Comerica Economic Weekly

We saw more mixed data this week and a growing consensus that the Fed will not lift interest rates in June.

After a three-month decline, retail sales increased by 0.9 percent in February, driven by retail sales of autos which increased by 2.7 percent. Unit sales climbed back up to a 17.2 million unit annual rate. Sales outside of autos were generally positive but unspectacular.

The University of Michigan Consumer Sentiment Index increased in early April to 95.9.

Price indexes are normalizing as oil stabilizes (relatively) near $50 per barrel. The Producer Price Index for final demand increased by 0.2 percent in March. The energy price sub-index for final demand goods gained 1.5 percent for the month, the first increased since last June. On a year-over-year basis, the PPI for final demand is still negative, down 0.8 percent. But as long as oil does not take another turn south, year-over-year comparisons will turn the corner and head north soon.

According to AAA, today’s national average regular gasoline price is $2.43 per gallon, a penny above where it was a month ago. The CPI energy index for March was up 1.1 percent, supporting a 0.2 percent gain in the headline CPI. Excluding food and energy, the core CPI for March was also up 0.2 percent. Over the last 12 months core CPI is up 1.8 percent.

Builders are expecting to see increased activity this spring according to the National Association of Home Builders, whose Builder Confidence Index increased in April to 56. However, increased confidence of builders didn’t add much to the March construction data, which still may have been impaired by weather. Housing starts for March gained 2.0 percent to hit an annual rate of 926,000 units, below market expectations. Permits for new construction eased by 5.7 percent to a 1,039,000 unit annual rate. The Federal Reserve’s Beige Book for April, tells of generally improving residential real estate activity across most Federal Reserve Districts.

The Conference Board’s Leading Economic Index increased by a sluggish 0.2 percent in March. Residential building permits were a big negative for the leading index in March. However, we expect to see permits increase through the spring, and that will pull the overall leading index up in the months ahead. The coincident and the lagging indexes also increased in March.

The National Federation of Independent Businesses said that their Business Optimism Index fell 2.8 points in March to 95.2. The overall trend is this survey remains positive.

Total business inventories were up a modest 0.3 percent in February after no change in January. It looks like inventory accumulation will be a drag on first quarter real GDP growth. Also, the inventory/sales ratio has been climbing since the middle of last year.

Firmer inflation metrics at both the consumer and producer levels will give the Federal Reserve a little more confidence in timing its first interest rate hike this year. Softer employment and production data through March has decreased the likelihood of a fed funds rate increase in June. But normalizing inflation, and improving employment and production data through mid-year keeps July or September in play. We expect to see the first increase in the fed funds rate announced on September 17.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  CMAEconWeekly 04-17-15.

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March Consumer Prices, Leading Indicators

Inflation Metrics Firming Up With $50 Oil

  • The March Consumer Price Index increased by 0.2 percent with gains in energy prices.
  • The March Core CPI also gained2 percent, and was up 1.8 percent over the previous 12 months.
  • The Conference Board’s Leading Economic Index for March increased by 0.2 percent.

Price levels are firming up as oil stabilizes (relatively) near $50 per barrel for WTI. However, it is still too early to call for a bottom in oil prices, especially considering the upward trend in crude oil stocks. Production is still trending up on a moving-average basis, although the last few weeks of data show hint at a possible top in production by mid-year. Global oil demand will increase this year, driven by developing economies, including China and India. But the key to the oil price puzzle is on the supply side. Rig counts are still easing, so the rate of gain in new U.S. production is falling significantly while ongoing production will eventually deplete existing wells. All this points to a more balanced oil market in the second half of the year. Saudi Arabia still holds the wild card as they set production schedules for the year ahead. They are no longer the swing producer, stabilizing prices for OPEC by modulating their output. Instead, they have actively driven oil prices down in order to maintain market share and possibly to extend global demand of oil in the face of the rapid main-streaming of alternative technologies and energy sources. With U.S. oil prices exploring a range of $45 to $57 per barrel since the beginning of this year, gasoline prices have bounced off the bottom. According to AAA, today’s national average regular gasoline price is $2.43 per gallon, a penny above where it was a month ago. The CPI energy index for March is up 1.1 percent, supporting a 0.2 percent gain in the headline CPI. Excluding food and energy, the core CPI for March is also up 0.2 percent. Over the last 12 months core CPI is up 1.8 percent. Firmer inflation metrics at both the consumer and producer levels will give the Federal Reserve a little more confidence in timing its first interest rate hike this year. Softer employment and production data through March has decreased the likelihood of a fed funds rate increase in June. But normalizing inflation, and improving employment and production data through mid-year keeps July or September in play. We expect to see the first increase in the fed funds rate announced on September 17.

