2015Q2 GDP and Revisions, July UI Claims

Second Quarter Real GDP Increased at a 2.3% Annual Rate, Q1 Revised Up

  • Real Gross Domestic Product for 2015Q2 increased at a 2.3 percent annual rate.
  • First quarter real GDP growth was revised up from -0.2 to +0.6 percent.
  • Initial Claims for Unemployment Insurance gained 12,000 to hit 267,000 for the week ending July 25.

The Bureau of Economic Analysis released their first estimate of second quarter 2015 real GDP, which, they said, increased at a moderate 2.3 percent annual rate. Included in the GDP data release was the annual revision of the national income and product accounts. This is essentially the fourth estimate of first quarter GDP. The annual revisions tended to dampen the recent historical pattern of weak first quarter GDP, meaning a little less weak. It also dampened the recent pattern of strong GDP in the second half of the year. On an annual basis, 2013 now looks a little weaker as a whole, with real GDP increasing at a 1.5 percent annual rate, where previously the estimate was 2.2 percent. For 2014 the stronger early quarter numbers and the weaker later quarter numbers left the annual growth rate unchanged at 2.4 percent. Today’s GDP data does not significantly change our outlook for the second half of 2015. We still expect to see moderate real GDP growth of about 2.5 to three percent for the last two quarters of the year. While the GDP revisions are fascinating to us data geeks, for normal humans they also have some implications. The slightly stronger first quarter real GDP growth, plus the confirmation of an acceleration in growth through the second quarter adds support to our view that the Federal Reserve will likely announce a small increase to the fed funds rate at the conclusion of the September 16-17 FOMC meeting. The interest rate move still remains highly data dependent. We expect to see reasonably strong job growth in July and August, above 200,000 per month, and a decrease in the unemployment rate to 5.2 percent by August. If U.S. data turn south over the next seven weeks, or if a major international event stresses global financial markets, then the Fed could delay interest rate lift-off until December or later.

Supporting our call for ongoing moderate-to-strong job growth through July and August, today’s release of initial unemployment insurance claims for the week ending July 25 shows an inconsequential gain of 12,000 to hit a level of 267,000. Anything below 300,000 is considered a very good number for the level of initial weekly claims and we have been cruising comfortably under 300,000 for most of this year. Continuing claims increased by 46,000 for the week ending July 18, also still a very good number.

Market Reaction: Equity markets opened with losses. The 10-year Treasury bond yield is down to 2.28 percent. NYMEX crude oil is up to $49.12/barrel. Natural gas futures are down to $2.81/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: GDP 07-30-15.

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From the Desk of Robert Dye

To Rent or to Own?

The Census Bureau reports that the U.S. homeownership rate dropped to 63.4 percent of households in the second quarter of 2015. This is the lowest homeownership rate since the mid-1960s, and it highlights the stark decline in the rate of homeownership that began prior to the onset of the Great Recession in 2007. With the last data point in 2015Q2, the decline in the homeownership rate shows no signs of levelling out. With a smaller percentage of households owning their homes, rental markets have tightened. Builders have responded with a surge in multi-family construction. Multi-family starts reached a 489,000 unit annual rate in June, well above the post-recession floor of a 58,000 unit annual rate in October 2009. But this is misleading. Despite the surge in construction, multi-family starts remain close to the historical average since 1959. Also, the U.S. population is now almost double what it was in 1959, so multi-family starts per capita are still low. The shortage of multifamily housing is evidenced by the steady decline in the rental vacancy rate, down to 6.8 percent in 2015Q2, well below the 11.1 percent peak of 2009Q4. And rents are rising.  Lately, we have seen a barrage of reports that say that rents, particularly in major metropolitan areas, are climbing quickly, faster than wages are climbing. Yet, the consumer price index for rent was up just under 3 percent in2015Q2, over the previous year, close to its historical average since 1990. The relatively mild increase in rents given the rapid tightening of rental markets suggests that rents will keep climbing over the next year. Both sides of the rent-versus-own calculation are changing. Rents are going up, but mortgage rates are too, as are house prices and family incomes. I expect that the decision to rent or to own will remain challenging for millennial households despite the fact that rents are likely to keep rising faster than the overall CPI.

