Comerica Bank’s Arizona Index Marks Fifth Month of Growth

Comerica Bank’s Arizona Economic Activity Index grew in January, increasing 0.2 percentage points to a level of 109.7. January’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. December’s index reading was 109.5.

“Our Arizona Economic Activity Index increased in January for the fifth consecutive month. Four out of eight index components were positive, including payroll employment, initial claims for unemployment insurance (inverted), house prices and hotel occupancy. State exports, housing starts, sales tax revenue and enplanements eased in January. The Arizona economy is starting to show more consistent growth after only modest gains through most of 2015. Employment growth in the state is once again trending above the U.S. average on a year-over-year basis,” said Robert Dye, Chief Economist at Comerica Bank. “As real estate costs and business expenses increase in neighboring California, we expect to see more spillover to the Arizona economy in the years ahead.”

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For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0316.

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Comerica Bank’s Florida Index Sees Broad-Based Gains

Comerica Bank’s Florida Economic Activity Index grew in January, increasing 3.4 percentage points to a level of 152.3. January’s index reading is 74 points, or 95 percent, above the index cyclical low of 78.1. The index averaged 138.0 in 2015, twenty and three-tenths points above the average for all of 2014. December’s index reading was 148.9.

“The Comerica Florida Economic Activity Index increased for the 22nd consecutive month in January. Almost all of the index components were positive for the month, indicating broad-based gains in the state economy. Only hotel occupancy dipped in January. The state economy is clearly accelerating and we expect to see ongoing growth for Florida over the remainder of this year,” said Robert Dye, Chief Economist at Comerica Bank. “House prices and house construction are firming up. The state is also seeing increased net migration as baby boomer retirement increases. A recent Census Bureau report shows Florida metro areas among the fastest growing in the U.S..”

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For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0316.

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February Income and Spending

Modest Income Growth Tempered by Declining Corporate Profits

  • U.S. Personal Income increased by 0.2 percent in February, despite strong job growth.
  • Real disposable income gained 0.3 percent for the month.
  • Nominal Consumer Spending increased by just 0.1 percent in February as unit auto sales eased.
  • Real Consumer Spending increased by 0.2 percent in February.

Income and spending data for February were about as expected, and consistent with an ongoing moderate GDP expansion through the nearly completed first quarter of 2016. Nominal personal income gained 0.2 percent even with strong job growth for the month. A net gain of 242,000 payroll jobs was added in February, according to last month’s data from the Bureau of Labor Statistics. We will see the March payroll numbers this Friday morning. Despite the solid job gains last month, wage and salary income decreased by 0.1 percent. The weak wage data for February may be more related to the strong 0.6 percent gain in wages and salaries in January than to real economic factors. There may also be a job mix component to the story. High paying energy-related jobs are being cut while some of the service sector jobs being added are relatively low paying. That is likely only a marginal factor. On a year-over-year basis, wages and salaries in February were up by a reasonable 4.3 percent. One part of income that is looking consistently weak is interest income. Even with the small increase in the fed funds rate initiated by the Federal Reserve in December, nominal interest income was up by just 3.2 percent for the twelve months ending in February, well below the comparable statistic of 15.8 percent from January 2006. Also, dividend income has been weak, unchanged in February as well as last December. Over the 12 months ending in February, nominal dividend income is down by 0.5 percent. Weak dividend income is consistent with the decline in corporate profits seen in three of the last four quarters. After adjusting for inflation and taxes, real disposable income increased by 0.3 percent in February. The personal consumption expenditure (PCE) price index fell by 0.1 percent in February with the drag from very low energy prices. Over the last 12 months the headline PCE price index was up by just 1.0 percent, while the core PCE price index (less food and energy) was up by 1.7 percent.

Nominal consumer spending increased by just 0.1 percent in February. Unit auto sales dipped slightly and gasoline prices were very low. Already, with the recent increase in crude oil prices to near $40 per barrel, gasoline prices are up. This will impact both the nominal spending data and inflation data in the months ahead. After adjusting for inflation, real consumer spending was up by 0.2 percent in February, consistent with our moderate growth forecast for real GDP this year. The personal saving rate (the percentage of personal income not spent), has been trending up. After dipping to 4.9 percent last November, the saving rate climbed to 5.4 percent in February. We believe that it does not need to increase substantially from here, but we will continue to monitor the saving rate in light of its impact on consumer spending going forward.

Market Reaction: U.S. equity markets opened with losses. The yield on the 10-year Treasury bond is down to 1.86 percent. NYMEX crude is down to $39.09/barrel. Natural gas futures are up to $1.91/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Personal Income 03-28-16.

