U.S. economic data released this week from the end of the first quarter was consistent with our expectation of anemic Q1 growth, followed by improving conditions in the current quarter and beyond. Let’s start with the good news first.
The Conference Board’s Leading Economic Index for March increased by 0.2 percent, after falling in December through February. We expect to see more positives from the LEI in the coming months. The Coincident and Lagging Indexes were also non-negative for the month.
Initial claims for unemployment insurance dipped by 6,000 for the week ending April 16, to an exceptionally low 247,000. Continuing claims fell by 39,000 to hit 2,137,000 for the week ending April 9. These are historically low numbers, on par with the end of the 1970s.
Housing related data was less positive. New home construction remains low relative to population growth despite firm house prices. The National Association of Homebuilders Housing Market Index rates market conditions for the single-family housing market. The April 2016 reading for the NAHB Index was unchanged at 58 for the third consecutive month, well below the recent peak of 65 from last October.
Housing starts for March dropped by 8.8 percent, down to a 1.089 million unit rate. Both single and multifamily starts were well off the February pace. Permits for new residential construction also fell in March, down 7.7 percent, to a 1.086 million unit rate. Single-family permits were down slightly, but the more volatile large multifamily segment fell noticeably, down 20.6 percent.
Existing home sales for March bounced back, gaining 5.1 percent and climbing to a 5.33 million unit annual rate, after falling by 7.3 percent in February. Months’ supply of existing homes on the market ticked up to a still-tight 4.5 months’ worth. The median sales price of an existing home was up 5.7 percent in March, over the previous 12 months.
The recent dip in mortgage interest rates, down close to 3.5 percent for a 30 year fixed rate mortgage, will help sales of new and existing homes in April. Mortgage apps surged in early April.
The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey for April pointed to a slight deterioration in manufacturing conditions in the Mid-Atlantic, after significant improvement in March.
Oil and natural gas prices rallied through the week, consistent with our expectation of more inflationary pressure in the current quarter.
On Thursday, Mario Draghi, President of the European Central Bank, announced that there would be no change to ECB monetary policy as a result of their policy deliberations. He opened the door for future rate cuts, deeper into negative territory, saying that the ECB would boost easing if it was warranted.
With soft first quarter U.S. data and only the beginning of a push to inflation from higher oil prices, we expect the Federal Reserve to leave monetary policy unchanged at the FOMC meeting this coming Tuesday and Wednesday. Unless there is a change in tone from the Fed in their policy statement on Wednesday, we expect to roll back our fed funds rate assumptions for this year. Currently, we have two 25 basis point fed funds rate hikes in our interest rates forecast, one in June and one in December. If the Fed continues to emphasize global risks to growth, we may eliminate the June rate hike from our May interest rate forecast, leaving only one fed funds rate hike for 2016, coming in December.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 04-22-2016.