July PPI, August UI Claims

  Wholesale Inflation Weak, Claims Very Low

  • The Producer Price Index for Final Demand decreased by 0.1 percent in July.
  • Initial Claims for Unemployment Insurance gained 3,000 for the week ending August 5, to hit 244,000.

Producer price inflation remains weaker than expected, held down by energy and services. The PPI for final demand declined by 0.1 percent in July. Over the previous 12 months, the headline index was up 1.9 percent, well below the peak year-over-year rate of 2.5 percent in April. The energy sub-index declined by 0.3 percent for the month, held down by gasoline and natural gas prices. This was the fourth time in the last five months that the energy sub-index has declined. Firmer crude oil prices in August will end that trend. Outside of energy, prices for final demand services were also weak in July. Wholesalers operated on thinner margins in July. Transportation and warehousing prices also declined. Prices for intermediate demand were also soft, down 0.1 percent in July. These are prices for goods and services sold as inputs to production. With inflation weaker than expected, the Federal Reserve will have a harder time justifying increases to the fed funds rate. This is why we believe that there is downside risk to the expectation of four fed funds rate hikes between now and the end of 2018.

Initial claims for unemployment insurance gained 3,000 to hit 244,000 for the week ending August 5. Continuing claims dropped by 16,000, to reach 1,951,000 for the week ending July 29. The four-week moving averages for both series remain very low, indicating tight labor market conditions. The Job Openings and Labor Turnover Survey for June also showed tight labor market conditions. The job openings rate returned to the all-time high of 4 percent. The separations rate remains lower than the openings rate, staying at 3.6 percent in June.

Market Reaction: U.S. equity markets opened with losses. The yield on 10-Year Treasury bonds is down to 2.21 percent. NYMEX crude oil is up to $49.52/barrel. Natural gas futures are up to $2.89/mmbtu.

For a PDF version of this Comerica Economic Alert click here: PPI _08102017.

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Jobs and Inflation and the Intersection of Monetary and Fiscal Policy

The U.S. job machine remains engaged. After a strong 231,000 net new payroll jobs were created in June, another 209,000 were created in July. In five of the first seven months of this year, more than 200,000 net new payroll jobs were created. While it looks like the rate of payroll job growth has stepped down from the robust pace of 2014 and 2015, it remains strong. The U.S. unemployment rate was back down to 4.3 percent in July and is set to go lower. However, despite several different data points that suggest that the U.S. labor market is very tight, wages have not increased as much as expected. That is not to say that they have not increased. Through 2015, average hourly earnings for private sector workers were up about 2 percent year-over-year. That has stepped up to about 2.5 percent year-over-year growth in the four months ending in July. However, it is fair to say that wages are not yet driving inflation up.

Economic theory says that late in the business cycle, when labor markets get tight, inflation starts to accelerate. The reality so far has not lived up to the theory. The headline Consumer Price Index in July was up by just 1.7 percent over the previous 12 months, under the Federal Reserve’s “comfort zone” of near 2 percent. After removing volatile food and energy prices, core CPI for July was up the same 1.7 percent over the past year.

The divergence between economic theory and recent performance has created some tension for monetary policy makers. Normally, the Federal Reserve increases the benchmark fed funds rate aggressively in the latter stages of an economic expansion as inflation heats up. The fed funds effective rate was increased from 5.9 percent in September 1986 to 9.9 percent in March 1989, ahead of a surge in the CPI to an eventual high of 6.4 percent year-over-year growth in October 1990. Likewise, the fed funds effective rate was raised from a low of 1.0 percent in June 2004, to a high of 5.3 percent in July of 2007, coincident with the CPI climbing to a peak 4.2 percent year-over-year increase in June 2006. Now, inflation is still muted after 96 months of economic expansion, and the Fed has only slowly raised the fed funds effective rate from near zero through November 2015 to 1.2 percent in July 2017.

We expect the Federal Reserve to leave the benchmark fed funds rate unchanged at the conclusion of the next Federal Open Market Committee meeting on September 20. We look for FOMC Chair Janet Yellen to announce on September 20 that the next chapter of monetary policy will begin this October with the phasing in of balance sheet reduction. The Fed’s goal with balance sheet reduction is to gradually ramp up the amount of maturing assets that will not be reinvested and allowed to roll off the Fed’s balance sheet. We expect this to have a small tightening effect on liquidity in U.S. financial markets. The goal of the Fed is to have the program “running in the background,” so that it is not a lever in the management of monetary policy. It could take several years for the Fed’s balance sheet to shrink to the target size.