The Conference Board’s Leading Economic Index increased by a sluggish 0.2 percent in March. Residential building permits were a big negative for the leading index in March. However, builder sentiment is improving and we expect to see permits increase through the spring, and that will pull the overall leading index up in the months ahead. The coincident and the lagging indexes also increased in March. Across-the-board gains in the three indexes are a positive signal for the U.S. economy.

Market Reaction: Equity markets opened with losses. The 10-Year Treasury bond yield is down to 1.88 percent. NYMEX crude oil is down to $55.98/barrel. Natural gas futures are down to $2.73/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: CPI 04-17-15.

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March Residential Construction, Industrial Production, April UI Claims

Housing Starts Washed Out, Builder Confidence Sunny

  • March Housing Starts increased by 2.0 percent to a 926,000 unit annual rate.
  • Permits for new residential construction decreased in March by 5.7 percent to a 1,039,000 unit pace.
  • The National Association of Home Builders’ Builder Confidence Index jumped by 4 points to 56 in April.
  • Industrial Production declined by 0.6 percent in March as utilities normalized.
  • Initial Claims for Unemployment Insurance gained 12,000 to hit 294,000 for the week ending April 11.

Builders are expecting to see increased activity this spring according to the National Association of Home Builders, whose builder confidence index increased in April to 56.  However, increased confidence of builders didn’t add much to the March construction data, which still may have been impaired by weather. Housing starts for March increased off the weather-beaten slump in February, when starts dipped to a 908,000 unit rate, lower than any month of 2014. In March, total starts gained 2.0 percent to hit an annual rate of 926,000 units, below market expectations. Single-family starts gained 4.4 percent for the month while multifamily starts eased by 7.1 percent. Permits for new construction eased by 5.7 percent to a 1,039,000 unit annual rate. Given very tight housing markets across most major markets, still low interest rates, strong labor markets and increasing builder confidence, we still expect to see an uptick in construction and new home sales this spring. The Federal Reserve’s Beige Book for April, released yesterday, tells of generally improving residential real estate activity across most fed regions. Exceptions for Philadelphia, Cleveland, Atlanta and Dallas were blamed on the weather.

Total industrial production for March stepped down by 0.6 percent as utility output reset. Utility output increased by 3.3 percent in January and again by 5.7 percent in February, reflecting the very cold winter, and then declined by 5.9 percent in March as weather improved somewhat. Manufacturing output gained only 0.1 percent in March after declining in January and February. Considering the unchanged manufacturing output in December, we can say that the meager March gain was the first increase in output since November. Manufacturing output appears to have several headwinds. First, low oil and natural gas prices are reducing demand for steel and other equipment related to oil and gas drilling and production. Second, the strong dollar is a headwind for exporters, and also for those facing competition in domestic markets from cheaper imported products. Third, auto sales from December through February cooled. Fortunately, March auto sales snapped back to a 17.2 million unit pace. Fourth, backlogs at West Coast ports, left over from now-resolved labor issues, are still dragging on supply chains. Regional indicators are mixed. The Beige Book reported mixed manufacturing conditions from mid-February through the end of March. The Empire State Manufacturing Survey for April shows flat conditions for New York area manufacturers. The Philadelphia Fed’s Manufacturing Business Outlook Survey for April improved modestly.

