Comerica Economic Weekly

U.S. economic data released over the last week of January was generally positive, although 2016Q4 real GDP growth was weaker than expected. International data was also supportive.

The first estimate of 2016Q4 real GDP growth came in at 1.9 percent annualized. The components of GDP were mixed. Consumer spending increased at a moderate 2.5 percent annual rate, supported by a surge in auto sales, but weighed down by warm weather (utilities). Trade was a big drag as imports grew at the strongest rate since the end of 2014. Inventories were a support to GDP growth. Federal defense spending eased.

The Markit Flash U.S. Manufacturing PMI for January was up sharply, while their services PMI was also up. The Eurozone Composite PMI eased slightly to a still-positive 54.3 for January. Japan showed a strong improvement in January.

New orders for durable goods dipped in December by 0.4 percent, weighed down by a large drop in orders for defense aircraft, a very volatile component. Other categories were mixed. Core orders, nondefense capital goods excluding aircraft, increased by 0.8 percent.

The Federal Reserve Bank of Kansas City reported that their January manufacturing survey was positive, as did the Richmond Fed.

Home sales were soft in December. This may just be noise, but it comes as mortgage rates increased, weighing on affordability, along with price gains. Existing home sales dipped by 2.8 percent to a 5.49 million unit rate. New home sales slumped by 10.4 percent to a 536,000 unit rate, the lowest rate since last March.

Initial claims for unemployment insurance increased by 22,000 for the week ending January 21, to hit 259,000, still a very low number. Continuing claims gained 41,000 for the week ending January 14, bouncing off an exceptionally low number the previous week to hit 2,100,000.

Looking ahead, The Conference Board’s Leading Economic Index increased by 0.5 percent in December, the best result since last July. Interest rates, stock prices and consumer expectations were supportive. The coincident and the lagging indexes both increased by 0.3 percent for the month.

The fed funds futures market shows a minimal 4 percent chance of a rate hike on Wednesday. Lets just round that off to zero. Expectations remain focused on June 14 as the date for the next rate hike. We look forward to clarified forward guidance.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 01272017.

 

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2016Q4 GDP, December Durable Goods Orders

First Estimate of Q4 GDP Below Expectations on Drags from Trade, Defense, Weather

  • Real Gross Domestic Product for 2016Q4 increased at a weaker-than-expected 1.9 percent annual rate.
  • New Orders for Durable Goods decreased by 0.4 percent in December.

The first estimate of fourth quarter 2016 real GDP growth was positive but weaker than expected, showing a 1.9 percent annualized growth rate. The components of GDP were mixed, highlighting the cross currents in the U.S. economy. The largest part of GDP, real consumer spending, increased at a moderate 2.5 percent annual rate. Consumer spending in the fourth quarter was supported by a surge in auto sales, boosting consumer spending on durable goods by 10.9 percent (annualized). But the largest part of consumer spending, on services, was held in check by a decline in the housing and utilities component, possibly weather-related. Growth in nonresidential fixed investment increased to a 2.4 percent annualized rate, supported by gains in equipment and intellectual property, but the structures component was still weak even though drilling rig counts have increased. Trade was a big drag, subtracting 1.7 percent from headline GDP growth in the fourth quarter as exports eased while imports grew at the strongest rate since the end of 2014. Inventories were a support to GDP growth, increasing by $48.7 billion ($2009) in the quarter, and boosting headline GDP growth by 1.0 percent. Federal spending declined at a 1.2 percent annualized rate as defense spending eased. Overall, this was a positive first estimate, thwarted by a surge in imports.

New orders for durable goods eased in December by 0.4 percent, weighed down by a large decline in new orders for defense aircraft and parts, often a very volatile component. Other categories were mixed. New orders for primary metals dipped by 0.9 percent while orders for fabricated metals eased by 0.8 percent. Communication equipment orders gained 4.9 percent. Commercial aircraft orders, another highly volatile component, jumped by 42.4 percent. Core orders, nondefense capital goods excluding aircraft, increased by 0.8 percent in December. Recent regional Federal Reserve manufacturing surveys have been positive. That trend continued with the Federal Reserve Bank of Kansas City reporting that their January survey showed a modest expansion of manufacturing activity.

