Comerica Bank’s Arizona Index Improves

Comerica Bank’s Arizona Economic Activity Index improved in June, up 0.3 percentage points to a level of 109.5. June’s index reading is 33 points, or 42 percent, above the index cyclical low of 77.0. The index averaged 106.9 points for all of 2015, seven and one-fifth points above the average for full-year 2014. May’s index reading was 109.2.

“Our Arizona Economic Activity Index improved in June after dipping slightly in both April and May. Still, the index level for June is about where it was last February, showing that the state’s recent economic performance has been mixed. The good news is that Arizona continues to generate new jobs at a rate that is above the U.S. average. Payroll employment for Arizona in June was up by 2.9 percent over the previous year, while the U.S. average increase was 1.7 percent. In addition to payroll employment, other positives for the June Arizona Index were state exports, housing starts and hotel occupancy,” said Robert Dye, Chief Economist at Comerica Bank. “We expect the Arizona economy to continue to show at least moderate growth through the second half of the year, supported in part by more active housing markets.”

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For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0816.

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Comerica Bank’s California Index Gains Momentum

Comerica Bank’s California Economic Activity Index improved by 0.5 percentage points in June to a level of 121.0. June’s reading is 37 points, or 44 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. May’s index reading was 120.5.

“The Comerica Bank California Economic Activity Index improved in June, breaking out of the range established in June 2015. Performance was strong across most components. Nonfarm payrolls, state exports, initial claims for unemployment insurance (inverted), housing starts, defense spending and the NASDAQ 100 Technology Sector stock index all improved in June. House prices eased, reflecting cooler real estate conditions in Northern California. Hotel occupancy eased in June as well. Recent job growth has been close to the average of about 35,000 net new jobs per month since 2012,” said Robert Dye, Chief Economist at Comerica Bank. “We look for the resumption of an upward trajectory in our California Index through the second half of this year, indicating an ongoing expansion for the state economy.”

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For a PDF version of the  California Economic Activity Index click here: CaliforniaIndex_0816.

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Comerica Bank’s Michigan Index Climbs

Comerica Bank’s Michigan Economic Activity Index increased 1.9 percentage points in June to a level of 129.8. June’s reading is 56 points, or 75 percent, above the index cyclical low of 74.1. The index averaged 123.6 points for all of 2015, five and four-fifths points above the index average for 2014. May’s index reading was 127.9.

“Our Michigan Economic Activity Index climbed in June after dipping in May. The index is on an upward trajectory so far in 2016, but it has been somewhat inconsistent, not showing back-to-back gains since mid-year 2015. Six subcomponents were positive in June, including state exports, initial claims for unemployment insurance, housing starts, auto production, sales tax revenues and hotel occupancy. House prices eased while nonfarm employment was unchanged,” said Robert Dye, Chief Economist at Comerica Bank. “U.S. auto sales surged in July to a 17.9 million unit sales rate, but we expect sales to gradually ease from that strong pace, allowing U.S. auto production to ease as well.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0816.

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August ADP Jobs, Case-Shiller House Prices

Moderate Job Gains for August May not be Enough for a September Fed Rate Hike

  • The August ADP Employment Report showed a gain of 177,000 private-sector jobs for the month.
  • The Case-Shiller U.S. National House Price Index for June was up 5.1 percent over the previous year.

August job data is attracting more attention than usual as the Federal Reserve prepares for the next meeting of the Federal Open Market Committee over September 20/21. Today’s release of the ADP Employment Report for August suggests that job growth for the month may be solidly in the indeterminate zone, not strong enough to justify a decisive move by the Fed in September, and not weak enough to take that possibility completely off the table. ADP reports that 177,000 private sector jobs were added in August. If we add about 10,000 government jobs to that total we get a reasonable guess for this Friday’s official employment data from the Bureau of Labor Statistics of about 187,000 payroll jobs added to the U.S. economy in August. That would not be a bad number by any reckoning, but it would represent a reset from the robust job growth of June and July, which averaged 273,500 net new jobs per month, after a weak 24,000 job gain in May. We believe that if we see a jobs number on Friday in the vicinity of 187,000 then the Fed will not raise the fed funds rate on September 21, falling back on their wait-and-see data dependent approach toward interest rate policy. That is by no means a sure bet. We could still see a larger-than expected job gain in August in the official BLS data. Or the Fed could decide that moderate job growth in August is enough to justify a rate hike. If Janet Yellen and company are ready to pull the trigger on a September rate hike, we expect to see strong hints of that after the Labor Day holiday. The last thing that the Fed wants to do right now is surprise financial markets in a bad way. The next rate hike will be well telegraphed.

