Tepid Data Will Not Motivate the Fed to Raise Interest Rates Tomorrow

  • The Consumer Confidence Index ticked down slightly in July from 97.4 to 97.3.
  • New Home Sales for June increased by 3.5 percent to a 592,000 unit annual rate.
  • The U.S. National Case-Shiller Home Price Index was up 5.0 percent in May from a year earlier.

New home sales in June increased by 3.5 percent to a 592,000 unit annual rate. While the series is still below its historical average of about 650,000 units per year, it is once again trending up. This will show up in the GDP accounts as a boost to residential fixed investment in the second quarter. Given our expectation of ongoing job creation and low mortgage rates, we expect to see new home sales continue to improve through the second half of this year. The months’ supply of new homes available for purchase dipped in June to 4.9 months’ worth, fairly tight conditions. This will motivate builders to boost single-family permits and starts, which have been range-bound over the last year. The median sale price of a new home increased in June to $306,700, a 6.1 percent increase over the previous 12 months. As previously reported, existing home sales increased by 1.1 percent in June to a 5.57 million unit annual rate.

Overall house prices, as measured by the Case-Shiller U.S. National Home Price Index, continue to increase. However, price gains through the first five months of 2016 have not been as strong nor as evenly distributed as they were at the end of 2015. In May, the national index increased by 0.2 percent for the month, and was up 5.0 percent over the previous 12 months. Several cities in the Case-Shiller 20 city index reported slight price declines for the month, including Atlanta, Cleveland, Detroit and Los Angeles. New York house prices were down a moderate 0.5 percent in May, while San Francisco registered a bigger 1.3 percent drop.

The Conference Board’s Consumer Confidence Index ticked down slightly in July to 97.3, after increasing in June to 97.4. The index has been range-bound since early 2015. It is above its historical average of 93.6 since 1967, but it has not shown a typical mid-cycle surge so far in the current business cycle. However, we could turn that analysis on its head and say that this is the typical mid-cycle surge, and it is happening at a lower level. Time will tell.

The Federal Reserve Bank of Richmond released a couple of data points for South Atlantic states. Their survey of Fifth (Federal Reserve) District manufacturing activity improved in July, as did service sector activity. We do not expect the Federal Open Market Committee, which is meeting today and tomorrow, to increase the fed funds rate. We will read the policy statement tomorrow to see if there are any hints about a later interest rate hike, possibly coming as early as September 21. Between now and then, the Federal Reserve will also have its annual conference in Jackson Hole, Wyoming in late August. That will be another opportunity for Federal Reserve officials and global central bankers to compare notes.

Market Reaction: U.S. equity markets are mixed. The 10-year Treasury bond yield is up to 1.58 percent. NYMEX crude oil is down to $42.86/barrel. Natural gas futures are down to $2.69/mmbtu.

Economic Alert 072616

For a PDF version of this Comerica Economic Alert click here: New_Home Sales 07-26-16.

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Comerica Economic Weekly

U.S. economic data released this week was generally positive and consistent with an ongoing moderate GDP expansion in the third quarter.

The Conference Board’s Leading Economic Index for June increased by 0.3 percent, consistent with our expectations of an ongoing moderate expansion for the U.S. economy in the third quarter. We expect to see the Leading Index show consistent gains through the second half of 2016, indicating ongoing momentum as we turn the corner into 2017.

Initial claims for unemployment insurance dipped by 1,000 for the week ending July 16, to a very low 253,000. Continuing claims fell by 25,000 to hit 2,128,000 for the week ending July 9. Given these strong numbers, we expect July payroll job gains to be solid, in the vicinity of about 195,000 jobs.

Housing starts improved in June, but remained within the range established in the second quarter of 2015. Total starts increased by 4.8 percent in June to a 1.189 million unit annual rate. Total housing starts are still below the estimated rate of household formation.

According to the National Association of Homebuilders, builder sentiment ticked down slightly in July to 59. Builders’ expectations of future sales declined, perhaps in reaction to financial news chatter about BREXIT. We believe that long-term underbuilding, moderate economic growth and low interest rates mean that the demand is out there to support increases in the rate of construction through the remainder of this year.

