December ADP Jobs, ISM Non-MF Index, Auto Sales, November Trade

Data Support Case for Ongoing Momentum in 2016

  • The December ADP Employment Report showed a strong increase of 257,000 private-sector jobs.
  • The ISM Non-Manufacturing Index for December dipped to a still-positive 55.3 percent.
  • December Auto Sales missed expectations, easing to a still-strong 17.34 million unit rate.
  • The U.S. International Trade Gap for November narrowed to $42.4 billion.

Recent economic data supports the case for ongoing U.S. economic momentum in 2016. Job growth is key to our assumption that the consumer sector will be healthy in 2016. We finished 2015 with a strong 257,000 job gain in the private sector according to the ADP Employment Report. On Friday morning we will get the official Bureau of Labor Statistics payroll job count and the unemployment rate for December. The ADP report is a good, but not 100 percent accurate, preview of the official data. So we expect to see a strong payroll gain in the BLS data of about 240,000 for December with the unemployment rate dropping to 4.9 percent. The ADP report showed an interesting distribution of jobs gains in December with small businesses (less than 50 employees) adding a solid 95,000 jobs for the month. Medium sized businesses (50-499 employees) added 65,000 workers. It was in large businesses (500+) that we find a surge of 97,000 workers added, extending what looks like a new trend in recent months of strong gains in large business hiring.

The ISM Non-Manufacturing Index for December dipped to 55.3 percent from November’s 55.9. The index has declined from a robust reading of 60.3 in July, but remains solidly in positive territory. Seven out of 10 sub-indexes were positive, including the hiring sub-index, which increased from 55.0 to 55.7 percent in December. Anecdotal comments were generally favorable.

Auto sales in December were expected to be robust again, above an 18 million unit annual rate. Instead, they were merely very good, at a 17.34 million unit rate. The very good sales in December capped a banner year for U.S. auto sales, very close to the peak 2000 number (or just above it, depending on the data source). It looks like robust sales through September, October and November spent out some pent-up demand. We do not take the December miss in auto sales as a sign of consumer fatigue. Rather, we expect another strong year for auto sales this year, close to last year’s strong pace.

The U.S. international trade gap narrowed in November to $42.4 billion, from October’s $44.6 billion. The improvement came as imports dropped by $3.8 billion for the month, while exports eased by $1.6 billion. The real U.S. trade gap in goods narrowed by $1.4 billion ($2009). This implies a small drag to 2015Q4 real GDP from trade unless something unusual happens in December. We expect the strong dollar to remain a headwind for U.S. exports through 2016. At the end of December, ConocoPhillips pumped crude oil from the Eagle Ford Shale into a tanker docked at Corpus Christi and bound for Italy. This is the first shipment of U.S. crude oil allowed after the ban on crude oil exports was lifted last month. Crude oil exports are not expected to eliminate our trade gap soon, but every export helps.

Market Reaction: U.S. stock prices opened with losses. The yield in 10-Year T-bonds is down to 2.19 percent. NYMEX crude oil is down to $34.50/barrel. Natural gas futures are up to $2.33/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: ADP 01-06-16.

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Comerica Bank’s California Index Flattens on Mixed Components

Comerica Bank’s California Economic Activity Index was unchanged in October, maintaining a level of 119.5. October’s reading is 35 points, or 42 percent, above the index cyclical low of 84.1. The index averaged 113.7 points for all of 2014, seven and two-fifths points above the average for all of 2013. September’s index reading was 119.5.

“Our California Economic Activity Index stabilized in October after three consecutive months of declines from July through September. Four index components were positive in October, including payroll employment, unemployment insurance claims (inverted), house price index and hotel occupancy. State exports, housing starts, U.S. defense spending and the NASDAQ 100 tech stock index were negative factors in October,” said Robert Dye, Chief Economist at Comerica Bank. “A strong positive for the state is payroll employment which has increased every month since April 2011. Consistent job growth is a strong support to California households and to the state’s housing industry.”

