February U.S. Employment

 Last Hurdle Cleared for March 15 Fed Rate Hike

  • Payroll Employment increased by 235,000 jobs in February.
  • The Unemployment Rate for February dipped to 4.7 percent.
  • Average Hourly Earnings increased by 0.2 percent for the month, the average workweek was unchanged.

The official count of payroll jobs for February showed a solid net gain of 235,000, consistent with a variety of other strong labor market indicators. The household survey of employment was also strong, showing a net gain of 447,000 net new jobs after weak results for three out of the previous four months. The bounce-back in employment in the household survey brought the unemployment rate back down to 4.7 percent, after ticking up to 4.8 percent in January. The labor force numbers were also strong, increasing by 340,000, which brought the overall labor force participation rate up to 63.0 percent. Average hourly earnings were not as strong as we expected, increasing by 0.2 percent for the month, and 2.8 percent over the previous 12 months. The average workweek was unchanged at 34.4 hours.

Gains in the establishment data were strong in blue-collar industries. Mining and logging industries increased employment by 9,000 jobs in February, consistent with the increased drilling rig count. Construction was up a strong 58,000. Manufacturing also showed a strong gain of 28,000 net new jobs for the month. Retail trade was weak, losing 26,000 jobs in February, consistent with several announcements of retail store closings after a disappointing shopping season at the malls. Transportation and warehousing added 8,800 jobs. Utilities lost 1,000 jobs. Financial services employment increased by 7,000 jobs. Professional and business services added 37,000 jobs. Education and healthcare gained a vigorous 62,000 net new jobs. Leisure and hospitality employment was up by 26,000 jobs. Government employment increased by 8,000 jobs, held in check by the federal government hiring freeze.

Today’s favorable jobs data was the last hurdle for the Federal Reserve to clear before they announce a 25 basis point increase in the fed funds rate range on Wednesday, March 15.  The Fed will also release a new “dot plot” and economic projections on Wednesday, and Janet Yellen will have a press conference. With a fed funds rate hike next week a near certainty, the focus is now on forward guidance. If the Fed hikes on Wednesday they will have begun a pattern of raising interest rates every other meeting, and on meetings that coincide with scheduled press conferences.  So analysts will be looking for clues in the policy announcement, in the dot plot and in Janet Yellen’s answers to reporters’ questions about the pacing of interest rate hikes for the remainder of this year. The December 2016 dot plot was consistent with three rate hikes for 2017. We could see the March dot plot shift upward, to be consistent with four rate hikes in 2017. The minutes of the March 14/15 FOMC meeting should prove interesting when they are released on April 5.

Market Reaction: U.S. equity markets opened with gains. The 10-Year T-bond yield is down to 2.59 percent. NYMEX crude oil is up to $49.35/barrel. Natural gas futures are up to $3.09/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Employment_03102017.

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February ADP Jobs, Q4 Productivity

Strong Job Gains Reinforce High Odds of March 15 Rate Hike

  • The February ADP Employment Report showed a strong gain of 298,000 private-sector jobs for the month.
  • Productivity increased in 2016Q4 at a 1.3 percent annualized rate.

The ADP National Employment Report for February showed a larger-than-expected increase of 298,000 private-sector jobs for the month. Given the federal government hiring freeze, we will take the ADP number as a first approximation for the official Bureau of Labor Statistics payroll job count for February, to be released this Friday morning. The ADP and BLS numbers do not have to line up for any given month, but they are well correlated over time. Last Friday we estimated a gain of 190,000 payroll jobs for the month of February in the BLS data. It now looks like we should increase our estimate substantially. A strong net increase of payroll jobs in February will provide further justification to the Federal Reserve for a March 15 fed funds rate hike. The implied probability of a March 15 fed funds rate hike is now 88.6 percent according to the CME Group. We expect the implied probability to remain very high after the Friday morning BLS data release. We will get no more communication from Federal Reserve officials until the March 15 monetary policy announcement. According to ADP, resources and mining companies added 8,000 jobs in February, consistent with the increasing drilling rig count. Construction was very strong, adding 66,000 jobs. Manufacturing was also strong, up 32,000 jobs in February. Trade/transportation/utilities gained 9,000 jobs. Information services was up 25,000. Financial services employment increased by 4,000 jobs. Professional and business services employment increased by 66,000 jobs. Education and healthcare added 40,000, as did leisure and hospitality industries.

Productivity growth in the U.S. dipped in the fourth quarter of 2016 to 1.3 percent, after growing at a 3.3 percent annualized rate in 2016Q3. Productivity growth has been a focus of economists recently for two key reasons. First, high productivity growth means that wage gains do not necessarily cut into corporate profits, and so are not necessarily inflationary. A period of low productivity growth, such as we have now, increases the propensity for wage gains to fuel price gains. This factors into the Federal Reserve’s calculation for the need to increase the fed funds rate this year, to reposition monetary policy ahead of increasing inflation expectations. The other reason for the keen interest in productivity growth now is that productivity growth is half of the calculation for potential GDP growth. The other half is labor force growth. It is a goal of the Trump Administration to increase U.S. GDP growth on a sustained basis. This will be difficult if the productivity numbers remain subdued.

