Comerica Bank’s Michigan Index Eases

Comerica Bank’s Michigan Economic Activity Index declined 0.4 percentage points in February to a level of 129.7. February’s reading is 56 points, or 75 percent, above the index cyclical low of 74.1. The index averaged 127.8 points for all of 2016, four and one-fifth points above the index average for 2015. January’s index reading was 130.1.

“The Comerica Bank Michigan Economic Activity Index declined in February, following three months when it was essentially unchanged from November through January. Four out of eight index components fell in February. They were unemployment insurance claims (inverted), auto production, state sales tax revenue, and hotel occupancy. With softer auto sales so far in 2017, we expect auto production to continue to be a modest drag on the Michigan Index through the remainder of 2017. Four out of eight index components increased in February. They were nonfarm payrolls, state exports, housing starts and house prices,” said Robert Dye, Chief Economist at Comerica Bank. “The automakers’ commitments to reinvest in Michigan are good news, but the drag from easing auto production and stable-to-declining manufacturing employment will keep overall growth restrained this year.”

For a PDF version of the Michigan Economic Activity Index click here:  Michigan_Index_0417.

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Comerica Bank’s California Index Ticks Up

Comerica Bank’s California Economic Activity Index grew by 0.8 percentage points in February to reach 127.9. February’s reading is 44 points, or 52 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. January’s index reading was 127.1.

“Our California Economic Activity Index increased again in February, for the 11th consecutive month. This is good news for the largest state economy. However, a cautionary note comes from payroll job growth. That component of our index did not increase in February; it was unchanged. Monthly job creation in the state has been cycling down from about 42,000 net new payroll jobs per month in 2015, to about 30,000 per month in 2016, to about 19,000 per month for the first three months of 2017. Softer job growth in California is indicative of a slower growing state economy and has national implications as well. Four out of eight index components increased in February. They were state exports, housing starts, house prices and the technology stock index. Three components decreased. They were unemployment insurance claims (inverted), defense spending, and hotel occupancy,” said Robert Dye, Chief Economist at Comerica Bank. “We expect the California economy to continue expanding this year, but weaker job growth is a potential drag for the state.”

For a PDF version of the  California Economic Activity Index click here: California_Index_0417.

 

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Comerica Bank’s Texas Index Continues to Improve

Comerica Bank’s Texas Economic Activity Index ticked up by 1.9 percentage points in February to a level of 95.0. February’s index reading is 22 points, or 30 percent, above the index cyclical low of 72.8. The index averaged 91.3 points for all of 2016, six and one-tenth points below the average for full-year 2015. January’s index reading was 93.1.

“The Comerica Bank Texas Economic Activity Index increased for the sixth consecutive month in February. Oil producers continue to gain efficiencies with new technology and practices and that is adding support to the state’s important energy sector, even with crude oil prices near $50 per barrel and likely to remain subdued for some time. Seven out of eight index components were positive in February, including nonfarm payrolls, state exports, unemployment insurance claims (inverted), housing starts, rig count, house prices and state sales tax revenues. The broad base of positive indicators is encouraging news for Texas. Only the hotel occupancy sub-index dipped for the month,” said Robert Dye, Chief Economist at Comerica Bank. “Job growth cooled through February and March but we expect to see a turnaround in the April data, supporting our positive outlook for Texas.”

For a PDF version of the Texas Economic Activity Index click here:  Texas_Index_0417.

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Comerica Bank’s Arizona Index Inched Up in February

Comerica Bank’s Arizona Economic Activity Index grew 0.2 percentage points in February to a level of 112.6. February’s index reading is 36 points, or 46 percent, above the index cyclical low of 77.0. The index averaged 110.3 points for all of 2016, three and two-fifths points above the average for 2015. January’s index reading was 112.4.

“The Comerica Bank Arizona Economic Activity Index increased slightly in February, after easing in January. The index has been essentially range bound for the last three months, showing cooling conditions for the state economy in the first quarter of 2017. Four out of eight index components increased in February, including nonfarm payrolls, unemployment insurance claims (inverted), housing starts and house prices. State exports, state sales tax revenues, hotel occupancy and enplanements all decreased for the month. Mixed results for the Arizona Economic Activity Index are consistent with a state economy that is struggling to find sustained momentum,” said Robert Dye, Chief Economist at Comerica Bank. “Job growth in the state has been inconsistent since last October. If there is no improvement soon, we will need to lower our expectations for the state economy this year.”

For a PDF version of the complete Arizona Economic Outlook, click here: Arizona_Index_0417.

