December 2016, Comerica Economic Outlook

After a Weak Start, U.S. Economy Set to Finish 2016 on a Stronger Note

The recent upward revision to Q3 real GDP growth, to 3.2 percent, is a look in the rear-view mirror, but it does suggest that the U.S. economy entered the soon-to-be-complete fourth quarter with more momentum than previously thought. Inventories remain a key factor in the GDP calculation. Inventory accumulation was strong in 2015 and supported a moderate 2.6 percent real GDP growth for the year. In 2016, inventory accumulation was much weaker. In fact in the second quarter of 2016, inventories declined by $15 billion (nominal), the first decline in inventories since 2011Q3. Oil inventories were part of the story, as were manufactured goods. We expect U.S. oil stocks to continue to decline through 2017, but at a slower rate than they did this summer. Also, with firmer oil prices, and firming drilling activity, we expect that manufacturers who supported the oil and gas industry will have better control over their inventories in 2017 than they have for the past two years. In our U.S. forecast, inventories contribute positively to GDP growth from 2016Q3 through 2017Q4. This is a major assumption, and it could prove to be wrong, but if it is correct, it will result in above-potential GDP growth through 2017. There are several significant risks to our inventory outlook. U.S. crude oil inventories may fall through 2017 faster than expected. Lower oil prices could result in weaker-than-expected drilling activity. A strong dollar could stifle U.S. exports, as could the fallout from any challenges to existing trade deals. Finally, the auto sector is in play. We expect U.S. auto sales to gradually ease through 2017. If auto sales are worse than expected, auto-related manufacturers could reduce their inventories significantly.

Beyond GDP, other U.S economic metrics improved late in the year. The ISM-Manufacturing Index increased from a mildly contractionary 49.4 in August, to a moderately positive 53.2 in November. Despite the concern about the strong dollar and adverse consequences of trade negotiations, U.S. manufacturers are finishing the year with some momentum. The ISM Non-Manufacturing Index is also showing more momentum, having increased from its August low of 51.4 to November’s strong 57.2. Taken together, the two indexes are consistent with real GDP growth in the neighborhood of 3 percent or more in the fourth quarter.

Add a post-election stock market rally and rising consumer confidence into the mix and 2016 looks to end on a good note, which should carry over into early 2017. As the incoming Trump Administration launches its 100-day plan, we expect to see policy measures designed to boost economic growth, including some form of fiscal stimulus and corporate tax reform. These should help to sustain economic momentum through 2017. With stronger GDP growth and a widening federal deficit, inflation expectations should firm up through 2017. Oil markets will also factor into inflation expectations. The recent OPEC agreement to cut production is more marginal than radical, but it should support slightly higher prices. Stronger inflation, in turn, is an upside risk factor for our interest rate outlook. We continue to expect the Federal Reserve to increase the feds funds rate range by 25 basis points on December 14. We have maintained our call for two more interest rate hikes in 2017. However, we recognize that there is increasing upside risk to our interest rate forecast for 2017 and 2018, which needs to be balanced against the probability of recession in a late-cycle economy.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: useconomicoutlook1216.

 

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Comerica Economic Weekly

Since we had the holiday week last week, we will cover two weeks’ worth of U.S. economic data, which has been generally favorable.

Expectations for the official payroll job numbers for November were boosted by a stronger-than-expected ADP Employment Report, which showed 216,000 private sector jobs added in November. The official BLS payroll report did not quite get there, showing 178,000 net new jobs added to the U.S. economy in November. The unemployment rate dropped more than expected, down to 4.6 percent from October’s 4.9 percent. Average hourly earnings dipped by 3 cents in November after gaining 11 cents in October. Over the previous 12 months, average hourly earnings were up by 2.5 percent. Average weekly hours were unchanged at 34.4.

Initial claims for unemployment insurance for the week ending November 26 increased by 17,000, to hit a still-low 268,000. Weekly data around holidays is always suspect due to seasonal adjustment.

