Detroit in Transition

Job growth in the Detroit metro area is moderately above the U.S. average through the first three months of 2015. On a year-ago basis, Detroit added jobs at a 2.4 percent rate in March, while the U.S. as a whole added jobs at a 2.2 percent rate. A key support to job growth in Detroit has been the manufacturing sector. Employment in Detroit area manufacturing is up a strong 4.8 percent over the past year, significantly above the U.S. average of 1.6 percent growth. The employment component of the Southeast Michigan Purchasing Managers Index was very strong at 76.3 in April.

A key question for Detroit is how sustainable is the strong performance in manufacturing employment? We believe that manufacturing employment will stabilize in the area, and that job gains for Detroit will ultimately be driven by non-manufacturing industries. Since peaking in July 2000 at 397,000, the Detroit MSA has lost 148,000 manufacturing jobs. Michigan manufacturing employment faces headwinds. First, U.S. auto sales are already near the cyclical peak of the previous expansion cycle. In April, U.S. light vehicle sales dipped to a 16.5 million unit annual rate, after posting a 17.0 million unit sales pace in March. These rates are already very close to the 16.9 million units sold in 2005, so there is only limited upside potential for more auto sales. Second, a strong U.S. dollar suggests that less U.S. manufactured goods will be sold overseas, and more foreign manufactured goods will be sold in the U.S. Third, as the business cycle matures, it becomes more difficult to sustain corporate profits. Labor costs are a huge part of total business costs and so hiring typically slows in the late stages of the business cycle.

Detroit’s role as a key gateway for U.S./Canada trade is slated to expand in 2020 with the completion of the $2.1 billion, 6-lane Gordie Howe International Bridge over the Detroit River, funded almost entirely by Canada. Because of the lopsided funding for the bridge, we expect relatively little of the economic benefit of construction to land on the Detroit side.

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Click here for the complete Detroit Regional Economic Update: Detroit2015Q2.

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Central West Michigan Revving up for Summer

As Michigan emerges from a tough and long winter, the state economy is improving. While the strong dollar has started to hit manufacturers’ export sales, vehicle demand remains firm and near its cyclical high, driving high-paying jobs in the region. Low gasoline prices will contribute to regional tourism, as fishing season and other outdoor activities open for the season. Ann Arbor and Grand Rapids are both experiencing a great deal of improvement initiatives, like “GR Forward,” which is redirecting millions of tax dollars to public spaces.

Labor markets in Central West Michigan continue to improve, with unemployment dropping to an average of 4.38 percent in 2015Q1. Google recently announced intentions to expand its office space in the area, and the MADA/Office Furniture Industry Trends survey has remained strong, indicating that 2015 will be the best year in a decade for office furniture. The Western Michigan Purchasing Manager’s Index reinforces the generally positive outlook for regional business; new orders have increased substantially in the region, and supply lags from the California port dispute are decreasing. The region’s job growth will be sustained, but the growth sectors will pivot towards services as the strong dollar hurts U.S. exports.

Unsurprisingly, housing metrics dragged through the winter. Year-over-year gains in house prices have remained above five percent for six quarters, and the tightening labor markets of Central West Michigan will only aid the springtime bounce-back for housing starts and sales. Area realtors are reporting limited inventories. The American Institute for Economic Research recently named Ann Arbor as the number one small city for college graduates due to its rich concentration of an educated population and appealing tech jobs. Grand Rapids came in at number 12. Income growth in Central West Michigan has outpaced the rest of the state, and will continue to do so as former residents return due to its improving quality of life.

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Click here for the complete Central West Michigan Regional Economic Update: CentralWestMI 2015Q2.

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April Residential Construction, May Home Builders Survey

Housing Started but Builders Balked

  • April Housing Starts increased by a strong 20.2 percent to a 1,135,000 unit annual rate.
  • Permits for new residential construction climbed in April by 10.1 percent to a 1,143,000 unit pace.
  • The National Association of Home Builders’ Builder Confidence Index fell by 2 points to 54 in May.