House prices in many major markets eased in June but are still up moderately over the previous 12 months. The Case-Shiller U.S. National Home Price Index increased by 0.2 percent in June, showing a 5.1 percent gain over the previous year. The 20-city data show mixed results. Gainers for the month were Charlotte, Dallas, Denver, Las Vegas, Miami, Phoenix, Portland, Seattle and Washington. Losers in June were Atlanta, Boston, Chicago, Cleveland, Detroit, Minneapolis, New York, San Francisco and Tampa. The house price indexes for Los Angeles and San Diego were unchanged. We expect to see moderate house price growth in most major markets through the second half of this year, supported by ongoing job growth, increasing wages and still-low mortgage interest rates.

Market Reaction: U.S. equity markets opened with losses. The yield in 10-Year T-bonds is down to 1.56 percent. NYMEX crude oil is down to $45.14/barrel. Natural gas futures are up to $2.86/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: ADP 08-31-16.

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July Income and Spending

Consumers Are Doing Their Part, A Good Start to Q3

  • U.S. Personal Income increased by 0.4 percent in July.
  • After inflation and taxes, Real Disposable Income also gained 0.4 percent for the month.
  • Nominal Consumer Spending increased by 0.3 percent in July as did Real Consumer Spending.

A key theme for the U.S. economy this year has been the strength of consumer spending. In the second quarter, real consumer spending increased at a strong 4.4 percent annual rate. We expect that to moderate when the third quarter data are tabulated to about 2.4 percent growth, but that would still represent a solid performance by the consumer sector. This is important because consumer spending accounts for about two-thirds of gross domestic product. So a healthy consumer sector can stabilize the U.S. economy even when other parts of the economy, such as business investment, are wobbly. Today’s income and spending report from the Bureau of Economic Analysis shows that income growth was good in July at the start of the third quarter, and that consumers are not retreating after strong spending in the second quarter. Nominal personal income for the U.S. increased by 0.4 percent in July. Stronger-than-expected job growth in June and July, plus higher wage rates, were supportive of overall wages and salaries, which account for about half of personal income. Wages and salaries increased by 0.5 percent in July. Non-wage income falls into several buckets, including employers’ contributions to pensions and insurance, proprietors’ income, rental income and transfer payments, including social security. After accounting for inflation and taxes, real disposable income increased by 0.4 percent in July. Personal taxes increased by 0.6 percent while the price index for personal consumption expenditures was unchanged for the month, meaning that consumer inflation was absent. Over the 12 months ending in July, the PCE price index was up by just 0.8 percent, while the core PCE price index (excluding food and energy) was up by 1.6 percent.

Along with good job growth and increasing wages, many consumers are feeling the support of strong gains in homeowner equity, supported by steady house price growth and low mortgage interest rates. Nominal consumer spending increased by 0.3 percent in July, buoyed by strong unit auto sales, which hit a 17.9 million unit rate for the month. Real (inflation adjusted) consumer spending also increased by 0.3 percent in July. With personal income increasing slightly more than spending, the personal saving rate increased to 5.7 percent in July. July’s income and spending numbers are consistent with our expectation of about 2.5 percent real GDP growth for the third quarter.

Market Reaction: U.S. equity markets opened with gains. The yield on the 10-year Treasury bond is down to 1.59 percent. NYMEX crude is down to $46.86/barrel. Natural gas futures are up to $2.91/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Personal Income 08-29-16.

