Comerica Bank’s Texas Index Sees Lightest Decline Since Energy Downturn

Comerica Bank’s Texas Economic Activity Index fell in February, decreasing 0.1 percentage points to a level of 92.4. February’s reading is 20 points, or 27 percent, above the index cyclical low of 72.8. The index averaged 97.7 points for all of 2015, seven and three-fifths points below the average for full-year 2014. January’s index reading was 92.5.

“Our Texas Economic Activity Index declined in February, down for 15 out of the last 16 months. Four of the eight index components were positive for the month, including nonfarm employment, exports, unemployment insurance claims (inverted) and house prices. Housing starts, drilling rig count, sales tax revenue and hotel occupancy were negative factors. With oil prices firming, we expect to see the drilling rig count level out by the end of summer, so that major drag will start to dissipate. However, the state’s large energy sector will likely remain subdued through the course of this year,” said Robert Dye, Chief Economist at Comerica Bank. “Both Austin and North Texas will drive growth for the state in the near term, propelled by their ability to attract and incubate new non-energy businesses.”

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For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0416.

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Comerica Bank’s California Index Flat on Stalling Tech Sector

Comerica Bank’s California Economic Activity Index was unchanged in February, maintaining a level of 119.7. February’s reading is 36 points, or 42 percent, above the index cyclical low of 84.1. The index averaged 119.8 points for all of 2015, six and two-fifths points above the average for all of 2014. January’s index reading was 119.7.

“Our California Economic Activity Index was unchanged in February, and has been range bound since April 2015. What our index shows is that California is a two-handed economy. On the one hand, overall job growth has been steady and that is a fundamentally positive indicator, supporting most non-manufacturing industries. On the other hand, tech sector stock prices have been stagnant, as have federal defense spending and housing starts in the state,” said Robert Dye, Chief Economist at Comerica Bank. “We expect to see an upside breakout in our California index in the months ahead, supported by the positive outlook for the tech sector and firmer residential construction activity.”

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For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0416.

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Comerica Bank’s Arizona Index Continues to Gain

Comerica Bank’s Arizona Economic Activity Index grew in February, increasing 0.4 percentage points to a level of 110.1. February’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. January’s index reading was 109.7.

“Our Arizona Economic Activity Index increased in February for the sixth consecutive month. Five out of eight index components were positive, including payroll employment, initial claims for unemployment insurance (inverted), house prices, housing starts and enplanements. State exports, sales tax revenue and hotel occupancy eased in February. Job growth in the state is accelerating above the national average, which has been the normal historical condition of the mid-cycle Arizona economy. In this expansion cycle it has taken longer than usual for the state to get there,” said Robert Dye, Chief Economist at Comerica Bank. “Real estate conditions are improving, but new home sales remain subdued. Higher affordability than California is a strong point for Arizona real estate.”

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For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0416.

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Comerica Bank’s Florida Index Continues Solid Performance

Comerica Bank’s Florida Economic Activity Index grew in February, increasing 1.7 percentage points to a level of 153.8. February’s index reading is 76 points, or 97 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. January’s index reading was 152.0.

“The Comerica Florida Economic Activity Index increased for the 23rd consecutive month in February. Five out of eight index components were positive for the month, including nonfarm employment, state exports, initial claims for unemployment insurance (inverted), housing starts and house prices. State sales tax revenue dipped, as did hotel occupancy and enplanements. Overall, the state economy remains very strong and real estate conditions, especially in the single-family market, are improving. However, the condo market is looking overbuilt in some areas, including Miami, where sales metrics are cooling,” said Robert Dye, Chief Economist at Comerica Bank. “Despite the potential for a near-term reset in the Florida condo market, we look for ongoing gains to the Florida economy this year.”

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For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0416.

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Comerica Bank’s Michigan Index Returns to Gains

Comerica Bank’s Michigan Economic Activity Index improved in February, increasing 0.5 percentage points to a level of 127.0. February’s reading is 53 points, or 71 percent, above the index cyclical low of 74.0. The index averaged 124.4 points for all of 2015, seven points above the index average for 2014. January’s index reading was 126.4.

“Our Michigan Economic Activity Index increased in February after dipping in January. Six out of eight index components were positive in February, including nonfarm employment, exports, housing starts, house prices, auto production and hotel occupancy. Only unemployment insurance claims (inverted) and state sales tax revenues were drags in February. With the domestic auto sector near its cyclical peak and international demand for Michigan’s exports soft, the Michigan economy is in a new phase, where growth will be driven by non-manufacturing industries,” said Robert Dye, Chief Economist at Comerica Bank. “Steady gains in non-manufacturing employment and improving real estate conditions will be the hallmarks of the Michigan economy for the remainder of the year.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0416.