The Fed may then resume fed funds rate increases at the FOMC meeting of December 12-13. The current implied probability of a December 13 fed funds rate hike, as determined by the fed funds futures market, is about 50 percent. One key issue for the U.S. economy over the next several months is the Trump Administration’s success or failure with their fiscal policy agenda. The federal debt ceiling debate looms large after Labor Day. Tax reform will likely have a contentious path through Congress later this fall. Perhaps infrastructure spending comes next year.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here:  US_Economic_Outlook_0817.

 

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Comerica Economic Weekly

Economic data for the week highlighted the strength of the U.S. labor market, and were consistent with moderate GDP growth in the third quarter.

The ISM Non-Manufacturing Index for July eased to a still-positive 53.9, down from a strong 57.4 in June. Similarly, the ISM Manufacturing Index for July eased to a still-positive 56.3, down from 57.8 in June. These broad indexes show ongoing expansion at the start of Q3.

Payroll job data for July exceeded expectations, showing a net gain of 209,000 jobs for the month. The household employment survey also showed a strong gain in July, up by 345,000 for the month. Likewise, the civilian labor force increased by 349,000, bringing the unemployment rate back down to a tight 4.3 percent.

Initial claims for unemployment insurance fell by 5,000 for the week ending July 29, to hit 240,000. This is a very low number, also indicating tight labor markets. Continuing claims inched up by 3,000 to a very low 1,968,000 for the week ending July 22.

Auto sales inched up in July, to a 16.77 million unit rate. The year-over-year comparisons were soft, and that is what the press focuses on, but sales improved slightly on a month-to-month basis.

According to the Mortgage Bankers Association, applications for mortgages fell 2.8 percent for the week ending July 28. Purchase apps fell 2.0 percent and refi apps were down by 3.8 percent, implying that the new and existing homes sales data for July will be soft.

The U.S. international trade gap in goods and services narrowed in June to -$43.6 billion. This is a backwards looking number with neutral implications for Q2 GDP. Imports eased by $0.4 billion while exports expanded by $2.4 billion.

Personal income and spending were both flat in June. This is also backward looking data, already incorporated into the first estimate of Q2 GDP. The June income data shows that wages and salary were in good shape, increasing by 0.4 percent for the month, consistent with the strong job growth we saw in June and the low unemployment rate.

Construction spending eased by 1.3 percent in June, with a large 5.4 percent drop in public projects. Private residential projects eased by 0.2 percent, while private nonresidential ticked up by 0.1 percent.

We expect August to be mostly quiet for central banks. Europe is on vacation. The Fed will convene in Jackson Hole at the end of the month.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  Comerica_Economic_Weekly_ 08042017.

 

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July U.S. Employment

July Payrolls Up by 209,000, Unemployment Rate Down to 4.3 Percent

  • Payroll Employment increased by 209,000 jobs in July, exceeding expectations.
  • The Unemployment Rate for June dipped back down to 4.3 percent.
  • Average Hourly Earnings were up by 2.5 percent over the year; the average workweek was unchanged.
  • The U.S. International Trade Gap for June narrowed to -$43.6 billion.

Payroll job data for July exceeded expectations, showing a net gain of 209,000 jobs for the month. Since January, payroll jobs gains have exceeded 200,000 five out of seven months. The household employment survey also showed a strong gain in July, up by 345,000 for the month. Likewise, the civilian labor force increased by 349,000, bringing the unemployment rate back down to 4.3 percent. We expect the unemployment rate to continue to drift down, possibly breaking below 4 percent by the end of the year. The U.S. unemployment rate hit a low of 3.8 percent in April 2000. Average hourly earnings were up by 2.5 percent over the 12 months ending in July. The low unemployment rate suggests that wages and salaries will begin to accelerate, but so far that relationship has been weaker than expected. Slower gains in wages and salaries, plus tepid inflation data adds downside risk to the expectation of four more fed funds rate hikes between now and the end of 2018. Today’s strong jobs report keeps the Federal Reserve on track to announce on September 20 that balance sheet reduction will begin in October. The Fed will see one more jobs report for August, before the September 19-20 FOMC meeting.

