Comerica Bank’s Texas Index Improves in April

Comerica Bank’s Texas Economic Activity Index advanced 1.4 percentage points in April to a level of 109.2. April’s reading is 38 points, or 52 percent, above the index cyclical low of 71.7. The index averaged 105 points for all of 2013, three points above the average for full-year 2012. March’s index reading was revised up to 107.8.

“Our Texas Index increased in April, supported by a broad range of positive indicators for the state. Payroll employment growth continues to be strong in most major metropolitan areas, including Dallas/Fort Worth, Houston, Austin and San Antonio. Residential construction activity is picking up to meet the strong demographic demand and drilling activity continues at a robust rate,” said Robert Dye, Chief Economist at Comerica Bank. “We expect to see the strong growth in the Texas economy to continue through the second half of this year and beyond.”

TX Index 0614

For a PDF version of the Texas Economic Activity Index, click here: TexasIndex_0614.

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Comerica Economic Weekly

The Federal Reserve dominated this week’s U.S. economic headlines as they did the expected, more tapering and no change to interest rate policy. The Federal Open Market Committee policy announcement on Wednesday called for a reduction in asset purchases to $35 billion beginning in July and no change to near-zero interest rate policy. In her post-announcement press conference, FOMC chairwoman Janet Yellen said that the Fed would be issuing a revised set of exit (from extraordinary monetary policy) principles later this year. The Yellen Fed has two significant challenges ahead of it. The first is the timing and the execution of the pivot from extraordinary monetary policy to something that could be called the new new normal. The second challenge is how to communicate about the pivot. The pivot and eventual interest rate lift-off is complicated by the proliferation of policy levers that the Fed may employ, including the fed funds rate, the interest rate on excess reserves, term deposits and overnight reverse repurchase agreements.

U.S. economic data remain consistent with a Q2 GDP rebound and ongoing moderate economic expansion through the second half of the year.

Industrial production increased by 0.6 percent in May as manufacturing rebounded from a sluggish April. Overall capacity utilization increased to 79.1 percent, still below the 40-year average.

Residential construction activity eased in May, following a strong April. Overall trends still look positive. Housing starts declined by 6.5 percent for the month, to hit an annual rate of 1,001,000 units. Permits dipped by 6.4 percent to hit a 991,000 unit annual rate.

The Conference Board’s Leading Index gained 0.5 percent in May, its fourth consecutive gain. The Coincident and the Lagging Indexes were also up.

Initial claims for unemployment insurance for the week ending June 14 decreased by 6,000 to hit 312,000. Continuing claims fell by 54,000 for the week ending June 7 to reach 2,561,000. UI claims data remain consistent with ongoing improvement in labor market conditions.

 The Federal Reserve Bank of Philadelphia’s Business Outlook Survey increased in June, showing a notable improvement in the future activity index. The New York Fed’s Empire State Manufacturing Survey for June also showed solid manufacturing conditions, maintaining the strong index level from May.

The week’s most intriguing data point was the May Consumer Price index, up a strong 0.4 percent, the third consecutive step up for consumer price inflation. Over the previous 12 months, the headline CPI is now up 2.1 percent and core CPI (less food and energy) is up 2.0 percent. While the flames of inflation are not yet burning, the embers are warming up.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 06-20-14.

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Comerica Economic Weekly

Chaos in Iraq is driving oil prices up. U.S. oil production is surging, but crude oil markets are global and the U.S. is expected to remain a net energy importer for several years to come. In 2013, the U.S. satisfied 84 percent of its energy demand with domestic sources. The NYMEX price for WTI crude has elevated to near $107/barrel. Gasoline prices can be expected to increase as well, adding yet another glowing coal to warm up inflation indicators.

Other U.S. data for the week were consistent with our view of a moderate Q2 GDP rebound following a dismal Q1.

Retail sales increased by a less-than-expected 0.3 percent in May. Despite stronger auto sales, non-auto retail sales might be hitting a budget constraint after very high winter heating bills and a surge in consumer spending on healthcare related to the roll-out of the Affordable Care Act.

The Producer Price Index for Final Demand fell in May by 0.2 percent after strong gains through March and April. On a year-over-year basis, the index is up 2.0 percent. We expect energy to be a factor in the June and July indexes.

Business inventories were up 0.6 percent in April. The solid start to Q2 inventories suggests that most of the drag from the early 2014 inventory correction is behind us, supportive of Q2GDP.

