Comerica Bank’s Florida Index Continues to Advance in August

Comerica Bank’s Florida Economic Activity Index improved in August, growing 0.7 percentage points to a level of 119.5. August’s index reading is 41 points, or 53 percent, above the index cyclical low of 78.0. The index averaged 109.2 in 2013, ten and one half points above the average for all of 2012. July’s index reading was 118.8.

“Our Florida Economic Activity Index increased in August for the fifth consecutive month. As in most other states, Florida labor market indicators are steadily improving. Payroll jobs in Florida for August were up by 2.7 percent over the previous 12 months, well above the national average increase of 1.9 percent. Continuing claims for unemployment insurance in Florida are approaching the lows of early 2006,” said Robert Dye, Chief Economist at Comerica Bank. “We expect to see residential housing markets continue to improve late this year and carry that momentum into 2015. Strong job creation, improving consumer confidence and easing credit conditions are all positives for Florida’s housing market.”

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For a PDF version of the Michigan Economic Activity Index click here: FloridaIndex_1014.

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Comerica Bank’s Arizona Index Improves in August

Comerica Bank’s Arizona Economic Activity Index grew in August, increasing 0.6 percentage points to a level of 99.8. August’s index reading is 23 points, or 30 percent, above the index cyclical low of 76.7. The index averaged 95 points for all of 2013, seven points above the average for full-year 2012. July’s index reading was 99.2.

“Our Arizona Economic Activity Index increased in August, reflecting broad-based gains to the state economy. Six out of eight components of our index either improved or were flat in August; only housing starts and enplanements dipped. We expect Arizona house prices to firm up through the fall, supported by job growth, improving consumer confidence, lower gasoline prices and easing credit conditions,” said Robert Dye, Chief Economist at Comerica Bank. “Lower gasoline prices are also a boost to the state’s tourism industry, making travel cheaper and increasing discretionary consumer spending.”

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For a PDF version of the Michigan Economic Activity Index click here: ArizonaIndex_1014.

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Comerica Bank’s Michigan Index Grew Again in August

Comerica Bank’s Michigan Economic Activity Index grew in August, increasing 0.2 percentage points to a level of 120.4. August’s reading is 47 points, or 63 percent, above the index cyclical low of 73.8. The index averaged 114.2 points for all of 2013, seven and one-tenth points above the index average for 2012. July’s index reading was 120.2.

“Our Michigan Index continued to climb higher in August, indicating ongoing gains for the state economy. Six of the eight index components either improved or held steady in August. Only state exports and house prices eased. Automobile production remains a strong positive for Michigan. Recent declines in the price of gasoline and improvements to consumer confidence are positive indicators for the auto sector,” said Robert Dye, Chief Economist at Comerica Bank. “We also expect house prices to firm up through the fall, supported by recently firmer job growth in Michigan, and easing conditions for housing finance across the U.S.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_1014.

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October ISM Manufacturing, September Construction Spending

Strong ISM MF Report Bolsters Case for Solid U.S. Economy, Despite Global Headwinds

  • The ISM Manufacturing Index for October increased to a robust 59.0 percent.
  • October Construction Spending dipped by 0.4 percent, with easing public construction.

Let’s not call it Fortress America, because the U.S. economy is intricately linked to global markets. However, U.S. economic indicators are continuing a strong run, helping equity prices challenge new highs shortly after their early October swoon. The ISM Manufacturing Index for October recaptured the robust reading of 59.0 that it had in August, tying the highest reading since March 2011. Nine out of ten subcomponents of the ISM-MF Index increased in October. The new orders sub-index was very strong at 65.8. Production was not far behind at 64.8. Of the 18 reporting industries, 16 reported growth in October. Leading the gains were rubber and plastics products, followed by textile mills and fabricated metal products. Anecdotal comments were positive. Today’s ISM-MF report for October highlights a strong U.S. economy heading into year end, despite evidence that the global economy is facing headwinds. The euro-zone is slumping once again and growth in China, while still strong, is slowing down. Lower oil prices, in the vicinity of $80 per barrel will generally be a positive for the manufacturing sector, helping to increase profit margins on the way down. However, significantly lower oil prices will potentially drag on industries that are directly linked to oil field drilling and exploration activity, including some components of the fabricated metals industry.

 Total construction spending in the U.S. decreased by 0.4 percent in September. Private residential construction was positive for the month, gaining 0.4 percent on strength in single-family projects. Private non-residential construction spending eased by 0.6 percent in September, with a dip in spending on power plant projects. Public construction spending eased by 1.3 percent with reduced spending on highways and streets.

