Comerica Bank’s Arizona Index Advances

Comerica Bank’s Arizona Economic Activity Index improved in April, up 0.3 percentage points to a level of 110.0. April’s index reading is 33 points, or 43 percent, above the index cyclical low of 77.0. The index averaged 107.1 points for all of 2015, seven and two-fifths points above the average for full-year 2014. March’s index reading was 109.7.

“Our Arizona Economic Activity Index increased in April, consistent with our expectations of stronger state and U.S. economic growth through the second quarter of 2016. Most index components were positive for the month. This includes payroll employment, which has expanded for 23 consecutive months through April. For most of the post-recession period, Arizona has grown jobs at close to the national average pace. Over the past 12 months, the performance gap has widened and Arizona is now showing better than average year-over-year job gains,” said Robert Dye, Chief Economist at Comerica Bank. “We expect the stronger performance of the state economy to continue through the second half of this year.”

AZ Index 0616

For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0616.

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May Income and Spending, April Case-Shiller HPI

Another Solid Spending Report Supports Expectations of Stronger Q2 GDP

  •  U.S. Personal Income increased by 0.2 percent in May.
  • After inflation and taxes, Real Disposable Income gained 0.1 percent for the month.
  • Nominal Consumer Spending increased by 0.4 percent in April. Real spending gained 0.3 percent.
  • The S&P/Case-Shiller U.S. National Home Price Index gained 0.1 percent in April.

Income and spending data for May were solid, building on good data for April, and supporting expectations of a rebound in real GDP growth for the nearly complete Q2 to about 2.5 percent. Nominal personal income for May increased by 0.2 percent as wages and salaries also gained 0.2 percent, not bad considering the very weak payroll employment growth in May of just 38,000 net new jobs. Inflation was moderate for the month as the PCE price index gained 0.2 percent. Over the previous 12 months, the PCE price index was up by 0.9 percent. The energy component of the PCE price index was up 1.4 percent in May after gaining 3.8 percent in April. Excluding food and energy, the core PCE price index increased by a moderate 0.2 percent in May, finishing the 12-month period up by 1.6 percent. After adjusting for moderate inflation and a 0.2 percent increase in personal taxes, real disposable income was up by 0.1 percent for the month. Nominal personal spending was up by 0.4 percent in May. Real spending gained a respectable 0.3 percent after growing by 0.8 percent in April. With spending up more than income, the personal saving rate ticked down to 5.3 percent.

According to the S&P Case-Shiller U.S. national house price index, house prices increased by 1.0 percent on average in April, and are up 5.0 percent nationwide over the last year. Most of the 20 cities covered showed gains for the month, and moderate-to-strong gains over the previous 12 months. Dallas house prices are up 8.6 percent over the last year. Detroit is up 5.7 percent. Los Angeles gained 5.9 percent. Miami, 6.4 percent. Phoenix, 5.5 percent. San Diego, 6.3 percent. San Francisco house prices are up 7.8 percent over the last year.

Both the income/spending and the house price reports are supportive of overall consumer spending, which accounts for two-thirds of U.S. GDP. With stronger U.S. GDP growth, domestic demand for crude oil will increase. We will be watching European and Asian economic indicators through the second half of the year to see if global demand for crude will continue to increase. BREXIT is obviously a challenge to the European economy, with possible spillover effects for the U.S. and Asia. Crude oil demand growth accompanied by declining non-OPEC crude production is still expected to tighten crude oil inventories this year and support firmer prices, and push on inflation. Stronger inflation in a stable U.S. and global economic environment could lead to one fed funds rate hike this year, likely not coming until December. But that scenario has been undercut by BREXIT. Meanwhile the U.S. election cycle will heat up, as well as the British election cycle, and this could keep a lid on consumer confidence this fall. With lots of economic and political levers in play, we retain our view that the U.S. economy will continue to show moderate growth into 2017. Stay tuned.

