February Leading Indicators, Existing Home Sales, March UI Claims, Fed Wrap-Up

Indicators Positive, Fed Signals Ongoing Unwind from Extraordinary Policy

  • The Leading Economic Index for February increased by 0.5 percent, suggesting a spring thaw is coming.
  • Existing Home Sales for February fell slightly to a 4.60 million unit annual rate.
  • Initial Claims for Unemployment Insurance gained 5,000 for the week ending March 15, to hit 320,000.
  • The Federal Open Market Committee voted yesterday to reduce asset purchases in April.

U.S economic metrics released this morning were generally positive and suggestive of an impending spring thaw. The Conference Board’s Leading Economic Index increased by 0.5 percent in February, after stalling in December and January. The coincident and lagging indexes were also positive for the month. The five factors that pushed the leading index up in February were interest rate spread, residential building permits, the leading credit index, manufacturers’ new orders for consumer goods and manufacturers’ new orders for capital goods ex-aircraft. Summed up, the leading, coincident and lagging indicators gained a combined 1.0 percent in February, after gaining 0.7 percent in January and 0.3 percent in December.

Existing home sales edged down in February, as we expected. February sales dipped by 0.4 percent to a 4.60 million unit rate. Four negative factors were in play in February – mortgage rates above recent historic lows, bad weather, soft jobs data and less activity from institutional buyers and investors. As other economic metrics, including job creation, step up this spring, we expect existing home sales to first stabilize near current levels, and then resume an upward track, boosted by rising demand from traditional buyers.

Initial claims for unemployment insurance increased by 5,000 for the week ending March 15, to hit a level of 320,000. Initial claims appear to be stabilizing at a level consistent with ongoing moderate job growth, another signal that the winter freeze out in job creation will prove to be temporary. Continuing claims for the week ending March 8 increased by 41,000 to hit 2,889,000. We see an overall declining trend in continuing claims since early January, as expected, following the elimination of federal benefits for extended unemployment.

The Philadelphia Federal Reserve Bank’s Business Outlook Survey showed that current manufacturing conditions improved in early March, after deteriorating in February.

As widely expected, the Federal Open Market Committee voted yesterday to reduce its asset purchase program by another $10 billion, to $55 billion per month. The reduced monthly rate of purchases will begin in April. The Fed remains on track to eliminate this program by the end of this year, possibly by the end of October. The fed funds rate remains set near zero. Forward guidance for the fed funds rate has been modified. The Fed has backed away from an explicit unemployment rate target. We expect the fed funds rate to remain near zero until the second or third quarter of 2015. As the Fed gets closer to raising the fed funds rate, they will modify their forward guidance again, alerting markets to the forthcoming change. At this time the FOMC is not formally signaling any changes to fed funds rate policy. However, at her first post-meeting press conference, FOMC chairwoman Janet Yellen suggested that the first increase in the fed funds rate might come about six months after the end of its asset purchase program. Six months after the end of October 2014, is the end of April 2015. The FOMC could announce an increase in the fed funds rate target at its end of April 2015 or mid-June 2015 meetings. The FOMC acknowledged the economic drag from the unusually harsh winter. Other economic comments by the FOMC were generally positive.

Market Reaction: Equity markets are up after a weak opening. Treasury yields are up at the long end of the yield curve. The 10-Year Treasury bond yield is up to 2.78 percent. NYMEX crude oil is down to $99.19/ barrel. Natural gas futures are down to $4.36/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Leading Indicators 03-20-14.

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February Residential Construction, Consumer Prices, Industrial Production

Permits and Production Up, Prices Tame, Fed Set to Taper

  • February Housing Starts were little changed, down by 0.2 percent to a 907,000 unit annual rate.
  • Permits for new residential construction increased in February by 7.7 percent to a 1,018,000 unit pace.
  • The Consumer Price Index increased by 0.1 percent in February. Core CPI also gained 0.1 percent.
  • Industrial Production for February climbed a strong 0.6 percent as auto production rebounded.

Benign economic data for February support the view that bad weather was a factor in December and January, and that metrics will tend to improve in March. This last bit of U.S. data before the Federal Open Market Committee’s meeting today and Wednesday is supportive of another round of QE tapering. We expect the Fed to announce another $10 billion reduction in their asset purchase program, bringing purchases down to $55 billion per month until the next meeting at the end of April. The fed funds rate stays near zero into next year. Also, we expect to see a modification to forward guidance about the fed funds rate. It will no longer be linked to an explicit unemployment rate threshold.

The good news in the residential construction report for February is that permits for new construction accelerated after dipping through December and January. Permits increased by 7.7 percent to hit an annual rate of 1,018,000 units. Multifamily permits jumped by 27 percent to a 407,000 unit rate, the best performance in that category since June 2008. We are seeing that comparison more and more as data is normalizing to pre-recession readings. Housing starts for February were essentially unchanged at a 907,000 unit annual pace.

Overall consumer prices were little changed in February as the headline CPI gained just 0.1 percent. Over the previous 12 months, the CPI was up a tame 1.1 percent. Core CPI (all items less food and energy) was also up just 0.1 percent in February. Over the past year core CPI has increased by 1.6 percent.

Industrial production for February was stronger than expected, increasing by a solid 0.6 percent. Manufacturing output increased by 0.8 percent, boosted by a rebound in auto production. Vehicle assemblies sagged in January after a strong run through November and December. February’s assembly rate of 11.4 million vehicles was just a little below the November-December average of 11.5 million units. Utility output dipped by 0.2 percent in February, following a January surge.

