Comerica Economic Weekly

Inverting Charles Dickens, we can say that it is not the best of times nor the worst of times for the U.S. economy. This week’s crop of data are consistent with an economy that downshifted this winter, but still maintains some momentum at the start of the new year.

Payroll job gains for January were below expectations of 185,000, hitting 151,000 for the month. The household employment survey posted a very strong gain of 615,000 jobs in January, enough to bring the unemployment rate down to 4.9 percent. The average workweek increased by 0.1 hour to 34.6 hours and average hourly earnings increased by 12 cents to finish up 2.5 percent over the previous 12 months. Job gains times longer workweek times pay gains equals income growth.

U.S. equity markets sold off on the news. The lower unemployment rate, increase in workweek and increase in average earnings all imply more pressure on wages to come. This slightly lifts expectations for Federal Reserve interest rate increases this year.

Initial claims for unemployment insurance increased by 8,000 for the week ending January 30, to reach 285,000. Initial claims have lifted off the lows from last October, but remain favorable. Continuing claims dropped by 18,000 for the week ending January 23, to hit 2,255,000, a good number.

The U.S. international trade gap widened in December to -$43.4 billion. The strong dollar is a headwind on exports. They were down by $0.5 billion for the month. Imports were up $0.6 billion. The December trade data looks close to the estimate used for 2015Q4 GDP, so there is no implication for a revision to Q4 GDP when the second estimate comes out on February 26.

With hiring strong and real GDP growth weak in the fourth quarter at 0.7 percent annualized, productivity growth in fourth quarter was weak. Nonfarm labor productivity decreased at a 3.0 percent annual rate in Q4. This brought unit labor costs up at a 4.5 percent annual rate. Unit labor cost tends to bounce around, but increasing ULC highlights the potential for a squeeze on corporate profits over the year ahead as labor markets tighten, putting pressure on wages.

Bolstered by ongoing job creation and low gasoline prices, consumers were undeterred in January from their pursuit of new wheels. Despite the bad weather, light vehicle sales in January increased to a 17.6 million unit rate. According to AAA, the national average price of regular gasoline fell to $1.76 per gallon as of February 5.

The ISM Non-Manufacturing Index for January dropped from 55.8 to 53.5, showing that services and construction are expanding at the start of the year, but at a slower pace. Most components, including business activity, new orders and employment are still growing.

The ISM Manufacturing Index for January was slightly less bad than it was in December. The index gained two-tenths to hit 48.2 percent, still a contractionary number. On a positive note, the production sub-index increased from 49.9 in December, to 50.2 in January, indicating a slight expansion of activity.

China’s official manufacturing purchasing manager’s index for January ticked down to 49.4 for January. The China Caixin Manufacturing Index improved to a slightly less bad 48.4 in January.

Construction spending increased by 0.1 percent in December, well within the margin of error for the report.

We still believe that the Federal Reserve will not raise rates again at the next FOMC meeting over March 15/16. The April 26/27 FOMC meeting remains in play. Stronger financial and economic data over the next two-and-half months would increase the odds of a rate hike at the end of April. Right now, we place the odds of a fed funds rate hike in April in the neighborhood of 25 percent. The fed funds futures market responded to today’s employment data by increasing the odds of an end-of-April fed funds rate hike from 16 to 20 percent.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 02-05-2016.

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January U.S. Employment, December Trade

Payroll Gains Less Than Expected, But Other Labor Indicators Positive

  • January Payroll Employment increased by a 151,000 jobs, below consensus expectations of 185,000.
  • The Unemployment Rate for January declined to 4.9 percent.
  • The U.S. International Trade Gap widened in December to -$43.4 billion.