Market Reaction: U.S. equity markets opened with strong gains. The yield on the 10-year Treasury bond is down to 1.46 percent. NYMEX crude is up to $48.97/barrel. Natural gas futures are up to $2.86/mmbtu.

Alert 06_29_2016

For a PDF version of this Comerica Economic Alert click here: Personal Income 06-29-16.

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BREXIT

The World has Changed

  • The consequences of BREXIT will be felt over years.
  • The odds of a fed funds rate hike this year are significantly lower because of BREXIT.

In a stunning rebuke to transnationalism, the citizens of the United Kingdom have voted to leave the European Union. Global financial markets were clearly unprepared for what should have been a reasonably foreseeable event. The false positive signal of the Guardian poll just days before the election added to the complacency despite notoriously inaccurate British polling. BREXIT is no doubt a historic event, not only for the United Kingdom, but also for the European Union. The immediate impacts of the LEAVE vote are still playing out in global financial markets as they grope through the uncertainty. U.S. and global equity markets sold off on Friday. Fortunately, the weekend provided a much needed, although temporary, circuit breaker. Treasury bond yields dropped as investors crowded into lower risk assets. The dollar strengthened against the pound and the euro. Gold rallied. Oil sunk.

Short Term: We expect to see ongoing, but diminishing, volatility in global financial markets in coming weeks. BREXIT was a game changer, but it does not appear to be a Lehman moment. There is not a huge avalanche of potential energy behind the vote waiting to pull down primary financial institutions in very short order. The Bank of England and the European Central Bank stand ready to provide liquidity as needed. Prime Minister David Cameron has announced his intention to step down, launching a new election cycle in the U.K. and increasing political uncertainty there. We assume that the next Prime Minister will invoke Article 50 of the EU bylaws which is the mechanism for exiting the EU. U.S. and other foreign owned corporations that have maintained a presence in the U.K. as an entry point to the EU will start shifting resources and operations toward the continent.

Medium Term: Article 50 negotiations will be contentious. The EU will be eager to make BREXIT painful in order to discourage other countries from following the example of the U.K. The U.K. will retaliate where possible, but their leverage is limited. Article 50 imposes a two-year time limit for negotiating a withdrawal from the EU, so there is a hard break if negotiations fail. Scotland may seek another referendum on independence from England. Northern Ireland faces a much thicker border with the Republic of Ireland. There could be consequences for NATO in a more contentious Europe.

Long Term: BREXIT is a fundamental challenge to the founding principles of the EU. It may no longer be meaningful to talk of an ever closer Europe. If other countries, such as the Czech Republic and the Netherlands, decide to leave the EU, setting the stage for still more departures, then Germany faces a prisoners’ dilemma. Do they try to hold together a crippled EU and face a greater burden for revenue sharing? Or do they move toward an EU Light with reduced financial obligations, or even a two-tiered EU?

Implications for the U.S.: Near term global financial market volatility puts even more pressure on the Federal Reserve to be cautious. We think that there is very little chance that the FOMC will vote to raise the fed funds rate at their next meeting over July 26/27. If the U.K. falls into recession this year without the EU following, global headwinds will be small. However, if the U.K. plus the EU fall back into recession, slower global demand growth would be a headwind for the U.S. and for Asia. An Asian recession would have very serious global consequences. Oil prices might not lift in that environment and inflationary pressure would be very weak. Central banks, including the Federal Reserve, would have to abandon their intention of eventually raising interest rates. There would be no new normal; normal would be something else. Because of increased global risk as a result of BREXIT, we believe that the Federal Reserve will be very cautious through the end of this year. For now, we are leaving one fed funds rate hike in our interest rate forecast, coming in December, but that is not a sure thing. The fed funds futures market places only a 15.5 percent change of at least one fed funds rate hike by December 14th and an equal probability of a rate cut by then.

For a PDF version of this Comerica Economic Alert click here: BREXIT 06-27-16.

