Comerica Economic Weekly

U.S. economic data for the week was positive and consistent with an ongoing moderate economic expansion through the fourth quarter of 2016.

The biggest surprise of the week came from the National Federation of Independent Business. Their Small Business Confidence Survey showed a surge in optimism in December, to 105.8, the strongest reading since December 2004. If the surge in small business optimism is maintained, we could see stronger hiring, inventory spending and capital spending in 2017 as a result.

Initial claims for unemployment insurance increased by 10,000 for the week ending January 7, to hit 247,000, still a very low number. Continuing claims for the week ending December 31 fell by 29,000 to reach 2,087,000, also a very low number.

The Job Openings and Labor Turnover Survey for November showed stable and positive labor market conditions. The jobs openings rate ticked up to 3.7 percent for the month. The hiring rate was unchanged at 3.6 percent . The separations rate ticked up to 3.5 percent.

Retail sales for December increased by 0.6 percent, supported by strong auto sales and rising gasoline prices. For the month, unit auto sales surged to an 18.4 million unit rate. The dollar value of retail auto sales increased by 2.4 percent in December. Gasoline increased from an average of $2.18 per gallon for regular unleaded in November to $2.26 in December, boosting retail sales at gasoline stations by 2.0 percent for the month. Other components of retail sales were mixed to down.

The producer price index for final demand increased by 0.3 percent in December, about as expected. Gains over the last 12 months continue to trend up. The PPI for final demand is now up 1.6 percent over the last 12 months.

Manufacturing and trade inventories were up 0.7 percent in November. The nominal gain was ahead of the PPI, suggesting real inventory accumulation in November. We are expecting to see an increase in the rate of real inventory growth in 2016Q4 that will support ongoing moderate GDP growth.

Mortgage applications rose in early January as mortgage rates eased. Both purchase and refi apps increased. According to the Mortgage Bankers Association, the 30-year fixed rate mortgage eased to 4.32 percent as of January 6, motivating increased refi activity.

The University of Michigan’s Consumer Sentiment Index eased slightly in mid-January to 98.1, after surging in December.

We continue to expect the Federal Reserve to keep key short-term interest rates unchanged at the upcoming Federal Open Market Committee meeting over January 31/February 1. So does the fed funds futures market, which shows the implied probability of a rate hike on Feb. 1 of just two percent. The futures market remains focused on June 14 for the date of the next fed rate hike. Stronger inflation data could move that schedule up.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 01-13-2017.

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December Retail Sales and Producer Prices

Cars and Gasoline

  • December Retail Sales increased by 0.6 percent, boosted by auto sales and gasoline prices.
  • Retail Sales Ex-Autos increased by 0.2 percent in December.
  • The Producer Price Index for Final Demand gained 0.3 percent in December, on higher energy prices.
  • The PPI for Final Demand Less Food Energy and Trade increased by 0.1 percent in December.

Retail sales for December increased by 0.6 percent, supported by strong auto sales and rising gasoline prices. For the month, unit auto sales surged to an 18.4 million unit rate. The dollar value of retail auto sales increased by 2.4 percent in December. Gasoline prices increased from an average of $2.18 per gallon for regular unleaded in November to $2.26 in December, boosting retail sales at gasoline stations by 2.0 percent for the month. Other components of retail sales were mixed to down. Retails sales ex-autos gained a more sedate 0.2 percent in December. Softer categories were electronics, down 0.5 percent, food, down 0.3 percent, general merchandise stores, down 0.5 percent, and restaurants, down 0.8 percent in December. Strong overall retail sales in December are consistent with solid consumer spending in the last quarter of 2016, which, in turn, is supportive of ongoing moderate GDP growth for the fourth quarter. Self-reported sales at several traditional retailers were weak through the holiday shopping season even though overall sales (including internet sales) were positive. Macy’s announced that it will close 100 stores in 2017 and cut 6,200 jobs. Kolh’s also reported weaker-than-expected holiday sales. Sears is selling its Craftsman brand and will close 150 stores this year. According to the National Retail Federation, holiday retail sales over November and December were up 4 percent this season, above the NRF’s forecast of 3.6 percent growth.

