April PPI, Import Prices, May UI Claims

Wholesale Inflation Warmer Than Expected in April

  • The Producer Price Index for Final Demand increased by 0.5 percent in April.
  • The Import Price Index also increased by 0.5 percent in April.
  • Initial Claims for Unemployment Insurance eased by 2,000 for the week ending May 6, to hit 236,000.

Upstream inflation was a little warmer than expected in April as the Producer Price Index for final demand registered a 0.5 percent month-to-month gain. Much of the increase in the headline series came from final demand services which climbed by 0.4 percent in April. The services index was boosted by increases in the prices for brokerage, dealing, investment advice and related services. The price index for final demand goods gained 0.5 percent in April, pushed by cigarette prices and fruit and vegetable prices. The energy price index also increased, rising by 0.8 percent in April, after falling by 2.9 percent in March. Declines in jet fuel prices were countered by increasing gasoline prices. Over the 12 months ending in April, the Producer Price Index for final demand is up by 2.5 percent. Core PPI (final demand less food, energy and trade) was up 2.1 percent over the previous year.

Reported separately, the Import Price Index also increased by 0.5 percent in April. Higher imported fuel prices helped to drive the headline index higher. The dollar has been tending to ease relative to our trading partners’ currencies this year, supporting import prices.

Crude oil futures are climbing today on speculation that reduced OPEC oil production this spring has helped to put a dent in U.S. crude oil stocks. The Energy Information Agency reported that U.S. crude oil inventories dropped by 5.2 million barrels for the week ending May 5, much more than expected.

Initial claims for unemployment insurance dipped by 2,000 for the week ending May 6, to hit 236,000. Continuing claims were extremely low for the week ending April 29, falling by 61,000, to reach 1,918,000.

Firm prices and tight labor market conditions will keep the Federal Reserve on track to raise the fed funds rate range by 25 basis points on June 14, to 1.00-to-1.25 percent. According to the fed funds futures market, the odds of a June 14 rate hike are up to 83 percent.

Market Reaction: U.S. equity markets opened with losses. The yield on 10-Year Treasury bonds is down to 2.40 percent. NYMEX crude oil is up to $48.04/barrel. Natural gas futures are up to $3.36/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  PPI _05112017.

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Labor Market Dynamics, Inflation and the Fed

The U.S. unemployment rate has fallen faster than we expected. In April it dipped to 4.4 percent, pulled down by strong job growth, especially through February and March, as measured by the household survey of employment. The other input to the unemployment rate calculation is the civilian labor force. It barely increased in April, gaining only 12,000 workers, which also pulled down the unemployment rate. The unemployment rate could easily tick back up in May or June if we get a surge of labor force growth and/or job growth suddenly eases.

Looking past normal monthly fluctuations in the unemployment rate, we agree with the mainstream of macroeconomic thought that assumes the unemployment rate may go a little lower, but is getting close to bottoming out in this cycle. Typically, as the unemployment rate drops, new labor becomes more difficult to find and companies increasingly bid against each other to attract new workers. Wages begin to accelerate. Strong wage acceleration is thought to contribute to undesirable inflation, and so the Federal Reserve pre-emptively raises interest rates, adding some friction to the economy to keep it from running too strong and fueling hyperinflation.

Labor force growth itself is cyclical. During periods of strong economic growth, people who may not otherwise be employed are pulled into the labor market, either attracted by high wages or pulled in with lower barriers to entry, including lower hiring standards. It is normal to see the labor force growing faster than the rate of growth for the working age population when the economy is strong. Likewise, it is normal to see the labor force growing more slowly than the working age population, or even going negative, when the economy is weak. In recessions, inefficient companies go out of business and low productivity labor is laid off.

What we see now is that labor force growth in the first quarter of 2017 was only 0.7 percent over the previous four quarters, fairly close to the growth rate of working age population. This suggest that this economy is not yet pulling large numbers of nonworking adults, who are capable of working, into the labor force. This begs an interesting set of questions. Is there a pool of nonworking adults who are going to step in and fill the demand for new labor as the economy grows through 2017 and beyond? This would tend to keep the unemployment rate higher and allow the economy to grow with less friction in the form of higher interest rates from the Federal Reserve. We expect to see more evidence of the absorption of new workers into the labor force later this year and in 2018.