The establishment data showed broad-based job gains in July. Mining and logging employment was unchanged for the month, consistent with a flattening rig count. Construction employment increased by 6,000 jobs. Manufacturing gained a surprising 16,000 jobs. Wholesale trade employment was up by 6,100. Retail trade was flat, up only 900 jobs in July. Information services gained 4,000 jobs while financial services added 6,000 jobs. Professional/business services was strong, up 49,000 jobs. Education and health care was also strong, up by 54,000 jobs. Leisure/hospitality showed an outsized gain of 62,000 jobs in July. Government employment was up by 4,000 jobs.

The U.S. international trade gap in goods and services narrowed in June to -$43.6 billion. This is a backwards looking number with neutral implications for Q2 GDP. Imports eased by $0.4 billion while exports expanded by $2.4 billion.

Market Reaction: U.S. equity markets opened with gains. The 10-Year T-bond yield is up to 2.28 percent. NYMEX crude oil is down to $48.80/barrel. Natural gas futures are down to $2.78/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  Employment_08042017.

 

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July ISM Non-MF Index, UI Claims

Broad Economic Indexes Eased in July

  • The ISM Non-Manufacturing Index for July decreased to a still-positive 53.9.
  • Initial claims for unemployment insurance fell by 5,000 for the week ending July 29, to 240,000.

The ISM Non-Manufacturing Index for July eased to a still positive 53.9, from a strong 57.4 in June. All 10 sub-indexes still in positive territory. Fifteen of the 17 reporting industries said that they expanded in July. Several anecdotal comments alluded to a summer slow-down in orders, hiring or production.

Both the ISM Non-Manufacturing Index, and the ISM Manufacturing Index eased to a still-positive position in July. This raises a yellow caution flag for U.S. economic activity in the second half of 2017. We still expect the U.S. economy to maintain moderate expansion in Q3 after real GDP grew at a 2.6 percent rate in Q2. We will be releasing our August U.S. Economic Outlook early next week which will include our revised Q3 GDP forecast. It is a reasonable question to ask at this point, “What is driving the U.S. economy forward?” To answer that, we can start with a list of what is not driving it forward. First, autos. Auto sales remain below last year’s record setting pace. We expect to see moderate cutbacks in auto production next year. Second, oil drilling. Range-bound oil prices are resulting in smaller increases in the drilling rig count this summer. Third, fiscal stimulus. So far, the Trump Administration has had difficulty driving its agenda through Congress. We still may see tax reform before the end of this year, but the debt ceiling debate could prove to be a political logjam in September. Fourth, housing. It is fair to say that housing is keeping pace with the economic expansion, but it is not leading the expansion. What is driving the U.S. economy forward? First, a synchronized global expansion. Improving global conditions are creating more demand for U.S. goods and services. Second, a weaker dollar which is helping to make those goods and services cheaper. Third, consumer spending. A strong job market, increasing confidence and pent-up demand is a potent combination. Fourth, global liquidity. Huge deals are being announced almost daily.

Initial claims for unemployment insurance fell by 5,000 for the week ending July 29, to hit 240,000. This is a very low number indicating tight labor market conditions. Continuing claims inched up by 3,000 to hit 1,968,000 for the week ending July 22, this is also a very low number.

Market Reaction: U.S. equity markets opened with losses. The yield on 10-Year Treasury bonds is down to 2.24 percent. NYMEX crude oil is up to $49.85/barrel. Natural gas futures are up to $2.81/mmbtu.

For a PDF version of this Comerica Economic Alert click here: ISM-MF_08032017.

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July ADP Employment, Mortgage Applications

Private Sector Jobs Report Looks Good

  • The July ADP Employment Report showed a solid net gain of 178,000 private sector jobs.
  • Mortgage Applications fell by 2.8 percent for the last week of July.

Based on today’s release of the July ADP Employment Report, we expect to see another moderate gain of about 175,000 net new payroll jobs for the month when the official Bureau of Labor Statistics data for July is released on Friday morning. The ADP Report showed a net gain of 178,000 private sector jobs in June. Normally, we would add about 10,000 net new government jobs to the ADP private sector total to derive an estimate for the BLS numbers (which include the government sector). However, the Trump Administration’s freeze on federal hiring earlier this year has distorted the government sector jobs numbers. From January through May of this year, government sector net hiring added an average of 4,000 jobs per month to nonfarm payrolls. However, in June, the government sector added 35,000 net new jobs. We expect the July government sector number to be considerably weaker, and possibly show a net loss for the month. Therefore, we will stick to our initial estimate of about 175,000 net new nonfarm jobs added to the U.S. economy in July. This should be enough to bring the unemployment rate down to 4.3 percent.

