May ADP Employment, Auto Sales, ISM MF and Non-MF, April Trade

U.S. Data Improves, Consistent with 2015 GDP Ramp-Up After Dismal Q1

  • Private-Sector Employment increased by 201,000 jobs in May, according to ADP.
  • Light Vehicle Sales zoomed to a 17.8 million unit annual rate in May.
  • The ISM Manufacturing Index for May increased to 52.8 percent as new orders firmed up.
  • The ISM Non-Manufacturing Index for May eased to a still-positive 55.7 percent.
  • The U.S. International Trade Gap narrowed significantly in May to -$40.9 billion.
  • Personal Income gained 0.4 percent in April. Spending was flat.
  • April Construction Spending gained 2.2 percent with increased spending on public projects.

The bulk of U.S. data from early June point to improved real GDP growth in the current second quarter, after the dismal -0.7 percent real GDP growth rate of Q1. Ahead of this Friday’s official Bureau of Labor Statistics employment report for May, the ADP jobs report showed a solid gain of 201,000 jobs for the month. Small businesses (0-49 employees) accounting for over 60 percent of the hiring in May. If we add an estimated 10,000 government jobs to the private-sector total from ADP, that puts us at a forecast of 211,000 in May for the official non-farm count. That would be a healthy gain, but probably not enough to change the 5.4 percent unemployment rate from April. Consistent moderate-to-strong job growth in April and May would give us more confidence in saying that the weak March jobs data (+85,000), was an aberration, and not due to an enduring downshift in hiring. However, a downside miss on Friday’s jobs report for May would provoke speculation about a weaker U.S. economy.

Auto sales for May were even better than the strong whisper numbers. Sales zoomed ahead to a 17.8 million unit rate for the month, supportive of Q2 GDP.  Auto sales near the 18 million unit mark are probably not sustainable, but strong May sales suggest that the U.S. consumer is willing to spend again after weaker-than-expected retail sales and consumer spending reports since late last year. We expect June sales to settle back to a 16.5-17.0 million unit rate.

The ISM Manufacturing Index for May increased to 52.8 percent as both new orders and the backlog of orders improved. A strong dollar and decreased oil drilling activity are drags for U.S. manufacturing, but a strong U.S. consumer sector (auto sales) is a plus. Also, supply chain problems stemming from the California port strike are resolving. The ISM-Nonmanufacturing index for May eased to a still-positive 55.7 percent. There does not appear to be an overall theme to the slight loss of momentum in non-manufacturing industries.

The U.S. international trade gap narrowed significantly in April after widening in March. Labor issues at California ports have been blamed for some of the erratic behavior. Goods imports have been unpredictable, dipping in January and February, and then surging in March. April goods imports eased, but look like an undershot, so we may see another gain in May, widening the trade gap yet again. Goods exports have been steadier. We expect trade to be positive for GDP in Q2 after subtracting almost 2 percent from Q1 real GDP growth.

Construction spending increased by 2.2 percent in April, supportive of Q2 GDP. Total public construction gained 3.3 percent. Private-nonresidential was also strong, up by 3.1 percent in April. Private residential construction spending increased by a more moderate 0.6 percent, but we expect to see gains there in the months ahead.

Better recent U.S. data also clears the path for the Federal Reserve to begin to increase the fed funds rate this year. We still look for a September 17 announcement from the FOMC signaling the beginning of the “crawl” to higher short-term interest rates.

Market Reaction: U.S. equity prices are up. The 10-year Treasury bond yield is up to 2.34 percent. NYMEX crude oil is up to $60.39/barrel. Natural gas futures are down to $2.65/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Int Trade 06-03-15.

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Comerica Economic Weekly

The forward-looking data from this week were positive. The backward-looking numbers, not so much.

U.S. real GDP growth for Q1 was revised to a -0.7 percent annual rate, about as expected. This is a backward looking number, and a number that has become controversial among data gnomes. Some argue that the seasonal adjustment factors of the components of GDP were not calculated correctly and that we actually had a modest gain in Q1 real GDP. As they stand now, the official numbers from the Bureau of Economic Analysis show modest real consumer spending growth, weak business fixed investment, a moderate gain from inventories, a big drag from trade and weak government spending. With the second estimate of Q1 GDP comes our first look at Q1 corporate profits. They were weak, declining at a 5.9 percent annual rate. The backstory to today’s GDP numbers involves the labor dispute at California ports skewing the trade data, very bad weather and low oil prices dragging business investment and corporate profits.

U.S. consumers’ outlook was better in May according to the Conference Board’s Consumer Confidence Index. The index increased moderately to 95.4 after slumping to 94.3 in April.

