Comerica Bank’s California Index Climbing Steadily

Comerica Bank’s California Economic Activity Index increased by 1.3 percentage points in May to reach 131.0. May’s reading is 47 points, or 56 percent, above the index cyclical low of 84.1. The index averaged 122.4 points in 2016, two and three-fifths points above the average for all of 2015. April’s index reading was 129.7.

“Our California Economic Activity Index increased again in May. Revised data show that the index has increased for the 14th consecutive month. Results for May were more broadly positive, with seven out of eight index components increasing. They were nonfarm employment, unemployment insurance claims (inverted), housing starts, defense spending, house prices, hotel occupancy and the Nasdaq 100 Technology stock index. Only state exports declined in May. A cautionary sign comes from state employment growth which has clearly slowed down through the first half of 2017. Weaker job growth may exert more of a drag on the index in the second half of 2017 if current trends continue. The state unemployment rate remains on a downward trend, reaching 4.7 percent in May and June,” said Robert Dye, Chief Economist at Comerica Bank. “This ties the historical low for the California unemployment rate, set in late 2000.”

For a PDF version of the  California Economic Activity Index click here:  California_Index_0717.

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Comerica Bank’s Michigan Index Shows Some Lift

Comerica Bank’s Michigan Economic Activity Index increased 1.3 percentage points in May to a level of 132.1. May’s reading is 58 points, or 78 percent, above the index cyclical low of 74.1. The index averaged 127.7 points for all of 2016, four and two-tenths points above the index average for 2015. April’s index reading was 130.8.

“The Comerica Bank Michigan Economic Activity Index for May increased, pulling out of a five-month stall from December 2016 through April 2017. Four index components were positive in May. They were state exports, unemployment insurance claims (inverted), house prices and hotel occupancy. Housing starts, auto production and state sales tax revenues were negative factors in May. The nonfarm employment sub-index was unchanged. With U.S. auto sales easing this year, we look for less push from Michigan’s auto sector going forward. Non-auto-related manufacturing and the service sector can keep the state economy engaged but it will be difficult to overcome the drag from the auto sector if national auto sales continue to deteriorate,” said Robert Dye, Chief Economist at Comerica Bank. “Michigan’s unemployment has dropped sharply in recent months, down to 3.8 percent in June, still above the low of 3.2 percent from early 2000.”

For a PDF version of the Michigan Economic Activity Index click here:  Michigan_Index_0717.

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Comerica Bank’s Arizona Index Showing Gains

Comerica Bank’s Arizona Economic Activity Index rose 0.3 percentage points in May to a level of 113.4. May’s index reading is 36 points, or 47 percent, above the index cyclical low of 77.0. The index averaged 110.3 points for all of 2016, three and one-half points above the average for 2015. April’s index reading was 113.1.

“The Comerica Bank Arizona Economic Activity Index increased again in May and is now up for three out of the last four months. The state economy is showing more momentum after a weak first quarter. Six out of eight index components increased in May. They were nonfarm payrolls, unemployment insurance claims (inverted), house price index, sales tax revenues, hotel occupancy and enplanements. State exports and housing starts declined in May. The most recent labor data shows more consistent job growth through the second quarter. Arizona’s unemployment rate has been stable, near 5.1 percent since August 2016. This is still well above the historical low of 3.7 percent from the summer of 2007,” said Robert Dye, Chief Economist at Comerica Bank. “Phoenix house prices have shown consistent gains over the last year, up 5.8 percent over the year ending in May according to the Case-Shiller data.”

For a PDF version of the complete Arizona Economic Outlook, click here: Arizona_Index_0717.

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Comerica Bank’s Florida Index Eases Again

Comerica Bank’s Florida Economic Activity Index decreased by 0.9 percentage points in May to a level of 163.8. May’s index reading is 86 points, or 110 percent, above the index cyclical low of 78.1. The index averaged 155.4 in 2016, seventeen and one-fifth points above the average for all of 2015. April’s index reading was 164.7.