Market Reaction: Equity markets opened with losses. The yield on 10-Year Treasury bonds is up to 1.92 percent. NYMEX crude oil is down to $55.64/barrel. Natural gas futures are down to $2.69/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Housing Starts 041615.

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March Retail Sales, Producer Prices, NFIB, February Inventories

Cars Drive Sales, Wholesale Prices Lift as Oil Stabilizes

  • March Retail Sales climbed by 0.9 percent as auto sales gained 2.7 percent.
  • Ex-auto Retail Sales increased by 0.4 percent.
  • The Producer Price Index for final demand increased by 0.2 percent in March.
  • Business Inventories for February increased by a moderate 0.3 percent.

After a three-month decline, retail sales increased by 0.9 percent in February, driven by retail sales of autos which increased by 2.7 percent. Previously reported unit auto sales for March climbed back up to a 17.2 million unit annual rate. Sales outside of autos were generally positive but unspectacular given very strong job growth through February. Building materials sales gained 2.1 percent for the month. Clothing stores increased sales by 1.2 percent in March. We expect firmer home sales this spring to add to overall retail sales, however, this is starting to feel like a different retail sales climate. Year-over-year changes in retail sales are almost always stronger than year-over-year changes in payroll employment. That is not the case now, with a 1.3 percent y/y gain in retail sales and a 2.3 percent y/y gain in payroll employment. Low inflation narrows the gap between job growth and retail sales, but something else is afoot. Retiring baby boomers, and risk averse millennials may have a lower propensity to consume. The Affordable Care Act may also be shifting spending habits for lower income households. Finally, the personal saving rate is trending higher. This shapes our long-term view that U.S. consumers keep pace with the overall economy, but do not lead the economy as they have done in previous decades.

Price indexes are normalizing as oil stabilizes near $50 per barrel. The Producer Price Index for final demand increased by 0.2 percent in March. The energy price sub-index for final demand goods gained 1.5 percent for the month, the first increased since last June. On a year-over-year basis, the PPI for final demand is still negative, down 0.8 percent. But as long as oil does not take another turn south, year-over-year comparisons will turn the corner and head north soon. The National Federation of Independent Businesses said that their Business Optimism Index fell 2.8 points in in March to 95.2 “in sympathy” with a string of weak economic reports. The overall trend is this survey remains positive. We expect to see a sympathetic turn higher in the second quarter. Total business inventories were up a modest 0.3 percent in February after no change in January. It looks like inventory accumulation will be a drag on first quarter real GDP growth. Also, the inventory/sales ratio has been climbing since the middle of last year which is not a good sign.

Market Reaction: Equity markets opened with losses. The 10-year Treasury yield is down to 1.86 percent. NYMEX crude oil is up to $53.06/barrel. Natural gas futures are up to $2.54/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Retail Sales 04-14-15.

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Comerica Economic Weekly

It was a light week for U.S. economic data, but three data releases all reinforced our view that the weaker-than-expected March jobs report, with just 126,000 net new jobs added, was a normal abnormality, and does not represent the start of a cooler labor market.

The ISM Non-Manufacturing Index eased slightly from 56.9 in February, to a still-positive 56.5 in March. The production and new orders sub-indexes were well into positive territory. Significantly, so was the employment sub-index, which increased from 56.4 in February to 56.6 in March. No hiring slowdown here.

The Jobs Openings and Labor Turnover Survey (JOLTS) for February showed an uptick in the jobs openings rate to 3.5 percent. The 5.1 million job openings in February was the highest level since January 2001. The hiring rate was unchanged in February, and that may be due, in part or whole, to bad weather.

Finally, initial claims for unemployment insurance for the week ending April 4, increased by 14,000 to a still-very-low 281,000. The 4-week average for initial claims, at 282,250, was the lowest since June 3, 2000. Continuing claims for the week ending March 28 dropped by 23,000 to hit 2,304,000, a 14 year low.

The Federal Reserve’s assessment of the U.S. labor market is a critical factor in the timing of interest rate lift-off. The minutes of the Federal Open Market Committee meeting of March 17/18 were released Wednesday afternoon. This meeting concluded 12 days before the release of the weak March jobs report.

