Comerica Economic Weekly

Economic data this week showed a good finish for the recently completed second quarter, and a good start to the current third quarter.

Housing starts increased in June by 8.3 percent, to a 1.215 million unit annual rate. The volatile multifamily component bounced back, gaining 13.3 percent for the month and hitting a 0.366 million unit rate. Single-family starts increased by 6.3 percent in June, to a 0.849 million unit rate. Building permits were also stronger in June, up by 7.4 percent to a 1.254 million unit rate. Multifamily permits were up 13.9 percent, to a 0.443 million unit rate. Single-family permits gained 4.1 percent, to hit a 0.811 million unit annual rate.

Builder confidence eased in early July according to the National Association of Homebuilders. Builders are increasingly concerned about rising material prices.

Mortgage applications increased in mid-July after falling in early July. The 12-week moving average for total apps remains on a moderate upward trend. According to the Mortgage Bankers Association, the rate for a 30-year fixed rate mortgage was stable at 4.22 percent for the week ending July 14.

The Conference Board’s Leading Economic Index increased by 0.6 percent in June, its 10th consecutive monthly increase, and the strongest monthly gain since January. Both the Coincident Index and the Lagging Index were up by 0.2 percent for the month. The solid increase across all three indexes for the month of June is a positive signal for the U.S. economy, reinforcing our expectations for moderate GDP growth through the second half of this year.

Initial claims for unemployment insurance decreased by 15,000 for the week ending July 15, to hit 233,000, a very low number. There may be some residual seasonality imbedded in the midsummer numbers due to the annual auto plant summer closures. Continuing claims increased by 28,000 for the week ending July 8, to hit 1,977,000, another very low number.

The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey’s current conditions index dipped to a still-positive 19.5, suggesting that manufacturing conditions in the mid-Atlantic area are still improving, but at a slower pace than last month. The New York Fed’s Empire State Manufacturing Survey’s current condition index also eased, to a still-positive 9.8.

We expect the Federal Reserve to leave the fed funds rate range unchanged at 1.00-1.25 percent at the conclusion of the upcoming Federal Open Market Committee meeting over July 25/26. They will likely reinforce expectations that the schedule for the beginning of balance sheet reduction will be announced at the conclusion of the September 19/20 FOMC meeting.

Market expectations for future interest rate hikes over 2018 have cooled a bit with weaker inflation readings. We look for the Fed to leave 2018 interest rate expectations unchanged next week, instead opting for maximum maneuvering room later this year. They are caught between lower than expected inflation now and the potential for more inflation later as the U.S. economy begins to run above the potential GDP trend line for the first time in this expansion cycle.

The European Central Bank issued a policy announcement that implied that they are considering how and when to end their asset purchase program. The ECB left their benchmark interest rates unchanged.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  Comerica_Economic_Weekly_ 07212017.

 

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June Leading Indicators, July Regional MF Surveys, UI Claims, FOMC

Indicators Point to Positive H2

  • The Conference Board’s Leading Economic Index for June increased by 0.6 percent.
  • Initial Claims for Unemployment Insurance fell by 15,000 for the week ending July 15, to hit 233,000.

The Conference Board’s Leading Economic Index increased by 0.6 percent in June, its 10th consecutive monthly increase, and the strongest monthly gain since January. Building permits was the strongest contributor to the LEI in June. Both the Coincident Index and the Lagging Index were up by 0.2 percent for the month. The solid increase across all three indexes for the month of June is a positive signal for the U.S. economy, reinforcing our expectations for moderate GDP growth through the second half of this year. The first estimate of second quarter GDP will be released on July 28.

The good LEI report for June should reassure the Federal Reserve as it begins a historic policy rotation toward balance sheet reduction this fall. We expect the Fed to leave the fed funds rate range unchanged at 1.00-1.25 percent at the conclusion of the upcoming Federal Open Market Committee meeting over July 25/26. They will likely reinforce expectations that the schedule for the beginning of balance sheet reduction will be announced at the conclusion of the September 19/20 FOMC meeting. Market expectations for future interest rate hikes over 2018 have cooled a bit with weaker inflation readings. It will be interesting to see if the Fed changes the language in their upcoming policy announcement to reflect a downshift in rate hike expectations. However, we look for the Fed to leave 2018 interest rate expectations unchanged next week, instead opting for maximum maneuvering room later this year. They are caught between lower than expected inflation now and the potential for more inflation later as the U.S. economy begins to run above the potential GDP trend line for the first time in this expansion cycle.

