February Employment, January International Trade

Better-Than-Expected Jobs Data Greenlights Another Fed Taper 

  • The February Payroll Employment Survey showed a better-than-expected gain of 175,000 jobs.
  • The Unemployment Rate for February increased to 6.7 percent with a weak gain in household employment.
  • The U.S. International Trade Gap widened slightly to $39.1 billion in January.
  • We expect the Federal Reserve to announce another $10 billion reduction in asset purchases on March 19.

We are seeing evidence that the U.S. economy is digging out from underneath this winter’s snow pile. Payroll jobs for February increased by 175,000, better than consensus expectations. Expectations for job growth fell this week after the ADP survey showed a gain of 139,000 private sector jobs for the month, and the ISM Non-Manufacturing Index for February showed contracting employment. The average workweek for all employees edged down to 34.2 hours in February. Average hourly earnings for February were up 2.2 percent over the previous 12 months. The household survey of employment did show some weather effects for the month, and posted a weak overall gain of 42,000 jobs. The weak gain in the volatile household employment series, combined with a strong gain in the labor force, drove the unemployment rate back up to 6.7 percent. This should not be taken as a sign of weakness in the labor market. Both the household employment series and the labor force series have been quirky lately, enough to render one-month changes in the unemployment rate meaningless. Construction industries added 15,000 jobs in February. Manufacturing employment was up by 6,000. Wholesale trade added 14,800 jobs, while retail trade dropped 4,100. Financial services employment was up 9,000 for the month. Professional and business services added a strong 79,000 jobs in February. Education and healthcare, which was surprisingly weak in January, added 33,000 jobs in February. Leisure and hospitality industries added 25,000, while the government sector gained 13,000 jobs. The U.S. international trade gap widened slightly in January to $39.1 billion. Imports increased by $1.3 billion in January while exports increase by $1.2 billion.

Today’s solid jobs report for February gives the Fed a green light to continue tapering its asset purchases by another $10 billion at the upcoming March 18/19 meeting of the Federal Open Market Committee. The FOMC is also expected to modify its forward guidance for the fed funds rate, downplaying or eliminating the concept of an unemployment “threshold.” We continue to expect no increase in the near-zero fed funds rate this year. The first increase in the fed funds rate is expected around mid-2015.

Market Reaction: U.S. equity markets opened with gains. The 10-Year T-bond yield is up to 2.80 percent. NYMEX crude is up to $102.18/barrel. Natural gas futures are down to $4.60/mmbtu.

Economic Alert 030714

For a PDF version of this Comerica Economic Alert click here: Employment 03-07-14.

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February ADP Employment, ISM Non-MF, Auto Sales, Ukraine Situation

Soft Data Says U.S. Still Under the Weather in February

  • The ADP Employment Report for February showed a tepid gain of 139,000 private-sector jobs.
  • The ISM Non-Manufacturing Index for February dipped to a still-positive 51.6 percent.
  • February Auto Sales increased by less than expected, to a 15.4 million unit annual rate.
  • Financial markets responded positively to signs of détente in Ukraine.

The U.S. continued to suffer from extreme winter weather conditions through February, weighing on economic data. The February ADP report was weaker than expected, showing a net gain of 139,000 private-sector payroll jobs for the month. Also, January and December job gains were revised down. The average miss in the ADP report relative to the official Bureau of Labor Statistics data is +/- 40,000 over the last 16 months since Moody’s Analytics revamped the methodology for the ADP numbers. The ISM Non-Manufacturing Index for February decreased to a still-positive 51.6 percent. The employment sub-index receded sharply to 47.5, indicating weak hiring for the month. Anecdotal comments cited weather as a negative factor. Today’s weak ADP and ISM Non-MF reports suggest that there is significant downside risk for our expectation of an increase of 160,000 payroll jobs in the official BLS data for February. The BLS numbers are scheduled to be released this Friday morning. If we do get a soft jobs report for February from the BLS, that raises the question of how the Fed will interpret the numbers. The Federal Open Market Committee meets again on March 18/19. We expect the Fed to announce at the upcoming meeting that it will continue to taper its asset purchase program by another $10 billion. If we get a clunker of a jobs report on Friday, that expectation may change.

