March Retail Sales, Producer Prices, February Inventories

Headline Numbers Weak, But Details Mixed in Today’s Economic Data

  • March Retail Sales declined by 0.3 percent, as auto sales fell.
  • Ex-auto Retail Sales increased by 0.2 percent, supported by building materials.
  • The Producer Price Index for Final Demand fell by 0.1 percent in March.
  • Business Inventories decreased by 0.1 percent in February.

Today, bad news is good news. Total retail sales fell. Producer prices eased. Business inventories dropped, consistent with weak first quarter GDP. All three factors weigh against a near-term increase in short-term interest rates by the Federal Reserve, and so U.S. equity markets opened with gains and Treasury bond yields are up. However, this morning’s indicators are somewhat nuanced, and so we can say that the implications for the economy are not especially negative. March retail sales fell by 0.3 percent. We knew that auto sales would be a negative factor, as unit auto sales fell to a 16.6 million unit pace, taking a breather from the blistering 18 million unit pace of late last year. Two things to say…other retail sales were mostly positive, and non-retail consumer spending (services) remains healthy. The dollar value of retail auto and parts sales fell by 2.1 percent in March. However, the building materials category was up by 1.4 percent. Health and personal care store sales were up by 1.0 percent. Gasoline station sales were up by 0.9 percent. We believe that the auto component will be mixed in the months ahead, some good months and some bad, but other components will continue to grow. Total retail sales are up 2.8 percent nominally over the last 12 months. With essentially zero inflation for the consumer prices index (less shelter) over that period, the 2.8 percent nominal is close to 2.8 percent real. That is not bad. Consumer demand for services will remain strong as incomes grow and the population ages. Overall, consumer spending will continue to be a stabilizing force for the U.S. economy.

The producer price index for final demand eased by 0.1 percent in March as food and services prices dipped. Energy prices were up by 1.8 percent, reflecting the bounce back in crude oil prices, after bottoming out in early-to-mid February. We expect energy prices to gradually increase in the second half of this year, with the usual ups and downs. Going forward, energy will tend to be more of a boost to inflation than a drag. On a year-over-year basis, we expect prices indexes to continue to trend upward in the months ahead, giving the inflation hawks at the Fed something to speak about.

Business inventories dropped by 0.1 percent in March, confirming another weight on the expected weak first quarter GDP report, due out on April 28. The headline numbers are masking two effects. One is oil. We know that crude oil and petroleum product inventories are swollen and are expected to gradually decline as the oversupplied oil market tightens up over the next year or so. The other issue is auto inventories, up a strong 9.3 percent over the last year. If sales do not pick up following the March dip, we may see some production adjustments among auto producers. This could increase downward pressure on manufacturing employment.

Market Reaction: Equity markets opened with gains. The 10-year Treasury yield is up to 1.78 percent. NYMEX crude oil is down to $42.12/barrel. Natural gas futures are up to $2.01/mmbtu.

Alert_04_13_2016

For a PDF version of this Comerica Economic Alert click here: Retail Sales 04-13-16.

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Comerica Economic Weekly

It was a fairly light week for U.S. economic data. Economic news was dominated by oil prices, Fedspeak and the dollar. This was not a spurious relationship. The three are closely linked.

Let’s start with oil. U.S. oil prices respond to supply, demand, inventories and the value of the dollar. U.S. supply is easing as the rig count continues to drift downward, with severe and ongoing financial pressure on exploration and production companies. Iran’s ability to ramp up production with the lifting of U.S. sanctions is in question. Demand continues to increase but China remains a key concern. China accounts for about half of global GDP growth. Recent news from China shows some success in their policy responses to changing economic conditions there. U.S. crude oil inventories are very high, putting downward pressure on prices. The dollar has weakened recently, putting upward pressure on prices. The net result was a decline in crude oil dollar prices from late March through early April, and then a rebound to $39.22 as of this writing.