Labor data continues to improve. Job openings increased in April and the hiring rate remained strong. Initial claims for unemployment insurance for the week ending June 17 ticked up by 4,000 to hit 317,000, still a good number.

Mortgage applications jumped in early June, good news for summer home sales.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 06-13-14.

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June 2014, Comerica U.S. Economic Update

Q2 GDP Rebound Is in Gear, Green Light for 2014H2

The confluence of events that added up to –1.0 percent real GDP growth in 2014Q1 will not be repeated. The weather has normalized. After a sizeable inventory correction in Q1, we expect to see less drag from inventories going forward. The drag on federal spending from the budget sequester is winding down. Even though Q2 international trade got off to a weak start, we expect the fundamental changes to the U.S. energy sector, and the related strengthening of the U.S. manufacturing sector, to exert a positive influence on the balance of trade going forward. We forecast real GDP growth for the current quarter to rebound at a moderate 2.6 percent annualized rate, and then to improve to about 3.0 percent for Q3 and Q4 of this year.

Recent economic indicators are consistent with this view. The May ISM reports for manufacturing and non-manufacturing industries both point to a solid second quarter. After revision, the ISM Manufacturing Index for May increased to 55.4, showing that manufacturing conditions are generally improving. There are some exceptions. U.S. Steel announced this week that it would temporarily close plants in Texas and Pennsylvania, blaming unfair competition from illegally priced imports of tubular steel. The ISM Non-Manufacturing Index for May increased to 56.3 percent. Light vehicle sales for May were better than expected, increasing to a 16.8 million unit annual pace, with help from both cars and light trucks. This was the strongest reading for auto sales since July 2006. Although we expect to see a correction in the June sales data, the trend for light vehicle sales for the remainder of this year looks positive.

May payroll job growth came in slightly-better-than expected at +217,000. The May jobs numbers are a double shot-in-the-arm for the U.S. economy. First, they confirm a durable rebound from this winter’s weather-induced poor performance. Second, May’s job growth puts U.S. payroll employment at a new all-time high. May’s total payroll employment of 138,463,000 is 98,000 jobs higher than the January 2008 pre-recession peak. The May unemployment rate was steady at 6.3 percent.

With conditions improving, the Federal Reserve will look past the temporarily dismal performance of Q1 and continue to taper their asset purchase program. We expect to see another $10 billion reduction in the pace of asset purchases announced at the conclusion of the upcoming June 17/18 FOMC meeting. The Fed will be finished with active QE by the end of this year. We expect to see no changes to the near-zero interest rate policy this year. For more discussion on the Federal Reserve and European Central Bank, please see page 2.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate0614.

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Comerica Economic Weekly

Solid U.S. economic data this week adds to our confidence that Q2 GDP growth will rebound from the weak first quarter.

May payroll job growth came in slightly-better-than expected at +217,000. The May jobs numbers are a double shot-in-the-arm for the U.S. economy. First, they confirm a durable rebound from this winter’s weather-induced poor performance. Second, May’s job growth puts U.S. payroll employment at a new all-time high. May’s total payroll employment of 138,463,000 is 98,000 jobs higher than the January 2008 pre-recession peak. The May unemployment rate was steady at 6.3 percent.

The May ISM reports for manufacturing and non-manufacturing industries both point to a solid second quarter. After revision, the ISM Manufacturing Index for May increased to 55.4, showing that manufacturing conditions are generally improving. There are some exceptions. U.S. Steel announced this week that it would temporarily close plants in Texas and Pennsylvania, blaming unfair competition from illegally priced imports of tubular steel. The ISM Non-Manufacturing Index for May increased to 56.3 percent.

Light vehicle sales for May were better than expected, increasing to a 16.8 million unit annual pace, with help from both cars and light trucks. This was the strongest reading for auto sales since July 2006. Although we expect to see a correction in the June sales data, the trend for light vehicle sales for the remainder of this year looks positive.

The U.S. international trade gap for April widened unexpectedly to -$47.2 billion. Net exports decreased marginally by $0.3 billion for the month. Net imports gained $2.7 billion in April. Trade data can be volatile on a month-to-month basis. We expect to see a smaller trade gap as a percentage of GDP going forward, supported by a more favorable balance for energy, in particular, and also for some manufactured goods. Nonetheless, the weak start to Q2 trade data suggests that we could see a net drag from trade on Q2 GDP.

