Comerica Economic Weekly

U.S. economic data from late summer has been largely positive. However, global financial markets have exhibited a high degree of volatility and this creates the potential for an adverse feedback loop back to the U.S. economy. The global stock market sell-off that was triggered in China, and rolled through Europe before cascading over U.S. markets appears to have run its course. But this cannot be said definitively.

About China, nothing can be said definitively. The Chinese economy appears to be slowing down, well below the official 7 percent year-over-year real GDP growth rate reported for 2015Q2. Current estimates of real GDP growth for China range from 5 to 3.5 percent , with outlier estimates down to zero. Countries tightly linked to China through international trade, such as Australia, Brazil and most east-Asian economies, are already feeling the drag from a weaker China. Japan, the most leveraged of all major economies, is tightly linked to China. Slow growth and high leverage is an unattractive combination for both China and Japan.

The U.S. is not as tightly coupled to China, but it would be an overstatement to say that the U.S. economy is entirely decoupled from China. China is simply too big and globally connected to ignore.

What we can say about the U.S. economy is that momentum appears to be growing in the consumer sector, which accounts for two-thirds of U.S. GDP. Low gasoline prices, strong job growth and firming house prices have put the wind at the back of U.S. consumers.

However, uncertainty emanating from the recent global equity market correction may take some wind out of sails, and the sales, of U.S. consumers. If the correction has run its course, and if businesses continue to hire at at least a moderate pace, then consumer spending will continue as a powerful stabilizing force for the U.S. economy. We believe that that is the most likely outcome.

U.S. real GDP growth for 2015Q2 was revised up to 3.7 percent, confirming a consumer led rebound after the meager 0.6 percent GDP gain for the first quarter. The gain in consumer spending in Q2 accounted for over half the total GDP growth.

Real disposable personal income increased by 0.4 percent in July, the strongest gain since January. Real consumer spending increased by 0.2 percent, pushing the personal saving rate up to 4.9 percent.

Initial claims for unemployment insurance fell by 6,000 for the week ending August 22, to hit 271,000. This very low level of new claims is entirely consistent with ongoing payroll job gains in August. Continuing claims for unemployment insurance gained 13,000 to finish the week of August 15 at a very favorable 2,269,000.

New orders for durable goods increased by 2.0 percent in July, aided by a strong auto industry.

New home sales increased by 5.4 percent, to a 507,000 unit annual rate, after falling in June. The U.S. national Case-Shiller house price index gained 0.1 percent in June, and was up 4.5 percent for the year.

Financial markets are firmly focused on the Federal Reserve, anticipating what policy makers will do at the upcoming September 16/17 FOMC meeting. We believe that the most likely timing for the first fed funds rate increase is still September, but that is not written with overwhelming conviction. We would place the odds of a September rate increase at 30 percent. Late October gets 25 percent and mid-December gets 20 percent, leaving 25 percent for all of 2016. The flattish probability distribution reflects the potential for more financial market stress in the near term.

 For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 08-28-15.

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Comerica Bank’s Texas Index Sees Smallest Decline of 2015

Comerica Bank’s Texas Economic Activity Index eased in June, decreasing 0.6 percentage points to a level of 96.0. June’s reading is 23 points, or 32 percent, above the index cyclical low of 72.9. The index averaged 105.1 points for all of 2014, four and four-fifths points above the average for full-year 2013. May’s index reading was 96.6.

“Our Texas Economic Activity Index declined moderately in June, marking the eighth straight monthly drop. While it is obvious that low oil prices are having an impact on the Texas economy, it is also noteworthy that recent labor data shows that total payroll employment in the state has so far declined in only one month this year, March. In April, May, June and July, Texas saw net job gains. Other components of our index are showing consistent losses, including unemployment insurance claims (inverted), rig count, sales tax and hotel occupancy. The data show the nuances in Texas. The energy sector is a major component of the Texas economy, but oil is not the whole story. The state economy has shown resiliency in the early days of the dramatic collapse of oil prices,” said Robert Dye, Chief Economist at Comerica Bank. “That said, our June index does not include the drop in oil prices to below $40 per barrel. This will undoubtedly increase the stress on the Texas energy sector, and the whole state economy.”

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For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0815.

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Comerica Bank’s California Index Sees Third Consecutive Gain

Comerica Bank’s California Economic Activity Index grew in June, increasing 0.4 percentage points to a level of 121.1. June’s reading is 37 points, or 44 percent, above the index cyclical low of 84.0. The index averaged 113.7 points for all of 2014, seven and one-half points above the average for all of 2013. May’s index reading was 120.6.