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Comerica Economic Weekly

March has been a better month for U.S. financial markets. Equity markets have now largely clawed back their January and early February losses. Long-term bond yields have increased, but not by as much as they would have without the downward pressure from negative interest rates in Europe and Japan.

Oil prices have bounced off their earlier lows. West Texas Intermediate has been near $40 per barrel for most of this month. Every day in the new $40 range suggests that the floor for global oil markets is firmer. Some industry experts are voicing stronger opinions lately in favor of significantly higher crude oil prices by the end of this year. But even if that optimistic (for the energy industry) scenario does happen, it will take more months for the industry to fully respond with a meaningful upturn in activity. Labor resources have dwindled. Machinery has not been maintained. Credit conditions will remain tight for exploration and production companies this year.

One area that continues to underperform is home sales. Prices are up, inventories are tight, but the number of new and existing homes sales on a monthly basis remains range bound, showing little upward momentum over the last year. New homes sales for February gained 2.0 percent to hit a 512,000 unit annual rate. We believe that improving labor market conditions and easier credit, especially for first time buyers, will help elevate the rate of new home sales this year.

Existing home sales fell by 7.1 percent in February to hit a 5.08 million unit annual rate. Inventories of available existing homes are tight at 4.4 months’ supply. In February, the median price of an existing home was up 4.4 percent over the previous 12 months.

New orders for durable goods decreased by 2.8 percent in February. Both commercial and defense aircraft were big losers in February, after being big winners in January. Other areas were also weak in February. New orders for nondefense capital goods excluding aircraft were down by 1.8 percent. While some regional manufacturing indicators have improved lately, we still believe that significant headwinds remain for U.S. manufacturing. The strong dollar, weak global demand, peak auto production and the consolidating energy sector are still important economic factors for 2016.

Initial claims for unemployment insurance for the week ending March 19 increased by 6,000, to reach 265,000, still a very good number. Continuing claims for the week ending March 12 dropped by 39,000 to hit 2,179,000, amongst the best numbers for that series in this millennium.

The third estimate of 2015Q4 real GDP growth was better than expected, rising to 1.4 percent, double the growth rate of the first estimate. It’s a backward looking number but it does warm the economic heart to know that the end of last year was not as weak as first thought. The bad news in the GDP report came from corporate profits, which declined by 7.8 percent for the quarter (not annualized). This was the third quarterly decline in nominal corporate profits over the last four quarters.

Recent statements and speeches by Federal Reserve officials reinforce expectations for two interest rate hikes this year, set by the dot plot released on March 16. We will continue to show two fed funds rate hikes this year in our monthly interest rate forecast, one in June and one in December.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 03-25-2016.

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From the Desk of Robert Dye

Taking Auto Sales Out for a Test Drive

Data from the Bureau of Economic Analysis shows that U.S. light vehicles sales bottomed out in the Great Recession in February 2009, at a 9.0 million unit sales rate. Auto sales have been on a fairly steady upward progression since 2009, doubling to an 18.1 million unit sales rate for September, October and November of last year. The reinvigoration of the auto industry was a key component of the overall U.S. economic recovery since 2009. The historic bailouts of Chrysler and GM, the highly targeted Cash For Clunkers fiscal stimulus program, the surge in oil and natural gas exploration (prior to the later crash), the lift in residential construction activity, and the overall improvement in household balance sheets were all part of the auto industry story. Another part of the recent auto industry story is the increase in subprime auto lending. Credit is readily available for even deep subprime market segments.  With very strong sales rates fueled, in part, by an expansion of subprime lending, now is a good time to examine historical trends in auto sales and our expectations for sales for the next few years.

Let’s start (as economists usually do) by a look backward. The graph below shows U.S. light vehicle sales over the past three expansion cycles. We’ve massaged the monthly data with a four-month moving average process to smooth it a bit. Then we indexed the data to 100 at the low point of sales for each of the last three cycles. In that way we can overlay the last three expansion cycles. The time scale at the bottom of the graph shows the months since the low point of the cycle.

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We can see that two of the time series are similar, and one is not like the others. The index for the sales expansion cycles of the 1980s overlays the index for the current cycle of the 2010s. The line for the 1990s is clearly a different animal. The low point in auto sales the early 1990s came in January 1991, with an 11.6 million unit monthly sales rate. Whereas, both the earlier and the later sales cycles had a lower starting point. In October of 1981, auto sales dipped to a 9.2 million unit rate, similar to the low of February 2009. Because we indexed the three data series to their low points, they all line up at 100 on the left hand side of the graph.

