Comerica Economic Weekly

Economic data this week are again consistent with a moderate rebound in U.S. GDP growth for the second quarter. The first estimate of Q2 GDP is due out on July 28.

Payroll employment increased by a strong 222,000 net jobs for the month. The civilian labor force showed even stronger growth, increasing by 361,000 workers for the month. This brought the unemployment rate up inconsequentially to 4.4 percent. The temporary increase in the unemployment rate is not a sign of a cooling labor market. We expect that that labor market will continue to tighten through the second half of this year. The average workweek inched up by one tenth of an hour to 34.5. Average hourly earnings increased moderately by 4 cents, or 0.2 percent.

Initial claims for unemployment insurance increased by 4,000 for the week ending July 1, to hit 248,000, staying in the very low range where they have been since the first of the year. Continuing claims gained 11,000 for the week ending June 24, to hit 1,956,000, still a very low number.

The ISM Non-Manufacturing Index increased from a positive 56.9 in May, to a strong 57.4 in June. All 10 sub-indexes were above 50, indicating improving conditions. The ISM Manufacturing Index also improved in June, climbing to 57.8, indicating strong and improving conditions in the manufacturing sector. Together, these two indexes cover a significant portion of the U.S. economy.

The U.S. international trade gap narrowed by $1.1 billion in May, to reach -$46.5 billion. Exports increased by $0.9 billion, while imports edged down by $0.2 billion. The average inflation-adjusted balance of trade in goods for April and May was a little above the first quarter average. This suggests that trade may be a modest drag on Q2 GDP growth.

Auto sales for June eased to a 16.5 million unit rate, the lowest sales rate since October 2014. The June data was not terrible, but it feeds the growing consensus that we are past peak auto for this business cycle.

Construction spending was steady in May. Declines in private residential and private non-residential projects were offset by gains in public projects.

Oil prices climbed in late June, but gave back ground in early July to hit $45 per barrel Friday morning. The U.S. drilling rig count leveled out in late June reflecting a growing expectation for “lower for longer” oil prices.

The Federal Reserve released the minutes of the June 13/14 Federal Open Market Committee meeting. The Fed minutes showed ongoing, but general, discussion about the timing of balance sheet roll-off. The minutes reinforced the consensus view that the Fed will take a pause on rate hikes until the end of this year. The next significant development is expected to be a September 20 announcement of the start of balance sheet reduction. We expect balance sheet reduction to begin in early October. The dollar amount of maturing assets not reinvested will start out low and then gradually increase over the following year.

According to the fed funds futures market, there is only a 3 percent probability of a rate hike on July 26. September 20 stays low at 14 percent. November 1 barely climbs to 15 percent. The implied probability of a December 13 rate hike jumps to about 59 percent.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 07072017.

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June U.S. Employment

June Payrolls Up by a Strong 222,000, Unemployment Rate Ticks Up to 4.4 Percent

  • Payroll Employment increased by 222,000 jobs in June, above expectations.
  • The Unemployment Rate for June increased slightly to 4.4 percent.
  • Average Hourly Earnings increased by 0.2 percent for the month; the average workweek gained 0.1 hours.

Expectations for employment growth have eased in recent months. Today’s employment report for June confounded those softer expectations, showing that payroll employment increased by a strong 222,000 net jobs for the month. Moreover, April and May payrolls were revised up by a combined 47,000 jobs. The household survey of employment was also strong, showing a net gain of 245,000 jobs. But the civilian labor force showed even stronger growth, increasing by 361,000 workers for the month. This brought the unemployment rate up slightly to 4.4 percent. This is not a sign of a cooling labor market. We expect that labor market conditions will continue to tighten through the second half of this year. The average workweek inched up by one tenth of an hour to 34.5. Average hourly earnings increased moderately by 4 cents, or 0.2 percent. So this labor report hit the trifecta, showing that more workers worked longer hours and got paid more for it. This is supportive of income growth in June and beyond, and consumer spending too. A healthy labor market combined with increasing house prices is good news for household wealth. Today’s good labor report for June is consistent with increasing real GDP growth in the recently completed second quarter. It does not alter our view that we will see no fed funds rate increase at the upcoming July 25/26 FOMC meeting. We continue to expect that the Fed will announce the beginning of balance sheet reduction at the September 19/20 FOMC meeting. We look for the next 25 basis point increase in the fed funds rate range to come at the conclusion of the December 12/13 FOMC meeting.

