July Residential Construction, Consumer Prices

Construction Revved Up, Prices Tame

  • July Housing Starts were up significantly, by 15.7 percent to a 1,093,000 unit annual rate.
  • Permits for new residential construction increased in July by 8.1 percent to a 1,052,000 unit pace.
  • The Consumer Price Index increased by a tame 0.1 percent in July. Core CPI also gained 0.1 percent.

It was a good mix of U.S. data to start the day. House construction revved up in July after easing in June. Consumer prices in July were well contained. What’s not to like? Housing starts increased by a strong 15.7 percent to hit a 1,093,000 unit annual rate. Single-family starts gained 8.3 percent to hit their strongest rate this year. Multi-family starts were up by a robust 33.0 percent, hitting their best mark this side of the Great Recession. Permits numbers were also up, but they look a little tentative on the single-family side. Single-family permits increased by just 0.9 percent in July, and are now on par with last April. Multifamily permits were up by 23.6 percent, still well shy of April’s strong reading. Overall, it is a good residential construction report, reinforcing the July and August rebound in builders’ confidence reported by the National Association of Home Builders.

After three consecutive months of above-trend readings, the Consumer Price Index settled down in July, showing a tame 0.1 percent increase. The headline CPI is now up an even 2.0 percent over the past 12 months. Food prices were still warm in July, up 0.4 percent, boosted by the severe drought in California. However, a bumper corn harvest this year will have a mitigating effect on overall food prices. Countering the ongoing gains to food prices, consumer energy prices were down by 0.3 percent as crude oil and gasoline price eased. The core CPI (all items less food and energy) was also calm, gaining just 0.1 percent. Core CPI is up 1.9 percent over the past 12 months. Today’s CPI report for July will take some pressure off the Fed. As long as production and employment metrics are going in the right direction, and inflation looks tame, they will see no need to deviate from current expectations of an October end to QE and a mid-2015 rendezvous with interest rate lift-off.

Market Reaction: Equity markets opened with gains. The yield on 10-Year Treasury bonds is down to 2.38 percent. NYMEX crude oil is down to $95.90/barrel. Natural gas futures are down to $3.90/mmbtu.

Economic Alert 081914

For a PDF version of this Comerica Economic Alert click here: Housing Starts 081914.

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Comerica Economic Weekly

As we go to press financial markets are responding to an escalation in the Ukraine/Russia conflict. Indeed, financial markets have been buffeted recently by heightened geopolitical tensions in Eastern Europe and in the Middle East.

U.S. economic data for the week was mixed, dominated by a weak retail sales report for July, but also buoyed by a solid July industrial production.

Retail sales numbers were disappointing for July as total sales were unchanged from June, making for a slight real decline after adjusting for inflation. The weak start to Q3 real consumer spending reinforces our expectation that the Q2 rebound to 4.0 percent real GDP growth is not sustainable. Consumers are feeling more confident and secure in their jobs, but they are not tripping over themselves to rack up more credit card debt.

The National Federation of Independent Business’s Small Business Optimism Index is trending up, increasing to 95.7 in July. Both the actual compensation and the planned compensation components of the survey are up, pointing to current and future wage pressure.

Industrial production increased by 0.4 percent in July as manufacturing output gained a strong 1.0 percent. Overall IP was weighed down by moderate summer temperatures, contributing to a drop in utility output after seasonal adjustment. Utility output has either declined or stayed flat for six consecutive months, on the heels of the cold-weather- induced jump in utility output in January.

Initial claims for unemployment insurance increased by 21,000 to hit 311,000 for the week ending August 9. This looks like volatility in an otherwise very good trend. The job opening rate for June climbed smartly to 3.3 percent, consistent with other improving labor market metrics.

The Federal Reserve’s annual conference in Jackson Hole starts on August 21. Both Janet Yellen and the European Central Bank’s Mario Draghi will be speaking there, and no doubt talking to each other. European economic data looks soft, suggesting more desynchronization of monetary policy, as the Fed pivots toward eventual tightening, and the ECB is forced to double down on stimulus.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 08-15-14.

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July Retail Sales, NFIB, June JOLTS

Shoppers Feeling Good, Went on Vacation in July, Sales Soft 

  • Retail Sales for July disappointed, unchanged from June, providing a soft start to Q3 consumer spending.
  • Ex-auto Retail Sales gained just 0.1 percent, pushed by clothing, personal care and food/beverages.
  • The National Federation of Independent Business’s Small Business Optimism Index climbed in July to 95.7.
  • The Job Openings and Labor Turnover Survey for June showed another increase in the rate of openings.