We also see that auto sales dropped off earlier in the 1980s after hitting their peak, compared with the current cycle. It is fair to say that we may have more pent-up demand now for autos, and that will sustain a longer peak. It could be that subprime auto lending is also helping to extend the current strong sales regime.

We are taking a more conservative view than some others in terms of our auto sales forecast. In our March 2016 U.S. Economic Update, we forecast auto sales for 2016 to remain very strong at a 17.6 million unit rate. Then we show sales easing to a 16.5 million unit rate for 2017, still strong, but falling off the recent robust sales rates. We expect that easing monthly job growth, reduced oil field activity and an increase in subprime auto loan delinquencies will begin to constrain the market, as pent-up demand is spent out. This is not an apocalyptic view, but it is a conservative view on auto sales that recognizes that there is an upper limit to the current sales cycle, and we are already close to it.

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Comerica Economic Weekly

This week’s economic news was dominated by the March 15-16 FOMC meeting, where the Fed decided, as expected, to leave the fed funds rate unchanged. Little forward guidance came from the Fed’s policy announcement or from Janet Yellen’s press conference. The dot plot showed a downward shift in FOMC member’s expectations for the fed funds rate at the end of this year, consistent with two 25 basis point rate hikes. We continue to forecast two 25 basis point fed funds rate hikes for this year, one in June and one in December.

We look for two key ingredients to support two rate hikes this year. First, is ongoing moderate-to-strong job growth and a tightening labor market. The second is firmness in crude oil prices. Both of these ingredients look reasonably likely at this time. Both would increase upward momentum in inflation indicators.

This week’s labor data was consistent with our expectation of a tightening labor market. The job openings rate ticked up in January to 3.7 percent. The hiring and quits rates fell, likely due to weather. Initial claims for unemployment insurance increased inconsequentially by 7,000 jobs for the week ending March 12. Continuing claims gained 8,000 for the week ending March 5.

The Conference Board’s Index of Leading Indicators increased by 0.1 percent in February, after declining in December and January. The coincident index also gained 0.1 percent. The lagging index was up 0.4 percent.

Inflation readings for February cooled as oil prices sagged. The Producer Price Index for Final Demand dropped by 0.2 percent. The Consumer Price Index for February fell by 0.2 percent. Oil prices climbed through the first half of March, with WTI currently near $41 per barrel. We do not expect a one-way trip for oil on the way up. But we do expect to see warmer inflation readings in the months ahead if oil can stay above the February floor.

Housing starts for February increased by 5.2 percent, while permits dipped by 3.1 percent. We look for a gradual increase in residential construction this year. NAHB builder confidence was steady for March.

Industrial production dipped by 0.5 percent in February as utility output cycled down from a January surge. Manufacturing output was up by 0.2 percent for the month. Both the Empire State (New York) and the Philadelphia Fed manufacturing indexes improved in March. The trifecta of good manufacturing data was a welcomed surprise, however, we believe that strong dollar headwinds remain in place.

Retail sale were soft in February, down 0.1 percent, reflecting lower gasoline prices and easing auto sales. Inventory-to-sales rates are climbing.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 03-18-2016.

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February Residential Construction, Consumer Prices, Industrial Production

Houses Started, Manufacturing Produced, Oil Up, Fed on Hold

  • February Housing Starts increased by 5.2 percent to a 1,178,000 unit annual rate.
  • Permits for new residential construction decreased by 3.1 percent to a 1,167,000 unit pace in February.
  • The Consumer Price Index fell by 0.2 percent in February as energy prices dropped.
  • Industrial Production decreased by 0.5 percent in February, dragged down by utilities and mining.

Housing starts bounced back in February after dipping through December and January. Total housing starts increased by 5.2 percent to a 1,178,000 unit annual rate, still modest by historical standards. The average annual rate of housing starts since 1959 is 1,443,358 units, 23 percent higher than where we were in February. Most of the gain in February came from single-family starts, up 7.2 percent for the month, while multifamily starts gained 2.4 percent. There is a noticeable geographic pattern to the February data. In the South starts were up 7.1 percent. The Midwest increased by 19.9 percent and the West increased by 26.1 percent. However, the Northeast saw a big 51.3 percent decline, likely weather-related. This pattern suggests that starts in the Northeast will rebound next month, supporting the U.S. totals. Permits nationwide eased by 3.1 percent in February to a 1,167,000 unit annual rate. Single-family permits ticked up slightly while multifamily permits for five units or more dropped by 9.1 percent. The regional pattern in permits is the mirror image of the pattern in starts. The South, Midwest and West all posted declines for the month, while the North posted a strong increase.