Market Reaction: U.S. equity prices are giving back opening gains. The yield on 10-Year Treasury bonds is up to 2.37 percent. NYMEX crude oil is down to $80.11/barrel. Natural gas futures are up to $4.11/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: ISM-MF 11-03-14.

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Comerica Bank’s California Index Advances in August

Comerica Bank’s California Economic Activity Index grew in August, climbing 1.2 percentage points to a level of 114.6. August’s reading is 31 points, or 37 percent, above the index cyclical low of 83.8. The index averaged 106.2 points for all of 2013, five and one-half points above the average for all of 2012. July’s index reading was 113.4.

“Our California Economic Activity Index increased again in August, propelled by improvements in labor market conditions. Both payroll jobs and continuing claims for unemployment insurance improved at the end of summer. Housing market activity remains strong as shown by increasing housing starts. However, house price growth eased over the summer. Los Angeles, San Diego and San Francisco have all shown flat to slightly declining prices in late summer, but we expect prices to stabilize and then increase through 2015,” said Robert Dye, Chief Economist at Comerica Bank. “Lower gasoline prices, improving consumer confidence, job creation and easing credit conditions are all positives for the California housing market.”

StateIndex1014California

For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_1014.

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Comerica Bank’s Texas Index Advanced in August

Comerica Bank’s Texas Economic Activity Index grew in August, increasing 0.7 percentage points to a level of 106.0. August’s reading is 33 points, or 46 percent, above the index cyclical low of 72.6. The index averaged 100.3 points for all of 2013, two and one-tenth points above the average for full-year 2012. July’s index reading was 105.3.

“The Texas economy continued to advance strongly in August, according to our Texas Economic Activity Index. Seven out of eight components of the index improved or held steady. Only housing starts eased. The drilling rig count remained strong through August, even as oil prices began to fall. With the ongoing slide in crude oil prices into October, I expect to see a levelling out of oil field activity. But current prices near $81 per barrel can sustain a healthy Texas energy sector,” said Robert Dye, Chief Economist at Comerica Bank. “We do not expect oil prices to plunge lower. However, that is a downside risk to the Texas economy that we are monitoring carefully.”

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For a PDF version of the Texas Economic Activity Index, click here: TexasIndex_1014.

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Comerica Economic Weekly

October ended with a treat and not a trick. U.S. equity indexes are approaching all time highs at the end of October, reversing a month-long slide that began in mid-September. The rebound in U.S. equity prices and the change in mood at month-end is supported by solid U.S. economic data and consistency at the Federal Reserve.

Third quarter GDP was stronger than we expected, with real GDP growth registering a solid 3.5 percent annualized growth rate. As usual, with the GDP report, the devil is in the details. But growth is growth, so a 3.5 percent Q3, following on the heels of a 4.6 percent Q2, makes a statement about ongoing momentum in the U.S. economy. Of note in the GDP report was stronger-than-expected federal government defense spending, which surged at a 16.0 percent annualized rate in Q3. This is clearly not sustainable, especially in light of the ongoing constraints enforced by the federal spending sequester, and strongly suggests that we will see a major pullback in federal defense spending over the next quarter or two. Real inventories settled to a normalish $62.8 billion ($2009) in Q3, dragging on growth as expected. Real consumer spending (accounting for about two-thirds of GDP) increased at an uninspired 1.8 percent annualized rate. We had forecast 1.9 percent. Net exports were also stronger than expected in Q3, supported by a surge in goods exports.

The Federal Open Market Committee took their opportunity to get out of the business of active QE, voting, as expected, Wednesday to end new purchases by today. They are still in the business of sustaining their balance sheet by reinvesting maturing assets, but we can call that passive QE. The FOMC statement contained a marginally better interpretation of labor market conditions. Fed officials looked through the price drag from lower energy prices, saying that the likelihood of inflation running persistently below 2 percent has diminished. The next step in the Fed’s pivot away from extraordinary monetary policy will be interest rate lift-off. The FOMC retained the “considerable time” forward guidance on interest rate lift-off. We still think that June is a good guess for the timing of lift-off.

Initial claims for unemployment insurance ticked up inconsequentially, by 3,000, to hit a still ultra-low 287,000 for the week ending October 25. Continuing claims increased by 29,000 for the week ending October 18, to reach 2,384,000, also still a very good number.

New orders for durable goods declined by 1.3 percent in September. This number looks like it is still impacted by the gyration in orders through July and August that came as a result of record commercial aircraft orders.