The most disappointing numbers of the week came from the Q1 productivity and unit labor cost report (ULC). Nonfarm business productivity for the first quarter of 2014 decreased at a 3.2 percent annual rate. We know that both output and employment data for Q1 were influenced by the unusually bad winter weather, so the Q1 productivity and ULC data come with an asterisk. ULC for Q1 increased at a 5.7 percent annual rate. On a year-ago basis, ULC was up a tamer 1.2 percent in Q1. So, that does not look like a big push to inflation.

The European Central Bank expanded their monetary policy tool bag by dropping the interest rate it charges on overnight bank deposits to –0.1 percent on Thursday, with the goal of encouraging lending. That, and other policy measures are designed to work in concert with a reduction in its main lending rate to 0.15 percent. The recovery in Europe is uneven and inflation is too low.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 06-06-14.

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May U.S. Employment

U.S. Payroll Employment Reaches New All-Time High, May U. Rate Steady at 6.3 Percent

  • The May Payroll Employment Survey showed a gain of 217,000 jobs. April was revised down slightly.
  • The Unemployment Rate for May was unchanged at 6.3 percent.
  • Average Hourly Earnings increased by 0.2 percent in May and are up 2.1 percent over the last year.

May payroll job growth came in slightly-better-than expected at +217,000 for the month. Revisions to March and April were minimal. The May jobs numbers are a double shot-in-the-arm for the U.S. economy. First, they confirm that the rebound from the weather-induced poor performance over the winter is durable. Second, May’s job growth puts U.S. payroll employment at a new all-time high. May’s total payroll employment of 138,463,000 is 98,000 jobs higher than the January 2008 pre-recession peak. The unemployment rate held steady in May at 6.3 percent. The household employment survey, which feeds into the unemployment rate, showed a gain of 145,000 jobs. The payroll survey and the household survey are reasonably well correlated over the medium term. But on a month-to-month basis they can diverge significantly. The civilian labor force increased by 192,000 workers in May after showing a big 806,000 worker drop in April. The labor force numbers remain somewhat quirky, reducing the reliability of the unemployment rate as a measure of central tendency of the U.S. labor market. Average hourly earnings were up 0.2 percent in May, and up 2.1 percent over the previous 12 months. The rise in earnings over the previous year is not inflationary. We expect to see average hourly earnings trending up over the year ahead. This may put more pressure on overall inflation given recent weak productivity growth. If productivity growth renormalizes, then the expected rate of wage growth in the near-term is not inherently inflationary. Average weekly hours for all workers has been relatively steady over the last two years, near the May level of 34.5.

Construction employment was up 6,000 in May. We except to see ongoing gains as both residential and commercial projects increase. Manufacturing employment gained 10,000 jobs in May. The steady improvement in manufacturing employment, enduring into mid-cycle, has been a pleasant surprise. Wholesale trade gained 9,900 net new jobs in May, while retail was up 12,500 jobs. Transportation and warehousing employment was up 16,400. Financial services job growth is still flattish, up only 3,000 for the month. Sizeable job growth came from business and professional services, up 55,000 in May. Education and healthcare added a strong 63,000 net new jobs. Leisure and hospitality employment was up nicely by 39,000. The government sector is still stuck in neutral due, in part, to the federal spending sequester. The government sector added 1,000 net jobs in May.

Market Reaction: U.S. equity markets opened with gains. The 10-Year T-bond yield is down to 2.56 percent. NYMEX crude is up to $102.81/barrel. Natural gas futures are down to $4.69/mmbtu.

Economic Alert 060614

For a PDF version of this Comerica Economic Alert click here: Employment 06-06-14.

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May ADP Employment, ISM Surveys, Auto Sales, April International Trade

Mixed Bag of Data Mostly Positive, Consistent With Ongoing Moderate Expansion

  • The ADP Employment Report for May showed a moderate increase of 179,000 private-sector jobs.
  • The ISM Manufacturing Index for May improved to 55.4 percent, indicative of healthy conditions.
  • The ISM Non-Manufacturing Index for May increased to a solid 56.3 percent.
  • May Auto Sales were better than expected, increasing to a 16.8 million unit annual rate.
  • The U.S. International Trade Gap for April widened to -$47.2 billion, implying a drag to Q2 GDP.
  • Nonfarm Business Productivity declined at a 3.2 percent annual rate in 2014Q1.