The headline consumer price index for February dipped by 0.2 percent as consumer energy prices dropped by 6.0 percent. We expect firmer crude oil and refined product prices in March to pull the consumer energy price index back to a gain, which will push up the headline index. Over the last 12 months, headline CPI is up 1.0 percent. Core CPI (less food and energy) increased by a noticeable 0.3 percent. Over the year, core CPI is up 2.3 percent, showing a consistent current of inflation. That current will become visible in the headline numbers when energy prices stop declining. We believe that the global crude oil market is in a bottoming out process that may take weeks or months to complete. Recent crude oil price gains to the $36 to $39/barrel range for WTI will focus attention on headline inflation if they are sustained. Industrial production fell by 0.5 percent in February as utility output fell by 4.0 percent and mining output fell by 1.4 percent. The good news in the IP report is that manufacturing output increased by 0.2 percent, the second straight monthly gain. Over the last 12 months, total industrial production is down by 1.0 percent due to big declines in mining and utilities. Manufacturing output is up by 1.8 percent over the last year. With houses started, manufactured goods produced and energy prices on the upswing, we believe that the Federal Reserve will issue a somewhat favorable assessment of the U.S. economy this afternoon. Like everyone else on the planet, we think that they will not raise the fed funds rate this afternoon. The dot plot will be interesting, but it has tended to be a lagging rather than leading indicator of what the Fed is thinking. We have two 25 basis point fed funds rate hikes in our interest rate forecast for this year, one in June, before the election, and one after, in December.

Market Reaction: Stocks opened with losses but quickly reversed. The yield on 10-Year Treasury bonds is up to 1.99 percent. NYMEX crude oil is up to $37.71/barrel. Natural gas futures are down to $1.93/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Housing Starts 031616.

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February Retail Sales, Producer Prices

Auto Sales Top Out as Energy Prices Bottom Out

  • February Retail Sales declined by 0.1 percent, and January was revised down to -0.4 percent.
  • Ex-auto Retail Sales also dipped by 0.1 percent as categories showed mixed results.
  • The Producer Price Index for Final Demand fell by 0.2 percent in February.

Today’s indicators show the impact of sub-$29/barrel oil in February, as low energy prices held producer prices in check and deflated nominal retail sales. The rebound in oil prices in March, if sustained, will have the opposite effect. Crude oil in the mid-to-upper 30s will warm up inflation indicators in March and April and will support gains in nominal retail sales. We believe that it is still possible for oil prices to test the February floor, but every day above $30 suggests that the floor for oil is firmer. Headline retail sales dipped by 0.1 percent in February, and January saw a big downward revision, from +0.2 percent to -0.4 percent. Nominal dollar motor vehicle sales for January are now shown to be down by 0.2 percent, in line with the slightly lower unit sales for the month. Two consecutive monthly declines in retail sales does focus the attention and challenges our call for ongoing moderate GDP growth this year steadied by consumer spending. However, we believe that firmer energy prices and improving real estate markets this spring will support firmer nominal retail sales. Auto sales are more nuanced. We have seen evidence that the sub-prime component of auto financing is showing higher delinquencies. Also, light truck sales may be impacted by lower oil field activity. Moreover, a big part of the increase in total light vehicle sales to a record-tying pace last year was due to a run-up in light truck sales. So the ability of auto sales to sustain the 18 million unit sales rate of last September, October and November is in question. In our March U.S. Economic Update, we show auto sales peaking this year at a 17.6 million unit rate and then easing in 2017 to a 16.5 million unit rate. These are still strong numbers but they imply that unit auto sales will tend to ease by the second half of this year.

The producer prices index for final demand eased by 0.2 percent in February as energy prices fell. The energy component of final demand goods fell by 3.4 percent for the month, the seventh decline in the last eight months. Firmer energy prices in March will break that streak. The year-over-year change in the PPI for final demand is now back up to zero after first going negative in February 2015. The PPI for final demand services showed no change in February, held down by the transportation component. The year-over-year change in the PPI for final demand less food, energy and trade is up to 0.9 percent. If we have firmer energy prices through this year then we will see the headline price indexes continue to push up. For now, the Federal Reserve remains in observation mode. We think that by mid-June the Fed will raise the fed funds rate as a pre-emptive strike against increasing inflation.

