Comerica Bank’s Michigan Index Slips on Weather

Comerica Bank’s Michigan Economic Activity Index decreased in February, losing 1.9 percentage points to reach a level of 118.7. February’s reading is 45 points, or 61 percent, above the index cyclical low of 73.8. The index averaged 117.6 points for all of 2014, three and three-tenths points above the index average for 2013. January’s index reading was 120.6.

“Our Michigan Economic Activity Index eased in February as severe winter weather gripped the Midwest and Northeast. Four components of our Michigan Index that were negative factors for February are weather-sensitive. These are unemployment insurance claims, housing starts, auto production (depressed by weaker sales) and sales tax revenue. Fortunately, U.S. auto sales bounced back in March to a 17.2 million unit pace after slumping through the winter.  Also, we expect home sales and residential construction activity to improve this spring,” said Robert Dye, Chief Economist at Comerica Bank. “With auto industry output nearing a cyclical peak, and other manufacturing industries feeling the headwinds of a weaker energy sector and a stronger dollar, we expect Michigan’s non-manufacturing industries to account for a bigger portion of new business for the state this year.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0415.

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Comerica Bank’s California Index Flat in February

Comerica Bank’s California Economic Activity Index held flat in February, maintaining a level of 119.4. February’s reading is 36 points, or 42 percent, above the index cyclical low of 83.8. The index averaged 113.7 points for all of 2014, seven and one-half points above the average for all of 2013. January’s index reading was 119.4.

“Our California Economic Activity Index was unchanged in February. State exports have been a drag on the index for four consecutive months as a labor dispute slowed port activity. While the dockworkers’ dispute has been resolved, truckers who service the ports have recently authorized a strike, threatening to extend shipping delays. Still, job growth in California has been steady, and our California Index shows only one decline in the last 27 months,” said Robert Dye, Chief Economist at Comerica Bank. “The chronic water shortage for much of the state is a potentially limiting factor for business activity. Agricultural businesses are making adjustments, but non-agricultural industries are also facing limits as the state grapples with a call by Governor Brown for a 25 percent reduction in water usage.”

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For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0415.

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Comerica Bank’s Florida Index Accelerates

Comerica Bank’s Florida Economic Activity Index gained in February, growing 3.8 percentage points to a level of 129.7. February’s index reading is 52 points, or 66 percent, above the index cyclical low of 78.0. The index averaged 118.0 in 2014, eight and four-fifths points above the average for all of 2013. January’s index reading was 125.9.

“Our Florida Economic Activity Index increased in February, showing accelerating economic activity for the Sunshine State. Our Florida index has now increased for 11 consecutive months. In February, all but one index component, state exports, was positive.  Broad-based economic growth is self-reinforcing, and we expect to see ongoing gains for Florida through 2015,” said Robert Dye, Chief Economist at Comerica Bank. “Residential and commercial property markets continue to firm up through the state. Lower energy prices and improving labor market conditions through the U.S. are supportive of Florida’s tourism and real estate industries.”

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For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0415.

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Comerica Bank’s Arizona Index Continues to Climb

Comerica Bank’s Arizona Economic Activity Index grew in February, increasing 1.0 percentage points to a level of 106.9. February’s index reading is 30 points, or 39 percent, above the index cyclical low of 76.7. The index averaged 99.9 points for all of 2014, four and two-fifths points above the average for full-year 2013. January’s index reading was 105.9.

“Our Arizona Economic Activity Index increased again in February, driven by improved job creation and firmer real estate conditions. We note that the state did lose 3,800 jobs in March, and that will factor into our Arizona Index next month. Phoenix house prices increased by 0.6 percent in March, according to the Case-Shiller data, and are up 2.9 percent over the previous 12 months. That lags the U.S. average gain of 4.2 percent,” said Robert Dye, Chief Economist at Comerica Bank. “Arizona is facing increasing competition as a retirement destination. Right now, a strong dollar is bolstering the desirability of many overseas destinations, weighing on migration to Arizona.”

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For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0415.