“Our California Economic Activity Index increased again in June, showing a consistent recovery from a slight dip last March. Most components of the index were positive in June, including payroll employment, unemployment insurance claims, housing starts, defense spending and the Nasdaq 100. We did see a little give back in the house price index and in hotel occupancy for June, but the bulk of the data show positive conditions for the state economy. The recent global stock market correction will show up in our tech sector indicator – the Nasdaq 100 – but we believe that the correction will not be a fundamental drag on the state economy,” said Robert Dye, Chief Economist at Comerica Bank. “Solid job creation and cheaper gasoline prices are supportive of the state’s large consumer sector.”

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For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0815.

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Comerica Bank’s Arizona Index Back to Decline

Comerica Bank’s Arizona Economic Activity Index declined in June, easing 0.3 percentage points to a level of 106.4. June’s index reading is 30 points, or 38 percent, above the index cyclical low of 76.9. The index averaged 99.7 points for all of 2014, four and one-fifth points above the average for full-year 2013. May’s index reading was 106.7.

“Our Arizona Economic Activity Index dipped slightly in June, extending the stall that began in March. The state economy continues to underperform both the national economy, and relative to its previous strong cyclical performance. Arizona has been a growth leader in recent expansion cycles, but this time we are seeing a state economy that is struggling to find momentum,” said Robert Dye, Chief Economist at Comerica Bank. “Four out of eight index components declined in June, including exports, unemployment insurance claims (inverted), hotel occupancy and enplanements. Also, two components were unchanged- payroll employment and house price index. We see a gradual improvement in the state’s housing market through 2015 and we expect momentum in this area to increase.”

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For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0815.

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Comerica Bank’s Florida Index Boosted by Construction

Comerica Bank’s Florida Economic Activity Index increased again in June, growing 1.6 percentage points to a level of 138.2. June’s index reading is 60 points, or 77 percent, above the index cyclical low of 78.1. The index averaged 117.6 in 2014, eight and three-fifths points above the average for all of 2013. May’s index reading was 136.6.

“Florida’s economy continued to show strong momentum through mid-year, as indicated by the 15th consecutive increase in our Florida Economic Activity Index. The June index was supported by gains in six out of eight components, including nonfarm payrolls, unemployment insurance claims (inverted), housing starts, sales tax receipts, hotel occupancy and enplanements. We saw minor declines in state exports and in house prices. Job growth, in particular, has been strong, up 3.5 percent over the previous year in June, well above the U.S. average gain of 2.1 percent,” said Robert Dye, Chief Economist at Comerica Bank. “With oil prices falling below $40 per barrel, gasoline prices will decline further, and this will free up cash in Florida households that can be spent on discretionary purchases. Cheaper gasoline was also a boon for tourists at the end of the summer vacation season.”

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For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0815.

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Comerica Bank’s Michigan Index Continues Strong Gains for Third Month

Comerica Bank’s Michigan Economic Activity Index grew in June, increasing 1.9 percentage points to reach a level of 126.8. June’s reading is 53 points, or 71 percent, above the index cyclical low of 74.0. The index averaged 117.4 points for all of 2014, three and one-third points above the index average for 2013. May’s index reading was 124.9.

“Our Michigan Economic Activity Index for June increased for the third consecutive month, propelled by the state’s resurgent auto industry, which is a key factor in the state’s steady job growth. The uptick in U.S. auto sales through mid-year has boosted auto production in Michigan. Nonmanufacturing job growth has also been an important part of Michigan’s economic revival. Property markets continue to firm up and residential construction activity is increasing,” said Robert Dye, Chief Economist at Comerica Bank. “The challenge ahead for Michigan will be to retain momentum in the nonmanufacturing economy, even as auto sales level out and eventually recede from current highs.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0815.

