June Retail Sales, Consumer Prices, Industrial Production

Strong Consumer Spending Supported Q2 GDP

  • June Retail Sales increased by 0.6 percent, adding to expectations for a rebound in Q2 GDP growth.
  • The Consumer price Index for June gained 0.2 percent, as energy prices increased.
  • Industrial Production increased by 0.6 percent in June, as utility output warmed up.

Retail sales beat expectations, increasing by a strong 0.6 percent in June. This supports our view that the second quarter GDP numbers (advance estimate due out July 29) will show a significant pickup in growth after a mediocre 1.1 percent real GDP gain in the first quarter. The rebound in payroll job growth in June, combined with strong retail sales for the month, suggests that the concern about a sustained rapid cool down in job creation in May was overdone. Ongoing strong job growth, increasing wages and meaningful gains in homeowner equity are all supportive of retail sales. Apparently, any drag on consumer sentiment resulting from the BREXIT vote and associated financial market volatility happened late enough in the month to avoid weighing on June retail sales. If job growth and the stock market rally so far through July are sustained, then we expect BREXIT to be a non-issue for American shoppers going forward. Retail sales ex-autos were up 0.7 percent in June supported by a strong 3.9 percent increase in building materials sales. Most other sales categories were positive for the month. Gasoline station sales were up by 1.2 percent, buoyed by higher prices. Retail sales of autos and parts were up barely, gaining 0.1 percent in June even as unit auto sales eased from a 17.5 million unit pace in May to 16.7 million in June.

The consumer price index for June was up by 0.2 percent, just below consensus expectations. Over the previous 12 months, the CPI was up by just 1.0 percent, reflecting the drag from lower energy prices through early this year. The headline index in June was supported by energy prices, which increased by 1.3 percent, paced by higher gasoline prices. According to AAA, today’s national average price for regular gasoline is $2.20 per gallon, down from $2.37 a month ago. This implies that energy will be a slight drag on the CPI in July. Core CPI (all items less food and energy) also increased by 0.2 percent in June, and was up by 2.3 percent from a year ago. Medical and housing continue to drive core CPI growth. Over the 12 months ending in June, the shelter price index was up 3.5 percent and the medical care services sub-index was up by 3.8 percent.

Industrial production also did better than expected in June, up 0.6 percent. Manufacturing output gained 0.4 percent. Despite cooler auto sales, motor vehicle assemblies were up by 9.6 percent. Auto and light truck assemblies reached their third highest rate in this cycle, hitting a 12.18 million unit annual rate. Strong production and softer sales is not a positive combination for the auto industry. It may take Detroit a few more months to ease production if sales remain below the late 2015 peak. This raises the possibility of at least a small inventory correction looming for the U.S. auto industry. It is still early to call for that, but it is worth watching.

Market Reaction: Equity markets opened with gains. The 10-year Treasury yield is up to 1.58 percent. NYMEX crude oil is up to $45.92/barrel. Natural gas futures are down to $2.67/mmbtu.

Economic Alert 071516

For a PDF version of this Comerica Economic Alert click here: Retail Sales 07-15-16.

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June Producer Prices, July UI Claims, Global Monetary Policy

Energy Boosts Wholesale Inflation, Bank of England Pauses, Fed Will Too

  • The June Producer Price Index increased by 0.5 percent with gains in energy prices.
  • Initial Claims for Unemployment Insurance were unchanged, at a very low 254,000 in early July.
  • The Bank of England did not change monetary policy there, giving the Fed a little breathing room.

Producer prices warmed up in June with a push coming from petroleum products. The energy index for final demand goods increased by 4.1 percent for the month, after gaining 2.8 percent in May. The total price index for final demand goods gained 0.8 percent in July, marking the largest single-month increase in over a year, since May 2015. The price index for final demand services also gained noticeably, up by 0.4 percent. Energy products are not a part of that accounting, but transportation and warehousing services are, and that price index was up by 0.5 percent. Wholesale food prices also gained 0.9 percent in June as meat prices climbed. The headline producer price index for final demand is still tame over the last 12 months, up by just 0.3 percent. With the drop in oil prices from the high 40s in June to the mid-40s in July, we expect the headline PPI to stabilize through July and possibly August.