 

 

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Comerica Bank’s Florida Index Strengthens

Comerica Bank’s Florida Economic Activity Index grew by 1.4 percentage points in February to a level of 165.1. February’s index reading is 87 points, or 111 percent, above the index cyclical low of 78.1. The index averaged 155.3 in 2016, seventeen and one-tenth points above the average for all of 2015. January’s index reading was 163.6.

“The Comerica Bank Florida Economic Activity Index climbed for the sixth consecutive month in February. Six index components were positive for the month, including nonfarm payrolls, state exports, unemployment insurance claims (inverted), housing starts, house prices and state sales tax revenues. Both hotel occupancy and enplanements declined for the third consecutive month. Even though the dollar is a bit weaker through the first four months of this year against many currencies, it remains fairly strong overall. The strong dollar and concern about U.S. border controls appear to be weighing on Florida tourism from outside of the U.S.,” said Robert Dye, Chief Economist at Comerica Bank. “Nonetheless, payroll job growth remains well above the U.S. average at about three percent over the 12 months ending in March, consistent with a strong overall state economy.”

For a PDF version of the Florida Economic Activity Index click here:  Florida_Index_0417.

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Comerica Economic Weekly

U.S. data was mixed this week, consistent with our expectation of modest first quarter real GDP growth. We look for about 1.1 percent 2017Q1 real GDP growth when the data is released next Friday.

Housing starts dropped by 6.8 percent in March. The trend still looks positive and the March reset looks like normal monthly volatility. Single-family starts for March dropped by 6.2 percent for the month, but remain up by 9.3 percent over the previous 12 months. Multifamily housing starts fell by 7.9 percent for the month. Total permits for March were up by 3.6 percent.

According to the MBA Mortgage Applications Survey, the rate for a 30-year fixed rate mortgage was down to 4.22 percent for the week ending April 14. Mortgage applications for purchase were down into mid-April.

The National Association of Home Builders’ Housing Market Index fell modestly in April, still showing strong confidence in the market.

Existing home sales increased by 4.4 percent in April, after dipping in March. The median sales price of an existing home was up by 6.8 percent in March, over the previous 12 months.

Industrial production increased by 0.5 percent in March, pushed by a large increase in utility output. Mild winter weather weighed on utility output in January and February, but that reversed in March as utility output surged by 8.6 percent. Mining output ticked up by 0.1 percent in March, after a strong 2.9 percent gain February. Manufacturing output dropped by 0.4 percent as motor vehicle assemblies fell.

The Leading Economic Index increased by 0.4 percent in March, extending a string of moderate-to-strong monthly gains that began last December. This is good news for the U.S. economy and is consistent with our expectation that real GDP growth will pick up in 2017 after a tepid first quarter.

Initial claims for unemployment insurance increased by 10,000 for the week ending April 15, to hit 244,000, still a very low number. Continuing claims fell by 49,000 for the week ending April 8, dropping below the two million mark to hit 1,979,000, an exceptionally low number. The basket of solid labor market indicators suggests that the weaker-than-expected March payroll job gain of just 98,000 was more fluky than substantive.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  Comerica_Economic_Weekly_ 04212017.

 

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March Leading Indicators, Philly Fed, April UI Claims

 Indicators Still Positive for U.S. Economy

  • The Conference Board’s Leading Economic Index for March increased by 0.4 percent.
  • Initial Claims for Unemployment Insurance gained 10,000 for the week ending April 15, to hit 244,000.

The Conference Board’s Leading Economic Index increased by 0.4 percent in March, extending a string of moderate-to-strong monthly gains that began last December. The Leading Index incorporates 10 components that provide forward-looking insight into the U.S. economy. Eight out of the 10 components were positive in April. In order of the magnitude of their positive contribution, they were interest rate spread, ISM new orders, consumer expectations for business conditions, building permits, stock prices, a credit index, manufacturers’ new orders for nondefense capital goods ex-aircraft and manufacturers’ new orders for consumer goods. The two negative contributors for the month were weekly manufacturing hours and initial unemployment insurance claims. The string of positive reports for the LEI is good news for the U.S. economy and is consistent with our expectation that real GDP growth will pick up in 2017 after a tepid first quarter. Much depends on the ability of the Trump Administration to push its pro-growth agenda through Congress. Several LEI components are responsive to the political climate, including consumers’ expectations and stock prices. Stock prices slumped through the second half of March and through April, and that could weigh on the LEI next month. Related to the LEI are the Coincident Economic Index (CEI) and the Lagging Economic Index (LAG). The CEI registered a modest 0.2 percent gain in March, reflecting the slow first quarter, while LAG was unchanged for the month. It is considered to be a meaningful recessionary indicator when all three indexes go negative at the same time. We are very far away from that.