The European Central Bank today issued a policy announcement that implied that they are considering how and when to end their asset purchase program. The ECB left their ultra-low benchmark interest rates unchanged, but indicated that asset purchases will “run until the end of December 2017, or beyond.”

Labor market indicators remain positive. Initial claims for unemployment insurance decreased by 15,000 for the week ending July 15, to hit 233,000, a very low number. There may be some residual seasonality imbedded in the midsummer numbers due to the annual auto plant summer closures. Continuing claims increased by 28,000 for the week ending July 8, to hit 1,977,000, another very low number.

The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey’s current conditions index dipped to a still-positive 19.5, suggesting that manufacturing conditions in the mid-Atlantic area are still improving, but at a slower pace than last month. The New York Fed’s Empire State Manufacturing Survey was released on Monday. Its current condition index also eased, to a still-positive 9.8.

Market Reaction: Equity markets are mixed. The 10-Year Treasury bond yield eased to 2.24 percent. NYMEX crude oil is down to $46.89/barrel. Natural gas futures are up to $3.06/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  Leading_Indicators_07202017.

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June Housing Starts, NAHB, Mortgage Apps

Residential Construction Bounced Back in June

  • Housing Starts increased in June by 8.3 percent to a 1,215,000 unit annual rate.
  • Permits for new residential construction increased by 7.4 percent to a 1,254,000 unit pace in June.
  • Builder Confidence eased in early July.

Builders built in June, increasing housing starts by 8.3 percent, to a 1.215 million unit annual rate. The volatile multifamily component bounced back the most, gaining 13.3 percent for the month and hitting a 0.366 million unit rate. This is still well below the recent peak rate of 0.507 million from June 2015. The trend line in multifamily construction looks like it is sloping down despite the bounce back in June. Overbuilding, resulting in slower absorption and weaker rent growth, is a weight on many multifamily markets. We look for cooler multifamily construction in the second half of this year and into early 2018, with more emphasis from builders on the single-family side. Single-family starts increased by 6.3 percent in June, to a 0.849 million unit rate. This is still below the recent peak rate of 0.877 million from this past February, but the trend line looks positive. Building permits were also stronger in June, up by 7.4 percent to a 1.254 million unit rate. Multifamily permits were up 13.9 percent, to a 0.443 million unit rate. Single-family permits gained 4.1 percent, to hit a 0.811 million unit annual rate. Housing is still underperforming relative to recent expansion cycles. One reason is student debt. According to a new study by economists at the Federal Reserve Bank of New York, student debt is partially responsible for the observed decline in homeownership among 28-30 year olds from 2007 through 2015. According to the NY Fed, if student debt had remained at 2001 levels, there would have been 360,000 more 28-30 year old homeowners in 2015.

Builder confidence eased in early July according to the National Association of Homebuilders. Builders are increasingly concerned that rising material prices are hurting affordability. There may also be some drag on builder confidence from the slow legislative process in Washington.

Mortgage applications increased in mid-July after falling in early July. We see no clear trend through mid-July in both purchase and refi apps. The 12-week moving average for total apps remains on a moderate upward trend. According to the Mortgage Bankers Association, the rate for a 30-year fixed rate mortgage was stable at 4.22 percent for the week ending July 14.

Market Reaction: Stock indexes were up at the open. The yield on 10-Year Treasury bonds is up to 2.26 percent. NYMEX crude oil is up to $47.00/barrel. Natural gas futures are down to $3.06/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  Housing_Starts_071917.

