Bank of the West US Outlook Report for February 19, 2016

US Outlook Report: Soothing Signs of Economic Growth

This week’s influx of somewhat better U.S. economic data and tentative stabilization in crude oil prices provide more evidence that economic contraction in the near-term is unlikely.

Importantly, U.S. industrial production growth accelerated to an 11.7 percent annualized pace in January, the best annualized rate of growth since May 2010. The gain was well beyond Bloomberg analysts’ consensus expectations. Manufacturing comprises only 12.1 percent of the U.S. economy, but it often works as a barometer of overall economic activity and employment. We affirm our above 2.0 percent real GDP growth forecast for Q1 2016.  Signs of stabilization in industrial production are an encouraging signal that the economy isn’t yet hanging over a precipice.

The better-than-expected January data was partly driven by a strong increase in utility output (+5.4%) due to belated colder winter weather, but there was a decent monthly improvement in manufacturing output as well (+0.5%). Manufacturing output accounts for over three-fourths of all industrial production. Mining, which also includes oil drilling, remained unchanged (0.0%) in January- the first non-negative change since last August, but mining was still down 9.8 percent from January 2014.

Another comforting data release was the weekly initial jobless claims that unexpectedly fell 7,000 to 262,000 claims, near historical lows. The less volatile four-week average of new claims decreased to 273,250, the lowest level since December.

In the most recent FOMC minutes, Fed officials pointed out that inflation is expected to remain low in the near-term partly due to deterioration in energy prices.  Bucking these low expectations, producer prices for January came as a nice surprise, increasing 0.1 percent after a -0.2 percent in December and consensus expectations for a -0.2% decline on the month. Producer prices, excluding food and energy, advanced 0.4 percent, the most since October 2014, again beating consensus expectations by three tenths of a percent. On a year-on-year basis, we already see a sharp reversal of producer prices for finished goods.

Moderately improving economic data were accompanied by some stabilization in equity and commodity markets along with rising longer-term bond yields as flight to safety flows dissipated.  It isn’t much to write home about yet, but given what we have faced so far this year, I’ll take it.


To learn more, check out this week’s US Outlook Report.

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