Market Reaction: Equity markets opened with losses. The 10-year Treasury yield is down to 1.95 percent. NYMEX crude oil is down to $36.40/barrel. Natural gas futures are up to $1.98/mmbtu.

Alert_03_15_2015_Retail_salesFor a PDF version of this Comerica Economic Alert click here: Retail Sales 03-15-16.

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Comerica Economic Weekly

Super Mario Draghi, President of the European Central Bank, announced a mix of actions by the ECB that are designed to boost credit availability and financial market liquidity in the European Union. Draghi’s bazooka, as it was called in the Financial Times, consists of a package of central bank interest rate cuts, expansions to the ECB’s current asset purchase program and new long term credit facilities that may potentially even pay for banks to make loans. The euro tanked on the news, and then, in his post-announcement press conference, Draghi said that no further interest rates cuts were likely, and the euro stabilized. So we can say that Draghi’s bazooka represents the likely apex of easy ECB monetary policy.

Meanwhile, the Bank of Canada decided to leave its key interest rates unchanged even though labor market data for February was worse than expected. Canada had a net loss of 2,300 jobs for the month, allowing its unemployment rate to increase to 7.3 percent, well above the U.S. rate of 4.9 percent.

According to the International Energy Agency’s March report, crude oil prices may have bottomed out (our emphasis). The price for West Texas Intermediate crude nearly hit $39 yesterday before settling to its current $38.51 per barrel. We think it is fair to say that crude oil is in a bottoming out process that could take more weeks or months to become fully believable.

Otherwise it was a light week for U.S. economic data. The National Federation of Independent Businesses released their February survey showing the second consecutive monthly decline in their Optimism Index, now down to 92.9. This is clearly down from the recent peak of 100.3 from December 2014.

Initial claims for unemployment insurance decreased more than expected, by 18,000, for the week ending March 5, to hit 259,000. We can call this a generational low, approaching levels seen in the early 1970s. Continuing claims for unemployment insurance fell by 32,000, to hit a very low 2,225,000 for the week ending February 27.

Consumer credit expanded moderately in January, by $10.5 billion. Revolving credit (primarily credit cards) eased by $1.1 billion. Non-revolving (primarily auto and educational loans) increased by $11.6 billion.

Federal Reserve officials are in radio silence heading into next week’s Federal Open Market Committee meeting. We expect to see no policy changes announced next Wednesday afternoon. However, we are hopeful that the FOMC can reformulate forward guidance beyond repetition of their “data dependency”. A more positive assessment of current U.S. conditions is expected.

In our March interest rate forecast we again have two fed funds rate hikes in place for this year. One is before the general election, in June. The other is after the election, in December. We will see another dot plot on Wednesday, showing FOMC member’s expectations for the fed funds rate this year and beyond. That could be meaningful. However, the dot plot has tended to follow financial markets lately, rather than lead.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 03-11-2016.

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From the Desk of Robert Dye

Things Are (not so) Great

Even before The Great Recession, things were getting really great. Economists had already coined the term “The Great Moderation” to describe the recent tendency of U.S. business cycles toward longer expansions. This is clearly evident in a graph of year-over-year real GDP growth since 1945. After the back-to-back recessions of the early 1980s expansions got longer. John Taylor wrote about The Great Deviation, using that term to describe the recent period when, according to him, monetary policy became more interventionist, less rules-based and less predictable. That coincided with The Great Disinflation, when year-over-year changes in inflation indexes began increasing at a slower rate after the energy crises of the 1970s and early 1980s. Now low inflation seems to be part of The Great Malaise, according to Joseph Stiglitz. Low inflation is also part of The Great Stagnation story. Tyler Cowen used that term to talk about the slowdown in technology driven productivity growth. This appears to be contemporaneous with The Great Decoupling of resource use and economic growth. Economists are trying to find terms that are useful in describing an economy that just feels different from what we all think it should feel like. But maybe we should turn the tendency to label recent conditions as “Great” on its head. Maybe things are just getting normal in the U.S. after some very abnormal decades. The events of World War II and its aftermath were truly great, with unprecedented scope and scale. World War II established many of the conditions that led to the energy crisis, which was also great in terms of scope and scale. The scope and scale of the Great Recession also justifies the adjective. China had its Great Leap Forward, but that contributed to The Great Chinese Famine. Maybe we can make a mashup of Thomas Picketty and Robert Gordon and say that things are not so great right now, but that is ok. We are in The Great Ok.

 

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