April ADP Jobs, ISM Non-MF, Auto Sales, March International Trade

Job Growth Eases, Service Sector Up, Autos Back on Track, Trade Gap Narrows

  • The April ADP Employment Report showed a less-than-expected gain of 156,000 private-sector jobs.
  • The ISM Non-Manufacturing Index increased in April to 55.7 on pricing and new orders.
  • Light Vehicle Sales for April increased to a 17.4 million unit rate.
  • The U.S. International Trade Gap narrowed in March to $40.4 billion as imports eased.

The April ADP Employment Report, which provides a preliminary view on private-sector employment, showed an increase of 156,000 jobs for the month, which was less than expected. The ADP data implies that the official Bureau of Labor Statistics jobs report for April, which is due out Friday morning at 7:30 Central time, will also fall below expectations. Consensus expectations for Friday’s payroll gain were about 205,000 as of yesterday. If we take the ADP number as a reasonable estimator and add our guess of about 5,000 government sector jobs for the month, that gives us an estimate of a net gain of 161,000 nonfarm payroll jobs for April. This will be viewed as a downside miss and likely reinforce the Federal Reserve’s ongoing caution in its interest rate policy. We believe that the Federal Reserve will have enough cause for pause to leave the fed funds rate unchanged at its upcoming FOMC meeting over June 14/15. Large businesses were the weak link in today’s ADP Report, adding 24,000 jobs in April. Small businesses did their part, adding 93,000 jobs. Medium-sized businesses (between 50 and 499 employees) added 39,000 jobs in April.

The ISM Non-Manufacturing Index for April improved to 55.7 from March’s 54.5. All ten sub-indexes were above 50, indicating improving conditions across the board. Thirteen reporting industries said they grew in April. Four said they contracted, including mining. Anecdotal comments were generally positive.

Auto sales accelerated in April from March’s 16.6 million unit pace to a 17.4 million unit rate. Sales of domestic trucks did the heavy lifting. Over the next few months we will see whether auto sales can regain their robust 18.2 million unit sales rate held from last September through November. We expect auto sales to total about 17.2 million units this year and ease going into 2017. Incentives can help drive sales in the latter stages of the sales cycle, but they eat into corporate profits and often cannibalize sales from subsequent months.

The U.S. international trade gap narrowed significantly in March from February’s -$47.0 billion, to -$40.4 billion. The big move came from imports of goods, which dropped by $8 billion for the month as non-auto consumer goods imports eased. We expect trade to continue to be a mild-to-moderate drag on GDP in the current second quarter.

Market Reaction: U.S. stock prices opened with losses. The yield in 10-Year T-bonds is down to 1.80 percent. NYMEX crude oil is up to $44.00/barrel. Natural gas futures are up to $2.14/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: ADP 05-04-16.

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Comerica Economic Weekly

As we close out first quarter U.S. data releases it has become obvious that the U.S. economy lost significant momentum over the winter.

First quarter 2016 real GDP growth was a weak 0.5 percent annualized growth. On a quarter-over-quarter basis, real Q1 GDP increased by just 0.1 percent. Weak oil and the strong dollar were key culprits. Business fixed investment was down as consolidation in the energy sector drained the structures and equipment components. Exports declined, pulling the trade gap wider. Despite the gathering gloom in some parts of the economy, other areas continued to perform well. Solid consumer spending on services supported overall consumer spending even as auto sales fell below the very strong 2015Q4 pace. Residential investment increased at a 14.8 percent annual rate in Q4. State and local government spending increased at a solid 2.9 percent annualized rate.

Nominal personal income increased by 0.4 percent in March while nominal consumer spending gained just 0.1 percent. The PCE price index gained 0.1 percent for the month. Going forward, higher energy prices will start to push inflation indicators up.

The price for West Texas Intermediate crude oil broke through $45 at the end of this week. Gasoline prices are up too. The national average for unleaded regular gasoline hit $2.13 for the week ending April 22, up 42 cents from the mid-February low.

Mortgage rates fell through April, with 30 year fixed rate mortgages hitting 3.5 percent. Anecdotal evidence suggests that mortgage apps for purchase and refi jumped. New home sales for March increased by 1.5 percent to a 511,000 unit rate. We expect to see more new homes sales in the April data.

House prices are still increasing. The Case-Shiller National House Price Index for February was up by 0.4 percent for the month and 5.3 percent over the previous 12 months.

Unemployment claims data remains solid. Initial claims for unemployment insurance increased by 9,000, to 257,000 for the week ending April 23rd. Continuing claims fell by 5,000 to hit 2,130,000 for the week ending April 16th.

New orders for durable goods gained 0.8 percent in March, bouncing back from a 3.1 percent decline in February. Manufacturing indicators have improved a little over the last month, but we do not expect to see a fundamental improvement in current soft conditions.

