Comerica Economic Weekly

U.S. economic data through the end of summer was consistent with an ongoing moderate GDP expansion. That said, we do expect to see some giveback from the strong 3.7 percent real GDP growth that is now reported for the second quarter. In the current third quarter we expect real GDP growth to decrease to about 1.5 percent, before re-accelerating in the fourth quarter of this year. Through the quarterly fits and starts of the GDP numbers, we see the consumer sector consistently pushing the economy ahead. This view gives us some confidence that recent volatility in global financial markets will not evolve into serious headwinds for the U.S. economy.

Consumer spending accounts for two-thirds of U.S. gross domestic product. So a strong consumer sector can act as a flywheel, maintaining momentum in the U.S. economy even as it is buffeted from international events.

China is a source of uncertainty and volatility. Two recent manufacturing indexes confirm a slow-down in the Chinese economy over the summer. Also, the highly speculative Chinese stock market has sold-off. The Chinese response to the two developments appears to be scattered. While the U.S. is a key trading partner of China on an absolute scale, relative to the size of U.S. GDP, our trade with China is small enough to say that reduced demand for U.S. exports will hurt individual companies, but it will not be enough to significantly weaken the overall U.S. economy. Other countries will feel a larger drag from weaker Chinese demand, including Japan, Australia, South Korea and Malaysia.

Evidence of a solid U.S. economy is seen in August auto sales. Auto sales zoomed up to a robust 17.8 million unit sales rate in August, the best monthly sales rate since the blowout 20.6 million unit rate of July 2005. Lower gasoline prices and a firming residential construction industry boosted truck sales in August.

Halcyon days for the auto industry are supporting overall manufacturing indicators, even as headwinds increase from a stronger dollar and weaker oil field activity. The ISM Manufacturing Index for August eased to a still positive 51.1 percent, indicating overall improving conditions for the month.

The ISM Non-Manufacturing Index, which more closely aligns with overall U.S. economic performance than the ISM Manufacturing Index, is showing strength. In August, the ISM Non-MF Index ticked down to a still strong 59.0 percent. A 59 is a good reading for this index, which rarely surpasses 60. Production, new orders and employment sub-indexes were all solidly positive in August. Anecdotal comments were, too.

Overall construction spending increased by 0.7 percent in July, boosted by both private residential and private nonresidential spending.

The count of payroll jobs increased by 173,000 in August, below expectations. However, several other components of the report showed improvement, including the unemployment rate. Even with weaker-than-expected payroll jobs gains, the unemployment rate fell by more than expected, to 5.1 percent for the month. We are on track for a sub-5 percent unemployment rate by early 2016.

The financial news media will do its best to fill the vacuum created by a still undecided Federal Reserve over the next two weeks, until the FOMC makes their policy announcement on September 17. Nothing about the Fed’s view on interest rates can be said with certainty. What can be said, is that an uncertain Fed is adding to global uncertainty and therefore to financial market volatility. The combination of a shaky China, an uncertain Fed and gyrating oil markets is not good. We believe that the Fed will act to diminish global uncertainty by announcing a small increase in the fed funds rate on September 17, but that is just a guess at this point. They could easily delay the increase until October or December, or even wait until 2016. But if they pass on their window of opportunity now, the window could be even smaller later.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 09-04-15.

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August U.S. Employment

Headline Miss Belies Solid Employment Report

  • August Payroll Employment increased by 173,000 jobs. June and July payrolls were revised up by 44,000.
  • The Unemployment Rate for August dipped to 5.1 percent.
  • Average Weekly Hours edged up to 34.6 hours.
  • Average Hourly Earnings were up2 percent from a year ago.

