June Industrial Production, PPI, Yellen Testimony

Production Gains on Utility Output, Yellen Green Lights 2015 Rate Hike

  • Industrial Production for June increased by 0.3 percent as utility and mining output climbed.
  • The Producer Price Index for Final Demand increased by 0.4 percent in June.
  • FOMC Chairwoman Janet Yellen testified that she expects to raise the fed funds rate this year.
  • The Empire State Manufacturing Survey climbed to 3.9 for July.

Industrial production for June increased by 0.3 percent after declining in April and March. Overall production has been stagnant this year, increasing only in March and June. Part of the overall stagnant pattern is due to weather, swinging utility output beyond normal seasonal adjustments. The other part comes from manufacturing output, which accounts for nearly three-quarters of total output. Manufacturing output has also increased in only two out of the first six months of this year, in March and again in April. Three factors are contributing to the unimpressive manufacturing results. (1) Auto sales are near the cyclical peak, so a significant increase in auto assemblies from this point is unlikely. (2) A strong dollar is increasing price competition for U.S. manufacturers. (3) Reduced oil field activity is decreasing demand for machinery, fabricated metals and other products. In June manufacturing output was flat, as it was in May. June manufacturing output was weighed down by declining motor vehicle production.

Producer prices increased more than expected in June. The PPI for final demand gained 0.4 percent, boosted by a 2.4 percent increase in the energy sub-index, primarily gasoline. Food prices also increased as bird flu decimated poultry farms this spring, driving up the price of eggs. On a year-over-year basis, the PPI for final demand is still negative, down 0.7 percent, reflecting the drop in oil prices over the last year. The recent drop in oil prices, from near $60 per barrel for WTI, to now $52 per barrel suggests that the return to positive year-over-year producer price inflation may be delayed, depending on how low oil eventually goes, and for how long. The International Energy Agency stated in July that the global oil market is “massively oversupplied”; suggesting that oil prices could take another leg down, below the current $52 price regime for WTI.

Federal Open Market Committee Chairwoman Janet Yellen testified before the House Committee on Financial Services this morning. In her written testimony, Yellen confirmed her view that “if the economy evolves as we expect … (it) would make it appropriate at some point this year to raise the federal funds rate target.”

The Empire State Manufacturing Survey for July increased to 3.9, suggesting that manufacturing conditions in New York and Northern New Jersey have recently improved slightly.

Market Reaction: Equity markets are up. The yield on 10-Year Treasury bonds is down to 2.39 percent. NYMEX crude oil is down to $52.28/barrel. Natural gas futures are up to $2.88/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Industrial Production 07-15-15.

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June Retail Sales, NFIB

Disappointing June Sales Shave Q2 GDP

  • June Retail Sales declined by 0.3 percent, after gaining 1.0 percent in May.
  • Ex-auto Retail Sales dipped by 0.1 percent, with most broad categories down.
  • The National Federation of Independent Business’ Small Business Optimism Index fell in June to 94.1.

Retail sales finished the second quarter weaker than expected, with June sales down 0.3 percent, and May revised down to a still strong 1.0 percent gain. We knew that unit auto sales eased off their blistering 17.8 million unit pace in May, to a solid 17.2 million unit pace in June. This brought retail sales of autos and parts down by 1.1 percent in June. However, we were expecting to see strong non-auto retail sales for June, reflecting good job growth and rising consumer confidence. That did not happen. Instead, non-auto retail sales fell slightly, by 0.1 percent, with weakness spread over several categories. Furniture and appliance store sales fell by 1.6 percent in June, out of synch with recently improving home sales. Building materials sales fell by 1.3 percent after dipping by 0.4 percent in May. Food and beverage store sales were unchanged. Clothing store sales fell by 1.5 percent. Gains were seen in electronics store sales, up 1.0 percent for the month. Gasoline station sales gained 0.8 percent, consistent with reports of an active summer driving season. General merchandise store sales were up by 0.7 percent. The weak end to second quarter nominal retail sales translates into a downgrade for our expectations of Q2 real consumer spending, which may show about 3 percent annualized growth for the quarter. This is well below our July forecast for Q2 real consumer spending, and so adds downside risk to our July estimate of Q2 real GDP growth at 3.0 percent. Something closer to 2.5 percent now appears to be more likely for Q2 real GDP growth, still a significant improvement over the -0.2 percent decline for Q1 real GDP.

