Comerica Economic Weekly

This week’s economic scene was dominated by what did not happen. The Federal Reserve did not clear the fog around interest rate expectations. First quarter GDP, March personal income and the April ISM MF Index did not do much of anything. The sky did not fall.

The Federal Open Market Committee concluded their April 28/29 meeting with a policy announcement that did little to shape expectations for interest rate lift-off. There was no attempt by the FOMC to focus expectations for the date of interest rate lift-off. We believe that they will be unable to reach a consensus view by June, and that pushes our expectation for interest rate lift-off back to September.

True to pattern, real GDP growth for the U.S. was weak in 2015Q1, increasing at a meager 0.2 percent annualized rate. Weather was undoubtedly a factor weighing on auto sales and construction. The dockworkers’ strike at California ports was a drag. State and local government spending dipped at a 1.5 percent annual rate. The good news in the report is that components of GDP that were suppressed in Q1 are likely to bounce back in Q2. The not-so-good news is that inventory accumulation surged in Q1, adding 0.74 percent to GDP growth. Without the inventory surge we would have seen a decline in GDP. We are now set up for a drag from inventories later this year.

The Case-Shiller house price index for the U.S. increased by 0.4 percent in February. Over the 12 months ending in February, the U.S. HPI is up 4.2 percent. We expect the spring residential real estate season to show increased activity, supporting prices in most markets.

The Conference Board’s Consumer Confidence Index fell to 95.2 in April. The slump in consumer confidence coincides with the weak March jobs report, increasing gasoline prices and a shaky stock market.

Personal income in the U.S. was unchanged in March, contributing to the weak performance of Q1 GDP. Wages and salaries increased by a tepid 0.2 percent, consistent with mediocre payroll job gains for the month. Offsetting the wages gains were declines in asset income. Nominal consumer spending increased by 0.4 percent in March as car sales rebounded. The gain in spending, with income flat, pulled the personal saving rate down from 5.7 percent in February to 5.3 percent in March. The PCE price index climbed by 0.2 percent in March and is up just 0.3 percent over the past year.

The employment cost index for 2015Q1 continued to trend up, showing that both wage rates and benefits are climbing. This will support stronger income gains in the months ahead.

Initial claims for unemployment insurance fell by 34,000 for the week ending April 25, to hit 262,000, the lowest since April 15, 2000.

Construction spending dipped by 0.6 percent in March with declines in most major categories.

The ISM MF Index was unchanged in April at 51.5 percent, indicating moderately positive conditions.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 05-01-15.

 

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March Income and Spending, Q1 Employment Costs, April UI Claims, Fed

Unconvincing Data Keeps Fed on Hold

  • S. Personal Income was unchanged in March. After taxes and inflation it dipped 0.2 percent.
  • Real Consumer Spending increased by 0.3 percent in March as auto sales rebounded.
  • The Employment Cost Index continued to trend up in Q1, up 2.6 percent from a year earlier.
  • Initial Claims for Unemployment Insurance fell by 34,000 for the week ending April 25, to hit 262,000.
  • The Federal Reserve remained vague on the timing of interest rate hikes, unconvinced by soft data.

Personal income in the U.S. was unchanged in March, contributing to the weak performance of Q1 GDP. Wages and salaries increased by a tepid 0.2 percent, consistent with mediocre payroll job gains for the month. Offsetting the wages gains were declines in asset income. Interest payments have been on a long slow slide as bond yields bounce along the lower bound. In March weak interest payments were joined by declining dividends following the dividend surge in February. After factoring taxes and inflation, real disposable income dipped by 0.2 percent, its first decline since December 2013. Nominal consumer spending increased by 0.4 percent in March as car sales rebounded. The gain in spending, with income flat, pulled the personal saving rate down from 5.7 percent in February to 5.3 percent in March.  After inflation, real consumer spending was up 0.3 percent. The PCE price index climbed by 0.2 percent in March and is up just 0.3 percent over the past year. The employment cost index for 21015Q1 continued to trend up, showing that both wage rates and benefits are climbing. This will support stronger income gains in the months ahead.

Wages are under increasing pressure as the labor market tightens. Initial claims for unemployment insurance fell by 34,000 for the week ending April 25, to hit 262,000, the lowest since April 15, 2000. Continuing claims fell by 74,000 to hit a very low 2,253,000. With both wages and job creation expected to go in the right direction, we look for stronger GDP growth through the remainder of this year, supported by a healthier household sector. The Federal Reserve was unconvinced yesterday. The Federal Open Market Committee concluded their April 28/29 meeting with a policy announcement that did little to shape expectations for interest rate lift-off. There was no attempt by the FOMC to focus expectations for the date of interest rate lift-off. They simply said “the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

We believe that the two key conditions of ongoing improvement in the labor market and inflation returning to 2 percent may not be met in time for the Fed to feel comfortable with a June rate hike. The Yellen Fed is clearly willing to err in the direction of holding rates too low for too long, waiting for an indisputable string of historical data rather than risk making a forward-looking assessment that may prove to be incorrect. We expect the Fed to be convinced that they can begin lifting the fed funds rate without damaging the economy by September.