Lower oil prices since mid-2014 have weighed on U.S. business investment and have depressed inflation. The Fed has responded to weak U.S. GDP growth, cool inflation numbers and a generally shaky global environment by ratcheting down expectations for interest rate increases. Last December, the Fed’s dot plot showed a consensus for four 25 basis point increases in the fed funds rate this year. The March dot plot dialed that expectation back to two fed funds rate hikes this year. Last night in a forum with Paul Volcker, Alan Greenspan and Ben Bernanke, current FOMC Chair Janet Yellen defended the December rate hike while reinforcing expectations of a very gradual approach to fed funds rate hikes this year.

With reduced expectations of fed funds rate hikes in 2016, the value of the dollar has eased. The Fed’s nominal broad dollar index was down about 5 percent from its January 20th peak, through April 1. The weaker dollar then contributed to higher global oil prices, completing the circular relationship between the three key elements.

The ISM Non-Manufacturing Index for March increased to 54.5 percent, from February’s 53.4 percent. The improvement in the index is consistent with our expectation for weak-to-moderate real GDP growth, in the vicinity of 1.3 percent annualized, for the recently completed first quarter.

The U.S. international trade gap widened in February to -$47.1 billion as imports increased more than exports for the month. The real (price adjusted) balance of trade in goods for February widened, implying a drag from trade in the 2016Q1 GDP report, which will be released on April 28.

The Job Opening and labor Turnover Survey (JOLTS) for February showed an increase in the hiring rate while the job opening rate ticked down. Hiring was strong at 3.8 percent of total employment. The job openings rate ticked down to a still-strong 3.7 percent. The quits rate increased to 2.1 percent, also a strong number.

Initial claims for unemployment insurance fell by 9,000 for the week ending April 2, to hit 267,000. Continuing claims for the week ending March 26 increased by 19,000, to hit 2,191,000. The solid labor market data from this week reinforces our expectation for ongoing moderate-to-strong U.S. job growth. We expect the unemployment rate to resume its gradual downward track in the second quarter. Recent strong labor force growth is an increasingly important factor in that calculation.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 04-08-2016.

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March ISM Non-MF, February Trade and JOLTS

Trade Expected to Drag on Q1 GDP, Service Sector and Labor Data Positive

  • The ISM Non-Manufacturing Index for March increased to 54.5 percent.
  • The U.S. International Trade Gap widened in February to -$47.1 billion.
  • The JOLTS Report for February showed an increase in the hiring rate to a strong 3.8 percent.

This morning’s U.S. economic data releases show more of the same for the U.S. economy: a healthy service sector, trade headwinds and a strong labor market. The ISM Non-Manufacturing Index for March increased to 54.5 percent, from February’s 53.4 percent. The improvement in the index is consistent with our expectation for weak-to-moderate real GDP growth, in the vicinity of 1.3 percent annualized, for the recently completed first quarter. Nine of the 10 sub-indexes for the NMF index were above 50, indicating improving conditions, while only the prices sub-index was contracting at 49.1. Twelve industries reported growth in March and only two report contraction – arts/entertainment/recreation and transportation/warehousing. Anecdotal comments were mixed even though most businesses reported improving conditions.

The U.S. international trade gap widened in February to -$47.1 billion as imports increased more than exports for the month. Total imports gained $3.0 billion while exports gained $1.8 billion. For the year ending in February, nominal imports are slightly up, by just 0.3 percent. Nominal exports are down by 4.2 percent. Energy prices figure prominently in the nominal calculations. The real (price adjusted) balance of trade in goods for February widened by $1.6 billion ($2009) to -$63.3 billion. The January/February average for the real balance of trade in goods is wider than the 2015Q4 average, implying a drag from trade in the 2016Q1 GDP report, which will be released on April 28. On a trade-weighted basis the U.S. dollar remains strong while global demand growth is soft. Both factors are weighing on U.S. export growth, thus widening the trade gap.