The National Federation of Independent Business’ Small Business Optimism Index fell in June to 94.1, its lowest level since March 2014. The rather gloomy tone of the report suggests that Main Street America is not expecting a growth rebound in the second half of the year. “The index decline is not a disaster, just a big disappointment and another failed attempt to reach a solid growth path. The weakness was substantial and across the board, showing no signs of a growth spurt in the near future,” wrote Bill Dunkelburg, author of the report. The NFIB index can trail rather than lead macroeconomic trends, so we view it with less pessimism, but it is an important view on small business sentiment.

Market Reaction: Equity markets opened with gains as an arms control deal with Iran was announced. The 10-year Treasury yield is down to 2.42 percent. NYMEX crude oil is up to $52.30/barrel. Natural gas futures are down to $2.84/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Retail Sales 07-14-15.

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From the Desk of Robert Dye

Greece, China, Oil and the Fed, One Week Later

We used the headline Greece, China, Oil and the Fed last week in our U.S. Economic Update for July.  Now, a week later, the headline remains timely, but conditions are changing. Greece and eurozone leaders have reached a deal that will keep Greece in the eurozone, if it holds together.  The complex deal, featuring a fresh $96 billion bailout loan, is contingent on immediate pension overhauls and sales tax increases that must be ratified by the Greek parliament by Wednesday. European stock indexes rallied on the news. China’s stock market meltdown has abated. Chinese share prices increased Thursday, and were up again today. WTI oil is trading in the range of $53-$52 per barrel. Strong supply and increasing storage still feel like downside weights on the market.  Non-U.S. and non-OPEC supply looks like it is turning over first as major projects get canceled or delayed. Various Federal Open Market Committee members have commented recently. On Friday, FOMC chairwoman Janet Yellen said that she still favors a rate increase this year. John Williams, President of the Federal Reserve Bank of San Francisco said last week that he favors two rate hikes this year. Charles Evans, President of the Chicago Fed, said he still favors no interest rate increases until 2016. Loretta Mester, President of the Cleveland Fed, lines up with John Williams. If the Greek situation de-escalates, China stabilizes and oil prices do not take another leg down prior to the upcoming July 28/29 FOMC meeting, then I expect the Fed to show a stronger preference, by the end of July,  for a September 17 fed funds rate increase.  Retail sales data for June are due tomorrow morning.  Auto sales reset after the May surge, but we expect non-auto retail sales to confirm that consumers are energizing the economy.

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Comerica Economic Weekly

It was a light week for U.S. economic data, but a busy week nonetheless as Greece, China, oil prices and the Fed generated numerous headlines.

Greece and the European Union appear to be inching toward a deal that will allow Greece to stay in the eurozone. European equity markets rallied on Friday.

Chinese stock markets also rallied late in the week after massive support by the central government. The gyrations in Chinese equity markets add to speculation that the Chinese economy is cooling quickly, which, in turn, adds to speculation about what the government will do next. The willingness of the People’s Bank of China to act as the stock buyer of last resort, through its funding of the China Securities Finance Corporation, is reminiscent of ECB President Mario Draghi’s commitment to do “whatever it takes” to preserve the euro. “Whatever it takes” to preserve Chinese growth may lead to policies with far-reaching implications.

Oil prices bounced off a bottom price of $51/barrel on Tuesday to finish the week near $52.60 for WTI. The fear of increased global supply has prompted the International Energy Agency to warn that oil prices could fall further. This is good news for U.S. consumers as gasoline prices follow suit, but bad news for the oil patch where drilling activity may continue to decline. Lower oil prices complicate the Fed’s calculus as inflation eases.

The Federal Reserve released the minutes of the June 16/17 FOMC meeting on Wednesday. Recent developments in Greece, China and oil markets came to a boil after the June FOMC meeting and so diminished the usefulness of the minutes as a guide to future policy. The minutes show that the FOMC was scrutinizing U.S. data and weighing international events but was still reluctant, through June, about committing to a date for the first increase in the fed funds rate. This week, San Francisco Federal Reserve Bank President John Williams said that he was still in favor of a September rate hike, while Chicago Fed President Charles Evans said that he is in favor of waiting until 2016.

