Comerica Economic Weekly

At the halfway point in 2015 we see reasons to expect solid U.S. economic growth through the second half of the year.

U.S. data at the end of the second quarter are encouraging. There is ample evidence of a pickup in economic momentum through Q2, after a weak Q1. Job growth remains strong. In June, 223,000 jobs were added to the U.S. economy and the unemployment rate dropped to 5.3 percent. House prices are going up. Household balance sheets are improving. Consumer spending is picking-up. The two-thirds of the economy comprised of consumer spending has a strengthening base.

The even better news is that economic momentum looks like it will carry over into the just-begun third quarter. Government spending looks like it will firm up as the limits of the federal spending sequester ease going forward, and strengthening tax revenue supports states and municipalities. Business investment slumped in Q1 but that too will improve as businesses respond to an improving domestic economy.

That gurgling sound you hear is the world awash in oil. U.S. production is still increasing, even though the drilling rig count is less now than half of what it was this time last year. U.S. inventories of crude oil are still historically high. Petroleum consumption is ticking up, but only marginally. Global production and storage are also at peak levels. We have revised down our expectations for WTI oil prices at the end of this year to $60 per barrel. This will keep gasoline prices low, adding to consumer confidence.

International conditions are mixed. We can say with near certainty that anything we say about Greece will need to be revised by next week. The referendum in Greece, to be voted on Sunday, appears to be as crucial as it is ambiguous, and that is an interesting combination. We expect Greece to remain in the Eurozone with ongoing support to its banking system by the European Central Bank. European financial markets are edgy. The odds of a financial calamity in Europe appear to be low regardless of the outcome of the Greek situation. However, uncertainty is the bane of confidence. And lack of confidence is not good for any economic system. And so the emerging economic momentum in Europe is threatened by chaos in Greece.

Meanwhile, Chinese stock markets continue to deflate after bubbling up beginning late last year. The evaporation of a massive amount of market capitalization generated during the China bubble cannot be a good thing. After all, a trillion here, a trillion there, pretty soon it adds up to real money.

Puerto Rico was in the news this week for all the wrong reasons. The commonwealth economy is struggling and has been for a long time due to the erosion of its manufacturing base. According to Governor Alejandro Garcia Padilla, the economy is not generating enough revenue to service its $70 billion debt. A $1.9 billion payment this week averted an immediate crisis, but does not resolve Puerto Rico’s problems. Puerto Rican debt was downgraded last February to two levels below investment grade by the major rating agencies. About $30 billion of the debt is owned by residents of Puerto Rico. Most U.S.-based municipal bond funds own Puerto Rican bonds due to their very favorable tax treatment.

We still expect the Federal Reserve to begin raising the fed funds rate in September. Their mandate rests squarely on the U.S. economy, which is showing improved performance at mid-year. However, financial market turmoil in Europe could give the Fed cause to pause. We don’t think that will happen. But the potential for financial market volatility in Europe will cause the Fed to keep their cards close to their vest over the next few weeks. Until a near-term path is established for Greece and the rest of the European Union, the Fed keeps its options open.

 For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 07-03-15.

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Comerica Bank’s Texas Index Still Slipping on Oil

Comerica Bank’s Texas Economic Activity Index eased again in April, decreasing 2.7 percentage points to a level of 98.5. April’s reading is 26 points, or 36 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. March’s index reading was 101.2.

“The Texas economy continues to feel the pull from lower oil prices. Our Texas Economic Activity Index has now declined for six consecutive months, beginning in November of 2014. Fortunately, oil prices have been relatively stable near $60 per barrel for the last two months. Concerns about ongoing strong global production and floating storage may weigh on prices this summer. But on the other hand, you have a greatly reduced U.S. rig count, depletion of existing wells and increased gasoline demand by more confident U.S. consumers, which are all supportive of oil prices,” said Robert Dye, Chief Economist at Comerica Bank. “Job creation in Texas bounced back in May, but other indicators are showing the impact of reduced energy sector activity.”

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For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0615.

