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

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

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

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

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

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

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

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

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

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

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Comerica Economic Weekly

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

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

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

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

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

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

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

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The Detroit Metro Area Is Losing Jobs

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

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

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

Detroit 2014Q1

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

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Central West Michigan Continues to Grow Moderately

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

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

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

CWMI 2014Q1

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

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Southern California, Recovering and Transforming

Transformation is occurring in downtown Los Angeles with a number of mega-development projects underway or on the drawing boards. Greenland U.S. Holding Inc. broke ground this year on the first phase of the mega-project named Metropolis. The $1 billion project is a combined residential, retail and hotel urban development. The first phase consists of a 19-story hotel with the capacity for 350 rooms and a 38-story residential tower. Both structures are expected to be completed by 2016. Ongoing residential and commercial developments are expected to bring more workers into the downtown area, which will increase consumer spending.

Housing markets remain tight in Southern California, allowing home owners to continue gaining equity in their homes at a relatively fast pace. Case-Shiller home prices for Los Angeles and San Diego were up 16.8 percent and 18.9 percent, respectively, from a year ago in March. After peaking in 2006, home values in Southern California plummeted by around 42 percent. According to March’s Case-Shiller Home Price Index, single-family houses in Los Angeles still have to gain another 23 percent from current prices to attain their pre-recession peak. So, a recovering housing market remains an integral part of the economic story for Southern California for the next few years.

Southern California labor markets continue to improve. The construction sector grew 8.8 percent from a year ago in April, adding over 28,000 jobs to the area economy. Most sectors showed solid growth while financial activities and government-related industries have been a drag on area labor markets in the first part of 2014. Southern California nonfarm payrolls are expected to increase 2 percent or 150,000 jobs in 2014.

Southern CA 2014Q1

Click here for the complete Southern California Regional Economic Update: SouthernCA 2014Q1.

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Northern California, Looking Frothy

Some Northern California price metrics are looking frothy. Home price growth is strong, yet unsustainable. According to the Case-Shiller Home Price Index, San Francisco year-over-year single-family house price growth remained above 20 percent from March 2013 to March 2014. House price to household income ratios show that housing affordability has declined significantly in the region since 2011. The San Francisco Metropolitan Statistical Area (MSA) reading of 3.7 surpassed its long-run average for house price to income ratio in 2013, while the San Jose MSA was approaching its long-run average. However, these ratios remain below 2008 levels. We expect Northern California house price appreciation to begin moderating this year.

If 2013 was the year of tech IPOs, then 2014 is the year of high-valuations and uncertainty. A number of notable tech acquisitions occurred in early 2014 at above normal valuations. Reminiscent of the tech bubble of 1999-2001, investors and analysts are beginning to wonder how bubbly the tech sector has become. The Silicon Valley 150 saw a correction at the beginning of March, declining 15.2 percent before hitting its trough in April. But, companies are still sitting on a lot of cash, allowing for more acquisitions this year. Standard and Poor’s reported in April that 1,700 businesses increased their total cash and short-term investments by 11 percent in 2013, to a total of $1.53 trillion. The technology sector held about a third of all the cash and short term-investments.

Northern California labor markets continue to perform well. Year-over-year employment growth in the San Jose MSA has remained above 4 percent since June 2012. Most sectors have shown positive gains, particularly education and health services, which added over 18,000 jobs to the area in the 12 months ending in April. We expect gains in area employment to remain strong at around 3 percent in 2014.

Northern CA 2014Q1

Click here for the complete Northern California Regional Economic Update: NorthernCA 2014Q1.

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Miami Benefits from the Cold Winter and Improving Economic Outlook

Snowbirds flocked to Miami’s beautiful beaches in order to thaw out from this winter’s unusually cold weather. Miami’s warm weather drew in more domestic tourism in the first part of 2014, with total domestic passenger deplanements at Miami International Airport increasing 3.2 percent from a year ago in Q1. Hotel occupancy remained in solid territory in the Miami area, at 85.8 percent in March. It is not just the weather that is leading to improvements in Miami’s tourism industry. The improving overall U.S. economy continues to support growth in leisure and hospitality throughout the Miami area. Consumers are feeling the positive wealth effects from increasing home prices, improving 401ks and increasing incomes, leading to increased consumer spending.

Demand for single-family houses and condos remains strong throughout the Miami Metropolitan Statistical Area (MSA). Double-digit gains in house prices last year have encouraged more home owners to put their houses on the market. However, residential real estate markets remain tight. Miami house prices increased 16 percent or above year-over-year from November of 2013 through February 2014, according to the Case-Shiller Home Price Index. Improving U.S. and European economies will continue to drive both domestic and foreign demand for Miami real estate in 2014.

Miami MSA labor markets continue to improve. The Miami MSA labor force grew at a 4.1 percent annualized rate in Q1. This is a much stronger showing than the 0.7 percent labor force growth in 2013. Employment continues to advance in most industries throughout the MSA. According to the BLS, construction payrolls were up 7.8 percent, professional and business services were up 4.2 percent and leisure and hospitality were up 3.5 percent from a year ago in March. We expect the unemployment rate throughout the MSA to continue to decrease, creating tighter labor markets and putting upward pressure on wages in 2014.