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Global Expansion, Central Bank Strategy, the Bond Market and the Dollar

The global expansion remains engaged. The U.S economy, representing about one-fifth of global demand, got off to a sluggish start with 1.4 percent real GDP growth (annualized) in the first quarter. We expect U.S. GDP growth to approximately double for the recently completed second quarter. The Bureau of Economic Analysis will release the first estimate of Q2 GDP on July 28. Europe collectively represents a little more than a fifth of global demand and continues to show positive data with several countries growing faster than the United States. China, also representing about a fifth of global GDP, has recently looked a little better after a softer start to the year. Japan is gaining momentum. Together, these four regions represent about three-quarters of the global economy, and all of them are generating more demand.

A key theme for many central banks this year and next is to take advantage of the synchronized global expansion and begin normalizing monetary policy. This means raising interest rates off of the near zero, or below zero, floor. It also means gradually winding down extraordinary policy such as asset purchase programs, otherwise known as quantitative easing (QE). Finally, it means renormalizing the vastly expanded balance sheets that came as a result of QE.

The U.S. Federal Reserve took the lead amongst major central banks in driving interest rates down to near zero by the end of 2008. It took a leading role in central bank asset purchases, beginning QE1 in December 2008. It is also taking the lead in winding down extraordinary policy. The Fed ended asset purchases with the termination of QE3 in December 2013. It began lifting interest rates in late 2015, and has managed four 25-basis-point increases in the benchmark fed funds rate since then. The Fed has also announced its intention to begin reducing the size of its vastly expanded balance sheet, possibly as early as this October.

Recently, other central banks have begun to hint that they may also start to normalize policy. European Central Bank President Mario Draghi recently made bullish comments about the European economy that suggest he may announce the winding down of the ECB’s asset purchase program by the end of this year, to commence sometime in 2018. The euro climbed against the dollar after Draghi’s comments. U.S Treasury bond yields increased as expectations for future demand eased.

Bank of England President Mark Carney’s recent comments suggest that he may be considering an increase in the BOE’s benchmark interest rate soon. The Bank of England will be an interesting case because their economic tailwind may be fading. The UK has enjoyed one of the fastest growing economies in Europe recently, but that changed in 2017Q1 when UK real GDP growth slowed to 0.2 percent (quarter-to-quarter). This was the slowest 2017Q1 GDP growth of all the G7 countries. Canada was the fastest.

Confirmation of policy normalization by the ECB and other central banks will put more downward pressure on the dollar and upward pressure on Treasury bond yields. Downward movement on the value of the dollar would be good news for U.S. exporters, lowering their prices in local currencies. A weaker dollar would also revive import price inflation, giving the Fed a little more justification for its normalization policy. Finally, a weaker dollar would be welcome news for U.S. border regions that have seen trade with Mexico and Canada decline.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here:  US_Economic_Outlook_0717.

 

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Comerica Economic Weekly

Economic data this week are again consistent with a moderate rebound in U.S. GDP growth for the second quarter. The first estimate of Q2 GDP is due out on July 28.

Payroll employment increased by a strong 222,000 net jobs for the month. The civilian labor force showed even stronger growth, increasing by 361,000 workers for the month. This brought the unemployment rate up inconsequentially to 4.4 percent. The temporary increase in the unemployment rate is not a sign of a cooling labor market. We expect that that labor market will continue to tighten through the second half of this year. The average workweek inched up by one tenth of an hour to 34.5. Average hourly earnings increased moderately by 4 cents, or 0.2 percent.

Initial claims for unemployment insurance increased by 4,000 for the week ending July 1, to hit 248,000, staying in the very low range where they have been since the first of the year. Continuing claims gained 11,000 for the week ending June 24, to hit 1,956,000, still a very low number.

The ISM Non-Manufacturing Index increased from a positive 56.9 in May, to a strong 57.4 in June. All 10 sub-indexes were above 50, indicating improving conditions. The ISM Manufacturing Index also improved in June, climbing to 57.8, indicating strong and improving conditions in the manufacturing sector. Together, these two indexes cover a significant portion of the U.S. economy.