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2015Q1 GDP, February House Prices, April Consumer Confidence

First Quarter Real GDP Growth Meager at 0.2 Percent

  • Real Gross Domestic Product growth for 2015Q1 registered a barely positive2 percent annual rate.
  • The Case-Shiller U.S. House price index gained4 percent in February, up 4.2 percent for the year.
  • The Conference Board’s Consumer Confidence Index for April decreased to 95.2.

Repeating a recent pattern, real GDP growth for the U.S. was weak in 2015Q1, increasing at a meager 0.2 percent annualized rate. Weather was undoubtedly a factor. Even though the GDP data is seasonally adjusted, weather effects that are beyond normal, including an abnormally cold and snowy winter for much of the country, skew the data. We can see the impact of weather in at least two areas: consumer spending and business investment. Real consumer spending on durable goods increased by only 1.1 percent in 2015Q1 as auto dealerships in much of the Northeast were buried under snow. Total consumer spending increased at a mediocre 1.9 percent rate in Q1 after surging at a 4.4 percent rate in 2014Q4. Business fixed investment in structures declined at a 23.1 percent annual rate as construction projects were delayed. We see quirkiness in other areas. Net exports subtracted 1.25 percent from real GDP growth in Q1. The dockworkers strike at California ports may be a factor. The export of goods declined at a 13.3 percent annual rate in Q1. State and local government spending dipped at a 1.5 percent annual rate. Combined, state and local government spending is about 60 percent larger than federal spending in the GDP accounting. The good news in the report is that components of GDP that were suppressed in Q1 are likely to bounce back in Q2. The not-so-good news is that real inventory accumulation surged in Q1, up by $110.3 billion ($2009). Inventories added 0.74 percent to Q1 real GDP growth. Without the inventory surge we would have seen a decline in GDP. We suspect that a good portion of the inventory gain was due to crude oil storage, but it is impossible to tell from today’s report. If there was a significant inventory build in other areas, say automobile manufacturing, that would suggest that a correction in output is coming in the current quarter or beyond, with implications for hiring. Also, the crude oil inventory surge in Q1 reminds us that there will be the opposite, negative, impact on GDP when crude oil inventories are drawn down later this year as production drops with the wind down of drilling activity.

The Case Shiller house price index for the U.S. increased by 0.4 percent in February. Over the 12 months ending in February, the U.S. HPI is up 4.2 percent. San Francisco saw the biggest one-month gain among the 20 key cities, with house prices increasing by 3.3 percent. Denver was hot at 2.2 percent. Cleveland had the smallest gain at 0.4 percent for February. We expect the spring real residential real estate season to show increased activity, supporting prices in most major markets. A key exception may be in oil producing areas, including Houston. Consumer confidence fell in April according to the Conference Board. The consumer confidence index fell from 101.4 in March to 95.2 in April. The give-back of recent gains in consumer confidence coincides with the weak March jobs report, increases in gasoline prices and a shaky stock market.

Market Reaction: Equity markets opened with losses. The 10-year Treasury bond yield is up to 2.06 percent. NYMEX crude oil is up to $57.99/barrel. Natural gas futures are up to $2.58/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: GDP 04-28-15.

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Comerica Economic Weekly

The pushes and pulls on the U.S. economy are coming from multiple directions, adding to a sense of uncertainty that threatens to paralyze policy makers.

Among the negatives are a stronger dollar and weakening oil patch, both headwinds for U.S. manufacturers. Markit’s Flash U.S. Manufacturing PMI (not the ISM MF Index) eased in April, indicating slower momentum for the manufacturing sector.

Oil service companies have announced a second round of layoffs that number in the tens of thousands. The graph on page two of this report shows that oil patch states are feeling the hit.

Outside of the oil patch, labor market indicators look good. Initial claims for unemployment insurance ticked up by 1,000 for the week ending April 18, to hit a still-low 295,000. Continuing claims increased by 50,000, to hit 2,325,000 for the week ending April 11. The ongoing strength of the unemployment insurance claims data reinforces our view that the soft March payroll job gain of just 126,000 does not represent a sudden loss of momentum in the U.S. job market. We expect to see stronger payroll jobs data for April and May.

New home sales for March came in weaker than expected, resetting after a February surge. The March reset dropped new home sales by 11.4 percent to a 481,000 unit annual rate. Despite the dip this March, new home sales remain 19.4 percent above the rate from March 2014. The months’ supply of new homes on the market remains relatively tight at 5.3 months’ worth.

