Comerica Economic Weekly

The big news of the week was the widely expected non-action by the Federal Reserve, keeping the fed funds rate unchanged at the September 20-21 FOMC meeting. Importantly, Janet Yellen, in her post-announcement press conference, reaffirmed her expectation that interest rates will increase in the future. The expectation was reinforced by the three FOMC members who chose to vote against Wednesday’s policy action. Esther George of Kansas City, Loretta Mester of Cleveland and Eric Rosengren of Boston all would have preferred to raise to the fed funds rate on Wednesday.

We also saw in the Fed’s new “dot plot” that the expected trajectory of the fed funds rate over the next few years has become even shallower, putting the Yellen Fed on an unprecedented course defined by the ultra-slow pace of policy normalization. Yellen’s statements in her press conference focused market attention on the December 13-14 FOMC meeting as the most likely date for the next rate hike. We believe that the Fed will not risk getting pulled into the turbulent political pool with a rate hike on November 2, less than a week before the general election on November 8. We are maintaining our forecast for a 25 basis point increase in the fed funds target range in December. As of Friday morning, the fed funds futures market is showing an implied 59 percent probability of at least one rate hike by December 14.

Also on Wednesday, the Bank of Japan released a monetary policy announcement that contained two small changes to Japan’s monetary policy. First, the BOJ will now include longer-term sovereign bonds in their basket of asset purchases. This was introduced with the concept of “yield curve control.” The BOJ also said that their inflation rate target has been modified from “2 percent” to “2 percent or above.” Both of these changes are marginal and do not represent a sudden change in direction for the BOJ. The value of the yen climbed against the dollar on Wednesday, implying that financial markets are skeptical of the efficacy of the BOJ’s shift in strategy.

Washington, D.C. will remain in the economic news in the week ahead. Congressional leaders will try to put together a compromise budget that will keep the federal government running after the current budget expires at midnight on September 30. The Senate is expected to vote on a budget on Tuesday. The House will take up the plan following the Senate vote. The odds of a federal government shutdown in October appear to be low.

Housing starts for August fell by 5.8 percent to a 1.142 million unit annual rate. Both single and multifamily construction eased for the month. Building permits were essentially unchanged, dipping by 0.4 percent in August.

Existing home sales for August eased by 0.9 percent, to a 5.33 million unit annual rate. The median sales price of an existing home was up by 5.1 percent in August compared with a year earlier.

The Conference Board’s Leading Economic Index for August decreased by 0.2 percent, consistent with other economic metrics for the month that softened from strong June and July levels. The coincident index increased by 0.1 percent in August, its third straight gain. The lagging index gained 0.2 percent in August. Taken together, the three indexes make the case for steady, but unspectacular, growth through the end of this year.

Initial claims for unemployment insurance fell by 8,000 for the week ending September 17, to 252,000.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 09-23-2016.

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August Leading Indicators, Existing Home Sales, September UI Claims

Muddling Along

  • The Conference Board’s Leading Economic Index for August decreased by 0.2 percent.
  • Existing Home Sales for August decreased by 0.9 percent to a 5.33 million unit annual rate.
  • Initial Claims for Unemployment Insurance fell by 8,000 for the week ending September 17 to 252,000.

Today’s batch of U.S. economic data adds weight to the notion that the U.S. economy lost a little momentum in August after strengthening in mid-summer. We expect the third quarter to show a little stronger GDP growth after a weaker-than-expected first half of the year. But this is not an economy that is showing signs of roaring back. Rather, we expect to see more muddling along with real GDP growth near two percent through the second half of the year. The Conference Board’s Leading Economic Index for August decreased by 0.2 percent, consistent with other economic metrics for the month that softened from strong June and July levels. The August dip in the LEI breaks the short streak of two consecutive monthly gains following a similar 0.2 percent dip in May. Positives for the LEI in August were the interest rate spread, stock prices, the credit index and manufacturers new orders for consumer goods and materials. Negatives were average weekly manufacturing hours, the ISM new orders index, average weekly initial UI claims (inverted), manufacturers’ new orders for non-defense capital goods ex-aircraft, building permits and consumer expectations for business conditions. The coincident index increased by 0.1 percent in August, its third straight gain. The lagging index gained 0.2 percent in August. Taken together, the three indexes make the case for steady, but not spectacular, growth through the end of this year. It is not unusual to see a one-month dip in the LEI, followed by gains. A two or three month decline in the LEI, accompanied by dips in the coincident and lagging index, would be a cause for concern.