Existing home sales increased in June by 1.1 percent, to hit a 5.57 million unit annual rate. This is the strongest sales rate since February 2007. Months’ supply of existing homes dipped to 4.6 months’ worth, fairly tight conditions nationwide. The median sales price of an existing home was up by 4.8 percent in June over the previous 12 months.

European Central Bank President Mario Draghi said there would be no new stimulus from the ECB this month, despite the BREXIT vote and the recent terrorism in Nice, France. Draghi commented on the “encouraging market resilience” of the EU economy, but left the door open for more stimulus later, if needed. Next week we expect the U.S. Federal Reserve to follow suit and leave the fed funds rate unchanged. We will be watching to see if there are any hints that the Fed is considering lifting interest rates in September. We expect the Bank of Japan to break ranks and announce additional stimulus at their July 28/29 Monetary Policy Committee meeting.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 07-22-2016.

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June Leading Indicators, Existing Home Sales, July UI Claims, Central Banks

 “Encouraging Market Resilience”

  • The Conference Board’s Leading Economic Index for June increased by 0.3 percent.
  • Existing Home Sales for June increased by 1.1 percent to a 5.57 million unit annual rate.
  • Initial Claims for Unemployment Insurance fell by 1,000 for the week ending July 16 to 253,000.
  • We expect no change in interest rate policy at next week’s FOMC meeting.

The Conference Board’s Leading Economic Index for June increased by 0.3 percent, consistent with our expectations of an ongoing moderate expansion for the U.S. economy in the third quarter. The Coincident Index, which focuses on current conditions, also increased by 0.3 percent. The Lagging Index dipped by 0.1 percent in June. Of the ten components of the Leading index, eight were positive for the month. The biggest push came from initial claims for unemployment insurance (inverted), residential building permits and stock prices. The only negative component was average weekly hours for manufacturers. June is only the second positive month for the Leading Index in the last seven months. Weak stock prices early this year are a part of that story. Conversely, recent gains in stock prices will help boost the July index. We expect to see the Leading Index show more consistent gains through the second half of 2016, indicating ongoing momentum as we turn the corner into 2017.

Existing home sales increased in June by 1.1 percent, to hit a 5.57 million unit annual rate. This is the strongest sales rate since February 2007. The recent trend looks positive. Sales of existing homes are reasonably close to their long run average, in contrast to sales of new homes which remain historically weak. Months’ supply of existing homes dipped to 4.6 months’ worth, fairly tight conditions nationwide. The median sales price of an existing home was up by 4.8 percent in June over the previous 12 months.

Initial claims for unemployment insurance dipped by 1,000 for the week ending July 16, to a very low 253,000. Continuing claims fell by 25,000 to hit 2,128,000 for the week ending July 9. Given these strong numbers, we expect July payroll job gains to be solid, in the vicinity of about 195,000 jobs.

European Central Bank President Mario Draghi said there would be no new stimulus coming from the ECB this month, despite the BREXIT vote and the recent terrorism in Nice, France. Draghi commented on the “encouraging market resilience” of the EU economy, but left the door open for more stimulus later, if needed. This follows on the heels of the Bank of England’s similar non-action last week. Next week we expect the U.S. Federal Reserve to follow suit and leave the fed funds rate unchanged. We will be watching to see if there are any hints that the Fed is considering lifting interest rates in September. After the FOMC meeting next Tuesday and Wednesday, the Fed has its annual retreat in Jackson Hole, Wyoming. This will give U.S. and global central bankers the opportunity to discuss strategy for the fall. We expect the Bank of Japan to break ranks and announce additional stimulus at their July 29 Monetary Policy Committee meeting.

Market Reaction: Equity markets opened with losses. The 10-Year Treasury bond yield is down to 1.57 percent. NYMEX crude oil is down to $45.11/barrel. Nat gas futures are up to $2.65/mmBTU.