The Bank of Japan held key interest rates steady there this week despite expectations that they could go more negative. The yen surged on the news. Japan lead global stock markets down at the end of the week.

The Federal Reserve left key interest rates steady here, with no expectation that they would do anything else. The Fed’s assessment of current economic conditions went in two directions at once, saying that labor conditions have improved while economic activity slowed. The FOMC communique provided no hints that a rate hike is pending in June.

According to the CME Group, the fed funds futures market shows only a 15 percent probability that the FOMC will raise the fed funds rate at its next meeting over June 14 and 15. Fed funds futures show a 61 percent probability that there will be at least one 25 basis point fed funds rate increase by the end of this year. The odds of two 25 basis point rate hikes this year diminishes to about 20 percent, according to the CME group.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 04-29-2016.

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2016Q1 GDP, April UI Claims, FOMC

Weak First Quarter GDP Dragged Down by Business Investment, Inventories, Trade, Defense

  • Real Gross Domestic Product for 2016Q1 increased at a weak 0.5 percent annual rate.
  • Initial Claims for Unemployment Insurance increased by 9,000 to 257,000 for the week ending April 23.
  • The Federal Open Market Committee left short term interest rates unchanged.

First quarter 2016 real GDP growth was a weak 0.5 percent, held down by sagging business investment, a drop in inventory accumulation, a deteriorating trade balance and a drop in federal defense spending. The sag through Q1 comes on the heels of a soft 2015Q4, when real GDP growth increased by just 1.4 percent. For the most part, this is a backward-looking number. We expect real GDP growth to increase moderately in the current quarter and beyond. However, today’s weak GDP print shows how the strong dollar and soft global demand are weighing on the trade balance. Imports increased slightly from Q4, but exports declined for the second straight quarter, reducing real GDP growth by 0.34 percent in Q1. It also shows the dark side of the surge in inventories that we saw through the first half of 2015, which boosted GDP growth then. Now, as inventory accumulation declines appropriately, it is a drag on headline GDP growth, reducing it by 0.33 percent in Q1. Business fixed investment was weak across the board. The consolidating energy sector is a key factor in declining business investment in structures and in equipment. Declining fixed business investment pulled real GDP growth down by 0.76 percent. Finally, federal defense spending was a drag in Q1 GDP, subtracting 0.15 percent from topline growth. Previously, we have made the case that consumer spending will be a stabilizing force in the economy this year. That is exactly what happened in Q1. Despite the drag from declining auto sales, strong consumer spending on services kept GDP growth positive for the quarter.

Initial claims for unemployment insurance increased by 9,000, to 257,000 for the week ending April 23rd. Continuing claims fell by 5,000 to hit 2,130,000 for the week ending April 16th. Claims data remains solid.

Yesterday, as widely expected, the Federal Open Market Committee left the fed funds rate unchanged. The assessment of current economic conditions went in two directions at once, saying that labor conditions have improved while economic activity slowed. The FOMC communique provided no hints that a rate hike is pending in June. According to the CME Group, the fed funds futures market shows only a 15 percent probability that the FOMC will raise the fed funds rate at its next meeting over June 14 and 15. We will be revising our interest rate forecast in early May to show only one fed funds rate hike this year, of 25 basis points, coming in December.

Market Reaction: Equity markets opened with gains. The 10-year Treasury bond yield is up to 1.86 percent. NYMEX crude oil is up to $45.43/barrel. Natural gas futures are down to $2.08/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: GDP 04-28-16.

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Comerica Bank’s Texas Index Sees Lightest Decline Since Energy Downturn

Comerica Bank’s Texas Economic Activity Index fell in February, decreasing 0.1 percentage points to a level of 92.4. February’s reading is 20 points, or 27 percent, above the index cyclical low of 72.8. The index averaged 97.7 points for all of 2015, seven and three-fifths points below the average for full-year 2014. January’s index reading was 92.5.

“Our Texas Economic Activity Index declined in February, down for 15 out of the last 16 months. Four of the eight index components were positive for the month, including nonfarm employment, exports, unemployment insurance claims (inverted) and house prices. Housing starts, drilling rig count, sales tax revenue and hotel occupancy were negative factors. With oil prices firming, we expect to see the drilling rig count level out by the end of summer, so that major drag will start to dissipate. However, the state’s large energy sector will likely remain subdued through the course of this year,” said Robert Dye, Chief Economist at Comerica Bank. “Both Austin and North Texas will drive growth for the state in the near term, propelled by their ability to attract and incubate new non-energy businesses.”

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For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0416.

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Comerica Bank’s California Index Flat on Stalling Tech Sector

Comerica Bank’s California Economic Activity Index was unchanged in February, maintaining a level of 119.7. February’s reading is 36 points, or 42 percent, above the index cyclical low of 84.1. The index averaged 119.8 points for all of 2015, six and two-fifths points above the average for all of 2014. January’s index reading was 119.7.