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For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_1215.

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Comerica Bank’s Texas Index Back to Losses

Comerica Bank’s Texas Economic Activity Index fell in October, decreasing 0.7 percentage points to a level of 94.8. October’s reading is 22 points, or 30 percent, above the index cyclical low of 72.8. The index averaged 105.2 points for all of 2014, four and nine-tenths points above the average for full-year 2013. September’s index reading was 94.8.

“Our Texas Economic Activity Index eased again in October, after a small gain in September. The October dip is a reminder that the Texas economy is not yet out of the woods in terms of the drag from reduced oil field activity. We should also note that the price of oil has dropped substantially since October, when the average price of West Texas intermediate crude was $46.22 per barrel. Current prices, in the vicinity of $36 per barrel, suggest we are in for another leg down for the Texas energy sector,” said Robert Dye, Chief Economist at Comerica Bank. “As we turn the calendar to 2016, the stress on the Texas energy sector, and therefore on the entire Texas economy, enters a new phase. We expect to see ongoing reductions and consolidations in the oil patch through mid-year.”

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For a PDF version of the Texas Economic Activity Index click here: TexasIndex_1215.

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Comerica Bank’s Arizona Index Marks Second Consecutive Gain

Comerica Bank’s Arizona Economic Activity Index grew in October, increasing 0.5 percentage points to a level of 107.6. October’s index reading is 31 points, or 40 percent, above the index cyclical low of 77.0. The index averaged 99.7 points for all of 2014, four and one-fifth points above the average for full-year 2013. September’s index reading was 107.1.

“Our Arizona Economic Activity Index increased again in October after turning positive in September. October performance was strong with seven out of eight index components showing gains. Only state exports were negative for the month. We look for the state’s economy to gradually build momentum through 2016, supported by tourism, retirement relocations and West Coast businesses looking for lower-cost locations. Phoenix house prices were up 5.7 percent in October over the previous 12 months, a little better than the U.S. average according to the Case-Shiller data,” said Robert Dye, Chief Economist at Comerica Bank. “We expect gasoline prices to remain low through 2016, helping Arizona households and supporting the state’s important tourism industry.”

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For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_1215.

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Comerica Bank’s Florida Index Continues Solid Gains

Comerica Bank’s Florida Economic Activity Index grew in October, increasing 1.9 percentage points to a level of 142.3. October’s index reading is 64 points, or 82 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. September’s index reading was 140.3.

“Our Florida Economic Activity Index increased again in October, for the 19th consecutive month. Most components of the index were positive in October. Only state exports and housing starts were negative for the month. The Florida economy is firmly re-established as a growth leader for the U.S. after a recession that was worse than average in terms of the percentage of jobs lost in the state. We see no reason for the positive trend to change in the near term. Some South American economies, including Brazil, are suffering now and that may be a small drag on the Florida economy. But Europe is looking stronger heading into 2016 and that is supportive, although the strong dollar may mitigate some of the gain from healthier European economies,” said Robert Dye, Chief Economist at Comerica Bank. “Florida housing markets continue to tighten, with both Tampa and Miami showing strong price growth.”

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For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_1215.

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Comerica Bank’s Michigan Index Continues to Level Out

Comerica Bank’s Michigan Economic Activity Index improved marginally in October, increasing to a level of 127.3. October’s reading is 53 points, or 72 percent, above the index cyclical low of 74.1. The index averaged 117.4 points for all of 2014, three and three-tenths points above the index average for 2013. September’s index reading was 127.1.

“Our Michigan Economic Activity Index increased slightly in October after showing no change through August and September. Four index components were positive for the month including unemployment insurance claims (inverted), housing starts, state sales tax and hotel occupancy. State exports, house price index, and auto production were negative factors, and payroll employment was unchanged. Auto production has ramped up significantly since the bleak days of 2009, supporting gains in our Michigan index. However, going forward we expect auto production to plateau and then gradually decline, reflecting very strong auto sales through late 2015 that will most likely ease by 2017, if not sooner,” said Robert Dye, Chief Economist at Comerica Bank. “The U.S. manufacturing sector generally is facing headwinds with soft global demand, the strong dollar and the weak energy sector.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_1215.

