The Comerica Economic Outlook The Mid-Cycle U.S. Economy in a Multi-Speed World Robert A. Dye Chief Economist, Comerica Bank January 2015

2 Hits and Misses from 2014 Hits U.S. endogenous growth GDP expansion Falling unemployment rate Consumer re-emerges Low inflation Monetary policy unwind Misses Oil prices Eurozone weaker Long-term rates lower Housing metrics subdued

3 The U.S. and Global Economies in 2015, Many Moving Parts The U.S. economy is mid-cycle Labor metrics are improving Manufacturing conditions remain favorable However, U.S. economic growth remains hindered by wealth destruction, risk aversion and tight housing credit Housing metrics remain range bound Oil prices have eased, creating winners and losers Inflation remains well contained

4 Global Momentum Slowed in 2014H2 Global growth challenged by Europe, China and Japan Europe data softer, some leading indicators improving China vulnerable to credit bubble and weaker exports Japan still struggling for sustained lift-off Russia faces recession and possible default

5 The End of an Era for Global Monetary Policy Globally coordinated extraordinary monetary policy Very low interest rates Special programs Expanded currency swap lines Asset purchases De-synchronization Bank of Japan aggressive easing, beginning late 2012 U.S. Federal Reserve pivots Bank of England tightens European Central Bank doubles down

6 Foreign Exchange Rates Moved by Monetary Policy Euro/$ (L) Yen/$ (R) $

7 Fed Policy: Countdown to Interest Rate Lift-off Labor market metrics are improving Fiscal drag easing Strong consensus for solid 2015 GDP growth Falling oil prices and rising dollar complicate inflation outlook Next step in Fed pivot…forward guidance, started in December Yellen brackets lift-off…April-December 2015 Interest rate lift-off around mid-year 2015 Shallow trajectory, rates may not “normalize” before next recession

8 Recent Job Growth is Strong Payroll Employment, avg monthly diff, ths (L) Unemployment Rate, percent (R)

9 Potential For Wage Inflation Unemployment Rate, percent Avg Hourly Earnings, Prod Workers, pchya

10 U.S. Oil Production and Consumption U.S. crude oil production, quadrillion btu (L) U.S. petroleum consumption, quadrillion btu (R)

11 WTI Crude Oil Spot Price at Cushing, $/barrel (L) Falling Crude Oil Prices Complicate Inflation Outlook And Pose a Downside Risk for Oil Producing Regions Average Active Rotary Rigs, Total Number U.S. (R)

12 Lower Gasoline Prices Boost Auto Sales

13 Home Sales Supported by Job Growth, Low Rates Existing Home Sales, (L) New Home Sales, (R)

14 GDP Forecast Through 2015, Ongoing Moderate Expansion HistoryForecast

15 Interest Rates Face Upward Pressure with Monetary Policy Unwind Fed Funds 10-Year Treasury Bonds

16 Forecast Risks Downside Risks Crude oil prices China, Japan, Eurozone, Russia, MENA Consumer spending languishes Housing market stalls Job growth weakens Strong dollar hurts exports Monetary policy stumbles Fiscal policy failure, rating downgrade Upside Risks Lower gasoline and product prices Consumer/Business confidence surges Strong job growth Households unleash pent-up demand Easing underwriting for home mortgages Increased defense spending Manufacturing renaissance Europe and Japan turn the corner

17 Michigan Labor Markets Are Improving Unemployment Rate, percent, U.S. Michigan (L) Job Growth, y/y percent, U.S. Michigan (L) Payroll employment, ths, Michigan (R)

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