Initial claims for unemployment insurance were unchanged for the week ending July 9, staying at a very low 254,000. According to the Department of Labor, this marks 71 consecutive weeks of initial claims below the benchmark 300,000 level, the longest such streak since 1973. Continuing claims gained 32,000 for the week ending July 2, to hit 2,149,000, still a very low number.

Contrary to expectations, the Bank of England did not lower its benchmark lending rate today. However, the BOE’S policy statement did say that most members of the Monetary Policy Committee expect to add more stimulus in August. They need more time to come up with an appropriate response to the UK’s historic vote to leave the European Union. More stimulus could come in the form of lowering their benchmark lending rate below 0.5 percent, already a record low for the 322-year-old institution. Or they could undertake more asset purchases, or both. The British pound has been on a declining trend against the dollar since the June 23 BREXIT vote. It strengthened today on the non-action by the BOE. The Bank of Japan is widely expected to add more stimulus in the form of lower rates or more asset purchases at its next meeting which ends on July 29. This could be combined with a fiscal stimulus coordinated by Prime Minister Shinzo Abe. This is expected to reverse the recent strengthening of the yen which is a significant headwind for Japanese exports.

The U.S. Federal Reserve does not operate in a global vacuum. The expected easing by the Bank of England, the Bank of Japan and possibly the European Central Bank would all make Fed policy look relatively tighter even if the Fed does nothing. And nothing (in terms of policy changes) is what we expect the Fed to do at the upcoming FOMC meeting over July 26/27. The annual Federal Reserve retreat at Jackson Hole, Wyoming, over August 25-27, will be an opportunity for global central bankers to exchange ideas in interesting times.

Market Reaction: Equity markets opened with gains. The 10-Year Treasury bond yield is up to 1.53 percent. NYMEX crude oil is up to $45.44/barrel. Natural gas futures are down to $2.69/mmbtu.

Economic Alert 071416

For a PDF version of this Comerica Economic Alert click here: PPI 07-14-16.

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July 2016, Comerica U.S. Economic Update

The historic vote in the United Kingdom to leave the European Union sent shock waves through global financial markets, dropping sovereign bond yields and supporting the dollar relative to the pound and the euro. The discreet event is over, the incremental events are just beginning. The UK will delay invoking Article 50 as long as possible. It will be up to the next prime minister, expected to be Theresa May, to steer Britain away from the continent. When Article 50 of the EU charter is invoked a two-year clock will start ticking, defining the window for negotiations. After two years there is a hard break. The EU is expected to make negotiations as difficult as possible in order to discourage other euro skeptics from leaving. Now there are more questions than answers. Whither London? Where will be the financial capital of the EU? Can the remaining EU hold together? What is the leitmotif of the EU? Will the UK hold together? NATO? Financial markets, allergic to increasing uncertainty, shed risk and drove bond yields down, bringing the U.S. 10-Treasury bond yield to a record low of 1.35 percent in early July.

The pound sank against the dollar, now at $1.30. This will help British exports and tourism but it will also bring import price inflation. Likewise, the euro fell against the dollar, now down to $1.10. The Chinese yuan sank against the dollar. Japan is expected to act to devalue the yen. U.S. export industries face renewed headwinds from the strong dollar, and this will get the Fed’s attention. Conversely to the British experience, the strong dollar will tend to keep import price inflation in check in the U.S., circling back to Fed policy, and contributing to lower overall inflation expectations.

The stronger dollar and expectations of cooler global demand brought U.S. oil prices back down from about $50 dollars per barrel, to near $45. We continue to expect gradual tightening of the global oil market into next year, but that does not necessarily imply a monotonic increase in oil prices. The good news is that weekly drilling rig counts have flattened out with firmer pricing, and have slightly increased in many areas. However, the damage to the economies of energy producing states, including Texas, will not quickly reverse. We expect to see ongoing consolidation in the oil and gas sector through the remainder of this year. Fortunately, natural gas prices have also firmed up, now in the neighborhood of $2.80 per mmbtu.

The June payroll jobs data removed a key worry for the Fed as 287,000 net new jobs were added for the month, making the very weak May gain of just 11,000 jobs look more like an aberration, and less like a dramatic downshift in hiring. Still, we do expect to see a gradual downshift in hiring, visible through the second half of this year and into next year. Consistent gains in the labor force are expected to level out the unemployment rate between 4.5 and 4.8 percent.