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Comerica Bank’s California Index Shows Improving State Economy

Comerica Bank’s California Economic Activity Index grew in May, increasing 0.8 percentage points to a level of 120.5. May’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. April’s index reading was 119.7.

“The California economy continued to gain momentum in May after picking up speed in April. In May we see the second monthly increase in our California Economic Activity Index, reversing a three-month slide through the first quarter of this year. Job creation in the state remains well above the U.S. average. Through June, payroll job growth in California was up 3.0 percent over the previous 12 months, bringing the state unemployment rate down to 6.3 percent, the lowest it has been since February 2008,” said Robert Dye, Chief Economist at Comerica Bank. “Real estate markets continue to firm up, supported by the strong performance of the IT sector.”

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For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0715.

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Comerica Bank’s Texas Index Marks Seventh Consecutive Decline

Comerica Bank’s Texas Economic Activity Index eased again in May, decreasing 2.0 percentage points to a level of 96.6. May’s reading is 24 points, or 32 percent, above the index cyclical low of 72.9. The index averaged 105.2 points for all of 2014, four and nine-tenths points above the average for full-year 2013. April’s index reading was 98.6.

“Our Texas Economic Activity Index declined again in May, for the seventh consecutive month, showing the ongoing drag on the state economy from lower oil prices. Our index data extends through May, limited by the release of house price data. The recent drop in the price of West Texas Intermediate crude oil from near $60 per barrel in May and June, to now approaching $47 per barrel, is not reflected in our May Index. The drilling rig count for Texas stabilized in June and picked up slightly in early July, as drillers felt more confident that $60 oil was profitable,” said Robert Dye, Chief Economist at Comerica Bank. “Now with oil prices taking another leg down, we expect the drilling rig count to fall further and consolidation in the state’s energy sector to continue.”

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For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0715.

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Comerica Bank’s Michigan Index Sees Strongest Gain in a Decade

Comerica Bank’s Michigan Economic Activity Index continued to grow in May, increasing 3.3 percentage points to reach a level of 124.8. May’s reading is 51 points, or 69 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. April’s index reading was 121.5.

“The 3.3 percent gain in our Michigan Economic Activity Index for May was the strongest monthly gain since February 2005. May continued a strong run for the Michigan economy, which began last November, and was interrupted in February, primarily as a result of very bad winter weather. The climate is better in Michigan now in more ways than one. The U.S. auto industry is enjoying strong sales and solid profitability, supported by an improving U.S. economy and low gasoline prices. This is a tailwind for the state of Michigan, fostering broad-based economic gains,” said Robert Dye, Chief Economist at Comerica Bank. “Seven out of eight components of our Michigan Index increased in May, including labor market and housing-related indicators.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0715.

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Comerica Bank’s Arizona Index Returns to Growth

Comerica Bank’s Arizona Economic Activity Index grew in May, increasing 0.3 percentage points to a level of 106.6. May’s index reading is 29 points, or 38 percent, above the index cyclical low of 76.9. The index averaged 99.7 points for all of 2014, four and one-fifth points above the average for full-year 2013. April’s index reading was 106.2.

“Our Arizona Economic Activity Index increased again in May after stalling through March and April. The spring stall interrupted a streak of monthly gains going back to June 2014. Job growth has leveled out for the state. Payroll jobs increased this June, but are still below the level of last February. Arizona’s economy continues to underperform through this expansion cycle, relative to its typical pro-cyclical strength. One drag stems from the federal spending sequester which has limited contracts for the state’s defense industries,” said Robert Dye, Chief Economist at Comerica Bank. “Fortunately, the drag from the federal spending sequester will ease over the next year.”