Market Reaction: U.S. equity markets opened with gains. The yield in 10-Year T-bonds is up to 2.56 percent. NYMEX crude oil is down to $52.59/barrel. Natural gas futures are up to $2.91/mmbtu.

For a PDF version of this Comerica Economic Alert click here: ADP_03082017.

 

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Comerica Economic Weekly

It was early March Madness at the Federal Reserve as team Yellen exerted a full court press to pull interest rate hike expectations forward. They succeeded. Yellen capped a flurry of Fedspeak this week with her speech today saying that a fed funds rate hike on March 15 will likely be appropriate. Interest rates increased through the week and U.S. equity markets remained stable after strong recent gains, giving the Fed the green light for a near-term rate hike. The Fed goes into their pre-meeting communication blackout period tomorrow, so we will not hear anything more from team Yellen. The last major data point to digest before the March 14/15 FOMC meeting will be the February employment report, due out 7:30 am central time on Friday, March 10. A solid job gain for the month of February, of at least 120,000 net new jobs, plus a reasonable gain in average hourly earnings, after January’s weak increase, would seal the deal.

Economic data this week was mixed, and suggests that the curse of weak Q1 GDP may be back with us this year. We will likely be revising our estimate of first quarter real GDP growth downward in our upcoming March U.S. Economic Outlook. However, this does not change our view that the U.S. economy is gaining momentum.

The income and consumer spending numbers for January are consistent with weaker-than-expected real GDP growth. Nominal income was good, gaining 0.4 percent for the month, supported by moderate growth in wages and salaries, and strong growth in rents. However, inflation was hotter than expected and ate up the gain. The personal consumption expenditure price index gained 0.4 percent for the month. Consumer spending was challenged by the reset in auto sales after the December surge and warmer-than-normal temperatures. After adjusting for inflation, real consumer spending fell by 0.3 percent in January, which will be a drag on Q1 GDP.

U.S. auto sales were unchanged at a 17.6 million unit pace in February with strong dealer incentives. This is a good number, and sales are holding up better then expected, but total Q1 sales will likely step down from Q4.

The value of construction put in place fell by 1.0 percent in January as total public construction dropped by 5.0 percent. Private nonresidential was unchanged. Private residential increased by 0.5 percent, despite the small dip in housing starts for the month.

Now for the good economic news. The ISM Manufacturing Index for February increased to a strong 57.7 percent. Nine out of 10 sub-indexes were above 50 and most increased in February. The new orders index was robust at 65.1 percent. Production was not far behind at 62.9. Employment was solid at 54.2. Anecdotal comments were positive. Seventeen out of 18 industries reported growth in February; only furniture reported contraction.

The ISM Non-Manufacturing Index increased to a strong 57.6 percent in February. All 10 sub-indexes were positive. Most industries reported growth.

Unemployment insurance claims through February are trending down to exceptionally low levels. Initial claims for unemployment insurance for the week ending February 25 fell by 19,000 to hit 223,000, the lowest level since March 31, 1973.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 03032017.

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February ISM MF Index, Jan. Income, Construction Spending, Fedspeak

Likelihood of a March 15 Fed Rate Hike Climbing Quickly

  • The ISM Manufacturing Index increased to 57.7 in February.
  • U.S. Personal Income increased by 0.4 percent in January.
  • The Personal Consumption Expenditure Price Index jumped by 0.4 percent in January.
  • After inflation, Real Consumer Spending fell by 0.3 percent in January.
  • Construction Spending declined by 1.0 percent in January.
  • We now expect a March 15 fed funds rate hike.

The gears are turning today as the world digests President Trump’s first address to Congress, U.S. economic data begins to shape Q1 GDP expectations and Federal Reserve officials hint at a March 15 fed funds rate hike. The ISM Manufacturing Index for February increased to a strong 57.7 percent. Nine out of 10 sub-indexes were above 50 and most increased in February. The new orders index was robust at 65.1 percent. Production was not far behind at 62.9. Employment was solid at 54.2. Anecdotal comments were positive. Seventeen out of 18 industries reported growth in February; only furniture reported contraction.