The Job Opening and Labor Turnover Survey for May showed a steady job openings rate, but a slight decline in the hiring rate for the month. Initial claims for unemployment insurance increased by 15,000 for the week ending July 4, to hit 297,000. This is the highest weekly claims number since late February, but it remains consistent with an improving job market. The uptick in initial claims in early July may be related to summer closures at U.S. auto plants, which often wreak havoc with seasonal adjustment factors.

The U.S. international trade gap widened slightly to $41.9 billion in May as exports eased. The strong dollar is a headwind for U.S. exports. Through May, trade was neutral for Q2 GDP.

We have 19 days until the FOMC announcement expected on July 29, and about 10 weeks until the announcement of September 17. We expect to see an interest rate increase this year. The odds of a September rate increase have diminished with recent events.

 For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 07-10-15.

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July 2015, Comerica U.S. Economic Update

Greece is flirting with disaster. The referendum of July 5th, rejecting bailout terms, added no clarity to the path for Greece and the European Union. Last minute final final negotiations could not be more important for the citizens of Greece, and for the future of the European Union. If the parties fail to come to terms, then a Greek default and exit from the eurozone are high probability events. The near-term economic damage will be concentrated in Greece itself. The summer fun on the islands may continue, but the inefficiencies of a non-euro cash economy will soon plague households and businesses. The longer term damage of Grexit, far beyond the sun drenched shores of Santorini, will be political and geo-political.

 China too may be taking a step backwards as the government intervenes in a desperate attempt at averting a stock market meltdown there. So far, about $3 trillion of market capitalization has evaporated in the stock slide that began in mid-June. The fact that the run-up in market cap was recent, beginning last November, suggests that there is not yet a gaping hole where the Chinese economy used to be. But it does suggest that there has been a tremendous transfer of wealth within the economy that could have lasting implications. Just as in the U.S. housing bubble, where the least informed and most vulnerable got burned when house prices collapsed, in China, the least sophisticated traders were caught in a game of hot potato and have paid the tab for the first movers.

The world is awash in oil. The global oil slick pushed down the price of WTI to now $51.82 per barrel. U.S. gasoline prices will fall again… good news for consumers in the heart of the summer travel season; bad news for the oil patch. U.S. drilling rig counts were stabilizing with oil near $60 through May and June. Now, that stability is in question.

The U.S. economy has only limited direct exposure to the small Greek economy and to Greek bonds that may soon become worth less, or worthless. Likewise, the Chinese stock market meltdown is only a media event here for now. But both events at least have the potential for spillover into global financial markets. The risk-off trade has brought U.S. bond yields back down, with the 10-Year Treasury bong yield falling from 2.43 percent last week, to 2.22 percent as off this writing. Juxtaposed against the global fireworks is the improving U.S. economy. Job creation is strong, auto sales are robust, home sales are improving, and GDP momentum is picking up. All this makes for interesting times at the Federal Reserve. We believe that the Fed stays focused on the U.S. economy and begins to raise the fed funds rate in September, however, that is far from a sure thing.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate_07_2015.

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Comerica Economic Weekly

At the halfway point in 2015 we see reasons to expect solid U.S. economic growth through the second half of the year.

U.S. data at the end of the second quarter are encouraging. There is ample evidence of a pickup in economic momentum through Q2, after a weak Q1. Job growth remains strong. In June, 223,000 jobs were added to the U.S. economy and the unemployment rate dropped to 5.3 percent. House prices are going up. Household balance sheets are improving. Consumer spending is picking-up. The two-thirds of the economy comprised of consumer spending has a strengthening base.

The even better news is that economic momentum looks like it will carry over into the just-begun third quarter. Government spending looks like it will firm up as the limits of the federal spending sequester ease going forward, and strengthening tax revenue supports states and municipalities. Business investment slumped in Q1 but that too will improve as businesses respond to an improving domestic economy.