Economic Alert 072116

For a PDF version of this Comerica Economic Alert click here:Leading Indicators 07-21-16.

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June Residential Construction, July Homebuilders Survey

Starts Improve in June, But Still Range Bound

  • June Housing Starts increased by 4.8 percent to a 1,189,000 unit annual rate.
  • Permits for new residential construction ticked up by 1.5 percent to a 1,153,000 unit pace in June.
  • The National Association of Homebuilders’ Housing Market Index dipped in July to 59.

Housing starts improved in June, but remained within the range established in the second quarter of 2015. Total starts increased by 4.8 percent in June to a 1.189 million unit annual rate. Single-family starts increased by 4.4 percent to a 778,000 unit rate for the month. This is still well below the average, since 1959, of about a million single-family units per year. Multifamily starts picked up by 5.4 percent, to hit a 411,000 unit annual rate. This is still within the recent range established by late 2013, and it is close to the long-term average of about 417,000 new multifamily units per year. Also, total housing starts remain below the estimated rate of household formation. We expect to generate about 1.3 to 1.4 million new households in the U.S. this year. So it is fair to say that despite the boom in multifamily construction, visible in many urban areas, we are still underinvesting in housing. Prior to the housing boom of the mid-2000s, residential investment accounted for about 5.0 percent of GDP. That increased to a recent high of 6.2 percent in mid-2005, and then dropped to a low of 2.5 percent in 2010Q3. In 2016Q1, we were back to 3.4 percent, still well below the long run average share of total GDP. Housing permits increased by 1.5 percent in June to hit a 1.153 million unit annual rate. Both single- and multifamily permits in June remained within recent ranges.

According to the National Association of Homebuilders, builder sentiment ticked down slightly in July to 59. Builders’ expectations of future sales declined, perhaps in reaction to financial news chatter about BREXIT. We believe that long-term underbuilding, moderate economic growth and low interest rates mean that the demand is out there to support increases in the rate of construction through the remainder of this year.

Market Reaction: Stocks opened with losses. The yield on 10-Year Treasury bonds is down to 1.56 percent. NYMEX crude oil is down to $45.05/barrel. Natural gas futures are up to $2.71/mmbtu.

Economic Alert 071916

For a PDF version of this Comerica Economic Alert click here: Housing Starts 071916.

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Comerica Economic Weekly

U.S. data released this week was mostly positive, adding to expectations for a rebound in real GDP growth for the second quarter. Q2 GDP data will be released on July 29. Good economic data combined with the rally in U.S. equities over the week diminishes two lingering fears…fear of a sudden downturn in U.S. job growth, and fear of a spillover from the BREXIT vote in the UK. Instead, we see the U.S. economy picking up a moderate amount of momentum at mid-year and we believe that momentum will be sustained through year-end.

The producer price index for final demand warmed up in June, gaining 0.5 percent with a push coming from petroleum products. The index is still tame over the last 12 months, up by just 0.3 percent. With the drop in oil prices from the high 40s in June to the mid-40s in July, we expect the headline PPI to stabilize through July and possibly August.

Consumer prices for June were up by 0.2 percent, just below consensus expectations. Over the previous 12 months the CPI was up by just 1.0 percent, reflecting the drag from lower energy prices through early this year.

Retail sales beat expectations, increasing by a strong 0.6 in June. Retail sales ex-autos were up 0.7 percent in June supported by a strong 3.9 percent increase in building materials sales.

Industrial production also did better than expected in June, up 0.6 percent. Manufacturing output gained 0.4 percent. Despite cooler auto sales, motor vehicle assemblies were up by 9.6 percent.

Initial claims for unemployment insurance were unchanged for the week ending July 9, holding a very low 254,000. Continuing claims gained 32,000 for the week ending July 2, to hit 2,149,000, still a very low number.

The Job Openings and Labor Turnover Survey for May showed a small step down in the job openings rate to a still-strong 3.7 percent. The hiring rate remained at 3.5 percent, down a bit from its recent peak of 3.8 percent in February. This is consistent with our expectation for a gradual decrease in payroll job growth through next year.