Conversely, we can also ask, is the unemployment rate going to continue to fall, making it difficult and expensive for companies to find new labor? If the unemployment rate continues to fall perhaps it could approach its post-World War II low of 2.5 percent from May 1953. The more recent low, and better comparison, is 3.8 percent from April 2000. The unemployment rate from the previous cycle bottomed out at 4.4 percent in the spring of 2007.

It looks like we will see a stronger inflationary push from wages in the near term. The Fed will use that as an opportunity to normalize monetary policy by increasing interest rates and draining liquidity with balance sheet reduction. We look for the Fed to increase the fed funds range rate by 25 basis points, to 1.00-to-1.25 percent, on June 14.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: US_Economic_Outlook_0517.

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Comerica Economic Weekly

It was a busy week for U.S. economic developments, which ended on a good note with the April jobs report.

April payroll employment growth bounced back after a weak March, showing a net gain of 211,000 jobs for the month. The U.S. unemployment rate ticked down from 4.5 percent in March, to a tight 4.4 percent in April, the lowest it has been since May 2007. Average hourly earnings increased by 0.3 percent and are up 2.5 percent over the previous 12 months. The average workweek increased by 0.1 hours to 34.4.

Other labor metrics were also good. Initial claims for unemployment insurance dropped by 19,000 for the week ending April 29. Continuing claims for the week ending April 22 fell by 23,000, to hit a very low 1,964,000.

Nonfarm business productivity decreased at a 0.6 percent annual rate in Q1, consistent with weak real GDP growth of just 0.7 percent. Stronger Q2 GDP growth will pull productivity growth back to positive.

Real disposable personal income increased by 0.5 percent in March with the help of declining energy prices. The personal consumption expenditure price index fell by 0.2 percent in March as gasoline prices declined. Real consumer spending increased by a solid 0.3 percent for the month, even as nominal spending was unchanged.

Vehicles sale for April increased to a 16.9 million unit rate. Much ink was spilled in the financial press discussing weak April auto sales, but 16.9 million is not a bad number. Still, there is concern that tightening subprime auto loan availability may weigh on sales this summer.

The ISM Manufacturing Index dipped from a strong 57.2 reading in March, to a still-positive 54.8 in April. Nine out of the 10 sub-indexes remain in expansion territory, including new orders, production and employment. Sixteen out of 18 industries reported growth. Anecdotal comments were positive. So even though auto production looks like it may have peaked for this cycle, other manufacturing industries are still feeling a tailwind from improving U.S. and global conditions.

The ISM Non-Manufacturing Index increased to 57.5 in April, indicating improving conditions in the nation’s large service sector. All 10 sub-indexes were positive. Almost all industries reported growth. Anecdotal comments were generally positive, but there was some awareness of risks and uncertainty.

The U.S. international trade gap narrowed slightly in March to -$43.7 billion. This means that trade will likely not result in a negative revision to Q1 GDP when the second estimate comes out three weeks from today.

Total construction spending eased by 0.2 percent in March. Private residential construction spending increased by 1.2 percent, driven by multifamily projects. Private nonresidential construction spending dipped by 1.3 percent as both office and commercial projects eased. Total public construction declined by 0.9 percent.

The Federal Open Market Committee met over Tuesday and Wednesday. Their monetary policy announcement was about as expected, containing no interest rate hike. The fed said that weak Q1 GDP growth was likely transitory. This kept financial market expectations focused on a June 14 fed funds rate hike. The policy announcement contained no new information about the fed’s plans for balance sheet reduction.

The final round of the French election will be on Sunday. Polling shows that former economy minister Emmanuel Macron has a significant lead over EU separatist Marine Le Pen. Puerto Rico is seeking bankruptcy-like protection casting doubt on $120 billion worth of obligations.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 05052017.

 

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April U.S. Employment

April Payrolls Gain 211,000 after a Soft March Report, Unemployment Rate Drops to 4.4%

  • Payroll Employment increased by 211,000 jobs in April. March payroll gains were revised down to 79K.
  • The Unemployment Rate for April fell to 4.4 percent.
  • Average Hourly Earnings increased by 0.3 percent for the month, the average workweek also increased.