“Our California Economic Activity Index was unchanged in February, and has been range bound since April 2015. What our index shows is that California is a two-handed economy. On the one hand, overall job growth has been steady and that is a fundamentally positive indicator, supporting most non-manufacturing industries. On the other hand, tech sector stock prices have been stagnant, as have federal defense spending and housing starts in the state,” said Robert Dye, Chief Economist at Comerica Bank. “We expect to see an upside breakout in our California index in the months ahead, supported by the positive outlook for the tech sector and firmer residential construction activity.”

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For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0416.

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Comerica Bank’s Arizona Index Continues to Gain

Comerica Bank’s Arizona Economic Activity Index grew in February, increasing 0.4 percentage points to a level of 110.1. February’s index reading is 33 points, or 43 percent, above the index cyclical low of 77.0. The index averaged 107.1 points for all of 2015, seven and two-fifths points above the average for full-year 2014. January’s index reading was 109.7.

“Our Arizona Economic Activity Index increased in February for the sixth consecutive month. Five out of eight index components were positive, including payroll employment, initial claims for unemployment insurance (inverted), house prices, housing starts and enplanements. State exports, sales tax revenue and hotel occupancy eased in February. Job growth in the state is accelerating above the national average, which has been the normal historical condition of the mid-cycle Arizona economy. In this expansion cycle it has taken longer than usual for the state to get there,” said Robert Dye, Chief Economist at Comerica Bank. “Real estate conditions are improving, but new home sales remain subdued. Higher affordability than California is a strong point for Arizona real estate.”

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For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0416.

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Comerica Bank’s Florida Index Continues Solid Performance

Comerica Bank’s Florida Economic Activity Index grew in February, increasing 1.7 percentage points to a level of 153.8. February’s index reading is 76 points, or 97 percent, above the index cyclical low of 78.1. The index averaged 138.0 in 2015, twenty and three-tenths points above the average for all of 2014. January’s index reading was 152.0.

“The Comerica Florida Economic Activity Index increased for the 23rd consecutive month in February. Five out of eight index components were positive for the month, including nonfarm employment, state exports, initial claims for unemployment insurance (inverted), housing starts and house prices. State sales tax revenue dipped, as did hotel occupancy and enplanements. Overall, the state economy remains very strong and real estate conditions, especially in the single-family market, are improving. However, the condo market is looking overbuilt in some areas, including Miami, where sales metrics are cooling,” said Robert Dye, Chief Economist at Comerica Bank. “Despite the potential for a near-term reset in the Florida condo market, we look for ongoing gains to the Florida economy this year.”

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For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0416.

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Comerica Bank’s Michigan Index Returns to Gains

Comerica Bank’s Michigan Economic Activity Index improved in February, increasing 0.5 percentage points to a level of 127.0. February’s reading is 53 points, or 71 percent, above the index cyclical low of 74.0. The index averaged 124.4 points for all of 2015, seven points above the index average for 2014. January’s index reading was 126.4.

“Our Michigan Economic Activity Index increased in February after dipping in January. Six out of eight index components were positive in February, including nonfarm employment, exports, housing starts, house prices, auto production and hotel occupancy. Only unemployment insurance claims (inverted) and state sales tax revenues were drags in February. With the domestic auto sector near its cyclical peak and international demand for Michigan’s exports soft, the Michigan economy is in a new phase, where growth will be driven by non-manufacturing industries,” said Robert Dye, Chief Economist at Comerica Bank. “Steady gains in non-manufacturing employment and improving real estate conditions will be the hallmarks of the Michigan economy for the remainder of the year.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0416.

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Comerica Economic Weekly

U.S. economic data released this week from the end of the first quarter was consistent with our expectation of anemic Q1 growth, followed by improving conditions in the current quarter and beyond. Let’s start with the good news first.

The Conference Board’s Leading Economic Index for March increased by 0.2 percent, after falling in December through February. We expect to see more positives from the LEI in the coming months. The Coincident and Lagging Indexes were also non-negative for the month.

Initial claims for unemployment insurance dipped by 6,000 for the week ending April 16, to an exceptionally low 247,000. Continuing claims fell by 39,000 to hit 2,137,000 for the week ending April 9. These are historically low numbers, on par with the end of the 1970s.

Housing related data was less positive. New home construction remains low relative to population growth despite firm house prices. The National Association of Homebuilders Housing Market Index rates market conditions for the single-family housing market. The April 2016 reading for the NAHB Index was unchanged at 58 for the third consecutive month, well below the recent peak of 65 from last October.

Housing starts for March dropped by 8.8 percent, down to a 1.089 million unit rate. Both single and multifamily starts were well off the February pace. Permits for new residential construction also fell in March, down 7.7 percent, to a 1.086 million unit rate. Single-family permits were down slightly, but the more volatile large multifamily segment fell noticeably, down 20.6 percent.