StateIndex_Arizona_07_2015 For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0715.

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Comerica Bank’s Florida Index Continues to Shine

Comerica Bank’s Florida Economic Activity Index increased in May, growing 1.0 percentage point to a level of 136.5. May’s index reading is 58 points, or 75 percent, above the index cyclical low of 78.1. The index averaged 117.6 in 2014, eight and three-fifths points above the average for all of 2013. April’s index reading was 135.5.

“Florida’s economy is on a winning streak. Our Florida Economic Activity Index increased in May, for the 14th consecutive month, supported by strong job growth and improving real estate conditions. Payroll jobs through June were up 3.4 percent over the previous 12 months, well ahead of the U.S. average rate of 2.1 percent for the same period. The state’s important tourism industry is being helped by a firmer U.S. economy and lower gasoline prices, but it is being hurt by the strong U.S. dollar. The U.S. dollar has gained 20 percent against the Canadian dollar in the two years since June 2013, and has gained 17 percent against the euro over the same period,” said Robert Dye, Chief Economist at Comerica Bank. “The domestic support to the tourism industry has been stronger than the international drag, and we expect that to continue.”

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For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0715.

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From the Desk of Robert Dye

Oil and the Texas Economy

The Texas economy has shown remarkable resilience in the face of the dramatic decline in the price of oil that began about this time last year. As oil prices fell, so too did an important indicator of oil field activity, the drilling rig count. The Texas rig count dropped from 902 active rigs last September, to 363 in June. With oil prices apparently stable near $60 per barrel over May and June, some drillers increased activity, pushing the weekly drilling rig count up slightly to 374 last week. Our Texas Economic Activity Index, which includes the rig count, fell every month from November 2014 through April 2015. The downtrend could level out this week as we collect the data for the May edition of our Texas Index. Support for the May index number will come from state payroll employment, which increased in May by nearly 31,000 jobs, close to the average monthly gain for 2012 and 2013, when the Texas economy was booming and before oil prices collapsed. A glance at the May employment data suggests the Texas economy is shrugging off the big hit to its very important oil industry.  However, early this month oil prices took another leg down. With WTI oil now trading at less than $48 per barrel, and falling, I expect the recent increase in the Texas rig count to be temporary. I also expect monthly payroll job growth to reset at a lower level. Two news articles posted today, one in The Wall Street Journal, and one in the Financial Times, tell a cautionary tale for the Texas economy. According to today’s Wall Street Journal, U.S. energy companies are planning more layoffs, asset sales and other tactics in response to the drop in in oil prices to below $50 per barrel. Also, job cuts previously announced by service companies like Halliburton and Baker Hughes were much bigger than they previously disclosed. The Journal notes that hedges shielding many energy companies from sub-$50 oil will roll off through the second half of this year and into next year. Meanwhile, oil storage remains at historical highs, U.S. production has not declined, neither has OPEC production and Iran is looking to bring new supply to an already over-supplied market. Time is not on the side of U.S. drillers. The Financial Times said today that the world’s biggest oil companies have cancelled $200 billion of spending on new projects due to low oil prices. Today’s news suggests that the Texas economy has not fully adjusted to the new low oil price regime. Oil is not the only driver of the Texas economy, but it is an important driver. With the energy industry likely to continue consolidating, both energy-related industries and other industries connected to them, both directly and indirectly, will feel the drag from sub-$50 oil.

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Comerica Economic Weekly

It was a light week for U.S. data, and perhaps the closest we have come to the seasonal doldrums this summer. Financial markets are digesting Amazon’s Q2 earnings, international data and a weaker-than-expected report on U.S. new home sales for June.

The Greek situation has at least temporarily resolved, leaving Greece still within the eurozone, but strapped with onerous debt, a dysfunctional economy and a potentially volatile political situation. The Markit Eurozone Purchasing Managers’ Index for July ticked down slightly, to a still-positive 53.7. Not bad considering all the focus on the Greek situation.