The producer price index for final demand increased by 0.3 percent in December, about as expected. Gains over the last 12 months continue to trend up. The PPI for final demand is now up 1.6 percent over the last 12 months. On the goods side, producer prices were supported in December by petroleum products, light trucks, iron and steel scrap and eggs. Prices on the services side were supported by financial services, wholesaling and apparel.

Market Reaction: Equity markets opened with gains. The 10-year Treasury yield is up to 2.42 percent. NYMEX crude oil is down to $52.55/barrel. Natural gas futures are down to $3.35/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Retail Sales 01-13-17.

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January 2017, Comerica Economic Outlook

Global Reflation and the Trump Swerve

Commodity prices accelerated in the early 2000’s, encouraging the development of new supply and feeding capital investment globally. Very high commodity prices and the global financial market crisis led to significant demand destruction through the early years of this decade. With demand destruction came a downward reset in commodity prices, making high marginal cost production unprofitable. The stall in business investment fed back into demand destruction, pushing the U.S. economy to the brink of recession by the end of 2015. With commodity markets gradually rebalancing, in the presence of still highly accommodative monetary policy, the world is now reflating. U.S. demand upshifted in the third quarter of 2016, and looks set to continue in a higher gear for at least a few more quarters. China is catching a second wind. After revision, Japan GDP data looks better. European economies look stronger despite the ongoing political stress. The U.S. money supply, M2, is surging, up 7.8 percent in November on a year-ago basis.

Commodity prices are once again on the upswing. Wages are going up. Interest rates are still low as central banks respond to new conditions slowly. The global economy is reflating after a catastrophic loss of cabin pressure eight long years ago. The weak global economic recovery contributed to a rejection of the political status quo on both sides of the Atlantic. Now, as President-elect Trump prepares to take office under a mandate of change, the U.S. economy is already under the influence of the Trump Swerve. Equity markets jumped in November, and have not looked back. Measures of business and consumer confidence have surged. Anecdotal evidence suggests that businesses are set to accelerate capital spending in 2017.

The incoming administration has promised a lot. Healthcare reform, tax reform, fiscal stimulus and regulatory rollback are all expected, and soon. Major corporations have altered significant investment decisions under threat of tweet. Most policies expected of the Trump administration will support near-term growth and tend to increase inflation. With wages climbing, commodity prices up and very low inflation expectations threatening to unhinge, the Federal Reserve has ramped up the dot plot, showing upwardly revised expectations for interest rates. The dots now signal three rate hikes for 2017. If inflation warms up quickly, there may be more than three. So there is potential for a monetary offset to the Trump Swerve, in the form of higher interest rates. Fortunately, with interest rates still ultra low, the threat of interest rate drag on the U.S. economy is distant. Another key downside risk comes from rapidly inflating expectations for the stock market. The Trump Bump may morph into the Trump Slump if the administration fails to deliver this spring on the supercharged rhetoric of the 2016 political season. Trade is also a downside risk for 2017, both from the strong dollar and from the apparent potential for heavy-handed deconstruction of trade agreements.

Timing is everything. We believe that the Trump Swerve will position the U.S economy to catch a favorable tailwind from global reflation. As the threat of a near-term U.S. led recession recedes, businesses will recalibrate and extend the current expansion into the history books. At 90 months, the business cycle catches its second wind. Stronger growth, more inflation, higher interest rates and slower job creation are in store for 2017.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicOutlook0117.

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Comerica Economic Weekly

U.S. economic data for the week was generally positive and consistent with an ongoing moderate economic expansion through the fourth quarter of 2016.

A middling 156,000 net new jobs were added to the U.S. economy in December. Over 2016, an average of 180,000 net new jobs were added per month, stepping down from the robust +200K per month averages of 2014 and 2015. The unemployment rate increased inconsequentially by one-tenth to 4.7 percent for the month. This should be interpreted as noise and not as a sign of increasing slack in the labor market. The average workweek was unchanged at 34.3 hours. Wages jumped noticeably, up 10 cents, or 0.4 percent for the month, after falling slightly in November. Over the previous 12 months, average hourly earnings were up by 2.9 percent. With many states boosting their minimum wage rates this year, wages will be under pressure.

