Comerica Bank’s Florida Index Drives Ahead

Comerica Bank’s Florida Economic Activity Index grew in November, increasing 3.6 percentage points to a level of 145.8. November’s index reading is 68 points, or 87 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. October’s index reading was 142.2.

“The Florida economy continues to show strong momentum. Our Comerica Florida Economic Activity Index increased for the 20th consecutive month in November. Gains were broad-based. Seven out of eight index components were positive. Only state exports declined in November, possibly weighed down by the strong U.S. dollar. Payroll employment growth in Florida has eased from the robust 3.7 percent year-over-year growth registered last March, to 2.9 percent growth as of December, still well above the U.S. average of 1.9 percent for December. Strong state and national job growth, increasing house prices and low energy prices are supporting household finances and Florida is a key beneficiary of that support, both through local household spending and by tourism spending,” said Robert Dye, Chief Economist at Comerica Bank. “With the national average price for regular gasoline falling to $1.83 per gallon, it’s a great time to drive to Florida.”

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For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0116.

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Comerica Bank’s Arizona Index Gains Momentum

Comerica Bank’s Arizona Economic Activity Index grew in November, increasing 0.9 percentage points to a level of 108.5. November’s index reading is 32 points, or 41 percent, above the index cyclical low of 77.0. The index averaged 99.7 points for all of 2014, four and one-fifth points above the average for full-year 2013. October’s index reading was 107.6.

“Our Arizona Economic Activity Index increased in November for the third consecutive month. Index components show a broad base of support with seven out of eight components either increasing or staying the same. Only state exports decreased, similar to a pattern seen in other states. We suspect that the strong dollar is an increasing headwind for most states. However, improving conditions for U.S. households are a major support to destination economies, including those in Arizona. Solid U.S. job gains, moderate-to-strong house price growth and low energy prices are combining to boost seasonal tourism,” said Robert Dye, Chief Economist at Comerica Bank. “We look for ongoing gains for Arizona in 2016, boosted by leisure and hospitality industries and by residential construction.”

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For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0116.

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Comerica Economic Weekly

Global equity markets rallied today after European Central Bank President Mario Draghi strongly hinted that the ECB would ramp up its asset purchase program as early as March. Draghi said yesterday that “there are no limits to how far we are willing to deploy our instruments.” The German DAX stock market index climbed through Thursday and into today. U.S. stock indexes did the same.

At about the same time oil caught a bid. The NYMEX front-month contract for WTI climbed to $31.45 a barrel. In today’s news we see Saudi Arabian officials calling the crude oil market “irrational.” To date, Saudi Arabia has been unwilling to unilaterally reduce production. Iran appears poised to increase production soon, although some experts cite technical challenges to doing so. Iran produced 3.6 million barrels per day in 2011, and is down to about 2.8 million barrels per day currently. Oil well servicer Schlumberger announced that it will cut another 10,000 jobs worldwide this year, on top of 24,000 jobs already cut, for a total of 26 percent of its workforce since late 2014.

Key global financial leaders are meeting in Davos, Switzerland through tomorrow. Despite the strenuous networking, we expect economic and financial market data to remain choppy in early 2016.

A key concern is U.S. GDP growth this winter. In our January U.S. Economic outlook we forecasted subdued real GDP growth for 2015Q4, in the neighborhood of one percent, and then show 2016Q1 bouncing back to a moderate 2.1 percent. We will get the advanced estimate of 2015Q4 GDP a week from today, on January 29. The recent pattern in the GDP data from the Bureau of Economic Analysis has been for weak first quarter GDP growth. The data is seasonally adjusted, but the pattern remains.

So with broad expectations of weak growth at the end of 2015, and the possibility of weak growth at the beginning of 2016, we have to talk about the likelihood and possible contours of a winter recession. We believe that the odds of two consecutive quarters of declining real GDP this winter are elevated, but not overwhelming, in the range of 30 to 40 percent. Further, if we do slip into recession, we expect it to be shallow and of limited duration. We do not expect financial accelerators to increase downward momentum as they did in 2008. Rather, we expect that the relative health of the household sector to act as a solid support for the U.S. economy despite the potential for soft GDP numbers.