Existing home sales for August eased by 0.9 percent, to a 5.33 million unit annual rate. Sales in the Northeast increased moderately, while the Midwest, South and West all saw small losses. The months’ supply of existing homes on the market fell to 4.6 months’ worth, indicating fairly tight conditions for the U.S. generally. The median sales price of an existing home was up by 5.1 percent in August compared with a year earlier.

Initial claims for unemployment insurance fell by 8,000 for the week ending September 17. Consistent low UI claims data suggests that hiring is remaining strong through September. Continuing claims fell by 36,000 for the week ending September 10 to 2,113,000.

Market Reaction: Equity markets opened with gains. The 10-Year Treasury bond yield is down to 1.62 percent. NYMEX crude oil is up to $46.37/barrel. Natural gas futures are up to $3.11/mmbtu.

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For a PDF version of this Comerica Economic Alert click here:Leading Indicators 09-22-16.

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Comerica Economic Weekly

U.S. economic data leading into the upcoming Federal Open Market Committee meeting next week did nothing to change our view that the Fed will once again leave the fed funds rate unchanged. Fed Governor Lael Brainard had the opportunity to set market expectations for a rate hike on Monday when she delivered a speech to the Chicago Council on Global Affairs. Instead she stuck with her very dovish view on interest rate policy, and deflated the expectations of fed policy hawks. Recent stock market volatility stems, in part, from both the volume and the divergence of speeches and commentary from Federal Reserve officials. Stock prices rallied on Monday after Brainard’s speech was released. According to the fed funds futures market, the implied odds of a fed funds rate hike on September 21 have settled back down to 15 percent. The odds of at least one rate hike by December 14 have stabilized near 55.5 percent.

Oil price volatility also contributed to the ups and downs of equity prices this week. WTI crude oil started the week above $46 per barrel, but slid down to $43.21 by Friday afternoon.

Labor data for the week was positive. Initial claims for unemployment insurance remain very low, increasing by just 1,000 for the week ending September 10, to hit 260,000. Continuing claims increased by only 1,000 to hit 2,143,000 for the week ending September 3. This will be the last labor data that the Fed will see prior to the upcoming FOMC meeting on Tuesday and Wednesday.

Retail sales in August were soft. Ex-auto retail sales fell by 0.1 percent for the month, weighed down by lower gasoline prices. Total retail sales fell by 0.3 percent, despite solid gains in employment in June and July and moderate-to-strong house price growth over the last year. We already knew that auto sales were soft as they fell to a 17.0 million unit rate for August.

Industrial production was down 0.4 percent in August, which was below expectations. Manufacturing output also fell 0.4 percent with weakness primarily on the non-auto manufacturing side. Mining industries increased production by 1.0 percent, consistent with the uptick in the drilling rig count that has come with higher oil prices.

Nominal business inventories were unchanged for July from June. Weaker-than-expected inventory accumulation played a key role in the soft real GDP growth through the first half of 2016. We expect the weak inventory numbers from the first half of the year to eventually turn around, supporting moderately stronger GDP growth in early 2017.

Inflation was moderate in August at the consumer level as the CPI increased by 0.2 percent for the month, driven by higher natural gas and medical prices. Over the last 12 months the CPI is up by 1.1 percent. Core CPI (less food and energy) is up by a moderate 2.3 percent for the 12 month interval. The Producer Price Index for Final Demand was unchanged in August and it is also unchanged over the previous 12 months.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 09-16-2016.

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Comerica Economic Weekly

It was a light week for data, but Fed commentary is heating up as several Federal Open Market Committee members have recently made public statements. Loretta Mester (Federal Reserve Bank of Cleveland), John Williams (San Francisco), Jeffrey Lacker (Richmond), Esther George (Kansas City), and Eric Rosengren (Boston) have all recently made hawkish comments supportive of a rate hike. Of that group, Mester, Rosengren and George are voting members of the FOMC. Fed Governor Dan Tarullo this morning made more non-committal comments about the possibility of a near-term rate hike. It looks like he wants to be a counterweight to the hawks. All Fed Governors are voting members of the FOMC.

On Monday, Lael Brainard (Governor) is expected to make public comments before the Federal Reserve starts its media blackout period on Tuesday. The blackout will last until the monetary policy announcement on September 21. Hawkish comments by Brainard would be considered a particularly compelling signal that the Fed will hike short term interest rates on September 21. Dovish comments by Brainard would imply that we could have as many as three dissents in an FOMC vote to keep rates unchanged on September 21.

The implied probabilities calculated from the fed funds futures market for a September 21 rate hike have increased from a low of 15 percent early in the week to 30 percent on Friday morning, before settling to 27 percent after Tarullo’s comments. U.S. equity markets opened this morning with losses, possibly in recognition of increasing odds of a September 21 Fed rate hike, if so, that sentiment may be overplayed.