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Comerica Economic Weekly

U.S. economic data released this week from the end of the first quarter was consistent with our expectation of anemic Q1 growth, followed by improving conditions in the current quarter and beyond. Let’s start with the good news first.

The Conference Board’s Leading Economic Index for March increased by 0.2 percent, after falling in December through February. We expect to see more positives from the LEI in the coming months. The Coincident and Lagging Indexes were also non-negative for the month.

Initial claims for unemployment insurance dipped by 6,000 for the week ending April 16, to an exceptionally low 247,000. Continuing claims fell by 39,000 to hit 2,137,000 for the week ending April 9. These are historically low numbers, on par with the end of the 1970s.

Housing related data was less positive. New home construction remains low relative to population growth despite firm house prices. The National Association of Homebuilders Housing Market Index rates market conditions for the single-family housing market. The April 2016 reading for the NAHB Index was unchanged at 58 for the third consecutive month, well below the recent peak of 65 from last October.

Housing starts for March dropped by 8.8 percent, down to a 1.089 million unit rate. Both single and multifamily starts were well off the February pace. Permits for new residential construction also fell in March, down 7.7 percent, to a 1.086 million unit rate. Single-family permits were down slightly, but the more volatile large multifamily segment fell noticeably, down 20.6 percent.

Existing home sales for March bounced back, gaining 5.1 percent and climbing to a 5.33 million unit annual rate, after falling by 7.3 percent in February. Months’ supply of existing homes on the market ticked up to a still-tight 4.5 months’ worth. The median sales price of an existing home was up 5.7 percent in March, over the previous 12 months.

The recent dip in mortgage interest rates, down close to 3.5 percent for a 30 year fixed rate mortgage, will help sales of new and existing homes in April. Mortgage apps surged in early April.

The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey for April pointed to a slight deterioration in manufacturing conditions in the Mid-Atlantic, after significant improvement in March.

Oil and natural gas prices rallied through the week, consistent with our expectation of more inflationary pressure in the current quarter.

On Thursday, Mario Draghi, President of the European Central Bank, announced that there would be no change to ECB monetary policy as a result of their policy deliberations. He opened the door for future rate cuts, deeper into negative territory, saying that the ECB would boost easing if it was warranted.

With soft first quarter U.S. data and only the beginning of a push to inflation from higher oil prices, we expect the Federal Reserve to leave monetary policy unchanged at the FOMC meeting this coming Tuesday and Wednesday. Unless there is a change in tone from the Fed in their policy statement on Wednesday, we expect to roll back our fed funds rate assumptions for this year. Currently, we have two 25 basis point fed funds rate hikes in our interest rates forecast, one in June and one in December. If the Fed continues to emphasize global risks to growth, we may eliminate the June rate hike from our May interest rate forecast, leaving only one fed funds rate hike for 2016, coming in December.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 04-22-2016.

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March Leading Indicators, Existing Home Sales, April UI Claims, ECB/FOMC

Indicators Positive but Fed not Likely to Respond

  • The Conference Board’s Leading Economic Index for March increased by 0.2 percent.
  • Existing Home Sales for March increased by 5.1 percent to a 5.33 million unit annual rate.
  • Initial Claims for Unemployment Insurance fell by 6,000 for the week ending April 16 to 247,000.
  • We expect no change in interest rate policy at next week’s FOMC meeting.

The March edition of the Conference Board’s Leading Economic Index increased by 0.2 percent, after falling in December, January and February. The Coincident Index was unchanged in March and the Lagging Index gained 0.4 percent. The positive contributors to the leading index in March were (in order) stock prices, interest rate spread, leading credit index, the ISM new orders index, manufacturers’ new orders for nondefense capital goods ex aircraft, and manufacturers’ new orders for consumer goods and materials. The negative contributors for March were building permits and weekly unemployment insurance claims. As we show below, the weekly UI claims numbers have been exceptionally good; they were just a little less good in March. We needed a positive number for the Leading Index in March, and we got it. We expect to see more positives from the LEI in the coming months, consistent with our expectation of improving real GDP growth for the remainder of this year after a somewhat weak first quarter.

Existing home sales for March bounced back, gaining 5.1 percent and climbing to a 5.33 million unit annual rate, after falling by 7.3 percent in February. Months’ supply of existing homes on the market ticked up to a still-tight 4.5 months’ worth. The median sales price of an existing home was up 5.7 percent in March, over the previous 12 months. The recent dip in mortgage interest rates, down close to 3.5 percent for a 30 year fixed rate mortgage, will help sales of new and existing homes in April.

Initial claims for unemployment insurance dipped by 6,000 for the week ending April 16, to an exceptionally low 247,000. Continuing claims fell by 39,000 to hit 2,137,000 for the week ending April 9. These are exceptionally low numbers, on par with the end of the Nixon Administration.