The National Federation of Independent Business Small Business Optimism index increased by 0.7 points in June to 94.5, the third monthly gain.

The Bank of England surprised by not easing policy at its Monetary Policy Committee meeting on July 14. However, they strongly suggested that easing would come at the next meeting on August 4. We expect to see a combination of interest rate cuts and asset purchases as the MPC attempts to bolster the UK economy on the heels of the June 23 BREXIT vote.

The European Central Bank’s Governing Council meets on July 21. A recent Reuters poll suggests no easing. We expect the Bank of Japan to provide more monetary stimulus at its Monetary Policy Meeting over July 28/29. This may coordinate with a new fiscal stimulus.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 07-15-2016.

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June Retail Sales, Consumer Prices, Industrial Production

Strong Consumer Spending Supported Q2 GDP

  • June Retail Sales increased by 0.6 percent, adding to expectations for a rebound in Q2 GDP growth.
  • The Consumer price Index for June gained 0.2 percent, as energy prices increased.
  • Industrial Production increased by 0.6 percent in June, as utility output warmed up.

Retail sales beat expectations, increasing by a strong 0.6 percent in June. This supports our view that the second quarter GDP numbers (advance estimate due out July 29) will show a significant pickup in growth after a mediocre 1.1 percent real GDP gain in the first quarter. The rebound in payroll job growth in June, combined with strong retail sales for the month, suggests that the concern about a sustained rapid cool down in job creation in May was overdone. Ongoing strong job growth, increasing wages and meaningful gains in homeowner equity are all supportive of retail sales. Apparently, any drag on consumer sentiment resulting from the BREXIT vote and associated financial market volatility happened late enough in the month to avoid weighing on June retail sales. If job growth and the stock market rally so far through July are sustained, then we expect BREXIT to be a non-issue for American shoppers going forward. Retail sales ex-autos were up 0.7 percent in June supported by a strong 3.9 percent increase in building materials sales. Most other sales categories were positive for the month. Gasoline station sales were up by 1.2 percent, buoyed by higher prices. Retail sales of autos and parts were up barely, gaining 0.1 percent in June even as unit auto sales eased from a 17.5 million unit pace in May to 16.7 million in June.

The consumer price index for June was up by 0.2 percent, just below consensus expectations. Over the previous 12 months, the CPI was up by just 1.0 percent, reflecting the drag from lower energy prices through early this year. The headline index in June was supported by energy prices, which increased by 1.3 percent, paced by higher gasoline prices. According to AAA, today’s national average price for regular gasoline is $2.20 per gallon, down from $2.37 a month ago. This implies that energy will be a slight drag on the CPI in July. Core CPI (all items less food and energy) also increased by 0.2 percent in June, and was up by 2.3 percent from a year ago. Medical and housing continue to drive core CPI growth. Over the 12 months ending in June, the shelter price index was up 3.5 percent and the medical care services sub-index was up by 3.8 percent.

Industrial production also did better than expected in June, up 0.6 percent. Manufacturing output gained 0.4 percent. Despite cooler auto sales, motor vehicle assemblies were up by 9.6 percent. Auto and light truck assemblies reached their third highest rate in this cycle, hitting a 12.18 million unit annual rate. Strong production and softer sales is not a positive combination for the auto industry. It may take Detroit a few more months to ease production if sales remain below the late 2015 peak. This raises the possibility of at least a small inventory correction looming for the U.S. auto industry. It is still early to call for that, but it is worth watching.

Market Reaction: Equity markets opened with gains. The 10-year Treasury yield is up to 1.58 percent. NYMEX crude oil is up to $45.92/barrel. Natural gas futures are down to $2.67/mmbtu.

Economic Alert 071516

For a PDF version of this Comerica Economic Alert click here: Retail Sales 07-15-16.