That gurgling sound you hear is the world awash in oil. U.S. production is still increasing, even though the drilling rig count is less now than half of what it was this time last year. U.S. inventories of crude oil are still historically high. Petroleum consumption is ticking up, but only marginally. Global production and storage are also at peak levels. We have revised down our expectations for WTI oil prices at the end of this year to $60 per barrel. This will keep gasoline prices low, adding to consumer confidence.

International conditions are mixed. We can say with near certainty that anything we say about Greece will need to be revised by next week. The referendum in Greece, to be voted on Sunday, appears to be as crucial as it is ambiguous, and that is an interesting combination. We expect Greece to remain in the Eurozone with ongoing support to its banking system by the European Central Bank. European financial markets are edgy. The odds of a financial calamity in Europe appear to be low regardless of the outcome of the Greek situation. However, uncertainty is the bane of confidence. And lack of confidence is not good for any economic system. And so the emerging economic momentum in Europe is threatened by chaos in Greece.

Meanwhile, Chinese stock markets continue to deflate after bubbling up beginning late last year. The evaporation of a massive amount of market capitalization generated during the China bubble cannot be a good thing. After all, a trillion here, a trillion there, pretty soon it adds up to real money.

Puerto Rico was in the news this week for all the wrong reasons. The commonwealth economy is struggling and has been for a long time due to the erosion of its manufacturing base. According to Governor Alejandro Garcia Padilla, the economy is not generating enough revenue to service its $70 billion debt. A $1.9 billion payment this week averted an immediate crisis, but does not resolve Puerto Rico’s problems. Puerto Rican debt was downgraded last February to two levels below investment grade by the major rating agencies. About $30 billion of the debt is owned by residents of Puerto Rico. Most U.S.-based municipal bond funds own Puerto Rican bonds due to their very favorable tax treatment.

We still expect the Federal Reserve to begin raising the fed funds rate in September. Their mandate rests squarely on the U.S. economy, which is showing improved performance at mid-year. However, financial market turmoil in Europe could give the Fed cause to pause. We don’t think that will happen. But the potential for financial market volatility in Europe will cause the Fed to keep their cards close to their vest over the next few weeks. Until a near-term path is established for Greece and the rest of the European Union, the Fed keeps its options open.

 For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 07-03-15.

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Comerica Bank’s Texas Index Still Slipping on Oil

Comerica Bank’s Texas Economic Activity Index eased again in April, decreasing 2.7 percentage points to a level of 98.5. April’s reading is 26 points, or 36 percent, above the index cyclical low of 72.9. The index averaged 105.1 points for all of 2014, four and four-fifths points above the average for full-year 2013. March’s index reading was 101.2.

“The Texas economy continues to feel the pull from lower oil prices. Our Texas Economic Activity Index has now declined for six consecutive months, beginning in November of 2014. Fortunately, oil prices have been relatively stable near $60 per barrel for the last two months. Concerns about ongoing strong global production and floating storage may weigh on prices this summer. But on the other hand, you have a greatly reduced U.S. rig count, depletion of existing wells and increased gasoline demand by more confident U.S. consumers, which are all supportive of oil prices,” said Robert Dye, Chief Economist at Comerica Bank. “Job creation in Texas bounced back in May, but other indicators are showing the impact of reduced energy sector activity.”

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For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0615.

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Comerica Bank’s California Index Springs Back

Comerica Bank’s California Economic Activity Index improved in April, increasing 0.7 percentage points to a level of 119.7. April’s reading is 36 points, or 43 percent, above the index cyclical low of 84.0. The index averaged 113.7 points for all of 2014, seven and one-half points above the average for all of 2013. March’s index reading was 119.0.

“The California economy gained momentum after a soft first quarter. Our California Economic Activity Index picked up in April after little change over the previous three months. The state economy is large, diverse and resilient. Port activity is renormalizing. The high tech sector remains strong. Real estate markets in Northern California are super tight. Southern California conditions are tightening too,” said Robert Dye, Chief Economist at Comerica Bank. “Of course, water resources are a potentially binding constraint. Drought conditions are hurting the agricultural economy and may exert an increasing drag on real estate development.”

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For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0615.