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Comerica Bank’s California Index Springs Back

Comerica Bank’s California Economic Activity Index improved in April, increasing 0.7 percentage points to a level of 119.7. April’s reading is 36 points, or 43 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. March’s index reading was 119.0.

“The California economy gained momentum after a soft first quarter. Our California Economic Activity Index picked up in April after little change over the previous three months. The state economy is large, diverse and resilient. Port activity is renormalizing. The high tech sector remains strong. Real estate markets in Northern California are super tight. Southern California conditions are tightening too,” said Robert Dye, Chief Economist at Comerica Bank. “Of course, water resources are a potentially binding constraint. Drought conditions are hurting the agricultural economy and may exert an increasing drag on real estate development.”

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For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0615.

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June U.S. Employment, Auto Sales, ISM MF, UI Claims, May Construction Spending

U.S. Gains Momentum through Q2 as Greece Melts Down

  • June Payroll Employment increased by 223,000 jobs. April and May were revised down by 60,000.
  • The Unemployment Rate for June fell to 5.3 percent as the labor force shrank.
  • Average Weekly Hours were unchanged at 34.5 hours. Average Hourly Earnings were
  • June Auto Sales remained strong at a 17.2 million unit rate.
  • The ISM Manufacturing Index increased to 53.5 in June, boosted by employment.
  • Initial Claims for Unemployment Insurance gained 10,000 for the week ending June 27, to hit 281,000.
  • Construction Spending for May increased by 0.8 percent, supported by private nonresidential.

Heading into the July 4th holiday, U.S. economic data is sparkling. Job growth is solid. Auto sales are strong. Manufacturing conditions have improved. There is no doubt that Q2 real GDP growth rebounded from a weak performance in Q1. It looks like U.S. economic momentum will continue in the just-begun third quarter. All this would put the Federal Reserve on track for a September increase in the fed funds rate, which would be the first increase since mid-2006. However, the volatile situation in Greece, and its potential impact on Europe, is an ever shifting parameter in the Fed’s calculation.  Our expectation is that Greece stays in the euro zone and is able to negotiate its way around a calamitous default and exit.  But events could easily turn the other way. The Fed’s concern is formulating the appropriate monetary policy for the U.S., not for Europe. That said, Yellen and company will be in close communication with the European Central Bank, monitoring financial stresses in Europe. Given the volatile situation in Greece, we expect Fed officials to remain cautious in their public comments ahead of the July 28/29 FOMC meeting. The referendum in Greece this Sunday may allow the European Central Bank to quickly step in and backstop Greek banks, permitting them to eliminate or reduce capital controls.  The vote could go the other way and keep Europe on edge for weeks or months to come, and make the Fed hesitant to potentially contribute to stresses in Europe by tightening monetary policy here.

Today’s jobs report for June is somewhat nuanced. U.S. payrolls increased by a solid 223,000 in June. Strong April and May payroll gains were revised down by a total of 60,000. An unexpected large decline in the labor force, down 432,000 workers, brought the unemployment rate down two tenths to 5.3 percent in June. The labor force situation remains confounding. Following a large 397,000 worker gain in May, the data show a larger 432,000 worker loss in June. The volatility of the labor force numbers remains higher than normal. A sub-5 percent unemployment rate by the end of this year is within reach. We expect to see upward pressure on wages as the unemployment rate tightens in the second half of this year. Consistent with the solid monthly payroll numbers for June, initial claims for unemployment insurance for the week ending June 20 remained comfortably below the benchmark 300,000 level at 281,000, gaining 10,000 for the week.

The U.S. consumer is re-emerging as a primal force in the economy. Auto sales in June gave back a little of the outstanding 17.8 million unit sales rate in May, to settle in a still-strong 17.2 million unit rate. Consumer spending was a solid contributor to Q2 real GDP growth. The ISM Manufacturing Index for June shows stability in the manufacturing sector as the index increased to 53.5 percent.

Market Reaction: U.S. equity markets opened with gains. The 10-Year T-bond yield is down to 2.38 percent. NYMEX crude oil is up to $57.76/barrel. Natural gas futures are up to $2.87/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Employment 07-02-15.