The European Central Bank kept monetary policy unchanged this week. Mario Draghi left the door open to further stimulative action in his post-meeting press conference.

The ISM Non-Manufacturing Index for August was weaker than expected, as was the ISM Manufacturing index, which was released last week. The ISM Non-Manufacturing Index for August fell from a moderately strong 55.5 in July to a weaker, but still expansionary, 51.4. Anecdotal comments were generally favorable. Large declines in the inventories sub-index and the export orders sub-index held the overall index down in August.

Labor market indicators were positive this week despite the weaker-than-expected August payroll employment data. The Job Openings and Labor Turnover report for July showed a record 5,871,000 job openings in July. The job opening rate ticked up to 3.9 percent. The hiring rate was unchanged from June at 3.6 percent, leading some to opine about a possible job-labor quality mis-match. The JOLTS data suggests that solid hiring is to come this fall.

Unemployment insurance claims stayed very low through early September. Initial claims for the week ending September 3 decreased by 4,000 to hit 259,000. Continuing claims fell by 7,000 to hit 2,144,000.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 09-09-2016.

 

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September 2016, Comerica Economic Outlook

Through the second half of August, several Federal Reserve officials suggested that a federal funds interest rate hike may come sooner rather than later. In her speech at the Fed’s annual retreat in Jackson Hole , Wyoming, on August 26, FOMC chairwoman Janet Yellen began her remarks with two key statements. First, she said, “the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time.” Second, she continued with, “…the case for an increase in the federal funds rate has strengthened in recent months.” The case for a September rate hike was warming up. Labor data was looking better. The rebound in June and July job growth eased the fears of a cooldown in hiring that were spawned by the weak May employment report. Manufacturing indicators were looking better. Auto sales surged in July, back to a near-peak 17.9 million unit rate. The odds of September rate hike implied by the fed funds futures market began inching up. Inflation hawks were back on terra firma anticipating wage gains.

Then the data softened. Now the data-dependent Fed finds itself in data quicksand yet again. The August jobs report disappointed as it showed that payroll employment for the month increased by a less-than-expected 151,000 jobs. Taken in isolation this was not a terrible payroll number. It was well within the range of normal moderate job growth. But it did reflect a significant step down from the heady pace of job growth in June and July, which averaged 273,000 net new payroll jobs. The unemployment rate for August held steady at 4.9 percent, where it has been since June. Average hourly earnings ticked up by just 0.1 percent after increasing by 0.3 percent in July. Average weekly hours dipped to 34.3.

Then the ISM Manufacturing Index slumped back below the break-even 50 mark, hitting 49.4 in August. This is the first contractionary reading since the index regained momentum last March. Likewise, the ISM Non-Manufacturing Index took a significant step down in August, easing to 51.4, its weakest level since February 2010. Moreover, August auto sales cooled to a 17.0 million unit pace, adding yet another data point that makes the average 18.1 million unit rate from September through November 2015 look like the high water mark for auto sales in this cycle.

The members of the FOMC will not see enough U.S. data between now and their next meeting over September 20 and 21 to shake off any new doubts resulting from this recent round of soft data. So, the likelihood of a September fed funds rate hike appears to be receding. The implied odds posted by the fed funds futures market for a September 21 rate hike have slumped to 15 percent. If Janet Yellen wants to go ahead with a September rate hike, and not shock financial markets, she will need to send a clear signal of her intentions very soon.

We are not anticipating such a signal. The intentions of the data-dependent Fed have been thwarted by the data yet again. Despite what some members of the FOMC have stated, we believe that the Fed will not consider a November 2 rate hike due to the proximity of the presidential election on November 8. To wait this long and then to raise the fed funds rate right before the election would be to invite a torrent of criticism. For now, we are maintaining our forecast for one fed funds rate hike this year, coming on December 14.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicOutlook0916.

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Comerica Economic Weekly

It was a heavy week for U.S. data releases. Key metrics were softer than expected, pulling down the odds of a September 21 fed funds rate hike.

The August jobs report left something to be desired as it showed that payroll employment for the month increased less than expected, up 151,000 jobs. Taken in isolation this is not a terrible payroll number, but it is a significant step down from the heady 273,000 average for June and July. The unemployment rate for August held steady at 4.9 percent, where it has been since June. Average hourly earnings ticked up by just 0.1 percent after increasing by 0.3 percent in July. Average weekly hours dipped to 34.3.