The Fed will watch wage growth carefully over 2017, looking for signs that wage gains are fueling increasing inflation expectations. According to the December dot plot, FOMC members are expecting about three increases in the fed funds rate this year. The fed funds futures market shows that expectations are coalescing around June 14 for the next fed funds rate hike. Perhaps the remaining two could come in September and December, implying a back-loaded schedule. However, the Fed is not wedded to that schedule. If inflation measures warm up quickly, rate hikes will come sooner rather than later.

The minutes of the Federal Open Market Committee meeting of December 13/14 show FOMC member’s contemplating and struggling to integrate changing expectations for 2017.

Quantifying and sequencing the potential policy levers that the incoming Trump Administration may pull is still challenging, but it is safe to say that most potential economics-related policies would marginally boost inflation. Trump policies will be rolled out on the heels of a production agreement by OPEC members that has already boosted oil prices into the mid-to-low $50 range. Other commodity prices, particularly metals, have also been on the upswing, adding to inflation expectations.

The ISM Manufacturing Index for December increased to a solid 54.7. The ISM Non-Manufacturing Index for December was unchanged at 57.2, showing ongoing improvement in the broad non-manufacturing sector. Noteworthy in both the ISM-Manufacturing and Non-Manufacturing Indexes for December, the price sub-indexes are increasing.

Auto sales in December surged to an 18.4 million unit rate, bringing the 2016 total up to a record 17.54 million units. We expect sales to ease in 2017. Strong December retail sales are supportive of Q4 GDP.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  CMAEconWeekly 01-06-2017.

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December U.S. Employment

Middling Jobs Report Leaves Fed Expectations Unchanged

  • Payroll Employment increased by 156,000 jobs in December, a little below expectations.
  • The Unemployment Rate for December increased inconsequentially to 4.7 percent.
  • Average Hourly Earnings jumped by 0.4 percent for the month, after easing in November.
  • Average Weekly Hours were unchanged at 34.3 in December.

A middling 156,000 net new jobs were added to the U.S. economy in December. This was a little below expectations, but not dramatically so. October and November payrolls were revised up on net by 19,000 jobs. Over 2016, an average of 180,000 net new jobs were added per month, stepping down from the robust +200K per month averages of 2014 and 2015. A flattish household employment survey for December (+63,000 jobs), plus a moderate 184,000 worker gain in the labor force boosted the unemployment rate by one-tenth to 4.7 percent for the month. This should be interpreted as noise and not as a sign of increasing slack in the labor market. Other measures, including generationally low unemployment insurance claims, point to ongoing tightness in the labor market. The average workweek was unchanged at 34.3 hours. Wages jumped noticeably, up 10 cents, or 0.4 percent for the month, after falling slightly in November. Over the previous 12 months, average hourly earnings were up by 2.9 percent. With many states boosting their minimum wage rates this year, wages will be under pressure. The Fed will watch this carefully over 2017, looking for signs that wage gains are fueling increasing inflation expectations. According to the December dot plot, FOMC members are expecting about three increases in the fed funds rate this year. The fed funds futures market shows that expectations are coalescing around June 14 for the next fed funds rate hike. Perhaps the remaining two could come in September and December, implying a back-loaded schedule. However, the Fed is not wedded to that schedule. If inflation measures warm up quickly, rate hikes will come sooner rather than later.

The establishment data was mixed in December. Employment in mining industries (including oil drilling) was down by 2,000 jobs. The construction sector shed 3,000 jobs in December. Manufacturing did better than expected, adding 17,000 jobs for the month. Wholesale trade added 2,000. Retail trade gained 6,300 jobs in December. Information services gave up 6,000 jobs. Financial services increased employment by 13,000 jobs. Professional and business services was a little light, adding 15,000 jobs. Educational and healthcare added a strong 70,000 jobs in December. Leisure and hospitality served up 24,000 jobs. The government sector added 12,000.