The U.S. international trade gap narrowed by $1.1 billion in May, to reach -$46.5 billion. Exports increased by $0.9 billion, while imports edged down by $0.2 billion. The average inflation-adjusted balance of trade in goods for April and May was a little above the first quarter average. This suggests that trade may be a modest drag on Q2 GDP growth.

Auto sales for June eased to a 16.5 million unit rate, the lowest sales rate since October 2014. The June data was not terrible, but it feeds the growing consensus that we are past peak auto for this business cycle.

Construction spending was steady in May. Declines in private residential and private non-residential projects were offset by gains in public projects.

Oil prices climbed in late June, but gave back ground in early July to hit $45 per barrel Friday morning. The U.S. drilling rig count leveled out in late June reflecting a growing expectation for “lower for longer” oil prices.

The Federal Reserve released the minutes of the June 13/14 Federal Open Market Committee meeting. The Fed minutes showed ongoing, but general, discussion about the timing of balance sheet roll-off. The minutes reinforced the consensus view that the Fed will take a pause on rate hikes until the end of this year. The next significant development is expected to be a September 20 announcement of the start of balance sheet reduction. We expect balance sheet reduction to begin in early October. The dollar amount of maturing assets not reinvested will start out low and then gradually increase over the following year.

According to the fed funds futures market, there is only a 3 percent probability of a rate hike on July 26. September 20 stays low at 14 percent. November 1 barely climbs to 15 percent. The implied probability of a December 13 rate hike jumps to about 59 percent.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 07072017.

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June U.S. Employment

June Payrolls Up by a Strong 222,000, Unemployment Rate Ticks Up to 4.4 Percent

  • Payroll Employment increased by 222,000 jobs in June, above expectations.
  • The Unemployment Rate for June increased slightly to 4.4 percent.
  • Average Hourly Earnings increased by 0.2 percent for the month; the average workweek gained 0.1 hours.

Expectations for employment growth have eased in recent months. Today’s employment report for June confounded those softer expectations, showing that payroll employment increased by a strong 222,000 net jobs for the month. Moreover, April and May payrolls were revised up by a combined 47,000 jobs. The household survey of employment was also strong, showing a net gain of 245,000 jobs. But the civilian labor force showed even stronger growth, increasing by 361,000 workers for the month. This brought the unemployment rate up slightly to 4.4 percent. This is not a sign of a cooling labor market. We expect that labor market conditions will continue to tighten through the second half of this year. The average workweek inched up by one tenth of an hour to 34.5. Average hourly earnings increased moderately by 4 cents, or 0.2 percent. So this labor report hit the trifecta, showing that more workers worked longer hours and got paid more for it. This is supportive of income growth in June and beyond, and consumer spending too. A healthy labor market combined with increasing house prices is good news for household wealth. Today’s good labor report for June is consistent with increasing real GDP growth in the recently completed second quarter. It does not alter our view that we will see no fed funds rate increase at the upcoming July 25/26 FOMC meeting. We continue to expect that the Fed will announce the beginning of balance sheet reduction at the September 19/20 FOMC meeting. We look for the next 25 basis point increase in the fed funds rate range to come at the conclusion of the December 12/13 FOMC meeting.

The establishment details in the June employment report look good. Mining and logging gained 8,000 workers despite lower oil prices in June. Construction employment was up by 16,000. Construction companies still report difficulty finding workers. Manufacturing employment gained a net 1,000 workers for the month. Wholesale trade employment was up by 10,000 jobs. Retail trade was up by 8,100. Information industries shed 4,000 workers. Financial services employment was up by 17,000. Professional and business services gained 35,000 jobs. Education and healthcare employment was up by 45,000. Leisure and hospitality gained 36,000 jobs in June. Government employment was up by a strong 35,000 workers. At the beginning and at the end of the summer, seasonal adjustment effects sometimes skew the local government numbers.

Market Reaction: U.S. equity markets opened with gains. The 10-Year T-bond yield is up to 2.38 percent. NYMEX crude oil is down to $44.58/barrel. Natural gas futures are up to $2.92/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Employment_07072017.

