Comerica Bank’s Arizona Index Sees First Contraction in a Year

Comerica Bank’s Arizona Economic Activity Index eased in April, decreasing 0.4 percentage points to a level of 106.3. April’s index reading is 29 points, or 38 percent, above the index cyclical low of 76.9. The index averaged 99.7 points for all of 2014, four and one-fifth points above the average for full-year 2013. March’s index reading was 106.7.

“After a strong run through early this year, the Arizona economy stalled through March and April. Our Arizona Economic Activity Index was unchanged in March and has ticked down in April, breaking a string of nine consecutive monthly gains. Job creation has cooled. Payroll employment in May was about where is it was in January. Real estate conditions are improving, but not as quickly as in other areas. Residential construction activity is struggling to find momentum. High housing affordability relative to other areas, including California, remains a strong point for the state,” said Robert Dye, Chief Economist at Comerica Bank. “We expect the Arizona economy to regain momentum this summer.”

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For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0615.

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Comerica Bank’s Florida Index Continues Strong Gains

Comerica Bank’s Florida Economic Activity Index increased in April, growing 1.7 percentage points to a level of 135.5. April’s index reading is 57 points, or 73 percent, above the index cyclical low of 78.1. The index averaged 117.6 in 2014, eight and three-fifths points above the average for all of 2013. March’s index reading was 133.9.

“Florida’s economy is looking good. Our Florida Economic Activity Index improved again in April, for the 13th consecutive month. Solid job creation for the U.S., combined with firming wages and improving consumer confidence in the presence of low gasoline prices is a potent recipe for growth in the Florida economy. This summer’s tourism season looks promising. One counterweight, however, is the strong dollar, which makes the Florida experience more expensive for foreign tourists. Likewise, it is making Europe and other destinations cheaper for American tourists,” said Robert Dye, Chief Economist at Comerica Bank. “We expect residential construction activity to improve through the summer.”

State_Index_06_2015_Florida

For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0615.

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From the Desk of Robert Dye

More Thoughts About Greece

When I last wrote about Greece, at the end of May, I said that the probability of Greece exiting the European Union soon was about 25 percent. The failure of recent negotiations between the Greek government of Alexis Tsipras and eurozone finance ministers to extend the bailout program for Greece has changed that outlook. The lack of progress in the negotiations resulted in a significant move by the European Central Bank. The ECB statement of June 28 says that it will not remove the ceiling on emergency liquidity assistance to Greece. They will not backstop a run on Greek banks. That precipitated the capital controls on Greek banks that went into effect today, which severely restrict the flow of currency within the Greek economy. Restrictions on withdrawals of cash from banks and the insistence on cash payments by many hotels, restaurants and shops will hurt tourism as the summer season hits full swing. The economy will rapidly decelerate. Loan defaults will increase. Stress on Greek banks will multiply. The ECB says that it stands ready to reconsider its decision. It is waiting for the results of the referendum in Greece now scheduled for Sunday. The referendum is expected to be worded as a yes or no vote on the terms of the bailout package for Greece. It is being characterized as a vote for the euro or for the drachma. A yes vote for the bailout terms, and for the euro, could mean the end of the Tsipras government. It could also allow the ECB to reopen support for Greek banks. This will not be enough to salvage the summer tourist season. It is already severely damaged. But it could allow Greece to stay in the EU. The odds of a yes vote may be slightly greater than 50 percent. A no vote looks like it paves the way for Grexit. It’s going to be an interesting week.

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Comerica Economic Weekly

U.S. economic data from this week confirm that the household sector is strengthening, driving a GDP rebound for the about-to-be completed second quarter. Labor market conditions are improving, home sales are ramping up, auto sales are robust and the strong majority of U.S. economic indicators are consistent with an economy that is gaining momentum.

The BEA released their third estimate of 2015Q1 real GDP growth. It now shows a -0.2 percent annual rate, revised up from -0.7 percent. At the end of July, the BEA will release their annual benchmark revision to GDP data.

May home sales confirm that the U.S. housing market is warming up. New home sales increased by 2.2 percent in May to a 546,000 unit annual rate. Existing home sales increased by 5.1 percent in May to a 5.35 million unit rate. According to the Mortgage Bankers Association, the interest rate on a 30-year fixed rate mortgage was 4.22 percent as of June 12.

New orders for durable goods declined by 1.8 percent in May. The drop reflects volatility in commercial aircraft orders, down 35.3 percent in May. Core orders, nondefense capital goods excluding aircraft, increased by a moderate 0.4 percent.