Market Reaction: U.S. equity markets opened with losses. The 10-Year T-bond yield is up to 2.40 percent. NYMEX crude oil is up to $53.77/barrel. Natural gas futures are up to $3.29/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Employment 01-06-17.

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December ADP Jobs, ISM-Non MF, UI Claims, Auto Sales

Positive Data at Year-End Shows Momentum Heading into 2017. The Curse of Q1?

  • The December ADP Employment Report showed a gain of 153,000 private-sector jobs for the month.
  • The ISM Non-Manufacturing Index for December was unchanged at 57.2, showing ongoing improvement.
  • Initial Claims for Unemployment Insurance fell by 28,000 for the week ending December 31, to 235,000.
  • Auto Sales surged in December, hitting an 18.4 million unit sales rate as dealers pushed incentives.

The ADP Employment Report for December indicated that 153,000 private-sector jobs were added to the U.S. economy in December. This was a little short of expectations and suggests that the official job count, released tomorrow morning, will show about 163,000 net new payroll jobs. The ADP Report is not a perfect predictor of the BLS numbers, but it does suggest that payroll gains may fall below expectations for December and are trending lower, as expected. Still, something in the neighborhood of 163,000 net new jobs for December would not be a bad number. Also, we would not be surprised if the unemployment rate ticked up in December after falling three- tenths of a point in November to 4.6 percent. The combination of a disappointing payroll gain and an increase in the unemployment rate may be a sobering combination for financial markets tomorrow, but should not be interpreted as a loss of momentum for the U.S. economy. Still, we are mindful that first quarter GDP data has tended to be weaker than expected in the post-recession period. We will be publishing our updated January U.S. Economic Outlook early next week.

The ISM Non-Manufacturing Index for December was unchanged at 57.2, showing ongoing improvement in the broad non-manufacturing sector. Nine out of ten sub-indexes were above 50, indicating positive conditions in production, new orders and employment, amongst other areas. Out of 15 industries, 12 reported growth in December, including mining, retail trade, finance and insurance and information services. Three industries reported contraction in December. They were public administration, wholesale trade and agriculture. Anecdotal comments were generally positive. Noteworthy in both the ISM-Manufacturing and Non-Manufacturing Indexes for December, the price sub-indexes are increasing, suggesting that inflationary forces are building in the U.S. economy. The pace of inflation will be a key motivator for Federal Reserve interest rate policy this year.

Even if job growth was not robust in December, consumers felt confident in taking advantage of generous incentives at auto dealers. U.S. auto sales surged in December to an 18.4 million unit sales rate, the best monthly sales rate since July 2005. Strong sales in the fourth quarter pushed total sales for 2016 to 17.54 million units, a new record. We suspect that strong year-end sales will cannibalize sales from early 2017 and we will see a reset in auto sales at the start of this year. We have been bearish on auto sales for 2017, expecting them to gradually ease in a typical late-cycle pattern. However, we can also say that consumer spending on autos as a percentage of disposable income remains low, so consumers have some room to keep buying new wheels if they want to. Initial claims for unemployment insurance fell by 28,000 in the last week of 2016, to hit 235,000. This is an exceptionally low number, indicating that labor market conditions remain tight even as payroll job growth has eased off the robust +200K per month pace of 2014 through 2015. If we get 163,000 net new payroll jobs in December, with no revisions to history, we would end the year averaging 179,000 net new payroll job per month for 2016.

Market Reaction: U.S. equity markets have given up early gains. The yield in 10-Year T-bonds is down to 2.36 percent. NYMEX crude oil is down to $53.02/barrel. Natural gas futures are down to $3.19/mmbtu.

For a PDF version of this Comerica Economic Alert click here: ADP 01-05-17.

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Comerica Bank’s Arizona Index Continues to Improve

Comerica Bank’s Arizona Economic Activity Index was up 0.2 percentage points in October to a level of 111.0. October’s index reading is 34 points, or 44 percent, above the index cyclical low of 77.0. The index averaged 106.9 points for all of 2015, seven and one-fifth points above the average for 2014. September’s index reading was 110.8.