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December ISM Manufacturing, November Construction Spending

Manufacturing Sector Contracts for Second Month

  • The ISM Manufacturing Index for December decreased again to a contractionary 48.2 percent.
  • Construction Spending decreased by 0.4 percent in November as public construction eased.

The ISM Manufacturing Survey declined in December to 48.2 percent, following a dip to 48.6 percent in November. The back-to-back dips in the ISM-MF index provide a clear indication that soft global demand, the strong dollar, a weak energy sector and plateauing auto sector have put an end to the strong performance of the manufacturing sector that was a hallmark of the post-crisis economy. Only three out of 10 sub-indexes showed expansion for the month. Supplier deliveries, customers’ inventories and exports showed slight positive numbers in December. Meanwhile, new orders, production, employment, inventories, prices, backlog of orders and imports were all in negative territory. The employment sub-index fell by 3.2 percentage points in December to 48.1 percent, consistent with small-to-moderate job losses amongst manufacturing industries as a whole. A sub-50 ISM-MF reading is not a reliable nor a sufficient recession indicator as long as the larger non-manufacturing part of the U.S. economy is expanding. We expect to see a positive ISM Non-Manufacturing report for December on Wednesday. Anecdotal comments were mixed. Industries dependent on oil and natural gas extraction cited weak activity. The weak November and December ISM-MF index shows the worst two-month performance of the index since the current expansion started in July 2009.

Construction spending for November dipped by 0.4 percent, weighed down by a 1.0 percent decline in spending on public projects. Private nonresidential spending was off by 0.7 percent, consistent with a subdued manufacturing sector and retrenching energy sector. Spending on private residential construction was up by 0.3 percent in November, supported by a gain in single-family projects.

In other news this morning the price for WTI crude oil is up to $36.98 per barrel. Both the supply side and the demand side of the oil price equation are in motion. Escalating tensions between Iraq and Saudi Arabia and others is raising concerns about future supply, while a selloff in Chinese stocks raises concerns about future demand.

Market Reaction: U.S. equity markets opened with losses. The yield on 10-Year Treasury bonds is down to 2.21 percent. NYMEX crude oil is up to $36.98/barrel. Natural gas futures are down to $2.32/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: ISM-MF 01-04-16.

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November Home Sales, Income/Spending, Durable Goods and Q3 GDP

Home Sales Slump on Mortgage Processing

  • Personal Income increased by 0.3 percent in November. Consumer Spending also gained 0.3 percent.
  • New Home Sales for November increased by 4.3 percent to a 490,000 unit annual rate.
  • Existing Home Sales for November fell by 10.5 percent to an annual rate of 4.76 million units.
  • New Orders for Durable Goods were unchanged in November after a 2.9 percent increase in October.

The third estimate of third quarter 2015 GDP ticked down, to a 2.0 percent annual rate. This morning’s banquet of data show that the U.S. economy is maintaining moderate momentum at year end, and will likely continue that course into 2016. Total personal income increased by 0.3 percent in November as wage and salary income grew by 0.5 percent. Rental income was also strong, up 0.8 percent, supported by strong recent gains in real estate rental rates. With food and energy prices lower, the personal consumption expenditure (PCE) price index was unchanged for the month, leading to a gain in real disposable income of 0.2 percent in November. Nominal consumer spending increased by 0.3 percent, supported by gains in both durable and nondurable goods categories. Again, with no inflation for the month, real consumer spending increased by 0.3 percent. Over the previous 12 months, real disposable income is up 3.5 percent and real consumer spending is up 2.5 percent. We expect job growth and wage gains in 2016 to be supportive of an ongoing consumer-driven economic expansion. The University of Michigan’s Consumer Sentiment Index for December increased from 91.3 to 92.6.