Market Reaction: Equity markets opened with losses. The 10-year Treasury bond yield is down to 2.50 percent. NYMEX crude oil is down to $53.09/barrel. Natural gas futures are down to $3.30/mmbtu.

For a PDF version of this Comerica Economic Alert click here: GDP_01272017.

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December Existing Home Sales

  Sales Slip as Condos Crack

  • Existing Home Sales decreased by 2.8 percent in December to a 5,490,000 unit annual rate.

Existing home sales eased by 2.8 percent in December, ending the year in the same pattern that they started the year; zig zag with a gradual upward trend. Sales declined moderately in the Northeast, the Midwest and the West. The South was flat for the month. The condo market gave up the most ground, with existing condo sales down 10.3 percent in December. Existing single-family sales dipped by 1.8 percent. The months’ supply of existing homes for sale dipped to 3.6 months’ worth, indicating tight conditions for many regional markets. The median sales price of an existing single-family home was up 3.8 percent over the 12 months ending in December. Existing condo prices were up 5.5 percent over the year. We are seeing a disconnect between the single-family market and the condo market in some areas. Condo supply increased rapidly last year and absorption slowed. We expect to see cooler conditions for many condo markets through the first half of this year as over-supply weighs on prices. Still, fundamental demand looks good and oversupplied markets will gradually equilibrate. With stronger economic growth and warming inflation, we expect the Federal Reserve to increase the fed funds rate range about three times this year, putting upward pressure on mortgage interest rates. With higher rates and climbing prices, affordability will ease through 2017, but from a still-high level. So we expect to see some segments of the housing market feel the headwind from rising interest rates. But solid job and income growth and rising confidence will support ongoing demand.

Regional manufacturing surveys continue to look good. Last week we reported on both the Philadelphia Fed’s and the New York Fed’s manufacturing surveys. Today, the Federal Reserve Bank of Richmond showed a similar positive reading for January, showing that manufacturing activity expanded in the region from Maryland through South Carolina.

Market Reaction: U.S. equity markets opened with gains. The 10-year Treasury bond yield is up to 2.46 percent. NYMEX crude oil is up to $53.34/barrel. Natural gas futures are up to $3.33/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  Existing Home Sales 01-24-17.

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Comerica Economic Weekly

It was a short week bookended by the Martin Luther King Day holiday and the inauguration of President Trump and Vice President Pence, but there was a good amount of data released, most of which was positive.

Housing starts for December bounced back after a weak November, up 11.3 percent for the month, to a 1.226 million unit rate. The recent volatility has been concentrated on the multifamily side. Multifamily starts fell from a 442,000 rate in October, to 271,000 in November and then normalized to 417,000 in December. December permits were little changed from November, down 0.2 percent to a 1.210 million unit annual rate.

Industrial production jumped by 0.8 percent in December as utility output snapped back from a three-month decline. Manufacturing output increased by 0.2 percent for the month, supported by a 1.8 percent increase in motor vehicle assemblies.

The Philadelphia Fed manufacturing survey for December showed positive and improving conditions for eastern Pennsylvania and southern New Jersey manufacturers. The New York Fed’s manufacturing survey showed a similar positive outcome for New York and northern New Jersey companies.

Initial claims for unemployment insurance fell by 15,000 for the week ending January 14, to hit a very low 234,000. Continuing claims fell by 47,000 for the week ending January 7, to hit a super low 2,046,000.

The Consumer Price Index for December increased by a warm 0.3 percent, as expected. Over the previous 12 months, the headline CPI is up by 2.1 percent. Driving the December gains were energy prices, up by 1.5 percent for the month. Core CPI (less food and energy) gained 0.2 percent in December and is up by 2.2 percent over the previous 12 months.

The European Central Bank left their key interest rates unchanged on Thursday. They reaffirmed their intention to continue asset purchases through the end of this year or beyond.

Federal Reserve chairwoman Janet Yellen delivered a speech at Stanford University on Thursday where she maintained current expectations for about three fed funds rate hikes this year. She concluded her prepared remarks by saying that the course of monetary policy over the next few years will depend on many different factors, of which fiscal policy is just one. It was appropriate that she singled out fiscal policy on the eve of President Trump’s inauguration.