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From the Desk of Robert Dye

The global stock market sell-off that washed over into U.S. markets today reflects multiple sources of uncertainty. The health of the Chinese economy is of obvious concern. The world’s second largest economy appears to be closer to stalling than the official GDP numbers indicate. Manufacturing indicators for China are clearly in contraction. The China problem is having knock-on effects. The recent devaluation of the yuan has increased uncertainty in foreign exchange markets. Oil prices have tumbled below $40 per barrel for West Texas Intermediate crude. Energy companies, already in consolidation mode, are facing rapidly increasing pressure. The three factors already noted – China, global stock markets, and oil – add uncertainty to another major concern, namely, U.S. monetary policy. The Federal Reserve is now less than four weeks away from its September 16/17 FOMC meeting. U.S. economic data has been good recently, adding weight to the call for the Fed to begin raising the fed funds rate in mid-September. But much of the data is backward looking. Federal Reserve officials now face a very difficult task, and that is: how to judge the nature of the global stock market selloff. Is it a healthy correction that awakens us from somnambulistic faith in remarkably steady equity price gains? Or is it something worse, an indicator of fundamental weakness in China, or the global economy, for that matter. Does the global sell-off portend of more bad news to follow? U.S. Treasury yields have dipped with global investors seeking shelter from tumbling equities. The 10-Year T-bond yield fell below 2 percent for the first time since April. All of these conditions could have serious negative implications for the U.S. economy, if we were overleveraged and vulnerable to a credit contraction, as we were in 2007. But U.S. households and businesses are not over-leveraged. The potential downdraft of a broad-based credit contraction is small. While the U.S. economy is linked to Asia and China specifically, we are not coupled to the Chinese economy in the way that Australia is. Moreover, the experience of the 1990s shows us that even though U.S. manufacturing faces headwinds from a stronger dollar, a weaker China and a staggering energy sector, the broader U.S. non-manufacturing economy can continue to expand. We view the global stock market selloff as a wake-up call, alerting us to China’s vulnerability and to the dangers of complacency, but we do not expect to see a deceleration of the U.S. economy as a result. The Fed still has time to observe ahead of its mid-September policy meeting. A strong August jobs report on September 4th would be reassuring. But in the meantime we will dial back the subjective probability of a fed funds rate increase in September to about 35 percent. A late-October lift-off gets 25 percent, and mid-December gets 25 percent, with the remaining 15 percent spilling over into 2016. A quick recovery in U.S. and European stock prices would increase the odds of September fed funds liftoff.

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Comerica Economic Weekly

Mid-summer data show that the U.S. economy is expanding at a moderate pace, driven by growth in the service sector, sufficient to keep overall job growth on track, and sufficient to keep the Federal Reserve on schedule for an interest rate hike this year.

In July, 215,000 payroll jobs were added and the unemployment rate remained at 5.3 percent. There is one more employment report (for August, due September 4th) before the next FOMC meeting over September 16-17th. We expect the August payroll report to show a similar job gain, and the unemployment rate to dip to 5.2 percent. This will be enough to fulfill the Fed’s requirement of “some further improvement” in labor market conditions before they take their next step in normalizing monetary policy, increasing the fed funds rate.

The ISM Manufacturing Index for July dipped slightly, to a still expansive 52.7 percent. Given the headwinds to manufacturing output from the stronger dollar, reduced oil field activity and plateauing auto sales, we expect to see less push to the economy from manufacturing going forward.

The ISM Non-Manufacturing Index for July increased, more than expected, from 56.0 in June, to 60.3 in July. This is the strongest reading for the non-manufacturing index since August, 2005. This was a very strong report, with nine out of 10 sub-components accelerating for the month.

The U.S. international trade gap widened in June to $43.8 billion. The trade data, plus other recent data suggest the Q2 real GDP growth could be revised up from the preliminary 2.3 percent, to about 2.9 percent.

Personal income for June increased by 0.4 percent. After inflation and taxes, real disposable personal income expanded at a moderate 0.2 percent rate for the month. Real consumer spending was unchanged in June.

In July, we expect to see an increase in real consumer spending. Unit auto sales for July increased to a 17.6 million unit rate. July was the third month in a row that auto sales topped the 17 million unit mark. The good news is that new cars are zooming off the lots. The dark cloud in front of the silver lining is that there is only limited upside potential for car sales from here.

June construction spending increased slightly, by 0.1 percent. Losses in private non-residential spending were compensated by gains in public non-residential spending.

 For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 08-07-15.

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July U.S. Employment

Payrolls Up 215,000, Looks like “Some”

  • July Payroll Employment increased by 215,000 jobs. May and June payrolls were revised up by 14,000 jobs.
  • The Unemployment Rate for July was unchanged at 5.3 percent.
  • Average Weekly Hours edged up to 34.6 hours.
  • Average Hourly Earnings were up 2.1 percent from a year ago.