After slumping through February and March, residential construction activity rebounded in April. Weather appears to have played a major role in the pattern of construction. Total housing starts surged by 20.2 percent to a 1.135 million unit annual rate in April, with gains in both single-family and multifamily units. Single-family starts increased by 16.7 percent to a 733,000 unit annual rate in April. This was the strongest pace of single-family construction since January, 2008. Multifamily starts (5 or more units) increased by 31.9 percent in April to a 389,000 unit rate, the best since last July. Given the weather story, the regional pattern is not surprising. Total starts in the Northeast increased by 85.9 percent. The Midwest gained 27.8 percent. The West was up 39.0 percent, but the South dipped slightly by 1.8 percent. Total permits were up by 10.1 percent in April, to a 1.143 million unit rate, the most since June, 2008. Most of the gains came from multifamily units.

The April surge in residential construction activity has characteristics of both a rebound and a breakout. We make this distinction because a rebound in starts in April from two bad-weather months does not necessarily imply ongoing gains in May. The April permits number was strong however, and this implies strong starts in May. February and March permits were not weak, so there was no pent-up demand for permits in April even with the bad weather earlier. As we move on to builder confidence, the case for a sustained surge in residential construction activity becomes a little weaker. According to the National Association of Home Builders, builder confidence dropped in May, by 2 points to 54, following a strong April survey. Fifty-four is still a good number, but it does imply a little giveback in May after the strong April data. That said, we continue to expect firmer residential construction activity and home sales this summer. Job creation, real wage gains, still-low mortgage rates and improving household wealth are all supportive of a firmer housing market. The supply of homes available for purchase remains very tight in most major markets. Builders will respond.

Market Reaction: Equity markets opened with losses. The yield on 10-Year Treasury bonds is up to 2.27 percent. NYMEX crude oil is down to $57.91/barrel. Natural gas futures are up to $3.09/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Housing Starts 051915.

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Comerica Economic Weekly

It was a another week of softer-than-expected U.S. data. Our view is that this is a transitional economy right now. The drivers of the U.S. economy through the post-recession recovery phase are giving way to a new set of drivers in this mid-cycle economy (discussed in our May U.S. Economic Update).

The Job Opening and Labor Turnover Survey for March showed a step down in the job openings rate to 3.4 percent. This is consistent with the weak payroll job growth of just 85,000 for the month. The dip in the job openings rate was not universal across industries, but it did show up in construction, manufacturing and education/healthcare. Initial claims for unemployment insurance fell by 1,000 to hit a very low 264,000 jobs for the week ending May 9.

Industrial production fell for the fifth consecutive month, down 0.3 percent in April. Manufacturing output was flat while utility output dropped, still normalizing from the very cold winter. The manufacturing sector is facing headwinds from low oil drilling activity, a strong dollar and plateauing auto sales.

Retail sales were flat in April. Motor vehicle and parts sales dipped by 0.4 percent, consistent with the decline in unit auto sales to a 16.5 million unit rate for the month. Excluding autos, retail sales gained a meager 0.1 percent in April.

The University of Michigan’s Consumer Sentiment Index fell by a sizeable 7.3 points to 88.6 in the preliminary May estimate. Recent higher oil and gasoline prices increased consumers inflation expectations. According to AAA, gasoline prices for today are up 30 cents from a month ago.

However, the Producer Price Index for final demand fell by 0.4 percent, with a drop in upstream energy prices. Food prices and prices for services also slipped.

The National Federation of Independent Business’s Small Business Optimism Index increased by 1.7 points to 96.9 in April. Small business hiring was positive.

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

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May 2015, Comerica U.S. Economic Update

You never cross the same river twice. This also is true of the complex adaptive system known as the U.S. economy; it is always changing. As we muddle through the current business cycle, three distinct economic periods are apparent. First was the post-recession economy of 2010-2013. Then comes the transitional economy of 2014-2016, where we are now. This will be followed by the late cycle economy from approximately 2016 to the next down-cycle, perhaps not until 2018 or 2019 if we are lucky. The following table shows how our economy has changed, how it is changing now, and how it may change in the not-too-distant future.

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Job growth got back on track in April, with payroll gains of 223,000. The already disappointing March data was revised down to show a weak increase of just 85,000 jobs for the month. Average hourly earnings were up by 3 cents to show a 12 month gain of 2.2 percent, coming when the consumer price index is unchanged over 12 months due to lower oil prices. Stronger real wage growth is shoring up household budgets, and will contribute to firmer consumer spending, including firmer home sales this spring and summer. Resiliency in the U.S. economy, accompanied by real wage growth, bolster expectations for a Federal Reserve interest rate hike this year. A strong May employment report would give the Fed more confidence in their forward guidance, allowing them to focus market expectations by mid-summer on a September interest rate hike.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate_05_2015.