Nominal consumer spending surged by 0.9 percent in May. The personal consumption expenditure (PCE) price index was up 0.3 percent in May as energy prices gained 4.7 percent, leaving real consumer spending with a solid 0.6 percent increase. The personal saving rate dropped from 5.4 percent in April to 5.1 percent in May, reversing its climb from October through last February. After adjusting for taxes and inflation, real disposable income increased by 0.2 percent in May.

Consumer sentiment improved in June according to the University of Michigan survey.

Initial claims for unemployment insurance increased inconsequentially by 3,000 to hit a still-low 271,000 for the week ending June 20.

Federal Reserve Governor Jerome Powell said that he thinks there is a good chance that the Fed will begin to lift the fed funds rate in September, with another increase possibly coming in December. We expect to see more hints from the Fed by the end of July.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 06-26-15.

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May Income/Spending, June UI Claims

Strong Spending Points to Q2 GDP Rebound

  • U.S. Personal Income increased by 0.5 percent in May. After taxes and inflation it gained 0.2 percent.
  • Nominal Consumer Spending increased by 0.9 percent in May driven by auto sales.
  • Initial Claims for Unemployment Insurance added 3,000 for the week ending June 20, to hit 271,000.

We knew auto sales were strong in May, up at a 17.8 million unit rate. Now we see the surge in nominal consumer spending, up 0.9 percent for the month. Spending on durable goods gained 2.2 percent. Nondurables were up 1.9 percent. Spending on services, the largest category by volume, gained a moderate 0.3 percent, holding down the headline reading for overall consumer spending. The personal consumption expenditure (PCE) price index was up 0.3 percent in May as energy prices gained 4.7 percent. This leaves real consumer spending with a solid 0.6 percent increase for the middle month of the second quarter, supportive of a Q2 GDP rebound. Nominal income was up by 0.5 percent in May as wages and salaries also gained 0.5 percent. Spending growing faster than income implies a drawdown in the saving rate. The personal saving rate dropped from 5.4 percent in April, to 5.1 percent in May, reversing its climb from October through last February. Strong gains in house prices and equities may allow households to spend a little more freely and enjoy still-cheap gasoline. Anecdotal reports suggest that household automobile miles are increasing. After adjusting for taxes and inflation, real disposable income increased by 0.2 percent in May.

Labor data through June suggests that incomes will continue to improve at a healthy clip. Initial claims for unemployment insurance increased by 3,000 for the week ending June 20 to hit 271,000, still well below the benchmark rate of 300,000. Continuing claims added 22,000 for the week ending June 13, to hit 2,247,000. Pennsylvania reported a sizeable 6,007 increase in initial claims through June 13.

Market Reaction: U.S. equity markets opened with gains. The yield on the 10-year Treasury bond is up to 2.42 percent. NYMEX crude is down to $59.70/barrel. Natural gas futures are down to $2.82/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Personal Income 06-25-15.

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From the Desk of Robert Dye

This morning, the Bureau of Economic Analysis released their third estimate of first quarter 2015 real GDP growth. It now shows a -0.2 percent annual rate, revised up from the previous estimate of -0.7 percent. The initial estimate, released at the end of April, showed +0.2 percent growth. At the end of July, the BEA will release their annual benchmark revision to GDP data, meaning that we will see another revision to the somewhat controversial Q1 GDP number. That “final final” estimate may yet show a small positive real GDP growth rate for the quarter. When GDP growth is clearly positive, or clearly negative, revisions to the data generally do not significantly change our view on the economy. Now, however, a small negative growth rate may be revised to a small positive rate, and that can change our view on the economy. The revisions to Q1 GDP give us the perfect opportunity to mix a metaphor. It is as if we are looking through a rearview mirror on the economy, darkly. Not only are we looking backward, but the view itself is obscured by the always-imperfect mechanisms for deriving the GDP data. The example of the Q1 GDP data reminds us to always take a broad view of economic data, and not to overanalyze any particular number in isolation.  Through mid-June we can say that job growth is strong, home sales are improving, auto sales are robust and the strong majority of U.S. economic indicators are consistent with an economy that is gaining momentum.

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May Home Sales, Durable Goods Orders

Housing Heats Up Ahead of the Fed, Orders Lose Altitude on Aircraft

  • New Home Sales for May increased by 2.2 percent to an annual rate of 546,000 units.
  • Existing Home Sales in May gained 5.1 percent, to a 5.35 million unit annual rate.
  • New Orders for Durable Goods declined by 1.8 percent in May, still adjusting after a March surge.