“The Comerica Bank Arizona Economic Activity Index increased again in October, extending its winning streak to now five consecutive months. Index components were strong, with six out of eight categories gaining in October, including payroll employment, unemployment insurance claims (inverted), housing starts, home prices, hotel occupancy and enplanements. State sales tax revenues were stable for the month. Only state exports eased in October. The Arizona economy continues to make steady gains,” said Robert Dye, Chief Economist at Comerica Bank. “We look for positive momentum in the regional economic data through year-end 2016 and into early 2017.”

For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_1216.

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Comerica Bank’s Florida Index Climbs

Comerica Bank’s Florida Economic Activity Index increased by 1.9 percentage points in October to a level of 157.0. October’s index reading is 79 points, or 101 percent, above the index cyclical low of 78.1. The index averaged 138.2 in 2015, twenty and seven-tenths points above the average for all of 2014. September’s index reading was 155.1.

“The Comerica Bank Florida Economic Activity Index increased again in October after turning positive in September. The two-month climb pulls the Florida Index out of a summer stall that was caused, in part, by stagnant housing starts and an increase in unemployment insurance claims. In October, index gains were broad-based with six out of eight index components positive for the month. They were payroll employment, unemployment insurance claims (inverted), housing starts, home prices, sales tax revenues and hotel occupancy. State exports and enplanements were negatives for the month. We expect the Florida economy to continue to expand through early 2017,” said Robert Dye, Chief Economist at Comerica Bank. “Changing monetary and fiscal policies in 2017 are risk factors for the state as mortgage rates increase and the dollar remains strong. However, these downside risks may be mitigated by stronger overall economic performance at the state and national level.”

For a PDF version of the Florida Economic Activity Index click here:  FloridaIndex_1216.

 

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Comerica Bank’s Texas Index Improves for Second Consecutive Month

Comerica Bank’s Texas Economic Activity Index advanced by 0.4 percentage points in October to a level of 91.0. October’s index reading is 18 points, or 25 percent, above the index cyclical low of 72.8. The index averaged 97.5 points for all of 2015, seven and one-half points below the average for full-year 2014. September’s index reading was 90.6.

“The Comerica Bank Texas Economic Activity Index improved again in October, building on its September turn-around. Six out of eight index components were positive in October. They were nonfarm employment, state exports, unemployment insurance claims (inverted), rig count, home prices and hotel occupancy. Housing starts eased in October for the third consecutive month. State sales tax revenue eased as well. Job growth appears to be stabilizing for Texas, with gains seen for the last eight consecutive months. Also, the rig count continues to improve. As of the end of October, the Texas rig count had increased to 256 active rigs, well above the May 2016 low of 173,” said Robert Dye, Chief Economist at Comerica Bank. “The recent oil production cuts announced by Kuwait and Oman suggest that the early days of the OPEC production agreement have been successful and will support higher crude oil prices. We expect Texas drilling activity to continue to gradually improve through early 2017, contributing to a strengthening state economy.”

For a PDF version of the Texas Economic Activity Index click here: TexasIndex_1216.

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Comerica Bank’s Michigan Index Ticks Up

Comerica Bank’s Michigan Economic Activity Index grew in October, up 1.0 percentage point to a level of 128.4. October’s reading is 54 points, or 73 percent, above the index cyclical low of 74.1. The index averaged 123.6 points for all of 2015, five and four-fifths points above the index average for 2014. September’s index reading was 127.4.

“The Comerica Bank Michigan Economic Activity Index increased in October, breaking a three-month slide that started last July. Gains were visible across most indicators, with seven out of eight index components either improving or staying even in October. The gainers were nonfarm payrolls, state exports, unemployment insurance claims (inverted), housing starts, auto production and hotel occupancy. Home prices were unchanged, as they were in August and September. Only state sales tax revenue declined in October. Ford Motor Company announced that they are canceling plans to build a new plant in Mexico; instead, they will invest $700 million in the Flat Rock assembly plant,” said Robert Dye, Chief Economist at Comerica Bank. “Ford’s decision will add support to Michigan’s economy and increase their employment base in Michigan by 700 workers.”

For a PDF version of the Michigan Economic Activity Index click here: Michigan_1216.

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