The count of payroll jobs increased by 173,000 in August, shy of expectations. This is a highly scrutinized miss because it comes as the Federal Reserve prepares for its upcoming FOMC meeting over September 16/17. There is some thought that the August miss on the payroll count will be one more factor that causes the Fed to delay its first rate increase in nine years until October, December, or even until 2016 when economic conditions may be stronger. However, when we read through the full employment report for August we find a great deal of support for a more positive interpretation. First, 173,000 job gains for the month is not terrible, it was just not as strong as expected. Second, August payroll numbers tend to be revised in the positive direction when all the component data, including seasonal adjustment factors, are recalculated the following month. Third, the already strong June and July payroll numbers were revised up by 44,000. Fourth, the household survey of employment showed a stronger gain of 196,000 jobs in August. Fifth, the unemployment rate fell two-tenths of a percent to 5.1 percent. We are on track for a sub-5 percent unemployment rate by very early next year. The sixth reason for a stronger interpretation of the jobs report is the gain in the average workweek by one-tenth of an hour to 34.6 hours. Seventh, average hourly earnings increased by 8 cents in August, to gain 2.2 percent over the previous 12 months. We believe that the employment data prior to the upcoming September 16/17 FOMC meeting is strong enough to fulfill Janet Yellen’s requirement for “some” improvement in the labor data. Also wage gains are firming up and oil prices are also firming up, adding support to expectations of an upward trend in inflation data. Still, the Fed may not take the opportunity that it has now, and it may choose to delay a rate increase until October or December, or even wait until 2016.

Most of the establishment data was good. The misses here speak of sector-specific conditions that are not generalizable to the overall economy. Mining and logging industries gave up 10,000 jobs with weakness in both petroleum and coal operations. Construction added a meager 3,000 jobs, which speaks more about a shortage of labor than a lack of demand for labor. Manufacturing employment declined by 17,000 jobs with losses in fabricated metal and machinery. Nondurable manufacturing saw an inexplicable 6,500 job loss in food manufacturing. Wholesale trade employment was up 7,800. Retail trade gained 11,200, below the recent strong trend. Financial services added 19,000 jobs. Professional and business services employment increased by a solid 33,000 jobs. Education and health services added a strong 62,000 jobs for the month. Leisure and hospitality employment increased by a comfortable 33,000 jobs. Government employment was up by 33,000 jobs with strong gains in local government education. The last category is a good example, showing where seasonal adjustment factors at the end of the summer get squirrelly. All in, this is not a bad report and it is a little suspect due to end of the summer seasonal adjustment issues.

Market Reaction: U.S. equity markets opened with losses. The 10-Year T-bond yield is down to 2.16 percent. NYMEX crude oil is down to $46.42/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: Employment 09-04-15.

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August ISM Non-MF, UI Claims, July Trade

Service Sector Strength Provides Insulation from International Events

  • The ISM Non-Manufacturing Index for August eased to a still-strong 59.0 percent.
  • The U.S. International Trade Gap narrowed in August to -$41.9 billion.
  • Initial Claims for Unemployment Insurance gained 12,000 to hit 282,000 for the week ending August 29.

A strengthening consumer and service economy, aided by low energy prices, is providing some insulation for the U.S. against the drag from a cooler China. Increasing evidence of cooler than expected economic growth in China, in combination with the sell-off in China’s over-heated equity markets, has focused attention on the global ramifications of demand shocks and financial market volatility emanating from Asia. It would be a gross overstatement to say that the U.S. is completely insulated from the events in China. Clearly, the recent gyrations in U.S. equity markets show the nearly instantaneous global transmission of financial market volatility. However, we can say that the U.S. consumers are buying more houses, more cars, more furniture and more appliances. Gains in these discretionary purchases are consistent with increased job security for most workers and solid gains in real per capita disposable income. In July, real per capita disposable income was up 2.5 percent over the previous 12 months, well above the average 2.1 percent gains of the previous expansion cycle, from 2003 through 2006. Solid income growth and firming house prices are potent supports for consumer spending.

The broad non-manufacturing sector includes retail sales, but also includes business services, transportation and warehousing, construction, finance and insurance, education and so on. The ISM Non-Manufacturing Index, which more closely aligns with overall U.S. economic performance than the ISM Manufacturing Index, is showing strength. In August, the ISM Non-MF Index ticked down to a still strong 59.0 percent. A 59 is a good reading for this index which rarely surpasses 60. Production, new orders and employment sub-indexes were all solidly positive in August. Anecdotal comments were, too.