Even with a firmer labor outlook, ongoing uncertainty about BREXIT and the timing of the U.S. presidential election freezes the Fed until at least late this year. Our interest rate forecast contains a fed funds rate hike in December. The fed funds futures market is inching back in that direction, now showing a 33 percent chance of at least one rate hike by December. We expect overall U.S. economic growth to remain moderate through the rest of this year. Stronger business investment with higher oil prices and less drag from inventories supports a small growth bump in early 2017.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate0716.

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June ADP Jobs, Challenger Job Cuts, July UI Claims, Fed Minutes

Multiple Data Sources Point to Steady June Job Creation after May Miss

  • The June ADP Employment Report showed a gain of 172,000 private-sector jobs.
  • The June Challenger Job Cuts Report showed a slight increase in job cuts for June to a still low level.
  • Initial Claims for Unemployment Insurance at the beginning of July fell by 16,000 to hit 254,000.

Heading into tomorrow’s release of the official Bureau of Labor Statistics June jobs data, other labor-related data looks positive. The preponderance of recent labor data is supportive of our expectation for a bounce back in payroll job creation in June after a disappointing May payroll number which showed that a meager 38,000 net new jobs were added to the U.S. economy. Yesterday, we discussed the ISM Manufacturing and Non-Manufacturing reports for June, which both showed positive employment components for the month. This morning, we see positive data from the private ADP National Employment Report for June, the private Challenger, Gray and Christmas Job-Cut Announcement Report for June and the official unemployment insurance claims data for the end of June/early July.

The ADP National Employment Report for June showed a net of 172,000 private sector jobs added to the U.S. economy for June. If we add a guestimate of 10,000 government jobs, that provides a good starting point for expectations for tomorrow’s official BLS data release of about 182,000 jobs, close to the pre-existing consensus expectations. According to ADP, construction industries shed 5,000 jobs in June. Manufacturing cut 21,000 jobs. Trade/transportation/utilities added 55,000 jobs. Financial services added 2,000. Professional/business services added 51,000. Most of the gains came from small businesses, with less than 50 employees, which added 95,000 jobs in June. Medium sized business (50-499 employees) added 52,000 jobs for the month. Large businesses added 25,000 jobs. The methodologies for the ADP Report and the BLS data are completely different and independent of each other. The now-settled Verizon strike, which involved about 39,000 workers, may have contributed to the divergence of the ADP and BLS data last month. The June BLS data should not be skewed by the Verizon strike, as workers returned to their jobs on June 1 after 45 days on the picket lines.

Normally, we do not cover the Challenger, Grey and Christmas Job-Cut Announcement Report, but this month the labor data is especially important. The Challenger Report for June shows a modest increase in announced job cuts for the month to 38,536. But this is from a very low May level of 30,157. So we can say that announced job cuts for June remain low and are consistent with ongoing moderate job creation.

Initial claims for unemployment insurance fell by 16,000 for the week ending July 2 to reach 254,000, an exceptionally low number. Continuing claims for the week ending June 25 decreased by 44,000 to hit 2,139,000, so there is no problem there.

Yesterday afternoon we saw the minutes of the Federal Open Market Committee meeting of June 14/15. The minutes showed a Fed frozen in place by the disappointing May jobs data and by concern about the potential fallout from BREXIT. A “normalish” June jobs number of about 180,000 would go a long way toward removing one key concern for the Fed. The other concern will not fade so quickly. We expect the Fed to delay any fed funds rate hikes until December at the earliest, more likely next year. There is a potential linkage between a post-BREXIT European slowdown, lower oil prices, less U.S. inflation and a flatter path for the fed funds rate.

Market Reaction: U.S. equity markets opened with gains. The yield in 10-Year T-bonds is up to 1.42 percent. NYMEX crude oil is up to $47.95/barrel. Natural gas futures are up to $2.78/mmbtu.

For a PDF version of this Comerica Economic Alert click here: ADP 07-07-16.

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June ISM Non-NMF, Auto Sales, May International Trade

Service Sector Gains Momentum at Mid-Year, June Employment Indicators Positive

  • The ISM Non-Manufacturing Index for June increased to 56.5 percent.
  • The U.S. International Trade Gap widened in May to -$41.1 billion.
  • U.S. Auto Sales for June dipped to a 16.7 million unit rate.

