Comerica Economic Weekly

U.S. economic data continues to show evidence of a spring thaw. Retail sales for March were up a strong 1.1 percent, driven by a snap back in auto sales. Retail sales of autos and parts were up 3.1 percent in March.  Non-auto retail sales gained a solid 0.7 percent for the month. The strong retail sales growth seen in March will not be sustained in the months ahead as this winter’s pent-up demand is spent out. It is, nonetheless, a sign that consumer spending is resilient.

The Consumer Price Index for March increased by 0.2 percent, up from the previous two months of 0.1 percent gains. A key factor in the small uptick in consumer inflation was the cost of housing. As house prices go up, so too will the owners’ equivalent rent index which feeds into the shelter component of the CPI. Owners’ equivalent rent accounts for about 24 percent of headline CPI. Also, we can expect ongoing upward pressure from traditional rents, which account for about 7 percent of headline CPI. So we can say that about a third of CPI will feel more pressure from housing markets for the remainder of the year.

Residential construction activity is also showing an improving trend after a tough winter. Housing starts were up by 2.8 percent in March, to a 946,000 unit pace, propelled by a rebound in single-family starts. Building permits for residential construction fell by 2.4 percent in March to a 990,000 unit pace, after a strong February. The level of permits remains above the levels for starts for the month. So the dip in permits in March should not be interpreted as a sign of weakness in residential construction.

Industrial production was up a solid 0.7 percent in March, and February production was revised up to show a strong 1.2 percent gain. This is the strongest two-month percentage gain since April-May 2010. This has positive implications for GDP growth for the recently- completed first quarter, implying upside risk for our forecast of a very weak 0.5 percent growth rate for real GDP. Overall capacity utilization for March increased to 79.2 percent. Most industries remain well shy of their 1994-95 highs for capacity utilization. But as we cross from average to above-average capacity utilization, pricing power increases…something to watch for going forward.

The New York Fed’s Empire State Manufacturing Survey for April shows that business activity was flat for New York-area manufacturers. The Philadelphia Fed’s Business Outlook Survey for April showed improving conditions for manufacturing in Pennsylvania and New Jersey.

Initial claims for unemployment insurance for the week ending April 12 increased slightly by 2,000 to a level of 304,000. This is still well within the “healthy” range. Continuing claims for the week ending April 5 declined by 11,000 to hit 2,739,000.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 04-18-14.

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March Residential Construction, Industrial Production

Starts Up, Production Up and Positive for GDP

  • March Housing Starts were up by 2.8 percent to a 946,000 unit annual rate.
  • Permits for new residential construction decreased in March by 2.4 percent to a 990,000 unit pace.
  • Industrial Production for March increased by 0.7 percent, with a strong upward revision to February.

Residential construction activity is showing an improving trend after a tough winter. Housing starts were up by 2.8 percent in March, to a 946,000 unit pace, propelled by a rebound in single-family starts. Single-family starts increased 6.0 percent in March. Multifamily starts eased in March by 6.1 percent. Very tight housing markets in many major markets are providing ample incentive for further gains in both single-family and multifamily construction. Building permits for residential construction fell by 2.4 percent in March to a 990,000 unit pace. The March dip in permits comes after a strong February. Also, the level of permits remains above starts for the month, so the dip in permits in March should not be interpreted as a sign of weakness in residential construction. New residential completions were essentially unchanged in March after a strong February.

Industrial production was up by a solid 0.7 percent in March, and February production was revised up to show a strong 1.2 percent gain. This is the strongest two-month percentage gain since April-May 2010. The March increase in industrial production was supported by a 1.0 percent increase in utility output following a small dip in February. Still, manufacturing output was up 1.4 percent in February and another 0.5 percent in March for a strong back-to-back showing. The February gain in manufacturing output was driven by the auto sector. In March gains were more broad-based. This has positive implications for GDP growth for the recently completed first quarter, implying upside risk for our forecast of a very weak 0.5 percent growth rate for real GDP. Today’s IP report also shows good momentum heading into the second quarter. We expect to see a pickup in real GDP growth in the current second quarter to about 2.9 percent. Overall capacity utilization for March increased to 79.2 percent. Capacity utilization for many industries is close to its long-run average. Most industries remain well shy of their 1994-95 highs for capacity utilization. But as we cross from average to above-average capacity utilization, pricing power increases…something to watch for going forward.