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June Producer Prices, July UI Claims, Global Monetary Policy

Energy Boosts Wholesale Inflation, Bank of England Pauses, Fed Will Too

  • The June Producer Price Index increased by 0.5 percent with gains in energy prices.
  • Initial Claims for Unemployment Insurance were unchanged, at a very low 254,000 in early July.
  • The Bank of England did not change monetary policy there, giving the Fed a little breathing room.

Producer prices warmed up in June with a push coming from petroleum products. The energy index for final demand goods increased by 4.1 percent for the month, after gaining 2.8 percent in May. The total price index for final demand goods gained 0.8 percent in July, marking the largest single-month increase in over a year, since May 2015. The price index for final demand services also gained noticeably, up by 0.4 percent. Energy products are not a part of that accounting, but transportation and warehousing services are, and that price index was up by 0.5 percent. Wholesale food prices also gained 0.9 percent in June as meat prices climbed. The headline producer price index for final demand is still tame over the last 12 months, up by just 0.3 percent. With the drop in oil prices from the high 40s in June to the mid-40s in July, we expect the headline PPI to stabilize through July and possibly August.

Initial claims for unemployment insurance were unchanged for the week ending July 9, staying at a very low 254,000. According to the Department of Labor, this marks 71 consecutive weeks of initial claims below the benchmark 300,000 level, the longest such streak since 1973. Continuing claims gained 32,000 for the week ending July 2, to hit 2,149,000, still a very low number.

Contrary to expectations, the Bank of England did not lower its benchmark lending rate today. However, the BOE’S policy statement did say that most members of the Monetary Policy Committee expect to add more stimulus in August. They need more time to come up with an appropriate response to the UK’s historic vote to leave the European Union. More stimulus could come in the form of lowering their benchmark lending rate below 0.5 percent, already a record low for the 322-year-old institution. Or they could undertake more asset purchases, or both. The British pound has been on a declining trend against the dollar since the June 23 BREXIT vote. It strengthened today on the non-action by the BOE. The Bank of Japan is widely expected to add more stimulus in the form of lower rates or more asset purchases at its next meeting which ends on July 29. This could be combined with a fiscal stimulus coordinated by Prime Minister Shinzo Abe. This is expected to reverse the recent strengthening of the yen which is a significant headwind for Japanese exports.

The U.S. Federal Reserve does not operate in a global vacuum. The expected easing by the Bank of England, the Bank of Japan and possibly the European Central Bank would all make Fed policy look relatively tighter even if the Fed does nothing. And nothing (in terms of policy changes) is what we expect the Fed to do at the upcoming FOMC meeting over July 26/27. The annual Federal Reserve retreat at Jackson Hole, Wyoming, over August 25-27, will be an opportunity for global central bankers to exchange ideas in interesting times.

Market Reaction: Equity markets opened with gains. The 10-Year Treasury bond yield is up to 1.53 percent. NYMEX crude oil is up to $45.44/barrel. Natural gas futures are down to $2.69/mmbtu.

Economic Alert 071416

For a PDF version of this Comerica Economic Alert click here: PPI 07-14-16.

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July 2016, Comerica U.S. Economic Update

The historic vote in the United Kingdom to leave the European Union sent shock waves through global financial markets, dropping sovereign bond yields and supporting the dollar relative to the pound and the euro. The discreet event is over, the incremental events are just beginning. The UK will delay invoking Article 50 as long as possible. It will be up to the next prime minister, expected to be Theresa May, to steer Britain away from the continent. When Article 50 of the EU charter is invoked a two-year clock will start ticking, defining the window for negotiations. After two years there is a hard break. The EU is expected to make negotiations as difficult as possible in order to discourage other euro skeptics from leaving. Now there are more questions than answers. Whither London? Where will be the financial capital of the EU? Can the remaining EU hold together? What is the leitmotif of the EU? Will the UK hold together? NATO? Financial markets, allergic to increasing uncertainty, shed risk and drove bond yields down, bringing the U.S. 10-Treasury bond yield to a record low of 1.35 percent in early July.