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Comerica Economic Weekly

U.S. data released this week were consistent with an economy that has warmed up a bit after a chilly Q1.

Retail sales beat expectations for the second month, increasing in May by 0.5 percent. Already strong April retail sales growth was revised up to 1.3 percent. In both months headline sales were supported by higher prices at gasoline stations. Most categories were positive in May, including gasoline station sales which were up by 2.1 percent.

The National Federation of Independent Business’s business optimism index ticked up in May to 93.8, still somewhat low by historical standards. Expectations for the economy improved by becoming less negative and hiring plans gained strength.

The import price index rose for the third consecutive month in May, up by 1.4 percent as prices for fuel imports rose by 16.2 percent. Both the fuel and nonfuel component added to overall inflation in May.

The producer price index for final demand increased by a strong 0.4 percent in May, boosted by energy prices which gained 2.8 percent. Over the last 12 months the final demand PPI was up by just 0.8 percent.

Lower food prices kept the consumer price index in check, gaining 0.2 percent in May, below expectations. The energy sub-index was up 1.2 percent for the month after increasing by 3.4 percent in April. The food index, which represents around 14 percent of the total basket, about double the weighting for energy, declined by 0.2 percent in May. Over the last 12 months headline CPI is up by 1.0 percent, still weak, but trending up.

Initial claims for unemployment insurance increased by 13,000 for the week ending June 11, to hit 277,000. Continuing claims gained 45,000 for the week ending June 4, reaching 2,157,000.

Business inventories increased by 0.1 percent in April, led by wholesale inventories which increased by 0.6 percent as petroleum prices increased.

Industrial production fell by 0.4 percent in May as manufacturing output dipped and utilities reset after surging in April. Mining output increased for the first time in nine months. The U.S. drilling rig count is flattening out.

Housing starts were little changed in May, supported by a gain in the West. Permits were up just slightly.

The Federal Reserve kept the fed funds rate unchanged at the June 14/15 FOMC meeting. The dot plot, showing the expectations of the fed funds rate by FOMC members, was revised lower yet again. Expectations are now consistent with one-to-two fed funds rate hikes this year. We think that one rate hike is the mostly likely outcome, and that will not come until December.

The BREXIT vote on June 23 is casting a darker shadow over financial markets, suppressing long term interest rates. The potential for easier monetary policy from other central banks is weighing on the Fed.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 06-17-2016.

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May Consumer Prices, June UI Claims, Fed Policy, BREXIT

Warming Inflation, but Not Yet Hot, Warming BREXIT Too

  •  The May Consumer Price Index increased by 0.2 percent with gains in energy prices.
  • The May Core CPI also gained 0.2 percent, and was up 2.2 percent over the previous 12 months.
  • Initial Claims for Unemployment Insurance increased by 13,000 for the week ending June 11.
  • The Federal Open Market Committee kept the fed funds rate unchanged yesterday.

We got the expected push from energy prices in May but lower food prices kept the consumer price index in check, gaining 0.2 percent for the month, which was below expectations. The moderate gain in May was preceded by a strong 0.4 percent increase in the headline CPI in April. Over the last 12 months headline CPI is up by 1.0 percent, still weak, but well above the 0.0 percent year-over-year change from last September. The energy sub-index was up 1.2 percent for the month after increasing by 3.4 percent in April. The food index, which represents about 14 percent of the total basket, about double the weighting for energy, declined by 0.2 percent in May. All major grocery store food group indexes declined in May. Rents were up by 0.4 percent in May, keeping pressure on the core index. Core CPI (all items less food and energy) also gained 0.2 percent in May and finished the 12 month interval up by 2.2 percent. Inflation is warming up but it is not yet hot. We expect the push from energy to ease in mid-summer as crude oil prices stabilize. Warmer inflation is catching the Fed’s attention, but it is not hot enough to light a fire under interest rates.