Existing homes sales bounced back in December, increasing by 14.7 percent to a 5.56 million unit pace. Sales were weak in November due to new mortgage processing guidelines. We expect home sales to return to a gradual upward trajectory this year. But data may be choppy for another month for noneconomic reasons.

The Conference Board’s Leading Economic Index decreased by 0.2 percent in December, weighed down by weak manufacturing data, building permits, unemployment insurance claims and equity prices. The Leading Index has now been negative or unchanged for four out of the last six months. The Coincident and Lagging Indexes for December were both positive.

Initial claims for unemployment insurance increased by 10,000 for the week ending January 16, to hit 293,000. Continuing claims fell by 56,000 for the week ending January 9, to reach 2,208,000. Initial claims below 300K are still very good, but the series has trended up slightly since last October.

Housing starts eased by 2.7 percent in December to a 1,149,000 unit annual rate. The trend still looks positive. Permits for new construction eased by 3.9 percent to a 1,232,000 unit annual rate as multifamily permits backed off a November surge.

The December consumer price index declined by 0.1 percent as energy and food prices fell. The core CPI (less food and energy) gained 0.1 percent for the month, and was up 2.1 percent over the previous 12 months.

Choppy economic data, volatile financial markets and low commodity prices will make it difficult for the Federal Reserve to follow through with more interest rate increases in the first quarter of this year. We look for the next rate hike at the end of April.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 01-22-2016.

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Comerica Economic Weekly

The U.S. economic data stream so far in January has been rocky with the notable exception of the strong December jobs report. Today we see big losses in U.S. equity markets and oil prices below $30 per barrel.

The Federal Reserve finds itself at the confluence of mixed U.S. economic data, soft Chinese economic data, shaky U.S. and Chinese stock prices, a ham-fisted response by China to the stock market sell-off there, rapidly falling oil prices, a strengthening dollar and falling bond yields. Its not a pretty picture.

We ended 2015 thinking that the Fed would take a pause at the end of January, after raising interest rates in December, and then re-engage in March. But that was before the shudders of an unsettled global economy rattled financial markets.

It now looks like a March fed funds rate increase is off the table, rolling the Fed back to the April 26-27 FOMC meeting for their next opportunity to lift short term interest rates another 25 basis points.

As a consequence of a rollback to April, it is less likely that the Fed will be able to engineer four rate hikes this year. We are changing our guidance to three rate hikes for 2016, in April, July and December. We expect the fed funds effective rate to be around 1.13 percent at year end. The potential for weaker inflation and the shifting of inflation expectations downward is still a significant downside risk to our revised expectations.

The Bank of England did not follow the Fed in tightening policy at the January 13 meeting of the Monetary Policy Committee. The BOE kept its Bank Rate at 0.5 percent, citing low oil prices. The MPC said that “recent volatility in financial markets has underlined downside risks to global growth, primarily emanating from emerging markets.” The BOE gave no indication that it will be tightening policy soon.

U.S. retail sales for December fizzled, declining by 0.1 percent. Retail sales of autos did better than we expected, unchanged for the month, even though unit auto sales dropped. Gasoline station sales were again a drag. Clothing and general merchandise store sales were also weak, consistent with relatively mild December weather. The weaker-than-expected retail sales for December is a challenge to our expectations for ongoing moderate growth in consumer spending this year. But remember that consumer spending on services is about twice as large as consumer spending on durable and nondurable goods. We expect that a more secure and aging population will tend to increase spending on services, including medical services, relative to spending on goods.

Industrial production declined by 0.4 percent in December. Utility output dropped by 2.0 percent due to mild weather, the third consecutive notable drop in utility output in the fourth quarter. Manufacturing output dipped by 0.1 percent in December, matching the November decline. Motor vehicle assemblies dropped for the second consecutive month in December. Most manufacturing indicators are in retreat now as the effects of a strong dollar and weak energy sector kick in. The New York Fed’s Empire State Manufacturing Survey for January showed the weakest results since 2009 for New York area manufacturers.