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Comerica Bank’s Michigan Index Thaws for Spring

Comerica Bank’s Michigan Economic Activity Index grew in April, increasing 1.9 percentage points to reach a level of 121.6. April’s reading is 48 points, or 64 percent, above the index cyclical low of 74.0. The index averaged 117.4 points for all of 2014, three and three-tenths points above the index average for 2013. March’s index reading was 119.6.

“The Michigan economy is feeling the tailwind of a resurgent U.S. auto industry. Our Michigan Economic Activity Index improved in April after plateauing through the early months of 2015. Strong auto sales are supportive of the state’s manufacturing sector and are buffering the negative impact of a strong dollar on export-oriented manufacturing. Job creation is on an upward trend in Michigan and real estate markets continue to firm up,” said Robert Dye, Chief Economist at Comerica Bank. “Cheaper gasoline is a boost for the state’s summer tourism industry, which will also benefit from more confident consumers who have a little more money to spend this summer.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0615.

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Comerica Bank’s Arizona Index Sees First Contraction in a Year

Comerica Bank’s Arizona Economic Activity Index eased in April, decreasing 0.4 percentage points to a level of 106.3. April’s index reading is 29 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. March’s index reading was 106.7.

“After a strong run through early this year, the Arizona economy stalled through March and April. Our Arizona Economic Activity Index was unchanged in March and has ticked down in April, breaking a string of nine consecutive monthly gains. Job creation has cooled. Payroll employment in May was about where is it was in January. Real estate conditions are improving, but not as quickly as in other areas. Residential construction activity is struggling to find momentum. High housing affordability relative to other areas, including California, remains a strong point for the state,” said Robert Dye, Chief Economist at Comerica Bank. “We expect the Arizona economy to regain momentum this summer.”

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For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0615.

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Comerica Bank’s Florida Index Continues Strong Gains

Comerica Bank’s Florida Economic Activity Index increased in April, growing 1.7 percentage points to a level of 135.5. April’s index reading is 57 points, or 73 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. March’s index reading was 133.9.

“Florida’s economy is looking good. Our Florida Economic Activity Index improved again in April, for the 13th consecutive month. Solid job creation for the U.S., combined with firming wages and improving consumer confidence in the presence of low gasoline prices is a potent recipe for growth in the Florida economy. This summer’s tourism season looks promising. One counterweight, however, is the strong dollar, which makes the Florida experience more expensive for foreign tourists. Likewise, it is making Europe and other destinations cheaper for American tourists,” said Robert Dye, Chief Economist at Comerica Bank. “We expect residential construction activity to improve through the summer.”

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For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0615.

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From the Desk of Robert Dye

More Thoughts About Greece

When I last wrote about Greece, at the end of May, I said that the probability of Greece exiting the European Union soon was about 25 percent. The failure of recent negotiations between the Greek government of Alexis Tsipras and eurozone finance ministers to extend the bailout program for Greece has changed that outlook. The lack of progress in the negotiations resulted in a significant move by the European Central Bank. The ECB statement of June 28 says that it will not remove the ceiling on emergency liquidity assistance to Greece. They will not backstop a run on Greek banks. That precipitated the capital controls on Greek banks that went into effect today, which severely restrict the flow of currency within the Greek economy. Restrictions on withdrawals of cash from banks and the insistence on cash payments by many hotels, restaurants and shops will hurt tourism as the summer season hits full swing. The economy will rapidly decelerate. Loan defaults will increase. Stress on Greek banks will multiply. The ECB says that it stands ready to reconsider its decision. It is waiting for the results of the referendum in Greece now scheduled for Sunday. The referendum is expected to be worded as a yes or no vote on the terms of the bailout package for Greece. It is being characterized as a vote for the euro or for the drachma. A yes vote for the bailout terms, and for the euro, could mean the end of the Tsipras government. It could also allow the ECB to reopen support for Greek banks. This will not be enough to salvage the summer tourist season. It is already severely damaged. But it could allow Greece to stay in the EU. The odds of a yes vote may be slightly greater than 50 percent. A no vote looks like it paves the way for Grexit. It’s going to be an interesting week.