As expected, the April payroll job count bounced back, showing a net gain of 211,000 jobs for the month, following on the heels of a weak March payroll report. In fact, the initial low estimate for March payroll gains of 98,000 net new jobs was revised down to show just 79,000 new jobs for the month. The U.S. unemployment rate ticked down from 4.5 percent in March, to a tight 4.4 percent in April, the lowest it has been since May 2007. Average hourly earnings increased by 0.3 percent and are up 2.5 percent over the previous 12 months. The average workweek increased by 0.1 hour to 34.4. So we have more people working longer hours for more pay, a positive for consumer spending, housing and related metrics.

Today’s jobs report vindicates the Fed’s policy announcement from Wednesday where they said that slow growth in the first quarter was likely to be transitory. Moreover, rising wages and tighter labor markets will get the Fed’s attention when the Federal Open Market Committee next meets over June 13/14. We expect to see a 25-basis point increase in the fed funds rate range announced at the conclusion of the next FOMC meeting over June 13/14. The fed funds futures market shows an implied probability of 78.5 percent for a June 14 rate hike.

Today’s jobs report shows strong gains in the service sector. Mining and logging industries increased their payrolls by 10,000 in April, most coming in support activities. Construction added only 5,000 net new jobs, symptomatic of tight labor conditions in that sector. Manufacturing employment increased by 6,000 jobs in April, supported by gains in nondurable manufacturing industries. Wholesale trade added 8,200 jobs. Retail trade employment increased by a tepid 6,300 jobs. Retail trade appears to be at an inflection point where many brick-and-mortar retailers are rapidly losing market share to internet-based operations. Utilities employment increased by 700 jobs in April. Information services lost 7,000. Financial services employment increased by a strong 19,000 jobs. Business and professional services employment increased by a solid 39,000 jobs. Education and healthcare gained 41,000 jobs. Leisure and hospitality was up a strong 55,000 net new jobs in April. Government employment, which has been held down by the federal government hiring freeze, bounced back in in April, gaining 17,000 net new jobs. The hiring freeze was lifted on April 12.

Market Reaction: U.S. equity markets opened with gains. The 10-Year T-bond yield is up to 2.36 percent. NYMEX crude oil is up to $45.85/barrel. Natural gas futures are up to $3.24/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Employment_05052017.

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April ISM MF Index, March Personal Income, Construction Spending

Indicators Support Stronger Outlook for Q2 GDP, Fed on Hold

  • The ISM Manufacturing Index decreased to a still-positive 54.8 in April.
  • U.S. Real Disposable Personal Income increased by 0.5 percent in March.
  • The Personal Consumption Expenditure Price Index fell by 0.2 percent in March.
  • After inflation, Real Consumer Spending increased by 0.3 percent in March.
  • Construction Spending eased by 0.2 percent in March.
  • No Fed rate hike this week.

Real GDP increased at a meager 0.7 percent annualized rate in the first quarter. Today’s economic indicators are consistent with our expectations for strong growth in the current second quarter. Back-of-the-envelope calculations get us up to about 3.0 percent or better real GDP growth rate for the second quarter. This Friday we will begin our May U.S. Economic Update and take an in-depth look at GDP for Q2 and beyond. We expect to publish our May U.S. update early next week.

The ISM Manufacturing Index dipped from a strong 57.2 reading in March, to a still-positive 54.8 in April. Nine out of the 10 sub-indexes remain in expansion territory, including new orders, production and employment. Sixteen out of 18 industries reported growth. Only the apparel industry reported contraction in April. Anecdotal comments were positive. So even though auto manufacturing looks like it may have peaked for this cycle, in term of unit production, other manufacturing industries are still feeling a tailwind from improving U.S. and global conditions.