The producer price index for final demand eased by 0.2 percent in December, reflecting a drop in food and energy prices. The core index for final demand goods (less food and energy) was up by 0.1 percent for the month, its first gain since last June. Over the past 12 months the PPI for final demand is down 1.0 percent but shows an increasing trend. Newfound weakness in oil prices threatens to delay normalization in price indexes, and will weigh against a near-term increase in the fed funds rate.

Initial claims for unemployment insurance increased by 7,000 for the week ending January 9th, to hit 284,000. Continuing claims added 29,000 for the week ending January 2 to hit 2,263,000. Initial claims appear to be on a slightly increasing trend after bottoming out in early October. Ongoing layoffs in the oil patch and reduced hiring in manufacturing industries may be to blame. However, the strongest increase in initial claims over the past year have been in Iowa, Massachusetts and New Jersey. Go figure.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 01-15-2016.

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From the Desk of Robert Dye

Slushy Data Will Freeze the Fed this Winter

Recent financial market volatility plus another leg down in oil prices, to near $30 per barrel for WTI, will make for an interesting discussion at the upcoming Federal Open Market Committee meeting of January 26-27th. The Fed told us in their last policy announcement that changes to interest rates this year will remain data dependent.  Important data will include “measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

Heading into the end-of-January FOMC meeting, labor market data will look strong. The December increase in payroll employment by 292,000 was robust by any measure. However, lower oil prices and soft international conditions, in the presence of a strengthening dollar, will keep inflation weak. Federal Reserve Bank of St. Louis President Jim Bullard said in speech this morning that inflation may take longer to normalize than previously thought and that inflation expectations may become unmoored. That is to say inflation expectations may be drifting lower. New international developments will also be a topic for discussion at the January FOMC meeting.  Economic data from China and from other developing economies continues to disappoint. The selloff in Chinese stocks and the ham-fisted response by the Chinese government is worrisome. Shakiness in U.S. stock prices in early January appeared to be associated with Chinese contagion. However, U.S. stock market losses this week are taking on a life of their own. Also, we expect 2015Q4 real GDP to disappoint, registering a weak 0.8 percent annualized growth.  The advance estimate of Q4 GDP will be released on January 29th, after the upcoming FOMC meeting.

FOMC chairwoman Janet Yellen has made it clear that there is no preset course for the fed funds rate beyond the expectation for a gradual increase over the course of this year. The Fed’s “dot plot” from December 16th shows the largest cluster of dots for year-end 2016 at 1.38 percent, which implies that there will be four 25 basis point increases in the fed funds rate this year. But financial markets are discounting that possibility. The fed funds futures market points to two-to-three 25 basis point rate hikes this year with the fed funds rate ending 2016 near 0.75 to 1.0 percent.  Chiding the futures markets, FOMC vice-chairman Stanley Fischer warned against underestimating the resolve of the Fed to increase interest rates this year. But Martin Feldstein argues for a quicker rate increase.

Regional Federal Reserve Bank presidents appear to be getting more conservative. San Francisco Federal Reserve Bank President John Williams said on January 4th that something in the range of three to five rate hikes this year makes sense. However, Eric Rosengren, President of the Federal Reserve Bank of Boston, warned yesterday that cooler global and economic growth could force the Federal Reserve to an even more gradual approach to interest rate increases. Moreover, Atlanta Federal Reserve President Dennis Lockhart said on Monday that there will likely not be enough positive data to support a fed funds rate hike until the end of April. We can add Larry Summers to the mix. He has long been on record saying that the global economy is too weak for the Fed to raise rates this year. But Martin Feldstein argues for a quicker rate hike.

In this slushy economic and financial market environment, prudence guides us to a more conservative view on the Fed’s ability to engineer four rate hikes this year. In our January U.S. Economic Update we towed the Fed’s line and said that we think there will be four rate hikes, beginning in March. That is looking less likely. Let’s go with three rate hikes for now, with the next one announced on April 27th.