House prices are firming again. According to the Case-Shiller U.S. House Price Index for August, prices are up 0.4 percent for the month, following a 0.1 percent gain in July. This breaks a three-month slide in national average house prices.

Real disposable personal income was unchanged in September, held in check by soft gains in wages and salaries. Real consumer spending declined by 0.2 percent.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 10-31-14.

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2014Q3 GDP, Federal Reserve Policy Announcement, October UI Claims

The End of the World Is Over, Solid Data Trumps Market Jitters

  • Real Gross Domestic Product increased at a 3.5 percent annualized rate in 2014Q3.
  • The Federal Reserve ends balance sheet expansion, another step in the pivot.
  • Initial Claims for Unemployment Insurance increased by 3,000 to hit 287,000 for the week ending Oct. 25.

April is the cruelest month according to T.S. Eliot, but for financial markets it is often October. After sliding into October, equity market prices are stabilizing going into November, supported by two planks. The first is strong economic data. The second plank is the Federal Reserve’s “steady as she goes” pivot away from extraordinary policy. Despite some speculation that they might delay the end of QE, the Fed followed through yesterday on their previously stated intention to end it. Today’s GDP report for 2014Q3 came in stronger than we expected, with real GDP growth registering a solid 3.5 percent annualized growth rate. As usual, with the GDP report, the devil is in the details, and some of the details are worth extra scrutiny. But growth is growth, so a 3.5 percent Q3, following on the heels of a 4.6 percent Q2, makes a statement about ongoing momentum in the U.S. economy. Of note in the GDP report was stronger-than-expected real government spending, which increased at a noticeable 4.6 annualized rate, despite the continuing constraints of the federal spending sequester. The government spending growth spurt came from federal defense spending, which is somewhat lumpy, zooming ahead at a 16.0 percent annualized rate in Q3. This strongly suggests that we will see a major pullback in federal defense spending over the next quarter or two. Real inventories settled to a normalish $62.8 billion ($2009) in Q3, dragging on growth as expected. Real consumer spending (accounting for about two-thirds of GDP) increased at an uninspired 1.8 percent annualized rate. We had forecast 1.9 percent. Net exports were also stronger than expected in Q3, supported by a surge in goods exports.

The Federal Open Market Committee took their opportunity to get out of the business of QE, voting yesterday to end new purchases by the end of October (tomorrow). They are still in the business of sustaining their balance sheet by reinvesting maturing assets, but we can call that passive QE. The FOMC statement contained a marginally better interpretation of labor market conditions. They looked through the price drag from lower energy prices, saying that the likelihood of inflation running persistently below 2 percent has diminished. The next step in the Fed’s pivot away from extraordinary monetary policy will be interest rate lift-off. The FOMC retained the “considerable time” forward guidance on interest rate lift-off. We still think that June is a good guess for the timing of lift-off.

Speaking of improving labor market conditions, initial claims for unemployment insurance ticked up inconsequentially, by 3,000, to hit a still ultra-low 287,000 for the week ending October 25. Continuing claims increased by 29,000 for the week ending October 18, to reach 2,384,000, also still a very good number.

Market Reaction: Equity markets opened with gains. The 10-year Treasury bond yield is down to 2.29 percent. NYMEX crude oil is at $81.27/barrel. The dollar is trending higher against the euro and the yen.

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For a PDF version of this Comerica Economic Alert click here: GDP 10-30-14.

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Comerica Economic Weekly

Financial markets had a calmer week this week, following the equity market swoon into mid-October. Equity prices trended higher and bond yields followed, though the yield on 10-Year Treasury bonds is still quite low at 2.24 percent as of Friday morning. The euro resumed losing value against the dollar in anticipation of the ongoing divergence of monetary policy between the Federal Reserve and the European Central Bank.

Inflation metrics are attracting attention lately as energy prices dip while the Federal Reserve contemplates interest rate lift-off. Crude oil prices were relatively stable through the week, but Friday morning is showing downside pressure with WTI at $80.54, matching the lows from June 2012.

Headline CPI was up by 0.1 percent in September. Declines in energy prices through September brought the energy sub-index of the CPI down by 0.7 percent for the month. Food prices were a counterbalance to falling energy prices in September. The food sub-index of the CPI was up by 0.3 percent for the month. Less food and energy, core-CPI was up by 0.1 percent in September, and was up 1.7 percent over the previous 12 months.