Market Reaction: U.S. equity markets opened with losses. The yield on the 10-year Treasury bond is up to 2.09 percent. NYMEX crude is up to $58.64/barrel. Natural gas futures are down to $2.72/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Personal Income 043015.

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Comerica Bank’s Texas Index Continues to Sag with Oil Prices

Comerica Bank’s Texas Economic Activity Index eased again in February, decreasing 1.6 percentage points to a level of 104.6. February’s reading is 32 points, or 44 percent, above the index cyclical low of 72.6. The index averaged 105.1 points for all of 2014, four and four-fifths points above the average for full-year 2013. January’s index reading was 106.3.

“Our Texas Economic Activity Index has now declined for four consecutive months, beginning in November of last year. The decline largely reflects the impact of significantly lower crude oil prices on the state economy. Well drilling and servicing activity is reduced and those industries are shedding jobs. Oil is a key factor in the state economy, but not the only factor. In our February index we see the consumer-driven components, which are housing starts, house prices and sales tax, still going in a positive direction,” said Robert Dye, Chief Economist at Comerica Bank. “The key question for Texas regarding oil is…how low for how long? The increase in the price of West Texas Intermediate crude from a mid-March low of $47 per barrel, to now $57 per barrel, is a positive, but still tenuous development”.

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For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0415.

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Comerica Bank’s Michigan Index Slips on Weather

Comerica Bank’s Michigan Economic Activity Index decreased in February, losing 1.9 percentage points to reach a level of 118.7. February’s reading is 45 points, or 61 percent, above the index cyclical low of 73.8. The index averaged 117.6 points for all of 2014, three and three-tenths points above the index average for 2013. January’s index reading was 120.6.

“Our Michigan Economic Activity Index eased in February as severe winter weather gripped the Midwest and Northeast. Four components of our Michigan Index that were negative factors for February are weather-sensitive. These are unemployment insurance claims, housing starts, auto production (depressed by weaker sales) and sales tax revenue. Fortunately, U.S. auto sales bounced back in March to a 17.2 million unit pace after slumping through the winter.  Also, we expect home sales and residential construction activity to improve this spring,” said Robert Dye, Chief Economist at Comerica Bank. “With auto industry output nearing a cyclical peak, and other manufacturing industries feeling the headwinds of a weaker energy sector and a stronger dollar, we expect Michigan’s non-manufacturing industries to account for a bigger portion of new business for the state this year.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0415.

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Comerica Bank’s California Index Flat in February

Comerica Bank’s California Economic Activity Index held flat in February, maintaining a level of 119.4. February’s reading is 36 points, or 42 percent, above the index cyclical low of 83.8. The index averaged 113.7 points for all of 2014, seven and one-half points above the average for all of 2013. January’s index reading was 119.4.

“Our California Economic Activity Index was unchanged in February. State exports have been a drag on the index for four consecutive months as a labor dispute slowed port activity. While the dockworkers’ dispute has been resolved, truckers who service the ports have recently authorized a strike, threatening to extend shipping delays. Still, job growth in California has been steady, and our California Index shows only one decline in the last 27 months,” said Robert Dye, Chief Economist at Comerica Bank. “The chronic water shortage for much of the state is a potentially limiting factor for business activity. Agricultural businesses are making adjustments, but non-agricultural industries are also facing limits as the state grapples with a call by Governor Brown for a 25 percent reduction in water usage.”

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For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0415.

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Comerica Bank’s Florida Index Accelerates

Comerica Bank’s Florida Economic Activity Index gained in February, growing 3.8 percentage points to a level of 129.7. February’s index reading is 52 points, or 66 percent, above the index cyclical low of 78.0. The index averaged 118.0 in 2014, eight and four-fifths points above the average for all of 2013. January’s index reading was 125.9.

“Our Florida Economic Activity Index increased in February, showing accelerating economic activity for the Sunshine State. Our Florida index has now increased for 11 consecutive months. In February, all but one index component, state exports, was positive.  Broad-based economic growth is self-reinforcing, and we expect to see ongoing gains for Florida through 2015,” said Robert Dye, Chief Economist at Comerica Bank. “Residential and commercial property markets continue to firm up through the state. Lower energy prices and improving labor market conditions through the U.S. are supportive of Florida’s tourism and real estate industries.”

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For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0415.