After a strong bounce-back from the weather-induced winter lull, it looks like job growth moderated in May. Last month, we saw a very strong 288,000 net job gain in the official Bureau of Labor Statistics report for April. Today, we see a more moderate gain of 179,000 net new private-sector jobs tallied in the unofficial ADP employment report. This is consistent with our expectation for Friday’s official BLS job numbers for May of about 190,000 net new jobs. This level would be close to the average monthly gain for 2013. So we view the likelihood of a step-down in job creation for May as a normal correction following the very strong post-winter rebound. According to ADP, small businesses (less than 50 employees) added the lion’s share of private-sector jobs, +82,000 for May. Medium-sized businesses (50-499 employees) added 61,000 net new jobs. Large business added 37,000 jobs.

The May ISM reports for manufacturing and non-manufacturing industries both point to a solid second quarter. After revision, the ISM Manufacturing Index for May increased to 55.4, showing that manufacturing conditions are generally improving. There are some exceptions. U.S. Steel announced yesterday that it would temporarily close plants in Texas and Pennsylvania, blaming unfair competition from illegally priced imports of tubular steel. The ISM Non-Manufacturing Index for May increased to 56.3 percent. Seventeen out of 18 industries reported expansion in both the MF and the Non-MF surveys.

Light vehicle sales for May were better than expected, increasing to a 16.8 million unit annual pace with help from both cars and light trucks. This was the strongest reading for auto sales since July 2006. Upside potential for both private and commercial vehicles looks good. Although we expect to see a correction in the June sales data, the trend for light vehicle sales for the remainder of this year looks positive.

The U.S. international trade gap for April widened unexpectedly to -$47.2 billion. Net exports decreased marginally by $0.3 billion for the month. Net imports gained $2.7 billion in April. Trade data can be volatile on a month-to-month basis. We expect to see a smaller trade gap as a percentage of GDP going forward, supported by a more favorable balance for energy, in particular, and also for some manufactured goods. Nonetheless, the weak start to Q2 trade data suggests that we could see a net drag from trade on Q2 GDP. However, we still have two months of trade data left for Q2 so the negative outlook could potentially diminish.

Nonfarm business productivity growth for the first quarter of 2014 decreased at a 3.2 percent annual rate.  We know that both output and employment data for Q1 were influenced by the unusually bad winter weather, so the Q1 productivity and unit labor cast data come with an asterisk. The noticeable decline in Q1 productivity was accompanied by a symmetrically large increase in unit labor costs. ULC for Q1 increased at a 5.7 percent annual rate, also influenced by the weather. On a year-ago basis ULC was up a tame 1.2 percent in Q1 so that does not look like a big push to inflation.

Market Reaction: U.S. stock markets are improving after opening losses. Long-term Treasury yields are up with the 10-Year T-bond rate at 2.60 percent. NYMEX crude oil is up to $102.76/barrel. Natural gas futures are down to $4.63/mmbtu.

For a PDF version of this Comerica Economic Alert click here: ADP 06-04-14.

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Comerica Economic Weekly

This analysis covers this week’s U.S. economic data through Thursday, May 29. We are not including Friday’s release of April income and spending data.

The most eye-catching data event of the week was the widely anticipated downward revision to 2014Q1 real GDP growth, now set to –1.0 percent on an annualized basis. While the direction of the revision was anticipated, the magnitude was a surprise. We joined the consensus expectations at –0.5 percent. Fortunately, the bigger than expected downward revision to –1.0 percent comes with a silver lining.

 The revision was bigger than expected because 2014Q1 inventory accumulation was revised down more than expected, and there is the silver lining. A bigger inventory correction in Q1 implies less drag from inventories in subsequent quarters.

We still expect to see real GDP growth in the range of 2.5 to 3.0 percent for the current second quarter. The first estimate of Q2 real GDP growth will be released on July 30.

Initial claims for unemployment insurance fell by 27,000 for the week ending May 24, to hit an even 300,000. This is a very good number, consistent with moderate-to-strong job creation and a declining unemployment rate. Continuing claims for the week ending May  17 dipped by 17,000 to hit 2,666,000.

The Case-Shiller 20-City Composite House Price index for March was stronger than expected. The composite index was up 12.4 percent over the previous 12 months. Nineteen out of 20 cities reported monthly price gains. Only New York showed a small month-to-month house price decline.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 05-30-14.