Market Reaction: Equity markets opened with gains. The yield on 10-Year Treasury bonds is up to 2.69 percent. NYMEX crude oil is up to $98.44/barrel. Natural gas futures are down to $4.45/mmbtu.

Economic Alert 031814

For a PDF version of this Comerica Economic Alert click here: Housing Starts 031814.

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Comerica Economic Weekly

The perception of uncertainty in the U.S. and global economies appears to have increased. That is not to say actual uncertainty (whatever that is), as measured by the Economic Policy Uncertainty index, has increased. In fact, according to the monthly Economic Policy Uncertainty Index, uncertainty has been on a decreasing trend since last October when the index spiked at the time of the federal government shut-down. The daily uncertainty index does show a local spike around March 9, then it receded through March 14. The political and military events in the Ukraine have added to business uncertainty here in the U.S., but only moderately.

The combination of the October federal government shutdown, bad weather from December through early March, trouble in some small emerging markets  and the volatile geopolitical situation in the Ukraine appears to have heightened the perception of uncertainty.  U.S. stock market indexes declined through this week. The heightened perception of uncertainty, let’s call that twitchiness, obscures some recent positive metrics.

According to the Federal Reserve, the net worth of households and non-profits increased by 14 percent($10.6 trillion) in 2013, hitting a level of $80.7 trillion, surpassing the pre-recession peak. As wealth accumulates, households feel more comfortable satisfying demand and utilizing credit (a positive wealth effect). This is a very powerful and broad-based support for consumer spending.

Also, according to the Federal Reserve, commercial and industrial bank loans increased strongly in January and February. That is a positive leading indicator for business investment and job creation.

Retail sales increased in February by 0.3 percent reversing a two-month decline. Gains were spread across most major categories.

Unemployment insurance claims for the week ending March 8 fell by 9,000 to hit a level of 315,000. Continuing claims for the week ending March 1 declined by 48,000 to hit 2,855,000. On a related note, Senate negotiators have reached an agreement to renew long-tem unemployment benefits. A vote in the Senate could come in late March. Passage in the House is uncertain.

The Producer Price index for final demand declined by 0.1 percent in February. Over the last 12 months the final demand PPI is up 0.9 percent. The goods component increased in February, driven by gains in food and energy prices. The services component dipped as prices for wholesalers and retailers eased.

The National Federation of Independent Business’s Small Business Optimism index dipped February. Employment plans were still positive, but weaker than they were in January. Capital spending plans remain somewhat muted in this index despite the gain in lending reported by the Federal Reserve.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly031414.

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March 2014, Comerica U.S. Economic Update

Weak Q1 But Fundamentals Still Look Good

We expect to see a weak first quarter when the advance estimate of 2014Q1 GDP is published at the end of April. Weather impacted almost all economic metrics this winter. Personal consumption was shifted away from discretionary purchases, like automobiles, and toward non-discretionary services, like home heating. Business investment was hampered by bad weather. Likewise residential investment. Trade is not expected to be a large positive contributor in Q1. Inventories may be a large negative contributor, as inventory accumulation moderates following two strong quarters. Federal government spending will still be a drag, although it will be less of a drag now that we have a two-year budget deal in place. State and local government spending is expected to be a positive contributor to Q1 GDP. So we show weak real GDP growth of just 1.0 percent (annualized rate) in Q1, followed by a pickup to what we can call the new “moderately strong”, real GDP growth in the neighborhood of 3 percent.

We see a powerful positive for the economy in the form of improving household wealth. Stronger house prices, climbing equity prices and a tightening labor market are driving gains in household wealth. The net worth of households and non-profits increased by 14 percent in 2013 ($10.6 trillion), hitting a level of $80.7 trillion, surpassing the pre-recession peak. As wealth accumulates, households feel more comfortable satisfying demand and utilizing credit (a positive wealth effect). This is a very powerful and broad-based support for consumer spending.

While most recent U.S. economic data has been weaker than expected due in part to the weather, job creation in February was stronger than expected. Payroll jobs for February increased by 175,000. Expectations for job growth fell 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 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. That should not be interpreted as a sign of a weakening labor market.

U.S. monetary policy remains highly stimulative. We expect the Federal Reserve to maintain the near-zero fed funds rate until mid-2015. The better-than-expected labor data for February will allow the Fed to taper its asset purchase program by another $10 billion at the upcoming March 18/19 FOMC meeting. This will bring purchases down to $55 billion per month. We expect the Fed to reduce asset purchase in $10 billion increments at each meeting this year, possibly eliminating asset purchases at the October 28/29 meeting.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate0314.

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Comerica Economic Weekly

March came in like a lion with much of the nation still in the grip of a colder and snowier-than-normal winter. Economic data this week still reflects the big chill.  However, there are green shoots beneath the snow.

Payroll jobs for February increased by 175,000, better than expectations. 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.

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.

U.S. personal income increased by 0.3 percent in January, driven by offsetting special factors originating from the federal government. 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. Real overall consumer spending gained a moderate 0.3 percent in January. The PCE price index increased by a tame 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.

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. The ISM Non-Manufacturing Index for February decreased to a still-positive 51.6 percent. Anecdotal comments cited weather as a negative factor.

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.

Adding to the sense of economic uncertainty is the Ukraine situation. There appears to be little prospect for a direct negative impact to the economy of the U.S. from the conflict in the Ukraine as long as global financial markets look past a regional crisis. European economic indicators are generally improving. So far, the Ukraine crisis does not appear to be dampening the prospects of a European economic recovery. About 20 percent of U.S. merchandise exports flow to Europe. Ukraine accounted for 1.4 percent of exports from the EU in 2012 and 0.8 percent of imports.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly030714.

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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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