Auto sales for February increased to a 15.4 million unit rate, better than the 15.2 for January, but not as good as expected earlier in the month. Auto sales tend to be concentrated toward the end of the month, and that is when the weather got bad again in the Midwest and along the East Coast. We remain hopeful that consumer spending and hiring will re-engage as the weather improves. Obviously, there is some risk that the winter soft patch is due to more than just bad weather and represents a downshift in hiring and consumer spending that will have longer-term implications.

Adding to the sense of economic uncertainty is the Ukraine situation. The direct transmission mechanism from the Ukraine situation to the U.S. economy is potentially through two channels. One channel is through the real economy, i.e. production, trade, employment. The other channel is through financial markets. Both channels could potentially increase overall uncertainty, adding to an indirect negative impact. There appears to be little prospect for a direct negative impact to the real economy of the U.S. from the conflict in the Ukraine. There is some risk to Europe that Russia might temporarily curtail natural gas deliveries as a retaliatory measure. However, that would be self-defeating for the Russian economy. They will not want to give up the revenue. An energy-starved Europe would be weaker in the near-term, weighing on U.S. exports (about 20 percent of U.S. merchandise exports flow to Europe), but it would also open the door for increased shipments of natural gas to Europe from the U.S. over the long-term. Ukraine is an important, but small, trading partner for the European Union. According to the European Commission, Ukraine accounted for 1.4 percent of exports from the EU in 2012 and 0.8 percent of imports. Financial markets appear to be renormalizing after a weekend spasm. The prospects for military conflict in the region appear to be limited and receding. Global financial markets will quickly look past the events of the weekend as long as there is a peaceful resolution to the conflict.

Market Reaction: U.S. stock markets opened with gains. Treasury yields are down with the 10-Year T-bond rate at 2.69 percent. NYMEX crude oil is down to $102.59/barrel. Natural gas futures are down to $4.63/mmbtu. The dollar is stable against the euro.

For a PDF version of this Comerica Economic Alert click here: ADP 03-05-14.

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January Income and Spending, Construction Spending, Feb. ISM MF

Government Programs Support Income. Heating Bills Support Spending.

  • U.S. Personal Income increased by 0.3 percent in January, driven by special factors.
  • After accounting for inflation and taxes, Real Disposable Personal Income also gained 0.3 percent.
  • Real Personal Consumption Expenditures were up by 0.3 percent in January.
  • January Construction Spending ticked up by 0.1 percent as private residential spending increased.
  • The ISM Manufacturing Index for February increased to 53.2 as new orders improved.

U.S. personal income increased by 0.3 percent in January, driven by offsetting special factors originating from the federal government. Social benefits paid out (transfer receipts) increased by a strong 1.2 percent in January. Increased government benefits came from the Affordable Care Act and from cost-of-living increases. The expiration of long-term unemployment benefits was a drag, as was the after-effect of the December boost in lump-sum social security payments. The wage and salary component of personal income increased in January by a tame 0.2 percent, after declining by 0.1 percent in December. This reflected the weak job growth of those two months. Income from financial assets has recently been soft, essentially unchanged from last July. Real overall consumer spending gained 0.3 percent in January. Spending on both durable and nondurable goods declined in January, for the second month in a row. Consumer spending on services was strong in January as utility bills increased. Price indexes were tame for the month. The PCE price index gained 0.1 percent in January, as did the core PCE index (excluding food and energy).

Construction spending reportedly increased slightly in January, up by 0.1 percent. Public construction spending was down by 0.8 percent, consistent with the unwind of fiscal stimulus and the budget sequester. Private nonresidential spending was off 0.2 percent. Private residential was up, running counter to the weak housing starts numbers for the month. The ISM Manufacturing Index increased in February, up to a solid 53.2 percent. New orders firmed up, as did inventories and supplier deliveries. Anecdotal comments say that weather has been a negative factor this winter, but business optimism appears to be improving.

Market Reaction: U.S. equity markets are down, nervous about the Ukraine situation. The yield on the 10-year Treasury bond is down to 2.61 percent. NYMEX crude is up to $104.72/barrel. Natural gas futures are down to $4.57/mmbtu.

Economic Alert 030314

For a PDF version of this Comerica Economic Alert click here: Personal Income 030314.

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Comerica Economic Weekly

Data released in the last week of February are consistent with a winter soft patch, induced in large part by the brutal winter weather conditions gripping much of the country. Fortunately, we are also seeing signs that there is a current of momentum in the U.S. economy underneath the snow and ice.