The Job Opening and labor Turnover Survey (JOLTS) for February showed an increase in the hiring rate while the job opening rate ticked down. Hiring was strong at 3.8 percent of total employment. The job openings rate ticked down to a still-strong 3.7 percent. The quits rate increased to 2.1 percent, also a strong number.

Market Reaction: U.S. equity markets opened with losses. The 10-year Treasury bond yield is down to 1.73 percent. NYMEX crude oil is down to $35.60/barrel. Natural gas futures are down to $1.96/mmbtu.

Alert_04_05_2015_Int_Trade

For a PDF version of this Comerica Economic Alert click here: Int Trade 04-05-16.

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April 2016, Comerica U.S. Economic Update

We expect to see another sub-par GDP report for the recently completed first quarter of 2016 when the first estimate of Q1 GDP growth is released on April 28. Consumer spending has been stable, but uninspired. Business investment has been hurt by the reset in the energy sector. Inventories ran up through last year and are now a drag on growth. Exports have been hurt by subdued global demand and the strong dollar.

The shaky global environment was a key element of FOMC Chairwoman Janet Yellen’s speech at the New York Economic Club last week. Yellen’s somewhat dovish speech reset financial market expectations for fed fuds interest rate hikes this year. According to the fed funds futures market, the implied probability of an April 27 fed funds rate hike is now only 4.6 percent. That might be a bit high given Yellen’s speech. She clearly set the bar high for future rate hikes that appear to be as contingent on global conditions as they are on U.S. conditions. For now, we will maintain our interest rate forecast that shows one 25 basis point increase in fed funds in June and one in December. However, we will need to see a change in tone from Chair Yellen at the upcoming April 26-27 FOMC meeting, or soon afterwards, in order to maintain that view.

We think that U.S. economic data will improve enough to motivate another fed funds rate hike by September, even if the odds of a June rate hike are fading. There is ample upside potential for residential investment. Business investment will firm up as higher oil prices stabilize the energy sector. Higher oil prices will also begin to heat up inflation indicators. Manufacturing conditions are improving. Ongoing strong job creation will be a key support to U.S. households. Wages are going up.

However, global conditions, to which the Yellen Fed are keenly attuned, may be a different matter. Much depends on China and its ability to sustain strong growth through an awkward economic transition. China has made itself the focal point of global concern by being responsible for half the world’s GDP growth, while at the same time being both unpredictable and awkward in its policy responses to an economy that must make a difficult transition in order to avoid a serious stumble. China faces the difficult challenge of reducing productive capacity in many industries, and re-directing labor while trying to maintain political stability.

Higher oil prices will help stabilize the economies of other countries, including Canada, Mexico, Brazil and Venezuela here in the Americas. Firmer commodity prices generally would help other South American countries, Africa and Australia. Europe is facing a different set of issues. The jury is still out on the long-term consequences of negative interest rate policy by the European Central Bank and other central banks. The refugee crisis and the increased potential for terrorism will keep the population on edge and politics contentious. In Great Britain, the Leave campaign (for leaving the European Union) is gaining momentum. According to a recent poll, 43 percent of British voters want to “Leave,” while 39 percent want to “Remain.” The United Kingdom European Union membership referendum is scheduled for June 23. After that, the EU may never be the same, nor stand for the same things.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate -04_2016.

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Comerica Economic Weekly

U.S. economic data at the start of the second quarter is looking good. Labor data for March was solid. Payroll employment increased by 215,000 jobs for the month, a little stronger than expected. Despite the strong job gains the unemployment rate ticked up from 4.9 percent in February, to 5.0 percent for March due to very strong recent labor force growth. The strength of the labor force gains over the past three months is itself a positive economic indicator, showing that a healthy labor market is pulling in more workers. Also noteworthy in the employment report was the 29,000 job decline in manufacturing employment, following on the heels of an 18,000 job loss in February. Average hourly earnings increased by 0.3 percent for the month, after a slight decline in February. Average hours worked were unchanged from February at 34.4.