Payroll job gains for January were below expectations, up 151,000 for the month. Consensus expectations were about 185,000. December’s very strong gains were revised downward to a still strong 262,000 jobs, while November was revised up. Given the robust job growth of the fourth quarter, it is not surprising to see some reversion to the mean trend showing up in January. 151,000 is not a bad number given the relatively low rate of labor force growth visible through most of last year. The household employment survey posted a very strong gain of 615,000 jobs in January, enough to bring the unemployment rate down to 4.9 percent. The average workweek increased by 0.1 hour to 34.6 hours and average hourly earnings increased by 12 cents to finish up 2.5 percent over the previous 12 months. Job gains times longer workweek times pay gains equals income growth. In short, this is a reasonably good jobs report despite the miss on payroll employment relative to expectations. We still believe that the Federal Reserve will not raise rates again at the next FOMC meeting over March 15/16. The April 26/27 FOMC meeting is still in play. Stronger financial and economic data over the next two-and-half months would increase the odds of a rate hike at the end of April. Right now, we place the odds of a fed funds rate hike in April in the neighborhood of 25 percent, a little higher than the fed funds futures market, which has the odds of an April rate hike at 16 percent.

The job gains by industry look quirky in January. Seasonal adjustment issues are possible this time of year. Mining and logging industries shed 7,000 jobs in January, consistent with weak commodity prices. Construction employment increased by 18,000 with gains on the residential side. Manufacturing employment was up a surprising 29,000 jobs in January with hiring in both durable and nondurable goods industries. The January manufacturing employment increases are inconsistent with the weak ISM Manufacturing Index and generally weak regional Federal Reserve manufacturing indexes. Wholesale trade employment added 8,800 jobs. Retail trade employment increased by a sizeable 57,700 jobs for the month. Transportation and warehousing dropped 20,300 jobs. Financial services employment was up 18,000 jobs. Professional and business services employment increased by 25,300 jobs. Education and healthcare, which is normally a big gainer, added only 6,000 jobs in January. Leisure and hospitality industries increased employment by a strong 44,000 jobs. The government sector gave up 7,000 jobs.

The U.S. international trade gap widened in December to -$43.4 billion. The strong dollar is a headwind on exports. They were down by $0.5 billion for the month. Imports were up $0.6 billion. The December trade data looks close to the estimate used for 2015Q4 GDP, so there is no implication for a revision to Q4 GDP when the second estimate comes out on February 26.

Market Reaction: U.S. equity markets opened with losses. The 10-Year T-bond yield is up to 1.87 percent. NYMEX crude oil is down to $31.40/barrel. Natural gas futures are up to $2.04/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Employment 02-05-16.

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January ADP Jobs, ISM Non-MF Index, Auto Sales

Jobs Increasing, Cars Driving, Service Sector Expanding, but at a Slower Rate

  • The January ADP Employment Report showed a gain of 205,000 private-sector jobs.
  • The ISM Non-Manufacturing Index for January dipped again to a still-positive 53.5 percent.
  • January Auto Sales increased to a 17.6 million unit rate.

Recent U.S. and international financial and economic data has been choppy, to say the least. We view this as a sign that financial markets and economies are still adjusting to a new regime of low commodity prices, desynchronized central bank policy, a stronger dollar and uneven global demand. In this stream of choppy data, it is easy to lose track of where the data still looks good. Beginning with the auto sales data from yesterday afternoon and through this morning’s two key economic releases, we see where the U.S. economy shows ongoing momentum. According to the January ADP employment report, 205,000 private sector jobs were added for the month. Ongoing moderate-to-strong job growth, visible since mid-2011, is providing Main Street USA a degree of insulation from uneven international and financial market conditions. Today’s ADP results for January are consistent with our above-consensus expectation for about 210,000 new payroll jobs, as reported in the official Bureau of Labor Statistics data, due out Friday morning. The ADP jobs data was tilted toward medium and small business hiring. Small businesses, with less than 50 employees, added 79,000 in January. Medium sized business, with 50 to 499 employees, added 82,000. Large businesses added 44,000.

Bolstered by ongoing job creation and low gasoline prices, consumers were undeterred in January from their pursuit of new wheels. Despite the bad weather, light vehicle sales in January increased to a 17.6 million unit rate. Domestic truck sales were strong, and why not? According to AAA, the national average price of regular gasoline fell to $1.78 per gallon for the week of February 3. New cars and trucks are more fuel efficient, but vehicle-miles travelled are increasing, boosting gasoline consumption.

