Comerica Economic Weekly

Expectations for a fed funds rate hike at the upcoming May 2-3 Federal Open Market Committee meeting remain muted. According to the fed funds futures market, the implied probability of a 25 basis point rate hike on May 3 is just 6 percent. The FOMC ‘s June 13-14 meeting is in play for a rate hike, with the implied probability up to about 62 percent.

The Fed’s recent March 15 “dot plot” is consistent with two more 25 basis point rate hikes this year, for a total of three by year end. If we do have a June 14 rate hike, that will reinforce the cadence of one rate hike every other FOMC meeting, occurring on FOMC meetings that have a scheduled news conference. This cadence was established with the December 14, 2016 fed funds rate hike, followed by the March 15, 2017 rate hike.

This cadence is not set, but it shows that the Fed has some communication to do in order to establish expectations for the second half of the year since the cadence must change if they stick with only three rate hikes this year. Various Fed officials, including Chairwoman Janet Yellen, Vice-Chairman Stanley Fischer, and regional Fed presidents Williams, Evans, Rosengren, Dudley and Bullard all made comments this week. Their comments collectively suggest that there is an active debate within the Fed about what to do in the second half of 2017.

Inflation and inflation expectations figure large in that debate. The February income and spending data shows that a closely watched gauge of inflation, the personal consumption expenditure price index, increased by 0.1 percent in February after a large 0.4 percent gain in January. The core PCE price index (excluding food and energy) gained 0.2 percent in February. Over the previous 12 months the headline PCE price index was up by 2.1 percent and the core PCE price index was up by 1.8 percent. So it is fair to say that inflation indicators are closing in on the Fed’s near-2-percent target.

The recent swing in energy prices will factor into inflation indicators through the summer. WTI crude oil dipped below $48 per barrel last week, hitting a daily average low of $47.70 on March 23. Since then we have seen a rally in oil prices back up to just over $50 per barrel. Higher oil prices would add to the pressure on broad inflation indicators, possibly tilting the Fed toward a total of 4 rate hikes this year. Weaker oil prices suggest the opposite, favoring just three rate hikes this year.

Also in the income and spending data for February we see that nominal income was up by 0.4 percent for the month, while inflation-adjusted after-tax income gained a moderate 0.2 percent. Consumers held on to their gains as inflation-adjusted spending fell by 0.1 percent in February, giving the personal saving rate its second straight monthly increase, hitting 5.6 percent. Consumer spending was weighed down by stable auto sales and by warm winter weather which held down spending on utilities.

Other economic data from this week was generally favorable. House prices remain strong (see graph next page). Unemployment insurance claims remain very low through March 25. Consumer confidence spiked in March according to the Conference Board which could factor into stronger than expected auto sales for the month.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  Comerica_Economic_Weekly_ 03312017.

 

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Comerica Bank’s Florida Index Rises Again

Comerica Bank’s Florida Economic Activity Index grew in January, up by 1.7 percentage points to a level of 163.8. January’s index reading is 86 points, or 110 percent, above the index cyclical low of 78.1. The index averaged 155.3 in 2016, seventeen and one-tenth points above the average for all of 2015. December’s index reading was 162.1.

“The Comerica Bank Florida Economic Activity Index climbed for the fifth consecutive month in January. Five index components were positive for the month, including nonfarm payrolls, state exports, unemployment insurance claims (inverted), housing starts and home prices. State sales tax revenue eased, as did hotel occupancy. Airport enplanements were unchanged. According to the State of Florida, overseas visitation to the state was down by 2.6 percent in 2016, including a large drop in visitors from Brazil. There is concern that tighter border controls could weigh on international visitation in 2017,” said Robert Dye, Chief Economist at Comerica Bank. “After increasing through the second half of 2016, the value of the dollar has been stable to down over the past three months, good news for Florida tourism.”

For a PDF version of the Florida Economic Activity Index click here:   Florida_Index_0317.

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Comerica Bank’s Arizona Index Eases

Comerica Bank’s Arizona Economic Activity Index declined 0.2 percentage points in January to a level of 112.3. January’s index reading is 35 points, or 46 percent, above the index cyclical low of 77.0. The index averaged 110.3 points for all of 2016, three and two-fifths points above the average for 2015. December’s index reading was 112.5.