Initial claims for unemployment insurance gained 11,000 for the week ending March 26, to hit 276,000, still a good number. Continuing claims dipped by 7,000 for the week ending March 19, to 2,173,000, also a good number.

The ISM Manufacturing Index for February increased to 51.8, back into expansion territory after five months on the dark side. The production and new orders indexes were solidly in the black. However, consistent with the monthly labor data discussed above, the employment sub-index from the ISM MF report shows ongoing job losses. It looks like the U.S. manufacturing sector is transitioning to a better place, but that may not be enough to prevent more job cuts as employers seek efficiency gains.

Construction spending decreased by 0.5 percent in February. Private residential gained 0.9 percent. Declines in manufacturing-related construction helped pull the private non-residential total down by 1.3 percent for the month. Public construction spending dipped by 2.8 percent with less spending on education projects.

The Case-Shiller U.S. National House Price Index for January gained 0.5 percent for the month and was up 5.4 percent over the previous 12 months.

Income and spending data for February were consistent with an ongoing moderate GDP expansion through the first quarter of 2016. Nominal personal income gained 0.2 percent, even with strong job growth in February. One part of income that is looking weak is interest income. Even with the small increase in the fed funds rate initiated by the Federal Reserve in December, nominal interest income was up by just 3.2 percent for the 12 months ending in February, well below the comparable statistic of 15.8 percent from January 2006. Also, dividend income has been weak, unchanged in February. Over the 12 months ending in February, nominal dividend income is down by 0.5 percent, consistent with the decline in corporate profits seen in three of the last four quarters. Over the last 12 months the headline PCE price index was up by just 1.0 percent, while the core PCE price index (less food and energy) was up by 1.7 percent. Nominal consumer spending increased by just 0.1 percent in February.

FOMC Chairwoman Janet Yellen made a speech on Tuesday that lowered expectations for fed funds rate hikes this year. Yellen focused most of her comments on downside economic risks stemming from an unsteady global economy. Her dovish speech was translated by the financial press to mean that she will indeed be slow to raise interest rates for the foreseeable future. U.S. equity prices jumped with the release of her speech on the Fed’s website and bond yields dipped.

Based on Yellen’s comments, we place the odds of an April 27 increase in the fed funds at the minimum. If there is no change in tone from the FOMC with their April 27 policy announcement, or soon following, then we will significantly diminish our expectations for a June 15 fed funds rate hike. For now, we will stick with our forecast of two fed funds rate hikes this year, one in June and one in December.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 04-01-2016.

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March U.S. Employment

Another Solid Jobs Report. No Fooling!

  • March Payroll Employment increased by a solid 215,000 jobs, just above expectations.
  • The Unemployment Rate for March ticked up to 5.0 percent with strong recent gains in the labor force.
  • Average Hourly Earnings increased by 0.3 percent, reversing the February dip.
  • Average Weekly Hours were unchanged at 34.4.

We saw more solid jobs data for March this morning with the release of the official Bureau of Labor Statistics numbers. Payroll employment increased by 215,000 jobs for the month, a little stronger than expectations. The most eye-catching part of the labor report for March was the increase in the unemployment rate from 4.9 percent in February, to 5.0 percent for March. Sometimes an increase in the unemployment rate can be a result of positive trends. We are seeing that now. Because of strong job growth over the past few years, we are seeing more people entering the workforce, either by taking new jobs or actively looking for work. For the three months ending in March, the labor force has increased by a very strong average of 508,000 workers per month. For the 12 months ending in March, the labor force numbers are up by 1.53 percent, well above population growth, telling us that an increasing percentage of working age adults are in fact working or trying to work. It would be tough to bring the unemployment rate down under these conditions even with robust job growth. Average hourly earnings increased by 0.3 percent for the month, after a slight decline in February. Over the previous 12 months, average hourly earnings were up by 2.25 percent. Average hours worked were unchanged from February at 34.4. Today’s solid jobs report for March does not change our view that a fed funds rate increase at the upcoming April 26-27 FOMC meeting is highly unlikely.