Expectations for the incoming Trump Administration are high and the economic implications are numerous. Generally speaking, we expect to see slightly stronger economic growth, slightly higher inflation, slightly higher interest rates and a slightly stronger value of the dollar because of the net effect of Trump Administration policies. The Fed may raise interest rates more than currently expected if inflation expectations start to unhinge, in what has been labelled the “monetary offset.”

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 01-20-2017.

 

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Comerica Economic Weekly

U.S. economic data for the week was positive and consistent with an ongoing moderate economic expansion through the fourth quarter of 2016.

The biggest surprise of the week came from the National Federation of Independent Business. Their Small Business Confidence Survey showed a surge in optimism in December, to 105.8, the strongest reading since December 2004. If the surge in small business optimism is maintained, we could see stronger hiring, inventory spending and capital spending in 2017 as a result.

Initial claims for unemployment insurance increased by 10,000 for the week ending January 7, to hit 247,000, still a very low number. Continuing claims for the week ending December 31 fell by 29,000 to reach 2,087,000, also a very low number.

The Job Openings and Labor Turnover Survey for November showed stable and positive labor market conditions. The jobs openings rate ticked up to 3.7 percent for the month. The hiring rate was unchanged at 3.6 percent . The separations rate ticked up to 3.5 percent.

Retail sales for December increased by 0.6 percent, supported by strong auto sales and rising gasoline prices. For the month, unit auto sales surged to an 18.4 million unit rate. The dollar value of retail auto sales increased by 2.4 percent in December. Gasoline increased from an average of $2.18 per gallon for regular unleaded in November to $2.26 in December, boosting retail sales at gasoline stations by 2.0 percent for the month. Other components of retail sales were mixed to down.

The producer price index for final demand increased by 0.3 percent in December, about as expected. Gains over the last 12 months continue to trend up. The PPI for final demand is now up 1.6 percent over the last 12 months.

Manufacturing and trade inventories were up 0.7 percent in November. The nominal gain was ahead of the PPI, suggesting real inventory accumulation in November. We are expecting to see an increase in the rate of real inventory growth in 2016Q4 that will support ongoing moderate GDP growth.

Mortgage applications rose in early January as mortgage rates eased. Both purchase and refi apps increased. According to the Mortgage Bankers Association, the 30-year fixed rate mortgage eased to 4.32 percent as of January 6, motivating increased refi activity.

The University of Michigan’s Consumer Sentiment Index eased slightly in mid-January to 98.1, after surging in December.

We continue to expect the Federal Reserve to keep key short-term interest rates unchanged at the upcoming Federal Open Market Committee meeting over January 31/February 1. So does the fed funds futures market, which shows the implied probability of a rate hike on Feb. 1 of just two percent. The futures market remains focused on June 14 for the date of the next fed rate hike. Stronger inflation data could move that schedule up.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 01-13-2017.

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December Retail Sales and Producer Prices

Cars and Gasoline

  • December Retail Sales increased by 0.6 percent, boosted by auto sales and gasoline prices.
  • Retail Sales Ex-Autos increased by 0.2 percent in December.
  • The Producer Price Index for Final Demand gained 0.3 percent in December, on higher energy prices.
  • The PPI for Final Demand Less Food Energy and Trade increased by 0.1 percent in December.

Retail sales for December increased by 0.6 percent, supported by strong auto sales and rising gasoline prices. For the month, unit auto sales surged to an 18.4 million unit rate. The dollar value of retail auto sales increased by 2.4 percent in December. Gasoline prices increased from an average of $2.18 per gallon for regular unleaded in November to $2.26 in December, boosting retail sales at gasoline stations by 2.0 percent for the month. Other components of retail sales were mixed to down. Retails sales ex-autos gained a more sedate 0.2 percent in December. Softer categories were electronics, down 0.5 percent, food, down 0.3 percent, general merchandise stores, down 0.5 percent, and restaurants, down 0.8 percent in December. Strong overall retail sales in December are consistent with solid consumer spending in the last quarter of 2016, which, in turn, is supportive of ongoing moderate GDP growth for the fourth quarter. Self-reported sales at several traditional retailers were weak through the holiday shopping season even though overall sales (including internet sales) were positive. Macy’s announced that it will close 100 stores in 2017 and cut 6,200 jobs. Kolh’s also reported weaker-than-expected holiday sales. Sears is selling its Craftsman brand and will close 150 stores this year. According to the National Retail Federation, holiday retail sales over November and December were up 4 percent this season, above the NRF’s forecast of 3.6 percent growth.