Initial claims for unemployment insurance increased by 12,000 for the week ending August 29, to hit 282,000. This is also still a very good number. The four-week moving average for initial claims has been trending comfortably below the benchmark 300,000 level since mid-May. Continuing claims fell by 9,000 for the week ending August 22, to hit 2,257,000.

The U.S. international trade gap narrowed by $3.3 billion in July, to $41.9 billion. Exports were supported by gains in goods traded, while goods imports eased. The U.S. Energy Information Administration issued a report yesterday supportive of the case for an end to the ban on U.S. crude oil exports.

Market Reaction: U.S. equity prices are up. The 10-year Treasury bond yield is down to 2.16 percent. NYMEX crude oil is up to $47.15/barrel. Natural gas futures are up to $2.71/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Int Trade 09-03-15.

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August ADP Jobs, Auto Sales, ISM MF Index, July Construction Spending

Grab Bag of Economic Data Consistent with Moderate Growth Economy

  • The August ADP Employment Report showed a moderate increase of 190,000 private-sector jobs.
  • Auto Sales zoomed to a robust 17.8 million unit rate in August.
  • The ISM Manufacturing Index for August eased to a still-positive 51.1 percent.
  • Construction Spending for July increased by 0.7 percent.

Job growth in August was moderate according to the unofficial ADP Employment Report, which showed that 190,000 private-sector jobs were added in the month. This was a little below expectations, but not significantly so. It does cause us to shave down our guess for the official payroll job count for August that will be released by the Bureau of Labor Statistics on Friday morning. Previously, we had forecast about 215,000 net new nonfarm payroll jobs for the month. Now we will shave that down to about 200,000. This puts the unemployment rate on the bubble, meaning that our previous guess of a drop in the unemployment rate in August to 5.2 percent could easily overshoot if the unemployment rate stays at 5.3 percent for the month. While the ADP report did come in below the 205,000 consensus, it should not be judged as a weak report and should not factor into changing anyone’s calculus about the timing of the much anticipated Federal Reserve interest rate increase. We still believe that the preponderance of the data, and the discussion, slightly favor a small increase to the fed funds rate on September 17.

Perhaps the prospect of rising interest rates factored into the decision of many households to purchase a new car in August, ahead of possibly higher financing charges. Auto sales zoomed up to a robust 17.8 million unit sales rate in August, the best monthly sales rate since the blowout 20.6 million unit rate of July 2005. Lower gasoline prices and a firming residential construction industry boosted truck sales in August.

Halcyon days for the auto industry are supporting overall manufacturing indicators, despite the headwinds from a stronger dollar and weaker oil field activity. The ISM Manufacturing Index for August eased to a still positive 51.1 percent, indicating overall improving conditions for the month. Most sub-indexes were in positive territory, including new orders, production, employment, supply deliveries, customers’ inventories and imports. Anecdotal comments in the August report talk about the strong auto industry, lackluster demand from China, the favorable impact of low input prices and the headwind from the strong dollar.

Overall construction spending increased by 0.7 percent in July, boosted by both private residential and private nonresidential spending. Total public construction spending, which includes highway and other transportation spending, eased by 1.0 percent in August. Private residential construction spending gained 1.1 percent with help from new single-family projects. Private nonresidential spending gained 1.5 percent, with a strong 4.7 percent increase in manufacturing related projects.

Market Reaction: U.S. stock prices opened with gains. The yield in 10-Year T-bonds is up to 2.18 percent. NYMEX crude oil is down to $44.25/barrel. Natural gas futures are down to $2.66/mmbtu.

Alert_09_02_2015_ADP

For a PDF version of this Comerica Economic Alert click here: ADP 09-02-15.

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Comerica Economic Weekly

U.S. economic data from late summer has been largely positive. However, global financial markets have exhibited a high degree of volatility and this creates the potential for an adverse feedback loop back to the U.S. economy. The global stock market sell-off that was triggered in China, and rolled through Europe before cascading over U.S. markets appears to have run its course. But this cannot be said definitively.