“The Comerica Bank Florida Economic Activity Index declined for the second consecutive month in May. This is a clear break from the 36 month winning streak that started in April 2014. In May, five out of eight index components were positive. They were nonfarm employment, house prices, sales tax revenue, hotel occupancy and enplanements. The three negative components, state exports, unemployment insurance claims (inverted) and housing starts, were sufficiently negative to outweigh the positive factors. The trend in payroll job growth still looks positive. Also, the drag from housing starts will likely reverse in coming months. So we look at the two-month dip in the headline index as a course correction, but not a reversal for the Florida economy,” said Robert Dye, Chief Economist at Comerica Bank. “Florida’s unemployment rate has dropped sharply in recent months, to 4.1 percent, still above the low of 3.1 percent from the spring of 2006.”

For a PDF version of the Florida Economic Activity Index click here: Florida_Index_0717.

 

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Comerica Bank’s Texas Index Increased, but the Rig Count Has Stalled

Comerica Bank’s Texas Economic Activity Index increased by 0.6 percentage points in May to a level of 98.6. May’s index reading is 26 points, or 36 percent, above the index cyclical low of 72.8. The index averaged 91.2 points for all of 2016, six and three-tenths points below the average for full-year 2015. April’s index reading was 97.5.

“The Comerica Bank Texas Economic Activity Index increased for the ninth consecutive month in May. This is good news, but we can also see that the rate of increase is cooling, coincident with the plateauing of the state drilling rig count. The rig count had been steadily increasing from mid-2015 through early 2017. Since late May, the weekly rig count for Texas has stabilized near 463 active rigs. This is coincident with the drop in oil prices from over $57/barrel in early January, to a low of less than $43/barrel in late June. In July we have seen an upward trend in oil prices, to about $47.50, still well below the January peak. Six out of eight index components were positive in May. They were nonfarm employment, unemployment insurance claims (inverted), house prices, sales tax revenue, hotel occupancy and the rig count. “The rig count sub-index had a smaller positive contribution in May. That will decrease in June,” said Robert Dye, Chief Economist at Comerica Bank. “The large non-energy component of the state economy still has good momentum, but the push from the recovering energy sector will ease going forward.”

For a PDF version of the Texas Economic Activity Index click here: Texas_Index_0717.

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June New and Existing Home Sales, May House Prices

New Home Sales are Trending Up, But Existing Home Sales are Stalled

  • New Home Sales ticked up by 0.8 percent in June, to a 610,000 unit annual rate.
  • Existing Home Sales decreased by 1.8 percent in June to a 5,520,000 unit annual rate.
  • The Case-Shiller U.S. National Home Price Index was up 5.6 percent in May over the previous year.

New home sales ticked up by 0.8 percent in June to a 610,000 unit annual rate. This is still below the March peak of 638,000, but the trend looks positive. The month’s supply of new houses on the market also inched up, to 5.4 months’ worth. According to the Census Bureau, the median sales price of a new house in June was $310,800, about 3.4 percent lower over the previous 12 months. The drop in prices for new homes is due to builders increasingly focusing on downmarket segments.

Existing home sales eased by 1.8 percent in June, to a 5,520,000 unit annual rate. After trending up through 2015, existing home sales were range bound in 2016, near the 5.4 million unit mark. They appeared to gain some altitude in late 2016/early 2017, but over the past several months they once again look range bound near a 5.5 million unit pace. This is not a bad number. It approximates the pace of existing home sales before the big upswing in the mid-2000’s which was followed by the crash. However, it also shows that there is less momentum in housing than expected. It is fair to say that the single-family housing market is not leading the economy in this expansion, but following it, grudgingly. The inventory of available existing houses for sale inched up to 4.3 months’ worth in June, still showing a tight market. The median sales price of an existing house was up by 6.5 percent in June over the previous 12 months, according to the National Association of Realtors.