The producer price index for final demand increased by 0.3 percent in December, about as expected. Gains over the last 12 months continue to trend up. The PPI for final demand is now up 1.6 percent over the last 12 months. On the goods side, producer prices were supported in December by petroleum products, light trucks, iron and steel scrap and eggs. Prices on the services side were supported by financial services, wholesaling and apparel.

Market Reaction: Equity markets opened with gains. The 10-year Treasury yield is up to 2.42 percent. NYMEX crude oil is down to $52.55/barrel. Natural gas futures are down to $3.35/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Retail Sales 01-13-17.

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January 2017, Comerica Economic Outlook

Global Reflation and the Trump Swerve

Commodity prices accelerated in the early 2000’s, encouraging the development of new supply and feeding capital investment globally. Very high commodity prices and the global financial market crisis led to significant demand destruction through the early years of this decade. With demand destruction came a downward reset in commodity prices, making high marginal cost production unprofitable. The stall in business investment fed back into demand destruction, pushing the U.S. economy to the brink of recession by the end of 2015. With commodity markets gradually rebalancing, in the presence of still highly accommodative monetary policy, the world is now reflating. U.S. demand upshifted in the third quarter of 2016, and looks set to continue in a higher gear for at least a few more quarters. China is catching a second wind. After revision, Japan GDP data looks better. European economies look stronger despite the ongoing political stress. The U.S. money supply, M2, is surging, up 7.8 percent in November on a year-ago basis.

Commodity prices are once again on the upswing. Wages are going up. Interest rates are still low as central banks respond to new conditions slowly. The global economy is reflating after a catastrophic loss of cabin pressure eight long years ago. The weak global economic recovery contributed to a rejection of the political status quo on both sides of the Atlantic. Now, as President-elect Trump prepares to take office under a mandate of change, the U.S. economy is already under the influence of the Trump Swerve. Equity markets jumped in November, and have not looked back. Measures of business and consumer confidence have surged. Anecdotal evidence suggests that businesses are set to accelerate capital spending in 2017.

The incoming administration has promised a lot. Healthcare reform, tax reform, fiscal stimulus and regulatory rollback are all expected, and soon. Major corporations have altered significant investment decisions under threat of tweet. Most policies expected of the Trump administration will support near-term growth and tend to increase inflation. With wages climbing, commodity prices up and very low inflation expectations threatening to unhinge, the Federal Reserve has ramped up the dot plot, showing upwardly revised expectations for interest rates. The dots now signal three rate hikes for 2017. If inflation warms up quickly, there may be more than three. So there is potential for a monetary offset to the Trump Swerve, in the form of higher interest rates. Fortunately, with interest rates still ultra low, the threat of interest rate drag on the U.S. economy is distant. Another key downside risk comes from rapidly inflating expectations for the stock market. The Trump Bump may morph into the Trump Slump if the administration fails to deliver this spring on the supercharged rhetoric of the 2016 political season. Trade is also a downside risk for 2017, both from the strong dollar and from the apparent potential for heavy-handed deconstruction of trade agreements.

Timing is everything. We believe that the Trump Swerve will position the U.S economy to catch a favorable tailwind from global reflation. As the threat of a near-term U.S. led recession recedes, businesses will recalibrate and extend the current expansion into the history books. At 90 months, the business cycle catches its second wind. Stronger growth, more inflation, higher interest rates and slower job creation are in store for 2017.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicOutlook0117.

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Comerica Economic Weekly

U.S. economic data for the week was generally positive and consistent with an ongoing moderate economic expansion through the fourth quarter of 2016.