Retail sales numbers were disappointing for July as total sales were unchanged from June, despite solid job creation over the past six months and generally improving consumer confidence trends. Headline retail sales registered a 0.0 percent change for the month, making for a slight real decline after adjusting for inflation. Not surprisingly, motor vehicles and parts sales were down 0.2 percent for the month, consistent with the drop in unit auto sales from a robust 16.9 million unit rate in June, to 16.5 million in July. Retail sales ex-autos showed a slight increase, gaining 0.1 percent, which likely did not keep up with the consumer price index for the month. The weak start to Q3 real consumer spending reinforces our expectation that the Q2 rebound to 4.0 percent real GDP growth is not sustainable. Consumers are feeling more confident and secure in their jobs, but they are not tripping over themselves to rack up more credit card debt. That is increasing, but moderately. Revolving consumer credit was up 2.5 percent in June over the previous 12 months.

The National Federation of Independent Business’s Small Business Optimism Index is trending up, increasing to 95.7 in July. Both the actual compensation and the planned compensation components of the survey are trending up, indicating some current and future wage pressure. We expect to see the U.S. unemployment rate continue to trend down this fall. Already, some regional and occupational indicators are showing tightening labor markets, setting the stage for accelerating wage gains over 2015.

The Job Openings and Labor Turnover Survey (JOLTS) for June showed improved labor market conditions through mid-summer. The job openings rate is showing ongoing gains, up in June for the fourth consecutive month. The Job openings rate for June stands at 3.3 percent, on par with the cyclical highs of the previous expansion from 2007.

Market Reaction: Equity markets opened with gains. The 10-year Treasury yield is down to 2.43 percent. NYMEX crude oil is up to $97.03/barrel. Natural gas futures are down to $3.91/mmbtu.

Economic Alert 081314

For a PDF version of this Comerica Economic Alert click here: Retail Sales 08-13-14.

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Comerica Economic Weekly

Global financial markets were on edge this week, reacting to events outside the U.S. as geopolitical tensions increased in Ukraine and in the Middle East. Concern spread that Europe’s economic recovery may be stalling. China and Japan also appear to be vulnerable to a loss of momentum.

Within the U.S. we continue to see generally favorable economic data. The U.S. trade gap narrowed by more than expected to -$41.5 billion in June. This implies a small upward revision to Q2 GDP growth, in the neighborhood of 0.3 percent. Energy continues to exert a positive influence on the balance of trade. Net trade in petroleum has improved from a -$24.0 billion balance in January 2013 to -$14.7 billion this June, with both gains in exports and reductions to imports.

The July ISM Non-Manufacturing Index climbed into record territory for its short life. Since its introduction in January 2008, the ISM NMF index has never been as high as it was in July, at 58.7 percent, indicating strongly improving conditions in the service sector. All ten sub-indexes were above 50.

The Mortgage Bankers’ Association Composite Mortgage Applications Index ticked up by 1.6 percent for the week ending August 1. The gain came from refis, up 3.8 percent. Mortgage apps for purchase dipped by 1.3 percent, continuing a soft trend through July and indicating a lackluster start to home sales in August.

Initial claims for unemployment insurance fell by 14,000 to hit a very low 289,000 for the week ending August 2. Continuing claims were also low, falling by 24,000 to hit 2,518,000 for the week ending July 26.

Nonfarm business productivity bounced back in Q2, at a 2.5 percent annual rate, after falling at a 4.5 percent rate in Q1. Productivity appears to be on a gradual improving trend and will be helped by increasing business investment this year.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 08-08-14.

 

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June International Trade, July ISM Non-MF, Mortgage Apps

U.S. Economic Data Continues a Strong Run

  • The U.S. International Trade Gap narrowed to -$41.5 billion in June, adding to Q2 GDP.
  • The ISM Non-Manufacturing Index advanced to 58.7 in June, its best reading ever, since 2008.
  • The Composite Index for Mortgage Applications ticked up by 1.6 percent for the week ending August 1.