Initial claims for unemployment insurance were up by 2,000 to hit 263,000 for the week ending August 27. Continuing claims gained 14,000 to reach 2,159,000 which is still a very low number.

The ISM Manufacturing Index for August hit a sour note, falling into contraction territory at 49.4 percent. The new orders sub-index, the production sub-index and the employment sub-index all fell below the break-even 50 mark for the month. Strangely, anecdotal comments went the other way and were generally favorable. Of the 18 reporting industries, six reported expansion and 11 reported contraction for the month.

July personal income and spending data shows that income growth was good at the start of the third quarter. Nominal personal income for the U.S. increased by 0.4 percent in July. Wages and salaries increased by 0.5 percent. After accounting for inflation and taxes, real disposable income increased by 0.4 percent in July. Nominal consumer spending increased by 0.3 percent. Over the 12 months ending in July, the PCE price index was up by just 0.8 percent, while the core PCE price index (excluding food and energy) was up by 1.6 percent.

The Conference Board reported that U.S. consumer confidence increased in August to 101.1, showing an upward trend since May.

August auto sales fell to a 17.0 million unit pace after climbing to 17.9 million in July. Like the employment numbers, this is not a bad number taken in isolation, but it was weaker than expected.

The U.S. international trade gap narrowed in July to -$39.5 billion. The real trade gap in goods for July is down from the second quarter average, meaning that trade may be supportive of real GDP growth in the third quarter. July nominal exports increased by $3.4 billion, while nominal imports decreased by $1.8 billion.

House prices in many major markets eased in June but were still up moderately over the previous 12 months. The Case-Shiller U.S. National Home Price Index increased by 0.2 percent in June, showing a 5.1 percent gain over the previous year.

Overall mortgage applications stepped up at the end of August, with stronger gains for refis. Mortgage apps for purchase showed no clear trend through August.

Lukewarm data are left on the Fed’s plate to digest over the Labor Day weekend. Next week, as they prepare for the upcoming FOMC meeting over September 20/21, Fed officials may not have an appetite for a rate hike later this month. The data-dependent Fed will see that August data was not robust, and we believe that they will once again refrain from raising the fed funds rate. In our upcoming September macroeconomic and interest rate forecast we will keep our near-term fed funds rate forecast unchanged, with one 25 basis point increase coming in December. Currently, the fed funds futures market places the odds of a September 21 fed funds rate hike at 21 percent, down from the 27 percent probability that it showed prior to the release of the August payroll.

However, Fed stasis is not a fait accompli. But with weaker-than-expected labor, manufacturing and auto sales data, and a drop in the implied probability shown in the fed funds futures market, Janet Yellen knows that communication will be important next week if the FOMC still intends to raise the fed funds rate on September 21.

We are maintaining our forecast for one fed funds rate hike this year, coming in December.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 09-02-2016.

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August U.S. Employment, July International Trade

Job Growth Weaker Than Expected, Odds of September Fed Funds Rate Hike Diminish

  • Payroll Employment increased by 151,000 jobs in August, stepping down from strong gains in June/July.
  • The Unemployment Rate for August was steady at 4.9 percent.
  • Average Hourly Earnings increased by 0.1 percent.
  • Average Weekly Hours decreased to 34.3.
  • The U.S. International Trade Gap narrowed to -$39.5 billion in July, supportive of Q3 GDP.

The ISM Manufacturing Index for August hit a sour note yesterday, falling into contraction territory at 49.4 percent. Today, we see that the August jobs report also left something to be desired as it showed that payroll employment for the month increased less than expected, up 151,000 jobs. Taken in isolation this is not a terrible payroll number. It is well within the range of normal moderate job growth. But it does reflect a significant step down from the heady pace of job growth in June and July, which averaged 273,000 net new payroll jobs. The unemployment rate for August held steady at 4.9 percent, where it has been since June. Average hourly earnings ticked up by just 0.1 percent after increasing by 0.3 percent in July. Average weekly hours dipped to 34.3. So it is fair to say that the major metrics in the August jobs report underwhelmed expectations. The step down in August auto sales to a 17.0 million unit pace, the contractionary ISM Manufacturing Report for August and now the weaker-than-expected August payroll data are left on the Fed’s plate to digest over the Labor Day weekend. Next week, as they prepare for the upcoming FOMC meeting over September 20/21, hawkish Fed officials will not have the wind at their backs. The data-dependent Fed will see that August data was not robust, and we believe that they will once again refrain from raising the fed funds rate. In our upcoming September macroeconomic and interest rate forecast we will keep our near-term fed funds rate forecast unchanged, with one 25 basis point increase coming in December. Currently, the fed funds futures market places the odds of a September 21 fed funds rate hike at 21 percent, down from the 27 percent probability that it showed prior to the release of the August payroll.

