Global equity markets rallied today after European Central Bank President Mario Draghi strongly hinted that the ECB would ramp up its asset purchase program as early as March. Draghi said yesterday that “there are no limits to how far we are willing to deploy our instruments.” The German DAX stock market index climbed through Thursday and into today. U.S. stock indexes did the same.
At about the same time oil caught a bid. The NYMEX front-month contract for WTI climbed to $31.45 a barrel. In today’s news we see Saudi Arabian officials calling the crude oil market “irrational.” To date, Saudi Arabia has been unwilling to unilaterally reduce production. Iran appears poised to increase production soon, although some experts cite technical challenges to doing so. Iran produced 3.6 million barrels per day in 2011, and is down to about 2.8 million barrels per day currently. Oil well servicer Schlumberger announced that it will cut another 10,000 jobs worldwide this year, on top of 24,000 jobs already cut, for a total of 26 percent of its workforce since late 2014.
Key global financial leaders are meeting in Davos, Switzerland through tomorrow. Despite the strenuous networking, we expect economic and financial market data to remain choppy in early 2016.
A key concern is U.S. GDP growth this winter. In our January U.S. Economic outlook we forecasted subdued real GDP growth for 2015Q4, in the neighborhood of one percent, and then show 2016Q1 bouncing back to a moderate 2.1 percent. We will get the advanced estimate of 2015Q4 GDP a week from today, on January 29. The recent pattern in the GDP data from the Bureau of Economic Analysis has been for weak first quarter GDP growth. The data is seasonally adjusted, but the pattern remains.
So with broad expectations of weak growth at the end of 2015, and the possibility of weak growth at the beginning of 2016, we have to talk about the likelihood and possible contours of a winter recession. We believe that the odds of two consecutive quarters of declining real GDP this winter are elevated, but not overwhelming, in the range of 30 to 40 percent. Further, if we do slip into recession, we expect it to be shallow and of limited duration. We do not expect financial accelerators to increase downward momentum as they did in 2008. Rather, we expect that the relative health of the household sector to act as a solid support for the U.S. economy despite the potential for soft GDP numbers.
Existing homes sales bounced back in December, increasing by 14.7 percent to a 5.56 million unit pace. Sales were weak in November due to new mortgage processing guidelines. We expect home sales to return to a gradual upward trajectory this year. But data may be choppy for another month for noneconomic reasons.
The Conference Board’s Leading Economic Index decreased by 0.2 percent in December, weighed down by weak manufacturing data, building permits, unemployment insurance claims and equity prices. The Leading Index has now been negative or unchanged for four out of the last six months. The Coincident and Lagging Indexes for December were both positive.
Initial claims for unemployment insurance increased by 10,000 for the week ending January 16, to hit 293,000. Continuing claims fell by 56,000 for the week ending January 9, to reach 2,208,000. Initial claims below 300K are still very good, but the series has trended up slightly since last October.
Housing starts eased by 2.7 percent in December to a 1,149,000 unit annual rate. The trend still looks positive. Permits for new construction eased by 3.9 percent to a 1,232,000 unit annual rate as multifamily permits backed off a November surge.
The December consumer price index declined by 0.1 percent as energy and food prices fell. The core CPI (less food and energy) gained 0.1 percent for the month, and was up 2.1 percent over the previous 12 months.
Choppy economic data, volatile financial markets and low commodity prices will make it difficult for the Federal Reserve to follow through with more interest rate increases in the first quarter of this year. We look for the next rate hike at the end of April.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 01-22-2016.