Initial claims for unemployment insurance increased by 13,000 for the week ending June 11, to hit 277,000. Early June data is difficult to interpret due to the Memorial Day holiday and school closings, which makes today’s weekly claims report most disposable than most. Continuing claims gained 45,000 for the week ending June 4.

As was widely expected, the Federal Open Market Committee voted yesterday to leave the fed funds rate unchanged. In their assessment of current economic conditions the FOMC noted that the pace of improvement in the labor market had slowed while growth in economic activity appeared to have picked up. In her post-announcement press conference Janet Yellen did not rule out the possibility of a rate hike at the next FOMC meeting over July 26/27, but that likelihood has declined significantly. The reason for declining expectations of a July rate hike lies in the new version of the Fed’s “Dot Plot” which shows that FOMC members’ expectations for the level of the fed funds rate at the end of 2016, 2017 and 2018 have diminished somewhat. The central tendency of the June dot plot is consistent with one-to-two rate hikes this year. Three rate hikes this year now appears to be only a remote possibility. The fed funds futures market shows an implied probability of only 7.2 percent that we will see a fed funds rate hike at the end of July. September 20/21 receives only a 29 percent chance of a higher fed funds rate. The odds of a November 1/2 rate hike are only slightly better at 31 percent, due to the proximity of the FOMC meeting to the U.S. election. December 13/14 receives a 47 percent chance of a higher fed funds rate. Adding weight to expectations of ongoing low interest rates is the growing concern over the upcoming BREXIT vote, scheduled for June 23rd. The LEAVE camp appears to be gaining momentum and European financial markets are increasingly risk averse heading into the vote. A LEAVE vote could be destabilizing enough to cause the European Central Bank to drive their benchmark interest rates further into negative territory, which would spill over into the Treasury bond market and further depress U.S. interest rates.

Market Reaction: Equity markets opened with losses. The 10-Year Treasury bond yield is down to 1.53 percent. NYMEX crude oil is down to $46.68/barrel. Natural gas futures are down to $2.67/mmbtu.

For a PDF version of this Comerica Economic Alert click here: CPI 06-16-15.

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May Retail Sales, NFIB Survey, Import Prices, April Inventories

Second Month of Solid Sales Supported by Gasoline

  • May Retail Sales increased by 0.5 percent, after gaining 1.3 percent in April.
  • Ex-auto Retail Sales improved by 0.4 percent, supported by gasoline station sales.
  • The NFIB’s Business Optimism Index increased slightly in May to 93.8.
  • The Import Price Index gained 1.4 percent in May as fuel prices climbed.
  • Business Inventories increased by 0.1 percent in April.
  • FOMC preview…no change in interest rates tomorrow.

Retail sales beat expectations for the second month, increasing in May by 0.5 percent. Already strong April retail sales growth was revised up to 1.3 percent. In both months headline sales were supported by higher prices at gasoline stations. Unit auto sales ticked up just slightly in May to a 17.5 million unit rate. Retail sales of autos and parts (dollar value) increased by 0.5 percent. Excluding autos, retail sales gained 0.4 percent for the month. Most categories were positive, including gasoline station sales which were up by 2.1 percent on higher prices. However, building material sales were down by 1.8 percent in May after falling by 2.0 percent in April. Some of the softness in building materials could be weather-related. The May retail sales report was good news, consistent with our expectation of a rebound in Q2 real GDP growth to about 2.3 percent. The consumer continues to be a stabilizing force for the U.S. economy. However, the retail sales numbers are not so positive that the Federal Reserve will look past the very weak May employment numbers and raise the fed funds rate tomorrow. We expect no change in the fed funds rate until later this year, possibly September.The National Federation of Independent Business’s Business Optimism Index ticked up in May to 93.8, still somewhat low by historical standards. This tends to be a somewhat conservative survey so the better results in May are good news. Expectations for the economy improved by becoming less negative and hiring plans gained strength.