The Case-Shiller U.S. National Home Price Index gained 0.2 percent in May, after seasonal adjustment, and was up 5.6 percent over the previous 12 months. Looking at the 20-city statistics reveals that 6 out of 20 cities saw slightly lower prices in May. Most of the 20 cities are showing solid year-over-year price gains. Chicago trails the list, up only 3.3 percent over the last year. Seattle is leading the pack, up 13.3 percent.

The Federal Reserve will release a monetary policy statement today at 1pm central time at the conclusion of the two-day Federal Open Market Committee meeting. Policy makers are expected to leave interest rates unchanged. Fed watchers will be looking for clues about a possible September announcement for the beginning of balance sheet reduction in October. They will also be looking for signs that the Fed may want to lower expectations from their previous dot plot which was consistent with four rate hikes between now and the end of 2018. We expect the next interest rate hike to come this December.

Market Reaction: U.S. equity markets opened with gains. The 10-year Treasury bond yield is down to 2.33 percent. NYMEX crude oil is up to $48.44/barrel. Natural gas futures are down to $2.89/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  New_Home_Sales_072617.

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Comerica Economic Weekly

Economic data this week showed a good finish for the recently completed second quarter, and a good start to the current third quarter.

Housing starts increased in June by 8.3 percent, to a 1.215 million unit annual rate. The volatile multifamily component bounced back, gaining 13.3 percent for the month and hitting a 0.366 million unit rate. Single-family starts increased by 6.3 percent in June, to a 0.849 million unit rate. Building permits were also stronger in June, up by 7.4 percent to a 1.254 million unit rate. Multifamily permits were up 13.9 percent, to a 0.443 million unit rate. Single-family permits gained 4.1 percent, to hit a 0.811 million unit annual rate.

Builder confidence eased in early July according to the National Association of Homebuilders. Builders are increasingly concerned about rising material prices.

Mortgage applications increased in mid-July after falling in early July. The 12-week moving average for total apps remains on a moderate upward trend. According to the Mortgage Bankers Association, the rate for a 30-year fixed rate mortgage was stable at 4.22 percent for the week ending July 14.

The Conference Board’s Leading Economic Index increased by 0.6 percent in June, its 10th consecutive monthly increase, and the strongest monthly gain since January. Both the Coincident Index and the Lagging Index were up by 0.2 percent for the month. The solid increase across all three indexes for the month of June is a positive signal for the U.S. economy, reinforcing our expectations for moderate GDP growth through the second half of this year.

Initial claims for unemployment insurance decreased by 15,000 for the week ending July 15, to hit 233,000, a very low number. There may be some residual seasonality imbedded in the midsummer numbers due to the annual auto plant summer closures. Continuing claims increased by 28,000 for the week ending July 8, to hit 1,977,000, another very low number.

The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey’s current conditions index dipped to a still-positive 19.5, suggesting that manufacturing conditions in the mid-Atlantic area are still improving, but at a slower pace than last month. The New York Fed’s Empire State Manufacturing Survey’s current condition index also eased, to a still-positive 9.8.

We expect the Federal Reserve to leave the fed funds rate range unchanged at 1.00-1.25 percent at the conclusion of the upcoming Federal Open Market Committee meeting over July 25/26. They will likely reinforce expectations that the schedule for the beginning of balance sheet reduction will be announced at the conclusion of the September 19/20 FOMC meeting.

Market expectations for future interest rate hikes over 2018 have cooled a bit with weaker inflation readings. We look for the Fed to leave 2018 interest rate expectations unchanged next week, instead opting for maximum maneuvering room later this year. They are caught between lower than expected inflation now and the potential for more inflation later as the U.S. economy begins to run above the potential GDP trend line for the first time in this expansion cycle.

The European Central Bank issued a policy announcement that implied that they are considering how and when to end their asset purchase program. The ECB left their benchmark interest rates unchanged.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  Comerica_Economic_Weekly_ 07212017.