As we head into the second half of the year, the service sector of the U.S. economy is gaining momentum. The ISM Non-Manufacturing Index for May increased more than expected, to a solid 56.5 percent, indicating improving conditions. This is consistent with our expectation of stronger GDP growth for the just completed second quarter. Nine out of ten sub-components of the headline index were positive and eight out of nine of those were positive and improving. The only component below the break-even 50 mark was backlog of orders, which dipped to 47.5 percent. Overall business activity was strong at 59.5. New orders were also strong at 59.9. The employment sub-index flipped from a contracting 49.7 in May to an expanding 52.7 in June. That is supportive of a better payroll jobs number for June. Fifteen out of eighteen industries reported growth. Anecdotal comments were generally positive. The ISM Manufacturing Index for June, reported last Friday, also increased, climbing to a moderately expansive 53.2. The employment sub-index of the ISM MF increased to a barely positive 50.4 in June. The U.S. payroll data for June will be released this Friday morning. We expect to see a bounce back from the dismal 38,000 net new jobs added in May, to about 175,000 for June.

The U.S. international trade gap widened in May to -$41.1 billion as imports increased by $3.4 billion, while exports eased slightly, down $0.3 billion. For the year ending in May, nominal imports are down by 3.1 percent, largely reflecting the drop in oil prices from a year ago. Nominal exports are down 4.2 percent. After adjusting for price changes, the real balance of trade in goods went more negative in May. To date, trade looks to be a fairly neutral for GDP growth in the second quarter, but that could change with the June data and any revisions to May and April.

As reported last Friday afternoon, U.S. auto sales for June dipped to 16.7 million unit annual rate. This is not a bad number, but it is a clear step down from the robust 18 million unit rate from late last year. It adds weight to our characterization of peaking auto sales in the fourth quarter of last year. Also, the softer auto sales for June suggest that expectations for very strong consumer spending in the second quarter should be tempered. We expect real GDP growth in the neighborhood of 2.5 percent for Q2.

Market Reaction: U.S. equity markets opened with losses but have since recovered. The 10-year Treasury bond yield is down to 1.38 percent. NYMEX crude oil is down to $46.49/barrel. Natural gas futures are down to $2.77/mmbtu.

Economic Alert 070616

For a PDF version of this Comerica Economic Alert click here: Int Trade 07-06-16.

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Comerica Economic Weekly

This week we saw that the historic BREXIT was not the end of the world. But it was a wakeup call for global financial markets that were surprisingly complacent heading into the vote, and were surprised by the outcome. Given that it was a binary event with at least a reasonable chance of occurring, we thought that markets would be better positioned heading into the vote, but they were not. The good news is that U.S. and global equity prices are bouncing back. The sky is not falling. Now that the discreet political event has occurred with the vote, the follow-on economic events will be incremental and less disruptive. The UK is in no hurry to invoke Article 50 of the EU bylaws which starts the clock ticking for a 2-year limit to exit negotiations. They would prefer to wait until the next government is in place, possibly waiting until early next year.

U.S. economic data this week was generally positive. First quarter real GDP growth was revised up to 1.1 percent, more than double the first estimate. The Q1 GDP numbers are consistent with our expectation for a stronger GDP growth rate for the just-completed Q2, in the range of 2.5 to 3.0 percent. The cautionary note from the Q1 GDP report comes from the corporate profits numbers which are still somewhat weak. Corporate profits increased in Q1 but were 4.3 percent below the year-ago level. Profits have been impaired by weak oil prices. Energy sector profits will stabilize through the remainder of this year with firmer pricing.

Income and spending data for May were solid, building on good data for April, also supporting our expectations of a rebound in real GDP growth for Q2. Real spending gained a respectable 0.3 percent after growing by 0.8 percent in April. After adjusting for moderate inflation and a 0.2 percent increase in personal taxes, real disposable income was up by 0.1 percent for the month. With spending up more than income, the personal saving rate ticked down to 5.3 percent.

The ISM Manufacturing Index for June rose to 53.2 percent, indicating improving conditions for U.S. manufacturers. Nine out of ten sub-indexes were above 50.

U.S. construction spending declined by 0.8 percent in May. Private residential was flat, but private nonresidential and public construction both dipped.

The Case-Shiller U.S. house price index for April showed a 0.1 percent gain for the month, and was up 5.0 percent over the previous 12 months. Consistent house price appreciation is a fundamental support to the consumer sector.