The ISM Non-Manufacturing Index for January dropped from 55.8 to 53.5, indicating that services and construction are still expanding at the start of the year, but at a slower pace. Most components, including business activity, new orders and employment are still growing. However, the overall index was weaker than expected. The miss will add to unease about cooler overall growth in the U.S. economy this winter. Right now, it looks like 2016Q1 real GDP growth will increase from the weak 0.7 percent annualized rate in 2015Q4 to something in the neighborhood of 1.5 percent for 2016Q1. These are weaker numbers than we would like, but our view is that they do not point to a compounding slump. We will be updating our U.S. outlook next week.

Market Reaction: U.S. stock prices opened with losses. The yield in 10-Year T-bonds is down to 1.83 percent. NYMEX crude oil is up to $31.05/barrel. Natural gas futures are down to $2.00/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: ADP 02-03-16.

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January ISM-MF, December Income/Spending, Construction Spending

A Shifting U.S. Economy Struggles to Find Traction This Winter

  • The ISM Manufacturing Index for January increased slightly to 48.2 percent, still indicating contraction.
  • U.S. Personal Income lifted by 0.3 percent in December. Real disposable income gained 0.4 percent.
  • Nominal Consumer Spending was unchanged in December, as unit auto sales eased.
  • Construction Spending gained just 0.1 percent in December, held down by private nonresidential.

The ISM manufacturing Index for January was slightly less bad than it was in December. The index gained two-tenths to hit 48.2 percent, still a contractionary number. Five of the ten sub-indexes were below 50 for the month, with the worst being the prices index, which was unchanged at 33.5. The employment sub-index fell to 45.9 indicating reduced employment levels. On a positive note, the production sub-index increased from 49.9 in December, to 50.2 in January, indicating a slight expansion of activity. The weak energy sector and strong dollar remain headwinds for U.S. manufacturing. Also with auto sales at or near the cyclical peak, there is less lift coming from automakers and their suppliers. Global manufacturing conditions are generally soft. China’s official manufacturing purchasing manager’s index for January ticked down to 49.4 for January. The China Caixin Manufacturing Index improved to a slightly less bad 48.4 in January.

U.S. nominal personal income increased by 0.3 percent in December. The PCE price index fell by 0.1 percent in December as energy prices dropped. For the year ending in December, the PCE price index was up 0.6 percent. Accounting for a little deflation and taxes, real disposable income increased by 0.4 percent for the month. Nominal spending was unchanged as unit auto sales eased off their blistering +18 million unit pace from September through November, and settled to a still strong 17.3 million unit rate in December. Real consumer spending was up slightly, by 0.1 percent in December.

Construction spending increased by 0.1 percent in December, well within the margin of error for the report. Private residential construction increased by 0.9 percent with help from new multi-family projects. Private nonresidential spending was off by 2.1 percent with most categories in the negative column. We are seeing the impact of a weak energy sector and a weak manufacturing sector there. Total public construction gained 1.9 percent, supported by a gain in highway and street spending.

Market Reaction: U.S. equity markets opened with losses. The yield on the 10-year Treasury bond is up to 1.96 percent. NYMEX crude is down to $32.05/barrel. Natural gas futures are down to $2.14/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Personal Income 02-01-16.

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Comerica Economic Weekly

We thought 2015Q4 real GDP growth was going to be weak and it turns out that we were right. The advance estimate of Q4 real GDP growth came in at an anemic 0.7 percent, just below our forecast of 0.8 percent. The “advance” estimate contains forecasts of some components, including December international trade data, so it is subject to revision when the second and third estimates are released over the next two months.

Real consumer spending increased at a lackluster 2.2 percent rate in Q4. But that looks good compared to the headline growth rate. Real business fixed investment was a drag, declining at a 1.8 percent rate, held down by less oil and gas drilling and by less commercial building in oil and gas regions. Inventories were a drag and that is also oil related. With crude and refined product storage stretched to the gills, inventory drawdowns in the energy sector may be with us for a while. Trade was a drag, estimated by the BEA to have subtracted nearly 0.5 percent from Q4 real GDP growth. Government spending increased in the quarter, adding 0.12 percent to headline growth. So consumers did their part, as did the government sector. But the energy sector was a drag as was the strong dollar on trade.