New home sales for April increased by 6.8 percent to hit an annual rate of 517,000 units after declining sharply in March. New home sales are still very low compared to historical averages. However, the data for 2015 so far supports an upside breakout from the range-bound sales that we saw through 2013 and 2014.

The Case-Shiller 20-City Composite House Price Index for March increased by 1.0 percent. Solid house price appreciation is a major support to households, who are seeing the equity in their homes increase at a 9.9 percent year-over-year rate as of 2014Q4.

New orders for durable manufactured goods eased in April, down 0.5 percent after a strong 5.1 percent increase the month before. The “core” measure of new orders shows more stability in the manufacturing sector. New orders for nondefense capital goods excluding aircraft gained 1.5 percent in March and then gained another 1.0 percent in April.

The Richmond Fed reported flat manufacturing activity for May. The Dallas Fed said that Texas manufacturing activity fell sharply again in May.

Initial claims for unemployment insurance increased by 7,000 initial claims for the week ending May 23, to hit a level of 282,000. This is still a very good number, consistent with ongoing tightening in overall labor market conditions.

Oil prices eased through the week, falling below $57 on Thursday on renewed concern about overproduction. Oil remains a wildcard for Federal Reserve monetary policy. A significant drop in oil prices from here would drag on inflation, potentially delaying the much discussed first increase in the fed funds rate since June 2006.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 05-29-15.

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From the Desk of Robert Dye

Weekly Unemployment Insurance Claims Increase, but Still Look Very Good

Labor market metrics continue to look good. Today’s data release of initial claims for unemployment insurance shows an increase of 7,000 initial claims for the week ending May 23, to hit a level of 282,000. This is still a very good number, consistent with ongoing tightening in overall labor market conditions. Also it is consistent with solid payroll job growth in May. The jobs report for May is due from the BLS next Friday morning, June 5 at 8:30 a.m. eastern time. I expect to see about 230,000 jobs added for the month, and the unemployment rate unchanged at 5.4 percent.

Labor markets look like they are again going in the right direction, after soft job growth in March. Assuming ongoing steady job growth, the Federal Reserve will feel satisfied about one of its two key criteria for interest rate lift-off. The second criterion is inflation returning to about a 2 percent year-over-year rate. A key part of the inflation outlook is the price of oil. Oil prices steady in the $55-60/bbl range will allow inflation to gradually pick up from its current near-zero year-over-year rate (as measured by headline CPI in April).

With ongoing moderate-to-strong job growth through the summer and stable-to-increasing oil prices, we still expect the Federal Reserve to announce the first increase in the fed funds rate in nine years on September 17.

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From the Desk of Robert Dye

Thoughts About Greece as the June 5 Payment Deadline Approaches

According to today’s Financial Times, Greece owes a 300 million euro payment to the International Monetary Fund on June 5. There is widespread concern in global financial markets about Greece’s ability to pay, and speculation about Greece’s future inside or outside of the European Union. Often, the many issues surrounding Greece debt payments are rolled up into one big question…can Greece stay in the European Union? This assumes that there is a mechanism for leaving the EU, which there is not, and that Greece would be a successful state if only they could free themselves of the fiscal (taxation and spending) and monetary (currency, interest rates and money supply) controls imposed by EU membership. That is a big “if.”

GREXIT draws attention to the possibility of a failed and unstable Europe. The financial reporting on the crisis in Greece often conflates several issues, rendering the analysis meaningless. Let’s untangle the issues first by saying that Greece’s willingness to make the payment on June 5 does not necessarily equal their ability to make the payment. It appears likely that Greece will need a deal in order to have the ability to make the payment. Second, even if they are willing and able to make this payment, there may be future struggles involving later payments.

Greece appears to have both a liquidity crisis and a solvency crisis. Being liquid enough to make the payment on June 5 does not guarantee that the country can remain solvent over the long-term. Fiscal controls (spending cuts and revenue collections) are needed to insure long-term solvency. Tighter fiscal controls for Greece, however, raise the possibility of political instability, an adverse feedback loop that could have spillover costs for all of Europe. So here we see the linkage between the financial issue and the political issue for Greece.

To better understand the progression toward GREXIT, let us assume that the near-term liquidity crisis cannot be solved. There is no deal between Greece and the troika of the IMF, the European Union and the European Central Bank. The willingness and ability of Greece to make the payment evaporates, and Greece holds onto its liquidity, but potentially remains long-term insolvent.  If Greece cannot fulfill its obligations to its creditors, then it defaults, which is a legal issue.