The establishment payroll data was mixed in August. Mining and logging industries shed 4,000 jobs. Construction employment was down 6,000 jobs. Manufacturing employment contracted by 14,000 jobs. Wholesale trade was up 3,900 jobs, while retail trade gained a moderate 15,100. Financial services employment increased by 15,000 jobs. Professional and business services gained 22,000. Education and healthcare employment was up a solid 39,000 jobs in August. Leisure and hospitality gained 29,000 jobs. Government added a strong 25,000 jobs, boosted by local government employment.

The U.S. international trade gap narrowed in July to -$39.5 billion. The real trade gap in goods for July is down from the second quarter average, meaning that trade may be supportive of real GDP growth in the third quarter. July nominal exports increased by $3.4 billion, while nominal imports decreased by $1.8 billion.

Market Reaction: U.S. equity markets opened with gains. The 10-Year T-bond yield is up to 1.61 percent. NYMEX crude oil is up to $44.23/barrel. Natural gas futures are up to $2.81/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Employment 09-02-16.

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Comerica Bank’s Texas Index Dips

Comerica Bank’s Texas Economic Activity Index declined in June, down 0.3 percentage points to a level of 91.2. June’s reading is 18 points, or 25 percent, above the index cyclical low of 72.8. The index averaged 97.5 points for all of 2015, seven and three-fifths points below the average for full-year 2014. May’s index reading was 91.5.

“Our Texas Economic Activity Index dipped in June, for the second month, after firming in April. Overall, the trend is clearly down, reflecting the ongoing drag on the Texas economy from low oil prices. The index has now declined for 18 out of the last 20 months. Looking ahead, we know that the monthly Texas drilling rig count will cease to be a persistent negative for the state. The weekly rig count started to inch up in late May. However, that is not to say that the oil and gas sector will soon return to peak activity. We expect oil prices to remain in $45-$50 range through the third quarter, and that will provide only limited support for renewed oil field activity. Natural gas prices, which were generally trending up through the second quarter, now look a little softer. Natural gas in underground storage was about 9 percent higher in mid-August than a year ago, and that will keep prices soft,” said Robert Dye, Chief Economist at Comerica Bank. “Texas is still generating new jobs, but the rate of job growth is trending down. June nonfarm employment for the state was still up 1.5 percent over the previous 12 months.”

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For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0816.

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Comerica Bank’s Florida Index Inches Up

Comerica Bank’s Florida Economic Activity Index improved by just 0.1 percentage points in June to a level of 155.1. June’s index reading is 77 points, or 98 percent, above the index cyclical low of 78.1. The index averaged 138.2 in 2015, twenty and seven-tenths points above the average for all of 2014. May’s index reading was 155.0.

“The Comerica Florida Economic Activity Index inched up in June. The headline view is that our Florida index continued its very strong run, increasing in 26 out of the last 27 months. However, the details show mixed results. Three of the eight indicators were positive for the month. Nonfarm employment, housing starts and hotel occupancy all showed moderate gains. House prices were unchanged for the month, while state exports, initial claims for unemployment insurance (inverted) and sales tax receipts all eased. Job growth remains strong, with nonfarm employment increasing by 3.1 percent for the 12 months ending in June. Recent monthly job gains are close to the average of about 20,000 net new jobs per month since 2013,” said Robert Dye, Chief Economist at Comerica Bank. “We look for ongoing growth in the Florida economy, supported by strong demographic trends.”

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For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0816.

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Comerica Bank’s Arizona Index Improves

Comerica Bank’s Arizona Economic Activity Index improved in June, up 0.3 percentage points to a level of 109.5. June’s index reading is 33 points, or 42 percent, above the index cyclical low of 77.0. The index averaged 106.9 points for all of 2015, seven and one-fifth points above the average for full-year 2014. May’s index reading was 109.2.

“Our Arizona Economic Activity Index improved in June after dipping slightly in both April and May. Still, the index level for June is about where it was last February, showing that the state’s recent economic performance has been mixed. The good news is that Arizona continues to generate new jobs at a rate that is above the U.S. average. Payroll employment for Arizona in June was up by 2.9 percent over the previous year, while the U.S. average increase was 1.7 percent. In addition to payroll employment, other positives for the June Arizona Index were state exports, housing starts and hotel occupancy,” said Robert Dye, Chief Economist at Comerica Bank. “We expect the Arizona economy to continue to show at least moderate growth through the second half of the year, supported in part by more active housing markets.”

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For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0816.

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