The establishment details in the June employment report look good. Mining and logging gained 8,000 workers despite lower oil prices in June. Construction employment was up by 16,000. Construction companies still report difficulty finding workers. Manufacturing employment gained a net 1,000 workers for the month. Wholesale trade employment was up by 10,000 jobs. Retail trade was up by 8,100. Information industries shed 4,000 workers. Financial services employment was up by 17,000. Professional and business services gained 35,000 jobs. Education and healthcare employment was up by 45,000. Leisure and hospitality gained 36,000 jobs in June. Government employment was up by a strong 35,000 workers. At the beginning and at the end of the summer, seasonal adjustment effects sometimes skew the local government numbers.

Market Reaction: U.S. equity markets opened with gains. The 10-Year T-bond yield is up to 2.38 percent. NYMEX crude oil is down to $44.58/barrel. Natural gas futures are up to $2.92/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Employment_07072017.

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June ADP Jobs, ISM Non-MFG Index, UI Claims, May International Trade

Job Growth Shifting Down from High Gear

  • The June ADP Employment Report showed a moderate net gain of 158,000 private sector jobs.
  • Initial Claims for Unemployment Insurance increased by 4,000 for the week ending July 1, to hit 248,000.
  • The ISM Non-Manufacturing Index increased to a strong 57.4 in June.
  • The U.S. International Trade Gap narrowed in May, to -$46.5 billion.

The June ADP Employment Report was a little weaker than expected, showing a net gain of 158,000 private sector payroll jobs. We may not get much help from the government sector in tomorrow’s official Bureau of Labor Statistics Employment Report. Since last October, the government sector has averaged a net loss of 1,500 payroll jobs per month. Normally, we see a gain of about 10,000 net new government sector jobs per month. According to ADP, small business job creation was weak in June, adding only 17,000 net new jobs. Medium-sized businesses (50-499 employees) added 91,000 jobs in June, while large companies added 50,000. Sector results were mixed. Natural resources/mining saw a new loss of 4,000 jobs. This coincides with a leveling out of the drilling rig count in June as oil prices eased. Construction employment was down 2,000 jobs in June. Manufacturing added 6,000 jobs despite slower auto production. Private service-providing businesses added 158,000 net new jobs, a little below the 181,000 jobs per month average since 2014. It looks like we are starting to see some evidence of a downshift in job growth beyond the idiosyncratic issues with government and goods-producing industries. Tomorrow morning we will see the official BLS employment numbers for June.

Initial claims for unemployment insurance increased by 4,000 for the week ending July 1, to hit 248,000, staying in the very low range where they have been since the first of the year. Even with a little less job growth, we are not seeing evidence of increasing layoffs. Continuing claims gained 11,000 for the week ending June 24, to hit 1,956,000, still a very low number.

The ISM Non-Manufacturing Index increased from a positive 56.9 in May, to a strong 57.4 in June. All 10 sub-indexes were above 50, indicating improving conditions. Sixteen out of seventeen industries reported growth in June. The only industry reporting contraction was Other Services. Anecdotal comments were generally positive. Labor shortages were reported in construction. Healthcare is struggling with uncertainties around federal healthcare policy.

The U.S. international trade gap narrowed by $1.1 billion in May, to reach -$46.5 billion. Exports increased by $0.9 billion, while imports edged down by $0.2 billion. The average inflation-adjusted balance of trade in goods for April and May was a little above the first quarter average. This suggests that trade may be a modest drag on Q2 GDP growth.