Following on the heels of the European Central Bank’s announced intention to increase monetary stimulus, the Bank of Japan today announced that they will also be increasing stimulus. The ECB is widely expected to increase asset purchases by March. The BOJ said they will introduce a three-tier system for bank deposits, similar to the Swiss National Bank. The multiple tier system will allow the BOJ to set a positive interest rate for one tier, a zero rate for the second, and a negative rate for the third tier. With the ECB and the BOJ both easing, this will put more pressure on the Federal Reserve to either go slower with its plan to increase short-term interest rates, or abandon it altogether. Adding to the pressure against the Fed are weak energy and other commodity prices which are holding down inflation in the near term, and threaten to unmoor inflation expectations in the medium term.

The ongoing desynchronization of central bank monetary policy is putting more pressure on the dollar. With today’s announcement by the BOJ, the yen weakened significantly against the dollar, to now 121.39 yen per dollar. With more QE from the ECB and China widely expected to devalue its currency, it looks like the broad dollar index may keep climbing.

Oil caught a bid when rumors of a possible OPEC-Russia cooperation pact surfaced. We believe that it is still premature to call a bottom. But at $34.29 per barrel, WTI is about 20 percent above the January 20 low. Questions remain about Iran’s ability to ramp up production. Cooler China suggests global demand is still soft.

Initial Claims for unemployment insurance fell by 16,000 to hit 278,000 for the week ending January 23. Continuing claims gained 49,000 to hit 2,268,000 for the week ending January 16.

New orders for durable goods fell by 5.1 percent December, as orders for both defense and nondefense aircraft fell. The core index, orders for nondefense capital goods excluding aircraft, was down by 4.3 percent, showing weakness across a range of industries.

Housing metrics still look good. New home sales surged by 10.8 percent in December, reversing what had been a mild declining trend through most of 2015. The Case-Shiller U.S. house prices index was up 5.3 percent in November from a year earlier.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 01-29-2016.

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FOMC Statement, December New Home Sales, November House Prices

Fed Keeps Key Interest Rate Unchanged As Expected

  • The Federal Open Market Committee voted today to keep the fed funds target range unchanged.
  • New Home Sales for December surged by 10.8 percent to a 544,000 unit annual rate.
  • The U.S. National Case-Shiller House Price Index was up 5.3 percent in November over a year earlier.

As widely expected, the Federal Open Market Committee voted unanimously today to keep the target range for the fed funds rate unchanged at 0.25 to 0.50 percent. The FOMC acknowledged that U.S. economic growth slowed late last year. The Committee is “closely monitoring global and financial developments.” They continue to expect inflation to return to their two percent target over the medium term. The FOMC continues to expect gradual increases in the fed funds rate over time. But they do not hint at an expected path or an expected number of rate hikes over a given period. They did not issue a new “dot plot” showing committee members’ expectations for the fed funds rate. That will come at their next meeting in mid-March. The FOMC appears unlikely to raise the fed funds rate at their next meeting over March 15/16, but will wait at least until their April 26/27 meeting for their next 25 basis point fed funds rate increase. Also, the likelihood of four 25 basis point hikes this year, as implied by the December dot plot, has diminished to less than 50 percent.  We think that there is little danger of the FOMC reversing course and lowering the fed funds rate back to zero this year, barring a severe downturn in the U.S. economy. While the near-term odds of a recession in the U.S. are somewhat elevated, we believe that the U.S. economy will not enter into recession this year despite ongoing signs of weakness in some global economic indicators.

New home sales surged by 10.8 percent in December to a 544,000 unit annual rate. This was the second best monthly sales figure since the start of the current expansion cycle, just behind February 2015. The December number does look a little quirky. Sales in the Midwest surged by 31.6 percent. Sales in the West surged by 21.0 percent. However, sales in the South were essentially unchanged, and the Midwest was up just 2.6 percent. We expect to see the overall sales rate for new homes temper in January. U.S. house prices gained 0.1 percent in November, according to the Case-Shiller data, providing a year-over-year gain of 5.3 percent. The U.S. house price index was up 29.2 percent from its recent bottom in January 2012.

Market Reaction: U.S. equity markets dipped after the Fed announcement. The 10-year Treasury bond yield is up to 2.01 percent. NYMEX crude oil is up to $31.95/barrel. Natural gas futures are down to $2.15/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Existing _Home Sales 01-27-16.