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Comerica Economic Weekly

It was a fairly light week for data, but a heavy week for Fed-watching as the Federal Reserve Bank of Kansas City hosted their annual retreat in Jackson Hole, Wyoming, yesterday and today.

This morning, Janet Yellen delivered a speech   titled, “The Federal Reserve’s Monetary Policy Toolkit: Past, Present and Future.” The bulk of the speech focused on possible tools for the Fed for fighting the next recession. In her opening remarks, Janet Yellen made two key statements about the near-term outlook for interest rates.  First, she said, “the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time.”  Second, she continued with, “…the case for an increase in the federal funds rate has strengthened in recent months.” Yellen’s comments suggest the odds of a fed funds rate hike on September 21 have increased. We place them at about 33 percent, contingent on the August jobs data, due out next Friday.

New home sales in July beat expectations, surging by 12.4 percent to a 654,000 unit annual rate. This was the strongest sales rate since October 2007. Also, it was close to the historical monthly average of about 650,000 since the beginning of the series in 1963.

Existing home sales fell to a 5.39 million unit annual rate in July, near the series average since 1999. The months’ supply of existing homes on the market ticked up to 4.7 months’ worth, still indicative of a tight overall housing market. The median price of an existing home was up 5.3 percent in July over the previous 12 months.

Mortgage applications for refinance eased for the week ending August 19, but purchase apps were little changed after dropping by 3.9 percent for the prior week.

New orders for durable goods increased by a strong 4.4 percent in July, following a 4.2 percent drop in June. New orders for nondefense capital goods excluding aircraft (core orders) gained a healthy 1.6 percent.

Initial claims for unemployment insurance dipped by 1,000 for the week ending August 20, to hit 261,000. Continuing claims fell by 30,000 to hit 2,145,000 for the week ending August 13.

The good UI claims data suggests that August will be another solid month for job growth. The August jobs data is especially important given Janet Yellen’s speech today. We look for 175,000 jobs added, moderating after robust gains in June and July. If payroll gains remain very strong, say, north of 200,000, we believe that would significantly increase the likelihood of a fed funds rate hike on September 21.

Real GDP growth for the second quarter of 2016 was revised down slightly to a 1.1 percent annualized rate, from the previously reported 1.2 percent.

According to the University of Michigan, consumer sentiment eased slightly in August, but still remains within the “ok” range established this year.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  CMAEconWeekly 08-26-2016 1.

 

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From the Desk of Robert Dye

This morning at the annual Federal Reserve retreat at Jackson Hole, Wyoming, FOMC Chairwoman Janet Yellen delivered a speech titled “The Federal Reserve’s Monetary Policy Toolkit: Past, Present and Future.” The bulk of the speech was focused on possible tools the Fed could use to fight the next recession. In her opening remarks, Janet Yellen did make two key statements about the near-term outlook for Federal Reserve interest rate policy.  First, she said, “the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time.”  Second, she continued with, “…the case for an increase in the federal funds rate has strengthened in recent months.” Yellen’s second statement is consistent with several other recent statements by various FOMC members who said that they anticipate raising the fed funds rate in the not too distant future. So, Janet Yellen has reconfirmed her view on the appropriate path of interest rates (higher), and she has told us that we are approaching the conditions necessary for a rate hike. But she has not told us when the next rate hike will occur. The policy actions of the Yellen Fed remain highly data-dependent. I continue to believe that the August employment data, released next Friday, September 2, will be an important factor for the Fed to consider. If we see another strong month of job growth, after better-than-expected results for June and July, then the odds of a September 21 fed funds rate hike will increase. Conversely, a weaker-than-expected result next Friday would diminish the odds of a September rate hike. I believe that if we see payroll job growth north of 200,000 for August, then after the Labor Day holiday we will hear comments from various FOMC members that will more strongly hint at a September rate hike. According to the fed funds futures market, the odds of a September 21 fed funds rate hike are 18 percent. I believe that this is too low and I suggest that the odds are now closer to 33 percent.