In the minutes we see a Fed very busy discussing and planning interest rate lift-off. The minutes state that the Federal Reserve will continue to target a range for the fed funds rate that is 25 basis points wide. That is to say, no half steps. Also, at lift-off, the Fed will set the interest rate on excess reserves (IOER) equal to the top of the target range for the fed funds rate, and set the offering rate on overnight reverse repurchase agreements (ON RRP) to the bottom of the target range for the fed funds rate.

Several FOMC members judged that the economic data and outlook were likely to warrant  beginning the normalization process (interest rate lift-off) at the June meeting. However, that view was not unanimous. With the release of the March employment report, expectations for June lift-off have diminished. We now look for lift-off by September 17. The trajectory of increases in the fed funds rate will be shallow.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 04-10-15.

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April 2015, Comerica U.S. Economic Update

If Punxsutawney Phil was an economist instead of a groundhog, he would have said on February 2, “six more weeks of soft data.” It was a bad winter for much of the country, and like the cold weather, soft economic data lingered into March. After unsustainably strong real GDP growth last year, averaging 4.8 percent in 2014Q2 and Q3, real GDP growth stepped down to 2.2 percent in 2014Q4. We expect to see a similar number for 2015Q1. Auto sales dropped from December through February, and new home sales were stagnant through 2014. The spate of soft data was capped last Friday with the release of the March payroll employment report that showed a much-weaker-than-expected 126,000 net new jobs were added to the U.S. economy for the month. But rather than a sign of a fundamentally weaker U.S. economy, we view the March jobs data as a typical correction following a string of very impressive monthly job gains. Over the 12 months ending in February this year, average monthly job growth for the U.S. was a robust 269,000 jobs per month, well beyond consensus expectations of a year ago. It is normal to see a weak month of job growth after a string of very strong months. We had the same pattern in the 1990s and in the 2000s. Moreover, other labor market indicators show that this is still a very strong job market. Initial claims for unemployment insurance for the week ending March 28 fell to 268,000, lower than anything that we saw in the 2000s. Also, in the ISM Non-Manufacturing Index for March the employment sub-index increased from 56.4 percent in February, to 56.6 percent, indicating ongoing strong hiring. We expect to see a stronger April jobs report, consistent with improving household finances. Despite the soft jobs data for March, auto sales rebounded to a 17.2 million unit rate for the month and new home sales surged to a 539,000 unit annual rate in February.

Oil prices remain a source of uncertainty for the U.S. economy. There is some risk that limited storage capacity for crude oil will result in another leg down in oil prices by the end of April (see page 2 for a detailed discussion). Also, the strong dollar is emerging as a headwind for U.S. exports. However, since mid-March the dollar has weakened against the euro as the economic outlook for the Euro zone improved.

We expect the Federal Reserve to look past the winter chill and focus on the potential for very tight labor markets in the months ahead. This will keep the FOMC on track to begin increasing the fed funds rate this year. We expect to see the first increase in the fed funds rate on either June 17 or September 17. According to the “dot plot” released by the FOMC on March 18, 14 out of 17 FOMC members expect to see the fed funds rate at 0.50 percent or greater by the end of this year. Our interest rate forecast is consistent with that view.

 For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate_04_2015.

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Comerica Economic Weekly

This week’s U.S. data releases were mixed. Good news came from auto sales and unemployment insurance claims. Bad news came from a weaker-than-expected March jobs report.

In March, just 126,000 net new payroll jobs were added to the U.S. economy, well below inflated expectations of 248,000. The weak March data serves as a reality check on the labor market. It may not be supercharged after all, and it doesn’t need to be. Including downward revisions to January and February, we now see an average of 197,000 net new jobs per month over the last three months. This is a step down from the robust 324,000 average for the last three months of 2014. The 324,000 average from late last year was not sustainable. Near-200,000 new jobs per month is sustainable through this year, and will be enough to bring the unemployment rate down by about a tenth of a percent every other month, to finish the year near 5.0 percent.