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Comerica Economic Weekly

This week’s economic data was mixed, but directionally positive. Backward looking trade data, with implications for Q1 GDP was negative, while forward looking data was positive.

Labor data is looking better, suggesting gains in consumer spending later this year. Job growth got back on track in April, as 223,000 jobs were added, following a weak March gain of just 85,000. The unemployment rate ticked down to 5.4 percent.

Initial claims for unemployment insurance increased inconsequentially, by 3,000, to hit a still-very-low 265,000 for the week ending May 2.

The ISM Non-Manufacturing Index increased to a strong 57.8 for April. The employment sub-index in that report shows a faster pace of hiring.

Consumer credit for March increased by 20.5 billion, driven by gains in non-revolving credit, consistent with a more confident consumer.

Now for the backward looking part. March trade data was worse than expected, with the trade gap widening significantly from $35.9 billion in February to $51.4 billion in March. The worse-than-expected March trade data implies a downward revision to the already weak Q1 real GDP growth of just +0.2 percent (annualized). We expect to see Q1 real GDP growth revised down slightly, if all other components are unchanged.

Productivity declined at a 1.9 percent annual rate in Q1, given the preliminary GDP and employment reports. Low productivity growth means higher unit labor costs. This puts pressure on corporate profits.

Signs of resiliency in the U.S. economy bolster expectations for a fed funds rate increase this year. The Fed will see another employment report, for May, before the next FOMC meeting over June 16-17. A strong May employment report would give the Fed more confidence in their forward guidance, allowing them to focus market expectations on a September interest rate hike. A weak May report would perpetuate uncertainty about lift-off.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 05-08-15.

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April U.S. Employment

Hiring Bounces Back in April, Unemployment Rate Drops to 5.4 Percent

  • April Payroll Employment bounced back to show a gain of 223,000, as March was revised down to +85,000.
  • The Unemployment Rate for April fell to 5.4 percent.
  • Average Weekly Hours for all employees were unchanged at 34.5 hours.
  • Average Hourly Earnings were up by 3 cents, with a 12-month gain of 2.2 percent.

Job growth got back on track in April, with payroll gains of 223,000. The already disappointing March data was revised down to show a weak increase of just 85,000 jobs for the month. The weak March BLS employment report was sandwiched by two weak ADP (private sector) employment reports, for March and for April, and this contributed to fears that hiring had downshifted after disappointing 2015Q1 real GDP growth of just 0.2 percent. The expected downward revision of Q1 real GDP growth to about -0.5 percent, following the release of the March trade data, added to the concern about hiring this spring. But hiring got back on track in April, enough to bring the unemployment rate down another tenth to 5.4 percent for the month. Hours worked were unchanged, reflecting growing headwinds for the manufacturing sector. The manufacturing workweek edged down by 0.1 hours, as did factory overtime. Average hourly earnings were up by 3 cents to show a 12 month gain of 2.2 percent, coming when the consumer price index is essentially unchanged over 12 months. Stronger real wage growth is shoring up households budgets, and will contribute to firmer consumer spending, including firmer home sales this spring and summer.

Payroll gains were supported by hiring in the private service sector. However, with low oil prices and a declining rig count, employment in resources and mining dropped by 15,000 in April. Construction employment bounced back by 45,000 in April, after declining by 9,000 in March. Manufacturing employment gained just 1,000 jobs in April. We expect to see reduced job growth in manufacturing, eventually giving way to small declines as productivity gains trump output growth. Wholesale trade gave up 4,500 jobs, while retail gained 12,100. Employment in information industries gained 3,000. Financial services added 9,000 for the month. Professional and business services employment increased by a strong 62,000 jobs in April. Eds and meds added 61,000. The leisure and hospitality sector gained 17,000 jobs. Government employment increased by 10,000.

Signs of resiliency in the U.S. economy, accompanied by real wage growth, bolster expectations for a Federal Reserve interest rate hike this year. The Fed will see another employment report, for May, before the next FOMC meeting over June 16-17. A strong May employment report would give the Fed more confidence in their forward guidance, allowing them to focus market expectations on a September interest rate hike.

Market Reaction: U.S. equity markets opened with gains. The 10-Year T-bond yield is down to 2.13 percent. NYMEX crude oil is down to $58.63/barrel. Natural gas futures are up to $2.91/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Employment 05-08-15.

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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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