 

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July New and Existing Home Sales

Breakout Month for New Home Sales, Existing Home Sales Slump

  • Existing Home Sales decreased by 3.2 percent in July to a 5.39 million unit annual rate.
  • New Home Sales for July surged by 12.4 percent to a 654,000 unit annual rate.

Often, new and existing home sales move in the same direction in any given month, but it is not unusual to see a divergence. This July, new home sales zigged, surging by 12.4 percent, while existing home sales zagged, decreasing by 3.2 percent. Since new home sales are only about a tenth of total home sales, the count of total home sales in July decreased by 1.8 percent. This is consistent with the pattern of mortgage applications for purchase, which was soft in July. Existing home sales fell to a 5.39 million unit annual rate in July, near the series average since 1999. Sales dipped in the Northeast, Midwest and in the South, only increasing in the West. The months’ supply of existing homes on the market ticked up to 4.7 months’ worth, still indicative of a tight overall housing market. The median price of an existing home was up 5.3 percent in July over the previous 12 months.

New home sales in July beat expectations, surging by 12.4 percent to a 654,000 unit annual rate. This was the strongest sales rate since October 2007. Also, it was close to the historical monthly average of about 650,000 since the beginning of the series in 1963. Sales jumped in the Northeast by 40 percent in July, while the South increased by 18 percent. New home sales in the Midwest were up by 1.2 percent. The West was unchanged for the month.

With both new and existing home sales near their historical averages, we can say that the housing market has shown another normalized metric. We expect solid job and income growth plus available and cheap mortgages to continue to support new and existing home sales through the remainder of this year. There is ample potential for new and existing home sales to exceed their long-term averages in 2017, helping residential investment to

Market Reaction: U.S. equity markets opened with losses. The 10-year Treasury bond yield is up to 1.56 percent. NYMEX crude oil is down to $46.60/barrel. Natural gas futures  are down to $2.83/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: New_Home Sales 08-24-16.

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Announcement: New Publications

Beginning today, Comerica’s Economics Department will be rolling out a new series of publications, a “State Economic Outlook” for each of our five markets. These new publications, quarterly in frequency, will provide analysis and economic outlook for Arizona, California, Florida, Michigan and Texas with content, models, tables and forecasts that are consistent with those of our signature U.S. Economic Update. The new state-level publications will be forward-looking. They are designed to complement  our existing monthly State Economic Activity Indexes, which provide insight on current and historical economic conditions for each state. Our hope is that the new State Economic Outlook reports will further assist our readers with keeping current on economic data and trends at the state level, as well as assisting individuals and business owners with strategic planning and decision-making.

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Florida Labor Market Draws in Workers

Strong job growth in Florida continues to boost overall economic activity and draw people into the state. The state’s payroll jobs increased by 3.5 percent in 2015, well above the overall U.S. pace of 2.1 percent. Momentum continued into 2016 as Florida added another 113,000 jobs in the first six months of the year. This helped to boost the state’s real gross domestic product by 2.1 percent in the first quarter of 2016, which was more than double that of the U.S. at 0.8 percent. The relatively stronger economic activity has helped to pull into the state, on average, an additional 270,000 people per year over the last four years. Strong labor growth, combined with improving income and more people, is a recipe for a positive outlook for the Florida economy over the next year.

The surge in jobs, and better income growth, have supported the ongoing recovery of Florida’s hard-hit housing markets. According to the Federal Housing Finance Agency’s purchase-only home price index, home prices have rebounded 54 percent from the 2011 lows. This has helped homeowners regain some of the lost equity from the recession. However, Core Logic Inc. estimates that 15 percent of Florida mortgages remain under-water as of the first quarter of 2016. There is upside potential for Florida’s housing markets beyond job-driven demand. Baby boomers are retiring and Florida remains a popular destination for retirees. Recovered investment portfolios, the ability to sell their homes and kids who are finally moving out will increase the mobility of baby boomers.

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For a PDF version of the complete Florida Economic Outlook, click here: FL Outlook 082016.

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