Market Reaction: U.S. equity prices opened with losses. The yield in 10-Year T-bonds is up to 2.38 percent. NYMEX crude oil is up to $45.78/barrel. Natural gas futures are up to $2.87/mmbtu.

For a PDF version of this Comerica Economic Alert click here: ADP_07062017.

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Comerica Economic Weekly

Economic data this week are again consistent with a moderate rebound in U.S. GDP growth for the nearly complete second quarter. First quarter real GDP growth was revised up slightly to a modest 1.4 percent annualized rate. This is still a disappointing growth rate, but the third estimate of real GDP growth for Q1 has now doubled from the 0.7 percent growth of the first estimate.

Consumer spending added just 0.75 percentage points to Q1 real GDP growth. Warm winter weather was a factor, as was the inevitable decline in auto sales from the late-2016 peak. Business fixed investment was good, supported by the increase in oil drilling activity, adding 1.23 percent points to growth. Residential fixed investment was weaker, adding only 0.48 percentage points. Inventories were a big drag, pulling Q1 real GDP growth down by 1.11 percentage points. Net exports were a small positive in Q1, adding 0.23 percentage points. Government spending was another drag, subtracting 0.16 percentage points from Q1 real GDP growth.

We expect to see more support from consumer spending, inventories and government spending in Q2. The first estimate of second quarter gross domestic product is due out on July 28. We look for a moderate uptick in real GDP growth for Q2 to about 2.5 percent.

The income and consumer spending report for May is consistent with our expectations for increased real GDP growth in Q2. With the drop in energy prices in May, the personal consumption expenditure prices index fell by 0.1 percent. This means that the 0.4 percent nominal income growth for May translates into a solid 0.6 percent increase in real disposable income for the month. Real consumer spending increased by 0.1 percent in May. The April and May consumer spending numbers are consistent with a 2.5 to 3 percent growth rate for real consumer spending in Q2. This aligns with our estimate of 2.5 real GDP growth for Q2.

The Conference Board’s Consumer Confidence Index for June increased moderately to 118.9. Consumer confidence was trending up well before the November presidential election, then it spiked after the election. Consumer confidence has eroded in subsequent months, but it remains well into positive territory.

The Case-Shiller U.S. National Home Price Index was up by 5.5 percent for the year ending in April, below expectations. Fifteen of the 20 cities in the Case-Shiller 20-City Index showed price gains for the month, but Boston, Cleveland, San Francisco, Tampa and Washington did not. We expect tight inventories to keep upward pressure on house prices in most major markets.

New orders for durable goods decreased by 1.1 percent in May, weighed down by declining orders for both commercial and defense aircraft. Core orders, defense capital goods excluding aircraft, eased back by just 0.2 percent. New orders are an important leading indicator for the manufacturing sector, but they do not factor directly into the GDP calculation. The shipments data in the same report do factor into GDP through inventories and investment numbers. Shipments of durable goods increased by 0.8 percent nominally in May.

Initial claims for unemployment insurance increased inconsequentially by 2,000, to hit 244,000 for the week ending June 24. Continuing claims also ticked up slightly, gaining 6,000 for the week ending June 17, to reach 1,948,000.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  Comerica_Economic_Weekly_ 06302017.

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Comerica Bank’s California Index Extends Gains

Comerica Bank’s California Economic Activity Index increased by 0.9 percentage points in April to reach 129.7. April’s reading is 46 points, or 54 percent, above the index cyclical low of 84.1. The index averaged 122.4 points in 2016, two and three-fifths points above the average for all of 2015. March’s index reading was 128.8.

“Our California Economic Activity Index increased in April, for the 14th consecutive month. As we have seen in recent months, the results for April were mixed, but consistent with moderate overall growth in the state economy. Five out of eight index components were positive in April. They were unemployment insurance claims (inverted), housing starts, house prices, hotel occupancy and the Nasdaq 100 Technology stock index. State exports and defense spending were negatives in April, while nonfarm payrolls were neutral. Job growth in the state has clearly slowed down in 2017. For the year ending in April, California payroll employment had gained 1.4 percent, slightly below the national average of 1.5 percent growth,” said Robert Dye, Chief Economist at Comerica Bank. “The previously red-hot San Francisco housing market is showing signs of cooling as area housing prices eased in April.”