Market Reaction: Equity markets opened with gains. The yield on 10-Year Treasury bonds is up to 2.65 percent. NYMEX crude oil is up to $104.53/barrel. Natural gas futures are down to $4.61/mmbtu.

Economic Alert 041614

For a PDF version of this Comerica Economic Alert click here: Housing Starts 04-16-14.

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March Consumer Prices, Retail Sales

Housing and Food Push Consumer Prices Up, Retail Sales Strong 

  • The March Consumer Price Index increased by 0.2 percent, as rents moved up.
  • The March Core CPI also increased by 0.2 percent, and was up 1.7 percent over the past 12 months.
  • Retail Sales for March were up a strong 1.1 percent as auto sales snapped back.  
  • Retail Sales Ex-Autos were also strong in March, up 0.7 percent, with gains in building materials.

Even as the Federal Open Market Committee became increasingly concerned with low inflation, as seen in the minutes of their March 18/19 meeting, consumer price inflation was picking up. The Consumer Price Index for March increased by 0.2 percent, up from the previous two months of 0.1 percent gains. A key factor in the small uptick in consumer inflation was the cost of housing. House prices were up 11.4 percent in the fourth quarter of 2013 over the previous year, according to the Case-Shiller National U.S. House Price Index. Many large cities are well above the national average for house price appreciation. The Case-Shiller and other house price indexes do not factor directly into the CPI, but they are related. The Bureau of Labor Statistics calculates an index called owners’ equivalent rent. That index shows how much the average homeowner would have to pay to rent a house that is equivalent to the one they own. Obviously, house prices are a key factor in that index. As house prices go up, so too will the owners’ equivalent rent index which feeds into the shelter component of the CPI. Owners’ equivalent rent accounts for about 24 percent of headline CPI. Ongoing house price gains will keep upward pressure on the CPI. Also, rental vacancy rates are falling. We can expect ongoing upward pressure from traditional rents, which account for about 7 percent of headline CPI. So we can say that about a third of CPI will feel more pressure from housing markets for the remainder of the year. Energy prices were down slightly in March. Food prices were up 0.4 percent for the second straight month. The drought in California is showing up at the neighborhood grocery store. For those of us who do not eat, inflation was a non-issue in March. For everyone else, we see year-over-year growth in the CPI bottoming out and beginning to tick up this year.

Retail sales for March were up a strong 1.1 percent, driven by a snap back in unit auto sales to a 16.4 million unit annual rate. Retail sales of autos and parts were up 3.1 percent in March.  Non-auto retail sales gained a solid 0.7 percent for the month. General merchandise store sales were up 1.9 percent in March and building material sales were up 1.8 percent. So in autos and building materials we see a weather-related bounce back. The strong retail sales growth seen in March will not be sustained in the months ahead, but it is nonetheless a sign that consumer spending is resilient.

Market Reaction: Equity markets are turning south after opening gains. Treasury yields are down. NYMEX crude oil is down to $103.91/barrel. Natural gas futures are up to $4.67/mmbtu.

Economic Alert 04152014

For a PDF version of this Comerica Economic Alert click here: CPI 04-15-14.

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Comerica Economic Weekly

U.S. economic data at the start of the second quarter are consistent with an improving economy. Conditions in Europe also appear to be improving, evidenced by the strong demand for the first post-crisis issuance of Greek sovereign debt. However, China spooked global financial markets late this week after a poorly-subscribed bond sale raised concerns about slowing economic growth there.

Labor market indicators for the U.S. appear to be back on track after a weak December and January. The Job Opening and Labor Turnover Survey (JOLTS) for February showed an increase in the job openings rate for the month, consistent with the solid payroll job gain of 197,000 for that month.

Initial claims for unemployment insurance for the week ending April 5 decreased by 32,000 to hit an even 300,000. This is the lowest level of initial claims reported since May 2007 and it is on par with the lows seen in the previous expansion cycle when the unemployment rate was below 5 percent. Long story short, initial claims say that labor markets are normalizing.