Existing home sales for March increased by 6.1 percent to a 5,190,000 unit pace. While the uptick is welcomed news, existing home sales remain below their recent peak of 5,380,000 units from July 2013. The months’ supply of existing homes for sales was a tight 4.6 months’ worth in March. The median sales price of an existing home was up 7.8 percent for the year ending in March.

Mortgage applications for purchase gained 5.0 percent for the week ending April 17. Five out of the last seven weeks have seen increases in purchase apps, a positive indicator for the spring residential real estate season.

New orders for durable goods increased by a strong 4.0 percent in March, but the gains were not broad-based. Primary metals, fabricated metals, machinery, communications equipment and electrical equipment all saw declining orders in March. Gains came from both defense and nondefense aircraft. Core durable goods orders, non-defense capital goods excluding aircraft, slipped by 0.5 percent.

U.S. stock indexes climbed through the week and oil prices maintained their recent highs, with WTI finishing the week near $57 per barrel. Military activity in the Middle East is keeping the oil market on edge. But the oversupply is still an issue. U.S. weekly crude oil production may be levelling out. Data from early March through mid-April show no clear trend. A sustained drop in U.S. production would take some pressure off of storage capacity.

So what is the Fed to do? At next week’s FOMC meeting, the Fed leaves near-zero interest rate policy in place, and likely maintains that stance through June. Unfortunately, the Fed’s own uncertainty about interest rate policy threatens to add to financial market volatility. We still look for interest rate lift-off in September.

 For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 04-24-15.

 

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March Home Sales, April UI Claims

New Home Sales Reset in March, but Trend Looks Good

  • New Home Sales for March decreased by 11.4 percent to an annual rate of 481,000 units.
  • March Existing Home Sales increased by 6.1 percent, to a 5,190,000 unit annual rate.
  • Initial Claims for Unemployment Insurance gained 1,000 to hit 295,000 for the week ending April 18.

New home sales for March came in weaker than expected, resetting after a February surge. In February new home sales climbed to a 543,000 unit annual pace, breaking out of the near-400,000-unit range where they have been parked for two years. The March reset, down 11.4 percent to a 481,000 unit annual rate looks like it is still on a break-out trajectory, consistent with increasing confidence by home builders. Despite the dip this March, new home sales remain 19.4 percent above the rate from March 2014. The months’ supply of new homes on the market remains relatively tight at 5.3 months’ worth. The median sales price of a new home fell to $277,400 in March. This number is sensitive to the mix of homes sold as well as to market conditions. New home sales remain well shy of the near-1,400,000-unit rate from June 2005. Perhaps those days are best forgotten. A long-term average of about 600,000 units per year through the 1970’s and 1980’s suggests that there is still plenty of upside potential to the new home market.

Existing home sales for March increased by 6.1 percent to a 5,190,000 unit pace. While the uptick is welcomed news, existing home sales remain below their recent peak of 5,380,000 units from July 2013. The months’ supply of existing homes for sales was a tight 4.6 months’ worth in March. The median sales price of an existing home was up 7.8 percent for the year ending in March.

Initial claims for unemployment insurance ticked up by 1,000 for the week ending April 18, to hit a still-low 295,000. Continuing claims increased by 50,000, to hit 2,325,000 for the week ending April 11. The ongoing strength of the unemployment insurance claims data reinforces our view that the soft March payroll job gain of just 126,000 does not represent a sudden loss of momentum in the U.S. job market. We expect to see stronger payroll jobs data for April and May.  However, it is safe to say that there are some undercurrents in the jobs data. Oil field related employment is falling as rig counts plummet. Job creation in the manufacturing sector is also losing momentum, in part due to less drilling activity, and also because the strengthening dollar is making imports cheaper and U.S. exports more expensive.

There is enough uncertainty in U.S. and international economic conditions to give the Federal Open Market Committee reason to pause as it considers the path of monetary policy next week. We expect to see no change to interest rate policy in the upcoming April 29 FOMC policy statement. The odds of a June interest rate hike have diminished, so we are rolling back our expectation for interest rate lift-off to September.