Third quarter real GDP was revised to show an annualized growth rate of 3.2 percent, up from the initial estimate of 2.9 percent. We expect to see a similar near-3-percent growth rate for the fourth quarter when that data is published at the end of January.

The Conference Board’s Leading Economic index increased by 0.1 percent in October. We expect to see a stronger gain in November.

Real disposable income increased by a solid 0.4 percent in October. Real consumer spending gained 0.1 percent. The 12-month change in the personal consumption expenditure (PCE) price index increased to 1.4 percent, showing that the rate of inflation is warming up.

Auto sales for November were better than expected, dipping slightly to a 17.9 million unit sales rate as domestic truck sales eased.

Consumer confidence jumped in November. The Conference Board’s Consumer Confidence Index increased from 100.8 in October to 107.1. This is good news for fourth quarter consumer spending.

Existing home sales for October increased by 2.0 percent to hit a 5.6 million unit annual rate. The months’ supply of existing homes for sale dipped to 4.3 months’ worth, indicating tight conditions in most U.S. markets. New home sales for October eased by 1.9 percent to a 563,000 unit rate. The months’ supply of new homes for sale increased to 5.2 months’ worth, up from the July low of 4.6 months’ worth. Home prices increased more than expected in September. The Case-Shiller U.S. National House Price Index was up 0.8 percent in September (after seasonal adjustment) and was up 5.5 percent over the previous 12 months. Recent increases in home mortgage rates will be a headwind for first-time buyers.

Total construction spending increased by 0.5 percent in October, boosted by a 2.8 percent increase in spending on public projects.

The ISM Manufacturing Index for November firmed up to 53.2 percent, indicating improving conditions for U.S. manufacturers. New orders for durable goods increased by 4.8 percent in October with large gains in the typically volatile aircraft categories, both civilian and military. The “core” category, nondefense capital goods excluding aircraft, increased by 0.4 percent for the month.

The minutes of the November 1-2 Federal Open Market Committee meeting reinforced expectations for a 25-basis-point increase in the fed funds rate range at the next FOMC meeting, coming up over December 13-14. We expect to see a rate hike on December 14. We look for two more in 2017. However, the early speculation about Trumponomics suggests that the risk to our interest rate outlook for 2017 and 2018 is shifting to the upside.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: cmaeconweekly-12-02-2016.

 

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November U.S. Employment

Positive Jobs Report Sets the Stage for December 14 Rate Hike

  • Payroll Employment increased by 178,000 jobs in November.
  • The Unemployment Rate for November dropped to 4.6 percent.
  • Average Hourly Earnings decreased by 0.1 percent for the month, after a strong increase in October.
  • Average Weekly Hours were unchanged at 34.4 in November.

Expectations for the official payroll job numbers for November were boosted by a stronger-than-expected ADP Employment Report released on Wednesday. We did not quite get there, but the 178,000 net new jobs added to the U.S. economy in November is a solid number. Moreover, the unemployment rate dropped more than expected, down to 4.6 percent from October’s 4.9 percent. This is the lowest unemployment rate seen since August 2007 and it puts us within putting distance of the low for the previous cycle of 4.4 percent, which we hit three times from late 2006 through mid-2007. The large drop in the unemployment rate came as the household survey of employment increased by 160,000 for the month, and the labor force decreased by 226,000 after falling by 195,000 in October. Despite the last two monthly declines, the year-over-year trend in the labor force is increasing, showing that the labor market is still broadening. Average hourly earnings dipped by 3 cents in November after gaining 11 cents in October. Over the previous 12 months, average hourly earnings were up by 2.5 percent. Average weekly hours were unchanged at 34.4.

Establishment data for November was mostly positive but there were a couple of head-scratchers. Mining and logging employment increased by 2,000 jobs with help from oil and gas extraction, consistent with a gradual increase in the rig count. Construction added 19,000 jobs. Manufacturing employment dipped by 4,000 jobs with losses in durable goods industries. Wholesale trade added 2,800 net new jobs. Retail trade surprisingly lost 8,300 jobs in November. Transportation and warehousing gained 8,900 jobs. Information industries dropped 10,000. Finance gained 6,000 jobs for the month. Gains in professional and business services were strong at 63,000 net new jobs. Education and healthcare added a solid 44,000 jobs. Leisure and hospitality served up 29,000 jobs. The government sector was strong, adding 22,000 net new jobs in November.