Business confidence is improving. The National Federation of Independent Business’s Small Business Optimism Index increased in March, reversing the February decline. The improvement in small business optimism coincides with a strong 26 percent increase in commercial and industrial loans for all banks in February, as reported by the Federal Reserve.

Consumer sentiment is also improving. The University of Michigan’s Consumer Sentiment Index increased in early April to 82.6. Other measures of consumer confidence are also improving.

Producer prices for final demand jumped in March according to the Bureau of Labor Statistics. The new headline PPI series increased by 0.5 percent for the month. This unexpected gain reflects methodology changes by the BLS that have added more volatile components to their headline PPI measure. At this point, the surge in PPI for final demand does not appear to represent a clear inflationary threat. We will keep monitoring this series to see if it settles down.

The minutes for the Federal Open Market Committee meeting of March 18/19 show a repeated concern about weak inflation. The minutes have a “dovish” quality that suggests that the FOMC may keep the eventual increases in the fed funds rate at a lower trajectory than some might expect. There was broad agreement within the FOMC that the forward guidance linking the fed funds rate to an unemployment rate threshold of 6.5 percent needed to be revised. The minutes also suggest that the FOMC will continue to taper their asset purchase program in “measured steps” unless conditions change significantly.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 04-11-14.

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April 2014, Comerica U.S. Economic Update

It’s a Spring Thaw for the U.S. Economy

Recent data for the U.S. economy show a spring thaw in progress after one of the worst winters on record for parts of the upper Midwest. Consumer spending is picking up, companies are producing more and hiring more workers and houses are being built. Credit is flowing and confidence indexes are improving. We still expect to see a very weak 2014Q1 GDP report at the end of this month. Not only was the bad weather a drag through Q1, but  federal discretionary spending was still contracting and we expect to see a renormalization in inventories after last fall’s surge in both farm and nonfarm inventories. If Q1 comes in as weak as we expect, there is a danger that improving confidence will be throttled back, dragging on Q2 economic activity. Hopefully, consumers and businesses will respond to the clearing skies and calming seas in front of them, rather than to the stormy passage behind them.  With more confirmation of improving fundamentals, we expect to upgrade our Economic Outlook rating soon. We have not yet been above a C+ rating in its brief history, since September 2011.

In a benign economic environment the Federal Reserve will try to unwind extraordinary policy steadily and predictably, but without explicit forward guidance to box them in. We expect the Yellen Fed to be a little more boring than the Bernanke Fed simply because the times are different. Bernanke’s job was to surprise a very bad economy in a good direction. Yellen’s goal will be to avoid bad surprises in an improving economy. At their upcoming April 29/30 meeting, we expect the FOMC to announce another $10 billion reduction in its asset purchase program. We continue to expect to see the first increase in the near-zero fed funds rate around mid-year 2015, as early as the end of April, as late as mid-September.

Job growth got back on track in February and March after a weak December and January. In February 197,000 jobs were added. March saw 192,000 net new payroll jobs. Recently stronger labor force growth may be a developing trend. If it is, that could bring the unemployment rate down more slowly than previously thought. We have increased our estimate of labor force growth this year in our April forecast. Consequently, the unemployment rate declines more slowly for the remainder of this year than previously estimated. That does not imply a net worsening of the outlook. The unemployment rate is simply not a well-calibrated measure of economic activity. Vehicle sales stepped up in March to a 16.4 million unit rate. The bounce-back in sales was likely propelled by demand pent up over the winter. Light truck sales in particular were stronger than expected, which is a positive indicator for construction. We look for slightly weaker vehicle sales in April consistent with an overall improving trend.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate0414.

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Comerica Economic Weekly

True to form, March came in like a lion and went out like a lamb, at least in terms of economic data. Now we get to see whether or not April is in fact the cruelest month. So far, it looks like April will be a kind month for economic data as the U.S economy thaws out from one of the worst winters on record in many areas.