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Comerica Bank’s California Index Resumes Climb

Comerica Bank’s California Economic Activity Index grew in November, increasing 1.0 percentage point to a level of 120.6. November’s reading is 37 points, or 43 percent, above the index cyclical low of 84.1. The index averaged 113.7 points for all of 2014, seven and two-fifths points above the average for all of 2013. October’s index reading was 119.6.

“Our California Economic Activity Index increased again in November after dipping from July through September. Two index components contributed to California’s summer doldrums: housing starts and the tech stock index. Both of those components improved in November. Also in November, we see only one index component in decline, state exports, likely being weighed down by the strong dollar,” said Robert Dye, Chief Economist at Comerica Bank. “Year-over-year job growth in California remains well above the U.S. average, registering a strong 2.9 percent in December while the U.S. as a whole gained 1.9 percent.”

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For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0116.

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Comerica Bank’s Texas Index Slips on Oil

Comerica Bank’s Texas Economic Activity Index fell in November, decreasing 0.6 percentage points to a level of 94.1. November’s reading is 21 points, or 29 percent, above the index cyclical low of 72.8. The index averaged 105.2 points for all of 2014, four and nine-tenths points above the average for full-year 2013. October’s index reading was 94.7.

“Our Texas Economic Activity Index declined in November, marking two months of declines after improving slightly in September. The Texas index is clearly on a downward trajectory, easing for 12 out of the last 13 months, beginning in November 2014. A look across the components of the index reveals the complexity of the Texas economy. Four out of eight index components fell for the month, and four components increased. State exports, unemployment insurance claims (inverted), rig count and hotel occupancy all declined in November. However, payroll employment, housing starts, house prices and sales tax revenue all increased. Payroll job growth has stepped down from the strong gains we saw in 2013 and 2014, but has remained resilient through late 2015,” said Robert Dye, Chief Economist at Comerica Bank. “Job data through December shows four consecutive months of moderate gains. This speaks volumes about the strength of the Texas economy in the face of severe stress in the state’s vital oil and natural gas industry.”

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For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0116.

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Comerica Bank’s Michigan Index Sees Biggest Boost in Four Months

Comerica Bank’s Michigan Economic Activity Index improved in November, increasing 0.6 percentage points to a level of 127.9. November’s reading is 54 points, or 73 percent, above the index cyclical low of 74.1. The index averaged 117.4 points for all of 2014, three and three-tenths points above the index average for 2013. October’s index reading was 127.2.

“Our Michigan Economic Activity Index increased again in November, marking two consecutive monthly gains after flat lining from July through September. Job growth, while still a positive factor for the Michigan economy, appears to be easing with year-over-year growth of 1.9 percent in December, converging to the U.S. average. Most index components were positive in November, including unemployment insurance claims (inverted), housing starts, house prices, sales tax revenue and hotel occupancy. State exports and auto production were negatives in November,” said Robert Dye, Chief Economist at Comerica Bank. “We expect strong consumer demand for new automobiles to continue through 2016, however, auto production and auto-related employment is likely near its cyclical peak, so the boost to the state economy from the resurgent auto industry will diminish going forward.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0116.

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Comerica Bank’s Florida Index Drives Ahead

Comerica Bank’s Florida Economic Activity Index grew in November, increasing 3.6 percentage points to a level of 145.8. November’s index reading is 68 points, or 87 percent, above the index cyclical low of 78.1. The index averaged 117.6 in 2014, eight and three-fifths points above the average for all of 2013. October’s index reading was 142.2.

“The Florida economy continues to show strong momentum. Our Comerica Florida Economic Activity Index increased for the 20th consecutive month in November. Gains were broad-based. Seven out of eight index components were positive. Only state exports declined in November, possibly weighed down by the strong U.S. dollar. Payroll employment growth in Florida has eased from the robust 3.7 percent year-over-year growth registered last March, to 2.9 percent growth as of December, still well above the U.S. average of 1.9 percent for December. Strong state and national job growth, increasing house prices and low energy prices are supporting household finances and Florida is a key beneficiary of that support, both through local household spending and by tourism spending,” said Robert Dye, Chief Economist at Comerica Bank. “With the national average price for regular gasoline falling to $1.83 per gallon, it’s a great time to drive to Florida.”

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For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0116.

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