The import price index rose for the third consecutive month in May, up by 1.4 percent as prices for fuel imports rose by 16.2 percent. The price index for all imports excluding fuel increased by 0.3 percent in May. So even without the push from higher oil prices, import prices are generally up. Both the fuel and nonfuel component added to overall inflation in May.

Business inventories increased by 0.1 percent in April, led by wholesale inventories which increased by 0.6 percent. These are nominal numbers, so they reflect a price push from petroleum. Therefore, we maintain our view that inventories will continue to be a drag on GDP in the current quarter.

Market Reaction: Equity markets are down. The 10-year Treasury yield is down to 1.60 percent. NYMEX crude oil is down to $48.33/barrel. Natural gas futures are up to $2.59/mmbtu.

Economic Alert 061416

For a PDF version of this Comerica Economic Alert click here: Retail Sales 06-14-16.

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Comerica Economic Weekly

Economists are still trying to digest the big miss in the May payroll data, when only 38,000 payroll jobs were added for the month. It was a light week for data, but three data releases from this week add to the discussion about the May payroll data.

The first data release of interest is the Federal Reserve’s Labor Market Conditions Index for May. The LMCI is a relatively new tool launched by the Federal Reserve in May 2014. The LMCI mashes together 19 different labor market indicators each month to generate a single time series showing U.S. labor market conditions. It is a reasonable leading indicator for GDP growth. However, it is not foolproof. The LMCI has gone slightly negative near mid-cycle for each of the last three expansions. It is slightly negative in its most recent data point for May, as it has been since last January. A steep drop in the LMCI would be a major red flag for the economy, but we are not seeing a steep drop and we do not expect to see that in the near term.

Next is the Job Openings and Labor Turnover Survey for April. The JOLTS data trail the payroll data by a month and so the release is usually not of primary importance. Often, JOLTS data are used to confirm what we already think we know about the labor market. In the April JOLTS data, we see the job openings rate (as a percent of establishment employment) ticking up to 3.9 percent. This was the strongest job openings rate since January 2001. There is no sign of weakness there. Another series of interest in the JOLTS data is the quits rate, which shows voluntary separations, a positive economic indicator. The quits rate in April dipped slightly from 2.1 percent in March, to 2.0 percent. The overall trend in quits has been consistently positive since early 2010, and we do not expect that to change in the near term.

Finally, we have the weekly release of unemployment insurance claims. This is considered to be the best high frequency indicator of labor market conditions. For the week ending June 4, initial claims for unemployment insurance decreased by 4,000, bringing the series down to a total of 264,000 which is a very low number. Recent decreases in initial claims have alleviated our concerns about an uptick visible through April. Continuing claims for unemployment insurance (all active claims) fell significantly, by 77,000, for the week ending May 28, to reach 2,095,000. The claims data are very positive right now and do not indicate any impending softening in labor market conditions.

Still there is the corroborating evidence in some labor market indicators, including the May ISM Manufacturing Index and the May ISM Non-Manufacturing Index, that the weak May payroll data was not a complete anomaly. We now expect the June payroll numbers to bounce back to somewhere near 180,000.

The recent labor market data adds enough uncertainty to the Federal Reserve’s analysis to keep the FOMC from raising the fed funds rate at their upcoming meeting over June 14/15. A rate hike for July 27 is still on the table, but the odds are less than 50 percent.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 06-10-2016.

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June 2016, Comerica U.S. Economic Update

Recent U.S. economic data has generally been positive. The very weak first quarter real GDP growth has been revised up from the initial estimate of 0.5 percent annualized, to 0.8 percent. We expect to see another minor upward revision to GDP on June 28. Consumer spending in April was strong, gaining 0.6 percent after accounting for higher prices, a significant support to Q2 GDP growth. We expect the current quarter to show a moderate rebound in real GDP growth, up to about 2.3 percent, supported by stronger consumer spending and less drag from the energy sector. In early June, the U.S. rig count increased for the first time since last August.