The July ADP Report showed that most of the hiring in July was done by medium-sized businesses (50-499 employees), which added 83,000 employees. Small businesses added 50,000 employees on net and large businesses added 45,000. By sector, natural resources/mining added 3,000 workers. Construction employment was up by 6,000, which is a bit light. Manufacturing showed a net 4,000 job loss for the month. Professional/business services added a strong 65,000 workers. Education/healthcare employment gained 43,000 in July. Leisure/hospitality services added 15,000 net new jobs in July.

According to the Mortgage Bankers Association, applications for mortgages fell 2.8 percent for the week ending July 28.  Purchase apps fell 2.0 percent and refi apps were down by 3.8 percent. Purchase apps were down in three out of four weeks in July. This implies that the new and existing homes sales data for the month will be soft. The rate for a 30-year fixed rate mortgage was steady at 4.17 percent at the end of July.

Market Reaction: U.S. equity prices were down at the open. The yield in 10-Year T-bonds is down to 2.24 percent. NYMEX crude oil is up to $48.83/barrel. Natural gas futures are unchanged at $2.81/mmbtu.

For a PDF version of this Comerica Economic Alert click here: ADP_08022017.

 

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June Personal Income, Construction Spending, July ISM MF

Income Stagnant in June as Dividends Reset             

  • U.S. Real Disposable Personal Income eased by 0.1 percent in June.
  • The Personal Consumption Expenditure Price Index was unchanged for the month.
  • Real Consumer Spending was also unchanged in June.
  • Construction Spending dropped by 1.3 percent in June.
  • The ISM Manufacturing Index for July dipped to 56.3, still a positive number.

Personal income and spending were both flat in June. This data has already been incorporated into the first estimate of Q2 GDP, which was published last Friday. The soft June spending data sets the stage for solid Q3 performance, supportive of ongoing moderate GDP growth. The June income data shows that wages and salary were in good shape, increasing by 0.4 percent for the month, consistent with the strong job growth we saw in June and the low unemployment rate. However, there was a large drag from income derived from assets, which declined by 1.8 percent for the month, after increasing by 1.3 percent in May. Interest income was down for the third month in row, falling by 1.0 percent in June. Dividend income was down 3.0 percent in June after jumping by 4.8 percent in May. There was no inflation in June according to the personal consumption expenditure price index. This is good news for consumers but it puts the Federal Reserve in an awkward position. Their expectations for four more fed funds rate hikes between now and the end of 2018 (based on the June Dot Plot), may be too aggressive if inflation remains weak. We will see a new Dot Plot on September 20 that could show a shallower trajectory for the fed funds rate based on reduced inflation expectations. Real consumer spending was unchanged in June. Real spending on durable goods eased by 0.1 percent, consistent with cooler unit auto sales in June. We will see July unit auto sales in a separate report this afternoon. Real spending on nondurables was down 0.2 percent in June. Real spending on services increased by 0.1 percent. The personal saving rate has been revised down significantly with the June data revisions. It eased from 3.9 percent in May to 3.8 percent in June. There is now a discontinuity in the personal saving rate data as it dropped from 5.3 percent in October 2016 to 3.7 percent in November 2016. This is not unheard of, but it does look unusual.

Construction spending eased by 1.3 percent in June, with a large 5.4 percent drop in public projects. Private residential projects eased by 0.2 percent while private nonresidential ticked up by 0.1 percent.

Manufacturing conditions are good. The ISM Manufacturing Index eased to a still-positive 56.3 in July. Nine out of 10 sub-indexes were positive, including new orders, production and employment. Only customer’s inventories fell below 50, to 49.0, indicating a modest draw down, which is not necessarily a bad thing. Anecdotal comments in the report were positive. Of the 18 reporting industries, 15 said they expanded in July. Apparel, leather and petroleum/coal reported contraction for the month. We are watching for signs of drag from two industries, auto production and oil drilling. Auto sales have eased from last December’s high, and drilling rig counts are stabilizing. So far, the overall manufacturing sector appears to be undaunted.

Market Reaction: U.S. equity markets opened with gains. The yield on the 10-year Treasury bond is down to 2.26 percent. NYMEX crude is down to $49.61/barrel. Natural gas futures are up to $2.80/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  Personal_Income_08012017.

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Comerica Economic Weekly

Economic data published in the last week of July showed moderate U.S. economic growth in Q2, likely setting up more of the same for Q3, and keeping the Federal Reserve on track for the beginning of balance sheet reduction this fall.