Fourth quarter 2013 real GDP growth was revised down to 2.4 percent, following the preliminary estimate of a 3.2 percent growth rate. Real consumer spending was revised down from a strong 3.3 percent growth rate to a still-good 2.6 percent rate. Nonresidential fixed investment was revised up, as was residential fixed investment. Exports were trimmed and imports were boosted, so net trade was not as strong as originally thought. Inventory growth in 2013Q4 was dialed down, but still remains very strong. Two consecutive quarters of very strong inventory growth in the second half of 2013 still point to a drag from inventories in the first half of 2014. Government spending, both federal and state/local, was reduced. Without the self-imposed drag from government spending, fourth quarter GDP growth would have been 1.05 percentage points higher.

Housing-related data has been mixed. Construction is obviously impacted by the weather. House prices continue to firm up. Almost all of the 20 cities in the Case-Shiller 20-City Composite House Price Index showed monthly gains in December. Only in Cleveland did prices dip, down 0.2 percent for the month. Over the previous 12 months the 20-city index was up 13.4 percent. New home sales for December were a surprising positive, up 9.6 percent for the month, to a 468,000 unit annual rate. This was the best sales rate for new homes since July 2008. Months’ supply of new homes tightened up to 4.7 months’ worth.  There remains significant upside potential for new home sales. They could easily double from the current still-depressed rate as credit availability improves, incomes increase, confidence climbs and the rate of household formation renormalizes.

New orders for durable goods decreased by 1.0 percent in January, after falling by 5.3 percent in November. Always-volatile commercial aircraft orders have been a drag. The core measure of new orders, which is nondefense capital goods excluding aircraft, increased by 1.7 percent for the month.

Initial claims for unemployment insurance increased by 14,000 for the week ending February 22, to hit 348,000. Continuing claims ticked up as well. Claims data remain range-bound, likely supported by bad weather conditions this winter.

The University of Michigan Consumer Sentiment Survey showed a small improvement in February as the index ticked up to 81.6. Consumer expectations for future conditions continue to trend up.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly022814.

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Comerica Bank’s Michigan Index Falls in December

Comerica Bank’s Michigan Economic Activity Index decreased in December, down 4.3 percentage points to a level of 127.1. December’s reading is 55 points, or 76 percent, above the index cyclical low of 72.1. The index averaged 126 for all of 2013, 12 points above the index average for 2012. November’s index reading was unchanged at 131.4.

“Our Michigan Index fell again in December after dipping in November. Some of the December drag may be attributable to the very bad winter weather that Michigan is still enduring. Payroll employment for the state was essentially unchanged from September through December of last year. Also, sales tax data was soft at the end of last year,” said Robert Dye, Chief Economist at Comerica Bank. “Auto sales nationwide were hurt by the severe winter weather, pushing light vehicle sales down to a 15.2 million unit rate in January. Fortunately, it does look like auto sales in February will improve, and this is supportive of the increase in assembly line activity that we saw through 2013.”

MI Index 1213

Click here for a PDF version of the Michigan Economic Activity Index: Michigan0214.

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Comerica Bank’s Texas Index Climbs in December

Comerica Bank’s Texas Economic Activity Index grew 1.2 percentage points in December to a level of 111.1. The December reading is 40 points, or 55 percent, above the index cyclical low of 71.6. The index averaged 105 points for all of 2013, three points above the average for full-year 2012. November’s index reading was unchanged at 109.9.

“Our Texas Index showed its fourth consecutive increase in December, extending the breakout from flat early-2013 results. Payroll job growth continued to outpace the national average at the end of 2013, up 2.3 percent for the state, well above the 1.7 percent gain for the U.S. as a whole,” said Robert Dye, Chief Economist at Comerica Bank. “Besides payroll job growth, other components of our Texas Index that showed growth in December were state sales tax, hotel occupancy, residential building permits and the rig count. Negative components were limited to state exports and unemployment insurance claims. Texas will feel some secondary effects of the winter freeze affecting the broader U.S. economy, but we expect 2014 to be another strong year for the Texas economy.”

TX Index 1213

For a PDF version of the Texas Economic Activity Index, click here: TexasIndex_0214.

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Comerica Bank’s California Index Boosted by Silicon Valley in December

Comerica Bank’s California Economic Activity Index grew in December, advancing 2.5 percentage points to a level of 111.4. December’s reading is 39 points, or 53 percent, above the index cyclical low of 72.7. The index averaged 106 points for all of 2013, five points above the average for all of 2012. November’s index reading was revised slightly down from 109.1 to 108.9.