Weak consumer spending was the major reason that Q1 GDP growth was tepid. In the March income and spending data we see reasons to expect stronger consumer spending in Q2. Furthermore, we expect that the Q1 dip in auto sales will not be repeated in Q2 and that the weather-related drag on consumer spending in Q1 will abate. Real disposable personal income increased by 0.5 percent in March with the help of declining energy prices. The personal consumption expenditure price index fell by 0.2 percent in March as gasoline prices declined. Real consumer spending increased by a solid 0.3 percent for the month, even as nominal spending was unchanged. We are also looking for a rebound in payroll job growth in April to support consumer spending and overall Q2 GDP growth. The employment report will be released by the Bureau of Labor Statistics this Friday morning. We will have complete coverage.

Total construction spending eased by 0.2 percent in March. Private residential construction spending increased by 1.2 percent, driven by multifamily projects. Private nonresidential construction spending dipped by 1.3 percent as both office and commercial projects eased. Total public construction declined by 0.9 percent. Over the year ending in March, total public construction spending is down 6.5 percent. Here is where a new infrastructure program from the Trump Administration could result in a major turnaround.

The Federal Open Market Committee is meeting over this Tuesday and Wednesday to discuss the economy and monetary policy. We expect to see no changes to interest policy when the FOMC issues its policy announcement Wednesday afternoon. There might be some mention of the plans for balance sheet roll in the policy announcement, but plans have likely not yet been finalized and the policy statement is usually too brief to contain a detailed description of a complicated process. Instead the minutes of the May 2/3 FOMC meeting may yield more information about balance sheet reduction when they are made public on May 24. We expect the next fed funds rate range hike to come on June 14. The fed funds futures market shows a cumulative implied probability of about 66 percent for a rate hike on June 14.

Market Reaction: U.S. equity markets opened with gains. The yield on the 10-year Treasury bond is up to 2.31 percent. NYMEX crude is down to $48.68/barrel. Natural gas futures are down to $3.25/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  Personal_Income_05012017.

 

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Comerica Economic Weekly

U.S. data was mixed this week. Q1 GDP growth was tepid, but March new home sales were strong.

2017Q1 real GDP registered a sluggish 0.7 percent annualized growth rate, about as expected. Personal consumption expenditures increased at a very low 0.3 percent annualized rate due to falling car sales and warm weather. Good news came from business fixed investment which increased at a strong 9.4 percent annual rate. Residential fixed investment was also strong, increasing at a 13.7 percent annualized rate.

Sales of new single-family homes increased in March by 5.8 percent, hitting a 621,000 unit annual rate, continuing their upward trend.

The Employment Cost index for March showed a 0.8 percent month-over-month increase in compensation for civilian workers. This continued an increasing trend visible since early 2013. Tight labor market conditions are driving wages up.

Initial claims for unemployment insurance increased by 14,000 for the week ending April 22, to reach 257,000. Initial claims are showing a little volatility now on a week-to-week basis, but the longer-term trend still looks very favorable. Continuing claims for the week ending April 15 gained 10,000 to hit 1,988,000, still exceptionally low, below the two million mark.

New orders for durable manufactured goods increased by 0.7 percent in March, the third consecutive solid monthly gain. In March, new orders were supported by another increase in commercial aircraft orders and by rebounding defense aircraft orders. The core measure of durable goods orders, nondefense capital goods excluding aircraft, increased by 0.2 percent in March, after similar gains in January and February.

Both fiscal and monetary policy levers are in play in Washington D.C.

The Trump Administration unveiled the broad contours of their tax reform agenda on Wednesday. The initial proposal for personal taxes would reduce brackets from seven to three, with base rates of 10 percent, 25 percent and 35 percent. Trump wants to lower the corporate tax rate from 35 percent to 15 percent and shift to a territorial system where U.S. companies only pay taxes on income related to the U.S. This was just the opening public position for the Trump Administration. What emerges from Congress, hopefully before the end of this year, may be a different story.

The Federal Open Market Committee will meet over this coming Tuesday and Wednesday to discuss the economy and monetary policy. We expect the Fed to leave interest rates unchanged next week, and then to raise the fed funds rate range by 25 basis points on June 14. We also look for more communication about the timing, phasing and mechanics of balance sheet reduction over the course of the summer.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  Comerica_Economic_Weekly_ 04282017.