For a PDF version of the  California Economic Activity Index click here:  California_Index_0617.

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Comerica Bank’s Michigan Index Stays in Neutral

Comerica Bank’s Michigan Economic Activity Index eased 0.1 percentage points in April to a level of 130.8. April’s reading is 57 points, or 77 percent, above the index cyclical low of 74.1. The index averaged 127.7 points for all of 2016, four and one-tenth points above the index average for 2015. March’s index reading was 130.9.

“The Comerica Bank Michigan Economic Activity Index for April was essentially unchanged from March, about where it has been for the last five months. Five out of eight index components were positive in April, including nonfarm employment, unemployment insurance claims (inverted), housing starts, house prices and hotel occupancy. State exports, auto production and sales tax receipts were negative factors for the month. We expect national auto sales for the remainder of this year to remain below last year’s record setting pace. Auto production will likely remain a slight drag on the index through the second half of this year,” said Robert Dye, Chief Economist at Comerica Bank. “As auto production has eased, so has job growth in Michigan. For the year ending in April, nonfarm payrolls were up 1.7 percent in Michigan, still above the U.S. average of 1.5 percent. However, job growth will likely fall below the U.S. average in the second half of this year.”

For a PDF version of the Michigan Economic Activity Index click here:  Michigan_Index_0617.

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Comerica Bank’s Arizona Index Increases

Comerica Bank’s Arizona Economic Activity Index rose 0.8 percentage points in April to a level of 113.0. April’s index reading is 36 points, or 47 percent, above the index cyclical low of 77.0. The index averaged 110.3 points for all of 2016, three and one-half points above the average for 2015. March’s index reading was 112.2.

“The Comerica Bank Arizona Economic Activity Index increased in April after dipping in March. Gains in April were broad-based with seven out of eight index components positive. They were nonfarm employment, state exports, unemployment insurance claims (inverted), housing starts, house prices, hotel occupancy and enplanements. Only state sales tax revenues eased in April. Job growth has been choppy since the end of 2016, but it is still above the U.S. average, up 1.9 percent for the year ending in April,” said Robert Dye, Chief Economist at Comerica Bank. “The weak peso relative to the dollar has hurt trade with Mexico and cross-border retail sales for Arizona merchants. This year the peso has been gaining strength, which is a positive for the Arizona economy.”

For a PDF version of the complete Arizona Economic Outlook, click here:  Arizona_Index_0617.

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Comerica Bank’s Florida Index Dips

Comerica Bank’s Florida Economic Activity Index decreased by 0.3 percentage points in April to a level of 164.4. April’s index reading is 86 points, or 110 percent, above the index cyclical low of 78.1. The index averaged 155.4 in 2016, seventeen and one-fifth points above the average for all of 2015. March’s index reading was 164.8.

“The Comerica Bank Florida Economic Activity Index dipped in April, breaking a long string of monthly gains. Revised economic data now show that the Florida Index increased for the 36 consecutive months prior to April. In April we see some softening of the state economy as only three out of eight index components were positive. They were unemployment insurance claims (inverted), hotel occupancy and enplanements. State exports declined in April, as did housing starts and sales tax revenues. House prices and nonfarm employment were both neutral in April. Job growth in the state is easing, but it remains well above the U.S. average. Florida payrolls were up by 2.6 percent over the 12 months ending in April,” said Robert Dye, Chief Economist at Comerica Bank. “Tampa area house prices were up 5.0 percent in April over the previous year, a little below the U.S. average of 5.5 percent growth.”

For a PDF version of the Florida Economic Activity Index click here:  Florida_Index_0617.