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Comerica Bank’s Arizona Index Continues to Climb

Comerica Bank’s Arizona Economic Activity Index grew in February, increasing 1.0 percentage points to a level of 106.9. February’s index reading is 30 points, or 39 percent, above the index cyclical low of 76.7. The index averaged 99.9 points for all of 2014, four and two-fifths points above the average for full-year 2013. January’s index reading was 105.9.

“Our Arizona Economic Activity Index increased again in February, driven by improved job creation and firmer real estate conditions. We note that the state did lose 3,800 jobs in March, and that will factor into our Arizona Index next month. Phoenix house prices increased by 0.6 percent in March, according to the Case-Shiller data, and are up 2.9 percent over the previous 12 months. That lags the U.S. average gain of 4.2 percent,” said Robert Dye, Chief Economist at Comerica Bank. “Arizona is facing increasing competition as a retirement destination. Right now, a strong dollar is bolstering the desirability of many overseas destinations, weighing on migration to Arizona.”

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For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0415.

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2015Q1 GDP, February House Prices, April Consumer Confidence

First Quarter Real GDP Growth Meager at 0.2 Percent

  • Real Gross Domestic Product growth for 2015Q1 registered a barely positive2 percent annual rate.
  • The Case-Shiller U.S. House price index gained4 percent in February, up 4.2 percent for the year.
  • The Conference Board’s Consumer Confidence Index for April decreased to 95.2.

Repeating a recent pattern, real GDP growth for the U.S. was weak in 2015Q1, increasing at a meager 0.2 percent annualized rate. Weather was undoubtedly a factor. Even though the GDP data is seasonally adjusted, weather effects that are beyond normal, including an abnormally cold and snowy winter for much of the country, skew the data. We can see the impact of weather in at least two areas: consumer spending and business investment. Real consumer spending on durable goods increased by only 1.1 percent in 2015Q1 as auto dealerships in much of the Northeast were buried under snow. Total consumer spending increased at a mediocre 1.9 percent rate in Q1 after surging at a 4.4 percent rate in 2014Q4. Business fixed investment in structures declined at a 23.1 percent annual rate as construction projects were delayed. We see quirkiness in other areas. Net exports subtracted 1.25 percent from real GDP growth in Q1. The dockworkers strike at California ports may be a factor. The export of goods declined at a 13.3 percent annual rate in Q1. State and local government spending dipped at a 1.5 percent annual rate. Combined, state and local government spending is about 60 percent larger than federal spending in the GDP accounting. The good news in the report is that components of GDP that were suppressed in Q1 are likely to bounce back in Q2. The not-so-good news is that real inventory accumulation surged in Q1, up by $110.3 billion ($2009). Inventories added 0.74 percent to Q1 real GDP growth. Without the inventory surge we would have seen a decline in GDP. We suspect that a good portion of the inventory gain was due to crude oil storage, but it is impossible to tell from today’s report. If there was a significant inventory build in other areas, say automobile manufacturing, that would suggest that a correction in output is coming in the current quarter or beyond, with implications for hiring. Also, the crude oil inventory surge in Q1 reminds us that there will be the opposite, negative, impact on GDP when crude oil inventories are drawn down later this year as production drops with the wind down of drilling activity.

The Case Shiller house price index for the U.S. increased by 0.4 percent in February. Over the 12 months ending in February, the U.S. HPI is up 4.2 percent. San Francisco saw the biggest one-month gain among the 20 key cities, with house prices increasing by 3.3 percent. Denver was hot at 2.2 percent. Cleveland had the smallest gain at 0.4 percent for February. We expect the spring real residential real estate season to show increased activity, supporting prices in most major markets. A key exception may be in oil producing areas, including Houston. Consumer confidence fell in April according to the Conference Board. The consumer confidence index fell from 101.4 in March to 95.2 in April. The give-back of recent gains in consumer confidence coincides with the weak March jobs report, increases in gasoline prices and a shaky stock market.

Market Reaction: Equity markets opened with losses. The 10-year Treasury bond yield is up to 2.06 percent. NYMEX crude oil is up to $57.99/barrel. Natural gas futures are up to $2.58/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: GDP 04-28-15.

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Comerica Economic Weekly

The pushes and pulls on the U.S. economy are coming from multiple directions, adding to a sense of uncertainty that threatens to paralyze policy makers.

Among the negatives are a stronger dollar and weakening oil patch, both headwinds for U.S. manufacturers. Markit’s Flash U.S. Manufacturing PMI (not the ISM MF Index) eased in April, indicating slower momentum for the manufacturing sector.

Oil service companies have announced a second round of layoffs that number in the tens of thousands. The graph on page two of this report shows that oil patch states are feeling the hit.

Outside of the oil patch, labor market indicators look good. Initial claims for unemployment insurance ticked up by 1,000 for the week ending April 18, to hit a still-low 295,000. Continuing claims increased by 50,000, to hit 2,325,000 for the week ending April 11. The ongoing strength of the unemployment insurance claims data reinforces our view that the soft March payroll job gain of just 126,000 does not represent a sudden loss of momentum in the U.S. job market. We expect to see stronger payroll jobs data for April and May.