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January 2016, Comerica U.S. Economic Update

We begin 2016 with expectations of ongoing moderate growth for the U.S. economy. Real GDP growth steps down from 2.4 percent in 2015, to about 2.1 percent for all of 2016. Strong job growth, low gasoline prices, easier mortgage credit, increasing wages and rising homeowner equity all favor the consumer sector in 2016. We expect interest rates to gradually increase over the course of the year, but slightly higher interest rates will not diminish consumer confidence. Steady consumer spending will stabilize the economy amid painful consolidation in the energy sector, headwinds for U.S. manufacturing, and economic and financial market stresses originating outside the U.S.

The Caixin China Manufacturing PMI for December registered its 10th consecutive sub-50 reading, with the December value hitting 48.2. Chinese stocks sold off on the news, souring equity markets globally. China is clearly losing steam in its manufacturing sector and likely in the rest of its economy too. The International Monetary Fund’s October 2015 World Economic Outlook shows China real GDP growth easing from 6.8 percent in 2015 to 6.3 percent in 2016. The risk for China growth appears to be weighed to the downside. Fortunately, ongoing gains in the U.S. and Eurozone economies and elsewhere will buffer some of the drag from underperforming China.

Europe has a tailwind at the start of 2016. fanned by easy monetary policy and the related drop in the euro relative to the dollar. The European Union is showing more consistent signs of growth. Third quarter 2015 real GDP growth for the EU was up by 0.3 percent over the previous quarter, the 10th consecutive quarterly gain. The Markit Eurozone manufacturing PMI for December increased to 53.2, showing improving conditions for manufacturers there. The IMF projects EU real GDP to increase by 1.6 percent in 2016. A key test for the EU may come from the United Kingdom with the promised plebiscite before the end of this year on the UK’s place in, or out of, the EU. The timing for the EU is bad. Just as the overall EU economy starts to gain traction, a key pillar of Europe is threatening to exit, reducing the psychological hurdle for other countries to do so, and reducing confidence in Europe generally.

Oil figures large in the global and U.S. outlook for 2016. Low prices are supportive of consumer spending but drag on already low inflation and capital spending. The deterioration of relations between Saudi Arabia and Iran has temporarily supported oil prices in early 2016. However, short of a significant supply disruption in the Middle East, we believe that downside risks to prices remain dominant through the first half of 2016. U.S. production will ease through the year as drilling budgets are slashed and industry consolidation continues.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate_January_2016.

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Comerica Economic Weekly

Economic data from the first week of 2016 was mixed, but ended on a high note with a very strong jobs report for December.

China dominated financial market news as weak manufacturing data there contributed to a selloff in Chinese stocks. The Caixin Manufacturing PMI eased in December to 48.2 percent. The selloff in China spooked stock markets here and in Europe. Then the clumsy reaction of the Chinese government to the stock market selloff contributed to uncertainty and volatility in global equity markets. China reacted to financial market volatility by adding more, devaluing its currency, putting upward pressure on the dollar.

The robust gain in December of 292,000 payroll jobs, plus positive revisions of 50,000 to already solid payroll numbers for October and November, show that the U.S. economy ended 2015 with at least moderate momentum that will carry over into early 2016. The workweek was unchanged and average hourly earnings were little changed. The unemployment rate held at 5.0 percent. Strong fourth quarter job growth supports the argument for an improving consumer sector in 2016.

Low gasoline prices, good house price growth and a positive trend in wages will combine to provide the U.S. economy with at least some insulation from a faltering China. Better economic data from Europe also helps to counterbalance weaker growth in China. The Markit Eurozone Manufacturing PMI increased in December to 53.2.

Complimenting the U.S. payroll data, initial claims for unemployment insurance for the week ending January 2 decreased by 10,000 to hit 277,000. Continuing claims for the week ending December 26 gained 25,000, to hit 2,230,000, still a good number.