The pound sank against the dollar, now at $1.30. This will help British exports and tourism but it will also bring import price inflation. Likewise, the euro fell against the dollar, now down to $1.10. The Chinese yuan sank against the dollar. Japan is expected to act to devalue the yen. U.S. export industries face renewed headwinds from the strong dollar, and this will get the Fed’s attention. Conversely to the British experience, the strong dollar will tend to keep import price inflation in check in the U.S., circling back to Fed policy, and contributing to lower overall inflation expectations.

The stronger dollar and expectations of cooler global demand brought U.S. oil prices back down from about $50 dollars per barrel, to near $45. We continue to expect gradual tightening of the global oil market into next year, but that does not necessarily imply a monotonic increase in oil prices. The good news is that weekly drilling rig counts have flattened out with firmer pricing, and have slightly increased in many areas. However, the damage to the economies of energy producing states, including Texas, will not quickly reverse. We expect to see ongoing consolidation in the oil and gas sector through the remainder of this year. Fortunately, natural gas prices have also firmed up, now in the neighborhood of $2.80 per mmbtu.

The June payroll jobs data removed a key worry for the Fed as 287,000 net new jobs were added for the month, making the very weak May gain of just 11,000 jobs look more like an aberration, and less like a dramatic downshift in hiring. Still, we do expect to see a gradual downshift in hiring, visible through the second half of this year and into next year. Consistent gains in the labor force are expected to level out the unemployment rate between 4.5 and 4.8 percent.

Even with a firmer labor outlook, ongoing uncertainty about BREXIT and the timing of the U.S. presidential election freezes the Fed until at least late this year. Our interest rate forecast contains a fed funds rate hike in December. The fed funds futures market is inching back in that direction, now showing a 33 percent chance of at least one rate hike by December. We expect overall U.S. economic growth to remain moderate through the rest of this year. Stronger business investment with higher oil prices and less drag from inventories supports a small growth bump in early 2017.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate0716.

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June ADP Jobs, Challenger Job Cuts, July UI Claims, Fed Minutes

Multiple Data Sources Point to Steady June Job Creation after May Miss

  • The June ADP Employment Report showed a gain of 172,000 private-sector jobs.
  • The June Challenger Job Cuts Report showed a slight increase in job cuts for June to a still low level.
  • Initial Claims for Unemployment Insurance at the beginning of July fell by 16,000 to hit 254,000.

Heading into tomorrow’s release of the official Bureau of Labor Statistics June jobs data, other labor-related data looks positive. The preponderance of recent labor data is supportive of our expectation for a bounce back in payroll job creation in June after a disappointing May payroll number which showed that a meager 38,000 net new jobs were added to the U.S. economy. Yesterday, we discussed the ISM Manufacturing and Non-Manufacturing reports for June, which both showed positive employment components for the month. This morning, we see positive data from the private ADP National Employment Report for June, the private Challenger, Gray and Christmas Job-Cut Announcement Report for June and the official unemployment insurance claims data for the end of June/early July.

The ADP National Employment Report for June showed a net of 172,000 private sector jobs added to the U.S. economy for June. If we add a guestimate of 10,000 government jobs, that provides a good starting point for expectations for tomorrow’s official BLS data release of about 182,000 jobs, close to the pre-existing consensus expectations. According to ADP, construction industries shed 5,000 jobs in June. Manufacturing cut 21,000 jobs. Trade/transportation/utilities added 55,000 jobs. Financial services added 2,000. Professional/business services added 51,000. Most of the gains came from small businesses, with less than 50 employees, which added 95,000 jobs in June. Medium sized business (50-499 employees) added 52,000 jobs for the month. Large businesses added 25,000 jobs. The methodologies for the ADP Report and the BLS data are completely different and independent of each other. The now-settled Verizon strike, which involved about 39,000 workers, may have contributed to the divergence of the ADP and BLS data last month. The June BLS data should not be skewed by the Verizon strike, as workers returned to their jobs on June 1 after 45 days on the picket lines.