Even though inflation is a little weaker than expected due to lower energy prices, labor market metrics are tightening up. The U.S. unemployment rate is already below 6 percent, at 5.9 for September, and will fall further. Fifteen states are already at 5 percent unemployment or lower. Initial claims for unemployment insurance for the week ending October 18 increased by 17,000 to a still very low 283,000. Continuing claims for the week ending October 11 dropped by 38,000 to hit 2,351,000, the lowest since December 2000. Not only are companies hiring at a robust clip, they are generally not laying off.

Existing home sales for September increased by 2.4 percent to hit a 5.17 million unit annual rate, the best since September 2013. New home sales notched up by 0.2 percent, to hit a 467,000 unit annual rate in September, a post-recession high. The Federal Housing Finance Agency has announced plans that will allow Fannie Mae and Freddie Mac to relax underwriting standards, broadening the availability of mortgages. With job creation strong, consumer confidence rising and housing credit set to ease, conditions look positive for the housing sector at year end. Mortgage applications for refinance spiked in mid-October with the drop in interest rates. Purchase apps eased, but we expect them to improve as financial markets stabilize and economic metrics remain strong.

The Conference Board’s Leading Economic Index increased by a strong 0.8 percent in September. Both the Coincident Index and the Lagging Index also increased.

So heading into next week’s FOMC meeting central bankers have a lot to talk about. Falling energy prices complicate the Federal Reserve’s pivot away from extraordinary policy by keeping inflation lower than expected. However, economic conditions in the U.S. remain strong enough to justify the end of asset purchases. We believe that the Fed will announce, as planned, the end of QE at the upcoming October 28/29 FOMC meeting. We also continue to believe that interest rate lift-off will come around June of 2015.

 For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 10-24-14.

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September Consumer Prices, Existing Home Sales

Inflation Low as Oil Prices Fall, Home Sales Best in a Year

  • The September Consumer Price Index increased by 0.1 percent, boosted by food prices.
  • The September Core CPI also gained 0.1 percent, and was up 1.7 percent over the previous 12 months.
  • Existing Home Sales for September increased by 2.4 percent to a 5.17 million unit rate.

Inflation metrics are attracting attention lately as energy prices dip while the Federal Reserve contemplates interest rate lift-off. Headline CPI was up by 0.1 percent in September as energy prices continued to fall. The spot price for West Texas Intermediate crude oil has eased from a late June high of more than $107 per barrel, to a mid-October low of $81, a slide of nearly 25 percent. Over the last week, WTI has firmed to near $83 per barrel. Likewise, the national average price of a gallon of unleaded regular gasoline has dipped from $3.69 per gallon in late June to $3.15 per gallon in mid-October, giving up 15 percent. The rule of thumb is that every penny dip in gasoline prices puts an extra $1 billion in the hands of U.S. consumers over the course of a year. Some of those pennies will go to saving, some to paying down debt, but the bulk of it will go to purchasing more stuff, including more gasoline. Declines in energy prices through September brought the energy sub-index of the CPI down by 0.7 percent for the month. Further declines in gasoline prices through October will likely bring the energy sub-index down for the fourth consecutive month when the October CPI report comes out next month. Food prices were a counterbalance to falling energy prices in September. The food sub-index of the CPI was up by 0.3 percent for the month. Less food and energy, core-CPI was up by 0.1 percent in September, and was up 1.7 percent over the previous 12 months.

Falling energy prices complicate the Federal Reserve’s pivot away from extraordinary policy. We believe that the Fed will announce, as planned, the end of its asset purchase program at the upcoming October 28/29 FOMC meeting. There is a benefit to the Fed from being predictable and holding to its previously announced intentions. We also continue to believe that interest rate lift-off will come around June of 2015. Even though inflation is a little weaker than expected, due to lower energy prices, labor market metrics are tightening up. The U.S. unemployment rate is already below 6 percent, at 5.9 for September, and will fall further. Fifteen states are already at 5 percent unemployment or lower. The drop in energy prices, if durable, will also shift the regional balance of strength in the economy, marginally, toward energy consuming areas and away from energy producing areas. This will help labor market metrics in lagging regions.

Existing home sales for September increased by 2.4 percent to hit a 5.17 million unit annual rate, the best since September 2013. With job creation strong, consumer confidence rising and housing credit set to ease, conditions look positive for the housing sector at year end. The Federal Housing Finance Agency has announced plans that will allow Fannie Mae and Freddie Mac to relax underwriting standards, broadening the availability of mortgages.

Market Reaction: Equity markets are rebounding after their mid-October sell-off. Treasury yields are still low, but trending up. The 10-Year Treasury bond is yielding 2.24 percent. NYMEX crude oil is up to $83.26/barrel. Natural gas futures down to $3.85/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: CPI Oct 22 14.

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