Comerica Economic Weekly

U.S. economic data from first week of March was generally positive and consistent with an ongoing expansion through the first quarter of the year.

The impressive February jobs numbers focused attention back on the Federal Reserve. Despite bad weather, 295,000 payroll jobs were added on net in February. The unemployment rate fell from 5.7 percent in January to 5.5 percent in February, and remains on track to end this year at or below 5.0 percent. Over the previous 12 months, average hourly earnings for all workers are up a modest 2.0 percent, but consumer price inflation is weak at -0.1 percent over the year ending in January. We expect to see more wage inflation through the second half of this year as labor markets tighten up.

The strong February jobs report sets the stage for the Federal Reserve to take yet another step toward monetary policy normalization at the upcoming March 17-18 FOMC meeting. We expect the Fed to modify their forward guidance on interest rates by removing the word “patient” from their analysis. This small change will reinforce market expectations of interest rate lift-off this year. We continue to expect to see a small increase in the fed funds rate announced on June 17, with September 17 a reasonable second choice.

The U.S. international trade gap narrowed in January to $41.8 billion. That sounds good, but it was not a particularly robust report. The trade figures are muddied by the drop in oil prices and by the now-resolved labor issues on California docks. Imports dropped by $9.4 billion for the month. Exports dropped by less, $5.6 billion, so the net balance of trade improved. It is too early to say with conviction, but trade is starting out Q1 as a net drag on GDP.

Initial claims for unemployment insurance increased by 7,000 for the week ending February 28, to hit 320,000. Initial claims have trended up since mid-January, but remain within the favorable range that was established through most of 2014. Continuing claims gained 17,000, to hit 2,421,000 for the week ending February 21, still a good number.

Nonfarm productivity declined at a 2.2 percent annual rate in 2014Q4, reflecting softer GDP growth in the quarter, accompanied by strong job gains. We expect robust job gains to moderate through 2015, bringing productivity growth back into the black. Conversely, unit labor costs increased at a 4.1 percent annual rate in 2014Q4. Over the previous year, unit labor costs are up 2.6 percent on average.

The ISM Manufacturing Index slipped to a still-positive 52.9 in February. The ISM Non-Manufacturing Index increased to a solid 56.9 for the month.

Bad weather is blamed for weaker-than-expected U.S. auto sales in February, chilling to a 16.2 million unit sales rate. Strong job growth supports a March rebound.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 03-06-15.

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February U.S. Employment, January International Trade

Despite Bad Weather, Another Strong Month for Job Growth

  • The February Payroll Employment Survey showed a stronger-than-expected gain of 295,000 payroll jobs.
  • The Unemployment Rate for February fell to 5.5 percent.
  • Average Weekly Hours for all employees were steady at 34.6 hours.
  • Average Hourly Earnings were up by 3 cents in February, gaining 2.0 percent over the previous year.
  • The U.S. International Trade gap narrowed in January to $41.8 billion.

The U.S. jobs machine remains in high gear. Despite bad weather, 295,000 payroll jobs were added on net in February. Job gains were broad-based but there was a decline in the mining sector of 9,300 jobs, consistent with lower crude oil prices and the steep drop in the U.S. rotary rig count. This loss of 9,300 jobs does not align with the much larger announced layoffs and other anecdotal reports of cutbacks in the oil patch, so we expect to see larger job losses reported for mining in the months ahead. The unemployment rate fell from 5.7 percent in January to 5.5 percent in February, and remains on track to end this year at or below 5.0 percent. Over the previous 12 months average hourly earnings for all workers are up a modest 2.0 percent, but consumer price inflation is weak at -0.1 percent over the year ending in January. In other words, the drop in energy prices has been a boon to households despite modest real wage gains. We expect to see more wage inflation through the second half of this year as labor markets tighten up.

Outside of the mining sector, payroll job gains were broad-based. Construction industries added 29,000 jobs in February, after seasonal adjustment, almost all in residential trades. Manufacturing added 8,000 jobs for the month, weighed down by a loss of 5,700 jobs in petroleum and coal products, influenced by striking refinery workers. Wholesale trade employment was up by 11,700 jobs, while retail trade added 32,000 jobs in February. Transportation and warehousing gained 18,500 jobs for the month. Information systems employment increased by 7,000 while financial activities gained 10,000 jobs. Professional and business services employment continued to grow strongly, up by 51,000 jobs in February. Education and healthcare was up smartly, by 54,000 jobs. Leisure and hospitality industries did not relax; they gained a strong 66,000 jobs for the month. Government employment was up by 7,000 in February.