Today, Mario Draghi, President of the European Central Bank, announced that there would be no change to ECB monetary policy as a result of their policy deliberations. He opened the door for future rate cuts, deeper into negative territory, saying that the ECB would boost easing if it was warranted. With soft first quarter U.S. data and only the beginning of a push to inflation from higher oil prices, we expect the Federal Reserve to leave monetary policy unchanged at the FOMC meeting this coming Tuesday and Wednesday. Unless there is a change in tone from the Fed in their policy statement on Wednesday, we expect to roll back our fed funds rate assumptions for this year. Currently, we have two 25 basis point fed funds rate hikes in our interest rates forecast, one in June and one in December. If the Fed continues to emphasize global risks to growth, we may eliminate the June rate hike from our May interest rate forecast, leaving only one fed funds rate hike for 2016, coming in December.

Market Reaction: Equity markets opened with losses. The 10-Year Treasury bond yield is up to 1.87 percent. NYMEX crude oil is up to $42.74/barrel. Natural gas futures are up to $2.21/mmBTU.

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For a PDF version of this Comerica Economic Alert click here: Leading Indicators 04-21-16.

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Comerica Economic Weekly

Oil prices have turned, and so have a host of economic indicators. We expect April’s CPI and PPI to further reflect the push from higher crude oil and product prices, beyond what we saw this week in the March PPI and CPI reports. The U.S. import price index for March reflected higher oil prices, increasing by 0.2 percent. China’s producer price index increased by 0.4 percent in March. Oil countries’ stock markets are rallying. The price of iron ore is lifting off its December low. The Baltic Dry Index is climbing. The International Energy Agency issued a report yesterday supportive of a rebalance in global supply/demand fundamentals by the end of this year.

To the extent that higher oil prices will boost inflation, they will also factor into Federal Reserve monetary policy. We continue to expect that there will be no fed funds rate hike at the upcoming April 27/28 FOMC meeting. The bar for a June rate hike is looking higher, given the current tone of fedspeak. Beyond June, we expect increasing inflation and improving U.S. economic indicators to allow the Fed to follow through on at least one rate increase this year, and possibly two.

The fed funds futures market is showing a 98.9 percent probability that there will be no rate hike at the end of this month. That feels about right, maybe a smidge low. A June rate hike generates a 15.8 percent probability, September 28.8 percent. For December, the fed funds futures market shows a 45.4 percent chance of no additional rate hikes, a 39.2 percent chance of one, and a 13.1 percent chance of two rate hikes before the end of this year based on the pricing of fed funds futures contracts.

The National Federation of Independent Business’s Small Business Optimism Index fell slightly in March to 92.6. Expected business conditions posted a gain for the month.

March retail sales fell by 0.3 percent as unit auto sales fell to a 16.6 million unit pace. Other retail sales were mostly positive, including building materials, up by 1.4 percent, health and personal care stores, up by 1.0 percent, and gasoline station sales, up by 0.9 percent.

Business inventories dropped by 0.1 percent in March, confirming another weight on the expected weak first quarter GDP report, due out on April 28.

The producer price index for final demand eased unexpectedly by 0.1 percent in March as food and services prices dipped. Energy prices were up by 1.8 percent.

The consumer price index increased by 0.1 percent in March. Consumer energy prices were up by 0.9 percent. Food prices were down by 0.2 percent, holding down the headline number.

Initial claims for unemployment insurance dipped by 13,000 for the week ending April 9, to 253,000, the lowest number since mid-1973. Continuing claims fell by 18,000 for the week ending April 2, to hit 2,171,000, also a very low number.

Industrial production fell by 0.6 percent in March, weighed down by mining and utility production. Manufacturing output also dipped, by 0.3 percent. Unit motor vehicle production eased by two percent and other manufacturing categories were also down.

Mortgage apps jumped in early April.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 04-15-2016.

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March Retail Sales, Producer Prices, February Inventories

Headline Numbers Weak, But Details Mixed in Today’s Economic Data

  • March Retail Sales declined by 0.3 percent, as auto sales fell.
  • Ex-auto Retail Sales increased by 0.2 percent, supported by building materials.
  • The Producer Price Index for Final Demand fell by 0.1 percent in March.
  • Business Inventories decreased by 0.1 percent in February.