The soft payroll jobs data for March is just one set of labor market indicators. Yesterday’s release of initial unemployment claims for the week ending March 28, at 268,000, was lower than anything seen in the decade of the 2000’s. Continuing claims for the week ending March 21 fell by 88,000 to a very low 2,325,000.

Auto sales accelerated back to a 17.2 million unit annual rate in March, where we were in November. The slide in sales through December, January and February ran counter to strong job growth and falling gasoline prices. So it looks like some pent-up demand over the winter got spent out in March. The 17.5 million unit mark from last August is still the local high point. We expect that auto sales will stay strong this year but are cresting at their cyclical high. Improving residential construction activity this spring may support pickup truck sales, although cooler oil drilling activity is a downer.

The weaker-than-expected March jobs data adds to uncertainty about the timing of fed funds interest rate lift-off. Some analysts have already concluded that the weaker-than-expected March jobs data eliminates the possibility of June lift-off. However, that view fails to account for normal monthly fluctuations in jobs data and ignores the fact that expectations were simply too high. The March jobs report is the last one that the Fed will see before the April 28/29 FOMC meeting. However, they will see three more weekly UI claims reports. We expect those reports to be strong, and so we do not eliminate the possibility of June lift-off.

However, the probability of September lift-off has increased. For now we will split the baby and say that there is a 50/50 chance for June or September. Janet Yellen has repeatedly said that the timing of lift-off is data dependent. The next three weeks of data are critical.

 For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 04-3-15.

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March U.S. Employment

Meek March Brings Jobs Data Back to Earth

  • The March Payroll Employment Survey showed a weaker-than-expected gain of 126,000 payroll jobs.
  • The Unemployment Rate for March was steady at 5.5 percent.
  • Average Weekly Hours for all employees dipped to 34.5 hours.
  • Average Hourly Earnings were up by 7 cents, with a 12-month gain of 2.1 percent.

In March, just 126,000 net new payroll jobs were added to the U.S. economy, well below inflated expectations of 248,000. The weak March data serves as a reality check on the labor market. It may not be supercharged after all, and it doesn’t need to be. Including downward revisions to January and February, we now see an average of 197,000 net new jobs per month over the last three months. This is a step down from the robust 324,000 average for the last three months of 2014. The 324,000 average from late last year was not sustainable. Near-200,000 new jobs per month is sustainable through this year, and will be enough to bring the unemployment rate down by about a tenth of a percent every other month, to finish the year near 5.0 percent. In our view, there is nothing anomalous about the weak March data. It looks like a normal correction, typical of the periodic corrections that we saw in the strong job markets of the 1990’s and 2000’s. Also, the soft payroll jobs data for March is just one set of labor market indicators. Yesterday’s release of initial unemployment claims for the end of March, at 268,000, was lower than anything seen in the 2000’s. In March the unemployment rate held steady at 5.5 percent. The average workweek dipped slightly to 34.5 hours. Average hourly earnings increased by 7 cents, for a 12-month gain of 2.1 percent.

The March malaise is visible across many industry groups, but it was not universal. Mining and logging gave up 11,000 jobs for the month, almost all in support industries which includes oil well servicing, consistent with reduced oil field activity. Construction gave up 1,000 jobs, perhaps weather related. Manufacturing lost 1,000 jobs in March, the first loss there since June 2013. There is spillover from lower oil prices in energy-related manufacturing, and increasing exchange rate headwinds for exporters. Wholesale trade employment was up 5,800. Retail trade employment was up a healthy 25,900 jobs. Transportation and warehousing employment increased by 9,500. Information services gained 2,000 workers while financial services gained 8,000.  Professional and business services employment was up a solid 40,000 jobs in March. Education and health services employment increased by a reasonable 38,000. Leisure and hospitality industries gained 13,000 jobs. Government employment dropped by 3,000 jobs in March.