Normally, we do not cover the Challenger, Grey and Christmas Job-Cut Announcement Report, but this month the labor data is especially important. The Challenger Report for June shows a modest increase in announced job cuts for the month to 38,536. But this is from a very low May level of 30,157. So we can say that announced job cuts for June remain low and are consistent with ongoing moderate job creation.

Initial claims for unemployment insurance fell by 16,000 for the week ending July 2 to reach 254,000, an exceptionally low number. Continuing claims for the week ending June 25 decreased by 44,000 to hit 2,139,000, so there is no problem there.

Yesterday afternoon we saw the minutes of the Federal Open Market Committee meeting of June 14/15. The minutes showed a Fed frozen in place by the disappointing May jobs data and by concern about the potential fallout from BREXIT. A “normalish” June jobs number of about 180,000 would go a long way toward removing one key concern for the Fed. The other concern will not fade so quickly. We expect the Fed to delay any fed funds rate hikes until December at the earliest, more likely next year. There is a potential linkage between a post-BREXIT European slowdown, lower oil prices, less U.S. inflation and a flatter path for the fed funds rate.

Market Reaction: U.S. equity markets opened with gains. The yield in 10-Year T-bonds is up to 1.42 percent. NYMEX crude oil is up to $47.95/barrel. Natural gas futures are up to $2.78/mmbtu.

For a PDF version of this Comerica Economic Alert click here: ADP 07-07-16.

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June ISM Non-NMF, Auto Sales, May International Trade

Service Sector Gains Momentum at Mid-Year, June Employment Indicators Positive

  • The ISM Non-Manufacturing Index for June increased to 56.5 percent.
  • The U.S. International Trade Gap widened in May to -$41.1 billion.
  • U.S. Auto Sales for June dipped to a 16.7 million unit rate.

As we head into the second half of the year, the service sector of the U.S. economy is gaining momentum. The ISM Non-Manufacturing Index for May increased more than expected, to a solid 56.5 percent, indicating improving conditions. This is consistent with our expectation of stronger GDP growth for the just completed second quarter. Nine out of ten sub-components of the headline index were positive and eight out of nine of those were positive and improving. The only component below the break-even 50 mark was backlog of orders, which dipped to 47.5 percent. Overall business activity was strong at 59.5. New orders were also strong at 59.9. The employment sub-index flipped from a contracting 49.7 in May to an expanding 52.7 in June. That is supportive of a better payroll jobs number for June. Fifteen out of eighteen industries reported growth. Anecdotal comments were generally positive. The ISM Manufacturing Index for June, reported last Friday, also increased, climbing to a moderately expansive 53.2. The employment sub-index of the ISM MF increased to a barely positive 50.4 in June. The U.S. payroll data for June will be released this Friday morning. We expect to see a bounce back from the dismal 38,000 net new jobs added in May, to about 175,000 for June.

The U.S. international trade gap widened in May to -$41.1 billion as imports increased by $3.4 billion, while exports eased slightly, down $0.3 billion. For the year ending in May, nominal imports are down by 3.1 percent, largely reflecting the drop in oil prices from a year ago. Nominal exports are down 4.2 percent. After adjusting for price changes, the real balance of trade in goods went more negative in May. To date, trade looks to be a fairly neutral for GDP growth in the second quarter, but that could change with the June data and any revisions to May and April.

As reported last Friday afternoon, U.S. auto sales for June dipped to 16.7 million unit annual rate. This is not a bad number, but it is a clear step down from the robust 18 million unit rate from late last year. It adds weight to our characterization of peaking auto sales in the fourth quarter of last year. Also, the softer auto sales for June suggest that expectations for very strong consumer spending in the second quarter should be tempered. We expect real GDP growth in the neighborhood of 2.5 percent for Q2.

Market Reaction: U.S. equity markets opened with losses but have since recovered. The 10-year Treasury bond yield is down to 1.38 percent. NYMEX crude oil is down to $46.49/barrel. Natural gas futures are down to $2.77/mmbtu.

Economic Alert 070616

For a PDF version of this Comerica Economic Alert click here: Int Trade 07-06-16.

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