May home sales confirm that the U.S. housing market is warming up, with increases in both new and existing home sales. Prices are firming and mortgage rates are increasing too. So it will be an interesting fall season for residential real estate markets if Federal Reserve Governor Jerome Powell’s expectations on interest rates come true. Powell said this morning that he expects the Federal Reserve to be ready to begin raising interest rates in September, followed by another increase in the fed funds rate in December. The yield on 10-Year Treasury bonds is up to 2.38 percent. According to the Mortgage Bankers Association, the interest rate on a 30-year fixed rate mortgage was 4.22 percent as of June 12. We agree with Governor Powell’s fed funds rate forecast, and we expect to see gradual upward pressure on mortgage rates through the second half of this year as a result of the Federal Reserve’s actions to gradually increase the funds rate.  We expect solid real income growth this year to support moderately increasing housing demand in the face of gradual upward pressure on interest rates.

New home sales increased by 2.2 percent in May to a 546,000 unit annual rate. This is still well below the series average of about 650,000 units per year since 1963. The months’ supply of new homes on the markets ticked down to a tight 4.5 months’ worth. Existing home sales increased by 5.1 percent in May to a 5.35 million unit rate. In contrast to new home sales, existing home sales are already close to their long-run average. The month’s supply of existing homes on the market ticked down to 5.1 months’ worth in May. The median sales price of an existing home was up 7.9 percent in May over the previous year.

New orders for durable goods declined by 1.8 percent in May. The drop in orders reflects volatility in commercial aircraft orders, down 35.3 percent in May. The May decline in total orders also follows a 5.1 percent surge in March. Core orders, nondefense capital goods excluding aircraft, increased by 0.4 percent, a reasonably healthy number for U.S. manufacturing.

Market Reaction: U.S. equity markets have given up opening gains. The 10-year Treasury bond yield is up to 2.38 percent. NYMEX crude oil is up to 60.96/barrel. Natural gas futures are down to $2.78/mmb

For a PDF version of this Comerica Economic Alert click here: New_Home Sales 06-23-15.

The articles and opinions in this publication are for general information only, are subject to change, and are not intended to provide specific investment, legal, tax or other advice or recommendations.  The information contained herein reflects the thoughts and opinions of the noted authors only, and such information does not necessarily reflect the thoughts and opinions of Comerica or its management team.  We are not offering or soliciting any transaction based on this information.  We suggest that you consult your attorney, accountant or tax or financial advisor with regard to your situation.  Although information has been obtained from sources we believe to be reliable, neither the authors nor Comerica guarantee its accuracy, and such information may be incomplete or condensed.  Neither the authors nor Comerica shall be liable for any typographical errors or incorrect data obtained from reliable sources or factual information. 

 

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From the Desk of Robert Dye

In its monetary policy statement this afternoon, the Federal Open Market Committee made no changes to interest rate policy. The Fed did acknowledge that the U.S. economy has recently improved, after a weak first quarter.  Fed officials believe that U.S. economic activity will continue to expand at a moderate pace and labor market indicators will continue to improve. Inflation remains below the Fed’s “comfort zone” of near 2 percent. But they view energy prices as stabilizing, and that will allow inflation indicators to gradually re-normalize.

The economic projections of FOMC members released today show a downward adjustment to the rate of GDP growth for 2015, reflecting the weak historical data from Q1. In the March projections, Fed officials saw 2015Q4 year-to-year real GDP growth in the range of 2.3 to 2.7 percent. The June projections are revised down to 1.8 to 2.0 percent growth. The Comerica June U.S. forecast has 1.8 percent growth for the four quarters ending in 2015Q4.

The new “dot plot” is interesting. In the June dot plot of FOMC members’ expectations for the fed funds rate, we see a convergence of opinion about the expected path of the fed funds rate for 2015, compared with the March dot plot. In the just-released June dot plot all but two out of 17 dots are consistent with at least one interest rate increase this year, while no dots show an expectation of more than three rate hikes this year. From the June dot plot it is reasonable to expect the first increase in the fed funds rate in September to 25 basis points, and the second increase coming in December to 50 basis points.

The pacing of the “crawl” toward high interest rates remains very much data dependent. The Fed did not commit today to anything in their policy announcement. But, the new dot plot aligns with financial market expectations for a September fed funds rate increase.

In her post-announcement press conference, FOMC chair Yellen used the phrase “data-dependent” many times and emphasized a shallow trajectory for the expected path of the fed funds rate.  On Greece, she said that the U.S. economy has only limited exposure to a possible default. She defended the Fed’s role regarding the insurance giant AIG.

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Comerica Economic Weekly

Strong U.S. economic data are raising expectations for the remainder of the year after a weak Q1. So far this month, two nagging questions about the U.S. economy have been answered. The first nagging question was about the rate of hiring. We can now say that hiring has accelerated after a soft March. The second nagging question was about consumer spending. We can now say that consumers are responding positively to better jobs, increased pay and low energy prices.