“The Comerica Bank Arizona Economic Activity Index decreased slightly in January, breaking a string of seven consecutive monthly gains that began in June 2016. Three out of eight components increased in January, including initial unemployment claims (inverted), home prices and airport enplanements. State exports, housing starts and hotel occupancy all declined, while nonfarm employment and sales tax revenue were unchanged. The January Arizona Index reflects a mixed group of signals for the Arizona economy. After strong growth through most of 2016, the pace of net job creation in the state fell off from October through January,” said Robert Dye, Chief Economist at Comerica Bank. “We expect the Arizona economy to continue to expand at a moderate pace through 2017, but the mixed signals in January show that Arizona is still vulnerable to economic headwinds.”

For a PDF version of the Arizona Economic Activity Index click here:  Arizona_Index_0317.

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Comerica Bank’s California Index Improves

Comerica Bank’s California Economic Activity Index grew by 0.2 percentage points in January to a level of 127.0. January’s reading is 43 points, or 51 percent, above the index cyclical low of 84.1. The index averaged 122.4 points for all of 2016, two and three-fifths points above the average for all of 2015. December’s index reading was 126.8.

“Our California Economic Activity Index increased in January for the 10th month in a row. Graphically we can see that the pace of increase has slowed in recent months. Moreover, in January, index components were mixed, with five up and three down. Gainers for the month were nonfarm employment, state exports, defense spending, home prices and the tech stock index. Losers for the month were unemployment insurance claims (inverted), housing starts and hotel occupancy. Job growth is cooling in the state, with the year-over-year gain in January down to 2.1 percent, still above the U.S. average of 1.6 percent for January,” said Robert Dye, Chief Economist at Comerica Bank. “We expect to see ongoing moderate growth in the California economy this year supported by increased business investment in technology and a strengthening single-family housing market.”

For a PDF version of the  California Economic Activity Index click here:  California_Index_0317.

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Comerica Bank’s Michigan Index Inches Up

Comerica Bank’s Michigan Economic Activity Index grew just 0.1 percentage points in January to a level of 130.1. January’s reading is 56 points, or 76 percent, above the index cyclical low of 74.1. The index averaged 127.8 points for all of 2016, four and one-fifth points above the index average for 2015. December’s index reading was 130.0.

“The Comerica Bank Michigan Economic Activity Index increased just slightly in January, and is essentially stagnant at a value of 130 from November through January. Index components were about evenly matched in January, with four up and four down. The gainers were nonfarm employment, state exports, home prices and state sales tax revenues. The losers were unemployment insurance claims (inverted), housing starts, automobile production and hotel occupancy. Automakers are revving up their plans for reinvestment in the state, which is great news. However, we view this as a force for employment stability, not necessarily for net job growth in the state. Manufacturing employment in Michigan rebounded from 2010 through 2015, supported by rebounding auto sales. However, since early 2016, Michigan manufacturing employment has flat-lined,” said Robert Dye, Chief Economist at Comerica Bank. “The surge in U.S. consumer confidence this spring may provide some near term support for auto sales.”

For a PDF version of the Michigan Economic Activity Index click here: Michigan_Index_0317.

 

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Comerica Bank’s Texas Index Sees Strongest Monthly Gain Since 2014

Comerica Bank’s Texas Economic Activity Index ticked up by 1.3 percentage points in January to a level of 93.1. January’s index reading is 20 points, or 28 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. December’s index reading was 91.8.

“The Comerica Bank Texas Economic Activity Index increased for the fifth consecutive month in January. We believe that the recent positive performance of the index represents a fundamental turning point in the Texas economy. The state’s important energy sector is growing again in a low oil price environment as well-seasoned energy companies utilize new technologies and capture new efficiencies in their operations. Seven out of eight index components were positive in January, including nonfarm employment, state exports, unemployment insurance claims (inverted), drilling rig count, home prices and hotel occupancy. Only the state sales tax sub-index declined for the month,” said Robert Dye, Chief Economist at Comerica Bank. “We expect stabilizing conditions in the Houston area will gradually give way to renewed growth this year, eliminating a key drag on the Texas economy.”

For a PDF version of the Texas Economic Activity Index click here:  Texas_Index_0317.

 

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Comerica Economic Weekly

U.S. economic data showed mixed trends in housing and ongoing improvement in the manufacturing sector. The biggest economic news came from financial markets with some profit taking in stocks on Tuesday and from Washington where political power struggles are challenging healthcare reform.