This is the last monthly jobs report that the Fed will see before the April 28/29 FOMC meeting. They will see two more rounds of monthly jobs data before the June 16/17 meeting. If the April and May jobs data is also weak, that would likely delay fed funds lift-off to September or later. A resumption of +200,000 job gains in April and May increases the likelihood of a June 17 date for fed funds lift-off.

Market Reaction: U.S. equity markets are closed today. The 10-Year T-bond yield is down to 1.83 percent. NYMEX is closed today. NYMEX crude oil ended yesterday at $49.55/barrel. Natural gas futures ended yesterday at $2.70/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Employment 04-03-15.

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February International Trade, March Auto Sales and UI Claims

Trade Gap Narrows, Autos Sales Jump, Claims Fall, Life is Good

  • The U.S. International Trade Gap narrowed to -$35.4 billion in February.
  • Light Vehicle Sales accelerated to a 17.2 million unit annual rate in March.
  • Initial Claims for Unemployment Insurance fell by 20,000 to hit 268,000 for the week ending March 28.

The string of softer-than-expected U.S. economic data was broken yesterday and this morning with better-than-expected trade, auto sales and UI claims. However, the trade numbers look quirky and may be less positive than the headline numbers imply. The U.S. international trade gap narrowed noticeably from -$42.7 billion in January to -$35.4 billion in February. Exports of goods dipped by $2.9 billion in February while exports of services were little changed. The beneficial push to the overall numbers came from the imports of goods, which declined by $10.3 billion for the month, while the imports of services were little changed. The biggest swing in goods imports came from industrial supplies and materials. Crude oil and other petroleum products are a part of that grouping. Crude oil imports fell by $2.3 billion in February and other petroleum product imports dipped by another $0.4 billion. Nonautomotive capital goods imports also fell by $2.6 billion. After adjusting for price effects, the real balance of trade in goods fell by $3.8 billion ($2009) in February. So far, the January and February average for the real balance of trade in goods is still slightly worse than the 2014Q4 average, implying that trade will still be a small negative for 2015Q1 GDP. So even though the nominal headline number for February looks good, the first quarter 2015 numbers may not be favorable, especially if we see some reversion to the export and import data in March.

Auto sales accelerated back to a 17.2 million unit annual rate in March; a number last seen in November. The slide in sales through December, January and February ran counter to strong job growth and falling gasoline prices. So it looks like some pent-up demand over the winter got spent out in March. The 17.5 million unit mark from last August is still the local high point. We expect that auto sales will stay strong this year but are cresting at their cyclical high. Improving residential construction activity this spring may support pickup truck sales, although cooler oil drilling activity is a downer. Initial claims for unemployment insurance fell by 20,000, reaching a very low 268,000 for the week ending March 28. Even with reduced expectations for tomorrow’s official payroll report for March, U.S. labor market indicators are all going in the right direction. Regionally, we note that Texas led states with a 2,035 increase in UI claims for the week, likely related to reduced oil field activity.

Market Reaction: U.S. equity prices are up. The 10-year Treasury Bond yield is up to 1.90 percent. NYMEX crude oil is down to $49.47/barrel. Natural gas futures are up to $2.67/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Int Trade 04-02-15.

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Comerica Bank’s Michigan Index Shows Third Consecutive Increase

Comerica Bank’s Michigan Economic Activity Index increased in January, growing 0.3 percentage points to a level of 120.6. January’s reading is 47 points, or 63 percent, above the index cyclical low of 73.8. The index averaged 117.6 points for all of 2014, three and three-tenths points above the index average for 2013. December’s index reading was 120.3.

“Our Michigan Economic Activity Index increased for the third consecutive month in January, indicating ongoing gains to the Michigan economy. Inputs to the headline index were mixed, with 5 out of 8 components increasing for the month, including payroll employment. We expect that the push to the Michigan economy from improving manufacturing conditions will ease in the months ahead as auto production crests at a cyclical high, and manufactured exports face increasing price competition due to a stronger dollar,” said Robert Dye, Chief Economist at Comerica Bank. “We look for non-manufacturing industries to take a larger share of new jobs this year.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0315.

 

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