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June ADP Jobs, ISM Non-MFG Index, UI Claims, May International Trade

Job Growth Shifting Down from High Gear

  • The June ADP Employment Report showed a moderate net gain of 158,000 private sector jobs.
  • Initial Claims for Unemployment Insurance increased by 4,000 for the week ending July 1, to hit 248,000.
  • The ISM Non-Manufacturing Index increased to a strong 57.4 in June.
  • The U.S. International Trade Gap narrowed in May, to -$46.5 billion.

The June ADP Employment Report was a little weaker than expected, showing a net gain of 158,000 private sector payroll jobs. We may not get much help from the government sector in tomorrow’s official Bureau of Labor Statistics Employment Report. Since last October, the government sector has averaged a net loss of 1,500 payroll jobs per month. Normally, we see a gain of about 10,000 net new government sector jobs per month. According to ADP, small business job creation was weak in June, adding only 17,000 net new jobs. Medium-sized businesses (50-499 employees) added 91,000 jobs in June, while large companies added 50,000. Sector results were mixed. Natural resources/mining saw a new loss of 4,000 jobs. This coincides with a leveling out of the drilling rig count in June as oil prices eased. Construction employment was down 2,000 jobs in June. Manufacturing added 6,000 jobs despite slower auto production. Private service-providing businesses added 158,000 net new jobs, a little below the 181,000 jobs per month average since 2014. It looks like we are starting to see some evidence of a downshift in job growth beyond the idiosyncratic issues with government and goods-producing industries. Tomorrow morning we will see the official BLS employment numbers for June.

Initial claims for unemployment insurance increased by 4,000 for the week ending July 1, to hit 248,000, staying in the very low range where they have been since the first of the year. Even with a little less job growth, we are not seeing evidence of increasing layoffs. Continuing claims gained 11,000 for the week ending June 24, to hit 1,956,000, still a very low number.

The ISM Non-Manufacturing Index increased from a positive 56.9 in May, to a strong 57.4 in June. All 10 sub-indexes were above 50, indicating improving conditions. Sixteen out of seventeen industries reported growth in June. The only industry reporting contraction was Other Services. Anecdotal comments were generally positive. Labor shortages were reported in construction. Healthcare is struggling with uncertainties around federal healthcare policy.

The U.S. international trade gap narrowed by $1.1 billion in May, to reach -$46.5 billion. Exports increased by $0.9 billion, while imports edged down by $0.2 billion. The average inflation-adjusted balance of trade in goods for April and May was a little above the first quarter average. This suggests that trade may be a modest drag on Q2 GDP growth.

Market Reaction: U.S. equity prices opened with losses. The yield in 10-Year T-bonds is up to 2.38 percent. NYMEX crude oil is up to $45.78/barrel. Natural gas futures are up to $2.87/mmbtu.

For a PDF version of this Comerica Economic Alert click here: ADP_07062017.

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Comerica Economic Weekly

Economic data this week are again consistent with a moderate rebound in U.S. GDP growth for the nearly complete second quarter. First quarter real GDP growth was revised up slightly to a modest 1.4 percent annualized rate. This is still a disappointing growth rate, but the third estimate of real GDP growth for Q1 has now doubled from the 0.7 percent growth of the first estimate.

Consumer spending added just 0.75 percentage points to Q1 real GDP growth. Warm winter weather was a factor, as was the inevitable decline in auto sales from the late-2016 peak. Business fixed investment was good, supported by the increase in oil drilling activity, adding 1.23 percent points to growth. Residential fixed investment was weaker, adding only 0.48 percentage points. Inventories were a big drag, pulling Q1 real GDP growth down by 1.11 percentage points. Net exports were a small positive in Q1, adding 0.23 percentage points. Government spending was another drag, subtracting 0.16 percentage points from Q1 real GDP growth.

We expect to see more support from consumer spending, inventories and government spending in Q2. The first estimate of second quarter gross domestic product is due out on July 28. We look for a moderate uptick in real GDP growth for Q2 to about 2.5 percent.