Initial claims for unemployment insurance increased by 10,000 for the week ending June 25, to hit a still-low level of 268,000. Continuing claims dropped by 20,000 for the week ending June 18, to reach 2,120,000. June UI claims data are consistent with a rebound in payroll employment from the dismal May numbers.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 07-01-2016.

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Comerica Bank’s California Index Sees Spring Uptick

Comerica Bank’s California Economic Activity Index advanced 0.9 percentage points in April to a level of 120.6. April’s reading is 37 points, or 43 percent, above the index cyclical low of 84.1. The index averaged 119.8 points for all of 2015, six and two-fifths points above the average for all of 2014. March’s index reading was 119.7.

“Our California Economic Activity Index increased in April after remaining unchanged through the first quarter of the year. Still, the April index remains close to the level established back in May 2015. The biggest weight to the index over the last year has been the tech-sector stock index, which remained below its June 2015 peak through April of this year. The most consistent positive for the overall index over the last year has been payroll job growth, which has been steady and stronger than the U.S. average. For the year ending in April, California payroll employment increased by 2.9 percent, compared to the U.S. gain of 1.9 percent,” said Robert Dye, Chief Economist at Comerica Bank. “We believe that the state economy will continue to expand through the second half of this year at a moderate pace, held in check by a cooler tech-sector expansion.”

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For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0616.

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Comerica Bank’s Texas Index Increases for First Time Since September 2015

Comerica Bank’s Texas Economic Activity Index improved in April, up 0.2 percentage points to a level of 92.1. April’s reading is 19 points, or 27 percent, above the index cyclical low of 72.8. The index averaged 97.5 points for all of 2015, seven and three-fifths points below the average for full-year 2014. March’s index reading was 91.9.

“Our Texas Economic Activity Index increased slightly in April, marking the first increase since September 2015. We view this as a positive sign for the Texas economy which is still weighed down by the beleaguered energy sector. With oil prices firming near $50 per barrel after bottoming out in February, we are seeing the first signs of stability in the rig count. The last four weekly rig count totals for Texas have increased modestly after the count bottomed out for the week ending May 20th at just 173 active rigs. Despite the positive recent news from the rig count, the overall Texas economy is still underperforming. Payroll job growth appears to be trending down with only 11,900 jobs added in April and 200 jobs added statewide in May,” said Robert Dye, Chief Economist at Comerica Bank. “Even with stronger oil prices, downward momentum in the Texas economy may take some months to dissipate.”

TX Index 0616

For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0616.

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Comerica Bank’s Michigan Index Ticks Up

Comerica Bank’s Michigan Economic Activity Index climbed 1.9 percentage points in April to a level of 129.1. April’s reading is 55 points, or 74 percent, above the index cyclical low of 74.0. The index averaged 124.5 points for all of 2015, six and seven-tenths points above the index average for 2014. March’s index reading was 127.2.

“Our Michigan Economic Activity Index increased in April after dipping in March. The state’s important auto sector is not expected to increase production significantly from current strong levels and so that boost to the Michigan economy will diminish going forward. We expect growth in the second half of this year to come from the household sector, supported by ongoing job creation in services and by firming real estate market conditions. Over the 12-month period ending in April, payroll jobs increased by 2.5 percent in Michigan, well above the U.S. average of 1.9 percent,” said Robert Dye, Chief Economist at Comerica Bank. “However, going forward, we expect Michigan job growth to ease back toward the U.S. average.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0616.

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Comerica Bank’s Florida Index Resumes Gains

Comerica Bank’s Florida Economic Activity Index improved 1.3 percentage points in April to a level of 154.2. April’s index reading is 76 points, or 97 percent, above the index cyclical low of 78.1. The index averaged 138.0 in 2015, twenty and three-tenths points above the average for all of 2014. March’s index reading was 152.9.

“The Comerica Florida Economic Activity Index increased again in April. This marks the 25th consecutive month that the Florida index has either increased or stayed constant. Payroll job growth increased in Florida in April, as it has for every month since June 2011. Florida remains a growth leader in job creation. Over the year ending in April, Florida payroll employment was up by 3.2 percent, well above the U.S. average of 1.9 percent. Other index components were mostly positive in April, including house prices,” said Robert Dye, Chief Economist at Comerica Bank. “A surge in supply in the South Florida condo market may weigh on pricing in the second half of this year.”

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For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0616.

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