 

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June Leading Indicators, July Regional MF Surveys, UI Claims, FOMC

Indicators Point to Positive H2

  • The Conference Board’s Leading Economic Index for June increased by 0.6 percent.
  • Initial Claims for Unemployment Insurance fell by 15,000 for the week ending July 15, to hit 233,000.

The Conference Board’s Leading Economic Index increased by 0.6 percent in June, its 10th consecutive monthly increase, and the strongest monthly gain since January. Building permits was the strongest contributor to the LEI in June. Both the Coincident Index and the Lagging Index were up by 0.2 percent for the month. The solid increase across all three indexes for the month of June is a positive signal for the U.S. economy, reinforcing our expectations for moderate GDP growth through the second half of this year. The first estimate of second quarter GDP will be released on July 28.

The good LEI report for June should reassure the Federal Reserve as it begins a historic policy rotation toward balance sheet reduction this fall. We expect the Fed to leave the fed funds rate range unchanged at 1.00-1.25 percent at the conclusion of the upcoming Federal Open Market Committee meeting over July 25/26. They will likely reinforce expectations that the schedule for the beginning of balance sheet reduction will be announced at the conclusion of the September 19/20 FOMC meeting. Market expectations for future interest rate hikes over 2018 have cooled a bit with weaker inflation readings. It will be interesting to see if the Fed changes the language in their upcoming policy announcement to reflect a downshift in rate hike expectations. However, we look for the Fed to leave 2018 interest rate expectations unchanged next week, instead opting for maximum maneuvering room later this year. They are caught between lower than expected inflation now and the potential for more inflation later as the U.S. economy begins to run above the potential GDP trend line for the first time in this expansion cycle.

The European Central Bank today issued a policy announcement that implied that they are considering how and when to end their asset purchase program. The ECB left their ultra-low benchmark interest rates unchanged, but indicated that asset purchases will “run until the end of December 2017, or beyond.”

Labor market indicators remain positive. Initial claims for unemployment insurance decreased by 15,000 for the week ending July 15, to hit 233,000, a very low number. There may be some residual seasonality imbedded in the midsummer numbers due to the annual auto plant summer closures. Continuing claims increased by 28,000 for the week ending July 8, to hit 1,977,000, another very low number.

The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey’s current conditions index dipped to a still-positive 19.5, suggesting that manufacturing conditions in the mid-Atlantic area are still improving, but at a slower pace than last month. The New York Fed’s Empire State Manufacturing Survey was released on Monday. Its current condition index also eased, to a still-positive 9.8.

Market Reaction: Equity markets are mixed. The 10-Year Treasury bond yield eased to 2.24 percent. NYMEX crude oil is down to $46.89/barrel. Natural gas futures are up to $3.06/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  Leading_Indicators_07202017.

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June Housing Starts, NAHB, Mortgage Apps

Residential Construction Bounced Back in June

  • Housing Starts increased in June by 8.3 percent to a 1,215,000 unit annual rate.
  • Permits for new residential construction increased by 7.4 percent to a 1,254,000 unit pace in June.
  • Builder Confidence eased in early July.

Builders built in June, increasing housing starts by 8.3 percent, to a 1.215 million unit annual rate. The volatile multifamily component bounced back the most, gaining 13.3 percent for the month and hitting a 0.366 million unit rate. This is still well below the recent peak rate of 0.507 million from June 2015. The trend line in multifamily construction looks like it is sloping down despite the bounce back in June. Overbuilding, resulting in slower absorption and weaker rent growth, is a weight on many multifamily markets. We look for cooler multifamily construction in the second half of this year and into early 2018, with more emphasis from builders on the single-family side. Single-family starts increased by 6.3 percent in June, to a 0.849 million unit rate. This is still below the recent peak rate of 0.877 million from this past February, but the trend line looks positive. Building permits were also stronger in June, up by 7.4 percent to a 1.254 million unit rate. Multifamily permits were up 13.9 percent, to a 0.443 million unit rate. Single-family permits gained 4.1 percent, to hit a 0.811 million unit annual rate. Housing is still underperforming relative to recent expansion cycles. One reason is student debt. According to a new study by economists at the Federal Reserve Bank of New York, student debt is partially responsible for the observed decline in homeownership among 28-30 year olds from 2007 through 2015. According to the NY Fed, if student debt had remained at 2001 levels, there would have been 360,000 more 28-30 year old homeowners in 2015.