Initial claims for unemployment insurance increased by 10,000 for the week ending April 15, to hit 244,000, still a very low number. Continuing claims fell by 49,000 for the week ending April 8, dropping below the two million mark to hit 1,979,000, an exceptionally low number. The basket of solid labor market indicators suggests that the weaker-than-expected March payroll job gain of just 98,000 was more fluky than substantive.

The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey’s current conditions index dipped to a still-positive 22.0, suggesting that manufacturing conditions in the mid-Atlantic area are still improving, but at a slower pace than last month.

Market Reaction: Equity markets opened with gains. The 10-Year Treasury bond yield is up to 2.24 percent. NYMEX crude oil is down to $50.28/barrel. Natural gas futures are down to $3.24/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Leading_Indicators_04202017.

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March Residential Construction, Industrial Production

Starts Rebalance After February Bump

  • Housing Starts decreased in March by 6.8 percent to a 1,215,000 unit annual rate.
  • Permits for new residential construction increased by 3.6 percent to a 1,260,000 unit pace in March.
  • Industrial Production increased by 0.5 percent in March, pushed by utility output.

After a 5.0 percent increase in February, total U.S. housing starts dropped by 6.8 percent in March. The trend for total starts still looks positive and the March reset looks like normal monthly volatility. Single-family starts for March dropped by 6.2 percent for the month, but remain up by 9.3 percent over the previous 12 months. Multifamily housing starts fell by 7.9 percent for the month, and remain below the level from last December. Today’s housing data reinforces our belief that multifamily construction will be range bound for much of this year as absorption in local markets eases with strong recent supply additions. Conversely, we look for more gains on the single-family side, supported by more economically confident millennials growing their families. The inventory of available new and existing homes for sale remains historically tight and this will keep builders building single-family houses. However, many builders report a shortage of construction labor which is hampering completion rates. Total permits for March were up by 3.6 percent. Permits for new single-family projects eased by 1.1 percent, while multifamily permits gained 13.8 percent, which is not a huge number given the normal monthly volatility. Mortgage rates have eased after the March 15 fed funds rate hike. According to the MBA Mortgage Applications Survey, the rate for a 30-year fixed rate mortgage was down to 4.28 percent for the week ending April 7. Mortgage applications for purchase were positive in early April, a good sign for the spring home buying season.

Total industrial production increased by 0.5 percent in March, pushed by a large increase in utility output. Mild winter weather weighed on utility output in January and February, but that reversed in March as utility output surged by 8.6 percent. Mining output ticked up by 0.1 percent in March, after a strong 2.9 percent gain February. Even though many other manufacturing indicators were positive in March, the Federal Reserve’s report shows a 0.4 percent drop in manufacturing output, consistent with a 3.8 percent drop in motor vehicle assemblies for the month. The March decline in auto sales, to a 16.6 million unit rate, invites speculation about the shape of the auto sales curve through this year and next. We believe that there is growing potential for a flattish top to the auto sales cycle for a number of reasons. First, consumer confidence has surged since the general election last fall. Second, labor conditions remain very tight with the unemployment rate down to 4.5 percent. Third, the age of the vehicle stock remains high and vehicles that were purchased in the early months of the economic recovery, in late 2009 and 2010, are at replacement age. Fourth, the share of household income going to auto sales is still low, down from 5-6 percent of total consumer spending in the early 2000s, to 3.8 percent in 2016Q4.

Market Reaction: Stock indexes opened with losses. The yield on 10-Year Treasury bonds is down to 2.20 percent. NYMEX crude oil is down to $52.63/barrel. Natural gas futures are down to $3.24/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Housing_Starts_041817.

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Reshaping the Trump Bump and the Monetary Offset

The policy machinations of Washington D.C. will figure very large in the U.S. economy over the next year, both in terms of Trump Administration fiscal policy and the Yellen Fed monetary policy. Nearing the end of its first hundred days, the Trump Administration has fostered a business-friendly environment through the rollback of regulations via executive order. U.S. equity prices responded favorably to the initial steps and overall expectations of the potential Trump Bump on the economy were high. However, the Trump Administration’s first legislative challenge, the rollback of the Affordable Care Act, was successfully thwarted by an unlikely coalition of Democrats and conservative Republicans. Because of the potential tax and deficit implications of the American Health Care Act, it was interlinked with the tax reform and spending initiatives that were to follow. The failure of the American Health Care Act 1.0 to clear the House, much less the tougher hurdle in the Senate, increased doubts about the scope and the success of tax reform and infrastructure programs. Last week, President Trump renewed his public discussion of tax reform and a $1 trillion infrastructure program at the CEO Town Hall. These programs are potential game changers for the U.S. economy. If the Trump Administration can clear the runway with the passage of the American Health Care Act 2.0, and/or achieve a reasonable portion of the tax reform and $1 trillion infrastructure spending packages, then the Trump Bump will give us a significant lift in 2018. We have flattened our near-term GDP forecast and pushed the Trump Bump back into 2018 with the expectation that the Trump Administration will have a least some success with tax reform and infrastructure spending.