In their July 29 monetary policy announcement, the Federal Open Market Committee said that they anticipated that it would be appropriate to increase the fed funds rate when it has seen “some further improvement” in the labor market, and it is “reasonably confident” that inflation will move back to its 2 percent objective over the medium term. While it is impossible to know precisely what the Fed meant by the intentionally vague “some,” the July payroll gains do indeed look like “some.” We view today’s July employment data as partial fulfillment of the Fed’s requirement for interest rate lift-off. Payroll jobs increased in July by a solid 215,000, and May and June payrolls were revised up to show gains of 260,000 and 231,000, respectively. We will have one more jobs report between now and the next FOMC meeting over September 16-17th, and that will be the August report, due out September 4th. We expect to see further gains in payroll jobs for August, in the neighborhood of 210,000 jobs for the month. If oil prices can find a floor, and wages continue to firm up, then the Fed’s requirements for interest rate lift-off will be fulfilled. We believe that with today’s data, the subjective odds of a mid-September lift-off for the fed funds rate have increased to about 50 percent. We will give October 28 and December 16 each about 20 percent, and leave some tail risk that the Fed waits until 2016 for interest rate lift-off. We continue to expect to see more evidence of wage inflation as the unemployment rate tightens to near 5.0 percent by the end of this year, heading below 5.0 in 2016.

Today’s establishment data shows broad-based job growth across industries in July. Construction added 6,000 jobs for the month. Manufacturing employment was up 15,000 with large gains in nondurable goods industries. Wholesale trade employment increased by 6,300, while retail trade gained a strong 35,900 jobs.  Employment in financial services increased by 17,000 jobs with gains in insurance and real estate related companies. Professional and business services employment increased by a 40,000 jobs for the month. Education and healthcare added 37,000 jobs. Leisure and hospitality industries graciously expanded employment by 30,000. The government sector added 5,000 jobs in July.

Market Reaction: U.S. equity markets opened with losses as traders contemplate the increasing odds of a September fed funds rate hike. The 10-Year T-bond yield is down to 2.196 percent; however the yield on the 3-Month T-bill is up to 0.071 percent. NYMEX crude oil is down to $44.26/barrel. Natural gas futures are down to $2.80/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Employment 08-07-15.

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2015Q2 GDP and Revisions, July UI Claims

Second Quarter Real GDP Increased at a 2.3% Annual Rate, Q1 Revised Up

  • Real Gross Domestic Product for 2015Q2 increased at a 2.3 percent annual rate.
  • First quarter real GDP growth was revised up from -0.2 to +0.6 percent.
  • Initial Claims for Unemployment Insurance gained 12,000 to hit 267,000 for the week ending July 25.

The Bureau of Economic Analysis released their first estimate of second quarter 2015 real GDP, which, they said, increased at a moderate 2.3 percent annual rate. Included in the GDP data release was the annual revision of the national income and product accounts. This is essentially the fourth estimate of first quarter GDP. The annual revisions tended to dampen the recent historical pattern of weak first quarter GDP, meaning a little less weak. It also dampened the recent pattern of strong GDP in the second half of the year. On an annual basis, 2013 now looks a little weaker as a whole, with real GDP increasing at a 1.5 percent annual rate, where previously the estimate was 2.2 percent. For 2014 the stronger early quarter numbers and the weaker later quarter numbers left the annual growth rate unchanged at 2.4 percent. Today’s GDP data does not significantly change our outlook for the second half of 2015. We still expect to see moderate real GDP growth of about 2.5 to three percent for the last two quarters of the year. While the GDP revisions are fascinating to us data geeks, for normal humans they also have some implications. The slightly stronger first quarter real GDP growth, plus the confirmation of an acceleration in growth through the second quarter adds support to our view that the Federal Reserve will likely announce a small increase to the fed funds rate at the conclusion of the September 16-17 FOMC meeting. The interest rate move still remains highly data dependent. We expect to see reasonably strong job growth in July and August, above 200,000 per month, and a decrease in the unemployment rate to 5.2 percent by August. If U.S. data turn south over the next seven weeks, or if a major international event stresses global financial markets, then the Fed could delay interest rate lift-off until December or later.

Supporting our call for ongoing moderate-to-strong job growth through July and August, today’s release of initial unemployment insurance claims for the week ending July 25 shows an inconsequential gain of 12,000 to hit a level of 267,000. Anything below 300,000 is considered a very good number for the level of initial weekly claims and we have been cruising comfortably under 300,000 for most of this year. Continuing claims increased by 46,000 for the week ending July 18, also still a very good number.

Market Reaction: Equity markets opened with losses. The 10-year Treasury bond yield is down to 2.28 percent. NYMEX crude oil is up to $49.12/barrel. Natural gas futures are down to $2.81/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: GDP 07-30-15.

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