Miami 2014Q1

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

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Phoenix Ongoing Economic Development

Whether it’s the $136 million University of Arizona medical research building in downtown Phoenix or the 10-story office building in Tempe, economic development continues to be an integral part of the long-term strategy for the Phoenix Metropolitan Statistical Area (MSA).

Commercial real estate projects in Tempe are expected to draw in additional companies and workers. Developer, Ryan Companies, broke ground on a new Class A 10-story office building this year. This is the final phase of the Hayden Ferry development project which is a combined residential and business complex located on the southern portion of Tempe Town Lake. Next door to the Hayden Ferry development lays Marina Heights. This is the future site of a two million-square-foot project which will be a combination of retail activity, business activity and a lakeside plaza. The $600 million project, which broke ground in July of last year, will house a regional headquarters for State Farm Insurance. The dynamic developments are expected to bring new workers to the Tempe area, adding to consumer spending in the surrounding communities.

Residential development for the Phoenix MSA has been improving at a tepid pace in the early part of 2014. Phoenix total housing starts hovered at a 20,000 unit annual rate from December 2013 through March 2014. Our forecasts are for a population increase of 82,000 in 2014. If we take the population increase and divide it by the average persons per household, then the Phoenix area would need to build 32,000 units just to keep up with population growth. Therefore, a 20,000 unit annual rate for housing starts implies that residential vacancy rates are declining, and that housing markets are tightening in the Phoenix area. There is upside potential in construction activity for the area. Mortgage rates remain relatively low, aiding in housing affordability. Labor markets are improving, which can lead to increased household formation. Baby boomers are booming.

Phoenix 2014Q1

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

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San Antonio Maintains Robust Economic Outlook

San Antonio, the staging point for the Eagle Ford Shale development, comprises about 8.0 percent of the total nonfarm payroll jobs in the entire state of Texas. In the first quarter of 2014, San Antonio added a net of 4,400 nonfarm payroll jobs, about 1,700 fewer than last year’s first quarter. Most of the jobs created in the beginning of the year came from the service-producing sector (3,500) followed by construction (410) and manufacturing (300). Although the job growth looks a bit softer compared to the same period last year, the region is doing reasonably well compared to the previous quarter in which San Antonio added 3,300 jobs. On a year-over-year basis the region’s payrolls grew around 2.5 percent in the first quarter of 2014. This was above the long-term annual job growth of 2.2 percent seen since the 1990s.

San Antonio’s unemployment rate declined to 5.3 percent in 2014Q1 from 5.7 percent of the previous quarter. The decline in the unemployment rate came with an increase in both employment and labor force, a positive signal for the economy. We expect the unemployment rate to decline continuously through 2014 due to a modest improvement in payroll jobs. San Antonio saw a decline in both single- and multifamily housing starts in the first quarter of 2014 after a strong surge in the previous quarter. We expect the total housing starts to rebound in the next quarter and grow moderately through 2014. House prices are expected to grow moderately, at par or slightly above the national average in 2014.

Because of the advancement in oil and gas drilling technologies such as hydraulic fracturing and horizontal drilling, both the rig count and productivity of oil drilling has increased substantially nationwide and in the area. However, the natural gas rig count continues to moderate. We expect San Antonio to add more jobs in construction, manufacturing, health care, tourism, and other service-producing sectors in 2014 than in petroleum production, as most of the jobs in the energy sector have already been added to the economy.

San Antonio 2014Q1

Click here for the complete San Antonio MSA Regional Economic Update: SanAntonio 2014Q1.

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A Robust North Texas Economy

Over the year ending this April, the Dallas-Fort Worth-Arlington metro area added 106,800 payroll jobs, the equivalent of a moderately-sized city. Strong job growth has lowered the unemployment rate for the area to 5.4 percent as of March, well below the national average of 6.7 percent for that month. The recent announcement that Toyota will be moving its North American headquarters to Plano, creating 4,000 new jobs for North Texas, adds to our expectations for ongoing strong job growth. The majority of the new jobs will not be filled until Toyota completes construction of their new headquarters by early 2017. Likewise, State Farm Insurance is moving a regional headquarters to Richardson, adding about 8,000 jobs when fully operational.

The State Farm and Toyota relocations are significant additions for North Texas and will spur more development on the northeast side of the Metroplex. Developer Vision5 is planning to build a 17-story condo and retail tower later this year in Plano. It will be the first high-rise condo north of the Bush Turnpike. The developer already has plans for a second tower. Dallas-Fort Worth International Airport is also expanding, with the addition of 10 new gates at the Terminal B concourse extension. The south side of the Metroplex will be getting some help from a new 212-acre Midlothian Business Park.

Ongoing progress of the Trinity River Corridor Project will spur additional development west of downtown Dallas. Plans continue to be formulated for a high-speed rail connection from Dallas to Fort Worth as well as from Dallas to Houston. Eighteen minutes from Dallas to Fort Worth, and 90 minutes from Dallas to Houston sounds very attractive in light of the certainty of increasing traffic congestion throughout the rapidly growing Texas metro areas.

North Texas 2014Q1

Click here for the complete North Texas MSA Regional Economic Update: NorthTexas 2014Q1.

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