A middling 156,000 net new jobs were added to the U.S. economy in December. Over 2016, an average of 180,000 net new jobs were added per month, stepping down from the robust +200K per month averages of 2014 and 2015. The unemployment rate increased inconsequentially by one-tenth to 4.7 percent for the month. This should be interpreted as noise and not as a sign of increasing slack in the labor market. The average workweek was unchanged at 34.3 hours. Wages jumped noticeably, up 10 cents, or 0.4 percent for the month, after falling slightly in November. Over the previous 12 months, average hourly earnings were up by 2.9 percent. With many states boosting their minimum wage rates this year, wages will be under pressure.

The Fed will watch wage growth carefully over 2017, looking for signs that wage gains are fueling increasing inflation expectations. According to the December dot plot, FOMC members are expecting about three increases in the fed funds rate this year. The fed funds futures market shows that expectations are coalescing around June 14 for the next fed funds rate hike. Perhaps the remaining two could come in September and December, implying a back-loaded schedule. However, the Fed is not wedded to that schedule. If inflation measures warm up quickly, rate hikes will come sooner rather than later.

The minutes of the Federal Open Market Committee meeting of December 13/14 show FOMC member’s contemplating and struggling to integrate changing expectations for 2017.

Quantifying and sequencing the potential policy levers that the incoming Trump Administration may pull is still challenging, but it is safe to say that most potential economics-related policies would marginally boost inflation. Trump policies will be rolled out on the heels of a production agreement by OPEC members that has already boosted oil prices into the mid-to-low $50 range. Other commodity prices, particularly metals, have also been on the upswing, adding to inflation expectations.

The ISM Manufacturing Index for December increased to a solid 54.7. The ISM Non-Manufacturing Index for December was unchanged at 57.2, showing ongoing improvement in the broad non-manufacturing sector. Noteworthy in both the ISM-Manufacturing and Non-Manufacturing Indexes for December, the price sub-indexes are increasing.

Auto sales in December surged to an 18.4 million unit rate, bringing the 2016 total up to a record 17.54 million units. We expect sales to ease in 2017. Strong December retail sales are supportive of Q4 GDP.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  CMAEconWeekly 01-06-2017.

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December U.S. Employment

Middling Jobs Report Leaves Fed Expectations Unchanged

  • Payroll Employment increased by 156,000 jobs in December, a little below expectations.
  • The Unemployment Rate for December increased inconsequentially to 4.7 percent.
  • Average Hourly Earnings jumped by 0.4 percent for the month, after easing in November.
  • Average Weekly Hours were unchanged at 34.3 in December.

A middling 156,000 net new jobs were added to the U.S. economy in December. This was a little below expectations, but not dramatically so. October and November payrolls were revised up on net by 19,000 jobs. Over 2016, an average of 180,000 net new jobs were added per month, stepping down from the robust +200K per month averages of 2014 and 2015. A flattish household employment survey for December (+63,000 jobs), plus a moderate 184,000 worker gain in the labor force boosted the unemployment rate by one-tenth to 4.7 percent for the month. This should be interpreted as noise and not as a sign of increasing slack in the labor market. Other measures, including generationally low unemployment insurance claims, point to ongoing tightness in the labor market. The average workweek was unchanged at 34.3 hours. Wages jumped noticeably, up 10 cents, or 0.4 percent for the month, after falling slightly in November. Over the previous 12 months, average hourly earnings were up by 2.9 percent. With many states boosting their minimum wage rates this year, wages will be under pressure. The Fed will watch this carefully over 2017, looking for signs that wage gains are fueling increasing inflation expectations. According to the December dot plot, FOMC members are expecting about three increases in the fed funds rate this year. The fed funds futures market shows that expectations are coalescing around June 14 for the next fed funds rate hike. Perhaps the remaining two could come in September and December, implying a back-loaded schedule. However, the Fed is not wedded to that schedule. If inflation measures warm up quickly, rate hikes will come sooner rather than later.