U.S. economic data have been on a strong run. That continued yesterday and today with the release of June international trade data and the July ISM Non-Manufacturing index. The U.S. trade gap narrowed by more than expected to -$41.5 billion for the last month of Q2. This implies a small upward revision to Q2 GDP growth, in the neighborhood of 0.3 percent, if all other components of GDP remain the same in the upcoming second estimate. So as of now, we stand to see a 4.3 percent annualized growth rate for Q2 real GDP when the second estimate is released on August 28. Nominal exports increased marginally in June. The support to the trade gap came from an unexpected decline in nominal imports, down $2.9 billion for the month, with reduced imports of cars and consumer goods. Energy continues to exert a positive influence on the balance of trade. Net trade in petroleum has improved from a -$24.0 billion balance in January 2013 to -$14.7 billion this June, with both gains in exports and reductions to imports. U.S. merchandise exports to major trading partners are generally improving. Nominal merchandise exports to Canada are up 8.8 percent over the 12 months ending in June. Mexico is up 11.5 percent. European Union, 7.8 percent. China 1.9 percent.

The July ISM Non-Manufacturing Index climbed into record territory for its short life. Since its introduction in January 2008, the ISM NMF index has never been as high as it was in July, at 58.7 percent, indicating strongly improving conditions in the service sector. All ten sub-indexes were above 50. Interestingly, the inventories sub-index did decline, from 53.5 to 51.0, indicating that inventories were still expanding, but at a slower rate. In the separately reported ISM Manufacturing Index for July, the inventory sub-index fell below 50 to 48.5, indicating a slight contraction of inventories for manufacturing industries. These two inventory indexes support our view that the Q2 run-up in inventories, which significantly boosted GDP growth, is not sustainable. We expect to see lower inventory accumulation in the current third quarter. That will contribute to a more moderate real GDP growth rate in the vicinity of 2.2 percent.

Total mortgage applications ticked up at the end of July. The Mortgage Bankers’ Association Composite Index ticked up by 1.6 percent for the week ending August 1. The gain came from refis, up 3.8 percent. Mortgage apps for purchase dipped by 1.3 percent, continuing a soft trend through July and indicating a lackluster start to home sales in August.

Market Reaction: U.S. equity prices are up, reversing recent losses. The 10-year Treasury yield is down to 2.47. NYMEX crude oil is up to $97.47/barrel. Natural gas futures are up to $3.91/mmbtu.

Economic Alert 080614

For a PDF version of this Comerica Economic Alert click here: Int Trade 08-06-14.

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August 2014, Comerica U.S. Economic Update

Q2 GDP Bounce-Back Confirmed, but Rapid Growth is Not Sustainable

The first estimate of Q2 real GDP growth exceeded expectations at 4.0 percent. Q2 GDP was boosted by an unsustainable surge in inventories, accounting for 1.7 percentage points of the 4.0 percent growth rate. Nominal inventories increased by $110 billion in Q2, after growing by just $40 billion in Q1. Theoretically, in a steady-state economy, inventories would not add much to GDP growth. However, this is not a steady-state economy. The components of GDP are still changing significantly on a quarter-to-quarter basis. The average nominal change in quarterly inventories since 2010Q1 has been about $62 billion. So it looks like inventory accumulation should ease going forward, pulling current quarter real GDP growth back down to earth, near 2.2 percent.

Another component of GDP, federal government spending, is also changing. Federal consumption and investment expenditures have been a drag on GDP for 13 out of the last 15 quarters, exacerbated by the Budget Control Act of 2011 which introduced the word “sequestration” to the economic lexicon. Federal discretionary spending for 2014 is projected to be just shy of $1.2 trillion, or $153 billion below the 2010 level. The drag from the spending sequester begins to ease in the second half of this year, supporting marginally stronger GDP growth going forward. That is not to say that the federal spending spigot is being opened wide. Rather, nominal federal discretionary spending is projected by the Congressional Budget Office to stay stuck near the 2014 level through 2017, and then begin to lift. Of course, by 2017 we will have a new President and spending priorities may change.

Payroll employment gains totaled 209,000 in July, marking the sixth consecutive month of +200K job growth. The unemployment rate ticked up inconsequentially to 6.2 percent and will likely resume its downward track very soon. The Employment Cost Index for 2014Q2 jumped by 0.7 percent, indicating that tightening labor markets may be starting to put some upward pressure on business costs. To be complete, the biggest push from the ECI recently has come from benefits. Wages and salaries were up by 1.8 percent for the year ending in June, while benefits were up 2.5 percent.

The Federal Reserve remains on track to end its active asset purchase program in October. Passive QE (the reinvestment of maturing assets) will continue to put downward pressure on the long-end of the yield curve well after the end of active QE. We look for interest rate liftoff in 2015Q2. Recent regulatory changes to money-market mutual funds may increase demand for Treasury bills, adding a buffering force to interest rate liftoff next year.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate0814.