Labor market data looks good. We see no reason why the Federal Reserve will not follow through on the widely expected 25 basis point increase to the fed funds rate range on December 14. The fed funds futures market places the implied odds of a December 14 rate hike at about 95 percent.

Market Reaction: U.S. equity markets opened with gains. The 10-Year T-bond yield is down to 2.38 percent. NYMEX crude oil is up to $51.18/barrel. Natural gas futures are down to $3.50/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: employment-12-02-16.

 

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November ISM-MF Index, UI Claims, October Construction Spending

  • The ISM Manufacturing Index for November increased to 53.2 percent, showing improving conditions.
  • Initial Claims for Unemployment Insurance increased by 17,000, to 268,000 for the week ending Nov. 26.
  • Construction spending increased by 0.5 percent in October.

The ISM Manufacturing Index for November increased from a mildly positive 51.9 in October to a more positive 53.2 percent. Out of 18 reporting industries, 11 reported growth in November, including petroleum and coal products, paper products and computers and electronic products. Six industries reported contraction in November, including printing, wood products and apparel. Anecdotal comments were positive, with many industries indicating their expectations for strong demand into 2017. Seven out of ten sub-indexes were positive for the month, including new orders, production and employment. The prices sub-index was positive and that will catch the Fed’s attention. This is a solid report for the U.S. manufacturing sector which was sagging at the end of last year. Good recent economic data, combined with the post-election bump in U.S. stock prices, will make the Fed’s decision to raise the fed funds rates at the upcoming Federal Open Market Committee on December 13-14, an easy one. The fed funds futures market currently places the odds of a 25-basis-point increase in the fed funds rate range on December 14 at almost 99 percent. At this point it would come as a shock to financial markets if the Fed did not raise the fed funds rate on December 14.

Labor market data from November also looks good. Initial claims for unemployment insurance increased by 17,000, more than expected, to hit a still-low 268,000 for the week ending November 26. The Thanksgiving holiday may have impacted seasonal adjustment factors. Continuing claims for the week ending November 19 increased by 38,000 to hit a still-low 2,081,000. Yesterday, the ADP Employment Report for November showed a stronger-than-expected increase of 216,000 private sector jobs for November. This would be consistent with about 226,000 total nonfarm jobs. Tomorrow morning we will get the official employment data for November from the Bureau of Labor Statistics.

Construction spending for October increased by 0.5 percent, boosted by a 2.8 percent increase in public projects. Private nonresidential construction spending dipped by 2.1 percent. Private residential construction spending increased by 1.6 percent, consistent with the strong gain in housing starts for the month.

Market Reaction: U.S. equity markets opened with gains, but then went south. The yield on 10-Year Treasury bonds is up to 2.45 percent. NYMEX crude oil is up to $51.58/barrel. Natural gas futures up to $3.48/mmbtu.

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For a PDF version of this Comerica Economic Alert click here:ism-mf-12-01-16.

 

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Comerica Bank’s Arizona Index Steadily Gaining

Comerica Bank’s Arizona Economic Activity Index increased 0.3 percentage points in September to a level of 110.8. September’s index reading is 34 points, or 44 percent, above the index cyclical low of 77.0. The index averaged 106.9 points for all of 2015, seven and one-fifth points above the average for 2014. August’s index reading was 110.5.

“The Comerica Bank Arizona Economic Activity Index increased again in September, its fourth consecutive monthly gain after stalling though the second quarter of this year. Six out of eight index components were positive in September, including nonfarm employment, unemployment insurance claims (inverted), house prices, sales tax revenue, hotel occupancy and enplanements. State exports and housing starts eased in September. Recent gains in the Arizona Index are consistent with stronger overall U.S. economic growth through the third quarter. We expect the positive momentum for the state to continue through the fourth quarter of this year and into early next year,” said Robert Dye, Chief Economist at Comerica Bank. “The Phoenix area housing market improved through 2016 and will continue to be a solid performer through 2017. In September, Phoenix house prices were up 5.3 percent over the previous 12 months according to the Case-Shiller data.”