In order to analyze the consequences of a Greek default, we need make some assumptions about the type of default. A default could be structured, or negotiated, and not have catastrophic consequences for the creditors. Or a default could be unilateral and unstructured, with disastrous consequences for creditors and other counterparties. We assume that if Greece cannot make its payment to the IMF, then the IMF as an institution is not severely damaged. However, if Greece were to default on other obligations, such as on payments to holders of its sovereign debt, then individuals and institutions holding that debt could be damaged. A Greek default on its obligations would raise serious concerns about their ability to borrow money as an independent state after their exit from the EU.

Because we have no better way to assign odds to the process of GREXIT, let’s use the universal oddsmaker, a coin toss. Let’s set the probability of a missed payment on June 5 to be 50 percent. Let’s assume that the missed payment leads to a negotiated default and a restructuring of the loans by the IMF. Let’s assume that Greece does not default on its other sovereign obligations so that the damage from a Greek default is minimal. Let’s assume that a default on its IMF loan by Greece has a 50 percent chance of initiating the political process of a Greek exit from the EU. Then we can say that there is a 25 percent chance ( 0.50 times 0.50) that Greece will exit the EU soon.

While the ability to predict the final outcome of the Greek crisis is well beyond anyone’s ability, I hope that this brief discussion adds some value to your analysis of this very complex situation.

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Comerica Bank’s Texas Index Continues Decline on Oil

Comerica Bank’s Texas Economic Activity Index eased again in March, decreasing 3.4 percentage points to a level of 101.1. March’s reading is 29 points, or 39 percent, above the index cyclical low of 72.6. The index averaged 105.1 points for all of 2014, four and four-fifths points above the average for full-year 2013. February’s index reading was 104.6.

“The Texas economy has lost momentum due to the reset in oil prices. Our Texas Economic Activity Index has declined for five consecutive months, beginning in November of last year. We expect to see more declines over the coming months as consolidation in the state’s energy sector continues. Six out of eight index components declined in March. The exception was house prices, supported by the strong North Texas market,” said Robert Dye, Chief Economist at Comerica Bank. “Recent firming of crude oil prices to the $55-$60 range is a good sign. We expect drilling rig counts to level out by mid-summer after falling by almost 60 percent, and that will help to establish a floor for the energy sector.”

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For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0515.

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Comerica Bank’s Michigan Index Sees Second Consecutive Decline

Comerica Bank’s Michigan Economic Activity Index decreased in March, losing 0.8 percentage points to reach a level of 117.8. March’s reading is 44 points, or 60 percent, above the index cyclical low of 73.8. The index averaged 117.6 points for all of 2014, three and three-tenths points above the index average for 2013. February’s index reading was 118.6.

“Our Michigan Economic Activity Index declined again in March, showing the impact of a lingering bad winter on the state economy. Residential construction activity in particular was delayed due to weather. Also, auto production ticked down as sales were hampered nationally by bad weather in February. The good news is that job creation continues to match the U.S. average, and that will support increasing consumer spending for Michigan households,” said Robert Dye, Chief Economist at Comerica Bank. “So far in this business cycle the state’s manufacturing sector has added jobs at a steady rate. We expect those gains to taper as the business cycle matures, with more jobs coming from nonmanufacturing industries.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0515.

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Comerica Bank’s California Index Eases for First Time in a Year

Comerica Bank’s California Economic Activity Index declined in March, decreasing 0.6 percentage points to a level of 118.8. March’s reading is 35 points, or 42 percent, above the index cyclical low of 83.8. The index averaged 113.7 points for all of 2014, seven and one-half points above the average for all of 2013. February’s index reading was 119.4.

“Our California Economic Activity Index dipped in March after holding steady in February. Losses were not broad-based. Four out of the eight index components fell in March. They were state exports, housing starts, defense spending, and the tech stock index. Some of the weakness in the export data may be related to the now-resolved labor issues at California ports. The most important component of the index, payroll job growth, was positive in March,” said Robert Dye, Chief Economist at Comerica Bank. “We expect our California Index to resume its upward track soon, as the state economy expands through the summer.”

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For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0515.

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Comerica Bank’s Arizona Index Still Gaining

Comerica Bank’s Arizona Economic Activity Index grew again in March, increasing 0.4 percentage points to a level of 107.3. March’s index reading is 31 points, or 40 percent, above the index cyclical low of 76.7. The index averaged 99.9 points for all of 2014, four and two-fifths points above the average for full-year 2013. February’s index reading was 106.9.