Labor data is now added to the growing list of improving indicators that point to a spring thaw. U.S. payroll employment increased by 192,000 jobs in March. January payroll gains were revised up to 144,000, and February was revised up to 197,000. The unemployment rate did its usual confounding thing in March and remained unchanged at 6.7 percent. The household employment series, which feeds into the unemployment rate, was strong in March, gaining 476,000 jobs. However, the civilian labor force increased by 503,000 workers, keeping the unemployment rate unchanged. Over the last year, average hourly earnings are up a tame 2.1 percent, exerting little inflationary pressure. The average workweek increased by 0.2 hours in March. Combined with a solid payroll gains, the increase in the workweek implies solid production numbers for the month.

The U.S. international trade gap widened more than expected to -$42.3 billion in February. It now looks like trade will be a small-to-moderate drag on real GDP growth for the recently completed first quarter. Added to an expected drag from inventories, weak federal government spending and weather-suppressed consumer spending, the first quarter is shaping up to be a clunker.

The ISM Manufacturing Index for March moved up to 53.7, indicating solid overall manufacturing conditions. The customers’ inventories sub-index was weak, slipping to 42.0. This is consistent with the expected correction from the large run-up in inventories that we saw in the second half of 2013. The March ISM Non-Manufacturing Index increased to 53.1, up from February’s 51.6. Also notable was the contraction in the inventories sub-index for non-manufacturing, down to 48.0.

March auto sales were a nice surprise, rebounding strongly from a 15.4 million unit rate in February, to a 16.4 million unit rate in March. The light truck component was strong for the month, with positive implications for residential construction going forward.

Overall construction spending for February was still under the weather, gaining just 0.1 percent for the month. Total public construction projects, including transportation infrastructure, gained 0.1 percent in February. Private nonresidential was up 1.2 percent and private residential construction spending declined by 0.8 percent. There is quite a wide statistical confidence interval around construction spending estimates, so one-month movements are not the most reliable of indicators. We expect to see gains in both private residential and private nonresidential construction spending over the course of this year.

Initial claims for unemployment insurance increased by 16,000 for the week ending March 29, to hit 326,000. Continuing claims notched up 22,000 to hit 2,836,000 for the week ending March 22.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 04-04-14.

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March U.S. Employment

Labor Markets Thawing Out, Positive Feedbacks Are Engaging 

  • U.S. Payroll Employment increased by 192,000 jobs in March. January and February were revised up.
  • The Unemployment Rate for March was unchanged at 6.7 percent, with strong gains in the labor force.
  • Average Hourly earnings for March were up a tame 2.1 percent over the previous 12 months.

Labor data is now added to the growing list of indicators that point to a spring thaw for the U.S. economy after a brutal winter. Earlier this week we saw both the ISM Manufacturing and Non-Manufacturing Indexes for March solidly in expansion territory. Auto sales for March snapped back to a 16.4 million unit rate. U.S. payroll employment increased by 192,000 jobs in March. January payroll gains were revised up to 144,000, and February was revised up to 197,000. Moderate first quarter job growth is supportive of second quarter consumer spending and home sales. Even with the winter chill, February and March payroll gains were above the 190,000 jobs per month average increase for 2013.

The unemployment rate did its usual confounding thing in March and remained unchanged at 6.7 percent. The household employment series, which feeds into the unemployment rate, was strong in March, gaining 476,000 jobs, but the labor force has also shown strong gains recently. In March, the civilian labor force increased by 503,000 workers. In the five months since November, the labor force has increased by an average of 320,000 workers per month, substantially above the -86,000 average monthly declines over the 10 months prior to last November.

Now that the Federal Reserve has backed away from the concept of an unemployment rate threshold for the fed funds rate, strange patterns in the labor force data are more of a curiosity than a potential policy mover. Still, if the recent pattern persists, the unemployment rate may stall out at around 6.7 percent. More likely is a moderation in labor force growth that allows the unemployment rate to fall gradually. Average hourly earnings edged down by 1 cent in March to $24.30. This will be reversed soon. Over the last year average hourly earnings are up a tame 2.1 percent, exerting little inflationary pressure. The average workweek increased by 0.2 hours in March. Combined with a solid payroll gains, the increase in the workweek implies solid production numbers for the month.

Job growth was widespread across the private sector. The construction industry added 19,000 jobs in March, indicative of increasing building activity in the months ahead. Manufacturing employment dipped slightly by 1,000 jobs, weighed down by losses in fabricated metals and food manufacturing. Retail trade added 21,300 jobs in March. Transportation and warehousing added 7,900 jobs in March. Financial services added a scant 1,000 jobs for the month. Professional and business services employment was strong, increasing by 57,000. Education and health gains were solid at 34,000. Leisure and hospitality added 29,000 jobs. Government employment was a goose egg, adding no net jobs in March.