Mining and logging industries shed 12,000 jobs in March. Construction gained a strong 37,000 for the month led by residential construction trades. Manufacturing employment was noticeably weak, declining by 29,000 jobs in March, with losses concentrated in durable goods industries. The strong dollar, soft global demand and the weak energy sector are all contributing to cutbacks there. Wholesale trade added 5,500 workers. Retail trade staffed up by a strong 47,700 workers. Financial activities netted 15,000 more jobs. Professional and business services gained 33,000 new jobs. Education and healthcare gains were strong at 51,000 jobs. Leisure and hospitality didn’t slouch, adding 40,000 new jobs in March. Governments put your tax dollars to work, increasing employment by 20,000 jobs.

Market Reaction: U.S. equity markets opened with losses. The 10-Year T-bond yield is up to 1.78 percent. NYMEX crude oil is down to $36.86/barrel. Natural gas futures are up to $1.93/mmbtu.

Alert_04_01_2016_Employment

For a PDF version of this Comerica Economic Alert click here: Employment 04-01-16-.

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Comerica Bank’s Michigan Index Eases on Mixed Components

Comerica Bank’s Michigan Economic Activity Index declined in January, decreasing 1.2 percentage points to a level of 126.5. January’s reading is 52 points, or 71 percent, above the index cyclical low of 74.0. The index averaged 124.5 points for all of 2015, seven and one-tenths points above the index average for 2014. December’s index reading was 127.6.

“Our Michigan Economic Activity Index eased in January, the first decline since February 2015. Even though the index has not dipped over the previous year, it also has not elevated much, indicating that the Michigan economy is losing some economic momentum. This would be consistent with peaking auto production and increasing headwinds for other parts of the state’s vital manufacturing sector. In January, most index components declined, including state exports, initial claims for unemployment insurance (inverted), housing starts, auto production and hotel occupancy. Nonfarm payrolls, house prices and state sales tax revenues all increased for the month,” said Robert Dye, Chief Economist at Comerica Bank. “We expect to see a pattern of modest gains to the index through the remainder of this year, driven by gains in nonmanufacturing industries in Michigan.”

State_Index_Michigan_03_2016

For a PDF version of the Michigan Economic Activity Index click here: Michigan_0316.

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March ADP Jobs, January Home Prices, Yellen Speech

Jobs Growth and House Prices Support U.S. Households, Yellen Dials Back Expectations

  • The February ADP Employment Report showed a gain of 200,000 private-sector jobs.
  • The January Case-Shiller U.S. National House Price Index was up 5.4 percent from a year earlier.
  • FOMC Chairwoman Janet Yellen made a somewhat dovish speech yesterday in New York.

The March ADP jobs report showed a gain of 200,000 private sector jobs for the month. This is broadly consistent with our expectation of a 210,000 payroll job gain for March, when the official Bureau of Labor Statistics data is released on Friday morning. According to ADP, construction industries added 17,000 jobs in March. Manufacturing added 3,000. Trade/transportation/utilities employment was up by 42,000 jobs. Financial activities gained 14,000 jobs while professional/business services added 28,000. On a year-over-year basis, the ADP private sector employment series is up about 2.1 percent and looks relatively steady in that vicinity. The BLS payrolls were up by 1.9 percent for February, over the previous 12 months. The whole basket of labor market data looks good. UI claims are very low. Job openings are up. We may not see a drop in the unemployment rate in March, relative to February’s 4.9 percent, but we expect to see a downward trend in the rate this year, likely a shallower downward trend than we have seen over the past few years.

