It feels like U.S. economic data is changing from a little worse than expected since the start of the year, to a little better than expected as we finish up the first quarter. We reflect this in our lower odds of recession for this year, still elevated above the minimum 10-15 percent, but easing now to about 20-25 percent. Stable oil prices and a stable stock market will help us feel more confident in the U.S. economy through the year.
We are holding to our thesis of ongoing moderate gains in consumer spending this year buffering the impact of global volatility. Supports for consumer spending are strong job growth, reasonable wage gains, good house price appreciation, solid stock market performance, improving consumer confidence, easing credit availability, good credit quality and low energy prices. Most of those supports are in place now.
Above all other supports for consumer spending is strong job growth, and that is what we have. The BLS employment report for February showed a strong net gain of 242,000 payroll jobs for the month. The unemployment rate was unchanged at 4.9 percent and average hourly earnings ticked down by a tenth of a percent.
Today’s jobs data is positive for the economy, but it does not materially lift the low odds of a March 16 fed funds rate hike by the Federal Reserve, especially considering the drop in average hourly earnings which will be viewed as a temporary easing of inflationary pressure. The drop in earnings does not indicate a softer economy. It likely stems from a shift in the mix of jobs, with fewer high-paying energy and manufacturing jobs and more lower-paying service jobs.
We expect the unemployment rate to continue to drop through the course of this year, at a slower pace than last year, keeping upward pressure on wages by occupation.
Initial claims for unemployment insurance for the week ending February 27 gained 6,000 to reach 278,000, still a good number. Continuing claims for the week ending February 20 gained 3,000 to hit 2,257,000, also still a very good number.
Wage pressure from tighter labor market conditions, ongoing house price appreciation and rent increases plus stabilization in commodity prices is the recipe for future Federal Reserve interest rate hikes. That is still a believable scenario for the second half of this year. For now, we are expecting two 25 basis point increases in the fed funds rate this year. Hopefully, we will get some meaningful forward guidance from the Federal Reserve on March 16 to fill in the current guidance vacuum.
The U.S. international trade gap widened in January to -$45.7 billion. The strong dollar remains a headwind for exports, which dropped by $3.8 billion in January. Imports dropped by a smaller $2.9 billion for the month. The January real trade balance in goods is a little wider than the 2015Q4 average, meaning that international trade is shaping up to be a small drag on Q1 real GDP.
Consumers took their hard-earned dollars and bought cars in February. Light vehicle sales ticked down slightly from a 17.58 million unit annual rate in January, to 17.54 for February, still a very good number. Auto sales in February were strong despite volatility in financial market indicators, which contributed to a noticeable decline in consumer confidence. If confidence comes back with more settled financial indicators, we could revisit last fall’s very impressive car sales numbers.
The ISM Manufacturing Index for February increased to 49.5 percent from January’s 48.2 percent. This is still a barely contractionary number, and it is the fifth consecutive monthly reading below the break-even 50 mark. It looks like it is premature to expect the ISM-MF Index to continue its rising trend in the near term. We look for more of the same near-50 readings for a while. The ISM Non-manufacturing Index for February eased slightly to a still positive 53.4 percent, consistent with ongoing moderate GDP growth.
Construction spending for January increased by 1.5 percent, above the fairly wide plus or minus 1 percent confidence interval for this series. Total public construction was up significantly, gaining 4.5 percent in January, boosted by a seasonally adjusted 14.7 percent increase in highway and street projects. Without that unusual gain, total construction would have posted a more modest 0.3 percent gain.
According to the Texas Workforce Commission, the Lone Stare State added an impressive 31,400 jobs in January, despite ongoing job losses in the state’s important energy sector. The January job growth is on par with the robust job gains for the state seen through 2014. One month does not make a trend, but it is good news for Texas, the second largest state economy.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 03-4-2016.