This spring has also been an interesting time at the Federal Reserve. New York Fed President Bill Dudley’s Bloomberg interview and the follow-up article in the Wall Street Journal on March 31 gave the public the first glimpse of the Fed’s still-evolving plan for balance sheet reduction. More discussion was released to the public in the minutes of the March 14/15 Federal Open Market Committee meeting. According to the FOMC minutes, the Fed is focusing on a passive reduction in their $4.5 trillion balance sheet by ending the reinvestment of maturing assets, beginning later this year. The ending or phasing strategy could be different for different types of securities. The timing of the change in reinvestment policy could depend on economic and financial market conditions. Also, reinvestment could be restarted if the economy encountered significant adverse shocks. It was noted in the minutes that the FOMC would continue to discuss balance sheet policy during upcoming meetings. One possible strategy for the Fed would be to raise the fed funds rate range two more times this year, once on June 14, and then again on September 20, and then keep interest rates unchanged through the end of this year as the Fed initiates balance sheet roll-off.

Most U.S. and international economic data continues to be healthy. However, despite other strong labor data, the official payroll job count for March showed a weaker-than-expected gain of 98,000 jobs. The separate household survey of employment, which feeds into the unemployment rate calculation, posted an outsized gain of 472,000 jobs, bringing the unemployment rate down to a tight 4.5 percent, the lowest since May 2007. The Fed will see two more monthly jobs reports before the June 13/14 FOMC meeting, when we expect them to next raise the fed funds rate.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: US_Economic_Outlook_0417.

 

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Comerica Economic Weekly

It has been an active week for economic developments. U.S. economic data was generally positive this week, despite the miss on March payroll employment. We saw some discussion in the minutes of the March Federal Open Market Committee meeting that suggests that they will begin to roll-off maturing assets before the end of this year. On Thursday evening, the United States launched a Tomahawk missile attack on an airbase in Syria, resulting in a small upward movement in crude oil futures. Syria is not a major oil producer and its production capacity has deteriorated significantly in recent years. However, Syria’s proximity to other major oil producers and oil distribution routes adds some uncertainty to future oil prices. There are reports of a possible terrorist incident in Sweden this morning.

Despite the strong ADP jobs report for March, released on Wednesday, the official Bureau of Labor Statistics jobs report for March showed a much weaker-than-expected 98,000 net new payroll jobs. In contrast to the weak payroll survey, the household survey of employment recorded another very strong month, surging by 472,000 jobs after a similar 447,000 job gain in February. The household employment numbers feed into the unemployment rate, and brought it down more than expected, to a tight 4.5 percent.

We expect to see a stronger jobs report for April, to be released on May 5, after the upcoming FOMC meeting over May 2 and 3.  The weak March payroll data will not, by itself, change Federal Reserve monetary strategy. The Fed will see two more jobs reports before the June 13 and 14 FOMC meeting. We expect the Fed to leave interest rates unchanged on May 3 and then to increase the fed funds rate range by 25 basis points on June 14. The implied odds of a fed funds rate hike on June 14 are about 63 percent, according to the fed funds futures market.

The ISM Non-Manufacturing Index fell from 57.6 in February, to a still-positive 55.2 in March. The ISM Manufacturing Index for March eased to a still-positive 57.2 in March, indicating ongoing improvement in the nation’s manufacturing sector. Together, the two ISM reports suggest that the rate of overall business activity remained positive, but eased at the end of Q1.

Construction spending for February gained 0.8 percent, boosted by private multi-family projects.

Vehicle sales for March stepped down to a 16.7 million unit annual rate, after hitting a 17.6 million unit rate in February. Bad weather was a possible factor, but the step down in March vehicle sales is consistent with widely held expectations of lower auto sales this year, after last year’s record rate. Several factors suggest that there could be a flat top to the auto sales cycle, rather than a steep peak, following by a valley. First, the unemployment rate, at 4.5 percent is very low. Conversely, consumer confidence is up. The percent of household income spent on autos is low, suggesting that there is upside potential and the average age of the auto fleet remains high.

Applications for home mortgages for purchase increased through the second half of March, while applications for refinance fell. According to the Mortgage Bankers Association, rates for 30-year fixed-rate mortgages eased through the second half of March.

U.S. crude oil inventories increased through the second half of March, putting downward pressure on prices. However, increased tensions in the Middle East will add a risk premium to prices, likely offsetting the effect of the U.S. inventory gain.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 04072017.

 

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