“Comerica Bank’s Arizona Economic Activity Index climbed again in March with mixed support. Four of the eight index components improved in March, including nonfarm payroll employment. Real estate prices are starting to firm up and that is a good sign for the state economy. The fact that housing in Arizona remains very affordable may work in Arizona’s favor, as other competing U.S. vacation and retirement destinations get more expensive,” said Robert Dye, Chief Economist at Comerica Bank. “We expect the Arizona economy to keep improving through the summer.”

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For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0515.

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Comerica Bank’s Florida Index Shows Strong Growth

Comerica Bank’s Florida Economic Activity Index gained in March, growing 3.5 percentage points to a level of 133.2. March’s index reading is 55 points, or 71 percent, above the index cyclical low of 78.0. The index averaged 118.0 in 2014, eight and four-fifths points above the average for all of 2013. February’s index reading was 129.7.

“Economic activity is accelerating in Florida, as shown by the strong increase in our Florida Economic Activity Index in March. Most index components were positive for the month, including nonfarm payroll employment. Florida is once again showing strong mid-cycle economic growth, accompanied by tightening residential and commercial property markets,” said Robert Dye, Chief Economist at Comerica Bank. “Potential headwinds for the state economy are the strong U.S. dollar and rising interest rates. A strong dollar makes it more expensive for foreign tourists to vacation in Florida and for foreign investors to buy property in Florida. A strengthening dollar in a rising interest rate environment will reduce the affordability of real estate for foreign buyers.”

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For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0515.

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May Consumer Confidence, April Home Sales, Durable Goods, March Home Prices

Better Data Bolsters Case for GDP Rebound

  • New Home Sales for April increased by 6.8 percent to an annual rate of 517,000 units.
  • The Conference Board’s Consumer Confidence Index climbed moderately to 95.4 in May.
  • New Orders for Durable Goods declined by 0.5 percent in April, after a 5.1 percent increase in March.
  • The Case-Shiller 20-City Composite House Price Index increased by 1.0 percent in March.

Today’s grab-bag of generally improving U.S. data supports our expectations for a GDP rebound following the disappointing first quarter print of 0.2 percent real growth. Even though we expect that number to be revised to about -0.8 percent, we see economic momentum improving through the second quarter. U.S. consumers’ outlook was better in May according to the Conference Board’s Consumer Confidence Index. The index increased moderately to 95.4, after slumping to 94.3 in April. Improving labor market conditions were a contributing factor. With more workers in better jobs, more families are buying new houses. New home sales for April increased by 6.8 percent to hit an annual rate of 517,000 units after declining sharply in March. The April rebound in new home sales was concentrated in the Midwest, where sales gained 36.8 percent. The South gained 5.8 percent, while the Northeast declined by 5.6 percent and the West fell by 2.3 percent. The supply of new homes on the market fell to 4.8 months’ worth. New home sales are still very low compared to historical averages. However, the data for 2015 so far supports an upside breakout from the range-bound sales that we saw through 2013 and 2014.

House prices are still climbing. The Case-Shiller 20-City Composite House Price Index for March increased by 1.0 percent. Over the previous 12 months it was up by 5.0 percent, paced by San Francisco, which has seen gains of 10.3 percent over the past year. Denver is a close second at 10.0 percent gains, followed by Dallas at 9.3 percent. At the bottom of the list of 20 cities is New York, up 2.7 percent over the past year, and Cleveland and Washington D.C., both up 1.0 percent over the year. Solid house price appreciation is a major support to households, who are seeing the equity in their homes increase at a 9.9 percent year-over-year rate as of 2014Q4.

New orders for durable manufactured goods eased in April, down 0.5 percent after a strong 5.1 percent increase the month before. As is often the case, the headline new orders numbers were driven in March and April by volatile aircraft orders. Both defense and nondefense aircraft orders surged in March and then eased in April. A “core” measure of new orders shows more stability in the manufacturing sector. New orders for nondefense capital goods excluding aircraft gained 1.5 percent in March and then gained another 1.0 percent in April. There is no doubt that the drags from reduced oil drilling activity and the increased value of the dollar are weighing on manufacturers. The drag from reduced oil-field activity is especially evident in the regional manufacturing reports. The Federal Reserve Bank of Richmond reports flat manufacturing activity for May in the region from Maryland through South Carolina. However, the Dallas Fed said that Texas manufacturing activity fell sharply again in May.

Market Reaction: U.S. equity markets opened with losses. The 10-year Treasury bond yield is down to 2.16 percent. NYMEX crude oil is down to $59.79/barrel. Natural gas futures are down to $2.87/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: New_Home Sales 05-26-15.

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