The income and consumer spending report for May is consistent with our expectations for increased real GDP growth in Q2. With the drop in energy prices in May, the personal consumption expenditure prices index fell by 0.1 percent. This means that the 0.4 percent nominal income growth for May translates into a solid 0.6 percent increase in real disposable income for the month. Real consumer spending increased by 0.1 percent in May. The April and May consumer spending numbers are consistent with a 2.5 to 3 percent growth rate for real consumer spending in Q2. This aligns with our estimate of 2.5 real GDP growth for Q2.

The Conference Board’s Consumer Confidence Index for June increased moderately to 118.9. Consumer confidence was trending up well before the November presidential election, then it spiked after the election. Consumer confidence has eroded in subsequent months, but it remains well into positive territory.

The Case-Shiller U.S. National Home Price Index was up by 5.5 percent for the year ending in April, below expectations. Fifteen of the 20 cities in the Case-Shiller 20-City Index showed price gains for the month, but Boston, Cleveland, San Francisco, Tampa and Washington did not. We expect tight inventories to keep upward pressure on house prices in most major markets.

New orders for durable goods decreased by 1.1 percent in May, weighed down by declining orders for both commercial and defense aircraft. Core orders, defense capital goods excluding aircraft, eased back by just 0.2 percent. New orders are an important leading indicator for the manufacturing sector, but they do not factor directly into the GDP calculation. The shipments data in the same report do factor into GDP through inventories and investment numbers. Shipments of durable goods increased by 0.8 percent nominally in May.

Initial claims for unemployment insurance increased inconsequentially by 2,000, to hit 244,000 for the week ending June 24. Continuing claims also ticked up slightly, gaining 6,000 for the week ending June 17, to reach 1,948,000.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  Comerica_Economic_Weekly_ 06302017.

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Comerica Bank’s California Index Extends Gains

Comerica Bank’s California Economic Activity Index increased by 0.9 percentage points in April to reach 129.7. April’s reading is 46 points, or 54 percent, above the index cyclical low of 84.1. The index averaged 122.4 points in 2016, two and three-fifths points above the average for all of 2015. March’s index reading was 128.8.

“Our California Economic Activity Index increased in April, for the 14th consecutive month. As we have seen in recent months, the results for April were mixed, but consistent with moderate overall growth in the state economy. Five out of eight index components were positive in April. They were unemployment insurance claims (inverted), housing starts, house prices, hotel occupancy and the Nasdaq 100 Technology stock index. State exports and defense spending were negatives in April, while nonfarm payrolls were neutral. Job growth in the state has clearly slowed down in 2017. For the year ending in April, California payroll employment had gained 1.4 percent, slightly below the national average of 1.5 percent growth,” said Robert Dye, Chief Economist at Comerica Bank. “The previously red-hot San Francisco housing market is showing signs of cooling as area housing prices eased in April.”

For a PDF version of the  California Economic Activity Index click here:  California_Index_0617.

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Comerica Bank’s Michigan Index Stays in Neutral

Comerica Bank’s Michigan Economic Activity Index eased 0.1 percentage points in April to a level of 130.8. April’s reading is 57 points, or 77 percent, above the index cyclical low of 74.1. The index averaged 127.7 points for all of 2016, four and one-tenth points above the index average for 2015. March’s index reading was 130.9.

“The Comerica Bank Michigan Economic Activity Index for April was essentially unchanged from March, about where it has been for the last five months. Five out of eight index components were positive in April, including nonfarm employment, unemployment insurance claims (inverted), housing starts, house prices and hotel occupancy. State exports, auto production and sales tax receipts were negative factors for the month. We expect national auto sales for the remainder of this year to remain below last year’s record setting pace. Auto production will likely remain a slight drag on the index through the second half of this year,” said Robert Dye, Chief Economist at Comerica Bank. “As auto production has eased, so has job growth in Michigan. For the year ending in April, nonfarm payrolls were up 1.7 percent in Michigan, still above the U.S. average of 1.5 percent. However, job growth will likely fall below the U.S. average in the second half of this year.”

For a PDF version of the Michigan Economic Activity Index click here:  Michigan_Index_0617.

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