The ISM Manufacturing Index for December eased to 48.2 percent, the second straight month below 50. The strong dollar and weak energy sector are significant headwinds of U.S manufacturing. The ISM Non-Manufacturing Index for December ticked down to a still-positive 55.3 percent. The service-sector is much larger than the manufacturing sector, so ongoing strength in the ISM Non-MF Index is reassuring.

The U.S. international trade gap narrowed in November to $42.4 billion. Even with the monthly improvement, it looks like trade is shaping up to be a small drag on real GDP growth in the fourth quarter. The advance estimate of 2015Q4 real GDP is due out on January 29th.

U.S. vehicle sales for December failed to reach very optimistic expectations after three consecutive robust months above an 18 million unit pace. The sky is not falling. December vehicles sales clocked a 17.34 million unit pace which is still a very good number.

U.S. construction spending declined by 0.4 percent in November as public spending eased.

The minutes of the Federal Open Market Committee meeting of December 15/16 show a Fed focused on inflation. Collectively, the FOMC expects inflation to firm up this year, which would call for additional increases in the fed funds rate. FOMC vice-chairman Stanley Fischer warned this week that financial markets may be under-estimating the Fed’s resolve to lift interest rates this year. San Francisco Federal Reserve Bank President John Williams said this morning that he expects about four 25 basis point fed funds rate increases over the course of 2016. We think that the next one will occur on March 16.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 01-08-2016.

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December U.S. Employment

Robust Job Gains in 2015Q4 Support Ongoing Expansion

  • December Payroll Employment increased by a strong 292,000 jobs, well above consensus expectations.
  • Already good October and November payroll levels were revised up by a total of 50,000 jobs.
  • The Unemployment Rate for December held steady at 5.0 percent.
  • Average Hourly Earnings were up 2.5 percent from a year ago.

The Average Workweek was unchanged in December at 34.5 hours.The robust job growth in December of 292,000, plus positive revisions of 50,000 to already solid payroll numbers for October and November, show that the U.S. economy ended 2015 with at least moderate momentum that will carry over into early 2016. It will also build confidence in U.S. stocks after the Chinese flu struck again this week. The workweek was unchanged and average hourly earnings were little changed. Strong fourth quarter job growth supports the argument for an improving consumer sector in 2016. Low gasoline prices, good house price growth and a positive trend in wages will combine to provide the U.S. economy with at least some insulation from a faltering China. Better economic data from Europe also helps to counterbalance weaker growth in China.

The unemployment rate for December was unchanged at 5.0 percent. Feeding into the unemployment rate calculation are the results of the household survey of employment and labor force growth. The household survey showed a strong gain of 485,000 jobs for December. That series tends to show more volatility than the payroll survey, so we expect to see some payback next month. The labor force also increased strongly in December, up by 466,000 workers. October, November and December gains in the labor force have been strong and that has kept the unemployment rate fixed at 5.0 percent over the last three months. We expect that the unemployment rate will continue to decline very soon. However, it is reasonable to expect the unemployment to decline at a slower pace going forward than it has in the recent past, as job growth draws more people into the workforce.

The payroll survey shows us the industry detail. Mining and logging gave up 8,000 jobs in December, consistent with increasing stress in oil and gas extraction. Construction added a robust 45,000 jobs, helped by warm weather. The manufacturing sector added 8,000 jobs, with gains in nondurable industries. Durable goods manufacturing shed 6,000 jobs in December. We expect to see more losses there in the months ahead. Wholesale trade employment increased by 2,400 jobs. Retail gained 4,300 jobs in December. Information services added 16,000. Financial services gained 11,000 jobs. A strong 73,000 jobs were added in professional and business services. Eds and meds gained 59,000 jobs. Leisure and hospitality industries increased employment by 29,000 jobs. The government sector added 17,000, most coming from state and local governments.

Market Reaction: U.S. equity markets opened with gains. The 10-Year T-bond yield is up to 2.15 percent. NYMEX crude oil is down to $32.96/barrel. Natural gas futures are up to $2.42/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Employment 01-08-16.