Today, bad news is good news. Total retail sales fell. Producer prices eased. Business inventories dropped, consistent with weak first quarter GDP. All three factors weigh against a near-term increase in short-term interest rates by the Federal Reserve, and so U.S. equity markets opened with gains and Treasury bond yields are up. However, this morning’s indicators are somewhat nuanced, and so we can say that the implications for the economy are not especially negative. March retail sales fell by 0.3 percent. We knew that auto sales would be a negative factor, as unit auto sales fell to a 16.6 million unit pace, taking a breather from the blistering 18 million unit pace of late last year. Two things to say…other retail sales were mostly positive, and non-retail consumer spending (services) remains healthy. The dollar value of retail auto and parts sales fell by 2.1 percent in March. However, the building materials category was up by 1.4 percent. Health and personal care store sales were up by 1.0 percent. Gasoline station sales were up by 0.9 percent. We believe that the auto component will be mixed in the months ahead, some good months and some bad, but other components will continue to grow. Total retail sales are up 2.8 percent nominally over the last 12 months. With essentially zero inflation for the consumer prices index (less shelter) over that period, the 2.8 percent nominal is close to 2.8 percent real. That is not bad. Consumer demand for services will remain strong as incomes grow and the population ages. Overall, consumer spending will continue to be a stabilizing force for the U.S. economy.

The producer price index for final demand eased by 0.1 percent in March as food and services prices dipped. Energy prices were up by 1.8 percent, reflecting the bounce back in crude oil prices, after bottoming out in early-to-mid February. We expect energy prices to gradually increase in the second half of this year, with the usual ups and downs. Going forward, energy will tend to be more of a boost to inflation than a drag. On a year-over-year basis, we expect prices indexes to continue to trend upward in the months ahead, giving the inflation hawks at the Fed something to speak about.

Business inventories dropped by 0.1 percent in March, confirming another weight on the expected weak first quarter GDP report, due out on April 28. The headline numbers are masking two effects. One is oil. We know that crude oil and petroleum product inventories are swollen and are expected to gradually decline as the oversupplied oil market tightens up over the next year or so. The other issue is auto inventories, up a strong 9.3 percent over the last year. If sales do not pick up following the March dip, we may see some production adjustments among auto producers. This could increase downward pressure on manufacturing employment.

Market Reaction: Equity markets opened with gains. The 10-year Treasury yield is up to 1.78 percent. NYMEX crude oil is down to $42.12/barrel. Natural gas futures are up to $2.01/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Retail Sales 04-13-16.

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Comerica Economic Weekly

It was a fairly light week for U.S. economic data. Economic news was dominated by oil prices, Fedspeak and the dollar. This was not a spurious relationship. The three are closely linked.

Let’s start with oil. U.S. oil prices respond to supply, demand, inventories and the value of the dollar. U.S. supply is easing as the rig count continues to drift downward, with severe and ongoing financial pressure on exploration and production companies. Iran’s ability to ramp up production with the lifting of U.S. sanctions is in question. Demand continues to increase but China remains a key concern. China accounts for about half of global GDP growth. Recent news from China shows some success in their policy responses to changing economic conditions there. U.S. crude oil inventories are very high, putting downward pressure on prices. The dollar has weakened recently, putting upward pressure on prices. The net result was a decline in crude oil dollar prices from late March through early April, and then a rebound to $39.22 as of this writing.

Lower oil prices since mid-2014 have weighed on U.S. business investment and have depressed inflation. The Fed has responded to weak U.S. GDP growth, cool inflation numbers and a generally shaky global environment by ratcheting down expectations for interest rate increases. Last December, the Fed’s dot plot showed a consensus for four 25 basis point increases in the fed funds rate this year. The March dot plot dialed that expectation back to two fed funds rate hikes this year. Last night in a forum with Paul Volcker, Alan Greenspan and Ben Bernanke, current FOMC Chair Janet Yellen defended the December rate hike while reinforcing expectations of a very gradual approach to fed funds rate hikes this year.

With reduced expectations of fed funds rate hikes in 2016, the value of the dollar has eased. The Fed’s nominal broad dollar index was down about 5 percent from its January 20th peak, through April 1. The weaker dollar then contributed to higher global oil prices, completing the circular relationship between the three key elements.

The ISM Non-Manufacturing Index for March increased to 54.5 percent, from February’s 53.4 percent. The improvement in the index is consistent with our expectation for weak-to-moderate real GDP growth, in the vicinity of 1.3 percent annualized, for the recently completed first quarter.

The U.S. international trade gap widened in February to -$47.1 billion as imports increased more than exports for the month. The real (price adjusted) balance of trade in goods for February widened, implying a drag from trade in the 2016Q1 GDP report, which will be released on April 28.

The Job Opening and labor Turnover Survey (JOLTS) for February showed an increase in the hiring rate while the job opening rate ticked down. Hiring was strong at 3.8 percent of total employment. The job openings rate ticked down to a still-strong 3.7 percent. The quits rate increased to 2.1 percent, also a strong number.

Initial claims for unemployment insurance fell by 9,000 for the week ending April 2, to hit 267,000. Continuing claims for the week ending March 26 increased by 19,000, to hit 2,191,000. The solid labor market data from this week reinforces our expectation for ongoing moderate-to-strong U.S. job growth. We expect the unemployment rate to resume its gradual downward track in the second quarter. Recent strong labor force growth is an increasingly important factor in that calculation.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 04-08-2016.

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