Now comes the other hand. The income and consumer spending numbers for January are consistent with weaker-than-expected real GDP growth. The pattern of weak first quarters may still be with us. Nominal income was good, gaining 0.4 percent for the month, supported by moderate growth in wages and salaries, and strong growth in rents. However, inflation was hotter than expected and ate up the gain. The personal consumption expenditure price index gained 0.4 percent for the month. After accounting for inflation and taxes, real disposable income fell by 0.2 percent in January. We knew spending was going to be challenged by the reset in auto sales after the December surge. Added to that, it looks like warmer-than-normal temperatures (January was the third warmest globally, according to NASA) meant that spending on services, including residential heating, was unchanged for the month. After adjusting for inflation, real consumer spending fell by 0.3 percent in January, which will be a drag on Q1 GDP. Inflation was warm even outside of energy. The core PCE price index (less food and energy) gained 0.3 percent for the month. That will certainly get the Fed’s attention as they discuss interest rate policy at the next FOMC meeting over March 14 and 15.

The value of construction put in place fell by 1.0 percent in January as total public construction dropped by 5.0 percent. Almost all categories of public construction declined. Private nonresidential was unchanged. Private residential increased by 0.5 percent, despite the small dip in housing starts for the month. It is still early, but weaker than expected consumer spending and construction data are negatives for Q1 GDP. We may need to revise down our estimate of 2.2 percent real GDP growth for the first quarter. However, the strong manufacturing data implies a positive offset from business investment and inventories.

Tuesday afternoon, Bill Dudley, President of the Federal Reserve Bank of New York, gave an interview, aired by CNN, that appeared to be designed to pull fed funds rate hike expectations even more forward. Boiled down, Dudley said that conditions do not have to improve for the Fed to launch a near-term rate hike. He said we are already on the trajectory that would necessitate a rate hike. Further, he agreed with the interviewer’s categorization of the timing of the next rate hike as “obviously fairly soon.”  Dudley is a “core” member of the FOMC and so his comments were likely coordinated with Janet Yellen. Yellen speaks on Friday, which is the last day of public commentary for the Fed before their pre-meeting media black-out period. Yellen will get the last word, which we expect to be somewhat hawkish. Yellen will stop short of committing the Fed to a March 15 rate hike on Friday because she will wait to see what the February employment report looks like when it comes out on March 10. Right now, it looks like a solid employment report with at least moderate wage growth greenlights the Fed for a March 15 rate hike.

Market Reaction: U.S. equity markets opened with gains. The yield on the 10-year Treasury bond is up to 2.46 percent. NYMEX crude is down to $53.93/barrel. Natural gas futures are up to $2.79/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  Personal_Income_03012017.

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Comerica Bank’s Arizona Index Improves

Comerica Bank’s Arizona Economic Activity Index increased in December, up 0.5 percentage points to a level of 112.1. December’s index reading is 35 points, or 46 percent, above the index cyclical low of 77.0. The index averaged 110.2 points for all of 2016, three and three-tenths points above the average for 2015. November’s index reading was 111.6.

“The Comerica Bank Arizona Economic Activity Index increased in December for the seventh consecutive month. Further, the state index has only declined once out of the last 16 months, in May 2016. We have seen steady improvement in the Arizona economy primarily reflecting ongoing job growth and firming real estate markets. Positives for December were nonfarm employment, state exports, unemployment insurance claims (inverted) housing starts and house prices. State sales tax, hotel occupancy and enplanements were negatives. It is noteworthy that the three negative factors for December are all negatively impacted by a weak Mexican peso, which makes it more expensive for people coming in from Mexico to shop and stay in Arizona,” said Robert Dye, Chief Economist at Comerica Bank. “Still, we believe that the weak Mexican peso does not represent an existential threat to Arizona’s ongoing economic expansion.”

For a PDF version of the Arizona Economic Activity Index click here: Arizona_Index_0217.

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Comerica Bank’s Florida Index Gains

Comerica Bank’s Florida Economic Activity Index improved in December, up by 2.6 percentage points to a level of 161.9. December’s index reading is 84 points, or 107 percent, above the index cyclical low of 78.1. The index averaged 155.2 in 2016, seventeen points above the average for all of 2015. November’s index reading was 159.3.

“The Comerica Bank Florida Economic Activity Index climbed for the fourth consecutive month in December after stalling at mid-year. Positives for the month were nonfarm employment, state exports, unemployment insurance claims (inverted), housing starts, home prices and state sales tax receipts. Negatives were hotel occupancy and enplanements. The strong dollar is a headwind for international tourism in Florida, but a strong U.S. economy is a counterbalancing force. Both single-family and multifamily construction rates remain well below historical averages,” said Robert Dye, Chief Economist at Comerica Bank. “Oversupply has dampened the multifamily market, but we expect single-family construction to continue to increase in Florida this year.”

For a PDF version of the Florida Economic Activity Index click here: Florida_Index_0217.

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Comerica Bank’s California Index Up Slightly

Comerica Bank’s California Economic Activity Index improved by 0.1 percentage points in December to a level of 126.5. December’s reading is 42 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. November’s index reading was 126.4.