The stall in healthcare reform suggests there is some downside risk to the pro-growth Trump Administration agenda. Healthcare impacts the budget. The budget impacts tax reform. Tax reform impacts trade policy. All the above impact the Administration’s ability to pull off a major infrastructure program.

Existing home sales fell in February by 3.7 percent to hit a 5,480,000 unit annual rate. With weaker sales, very tight inventories increased a bit, to a still tight 3.8 months’ worth. The median sales price was up 7.7 percent in February over the previous 12 months.

New home sales were better than expected in February, increasing by 6.1 percent to a 592,000 unit annual rate in a continuation of the upward trend in new home sales that began in 2011.

Initial claims for unemployment insurance for the week ending March 18 increased by 15,000, to hit 258,000, which is still a very low number. Continuing claims for the week ending March 11 fell by 39,000, to hit an even two million. Continuing claims look like they are levelling out near the late-cycle lows of 1988 and 2000.

New orders for durable goods increased by 1.7 percent in February after a 2.3 percent gain in January. Commercial aircraft orders were strong in both months. The core measure, nondefense capital goods excluding aircraft, was little changed in January and February.

U.S. and global economic fundamentals continue to look good, which should provide a floor for downward momentum in stocks.

Oversupply in the U.S. and globally is putting downward pressure on oil prices. WTI crude oil fell from over $53 per barrel in early March to about $49 in mid-March, and fell again to $47.50 at mid-week. Lower oil prices reduce inflationary pressure, suggesting marginal downside potential for Fed rate hikes.

We believe that the Fed still needs to set expectations for the second half of the year. Those expectations will be shaped in part by oil and politics.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 03242017.

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February New and Existing Home Sales, March UI Claims

New Home Sales Strong in February

  • New Home Sales increased by 6.1 percent to a 592,000 unit annual rate.
  • Existing Home Sales fell by 3.7 percent in February to a 5,480,000 unit annual rate.
  • Initial Claims for Unemployment Insurance gained 15,000 for the week ending March 18, to hit 258,000.

Tight supply, higher prices and high mortgage rates are constraining the market for existing homes and fostering strong demand for new homes. Mortgage rates ticked up at the end of December, consistent with expectations of tighter Federal Reserve monetary policy this year. The Fed raised the fed funds rate range on March 15 by 25 basis points to 0.75-to-1.00 percent. According to the Freddie Mac mortgage market survey, the commitment rate on a 30-year fixed-rate mortgage increased again for the week of March 16, to 4.30 percent, and then eased to 4.23 percent for the week of March 23.

Existing home sales fell in February by 3.7 percent to hit a 5,480,000 unit annual rate. Sales fell most in the Northeast, down 13.8 percent for the month. The Midwest was down 7 percent. The West lost 3.1 percent while sales in the South increased by 1.3 percent. With weaker sales, very tight inventories increased a bit, to a still tight 3.8 months of supply at the February sales rate. The median sales price of an existing home was up 7.7 percent in February over the previous 12 months according to the National Association of Realtors.

New home sales were better than expected in February, increasing by 6.1 percent to a 592,000 unit annual rate. This is the second best monthly sales figure since the end of the Great Recession. It shows a continuation of the upward trend in new home sales that began in 2011. New home sales in the Northeast dropped by 21.4 percent in February. However, the Midwest saw a 30.9 percent increase. The West gained 7.5 percent and the South was up 3.6 percent. The months’ supply of available new homes for purchase decreased marginally to 5.4 months’ worth. The median sale price of a new home was down by 4.9 percent in February from 12 months earlier. This does not reflect weakness in the market. Rather, it shows a shift toward more affordable homes by builders and it also reflects the changing geographic mix of homes sold.

Initial claims for unemployment insurance for the week ending March 18 increased by 15,000, to hit 258,000, which is still a very low number. Continuing claims for the week ending March 11 fell by 39,000, to hit an even 2 million. Continuing claims look like they are leveling out near the late-cycle lows of 1988 and 2000.

Market Reaction: U.S. equity markets opened with gains. The 10-year Treasury bond yield is up to 2.41 percent. NYMEX crude oil is down to $47.85/barrel. Natural gas futures are up to $3.10/mmbtu.

For a PDF version of this Comerica Economic Alert click here: New_Home_Sales_0323017.