New home sales for March came in weaker than expected, resetting after a February surge. The March reset dropped new home sales by 11.4 percent to a 481,000 unit annual rate. Despite the dip this March, new home sales remain 19.4 percent above the rate from March 2014. The months’ supply of new homes on the market remains relatively tight at 5.3 months’ worth.

Existing home sales for March increased by 6.1 percent to a 5,190,000 unit pace. While the uptick is welcomed news, existing home sales remain below their recent peak of 5,380,000 units from July 2013. The months’ supply of existing homes for sales was a tight 4.6 months’ worth in March. The median sales price of an existing home was up 7.8 percent for the year ending in March.

Mortgage applications for purchase gained 5.0 percent for the week ending April 17. Five out of the last seven weeks have seen increases in purchase apps, a positive indicator for the spring residential real estate season.

New orders for durable goods increased by a strong 4.0 percent in March, but the gains were not broad-based. Primary metals, fabricated metals, machinery, communications equipment and electrical equipment all saw declining orders in March. Gains came from both defense and nondefense aircraft. Core durable goods orders, non-defense capital goods excluding aircraft, slipped by 0.5 percent.

U.S. stock indexes climbed through the week and oil prices maintained their recent highs, with WTI finishing the week near $57 per barrel. Military activity in the Middle East is keeping the oil market on edge. But the oversupply is still an issue. U.S. weekly crude oil production may be levelling out. Data from early March through mid-April show no clear trend. A sustained drop in U.S. production would take some pressure off of storage capacity.

So what is the Fed to do? At next week’s FOMC meeting, the Fed leaves near-zero interest rate policy in place, and likely maintains that stance through June. Unfortunately, the Fed’s own uncertainty about interest rate policy threatens to add to financial market volatility. We still look for interest rate lift-off in September.

 For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 04-24-15.

 

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March Home Sales, April UI Claims

New Home Sales Reset in March, but Trend Looks Good

  • New Home Sales for March decreased by 11.4 percent to an annual rate of 481,000 units.
  • March Existing Home Sales increased by 6.1 percent, to a 5,190,000 unit annual rate.
  • Initial Claims for Unemployment Insurance gained 1,000 to hit 295,000 for the week ending April 18.

New home sales for March came in weaker than expected, resetting after a February surge. In February new home sales climbed to a 543,000 unit annual pace, breaking out of the near-400,000-unit range where they have been parked for two years. The March reset, down 11.4 percent to a 481,000 unit annual rate looks like it is still on a break-out trajectory, consistent with increasing confidence by home builders. Despite the dip this March, new home sales remain 19.4 percent above the rate from March 2014. The months’ supply of new homes on the market remains relatively tight at 5.3 months’ worth. The median sales price of a new home fell to $277,400 in March. This number is sensitive to the mix of homes sold as well as to market conditions. New home sales remain well shy of the near-1,400,000-unit rate from June 2005. Perhaps those days are best forgotten. A long-term average of about 600,000 units per year through the 1970’s and 1980’s suggests that there is still plenty of upside potential to the new home market.

Existing home sales for March increased by 6.1 percent to a 5,190,000 unit pace. While the uptick is welcomed news, existing home sales remain below their recent peak of 5,380,000 units from July 2013. The months’ supply of existing homes for sales was a tight 4.6 months’ worth in March. The median sales price of an existing home was up 7.8 percent for the year ending in March.

Initial claims for unemployment insurance ticked up by 1,000 for the week ending April 18, to hit a still-low 295,000. Continuing claims increased by 50,000, to hit 2,325,000 for the week ending April 11. The ongoing strength of the unemployment insurance claims data reinforces our view that the soft March payroll job gain of just 126,000 does not represent a sudden loss of momentum in the U.S. job market. We expect to see stronger payroll jobs data for April and May.  However, it is safe to say that there are some undercurrents in the jobs data. Oil field related employment is falling as rig counts plummet. Job creation in the manufacturing sector is also losing momentum, in part due to less drilling activity, and also because the strengthening dollar is making imports cheaper and U.S. exports more expensive.

There is enough uncertainty in U.S. and international economic conditions to give the Federal Open Market Committee reason to pause as it considers the path of monetary policy next week. We expect to see no change to interest rate policy in the upcoming April 29 FOMC policy statement. The odds of a June interest rate hike have diminished, so we are rolling back our expectation for interest rate lift-off to September.

Market Reaction: U.S. equity markets are gaining. The 10-year Treasury Bond yield is up to 1.97 percent. NYMEX crude oil is up to $58.12/barrel. Natural gas futures are down to $2.59/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: New_Home Sales 04-23-15.

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