The strong February jobs report sets the stage for the Federal Reserve to take yet another step toward monetary policy normalization at the upcoming March 17-18 FOMC meeting. We expect the Fed to modify their forward guidance on interest rates by removing the word “patient” from their analysis. This small change will reinforce market expectations of interest rate lift-off this year. We continue to expect to see a small increase in the fed funds rate announced on June 17, with September 17 a reasonable second choice.

The U.S. international trade gap narrowed in January to $41.8 billion. That sounds good, but it was not a particularly robust report. The trade figures are muddied by the drop in oil prices and by the now-resolved labor issues on California docks. Imports dropped by $9.4 billion for the month. Exports dropped by less, $5.6 billion, so the net balance of trade improved. It is too early to say with conviction, but trade is starting out Q1 as a net drag on GDP.

Market Reaction: U.S. equity markets opened with losses. The 10-Year T-bond yield is up to 2.24 percent. NYMEX crude is down to $50.42/barrel. Natural gas futures are up to $2.82/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Employment 03-06-15.

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February ISM Manufacturing, January Income and Construction Spending

Manufacturing Sector Still Expanding but Headwinds are Increasing

  • The ISM Manufacturing Index for February decreased again to a still-positive 52.9 percent.
  • January Personal Income increased by 0.3 percent for the second month in a row.
  • January Personal Consumption Expenditures decreased by 0.2 percent, weighed down by energy prices.
  • Construction Spending eased by 1.1 percent in January, weighed down by public construction.

The ISM Manufacturing Survey declined for the third consecutive month in January, to a still-positive 52.9. A reading above 50 indicates improving manufacturing conditions. So we can say that the manufacturing economy is still getting better, but at a slower rate than it was last fall. Seven out of ten sub-indexes were in expansion territory in January, including new orders, production and employment. Customers’ inventories, prices and exports contracted. Given strong inventory accumulation last year, the weaker inventory numbers are not surprising. Soft prices could be due to a combination of weaker demand from the energy sector, lower energy prices themselves, and a raising dollar, which is also a headwind against exports. The now-resolved labor dispute affecting West Coast ports appears several times in the anecdotal comments. It may take months for supply chains to normalize.

Nominal personal income increased by 0.3 percent in January, the same as in December. That is where the similarity to December stops. The components of income tell a different story in January. Wage and salary growth picked up from a weak 0.1 percent in December, to a solid 0.5 percent in January. Proprietors’ income, which gained a strong 1.0 percent in December, gave up 0.9 percent in January. Personal consumption expenditures fell by 0.3 percent in December and by 0.2 percent in January, reflecting lower gasoline prices and flat auto sales. The PCE price index fell for the third consecutive month, down by 0.5 percent in January. Over the 12 months ending in January, the PCE price index is up just 0.2 percent, under the weight of falling energy prices. After adjusting for price effects, real consumer spending was up by 0.3 percent in January, after falling by 0.1 percent in December.

Construction activity is on a cooling trend. Total construction spending in the U.S. decreased by 1.1 percent in January after gaining 0.8 percent in December. The value of private residential construction increased by 0.6 percent with gains in both single and multifamily projects. Private nonresidential construction eased in January by 1.6 percent, weighed down by a 5.7 percent decline in commercial projects. Public projects were down by 2.6 percent for the month. For the 12 months ending in January, the value of all construction projects is up by just 1.8 percent, well below the 12-month change from January 2014, which was up by 9.8 percent. Flat residential construction is the primary culprit.

Market Reaction: U.S. equity markets opened with gains. The yield on 10-Year Treasury bonds is up to 2.07 percent. NYMEX crude oil is up to $50.68/barrel. Natural gas futures are up to $2.74/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: ISM-MF 03-02-15.

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Comerica Economic Weekly

U.S. economic data from the end of February are consistent with an economy that expanded through the winter, but at a slower rate than we saw through the middle of last year.

Fourth quarter real GDP growth was revised down to 2.2 percent with the second estimate released today. The lead cause of the downward revision to growth was weaker inventory accumulation. Consumer spending was the biggest driver of growth, adding 2.8 percent to Q4 real GDP growth. Trade was a big drag, subtracting 1.2 percent from total GDP growth. The consumer spending component was juiced by health care services, related to the rollout of the Affordable Care Act, and so that will not be sustained. This clearer view on Q4 GDP allows us to bring our estimate of Q1 real GDP growth up to around 2.5 percent.