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Comerica Economic Weekly

U.S. economic data from this week confirm that the household sector is strengthening, driving a GDP rebound for the about-to-be completed second quarter. Labor market conditions are improving, home sales are ramping up, auto sales are robust and the strong majority of U.S. economic indicators are consistent with an economy that is gaining momentum.

The BEA released their third estimate of 2015Q1 real GDP growth. It now shows a -0.2 percent annual rate, revised up from -0.7 percent. At the end of July, the BEA will release their annual benchmark revision to GDP data.

May home sales confirm that the U.S. housing market is warming up. New home sales increased by 2.2 percent in May to a 546,000 unit annual rate. Existing home sales increased by 5.1 percent in May to a 5.35 million unit rate. According to the Mortgage Bankers Association, the interest rate on a 30-year fixed rate mortgage was 4.22 percent as of June 12.

New orders for durable goods declined by 1.8 percent in May. The drop reflects volatility in commercial aircraft orders, down 35.3 percent in May. Core orders, nondefense capital goods excluding aircraft, increased by a moderate 0.4 percent.

Nominal consumer spending surged by 0.9 percent in May. The personal consumption expenditure (PCE) price index was up 0.3 percent in May as energy prices gained 4.7 percent, leaving real consumer spending with a solid 0.6 percent increase. The personal saving rate dropped from 5.4 percent in April to 5.1 percent in May, reversing its climb from October through last February. After adjusting for taxes and inflation, real disposable income increased by 0.2 percent in May.

Consumer sentiment improved in June according to the University of Michigan survey.

Initial claims for unemployment insurance increased inconsequentially by 3,000 to hit a still-low 271,000 for the week ending June 20.

Federal Reserve Governor Jerome Powell said that he thinks there is a good chance that the Fed will begin to lift the fed funds rate in September, with another increase possibly coming in December. We expect to see more hints from the Fed by the end of July.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 06-26-15.

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May Income/Spending, June UI Claims

Strong Spending Points to Q2 GDP Rebound

  • U.S. Personal Income increased by 0.5 percent in May. After taxes and inflation it gained 0.2 percent.
  • Nominal Consumer Spending increased by 0.9 percent in May driven by auto sales.
  • Initial Claims for Unemployment Insurance added 3,000 for the week ending June 20, to hit 271,000.

We knew auto sales were strong in May, up at a 17.8 million unit rate. Now we see the surge in nominal consumer spending, up 0.9 percent for the month. Spending on durable goods gained 2.2 percent. Nondurables were up 1.9 percent. Spending on services, the largest category by volume, gained a moderate 0.3 percent, holding down the headline reading for overall consumer spending. The personal consumption expenditure (PCE) price index was up 0.3 percent in May as energy prices gained 4.7 percent. This leaves real consumer spending with a solid 0.6 percent increase for the middle month of the second quarter, supportive of a Q2 GDP rebound. Nominal income was up by 0.5 percent in May as wages and salaries also gained 0.5 percent. Spending growing faster than income implies a drawdown in the saving rate. The personal saving rate dropped from 5.4 percent in April, to 5.1 percent in May, reversing its climb from October through last February. Strong gains in house prices and equities may allow households to spend a little more freely and enjoy still-cheap gasoline. Anecdotal reports suggest that household automobile miles are increasing. After adjusting for taxes and inflation, real disposable income increased by 0.2 percent in May.

Labor data through June suggests that incomes will continue to improve at a healthy clip. Initial claims for unemployment insurance increased by 3,000 for the week ending June 20 to hit 271,000, still well below the benchmark rate of 300,000. Continuing claims added 22,000 for the week ending June 13, to hit 2,247,000. Pennsylvania reported a sizeable 6,007 increase in initial claims through June 13.

Market Reaction: U.S. equity markets opened with gains. The yield on the 10-year Treasury bond is up to 2.42 percent. NYMEX crude is down to $59.70/barrel. Natural gas futures are down to $2.82/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Personal Income 06-25-15.

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