The establishment data was mixed in December. Employment in mining industries (including oil drilling) was down by 2,000 jobs. The construction sector shed 3,000 jobs in December. Manufacturing did better than expected, adding 17,000 jobs for the month. Wholesale trade added 2,000. Retail trade gained 6,300 jobs in December. Information services gave up 6,000 jobs. Financial services increased employment by 13,000 jobs. Professional and business services was a little light, adding 15,000 jobs. Educational and healthcare added a strong 70,000 jobs in December. Leisure and hospitality served up 24,000 jobs. The government sector added 12,000.

Market Reaction: U.S. equity markets opened with losses. The 10-Year T-bond yield is up to 2.40 percent. NYMEX crude oil is up to $53.77/barrel. Natural gas futures are up to $3.29/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Employment 01-06-17.

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December ADP Jobs, ISM-Non MF, UI Claims, Auto Sales

Positive Data at Year-End Shows Momentum Heading into 2017. The Curse of Q1?

  • The December ADP Employment Report showed a gain of 153,000 private-sector jobs for the month.
  • The ISM Non-Manufacturing Index for December was unchanged at 57.2, showing ongoing improvement.
  • Initial Claims for Unemployment Insurance fell by 28,000 for the week ending December 31, to 235,000.
  • Auto Sales surged in December, hitting an 18.4 million unit sales rate as dealers pushed incentives.

The ADP Employment Report for December indicated that 153,000 private-sector jobs were added to the U.S. economy in December. This was a little short of expectations and suggests that the official job count, released tomorrow morning, will show about 163,000 net new payroll jobs. The ADP Report is not a perfect predictor of the BLS numbers, but it does suggest that payroll gains may fall below expectations for December and are trending lower, as expected. Still, something in the neighborhood of 163,000 net new jobs for December would not be a bad number. Also, we would not be surprised if the unemployment rate ticked up in December after falling three- tenths of a point in November to 4.6 percent. The combination of a disappointing payroll gain and an increase in the unemployment rate may be a sobering combination for financial markets tomorrow, but should not be interpreted as a loss of momentum for the U.S. economy. Still, we are mindful that first quarter GDP data has tended to be weaker than expected in the post-recession period. We will be publishing our updated January U.S. Economic Outlook early next week.

The ISM Non-Manufacturing Index for December was unchanged at 57.2, showing ongoing improvement in the broad non-manufacturing sector. Nine out of ten sub-indexes were above 50, indicating positive conditions in production, new orders and employment, amongst other areas. Out of 15 industries, 12 reported growth in December, including mining, retail trade, finance and insurance and information services. Three industries reported contraction in December. They were public administration, wholesale trade and agriculture. Anecdotal comments were generally positive. Noteworthy in both the ISM-Manufacturing and Non-Manufacturing Indexes for December, the price sub-indexes are increasing, suggesting that inflationary forces are building in the U.S. economy. The pace of inflation will be a key motivator for Federal Reserve interest rate policy this year.

Even if job growth was not robust in December, consumers felt confident in taking advantage of generous incentives at auto dealers. U.S. auto sales surged in December to an 18.4 million unit sales rate, the best monthly sales rate since July 2005. Strong sales in the fourth quarter pushed total sales for 2016 to 17.54 million units, a new record. We suspect that strong year-end sales will cannibalize sales from early 2017 and we will see a reset in auto sales at the start of this year. We have been bearish on auto sales for 2017, expecting them to gradually ease in a typical late-cycle pattern. However, we can also say that consumer spending on autos as a percentage of disposable income remains low, so consumers have some room to keep buying new wheels if they want to. Initial claims for unemployment insurance fell by 28,000 in the last week of 2016, to hit 235,000. This is an exceptionally low number, indicating that labor market conditions remain tight even as payroll job growth has eased off the robust +200K per month pace of 2014 through 2015. If we get 163,000 net new payroll jobs in December, with no revisions to history, we would end the year averaging 179,000 net new payroll job per month for 2016.

Market Reaction: U.S. equity markets have given up early gains. The yield in 10-Year T-bonds is down to 2.36 percent. NYMEX crude oil is down to $53.02/barrel. Natural gas futures are down to $3.19/mmbtu.

For a PDF version of this Comerica Economic Alert click here: ADP 01-05-17.

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