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From the Desk of Robert Dye

Along with the highly anticipated monetary policy statement of March 15, when the Federal Reserve announced that they were increasing interest rates for the third time in this tightening cycle, the Federal Open Market Committee also issued an updated “dot plot” and updated economic projections. Both the dot plot and the economic projections were little changed from December when they were judged to be consistent with three fed funds rate hikes in 2017. So the Fed wants us to expect two more rate hikes before the end of this year. However, with the March 15 rate hike, the Fed established the pacing of one 25 basis point rate hike every other meeting, occurring on meetings when there are scheduled press conferences. The Fed is not bound to that pacing, but that is what financial markets now expect them to do. The implied odds of a rate hike happening at the conclusion of the next Federal Open Market Committee meeting on May 3 are very low, at about 6 percent according to today’s fed funds futures market. The odds of the next rate hike, coming with the every-other-meeting pacing, that is on June 14, are reasonably high already at about 58 percent.

Given that financial markets are leaning toward a June rate hike, what then comes next? There are four more FOMC meetings after June: July 25-26, September 19-20, October 31-November 1 and December 12-13. The Fed has two obvious choices with this schedule: either (1) change the pattern of every-other-meeting rate hikes, or (2) have more rate hikes. We assume that the Fed has left the second half of 2017 ambiguous because of the uncertainty associated with Trump Administration fiscal policy. If it looks like the Trump Administration is making good progress toward real economy stimulus through tax reform, budget initiatives, regulatory rollback and/or infrastructure programs, we could expect the Fed to maintain the every-other-meeting pacing of interest rate hikes through the second half of the year, for a total of four rate hikes this year. Conversely, a stalled out Trump Administration means the Fed could reset pacing and only initiate one rate hike in the second half of the year. We expect the Fed to clarify the pacing for the second half of the year before they go into their media black-out period in early June, prior to the June 13-14 FOMC meeting, otherwise financial markets could react adversely to the increasing uncertainty about Fed policy.

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Comerica Economic Weekly

It was a busy week. A plethora of U.S. economic data was released. The Federal Reserve increased the fed funds rate and other central banks made policy announcements. Politics happened on both sides of the Atlantic. Even with all that, the U.S. economic story has not changed much. We still expect to see a stronger U.S. economy this year. There is still fiscal policy uncertainty. The Fed is still tightening.

The National Federation of Independent Business’s Small Business Optimism Index for February remained elevated, showing that the post-election surge in small business optimism was no fluke.

The Conference Board’s Leading Economic Index increased by 0.6 percent in February. Gains were broad-based.

Retail sales for February were weak, as expected, gaining just 0.1 percent. We knew that retail sales of automobiles would be close to neutral as unit auto sales were little changed at a 17.6 million unit rate in February.

Housing starts increased in February, propelled by a strong 6.5 percent increase in single-family starts to an 872,000 unit annual rate. This is the strongest single-family construction rate since October 2007. Permits for new residential construction eased by 6.2 percent in February, weighed down by a drop in multifamily permits. According to the National Association of Home Builders, builder confidence jumped to a 12-year high in March.

Initial claims for unemployment insurance dipped by 2,000 for the week ending March 11, to hit 241,000. Continuing claims fell by 30,000 to hit 2,030,000 for theweek ending March 4. These are very good numbers indicating tight labor market conditions.

The Job Openings and Labor Turnover Survey for January also showed ongoing strength in the labor market. The rate of job openings was unchanged in January at 3.7 percent.

Overall consumer prices increased by 0.1 percent in February, a little more than expected given the small drop in energy prices. Over the 12 months ending in February, the headline CPI was up by 2.7 percent. The year-over-year growth rate is elevated primarily as a result of the very weak oil prices this time last year.

The Producer Price Index for Final Demand increased by a strong 0.3 percent in February. Over the last 12 months core PPI is up 1.8 percent, while the headline PPI has gained 2.2 percent.

Business inventories increased by 0.3 percent in January, suggesting that inventories will provide support to headline GDP for the first quarter of 2017.

Industrial production was unchanged in February after dipping slightly in January. Warm weather reduced utility output for the second month in a row.

The New York Fed’s Empire State Manufacturing Survey ticked down slightly, but showed ongoing improvement in area manufacturing conditions in March. The Philadelphia Fed’s Manufacturing Business Outlook Survey also showed a modest dip to a still-strong level.

President Trump unveiled his “skinny” budget proposal. Congress has a lot of work to do on that and on healthcare. The Dutch kept Prime Minister Mark Rutte’s center-right party in power.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 03172017.

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