Market Reaction: U.S. equity markets are holding onto yesterday’s gains. The 10-Year T-bond yield is down to 2.75 percent. NYMEX crude is up to $101.23/barrel. Natural gas futures are down to $4.44/mmbtu.

Economic Alert 04042014

For a PDF version of this Comerica Economic Alert click here: Employment 04-04-14.

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February International Trade, March ISM Non-MF and UI Claims

Trade Likely to Weigh on Q1 GDP, ISM Reports Supportive of March Jobs 

  • The U.S. International Trade Gap widened to -$42.3 billion in February, as exports eased.
  • The March ISM Non-Manufacturing Index increased to 53.1, the jobs sub-index was positive.
  • Initial Claims for Unemployment Insurance gained 16,000 for the week ending March 29, to hit 326,000.

The U.S. international trade gap widened more than expected to -$42.3 billion in February. It now looks like trade will be a small-to-moderate drag on real GDP growth for the recently completed first quarter.  Added to an expected drag from inventories, weak federal government spending and weather-suppressed consumer spending, the first quarter is shaping up to be a clunker. We are on the low side of consensus expectations for Q1 GDP. Our March U.S. Economic Update shows an anemic 1.0 percent annualized growth rate for Q1 real GDP.  We think we will see a confluence of one-off effects in the first quarter GDP numbers that do not reflect a fundamental slow-down in the U.S. economy. Imports increased by $1 billion in February while exports declined by $2 billion. On a year-over-year basis, exports to China were up 6.2 percent in February, while exports to the European Union were up 4.5 percent. The recent string of soft data from China appears to be motivating more stimulus there. According to today’s Wall Street Journal, the State Council has announced a new spending package featuring transportation and housing projects and small business tax credits.

While the expected weak Q1 GDP report is essentially backwards looking, forward-looking metrics are improving. As previously reported, the March ISM Manufacturing Index improved to 53.7. Today we see that the March ISM Non-Manufacturing Index increased to 53.1, up from February’s 51.6. Notable was the contraction in the inventories sub-index, down to 48.0. This is consistent with our expectation of a drag from inventories on Q1 GDP growth. Also notable, the employment sub-index increased from a weak 47.5 in February to an expansive 53.6 in March. We expect to see around 195,000 payroll jobs added in March when the official BLS employment report hits the street tomorrow morning at 8:30 Eastern time. Initial claims for unemployment insurance increased by 16,000 for the week ending March 29, to hit 326,000. Continuing claims notched up 22,000 to hit 2,836,000 for the week ending March 22. We expect the March unemployment rate to tick back down to 6.6 percent.

Market Reaction: U.S. equity prices are down after opening gains. The 10-year Treasury yield is down to 2.78 percent. NYMEX crude oil is up to $100.01/barrel. Natural gas futures are up to $4.45/mmbtu.

Economic Alert 04032014

For a PDF version of this Comerica Economic Alert click here: Int Trade 04-03-14.

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March ADP Employment, ISM MF, Auto Sales, February Construction

Q1 GDP Expected to Be Weak but Other Metrics Thawing Out

  • The ADP Employment Report for March showed a moderate gain of 191,000 private-sector jobs.
  • The ISM Manufacturing Index for March increased to 53.7 percent, inventories are a concern.
  • March Auto Sales increased strongly to a 16.4 million unit annual rate.
  • February Construction Spending inched up by 0.1 percent.

Forward-looking data is improving as the neo-Pleistocene weather conditions of the past winter moderate. Pent-up demand over the winter months for labor, houses, consumer items and many other goods and services is providing a quick thaw for frozen metrics. Backward-looking data for the winter is weak. We will put the soon-to-be released 2014Q1 GDP report in that camp. The first estimate of Q1 GDP is due out on April 30. We expect to see a weak real GDP growth rate of about 1.0 to 1.5 percent. The snap-back in March auto sales helped, but it is not enough to lift growth significantly. We expect to see drags from inventories and from federal spending combined with tepid overall consumer spending for the quarter.