Builder confidence eased in early July according to the National Association of Homebuilders. Builders are increasingly concerned that rising material prices are hurting affordability. There may also be some drag on builder confidence from the slow legislative process in Washington.

Mortgage applications increased in mid-July after falling in early July. We see no clear trend through mid-July in both purchase and refi apps. The 12-week moving average for total apps remains on a moderate upward trend. According to the Mortgage Bankers Association, the rate for a 30-year fixed rate mortgage was stable at 4.22 percent for the week ending July 14.

Market Reaction: Stock indexes were up at the open. The yield on 10-Year Treasury bonds is up to 2.26 percent. NYMEX crude oil is up to $47.00/barrel. Natural gas futures are down to $3.06/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  Housing_Starts_071917.

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Global Expansion, Central Bank Strategy, the Bond Market and the Dollar

The global expansion remains engaged. The U.S economy, representing about one-fifth of global demand, got off to a sluggish start with 1.4 percent real GDP growth (annualized) in the first quarter. We expect U.S. GDP growth to approximately double for the recently completed second quarter. The Bureau of Economic Analysis will release the first estimate of Q2 GDP on July 28. Europe collectively represents a little more than a fifth of global demand and continues to show positive data with several countries growing faster than the United States. China, also representing about a fifth of global GDP, has recently looked a little better after a softer start to the year. Japan is gaining momentum. Together, these four regions represent about three-quarters of the global economy, and all of them are generating more demand.

A key theme for many central banks this year and next is to take advantage of the synchronized global expansion and begin normalizing monetary policy. This means raising interest rates off of the near zero, or below zero, floor. It also means gradually winding down extraordinary policy such as asset purchase programs, otherwise known as quantitative easing (QE). Finally, it means renormalizing the vastly expanded balance sheets that came as a result of QE.

The U.S. Federal Reserve took the lead amongst major central banks in driving interest rates down to near zero by the end of 2008. It took a leading role in central bank asset purchases, beginning QE1 in December 2008. It is also taking the lead in winding down extraordinary policy. The Fed ended asset purchases with the termination of QE3 in December 2013. It began lifting interest rates in late 2015, and has managed four 25-basis-point increases in the benchmark fed funds rate since then. The Fed has also announced its intention to begin reducing the size of its vastly expanded balance sheet, possibly as early as this October.

Recently, other central banks have begun to hint that they may also start to normalize policy. European Central Bank President Mario Draghi recently made bullish comments about the European economy that suggest he may announce the winding down of the ECB’s asset purchase program by the end of this year, to commence sometime in 2018. The euro climbed against the dollar after Draghi’s comments. U.S Treasury bond yields increased as expectations for future demand eased.

Bank of England President Mark Carney’s recent comments suggest that he may be considering an increase in the BOE’s benchmark interest rate soon. The Bank of England will be an interesting case because their economic tailwind may be fading. The UK has enjoyed one of the fastest growing economies in Europe recently, but that changed in 2017Q1 when UK real GDP growth slowed to 0.2 percent (quarter-to-quarter). This was the slowest 2017Q1 GDP growth of all the G7 countries. Canada was the fastest.

Confirmation of policy normalization by the ECB and other central banks will put more downward pressure on the dollar and upward pressure on Treasury bond yields. Downward movement on the value of the dollar would be good news for U.S. exporters, lowering their prices in local currencies. A weaker dollar would also revive import price inflation, giving the Fed a little more justification for its normalization policy. Finally, a weaker dollar would be welcome news for U.S. border regions that have seen trade with Mexico and Canada decline.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here:  US_Economic_Outlook_0717.

 

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