Existing home sales for March bounced back, gaining 5.1 percent and climbing to a 5.33 million unit annual rate, after falling by 7.3 percent in February. Months’ supply of existing homes on the market ticked up to a still-tight 4.5 months’ worth. The median sales price of an existing home was up 5.7 percent in March, over the previous 12 months.

The recent dip in mortgage interest rates, down close to 3.5 percent for a 30 year fixed rate mortgage, will help sales of new and existing homes in April. Mortgage apps surged in early April.

The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey for April pointed to a slight deterioration in manufacturing conditions in the Mid-Atlantic, after significant improvement in March.

Oil and natural gas prices rallied through the week, consistent with our expectation of more inflationary pressure in the current quarter.

On Thursday, Mario Draghi, President of the European Central Bank, announced that there would be no change to ECB monetary policy as a result of their policy deliberations. He opened the door for future rate cuts, deeper into negative territory, saying that the ECB would boost easing if it was warranted.

With soft first quarter U.S. data and only the beginning of a push to inflation from higher oil prices, we expect the Federal Reserve to leave monetary policy unchanged at the FOMC meeting this coming Tuesday and Wednesday. Unless there is a change in tone from the Fed in their policy statement on Wednesday, we expect to roll back our fed funds rate assumptions for this year. Currently, we have two 25 basis point fed funds rate hikes in our interest rates forecast, one in June and one in December. If the Fed continues to emphasize global risks to growth, we may eliminate the June rate hike from our May interest rate forecast, leaving only one fed funds rate hike for 2016, coming in December.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 04-22-2016.

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March Leading Indicators, Existing Home Sales, April UI Claims, ECB/FOMC

Indicators Positive but Fed not Likely to Respond

  • The Conference Board’s Leading Economic Index for March increased by 0.2 percent.
  • Existing Home Sales for March increased by 5.1 percent to a 5.33 million unit annual rate.
  • Initial Claims for Unemployment Insurance fell by 6,000 for the week ending April 16 to 247,000.
  • We expect no change in interest rate policy at next week’s FOMC meeting.

The March edition of the Conference Board’s Leading Economic Index increased by 0.2 percent, after falling in December, January and February. The Coincident Index was unchanged in March and the Lagging Index gained 0.4 percent. The positive contributors to the leading index in March were (in order) stock prices, interest rate spread, leading credit index, the ISM new orders index, manufacturers’ new orders for nondefense capital goods ex aircraft, and manufacturers’ new orders for consumer goods and materials. The negative contributors for March were building permits and weekly unemployment insurance claims. As we show below, the weekly UI claims numbers have been exceptionally good; they were just a little less good in March. We needed a positive number for the Leading Index in March, and we got it. We expect to see more positives from the LEI in the coming months, consistent with our expectation of improving real GDP growth for the remainder of this year after a somewhat weak first quarter.

Existing home sales for March bounced back, gaining 5.1 percent and climbing to a 5.33 million unit annual rate, after falling by 7.3 percent in February. Months’ supply of existing homes on the market ticked up to a still-tight 4.5 months’ worth. The median sales price of an existing home was up 5.7 percent in March, over the previous 12 months. The recent dip in mortgage interest rates, down close to 3.5 percent for a 30 year fixed rate mortgage, will help sales of new and existing homes in April.

Initial claims for unemployment insurance dipped by 6,000 for the week ending April 16, to an exceptionally low 247,000. Continuing claims fell by 39,000 to hit 2,137,000 for the week ending April 9. These are exceptionally low numbers, on par with the end of the Nixon Administration.

Today, Mario Draghi, President of the European Central Bank, announced that there would be no change to ECB monetary policy as a result of their policy deliberations. He opened the door for future rate cuts, deeper into negative territory, saying that the ECB would boost easing if it was warranted. With soft first quarter U.S. data and only the beginning of a push to inflation from higher oil prices, we expect the Federal Reserve to leave monetary policy unchanged at the FOMC meeting this coming Tuesday and Wednesday. Unless there is a change in tone from the Fed in their policy statement on Wednesday, we expect to roll back our fed funds rate assumptions for this year. Currently, we have two 25 basis point fed funds rate hikes in our interest rates forecast, one in June and one in December. If the Fed continues to emphasize global risks to growth, we may eliminate the June rate hike from our May interest rate forecast, leaving only one fed funds rate hike for 2016, coming in December.

Market Reaction: Equity markets opened with losses. The 10-Year Treasury bond yield is up to 1.87 percent. NYMEX crude oil is up to $42.74/barrel. Natural gas futures are up to $2.21/mmBTU.

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For a PDF version of this Comerica Economic Alert click here: Leading Indicators 04-21-16.

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