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For a PDF version of the Arizona Economic Activity Index click here: arizonaindex_1116.

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Comerica Bank’s California Index Boosted by Tech Sector

Comerica Bank’s California Economic Activity Index increased by 1.6 percentage points in September to a level of 124.3. September’s reading is 40 points, or 48 percent, above the index cyclical low of 84.1. The index averaged 119.8 points for all of 2015, six and two-fifths points above the average for all of 2014. August’s index reading was 122.7.

“Our California Economic Activity Index increased in September, indicating that the California economy accelerated at the end of the third quarter. The California Index has now increased for six consecutive months. Seven out of eight index components improved in September. They were nonfarm employment, state exports, claims for unemployment insurance (inverted), defense spending, house prices, hotel occupancy and the NASDAQ 100 Technology Stock index. Only housing starts dipped for the month. The uptick in California economic activity is consistent with solid third quarter U.S. GDP growth. We expect the state to continue to show good momentum through the end of this year and into early next year,” said Robert Dye, Chief Economist at Comerica Bank. “House prices were stronger than expected in September. According to the Case-Shiller data, Los Angeles house prices increased by a solid 0.5 percent in September, after seasonal adjustment. San Francisco prices were up by 0.3 percent. San Diego house prices also gained 0.3 percent for the month.”

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For a PDF version of the  California Economic Activity Index click here: californiaindex_1116.

 

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Comerica Bank’s Florida Index Improves

Comerica Bank’s Florida Economic Activity Index increased by 0.9 percentage points in September to a level of 155.1. September’s index reading is 77 points, or 99 percent, above the index cyclical low of 78.1. The index averaged 138.2 in 2015, twenty and seven-tenths points above the average for all of 2014. August’s index reading was 154.2.

“The Comerica Bank Florida Economic Activity Index improved in September after easing in August. Through the summer months, the Florida Index essentially moved sideways, showing a brief stall in Florida’s economic expansion. We expect that pattern to break as the Index improves through year-end, consistent with ongoing momentum in the Florida economy. In September, seven out of eight index components were positive, including nonfarm employment, state exports, unemployment insurance claims (inverted), house prices, sales tax revenues, hotel occupancy and enplanements. The state will face some pressure from international tourism due to the stronger dollar, but domestic tourism will be supported by the strengthening U.S. economy,” said Robert Dye, Chief Economist at Comerica Bank. “Miami’s condo market is still correcting after overheating in 2015. A strong pipeline of new supply will keep prices subdued through 2017. However, a fundamentally strong Florida economy will eventually allow the Miami condo market to reset.”

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For a PDF version of the Florida Economic Activity Index click here: floridaindex_1116.

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Comerica Bank’s Michigan Index Eases Again

Comerica Bank’s Michigan Economic Activity Index fell in September, down 0.9 percentage points to a level of 128.1. September’s reading is 54 points, or 73 percent, above the index cyclical low of 74.1. The index averaged 123.6 points for all of 2015, five and four-fifths points above the index average for 2014. August’s index reading was 129.0.

“The Comerica Bank Michigan Economic Activity Index declined in September, for the third consecutive month. A reset in housing starts in late summer, after surging earlier in the year, was a persistent weight on the Michigan Index through the third quarter. In September only three out of eight index components were positive. They were nonfarm payrolls, state exports and hotel occupancy. Claims for unemployment insurance (inverted), housing starts, house prices, auto production and state sales tax revenues all declined for the month. We look for only modest momentum in the Michigan economy through early next year as auto production starts to ease in the state,” said Robert Dye, Chief Economist at Comerica Bank. “Most major auto makers expect slight declines in U.S. auto sales through 2017, and small car production is being shifted out of the state, so manufacturing employment is expected to be a drag on the state economy next year.”