About China, nothing can be said definitively. The Chinese economy appears to be slowing down, well below the official 7 percent year-over-year real GDP growth rate reported for 2015Q2. Current estimates of real GDP growth for China range from 5 to 3.5 percent , with outlier estimates down to zero. Countries tightly linked to China through international trade, such as Australia, Brazil and most east-Asian economies, are already feeling the drag from a weaker China. Japan, the most leveraged of all major economies, is tightly linked to China. Slow growth and high leverage is an unattractive combination for both China and Japan.

The U.S. is not as tightly coupled to China, but it would be an overstatement to say that the U.S. economy is entirely decoupled from China. China is simply too big and globally connected to ignore.

What we can say about the U.S. economy is that momentum appears to be growing in the consumer sector, which accounts for two-thirds of U.S. GDP. Low gasoline prices, strong job growth and firming house prices have put the wind at the back of U.S. consumers.

However, uncertainty emanating from the recent global equity market correction may take some wind out of sails, and the sales, of U.S. consumers. If the correction has run its course, and if businesses continue to hire at at least a moderate pace, then consumer spending will continue as a powerful stabilizing force for the U.S. economy. We believe that that is the most likely outcome.

U.S. real GDP growth for 2015Q2 was revised up to 3.7 percent, confirming a consumer led rebound after the meager 0.6 percent GDP gain for the first quarter. The gain in consumer spending in Q2 accounted for over half the total GDP growth.

Real disposable personal income increased by 0.4 percent in July, the strongest gain since January. Real consumer spending increased by 0.2 percent, pushing the personal saving rate up to 4.9 percent.

Initial claims for unemployment insurance fell by 6,000 for the week ending August 22, to hit 271,000. This very low level of new claims is entirely consistent with ongoing payroll job gains in August. Continuing claims for unemployment insurance gained 13,000 to finish the week of August 15 at a very favorable 2,269,000.

New orders for durable goods increased by 2.0 percent in July, aided by a strong auto industry.

New home sales increased by 5.4 percent, to a 507,000 unit annual rate, after falling in June. The U.S. national Case-Shiller house price index gained 0.1 percent in June, and was up 4.5 percent for the year.

Financial markets are firmly focused on the Federal Reserve, anticipating what policy makers will do at the upcoming September 16/17 FOMC meeting. We believe that the most likely timing for the first fed funds rate increase is still September, but that is not written with overwhelming conviction. We would place the odds of a September rate increase at 30 percent. Late October gets 25 percent and mid-December gets 20 percent, leaving 25 percent for all of 2016. The flattish probability distribution reflects the potential for more financial market stress in the near term.

 For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 08-28-15.

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Comerica Bank’s Texas Index Sees Smallest Decline of 2015

Comerica Bank’s Texas Economic Activity Index eased in June, decreasing 0.6 percentage points to a level of 96.0. June’s reading is 23 points, or 32 percent, above the index cyclical low of 72.9. The index averaged 105.1 points for all of 2014, four and four-fifths points above the average for full-year 2013. May’s index reading was 96.6.

“Our Texas Economic Activity Index declined moderately in June, marking the eighth straight monthly drop. While it is obvious that low oil prices are having an impact on the Texas economy, it is also noteworthy that recent labor data shows that total payroll employment in the state has so far declined in only one month this year, March. In April, May, June and July, Texas saw net job gains. Other components of our index are showing consistent losses, including unemployment insurance claims (inverted), rig count, sales tax and hotel occupancy. The data show the nuances in Texas. The energy sector is a major component of the Texas economy, but oil is not the whole story. The state economy has shown resiliency in the early days of the dramatic collapse of oil prices,” said Robert Dye, Chief Economist at Comerica Bank. “That said, our June index does not include the drop in oil prices to below $40 per barrel. This will undoubtedly increase the stress on the Texas energy sector, and the whole state economy.”

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For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0815.