Market Reaction: U.S. equity markets are gaining. The 10-year Treasury Bond yield is up to 1.97 percent. NYMEX crude oil is up to $58.12/barrel. Natural gas futures are down to $2.59/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: New_Home Sales 04-23-15.

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Comerica Economic Weekly

We saw more mixed data this week and a growing consensus that the Fed will not lift interest rates in June.

After a three-month decline, retail sales increased by 0.9 percent in February, driven by retail sales of autos which increased by 2.7 percent. Unit sales climbed back up to a 17.2 million unit annual rate. Sales outside of autos were generally positive but unspectacular.

The University of Michigan Consumer Sentiment Index increased in early April to 95.9.

Price indexes are normalizing as oil stabilizes (relatively) near $50 per barrel. The Producer Price Index for final demand increased by 0.2 percent in March. The energy price sub-index for final demand goods gained 1.5 percent for the month, the first increased since last June. On a year-over-year basis, the PPI for final demand is still negative, down 0.8 percent. But as long as oil does not take another turn south, year-over-year comparisons will turn the corner and head north soon.

According to AAA, today’s national average regular gasoline price is $2.43 per gallon, a penny above where it was a month ago. The CPI energy index for March was up 1.1 percent, supporting a 0.2 percent gain in the headline CPI. Excluding food and energy, the core CPI for March was also up 0.2 percent. Over the last 12 months core CPI is up 1.8 percent.

Builders are expecting to see increased activity this spring according to the National Association of Home Builders, whose Builder Confidence Index increased in April to 56. However, increased confidence of builders didn’t add much to the March construction data, which still may have been impaired by weather. Housing starts for March gained 2.0 percent to hit an annual rate of 926,000 units, below market expectations. Permits for new construction eased by 5.7 percent to a 1,039,000 unit annual rate. The Federal Reserve’s Beige Book for April, tells of generally improving residential real estate activity across most Federal Reserve Districts.

The Conference Board’s Leading Economic Index increased by a sluggish 0.2 percent in March. Residential building permits were a big negative for the leading index in March. However, we expect to see permits increase through the spring, and that will pull the overall leading index up in the months ahead. The coincident and the lagging indexes also increased in March.

The National Federation of Independent Businesses said that their Business Optimism Index fell 2.8 points in March to 95.2. The overall trend is this survey remains positive.

Total business inventories were up a modest 0.3 percent in February after no change in January. It looks like inventory accumulation will be a drag on first quarter real GDP growth. Also, the inventory/sales ratio has been climbing since the middle of last year.

Firmer inflation metrics at both the consumer and producer levels will give the Federal Reserve a little more confidence in timing its first interest rate hike this year. Softer employment and production data through March has decreased the likelihood of a fed funds rate increase in June. But normalizing inflation, and improving employment and production data through mid-year keeps July or September in play. We expect to see the first increase in the fed funds rate announced on September 17.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  CMAEconWeekly 04-17-15.

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March Consumer Prices, Leading Indicators

Inflation Metrics Firming Up With $50 Oil

  • The March Consumer Price Index increased by 0.2 percent with gains in energy prices.
  • The March Core CPI also gained2 percent, and was up 1.8 percent over the previous 12 months.
  • The Conference Board’s Leading Economic Index for March increased by 0.2 percent.

Price levels are firming up as oil stabilizes (relatively) near $50 per barrel for WTI. However, it is still too early to call for a bottom in oil prices, especially considering the upward trend in crude oil stocks. Production is still trending up on a moving-average basis, although the last few weeks of data show hint at a possible top in production by mid-year. Global oil demand will increase this year, driven by developing economies, including China and India. But the key to the oil price puzzle is on the supply side. Rig counts are still easing, so the rate of gain in new U.S. production is falling significantly while ongoing production will eventually deplete existing wells. All this points to a more balanced oil market in the second half of the year. Saudi Arabia still holds the wild card as they set production schedules for the year ahead. They are no longer the swing producer, stabilizing prices for OPEC by modulating their output. Instead, they have actively driven oil prices down in order to maintain market share and possibly to extend global demand of oil in the face of the rapid main-streaming of alternative technologies and energy sources. With U.S. oil prices exploring a range of $45 to $57 per barrel since the beginning of this year, gasoline prices have bounced off the bottom. According to AAA, today’s national average regular gasoline price is $2.43 per gallon, a penny above where it was a month ago. The CPI energy index for March is up 1.1 percent, supporting a 0.2 percent gain in the headline CPI. Excluding food and energy, the core CPI for March is also up 0.2 percent. Over the last 12 months core CPI is up 1.8 percent. Firmer inflation metrics at both the consumer and producer levels will give the Federal Reserve a little more confidence in timing its first interest rate hike this year. Softer employment and production data through March has decreased the likelihood of a fed funds rate increase in June. But normalizing inflation, and improving employment and production data through mid-year keeps July or September in play. We expect to see the first increase in the fed funds rate announced on September 17.