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Comerica Economic Weekly

U.S. economic data from the last week of July show a good start to Q3, but likely lower GDP growth than we saw in Q2. The first estimate of 2014Q2 real GDP growth came in stronger than expected, at a 4.0 percent annual rate. Overall, it was a solid, if unsustainable, report. The solid component was real consumer spending, up at a 2.5 percent annual rate, well above the weather-beaten 1.2 percent growth rate for the first quarter of this year. The unsustainable component of the GDP report was the unexpected ramp-up in inventories. Real inventory accumulation for the quarter was $93.4 billion ($2009), which boosted headline GDP growth by 1.7 percent.

The U.S. economy added 209,000 payroll jobs in July, the sixth consecutive month of +200K job gains. This includes April and June when about 300K jobs were added. These are healthy mid-cycle numbers consistent with rapid improvement in labor market conditions and ongoing moderate GDP growth. Still, today’s job’s report was not stellar, and that may be good news for equity markets. After yesterday’s selloff, today’s jobs report does not put additional pressure on the Fed to accelerate its schedule for interest rate liftoff, which would be a damper on equity markets. The unemployment rate ticked up inconsequentially from 6.1 percent to 6.2 percent.

The Employment Cost Index for Q2 showed a stronger-than-expected 0.7 percent increase, suggesting that tighter labor markets are beginning to exert some inflationary pressure. Over the previous 12 months, the ECI was up a moderate 2.0 percent.

June income and spending numbers were good, showing support from recent strong job growth. Nominal income was up by 0.4 percent, as was nominal consumer spending. Data revisions show a stronger U.S. saving rate than previously reported. In June, the personal saving rate increased to 5.3 percent.

The ISM Manufacturing Index for July increased to 57.1, showing good and improving overall manufacturing conditions. The employment sub-index for July increased to a strong 58.4, setting up positive expectations for August manufacturing employment.

Construction spending for June dipped by 1.8 percent as both private and public spending eased. Private residential construction spending dipped slightly by 0.3 percent for the month. Private nonresidential was down by 1.6 percent. Public construction spending was a bigger drag, down 4.0 percent for the month possibly related to delays in Congress in securing transportation funding (now resolved).

Initial claims for unemployment insurance increased by 23,000 to hit a still-low 302,000 for the week ending July 26. Continuing claims for the week ending July 19 increased by 31,000 to hit 2,539,000.

The Federal Open Market Committee did as expected, voting on Wednesday to further reduce their asset purchase program by another $10 billion. The Fed remains on track to completely eliminate active quantitative easing at the end of October. There was no change to near-zero interest rate policy. We continue to look for interest rate lift-off in 2015Q2.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 08-01-14.

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July U.S. Employment, June Income and Spending

Solid Job Growth Shows Ongoing Improvement to U.S. Economy

  • July U.S. Payroll Employment increased by 209,000 jobs. May and June were revised up by 15,000.
  • The Unemployment Rate for July ticked up inconsequentially to 6.2 percent.
  • Average Hourly Earnings were essentially flat in July, and were up 2.0 percent over the last year.
  • Nominal Personal Income for June was up by 0.4 percent, supported improving labor markets.
  • Nominal Consumer Spending was also up 0.4 percent; 0.2 percent after inflation.

The U.S. economy added 209,000 payroll jobs in July, the sixth consecutive month of +200K job gains. This includes April and June when about 300K jobs were added. These are solid mid-cycle numbers consistent with rapid improvement in labor market conditions and ongoing moderate GDP growth. Still, today’s job’s report was not stellar, and that may be good news for equity markets. After yesterday’s selloff, today’s jobs report does not put additional pressure on the Fed to accelerate its schedule for interest rate liftoff, which would be a damper on equity markets. The average workweek for all employees was unchanged for the fifth straight month at 34.5 hours. Average hourly earnings in July increased by a penny to $24.45, and are up 2.0 percent over the previous 12 months. The unemployment rate ticked up inconsequentially from 6.1 percent to 6.2 percent. The gains in the unemployment rate came as the civilian labor force increased by a strong 329,000 in July, perhaps catching up from a very weak April number. The U-6 unemployment rate, which captures marginally attached plus under-utilized workers, ticked up to 12.2 percent.