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Comerica Bank’s California Index Sees Third Consecutive Gain

Comerica Bank’s California Economic Activity Index grew in June, increasing 0.4 percentage points to a level of 121.1. June’s reading is 37 points, or 44 percent, above the index cyclical low of 84.0. The index averaged 113.7 points for all of 2014, seven and one-half points above the average for all of 2013. May’s index reading was 120.6.

“Our California Economic Activity Index increased again in June, showing a consistent recovery from a slight dip last March. Most components of the index were positive in June, including payroll employment, unemployment insurance claims, housing starts, defense spending and the Nasdaq 100. We did see a little give back in the house price index and in hotel occupancy for June, but the bulk of the data show positive conditions for the state economy. The recent global stock market correction will show up in our tech sector indicator – the Nasdaq 100 – but we believe that the correction will not be a fundamental drag on the state economy,” said Robert Dye, Chief Economist at Comerica Bank. “Solid job creation and cheaper gasoline prices are supportive of the state’s large consumer sector.”

State_Index_California_08_2015

For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0815.

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Comerica Bank’s Arizona Index Back to Decline

Comerica Bank’s Arizona Economic Activity Index declined in June, easing 0.3 percentage points to a level of 106.4. June’s index reading is 30 points, or 38 percent, above the index cyclical low of 76.9. The index averaged 99.7 points for all of 2014, four and one-fifth points above the average for full-year 2013. May’s index reading was 106.7.

“Our Arizona Economic Activity Index dipped slightly in June, extending the stall that began in March. The state economy continues to underperform both the national economy, and relative to its previous strong cyclical performance. Arizona has been a growth leader in recent expansion cycles, but this time we are seeing a state economy that is struggling to find momentum,” said Robert Dye, Chief Economist at Comerica Bank. “Four out of eight index components declined in June, including exports, unemployment insurance claims (inverted), hotel occupancy and enplanements. Also, two components were unchanged- payroll employment and house price index. We see a gradual improvement in the state’s housing market through 2015 and we expect momentum in this area to increase.”

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For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0815.

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Comerica Bank’s Florida Index Boosted by Construction

Comerica Bank’s Florida Economic Activity Index increased again in June, growing 1.6 percentage points to a level of 138.2. June’s index reading is 60 points, or 77 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. May’s index reading was 136.6.

“Florida’s economy continued to show strong momentum through mid-year, as indicated by the 15th consecutive increase in our Florida Economic Activity Index. The June index was supported by gains in six out of eight components, including nonfarm payrolls, unemployment insurance claims (inverted), housing starts, sales tax receipts, hotel occupancy and enplanements. We saw minor declines in state exports and in house prices. Job growth, in particular, has been strong, up 3.5 percent over the previous year in June, well above the U.S. average gain of 2.1 percent,” said Robert Dye, Chief Economist at Comerica Bank. “With oil prices falling below $40 per barrel, gasoline prices will decline further, and this will free up cash in Florida households that can be spent on discretionary purchases. Cheaper gasoline was also a boon for tourists at the end of the summer vacation season.”

State_Index_Florida_08_2015

For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0815.

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Comerica Bank’s Michigan Index Continues Strong Gains for Third Month

Comerica Bank’s Michigan Economic Activity Index grew in June, increasing 1.9 percentage points to reach a level of 126.8. June’s reading is 53 points, or 71 percent, above the index cyclical low of 74.0. The index averaged 117.4 points for all of 2014, three and one-third points above the index average for 2013. May’s index reading was 124.9.

“Our Michigan Economic Activity Index for June increased for the third consecutive month, propelled by the state’s resurgent auto industry, which is a key factor in the state’s steady job growth. The uptick in U.S. auto sales through mid-year has boosted auto production in Michigan. Nonmanufacturing job growth has also been an important part of Michigan’s economic revival. Property markets continue to firm up and residential construction activity is increasing,” said Robert Dye, Chief Economist at Comerica Bank. “The challenge ahead for Michigan will be to retain momentum in the nonmanufacturing economy, even as auto sales level out and eventually recede from current highs.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0815.

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