However, the May employment report from the Bureau of Labor Statistics landed with a thud. According to the BLS, only 38,000 net new payroll jobs were added to the U.S. economy in May, well below expectations. This could turn out to be an anomalous report, and it is reasonable to expect some bounce back in the June labor data, due out July 8. However, there is enough corroboration outside the June employment report to take the miss seriously. First, job growth in the ADP employment report has been trending down. We have been expecting a similar downtrend in the official BLS data. We could be seeing the start of a downtrend with the last two months of payroll data, when April saw a gain of just 123,000 jobs, followed by May’s very weak 38,000. Second, productivity growth has been very weak. Recent weak productivity growth has been an important debate topic amongst economists. University of Chicago economist Robert Gordon recently published a book focusing on productivity. U.S. productivity growth was just 0.6 percent in 2016Q1 versus 2015Q1. A pickup in GDP growth in Q2, plus weak hiring over the quarter, could mark the reset in productivity growth that some economists have been waiting for. Third, both the May ISM Manufacturing Index and the May ISM Non-Manufacturing Index showed employment sub-indexes below 50, indicating a contraction in employment for the month. As is often the case, the May employment report went in two directions at once, showing weak job growth combined with a noticeable step down in the unemployment rate, from 5.0 percent in April, down to 4.7 percent in May. Strong increases in the labor force have kept the unemployment rate stable near 5.0 percent since last September. In May, the labor force gains reversed, bringing the unemployment rate down despite weak hiring.

Timing is everything. The weak May employment report, released just 10 days before the upcoming Federal Open Market Committee meeting, over June 14 and 15, will likely keep an interest rate increase on hold. We still think that a fed funds rate increase for July 27 is on the table. But the economic data will need to be solid in front of that meeting. The upcoming BREXIT vote in the United Kingdom is also an issue for the Fed. The STAY camp is still ahead in the polls, but their lead is narrowing. A LEAVE vote is viewed as economically destabilizing in the near term for both the UK and the EU. Janet Yellen’s speech in Philadelphia on June 6 gave her an opportunity to set market expectations for the upcoming FOMC meeting. Her speech was generally positive, but highlighted several areas of uncertainty including the weak May employment data. Yellen’s optimistic but cautious speech was consistent with no rate hike in June, but also consistent with the possibility of a rate hike at the end of July if the data is supportive.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate0616.

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Comerica Economic Weekly

It was a short but interesting data-intensive week for the U.S. economy, starting out with a positive income and spending report for April and ending with a clunker of a jobs report for May.

Income and spending data for April were solid and consistent with stronger GDP growth in Q2 after weak first quarter real GDP growth of 0.8 percent annualized (now revised up from the initial 0.5 percent estimate). Nominal consumer spending increased by a strong 1.0 percent in April as auto sales picked up to a 17.4 million unit annual rate after dipping to 16.6 in March.

Light vehicles sales for May were little changed from April at a 17.4 million unit sales pace. We have now had six consecutive months of auto sales below the robust 18+ million unit sales rate of last September, October and November, strengthening the argument that auto sales have reached their cyclical peak.

House prices continued to increase through March according to the S&P/Case-Shiller U.S. National Home Price Index, which increased by 0.1 percent in March. Over the previous 12 months, the national HPI was up by 5.2 percent.

The ISM Manufacturing Index for May increased from 50.8 in April to 51.3 percent, indicating improving conditions for U.S. manufacturers. Most sub-indexes were above the break-even 50 level for the month, including new orders and production.

The ISM Non-Manufacturing Index for May ticked down from 55.7 in April to a still-positive 52.9. Eight out of ten sub-indexes were positive for the month. Notably, the employment sub-index dipped to 49.7 in May, indicating less new hiring.

Initial claims for unemployment insurance fell by 1,000 for the week ending May 28 to reach 267,000, a very good number. Continuing claims for the week ending May 21 increased by 12,000 to hit 2,172,000.