 

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2017Q1 GDP, March Employment Cost Index

First Quarter GDP was Weak, as Expected. We Look for Stronger Growth Later….if…

  • Real Gross Domestic Product for 2017Q1 increased at a weak 0.7 percent annualized rate.
  • Worker Compensation increased by 0.8 percent in March as labor markets tightened.

The first estimate of first quarter 2017 real GDP came in about as expected, with a weak 0.7 percent annualized growth rate. Several factors were in play and not all of the results were bad. Personal consumption expenditures, the lion’s share of GDP, increased at a very low 0.3 percent annualized rate. That kind of drag is hard for the other components of GDP to overcome. Consumer spending on durable goods declined at a 2.5 percent annualized rate, consistent with the drop in unit auto sales, from the robust average 18.1 million unit sales pace of the fourth quarter of last year, to an average 17.3 million unit rate for the first quarter of this year. Also, warmer-than-normal weather reduced the demand for home heating, and so consumer spending on services increased at only a 0.4 percent annualized rate in Q1. The good news in the GDP report came from business fixed investment which increased at a strong 9.4 percent annual rate, boosted by the ramp up in oil drilling activity. Residential fixed investment was also strong, increasing at a 13.7 percent annualized rate, with ongoing gains in the single-family housing market. Despite a negative read from the advance trade indicators, international trade was actually a small net positive for GDP in Q1. Inventories were weaker than expected, pulling 0.9 percent out of Q1 real GDP growth. Both federal and state/local government spending were also weak, declining in total at a 1.7 percent annualized rate. A soft Q1 was expected, and that’s what we got. We continue to expect better performance for the current quarter and through the end of this year. However, there is a growing question mark over Washington D.C. We need to see some real progress on the Trump Administration’s fiscal agenda in order to justify positive economic expectations for the second half of this year. The failure of meaningful tax reform and infrastructure initiatives could result in a negative and consequential reset of business and consumer expectations and confidence.

The Employment Cost index for March showed a 0.8 percent month-over-month increase in compensation for civilian workers. This was stronger than expected, and it continues an increasing trend visible since early 2013. Tight labor market conditions, evidence by the low 4.5 percent unemployment rate, are driving wages up. The Federal Reserve will factor this into their expectations for interest rate increases this year. We look for the Fed to keep the fed funds rate steady at their upcoming Federal Open Market Committee meeting next week, over May2/3. The odds of a June 14 interest rate hike are increasing. According to the fed funds futures market, the cumulative implied odds of a June 14 fed funds rate hike are now up to about 71 percent, which indicates a strong market expectation.

Market Reaction: Equity markets were mixed at the open. The 10-year Treasury bond yield is up to 2.29 percent. NYMEX crude oil is up to $49.52/barrel. Natural gas futures are up to $3.28/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  GDP_04282017.

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March Durable Goods, Advance Indicators, April UI Claims, Tax Reform

Lots of Moving Parts As Trump Administration Pushes Fiscal Agenda

  • New Orders for Durable Goods increased by 0.7 percent in March, the third consecutive monthly gain.
  • The Advance Estimate of International Trade in Goods showed a widening trade gap, dragging on Q1 GDP.
  • Initial Claims for Unemployment Insurance gained 14,000, to hit 257,000 for the week ending April 22.

Tomorrow morning we will get the first estimate of 2017Q1 real GDP growth, which we expect to be modest at about 1.1 percent annualized. Today we have a mixed bag of economic releases that shed some light on Q1. Manufacturing conditions generally improved through the quarter, with the notable exceptions of auto sales and auto production. New orders for durable manufactured goods increased by 0.7 percent in March, the third consecutive solid monthly gain. Often this series shows a saw tooth, or moving average pattern with a strong month followed by a weak month. So three consecutive monthly gains is good news. In March, new orders were supported by another increase in commercial aircraft orders and by rebounding defense aircraft orders. The core measure of durable goods orders, nondefense capital goods excluding aircraft, increased by 0.2 percent in March, after similar gains in January and February.