Existing homes sales dipped by 4.9 percent in January, to a 4.82 million unit rate. Bad weather was a factor. New home sales were essentially flat in January, easing by 0.2 percent to a 481,000 unit annual rate. Home price picked up in December. The Case-Shiller 20-City Composite Index gained a strong 0.9 percent for the month, resulting in a 4.5 percent gain over the previous 12 months.

Consumer prices fell in January, pulled down by gasoline. The headline CPI dropped by 0.7 percent. Gasoline prices were down almost 19 percent for the month. Over the previous 12 months, headline CPI dipped by 0.1 percent. Core CPI (less food and energy) gained 0.2 percent in January and showed a 1.6 percent gain over the previous 12 months.

New orders for durables goods increased by 2.8 percent in January, after falling through November and December. Both civilian and military aircraft have been somewhat volatile lately. A core measure, nondefense capital goods excluding aircraft, was up by 0.6 percent in January.

Initial claims for unemployment insurance increased by 31,000 for the week ending February 21, to hit 313,000. It still looks like we are trending just under 300,000, which is a very healthy number. Continuing claims dropped by 21,000 for the week ending February 14, to reach 2,401,000.

The Conference Board’s Consumer Confidence Index fell in January to 96.4, after surging in December. This does not look like a sudden downgrade in consumer attitudes, but rather reflects a reset after the December spike.

FOMC chairwoman Janet Yellen testified before House and Senate committees this week. She remained consistent in her approach to monetary policy normalization, giving herself plenty of wiggle room for the exact timing of interest rate lift-off later this year. We continue to look for a June move, with September as our second choice. We look for a further revision to forward guidance on interest rates on March 18.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 02-27-15.

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Comerica Bank’s Texas Steps down for Second Month

Comerica Bank’s Texas Economic Activity Index eased again in December, decreasing 0.2 percentage points to a level of 107.4. December’s reading is 35 points, or 48 percent, above the index cyclical low of 72.6. The index averaged 105.1 points for all of 2014, four and nine-tenths points above the average for full-year 2013. November’s index reading was 107.6.

“Our Texas Economic Activity Index declined slightly in December, following a small decline in November. The recent dip in the series clearly breaks the string of seven consecutive monthly gains beginning in April 2014. This dip in the Texas Index is consistent with the decline in crude oil and natural gas prices seen over the second half of last year and into early 2015. The drop in oil and gas prices has resulted in a significant reduction in planned expenditures for oil field development worldwide this year. Texas will share in that reduction in activity, and so we expect to see more evidence of the economic drag on Texas from lower oil prices in the months ahead,” said Robert Dye, Chief Economist at Comerica Bank. “Beyond the direct drag on oil field activity, we also expect to see more evidence of the indirect drag from lower oil prices on the rest of the Texas economy through 2015.”

StateIndex_02_15_Texas

For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0215.

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Comerica Bank’s Michigan Index Grows for Second Month

Comerica Bank’s Michigan Economic Activity Index grew in December, increasing 0.4 percentage points to a level of 120.0. December’s reading is 46 points, or 62 percent, above the index cyclical low of 73.8. The index averaged 117.3 points for all of 2014, three and one-tenth points above the index average for 2013. November’s index reading was 119.6.

“Our Michigan Economic Activity Index increased again in December, following a small increase in November. These two monthly gains put the Michigan Index back on an upward track after a one-month decline last October. Going forward we anticipate only limited gains from auto production driving the Michigan economy in 2015. However, we expect to see more improvement in housing markets, both in terms of residential construction and also in terms of house price gains in 2015,” said Robert Dye, Chief Economist at Comerica Bank. “Labor market conditions will continue to improve in 2015, providing a broadening base of support for the Michigan economy.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0215.

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Comerica Bank’s California Index Gains Momentum

Comerica Bank’s California Economic Activity Index grew in December, climbing 1.6 percentage points to a level of 118.3. December’s reading is 34 points, or 41 percent, above the index cyclical low of 83.8. The index averaged 113.4 points for all of 2014, seven and three-tenths points above the average for all of 2013. November’s index reading was 116.7.

“Our California Economic Activity Index increased nicely in December, showing ongoing improvement for the largest U.S. state economy. This was the ninth consecutive monthly gain for our California Index, and one that was broad-based, with seven out of eight index components increasing. We expect lower crude oil and gasoline prices to be a net benefit to the California economy, providing support to the state’s large consumer sector,” said Robert Dye, Chief Economist at Comerica Bank. “Gains in non-energy consumer spending and improving residential construction activity are pluses for the state in 2015. Also, the recent resolution of the labor dispute at California docks removes a key downside risk for the state economy.”

StateIndex_02_15_California

For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0215.