The Case-Shiller U.S. National House Price Index for January gained 0.5 percent for the month and was up 5.4 percent over the previous 12 months. House prices in Dallas gained 9.2 percent over the year. Detroit was up 7.1 percent. Los Angeles increased by 6.9 percent. Miami house prices were up by 6.8 percent. Phoenix added 6.1 percent. San Diego was up by 6.9 percent and San Francisco tops the short list, showing a 10.5 percent gain over the previous 12 months.

Yesterday, at the Economic Club of New York, FOMC Chairwoman Janet Yellen made a speech titled, “The Outlook, Uncertainty, and Monetary Policy.” Yellen began her remarks with a defense of the sentence in recent FOMC policy announcements (December, January and March) which contains the phrase “(FOMC) expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.” She called this a forecast and not a plan (emphasis hers). This was an implied justification and support of the March dot plot which is consistent with two 25-basis-point fed funds rate hikes this year. Yellen then spent the bulk of her remaining time in the speech and in the Q&A that followed highlighting downside risks to this forecast. Adverse global conditions were emphasized many times in her remarks. Yellen’s prepared remarks and responses to questions can be categorized as somewhat-to-very dovish, meaning that she will indeed be slow to raise interest rates for the foreseeable future. U.S. equity prices jumped with the release of her speech on the Fed’s website. Bond yields dipped. Based on Yellen’s comments, we place the odds of an April 27 increase in the fed funds at the minimum. If there is no change in tone from the FOMC with their April 27 policy announcement, or soon following, then we will significantly diminish our expectations for a June 15 fed funds rate hike.

Market Reaction: U.S. stock prices opened with gains. The yield in 10-Year T-bonds is up to 1.85 percent. NYMEX crude oil is up to $39.68/barrel. Natural gas futures are up to $1.99/mmbtu.

Alert_03_30_2016_ADP_Employment

For a PDF version of this Comerica Economic Alert click here: ADP 03-30-16.

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Comerica Bank’s Texas Index Weighed Down by Weak Energy Sector

Comerica Bank’s Texas Economic Activity Index fell in January, decreasing 0.4 percentage points to a level of 92.6. January’s reading is 20 points, or 27 percent, above the index cyclical low of 72.8. The index averaged 97.7 points for all of 2015, seven and three-fifths points below the average for full-year 2014. December’s index reading was 92.9.

“Our Texas Economic Activity Index declined again in January, down for 14 out of the last 15 months. Most index components have been consistently weak during that period, including state exports, unemployment insurance claims (inverted), rig count and hotel occupancy. Housing starts and state sales tax revenues have been mixed. Two index components have remained positive since the end of 2014 despite the drag from the depressed energy sector. They are house prices and payroll employment. The difference in the trends of the eight index components over the past 15 months shows the complexity and the resiliency of the state economy,” said Robert Dye, Chief Economist at Comerica Bank. “The improvement in oil prices, from late February through March, is good news for Texas, if prices hold up. This is not a sure thing, but we are hopeful that firmer oil prices will add support to the beleaguered energy sector this year.”

State_Index_Texas_03_2016

For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0316.

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Comerica Bank’s California Index Increases Again

Comerica Bank’s California Economic Activity Index grew in January, increasing 0.3 percentage point to a level of 121.3. January’s reading is 37 points, or 44 percent, above the index cyclical low of 84.1. The index averaged 119.9 points for all of 2015, six and two-fifths points above the average for all of 2014. December’s index reading was 121.0.

“Our California Economic Activity Index increased again in January, marking the fourth consecutive monthly gain, and counteracting the small losses from last summer. Four index components were positive for the month, including payroll jobs, housing starts, house prices and hotel occupancy. The four declining components were state exports, initial claims for unemployment insurance (inverted), defense spending and the NASDAQ 100 stock price index,” said Robert Dye, Chief Economist at Comerica Bank. “The state’s recent move to increase the minimum wage to $15 per hour by 2020 is not expected to be a significant drag on economic activity this year.”

State_Index_California_03_2016

For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0316.

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