The report on Advance Economic Indicators provides early estimates of international trade in goods, and for wholesale and retail inventories. The trade numbers imply that we will see a slightly widening trade gap in the first quarter, which will be a drag on first quarter GDP growth. Exports of goods in March were down $2.2 billion, while imports of goods were down by $1.4 billion, widening the trade gap for goods. Even though the value of the dollar has eased this year compared to a broad basket of currencies, it remains somewhat strong, making our exports expensive and imports cheap. Wholesale inventories dipped by 0.1 percent in March, but retail inventories were up by 0.4 percent. We expect inventories to be a positive for Q1 GDP growth.

Labor markets remain tight, especially for selected occupations, including construction workers. Initial claims for unemployment insurance increased by 14,000 for the week ending April 22, to reach 257,000. Initial claims are showing a little volatility now on a week-to-week basis, but the longer-term trend still looks very favorable. Continuing claims for the week ending April 15 gained 10,000 to hit 1,988,000, still exceptionally low, below the two million mark.

Team Trump unveiled the broad contours of their tax reform agenda yesterday. Gary Cohn, Director of the President’s National Economic Council, said that the initial proposal for personal taxes would reduce brackets from seven to three, with base rates of 10 percent, 25 percent and 35 percent. Capital gains and dividend taxes would also be reduced. Deductions would be pared down to the mortgage interest and charitable contributions deductions. The current deduction for state and local taxes would be eliminated. That last point alone threatens to make personal tax reform a very contentious fight in Congress, pitting high tax states like New York against low tax states like Texas. Treasury Secretary Steve Mnuchin said that he wanted to drop the corporate tax rate from 35 percent to 15 percent and shift to a territorial system where U.S. companies only pay taxes on income related to the U.S. A low, one-time tax on overseas earnings would be a significant incentive for the repatriation of trillions of dollars, according to Mnuchin. He did not mention the border adjustment tax at the press conference yesterday. Obviously this is just the opening salvo in what is expected to be a long battle for tax reform that may not get resolved until late this year. We will have to wait and see what emerges from Congress at the end of the process.

Market Reaction: U.S. equity markets are mixed. The 10-Year T-bond yield is down to 2.29 percent. NYMEX crude oil is down noticeably to $48.39/barrel. Natural gas futures are down to $3.25/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  Durable Goods_04272017.

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Comerica Bank’s Michigan Index Eases

Comerica Bank’s Michigan Economic Activity Index declined 0.4 percentage points in February to a level of 129.7. February’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. January’s index reading was 130.1.

“The Comerica Bank Michigan Economic Activity Index declined in February, following three months when it was essentially unchanged from November through January. Four out of eight index components fell in February. They were unemployment insurance claims (inverted), auto production, state sales tax revenue, and hotel occupancy. With softer auto sales so far in 2017, we expect auto production to continue to be a modest drag on the Michigan Index through the remainder of 2017. Four out of eight index components increased in February. They were nonfarm payrolls, state exports, housing starts and house prices,” said Robert Dye, Chief Economist at Comerica Bank. “The automakers’ commitments to reinvest in Michigan are good news, but the drag from easing auto production and stable-to-declining manufacturing employment will keep overall growth restrained this year.”

For a PDF version of the Michigan Economic Activity Index click here:  Michigan_Index_0417.

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Comerica Bank’s California Index Ticks Up

Comerica Bank’s California Economic Activity Index grew by 0.8 percentage points in February to reach 127.9. February’s reading is 44 points, or 52 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. January’s index reading was 127.1.

“Our California Economic Activity Index increased again in February, for the 11th consecutive month. This is good news for the largest state economy. However, a cautionary note comes from payroll job growth. That component of our index did not increase in February; it was unchanged. Monthly job creation in the state has been cycling down from about 42,000 net new payroll jobs per month in 2015, to about 30,000 per month in 2016, to about 19,000 per month for the first three months of 2017. Softer job growth in California is indicative of a slower growing state economy and has national implications as well. Four out of eight index components increased in February. They were state exports, housing starts, house prices and the technology stock index. Three components decreased. They were unemployment insurance claims (inverted), defense spending, and hotel occupancy,” said Robert Dye, Chief Economist at Comerica Bank. “We expect the California economy to continue expanding this year, but weaker job growth is a potential drag for the state.”

For a PDF version of the  California Economic Activity Index click here: California_Index_0417.

 

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