Comerica Economic Weekly

Comerica TrapezoidU.S. economic data at the start of the final quarter of 2012 was generally upbeat. Both the ISM Manufacturing and Non‐manufacturing Indexes improved in September. The ISM MF index increased to 51.5, breaking a streak of three consecutive months below the break‐even 50 level. Most anecdotal comments were positive, saying that the summer slowdown was easing and domestic business was picking up. The ISM Non‐MF index increased to 55.1, keep the string of positive readings there intact. Comments were similar to the MF report. Construction spending for August was down by 0.6 percent as losses in private non‐residential and in public construction overpowered gains in private residential. Auto sales had a break‐out September, climbing to a 14.9 million unit annual pace, breaking out of the 14.0‐14.5 range where they had been all year. Strong September auto sales, ongoing gains to home sales, lines at the Apple Stores for the iPhone5 all confirm a credit‐fueled increase in consumer spending in the third quarter that looks like it will extend into the current fourth quarter. Improving credit availability in the presence of pent‐up demand can work wonders for deleveraged households with improving confidence. This healthy and appropriate re‐leveraging has its limits however. Fundamental improvement to household quality of life is driven by real disposable income growth, which comes largely through job and wage gains. As of August, real disposable income for the U.S. was 1.8 percent above its year ago level. Three things potentially threaten that gain: accelerating inflation, large tax increases and weak labor markets. Inflation looks sedate barring an oil market flare‐up emanating from the Middle East. Tax increases in 2013, however, are already on the books unless Congress dials down the Fiscal Cliff. Labor market data is showing some improvement but those gains remain vulnerable to the Fiscal Cliff. Payroll job growth increased by a modest 114,000 jobs in September, including a substantial 86,000 combined upward revision to July and August. So we can see a significant improvement in payroll job growth in the third quarter over the very weak second quarter. But within the third quarter we see a downward trend…+181k for July, +142k for August and +114k for September. Expectations for job growth in October should remain modest. The unemployment rate dipped to 7.8 percent in September, down from 8.1 percent. This was driven by a huge 873,000 job gain in the household survey for September, following declines of 119,000 jobs in August and 195,000 jobs in July. The massive disconnect between the payroll survey and the household survey of employment over the entire third quarter should leave everyone less than confident about what the current jobs numbers are saying about the economy. The September dip in the unemployment rate will not cut short the Federal Reserve’s current program of agency bond purchases known as QE3.

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