Chinese equity markets have stabilized after massive government intervention. China Q2 GDP was reported at 7 percent y/y growth, right at government expectations. However, today’s release of the Caixin PMI shows a weakening Chinese manufacturing sector, with the index falling to 48.2 in July, a 15-month low. Suspected weakness in China is weighing on global commodity markets. Copper is on a three-month slide. Gold turned over in early July. Oil is reaching for a new bottom having just bounced off $48/barrel at Nymex.

Today’s U.S. new home sales report for June was an eye catcher, for the wrong reasons. Sales in June dipped 6.8 percent to a 482,000 unit rate, well below our conservative estimate of a small dip for the month. Moreover, March, April and May new home sales were all revised lower. The trend for new home sales still looks favorable, a clear upside breakout from the weak 2013-2014 pattern, but not as favorable is it did last month. The months’ supply of new homes jumped up from 4.8 months’ worth in May, to 5.4 months’ worth in June. Builders may pull back a bit after recent gains in starts and permits.

Existing home sales did better in June, up 3.2 percent, to a 5.49 million unit rate. Gains were spread across Census regions. The months’ supply of existing homes on the market ticked down to 5.0 months’ worth. The median sales price of an existing home was up 6.5 percent in June, over the previous year.

The Markit U.S. Manufacturing PMI increased slightly in July to 53.8. Output and new business expanded but employment weakened.

Initial claims for unemployment insurance fell by 26,000 to hit 255,000 for the week ending July 18. It looks like seasonal shut-downs at auto plants skewed the summer data, driving claims up in late June, and now back down. Despite the recent volatility, new claims remain on a stable trend at a very low level. Continuing claims for unemployment insurance fell by 9,000 for the week ending July 11, to hit 2,207,000, also a very low level.

The Federal Reserve accidentally released the staff economic projections ahead of next week’s FOMC meeting. This is not market moving news and does not reflect the assessments of FOMC voting members. We expect the FOMC to comment on improving U.S. data, but leave monetary policy exactly where it is now, on hold until at least September, if not longer.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 07-24-15.

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Comerica Economic Weekly

U.S. economic data from the middle of July are consistent with an acceleration in economic momentum through the second quarter.

Global financial markets were calmer as Greece and the EU pulled back from the brink. There remains much work to be done to make the Greek economy sustainable in the long term, but countering Germany’s hard line, support to Greece is coming from other parts of the EU, from the European Central Bank and from the IMF as well. Chinese equity markets have stabilized with the benefit of heavy government intervention. China reported stronger-than-expected Q2 real GDP growth of 7 percent year-over-year, immediately raising questions about the alignment of the official data with actual conditions.

Oil prices fell through the second half of the week, with WTI now trading at about $50 per barrel. We expect to see oil prices dropping below the $50 support level over the weeks ahead, reflecting strong global supply.

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. Non-auto retail sales fell slightly, by 0.1 percent, with weakness spread over several categories. The weak end to second quarter nominal retail sales translates into a downgrade for our expectations of Q2 real consumer spending, which, in turn implies a downward revision to our estimate of Q2 real GDP growth to around 2.5 percent.

The National Federation of Independent Business’ Small Business Optimism Index fell in June to 94.1, its lowest level since March 2014.

Industrial production for June increased by 0.3 percent after declining in April and March. Manufacturing output has 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.

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. The recent drop in oil prices, from near $60 per barrel for WTI, to now $50 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 near-$50 price regime for WTI.

The Consumer Price Index for June increased by 0.3 percent. Over the last 12 months, the headline CPI is up only by 0.1 percent, reflecting the significant drop in gasoline prices from last summer.

Finally, residential construction activity stepped up in June. Housing starts increased by 7.4 percent to a 1.343 million unit rate. Permits increased by 9.8 percent, to a 1.174 million unit rate.

 For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 07-17-15.

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