The U.S. international trade gap widened moderately in April to -$37.4 billion. Early in Q2, it looks like trade could be a slight adder to Q2 GDP, but that could change with the May and June trade data. Revisions to Q1 trade data are a slight positive for Q1 GDP.

Payroll jobs increased by just 38,000 on net in May. The meager gain was well below consensus expectations. Weak job growth was broad-based, visible in many different industries. Still, we did see a moderate 0.2 percent increase in average hourly earnings, reflecting tightening labor market conditions. The unemployment rate dropped to 4.7 percent as the labor force declined noticeably, by 458,000 workers.

With the big miss on payroll jobs for May, we believe that a fed funds rate hike at the upcoming June 14/15 FOMC meeting is off the table.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 06-03-2016.

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May U.S. Employment, April International Trade

Poor May Jobs Report Reduces Likelihood of June 15 Fed Rate Hike

  • May Payroll Employment increased by just 38,000 jobs, the lowest since September 2010.
  • The Unemployment Rate for May fell to 4.7 percent as the labor force declined sharply.
  • Average Hourly Earnings increased moderately by 0.2 percent.
  • Average Weekly Hours were steady at 34.4.
  • The U.S. International Trade Gap widened to -$37.4 billion in April.

Payroll jobs increased by just 38,000 on net in May. The meager gain was well below consensus expectations, and it is the weakest monthly payroll gain since September of 2010. Weak job growth was broad-based, visible in many different industries. Still, we did see a moderate 0.2 percent increase in average hourly earnings, reflecting tightening labor market conditions. The unemployment rate dropped to 4.7 percent as the labor force declined noticeably, by 458,000 workers. This is the second large monthly decline in the labor force after a string of outsized gains, which kept the unemployment rate from going down in recent months. The interpretation of today’s numbers is somewhat muddied by the seven-week Verizon strike which involved about 40,000 workers. But even putting 40K back into the payroll numbers, we still see a very disappointing report. Adding insult to injury, the April payroll gain was revised down from 160,000 to 123,000 jobs. We expect job growth to gradually ease from the heady +200K per month pace of the last two years, but we do not expect to see a sudden stall. We look for stronger job growth in the June data which will be released on July 8th.

The establishment data for May was generally poor. Employment in mining and logging industries fell by 11,000 as the oil patch continues to reset. Surprisingly, construction employment fell by 15,000 in May. Manufacturing industries shed 10,000 jobs. Wholesale trade dropped 10,300. Retail trade gained, but it was an unimpressive 11,400. Information services jobs were down by 34,000, and that is where we see the impact of the now-settled Verizon strike. Financial services gained 8,000 jobs for the month. Professional and business services employment was soft, gaining only 10,000 jobs in May. Education and healthcare was the saving grace, adding a strong 67,000 jobs for the month. Leisure and hospitality industries netted an unimpressive 11,000 jobs. Government employment was up normally, by 13,000 jobs.

So we now have three strikes against a fed funds rate increase on June 15: (1) recent unenthusiastic comments by Janet Yellen and Daniel Tarullo, (2) a very weak May jobs report and (3) uncertainty about the upcoming June 23rd BREXIT vote. A July 27 fed funds rate hike is still on the table, but we will have to see a solid June jobs report in order to have confidence in that.

The U.S. international trade gap widened moderately in April to -$37.4 billion. Imports increased by $4.5 billion for the month, while exports increased by $2.6 billion. Early in Q2, it looks like trade could be a slight adder to Q2 GDP, but that could change with the May and June trade data. Revisions to Q1 trade data are a slight positive for Q1 GDP.

Market Reaction: U.S. equity markets opened with losses. The 10-Year T-bond yield is down to 1.71 percent. NYMEX crude oil is down to $48.82/barrel. Natural gas futures are down to $2.40/mmbtu.

Alert 06_03_2016

For a PDF version of this Comerica Economic Alert click here: Employment 06-03-16.

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