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For a PDF version of the Michigan Economic Activity Index click here: michigan_1116.

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Comerica Bank’s Texas Index Sees Modest Improvement

Comerica Bank’s Texas Economic Activity Index improved slightly in September, up 0.3 percentage points to a level of 90.6. September’s reading is 18 points, or 24 percent, above the index cyclical low of 72.8. The index averaged 97.5 points for all of 2015, seven and one-half points below the average for full-year 2014. August’s index reading was 90.3.

“The Comerica Bank Texas Economic Activity Index improved in September, only the second monthly improvement in the 23 months since October 2014. Over the last two years, the decline in the state’s drilling rig count, reflecting much reduced oil field activity, has been a strong weight on the overall index. With firmer oil prices, the rig count leveled out over the summer and has begun to increase. We expect that stability in oil field activity will allow the Texas Index to stabilize and then to gradually improve through 2017. However, next year will likely not show a strong rebound for Texas. Oil field activity will remain well below the booming pace seen from 2010 through 2014. The Houston economy, in particular, will take some time to recover, and this will keep improvement in our Texas Index moderate through 2017,” said Robert Dye, Chief Economist at Comerica Bank. “We look for ongoing job gains in Texas through 2017 as the drag from the energy sector dissipates.”

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For a PDF version of the Texas Economic Activity Index click here: texasindex_1116.

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Comerica Economic Weekly

U.S. economic data released in mid-November has been generally positive and consistent with growing expectations of a fed funds rate increase on December 14. In her prepared remarks for the congressional Joint Economic Committee, FOMC chair Janet Yellen said today that “…an increase [in the fed funds target range] could well become appropriate relatively soon.” Yellen is still hedging her bets, but that is about as strong an indication from her as we are likely to hear that we will see a December rate hike. Expectations for a December rate hike are very high. According to the fed funds futures market, the implied odds of a December rate hike are 91 percent.

Retail sales were solid in October, gaining 0.8 percent, after increasing by a strong 1.0 percent in September. Auto sales drove the numbers higher. Unit auto sales for the month reclaimed the 18.0 million unit mark. Other retail sales categories were generally positive.

One of the softer reports for the week was on U.S. industrial production for October, which was unchanged after dipping slightly through August and September. Manufacturing output increased by 0.2 percent for the month. Mining output gained 2.1 percent, consistent with moderate gains in the drilling rig count. Utility output fell by 2.6 percent.

Housing starts surged in October, gaining 25.5 percent, with strong single-family construction and a rebound in multifamily building activity. Permits gained slightly, up 0.3 percent for the month.

Business inventories increased in September by 0.1 percent. Better still, the inventory/sales ratio is trending down after climbing through 2015.

The Producer Price Index for final demand was unchanged in October. On the goods side, increases in energy prices were muted by declining food prices. On the services side, declines in trade and other service prices reduced the services sub-index for the month. Over the previous 12 months the PPI for final demand was up by 0.8 percent. Excluding food, energy and trade, it was up by 1.6 percent over the year.

The Consumer Price Index increased by 0.4 percent in October, driven by increases in energy, apparel and shelter prices. Headline CPI is trending up on a year-over-year basis, now up by 1.6 percent. Core CPI (less food and energy) was up 0.1 percent for the month, and by 2.1 percent over the previous 12 months.

Initial claims for unemployment insurance fell by 19,000 for the week ending November 12, to hit a very low 235,000. Continuing claims for the week ending November 5 dropped by 66,000, with the total falling below the benchmark two million level to an ultralow 1,977,000. The Empire State Manufacturing Survey for November was stronger than expected, showing a pick-up in manufacturing activity for the New York region over the month.

The Federal Reserve bank of Philadelphia’s manufacturing index eased in November to a still-positive 7.6.

According to the Federal Reserve Bank of Atlanta, their hourly wage tracker was up 3.9 percent in October over the previous 12 months.

We will not publish a Comerica Economic Weekly next week. Happy Thanksgiving!

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 11-18-2016.

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