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Comerica Bank’s Texas Index Increases Again

Comerica Bank’s Texas Economic Activity Index increased by 1.2 percentage points in April to a level of 98.6. April’s index reading is 26 points, or 35 percent, above the index cyclical low of 72.8. The index averaged 91.3 points for all of 2016, six and one-tenth points below the average for full-year 2015. March’s index reading was 97.5.

“The Comerica Bank Texas Economic Activity Index increased for the eighth consecutive month in April. Six out of eight index components were positive, including nonfarm employment, unemployment insurance claims (inverted), rig count, house prices, state sales tax revenues and hotel occupancy. State exports and housing starts dipped for the month. The sustained broad-based positive momentum in the Texas economy has been supported by a rebound in oil drilling activity and by generally good conditions for the state’s non-energy businesses. However, the recent dip in oil prices is challenging the resurgence of the state’s energy sector. Since mid-May, the drilling rig count for Texas has stalled at about 460 active rigs, breaking the pattern of steady increases in the rig count over the last year,” said Robert Dye, Chief Economist at Comerica Bank. “Increasing demand from the improving U.S. and global economies will keep the Texas economy expanding, even if we have less of a push from energy going forward.”

For a PDF version of the Texas Economic Activity Index click here:  Texas_Index_0617.

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Comerica Economic Weekly

We attended the semi-annual meeting of the Economic Advisory Council of the American Bankers Association this week in Washington DC. This is a meeting of chief economists of major U.S. banks and financial institutions. The consensus expectation of this group was for ongoing moderate economic growth this year and next, with some boost from fiscal stimulus. The group expects that fiscal stimulus will come primarily in the form of tax reform early next year, but it will also include some net gain in government spending on infrastructure.

The EAC expects that the Federal Reserve will announce the beginning of its balance sheet reduction program in September, and will wait until December for the third and final fed funds rate increase this year. The group expects to see between two and four 25-basis-point fed funds rate increases in 2018, with some downside risk coming from lower-than-expected inflation.

The Conference Board’s Leading Economic Index increased by 0.3 percent in May, consistent with expectations for ongoing moderate GDP growth this year. Eight out of ten components of the LEI were positive, including the interest rate spread, the ISM new orders index, and consumer expectations for business conditions. Average weekly manufacturing hours were unchanged for the month. Residential building permits declined. The Coincident Economic index gained only 0.1 percent in May, consistent with easing expectations for growth in Q2. The Lagging Index also gained 0.1 percent.

Initial claims for unemployment insurance gained an inconsequential 3,000, to finish at 241,000 for the week ending June 17. Continuing claims increased by 8,000 to hit a still very low 1,944,000 for the week ending June 10.

Mortgage applications for purchase were strong in early May and then eased in the second half of the month. The data show a big jump in early June.

Existing home sales for May increased by 1.1 percent after falling in April. Existing home sales hit a 5,620,000 unit annual rate, near the long-term average. The series has been range bound since last November, showing no consistent upward momentum. The inventory of existing homes for sales inched up to a still-tight 4.2 months’ worth. Tight inventories will support ongoing price gains. The median sales price of an existing home was up by 5.8 percent over the previous 12 months.

New home sales for May also increased, gaining 2.9 percent for the month and hitting a 610,000 annual sale rate. New home sales are showing a little more upward momentum than existing home sales, but the May sales rate was still below the recent peak in February. The supply of new homes for sale remained at 5.3 months’ worth. Gains in median sales prices were looking softer this spring, but the May data shows a strong 16.8 percent increase in the median sales price of a new single-family home over the previous 12 months. This does not account for changes in the size of new homes being built.

The next meeting of the Federal Reserve’s Federal Open Market Committee is scheduled for July 25/26. We do not expect to see an interest rate hike announced at the upcoming meeting. According to the fed funds futures market, the implied probability of a July 26 rate hike is only 2.5 percent. We do expect the Fed to provide more guidance on the timing of balance sheet reduction in July. We expect the next rate hike to come in December.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  Comerica_Economic_Weekly_ 06232017.

 

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