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June U.S. Employment, Auto Sales, ISM MF, UI Claims, May Construction Spending

U.S. Gains Momentum through Q2 as Greece Melts Down

  • June Payroll Employment increased by 223,000 jobs. April and May were revised down by 60,000.
  • The Unemployment Rate for June fell to 5.3 percent as the labor force shrank.
  • Average Weekly Hours were unchanged at 34.5 hours. Average Hourly Earnings were
  • June Auto Sales remained strong at a 17.2 million unit rate.
  • The ISM Manufacturing Index increased to 53.5 in June, boosted by employment.
  • Initial Claims for Unemployment Insurance gained 10,000 for the week ending June 27, to hit 281,000.
  • Construction Spending for May increased by 0.8 percent, supported by private nonresidential.

Heading into the July 4th holiday, U.S. economic data is sparkling. Job growth is solid. Auto sales are strong. Manufacturing conditions have improved. There is no doubt that Q2 real GDP growth rebounded from a weak performance in Q1. It looks like U.S. economic momentum will continue in the just-begun third quarter. All this would put the Federal Reserve on track for a September increase in the fed funds rate, which would be the first increase since mid-2006. However, the volatile situation in Greece, and its potential impact on Europe, is an ever shifting parameter in the Fed’s calculation.  Our expectation is that Greece stays in the euro zone and is able to negotiate its way around a calamitous default and exit.  But events could easily turn the other way. The Fed’s concern is formulating the appropriate monetary policy for the U.S., not for Europe. That said, Yellen and company will be in close communication with the European Central Bank, monitoring financial stresses in Europe. Given the volatile situation in Greece, we expect Fed officials to remain cautious in their public comments ahead of the July 28/29 FOMC meeting. The referendum in Greece this Sunday may allow the European Central Bank to quickly step in and backstop Greek banks, permitting them to eliminate or reduce capital controls.  The vote could go the other way and keep Europe on edge for weeks or months to come, and make the Fed hesitant to potentially contribute to stresses in Europe by tightening monetary policy here.

Today’s jobs report for June is somewhat nuanced. U.S. payrolls increased by a solid 223,000 in June. Strong April and May payroll gains were revised down by a total of 60,000. An unexpected large decline in the labor force, down 432,000 workers, brought the unemployment rate down two tenths to 5.3 percent in June. The labor force situation remains confounding. Following a large 397,000 worker gain in May, the data show a larger 432,000 worker loss in June. The volatility of the labor force numbers remains higher than normal. A sub-5 percent unemployment rate by the end of this year is within reach. We expect to see upward pressure on wages as the unemployment rate tightens in the second half of this year. Consistent with the solid monthly payroll numbers for June, initial claims for unemployment insurance for the week ending June 20 remained comfortably below the benchmark 300,000 level at 281,000, gaining 10,000 for the week.

The U.S. consumer is re-emerging as a primal force in the economy. Auto sales in June gave back a little of the outstanding 17.8 million unit sales rate in May, to settle in a still-strong 17.2 million unit rate. Consumer spending was a solid contributor to Q2 real GDP growth. The ISM Manufacturing Index for June shows stability in the manufacturing sector as the index increased to 53.5 percent.

Market Reaction: U.S. equity markets opened with gains. The 10-Year T-bond yield is down to 2.38 percent. NYMEX crude oil is up to $57.76/barrel. Natural gas futures are up to $2.87/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Employment 07-02-15.

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Comerica Bank’s Michigan Index Thaws for Spring

Comerica Bank’s Michigan Economic Activity Index grew in April, increasing 1.9 percentage points to reach a level of 121.6. April’s reading is 48 points, or 64 percent, above the index cyclical low of 74.0. The index averaged 117.4 points for all of 2014, three and three-tenths points above the index average for 2013. March’s index reading was 119.6.

“The Michigan economy is feeling the tailwind of a resurgent U.S. auto industry. Our Michigan Economic Activity Index improved in April after plateauing through the early months of 2015. Strong auto sales are supportive of the state’s manufacturing sector and are buffering the negative impact of a strong dollar on export-oriented manufacturing. Job creation is on an upward trend in Michigan and real estate markets continue to firm up,” said Robert Dye, Chief Economist at Comerica Bank. “Cheaper gasoline is a boost for the state’s summer tourism industry, which will also benefit from more confident consumers who have a little more money to spend this summer.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0615.

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