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December ADP Jobs, ISM Non-MF Index, Auto Sales, November Trade

Data Support Case for Ongoing Momentum in 2016

  • The December ADP Employment Report showed a strong increase of 257,000 private-sector jobs.
  • The ISM Non-Manufacturing Index for December dipped to a still-positive 55.3 percent.
  • December Auto Sales missed expectations, easing to a still-strong 17.34 million unit rate.
  • The U.S. International Trade Gap for November narrowed to $42.4 billion.

Recent economic data supports the case for ongoing U.S. economic momentum in 2016. Job growth is key to our assumption that the consumer sector will be healthy in 2016. We finished 2015 with a strong 257,000 job gain in the private sector according to the ADP Employment Report. On Friday morning we will get the official Bureau of Labor Statistics payroll job count and the unemployment rate for December. The ADP report is a good, but not 100 percent accurate, preview of the official data. So we expect to see a strong payroll gain in the BLS data of about 240,000 for December with the unemployment rate dropping to 4.9 percent. The ADP report showed an interesting distribution of jobs gains in December with small businesses (less than 50 employees) adding a solid 95,000 jobs for the month. Medium sized businesses (50-499 employees) added 65,000 workers. It was in large businesses (500+) that we find a surge of 97,000 workers added, extending what looks like a new trend in recent months of strong gains in large business hiring.

The ISM Non-Manufacturing Index for December dipped to 55.3 percent from November’s 55.9. The index has declined from a robust reading of 60.3 in July, but remains solidly in positive territory. Seven out of 10 sub-indexes were positive, including the hiring sub-index, which increased from 55.0 to 55.7 percent in December. Anecdotal comments were generally favorable.

Auto sales in December were expected to be robust again, above an 18 million unit annual rate. Instead, they were merely very good, at a 17.34 million unit rate. The very good sales in December capped a banner year for U.S. auto sales, very close to the peak 2000 number (or just above it, depending on the data source). It looks like robust sales through September, October and November spent out some pent-up demand. We do not take the December miss in auto sales as a sign of consumer fatigue. Rather, we expect another strong year for auto sales this year, close to last year’s strong pace.

The U.S. international trade gap narrowed in November to $42.4 billion, from October’s $44.6 billion. The improvement came as imports dropped by $3.8 billion for the month, while exports eased by $1.6 billion. The real U.S. trade gap in goods narrowed by $1.4 billion ($2009). This implies a small drag to 2015Q4 real GDP from trade unless something unusual happens in December. We expect the strong dollar to remain a headwind for U.S. exports through 2016. At the end of December, ConocoPhillips pumped crude oil from the Eagle Ford Shale into a tanker docked at Corpus Christi and bound for Italy. This is the first shipment of U.S. crude oil allowed after the ban on crude oil exports was lifted last month. Crude oil exports are not expected to eliminate our trade gap soon, but every export helps.

Market Reaction: U.S. stock prices opened with losses. The yield in 10-Year T-bonds is down to 2.19 percent. NYMEX crude oil is down to $34.50/barrel. Natural gas futures are up to $2.33/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: ADP 01-06-16.

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Comerica Bank’s California Index Flattens on Mixed Components

Comerica Bank’s California Economic Activity Index was unchanged in October, maintaining a level of 119.5. October’s reading is 35 points, or 42 percent, above the index cyclical low of 84.1. The index averaged 113.7 points for all of 2014, seven and two-fifths points above the average for all of 2013. September’s index reading was 119.5.

“Our California Economic Activity Index stabilized in October after three consecutive months of declines from July through September. Four index components were positive in October, including payroll employment, unemployment insurance claims (inverted), house price index and hotel occupancy. State exports, housing starts, U.S. defense spending and the NASDAQ 100 tech stock index were negative factors in October,” said Robert Dye, Chief Economist at Comerica Bank. “A strong positive for the state is payroll employment which has increased every month since April 2011. Consistent job growth is a strong support to California households and to the state’s housing industry.”

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For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_1215.

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