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The Detroit Metro Area Is Losing Jobs

The official count of payroll jobs in the Detroit MSA has not only stalled, it has trended down over the last 10 months. Detroit MSA payroll employment hit a local peak of 1,867,100 in June 2013. By this April almost 10,000 jobs had been lost. The area’s unemployment rate continues to trend down, hitting 8.1 percent in April, still well above the U.S. average of 6.3 percent for that month. The unemployment rate fell, despite net job losses, due to a decline in Detroit’s labor force, and that is not good news. We expect payroll employment in the Detroit MSA to stabilize this year and next. At best, the near-term economic outlook for the Detroit area is hardly stellar. At worst we could see a continuation of the long slide in employment that was visible by early 2001. Despite the positive news of young entrepreneurs and high-tech workers heading to downtown Detroit, the broader metro area is still shedding jobs. New Jersey-based Caraco Pharmaceutical is closing its Detroit operation and will lay off 178 workers this summer. However, running counter to the official BLS employment numbers is the Southeast Michigan Purchasing Managers Index which shows improving manufacturing conditions in March and April. The SE Michigan PMI’s employment sub-index remains above 50, indicating expanding manufacturing payrolls.

The City of Detroit’s financial crisis and bankruptcy continue to dominate headlines. Emergency Manager Kevyn Orr has submitted a financial plan for the resolution of Detroit’s $18 billion bankruptcy. Approximately 110,000 creditors to the city, including some 30,000 pensioners, will vote on Orr’s plan by July 11. The vote is becoming highly politicized. In May, the Michigan House of Representatives voted to provide a $195 million bailout to the City of Detroit. The state bailout plan is currently in discussion at the state Senate.

Auto sales bounced back in March to a 16.4 million unit rate after a winter lull. April auto sales settled to a 16.0 million unit rate. We expect moderate job and income growth, combined with improving consumer confidence and the positive wealth effect from improving house prices to support national auto sales through the remainder of this year. That said, we are getting closer to an expected high plateau of auto sales of around 17 million units, so there is limited upside potential for new auto sector jobs.

Detroit 2014Q1

Click here for the complete Detroit MSA Regional Economic Update: Detroit 2014Q1.

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Central West Michigan Continues to Grow Moderately

The Central West Michigan (CWM) region, with auto, manufacturing, services, and furniture industries as the major drivers of the economy, comprises about 24 percent of the total nonfarm payroll jobs in Michigan.  In 2014Q1 CWM added a net of 4,400 nonfarm payroll jobs in contrast to 10,000 jobs in 2013Q1. Most of the new jobs in early 2014 came from service producing industries, followed by manufacturing. Although the job growth looks a bit softer in 2014Q1 compared to 2013Q1, the region is still a strong performer compared to the entire state of Michigan, which has lost a net of 11,000 nonfarm jobs in the first quarter of this year. We expect the current pace of moderate job growth in the region to continue through 2014 with most jobs coming from manufacturing (machinery, food, and auto) and service producing sectors. Because of its strategic location and its skilled labor force, the region has been a strong magnet for manufacturing industries.

CWM’s unemployment rate declined to 5.8 percent in 2014Q1 from 6.7 of the previous quarter. The decline in unemployment came as both payroll employment and the labor force increased, a good news for the economy. We expect the region’s unemployment rate to decline continuously through 2014 due to a modest improvement in payroll jobs. Both single- and multifamily housing starts declined in the first quarter of 2014 after a significant surge in 2013Q4.  We expect the total housing starts to rebound in the next quarter and grow moderately through 2014. House prices are expected to grow moderately at par with the national average in 2014 and 2015.

Kellogg, one of the world’s largest cereal producing companies, with 2013 total sales revenue of around $14.8 billion, will open a new North American Global Business Service operation in the Grand Rapids area. The center will employ between 300 and 600 workers. We also expect the office furniture industry to pick up through 2015 as business investment improves across the country. The region’s auto industry is expected to add only a modest number of jobs. National vehicle sales are forecasted to improve through 2015. However, job creation appears to be leveling out in the auto industry as sales approach the high-water mark for this business cycle.

CWMI 2014Q1

Click here for the complete Central West Michigan Regional Economic Update: CentralWestMI 2014Q1.

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