Real gross domestic product growth increased to a moderate 2.6 percent annualized rate in the second quarter, after a revised 1.2 percent growth rate for the first quarter of 2017. As expected some of the quirky factors that held back GDP in Q1 reversed in Q2.

New orders for durables goods surged by 6.5 percent in June, on the back of a doubling of commercial aircraft orders for the month. The core measure of durable goods orders, non-defense capital goods excluding aircraft, eased slightly by 0.1 percent.

Initial claims for unemployment insurance increased by 10,000 to hit 244,000 for the week ending July 22. Continuing claims dropped by 13,000, to hit 1,964,000 for the week ending July 15. These are good numbers consistent with ongoing job growth.

The Employment Cost Index for June increased by 0.5 percent over the previous three-month period. For the 12 months ending in June compensation costs are up by 2.4 percent. This was a tame report, but it does show that the rate of increase in both wages/salaries and benefits is climbing.

New home sales ticked up by 0.8 percent in June to a 610,000 unit annual rate. This was below the March peak of 638,000, but the trend looks positive.

Existing home sales eased by 1.8 percent in June, to a 5,520,000 unit annual rate. Over the past several months existing home sales again look range bound, near a 5.5 million unit pace.

The Case-Shiller U.S. National Home Price Index gained 0.2 percent in May, after seasonal adjustment, and was up 5.6 percent over the previous 12 months.

The Federal Open Market Committee voted on Wednesday to keep the fed funds rate range unchanged at 1.00 to 1.25 percent. The FOMC did not commit to a timetable, but the policy announcement was consistent with the widely held expectation that the Fed will begin balance sheet reduction this fall, possibly in October. We expect them to announce the starting date for balance sheet reduction at the next FOMC over September 19/20. We look for the next interest rate hike to come at the last FOMC meeting of this year, over December 12/13. However, weak inflation readings could delay the next rate hike.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 07282017.

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2017Q2 GDP, June Employment Cost Index

GDP Resumes Moderate Growth, as Expected. Employment Costs Edging Up

  • Real Gross Domestic Product for 2017Q2 increased at a moderate 2.6 percent annualized rate.
  • Worker Compensation increased by 2.4 percent for the 12 months ending in June.

Real gross domestic product growth increased to a moderate 2.6 percent annualized rate in the second quarter, after a revised 1.2 percent growth rate for the first quarter of 2017. As expected some of the quirky factors that held back GDP in Q1 reversed in Q2. Still, it would be an exaggeration to say that GDP growth rebounded. It did not. Rather it resumed a moderate growth track that looks like it will continue through the current third quarter. Real consumer spending increased at a solid 2.8 percent annualized rate in Q2 after a weather-beaten Q1. Even as unit auto sales slowed, other consumer spending on durables and nondurables was strong. Real business fixed investment growth was reasonable at a 5.2 percent, held in check by subdued gains in intellectual property. Inventories were neutral for the quarter. Net exports were a small positive, adding 0.18 percentage points to Q2 growth after dragging on headline growth in Q1. Government spending added to GDP in Q2, growing at a 0.7 percent annual rate after shrinking in Q1. If we have a similar 2.5 percent (plus or minus a couple of tenths) growth rate in Q3, that will be enough to keep job growth engaged, putting more downward pressure on the unemployment rate. Today’s GDP report will keep the Federal Reserve on track as they prepare for balance sheet reduction this fall. Looking farther down the road, moderate GDP growth, leading to a lower unemployment rate, is expected to put upward pressure on labor costs. This is the Philips Curve relationship that has received a good deal of attention recently. Fed policy makers will be watching to see if the Phillips Curve holds up in this business cycle and inflation starts to accelerate in 2018.

The Employment Cost Index for June increased by 0.5 percent over the previous three-month period. For the 12 months ending in June, compensation costs are up by 2.4 percent. This was a tame report, but it does show that the rate of increase in both wages/salaries and benefits is climbing off the lows of 2009-2013. The rate of increase remains less than previously expected, but it is now showing the kind of steady increase that we saw in the 1990s that caused the Federal Reserve to increase the fed funds rate to 6.5 percent by mid-2000. This increase in interest rates in turn contributed to the Recession of 2001.

Market Reaction: U.S. equity markets open with losses. The 10-year Treasury bond yield is down to 2.30 percent. NYMEX crude oil is up to $49.52/barrel. Natural gas futures are up to $2.97/mmbtu.

For a PDF version of this Comerica Economic Alert click here: GDP_07282017.

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Comerica Bank’s California Index Climbing Steadily

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

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

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

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