“Our California Economic Activity Index increased in December for the ninth consecutive month. We said 10 months last time, but a data revision this month has changed the story. Most index components were positive for December, including nonfarm employment, state exports, housing starts, home prices and the technology stock price index. However, unemployment claims (inverted), defense spending and hotel occupancy dipped. State exports have generally been increasing but the strong dollar is a headwind for California’s international exports, while the weak Mexican peso is a specific headwind,” said Robert Dye, Chief Economist at Comerica Bank. “President Trump has announced his intention to significantly increase U.S. defense spending, which is a positive for the state economy.”

For a PDF version of the  California Economic Activity Index click here:  California_Index_0217.

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Comerica Bank’s Michigan Index Little Changed

Comerica Bank’s Michigan Economic Activity Index was down slightly in December by 0.1 percentage points to a level of 129.7. December’s reading is 56 points, or 75 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. November’s index reading was 129.8.

“The Comerica Bank Michigan Economic Activity Index was essentially unchanged in December, decreasing by just one-tenth of a percent. Five components were positive for the month, including nonfarm payrolls, housing starts, home prices, state sales tax receipts and hotel occupancy. The negative factors were state exports, unemployment insurance claims (inverted) and auto production. The strong dollar and uncertainty about U.S. trade agreements imply ongoing downside risk for Michigan’s international exports. However, a stronger domestic economy would be a counterweight to reduced global demand. Auto production also has downside risk with the expectation that U.S. auto sales will ease this year after the record pace of 2016. Again, a stronger U.S. economy could shift that expectation,” said Robert Dye, Chief Economist at Comerica Bank. “Higher interest rates this year are another potential headwind for Michigan, likely reducing both housing and auto affordability.”

For a PDF version of the Michigan Economic Activity Index click here:  Michigan_Index_0217.

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Comerica Bank’s Texas Index Advances

Comerica Bank’s Texas Economic Activity Index improved by 0.2 percentage points in December to a level of 91.8. December’s index reading is 19 points, or 26 percent, above the index cyclical low of 72.8. The index averaged 91.4 points for all of 2016, six and one-tenth points below the average for full-year 2015. November’s index reading was 91.6.

“The Comerica Bank Texas Economic Activity Index increased for the fourth consecutive month in December. This is the longest expansion streak for the Texas Index since mid-2014. Improving oil prices, more active oil fields and a stronger U.S. economy are the keys to better performance for the Texas economy this year. With oil prices firm through February we expect the Texas Index to continue to climb through early 2017. Even though the December increase in the Texas Index was small, most index components were positive for the month, including nonfarm employment, state exports, unemployment insurance claims (inverted), housing starts, drilling rig count, home prices and state sales tax. Only hotel occupancy declined for the month,” said Robert Dye, Chief Economist at Comerica Bank. “North Texas continues to grow strongly. As the year progresses, we expect oil-producing areas to turn the corner and join in.”

For a PDF version of the Texas Economic Activity Index click here: Texas_Index_0217.

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Comerica Economic Weekly

U.S. economic data remains positive at the end of a fairly quiet week. January housing data bounced back after a weak December. The Federal Reserve released the minutes of the January 31/February 1 Federal Open Market Committee. We heard more discussion of tax reform this week from Washington. President Trump plans to release his plan by mid-March. Treasury Secretary Mnuchin hopes to have a deal by the end of the summer.

Sales of new single-family houses increased in January by 3.7 percent, after falling in December. Still, at an annual rate of 555,000 units, new home sales in January 2017 were weaker than all but four months of 2016. Months’ supply of new homes stayed at 5.7 months’ worth. The median sales price of a new single-family house was 7.5 percent higher in January than a year ago.

Existing home sales bounced back in January, gaining 3.3 percent, to a 5,690,000 unit rate. This is the fastest sales rate since February 2007. The months’ supply of existing homes for sale has dwindled to 3.6 months’ worth over December and January, which ties the all-time low for that metric, set in January 2005. The median sale price of an existing home was up 7.1 percent in January over the previous 12 months.

Labor markets remain tight. We expect average hourly earnings to reaccelerate in the February jobs data, to be released March 10. Initial claims for unemployment insurance increased inconsequentially, by 6,000, for the week ending February 18 to reach 244,000. Continuing claims fell by 17,000 to hit 2,060,000 for the week ending February 11.

The minutes of the January 31/February 1 FOMC meeting show concern by committee members over appropriate communications strategy as they prepare to raise the fed funds rate again this year. The minutes confirm the consensus view for ongoing gradual rate hikes this year and next. Some committee members stressed that a “gradual pace” means more than one or two rate hikes this year. We expect three rate hikes this year. The next rate hike could come as early as March 15, but financial markets are still discounting that possibility. We expect the next fed funds rate hike to come on May 3. The fed funds futures market still slightly favors June 14.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  Comerica_Economic_Weekly_ 02242017.

 

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