For the soon-to-be completed Q2 we expect real GDP growth to rebound from the sagging -0.7 percent contraction of Q1 to about +2.8 percent. The combination of strong job growth and confident consumer spending is a powerful accelerator. We expect to see more lift in the housing sector and in business investment through the remainder of this year.

Retail sales bounced back after three consecutive monthly declines from last December through February. March sales gained a strong 1.5 percent. April was more moderate at a 0.2 percent increase, and in the latest numbers from May, we see another strong gain of 1.2 percent. May retail sales were fortified by the surge in unit auto sales to a 17.8 million unit annual rate.

April business inventories increased by 0.4 percent, also supportive of Q2 GDP.

Initial claims for unemployment insurance increased inconsequentially, by 2,000, to hit 279,000 for the week ending June 6. Continuing claims for the week ending May 30 increased by 61,000, to reach 2,265,000, also a very good number.

The Job Openings and Labor Turnover Survey (JOLTS) for April showed an uptick in the rate of hiring, to a strong 3.7 percent.

The National Federation of Independent Business’s Small Business Optimism Index for May increased to 98.3 in May as hiring plans improved.

Firming energy prices brought producer prices up in May. The producer price index for final demand increased by 0.5 percent, its strongest monthly gain since September 2012. Over the previous 12 months the index is still down by 1.1 percent. But if oil prices remain in the $55-60 range, or increase, then year-over-year price comparisons will start to renormalize.

Along with raising our expectations about U.S. economic performance, strong recent data are reinforcing our expectations about Federal Reserve monetary policy. We continue to expect the FOMC to initiate its first fed funds rate increase since June 2006 at its September 16/17 meeting. Fed funds futures also point to a September rate increase.

We expect to see no changes to monetary policy announced at the upcoming June 16/17 FOMC meeting. However, the Fed will likely acknowledge better recent economic performance and firming inflation. Also, we will see the next “dot plot” showing FOMC members’ expectations for the fed funds rate.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 06-12-15.

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June 2015, Comerica U.S. Economic Update

The mystery number known as Q1 real gross domestic product growth is currently set at -0.7 percent. That may not be its final resting place. On July 30, the Bureau of Economic Analysis will release its annual revision for the national income and product accounts (NIPA); this includes GDP. The BEA will revise estimates for GDP going back three years, including the somewhat controversial 2015Q1 number. Seasonal adjustment factors to some components of GDP may be revised enough to swing the headline growth rate barely positive. The unfortunate pairing of the weak Q1 GDP numbers with a soft March payroll jobs gain (now revised up to +119,000) was a wet blanket on consumer and business confidence readings.

Fortunately, more recent data provides strong support that the soon-to-be-completed second quarter was a step in the right direction for the U.S. economy. We expect to see real GDP rebound to about a 2.8 percent growth rate for Q2, and remain near that rate through 2015Q3 and Q4. Hiring is on the increase, as shown in the April Job Openings and Labor Turnover Survey (JOLTS) data. Payroll job growth in April accelerated to 221,000 jobs, and then surged in May to 280,000. We do not expect job growth to be sustained indefinitely at the strong May rate, but neither do we expect to see a sudden downshift in job growth. Rather, what we expect to see is a gradual easing of job growth to around 200,000 jobs per month by the end of this year, and then easing further through 2016. This will not be a bad thing, and there will still be enough job growth to maintain a downward trend in the unemployment rate. Retail sales also surged in May by 1.2 percent, suggesting that real consumer spending, which was missing in action over the winter months, is re-emergent, supported by strong job growth. The May unit auto sales rate of 17.8 million units was a strong signal that consumer confidence is not as wobbly as the April and May numbers suggest.

Meanwhile, back at the Fed, Federal Open Market Committee voters are digesting the call from the International Monetary Fund’s Christine Lagarde to delay the first increase in the fed funds rate until 2016. We believe that recent strong U.S. data trumps the cautionary request from the IMF, and the FOMC remains on track to begin increasing the fed funds rate this year, possibly in September. Strong U.S. job growth and stabilizing U.S. inflation are the drivers for the Fed’s data-dependent decision. Communication about the first increase in the fed funds rate since June 2006 is changing. Instead of using the overly dramatic phrasing “interest rate lift-off,” Fed Governor Stanley Fischer has described the event as the start of a “crawl” toward normalizing Fed monetary policy. Treasury bond yields have already begun crawling. The yield on 10-Year T-Bond is up 70 basis points since early February.

 For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate_06_2015.

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