“Our California Index climbed again in December, now for the fifth consecutive month. Most of the eight components of the index eased in December. However, payroll jobs ticked up and market valuations for high tech companies were strong in December,” said Robert Dye, Chief Economist at Comerica Bank. “House price appreciation has also been strong for San Diego, Los Angeles and San Francisco and that is a positive for the state economy. We expect the California economy to show increasing momentum in 2014.”

CA Index 1213

For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0214.

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Comerica Bank’s Florida Index Gains in December

Comerica Bank’s Florida Economic Activity Index grew 1.5 percentage points in December, to a level of 119.5. December’s index reading is 39 points, or 48 percent, above the index cyclical low of 80.6. The index averaged 115 in 2013, 10 points above the average for all of 2012. November’s index reading was unchanged at 118.0.

“Our Florida Index improved for the fourth consecutive month in December. Payroll job growth for the Sunshine State was modest but steady through the second half of 2013. Tourism-related data has been strong. Both hotel occupancy and enplanements were positive contributors to our Florida index in December,” said Robert Dye, Chief Economist at Comerica Bank. “The reflation of house prices through 2013 was a positive development for the state. We expect that to continue through 2014, supporting all aspects of local real estate markets and consumer spending.”

FL Index 1213

For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0214.

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Comerica Bank’s Arizona Index Jumps in December

Comerica Bank’s Arizona Economic Activity Index expanded in December, up 4.4 percentage points to a level of 100.3. December’s index reading is 29 points, or 41 percent, above the index cyclical low of 71.3. The index averaged 96 points for all of 2013, nine points above the average for full-year 2012. November’s index reading was unchanged at 95.9.

“Our Arizona Index improved strongly in December, after a small gain in November. The jump in December was powered by very strong residential building permits data for the month. Almost all other components of our Arizona Index were positive in December as well. It is unlikely that the high rate of building permits for December will be sustained over the next couple of months, but the strong December data is a positive sign for the Arizona economy,” said Robert Dye, Chief Economist at Comerica Bank. “House prices eased a little in December according to the Case-Shiller data, but are still up 15.3 percent over the previous year in Phoenix. I expect the Arizona economy to continue to improve through 2014.”

AZ Index 1213

For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0214.

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Southern California Maintains Positive Outlook in 2014

Southern California labor markets continue to recover heading into 2014. Regional nonfarm employment gained 115,600 jobs in the 12 months ending in December. Boosts to nonfarm payrolls in 2013 included professional and business services, education and health services, and leisure and hospitality. Declining manufacturing and information jobs were a drag on area labor markets in 2013. The unemployment rate for Southern California dropped to 8.3 percent in December. This trailed the U.S. unemployment rate which dropped to 6.7 percent in December. We expect the region to gain 136,000 jobs and the regional unemployment rate to drop to 7.5 percent in 2014.

Southern California housing markets are set to improve in 2014. Regional housing starts hit 36,811 in 2013. This is a 36.9 percent increase from the 2012 average of 26,898. The 2013 average was boosted by a strong 2013Q4 starts total at a 43,794 annual unit rate. We expect the boost from job creation and income growth to overcome the drag of increasing mortgage rates in 2014. Our forecast has Southern California housing starts averaging 36,010 in 2014, increasing to 39,386 in 2015. Pent-up demand continues to drive up home prices in the area. Southern California home prices are expected to grow 16.5 percent (FHFA Price Index) from a year ago in 2013Q4. We expect home price growth to decelerate as housing markets expand the supply of homes in 2014 and 2015.

Increased uncertainty and federal budget sequestrations were a drag on defense-related industries in 2013. Boeing, which has facilities throughout L.A. County and Orange County, saw military aircraft revenues decline by 1 percent in 2013. Boeing announced in September that it will be discontinuing production on its C-17 Airlifter by 2015. Workforce restructuring of the 3,000 supporting production team for the C-17 will begin in 2014, the majority of which will take place in California. The passing of the Bipartisan Budget Act in December will provide $31.6 billion in relief to the automatic spending cuts that would have otherwise gone into effect for FY2014 and FY2015. Under the act, defense spending will increase to $520.5 billion for FY2014 and $521.3 billion for FY2015.

Southern California 2013Q4

Click here for the complete Southern California Regional Economic Update: SouthernCA 2013Q4.

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