Job growth was widespread across industries. Construction added 22,000 jobs. Manufacturing was up 28,000 jobs, boosted by gains in transportation equipment. Retail trade employment added 26,700. Financial services gained 7,000 jobs, mostly in securities/investments. Professional and business services employment increased by 47,000 jobs. Education and healthcare added 17,000 jobs, below average for that sector. Leisure and hospitality services employment was up by 21,000. Government employment increased by 11,000 jobs. The government sector was a drag on total employment through 2012 and 2013, but that is no longer the case in 2014.

June income and spending numbers were good, setting up a positive start to the third quarter. Data revisions show a stronger U.S. saving rate than previously reported. In June the personal saving rate increased to 5.3 percent.

Market Reaction: U.S. equity markets opened with gains after yesterday’s selloff. The 10-Year T-bond yield is down to 2.55 percent. NYMEX crude is down to $97.47/barrel. Natural gas futures are down to $3.80/mmbtu.

Economic Alert 080114

For a PDF version of this Comerica Economic Alert click here: Employment 08-01-14.

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2014Q2 GDP, July ADP Employment

Inventory Rebound Propels Q2 GDP, Job Growth Continues

  • Real Gross Domestic Product growth for 2014Q2 was stronger than expected at 4.0 percent.
  • Inventories rebounded after a weak first quarter, adding 1.7 percent to real GDP growth, not sustainable.
  • Real Consumer Spending increased at a 2.5 percent annual rate, as auto sales accelerated.
  • The ADP Employment Report for July showed a solid gain of 218,000 private-sector jobs for the month.

The first estimate of 2014Q2 real GDP growth came in stronger than expected, at a 4.0 percent annual rate. Overall, it was a solid, if unsustainable, report. The solid component was real consumer spending, up at a 2.5 percent annual rate, well above the weather-beaten 1.2 percent growth rate for the first quarter of this year. Auto sales were an important factor. Auto sales hit a 17.0 million unit rate for June. The Bureau of Economic Analysis estimates that real consumer spending on durable goods (including cars) for Q2 increased at a 14.0 percent annual rate. Spending on nondurables was also good, increasing to a 2.5 percent growth rate. The services component of consumer spending was a little weak, gaining just 0.7 percent. We could see some revision there later on. The unsustainable component of the GDP report was the unexpected ramp-up in inventories. Real inventory accumulation for the quarter was $93.4 billion ($2009), which added almost $60 billion (real) to the increase in Q2 GDP, boosting headline GDP growth by 1.7 percent. Ninety-three billion for the quarter is not sustainable and leads us to expect that inventories will be a small-to-moderate drag on Q3 GDP. Fixed (non-inventory) business investment accelerated in Q2, adding 0.9 percent to headline GDP growth. Exports were assumed to be a moderate drag for the quarter. Federal spending was a slight drag, inhibited by the federal budget sequester. State and local government spending more than compensated for the slight drag from federal spending, adding 0.4 percent to headline GDP growth.

Adding to the good economic news, the ADP Employment Report for July showed an increase of 218,000 private-sector jobs for the month, about as expected. This bodes well for Friday’s official BLS employment report. Plus 220,000 is a reasonable expectation for the official numbers on Friday. That would extend the winning streak of consecutive +200k months to six. With good news from GDP and labor markets, the Federal Open Market Committee can be expected to announce another $10 billion reduction in their asset purchase program later today.

Market Reaction: Equity markets opened with gains, but quickly normalized. The 10-year Treasury bond yield is up to 2.52 percent. NYMEX crude oil is up to $101.39/barrel. Natural gas futures are down to $3.76/mmbtu.

Economic Alert 073014

For a PDF version of this Comerica Economic Alert click here: GDP 07-30-14.

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Comerica Bank’s Florida Index Gains in May

Comerica Bank’s Florida Economic Activity Index increased by 0.4 percentage points in May, to a level of 116.2. May’s index reading is 36 points, or 45 percent, above the index cyclical low of 80.4. The index averaged 114 in 2013, nine points above the average for all of 2012. April’s index reading was revised up to 115.8.

“Our Florida Economic Activity Index improved in May, reversing a slight two-month decline. Most components of the index increased in May; however, payroll employment showed a slight decline. Recent job growth has generally been faster than the U.S. average, and we expect that to continue through the second half of this year,” said Robert Dye, Chief Economist at Comerica Bank. “House price appreciation has slowed in both Miami and Tampa, consistent with trends visible in most major markets across the U.S.”

FL Index 0714

For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0714.

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