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Comerica Bank’s Florida Index Maintains Strong Gains

Comerica Bank’s Florida Economic Activity Index improved in December, growing 1.5 percentage points to a level of 124.7. November’s index reading is 47 points, or 60 percent, above the index cyclical low of 78.0. The index averaged 117.9 in 2014, eight and eight-tenths points above the average for all of 2013. November’s index reading was 123.2.

“The Florida economy is showing solid, consistent growth as evidenced by the nine consecutive monthly gains in our Florida Economic Activity Index. All eight components of our Florida Index increased in December. This is the first time that we have seen across-the-board gains in all index components since May of 2014, demonstrating that Florida has reclaimed its place as a U.S. growth leader,” said Robert Dye, Chief Economist at Comerica Bank. “We expect housing markets to continue to improve through 2015 with ongoing gains in construction activity and firming prices. An improving U.S. economy and low gasoline prices are tailwinds for the Florida economy. However, the strong U.S. dollar will mitigate some of the gain expected from an improving global economy in 2015.”

StateIndex_02_15_Florida

For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0215.

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Comerica Bank’s Arizona Index Shows Strong Gain

Comerica Bank’s Arizona Economic Activity Index grew in December, increasing 1.7 percentage points to a level of 104.0. December’s index reading is 27 points, or 36 percent, above the index cyclical low of 76.7. The index averaged 99.9 points for all of 2014, four and one-half points above the average for full-year 2013. November’s index reading was 102.3.

“Our Arizona Economic Activity Index increased again in December, for the seventh consecutive month. Moreover, the last two monthly increases in our Arizona Index have been very broad-based, with all eight components of the index improving. Job creation in Arizona remains about on par with the overall U.S. economy, which is unusually subdued at this point in the business cycle. The residential real estate market in Arizona, which historically has been a driver of above-average job growth for the state, has improved only slowly,” said Robert Dye, Chief Economist at Comerica Bank. “According to the latest Case-Shiller House Price Index, Phoenix house prices were up only 2.4 percent for the year ending in December. We expect to see stronger house price growth for Arizona in 2015.”

StateIndex_02_15_Arizona

For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0215.

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Comerica Economic Weekly

The short week produced mixed U.S. data. Signs continue to point to a weak, but positive, GDP reading for the first quarter of 2015. Even though the GDP data is seasonally adjusted, we have had a spate of weak Q1 reports coming off the Great Recession, including 2010Q1, 2011Q1, 2014Q1, and now 2015Q1. Sometimes patterns just happen, particularly when the underlying components of a series are complex.

Home construction remains range-bound near the 1 million units per year mark. Housing starts fell by 0.2 percent in January to a 1,065,000 unit annual rate, essentially where they have been through the second half of 2014. We can blame the weather a little bit. The National Association of Homebuilders’ Builder Confidence Survey fell 2 points in February, attributed to snow cover. Aside from the weather, new home sales were stuck near a 450,000 unit pace over the last two years, holding builders in check. Building permits eased slightly by 0.7 percent in January, to a 1,053,000 million unit pace.

The Producer Price Index for Final Demand fell by 0.8 percent in January, well beyond consensus expectations. Final demand goods prices were down by 2.1 percent. The energy index slid by 10.3 percent, the largest one-month drop since oil prices started falling last July. Food prices eased 1.1 percent with lower dairy product prices. Final demand services prices were lower by 0.2 percent with lower costs for outpatient care. Over the previous 12 months the PPI for final demand is unchanged.

The Industrial Production Index for January was up by 0.2 percent. Manufacturing output matched that gain, increasing by 0.2 percent. Motor vehicle assemblies eased by 1.4 percent to an 11.76 million unit rate, reflecting the step down in auto sales from November through January. Utility output rebounded off a December dip, gaining 2.3 percent in January.

The Conference Board’s Leading Economic Index for January gained just 0.2 percent, the weakest gain since last August. The coincident and lagging indexes were also up, indicating broad momentum in the U.S. economy.

Initial claims for unemployment insurance for the week ending February 14 decreased by 21,000 to hit 283,000. Continuing claims increased by 58,000, to 2,425,000 for the week ending February 7.

The minutes of the Federal Open Market Committee meeting of January 27-28 show a Fed deeply engaged in the process of figuring out the mechanics of interest rate lift off. We may see a further refinement of the Fed’s forward guidance on interest rates after either the March or April FOMC meetings. We expect the Fed to modify forward guidance this Spring in order to signal their intentions to lift the fed funds rate later this year. The June FOMC meeting still feels like a reasonable guess for the timing of interest rate lift-off.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 02-20-15.

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