The Conference Board’s Leading Economic Index increased by a sluggish 0.2 percent in March. Residential building permits were a big negative for the leading index in March. However, builder sentiment is improving and we expect to see permits increase through the spring, and that will pull the overall leading index up in the months ahead. The coincident and the lagging indexes also increased in March. Across-the-board gains in the three indexes are a positive signal for the U.S. economy.

Market Reaction: Equity markets opened with losses. The 10-Year Treasury bond yield is down to 1.88 percent. NYMEX crude oil is down to $55.98/barrel. Natural gas futures are down to $2.73/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: CPI 04-17-15.

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March Residential Construction, Industrial Production, April UI Claims

Housing Starts Washed Out, Builder Confidence Sunny

  • March Housing Starts increased by 2.0 percent to a 926,000 unit annual rate.
  • Permits for new residential construction decreased in March by 5.7 percent to a 1,039,000 unit pace.
  • The National Association of Home Builders’ Builder Confidence Index jumped by 4 points to 56 in April.
  • Industrial Production declined by 0.6 percent in March as utilities normalized.
  • Initial Claims for Unemployment Insurance gained 12,000 to hit 294,000 for the week ending April 11.

Builders are expecting to see increased activity this spring according to the National Association of Home Builders, whose builder confidence index increased in April to 56.  However, increased confidence of builders didn’t add much to the March construction data, which still may have been impaired by weather. Housing starts for March increased off the weather-beaten slump in February, when starts dipped to a 908,000 unit rate, lower than any month of 2014. In March, total starts gained 2.0 percent to hit an annual rate of 926,000 units, below market expectations. Single-family starts gained 4.4 percent for the month while multifamily starts eased by 7.1 percent. Permits for new construction eased by 5.7 percent to a 1,039,000 unit annual rate. Given very tight housing markets across most major markets, still low interest rates, strong labor markets and increasing builder confidence, we still expect to see an uptick in construction and new home sales this spring. The Federal Reserve’s Beige Book for April, released yesterday, tells of generally improving residential real estate activity across most fed regions. Exceptions for Philadelphia, Cleveland, Atlanta and Dallas were blamed on the weather.

Total industrial production for March stepped down by 0.6 percent as utility output reset. Utility output increased by 3.3 percent in January and again by 5.7 percent in February, reflecting the very cold winter, and then declined by 5.9 percent in March as weather improved somewhat. Manufacturing output gained only 0.1 percent in March after declining in January and February. Considering the unchanged manufacturing output in December, we can say that the meager March gain was the first increase in output since November. Manufacturing output appears to have several headwinds. First, low oil and natural gas prices are reducing demand for steel and other equipment related to oil and gas drilling and production. Second, the strong dollar is a headwind for exporters, and also for those facing competition in domestic markets from cheaper imported products. Third, auto sales from December through February cooled. Fortunately, March auto sales snapped back to a 17.2 million unit pace. Fourth, backlogs at West Coast ports, left over from now-resolved labor issues, are still dragging on supply chains. Regional indicators are mixed. The Beige Book reported mixed manufacturing conditions from mid-February through the end of March. The Empire State Manufacturing Survey for April shows flat conditions for New York area manufacturers. The Philadelphia Fed’s Manufacturing Business Outlook Survey for April improved modestly.

Market Reaction: Equity markets opened with losses. The yield on 10-Year Treasury bonds is up to 1.92 percent. NYMEX crude oil is down to $55.64/barrel. Natural gas futures are down to $2.69/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Housing Starts 041615.

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