The March ADP employment report showed a gain of 191,000 private-sector jobs for the month, stepping up from 178,000 in February and 121,000 in January. While this is still a first quarter number, it has positive implications for income and consumer confidence in the just-started second quarter. We are revising upward our expectation for Friday’s official Bureau of Labor Statistics employment report. We now expect to see 195,000 payroll jobs added in March and an unemployment rate of 6.6 percent. The ISM Manufacturing Index for March moved up to 53.7, still indicating improving overall manufacturing conditions. The employment sub-index remained positive at 51.1, consistent with small net job growth for the sector. The customers’ inventories sub-index was weak, slipping down to 42.0. This is consistent with the expected correction from the large run-up in inventories that we saw in the second half of 2013. March auto sales were a nice surprise, rebounding strongly from a 15.4 million unit rate in February, to a 16.4 million unit rate in March. The light truck component was strong for the month, with positive implications for residential construction going forward. Overall construction spending for February was still under the weather, gaining just 0.1 percent for the month. Total public construction projects, including transportation infrastructure gained 0.1 percent in February. Private nonresidential was up 1.2 percent and private residential construction spending declined by 0.8 percent. There is quite a wide statistical confidence interval around construction spending estimates, so one-month movements are not the most reliable of indicators. We expect to see gains in both private residential and private nonresidential construction spending over the course of this year.

Market Reaction: U.S. stock markets are responding positively to the better economic data. Treasury yields are up with the 10-Year T-bond rate at 2.80 percent. NYMEX crude oil is down to $99.06/barrel. Natural gas futures are down to $4.34/mmbtu.

Economic Alert 04022014

For a PDF version of this Comerica Economic Alert click here: ADP 04-02-14.

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Comerica Economic Weekly

U.S. economic data released at the end of March remain consistent with our expectation that indicators will generally improve this spring as weather renormalizes. We expect to see an ongoing moderate economic expansion for this year, after a weak first quarter. Real GDP growth for the nearly complete 2014Q1 is expected to be somewhat muted, obscuring more positive elements of the economy. Three factors will keep 2014Q1 real GDP growth below potential. First, was the weather, which dragged on almost all economic series this winter, including job creation and auto sales. Second, is the drag from federal spending. The good news is that last fall’s two-year budget deal put some money back in the coffers for federal discretionary spending this year, but we will still see a drag from federal discretionary spending through the first half of this year. Third, is the expected inventory correction. Inventory accumulation significantly boosted GDP growth through the second half of 2013. This cannot continue indefinitely. There will be a correction, but we do not know exactly when it will happen. We expect to see some drag from inventories in 2014Q1.

Personal income growth for February was moderate, increasing nominally by 0.3 percent. Wage and salary growth was subdued at 0.2 percent for the month, reflecting weak job gains this winter. After adjusting for inflation, real consumer spending increased by 0.2 percent, consistent with the slight uptick that we saw in unit auto sales for February.

Consumer attitudes are going in two directions at once. According to the Conference Board, consumer confidence for February improved, continuing the upward trend in that series visible since last November. However,  according the University of Michigan, consumer sentiment dipped slightly in March.

Real GDP growth for the fourth quarter of 2013 was revised up slightly to 2.6 percent from 2.4 percent. This is largely a backwards looking revision with only minor implications for our 2014 outlook.

Initial claims for unemployment insurance dipped by 10,000 for the week ending March 22, to hit 311,000. This is a level consistent with ongoing moderate job creation. Continuing claims fell by 53,000 for the week ending March 15, reflecting the rollback of extended unemployment insurance benefits.

New home sales for February eased by 3.3 percent to hit a 440,000 unit annual rate. This came after a stronger-than-expected January report. The Pending Home Sales Index for February dipped by 0.8 percent. The Case-Shiller 20-City Composite House Price Index for January showed 13.2 percent year-over-year growth. On a monthly basis, prices fell in 12 out of the 20 cities. Housing markets remain tight in most cities.

New orders for durable goods increased by 2.2 percent in February. Commercial aircraft orders climbed after falling through December and January. Total shipments of durable goods also improved in February.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly032814.

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