We attended the semi-annual meeting of the Economic Advisory Council of the American Bankers Association this week in Washington DC. This is a meeting of chief economists of major U.S. banks and financial institutions. The consensus expectation of this group was for ongoing moderate economic growth this year and next, with some boost from fiscal stimulus. The group expects that fiscal stimulus will come primarily in the form of tax reform early next year, but it will also include some net gain in government spending on infrastructure.
The EAC expects that the Federal Reserve will announce the beginning of its balance sheet reduction program in September, and will wait until December for the third and final fed funds rate increase this year. The group expects to see between two and four 25-basis-point fed funds rate increases in 2018, with some downside risk coming from lower-than-expected inflation.
The Conference Board’s Leading Economic Index increased by 0.3 percent in May, consistent with expectations for ongoing moderate GDP growth this year. Eight out of ten components of the LEI were positive, including the interest rate spread, the ISM new orders index, and consumer expectations for business conditions. Average weekly manufacturing hours were unchanged for the month. Residential building permits declined. The Coincident Economic index gained only 0.1 percent in May, consistent with easing expectations for growth in Q2. The Lagging Index also gained 0.1 percent.
Initial claims for unemployment insurance gained an inconsequential 3,000, to finish at 241,000 for the week ending June 17. Continuing claims increased by 8,000 to hit a still very low 1,944,000 for the week ending June 10.
Mortgage applications for purchase were strong in early May and then eased in the second half of the month. The data show a big jump in early June.
Existing home sales for May increased by 1.1 percent after falling in April. Existing home sales hit a 5,620,000 unit annual rate, near the long-term average. The series has been range bound since last November, showing no consistent upward momentum. The inventory of existing homes for sales inched up to a still-tight 4.2 months’ worth. Tight inventories will support ongoing price gains. The median sales price of an existing home was up by 5.8 percent over the previous 12 months.
New home sales for May also increased, gaining 2.9 percent for the month and hitting a 610,000 annual sale rate. New home sales are showing a little more upward momentum than existing home sales, but the May sales rate was still below the recent peak in February. The supply of new homes for sale remained at 5.3 months’ worth. Gains in median sales prices were looking softer this spring, but the May data shows a strong 16.8 percent increase in the median sales price of a new single-family home over the previous 12 months. This does not account for changes in the size of new homes being built.
The next meeting of the Federal Reserve’s Federal Open Market Committee is scheduled for July 25/26. We do not expect to see an interest rate hike announced at the upcoming meeting. According to the fed funds futures market, the implied probability of a July 26 rate hike is only 2.5 percent. We do expect the Fed to provide more guidance on the timing of balance sheet reduction in July. We expect the next rate hike to come in December.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica Economic Weekly 062317