A note of caution comes from the housing market. Yesterday, we saw that existing home sales for November were down by 10.5 percent to a 4.76 million unit annual rate. We believe that this was largely due to increased mortgage processing times caused by new mortgage rules from the FHA that went into effect in early October. We expect existing home sales to recover in December. This morning’s report on new home sales for November shows a 4.3 percent increase to a 490,000 unit annual rate. However, revised data shows a generally weaker picture for new home sales in the second half of 2015 than we were anticipating. We expect both new and existing home sales to re-establish upward trends in 2016. If that does not happen we will downgrade our GDP growth expectations. Speaking of GDP, yesterday, 2015Q3 real GDP growth was revised down slightly to a 2.0 percent annual rate due a downward revision in inventories for the quarter.

New orders for durable goods were unchanged in November, following a 2.9 percent increase in October. The core measure, non-defense capital goods less aircraft slipped by 0.4 percent. Lackluster durable goods orders are symptomatic of the headwinds facing the manufacturing sector from the strong dollar, weak energy sector and peaking auto production. Shipments for durables goods increased by 0.9 percent in November after falling by 1.2 percent in October, indicating a slight drag to fourth quarter GDP.      

This will be our last Comerica Economics publication this year. Happy Holidays!

Market Reaction: U.S. equity markets opened with gains. The 10-year Treasury bond yield is up to 2.27 percent. NYMEX crude oil is up to $37.56/barrel. Natural gas futures are down to $1.95/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Existing _Home Sales 12-23-15.

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Comerica Economic Weekly

On Wednesday, the Federal Open Market Committee voted unanimously to increase the fed funds rate to a range of 25 to 50 basis points, launching a new monetary tightening cycle. This was exactly as expected and financial markets appear to be taking the policy change in stride. The Fed’s forward guidance for the path of the fed funds rate in the near term has been modified to emphasize only gradual increases going forward that will be dependent on labor market conditions, inflation pressures and inflation expectations, and readings on financial and international developments. In other words, future rate hikes remain data dependent. We expect the FOMC to keep the fed funds rate steady at the upcoming January 26/27 meeting, and then lift again, by 25 basis points, at their March 15/16 meeting.

Along with the policy announcement a new dot plot was released, showing FOMC members’ expectations for the fed funds rate at the end of 2016, 2017, 2018 and over the long run. The cluster of dots for year-end 2016 lowered and narrowed compared to the September dot plot. The new dot plot showed the most dots, six, at 1.38 percent. This implies four rate hikes over the course of 2016, as long as data aligns with current expectations.

Residential construction picked up in November, beating expectations for housing start and permits. Housing starts increased by 10.5 percent to hit a 1,173,000 unit annual rate. Permits for new residential construction increased by 11.0 percent in November, to hit a 1,289,000 unit annual rate. Since the Fed’s interest rate increase was widely anticipated in November, the strong construction data implies confidence among builders that demand for new homes will stay firm in the face of small increases in residential mortgage rates. According to the Mortgage Bankers Association, the interest rate on a conventional 30-year fixed rate mortgage increased slightly from 4.12 percent for the week ending November 27th, to 4.14 percent for the week ending December 11th.

Industrial production declined for the third consecutive month in November, falling by 0.6 percent. Utility output fell by 4.3 percent in November due to warm weather. Mining output fell for the third month in a row. Manufacturing output was unchanged in November. The staggering energy sector, the strong dollar and peaking auto production are all headwinds for manufacturing output. Vehicle assemblies have eased since hitting a recent peak at a 13.34 million unit annual rate in July, down to a 12.14 million unit annual rate in November. We expect auto sales to remain strong through 2016, but likely stepping down from the robust 18.2 million unit sales rate of September, October and November.

The Conference Board’s Leading Economic Index increased by 0.4 percent in November, following a 0.6 percent gain in October. November’s gain was driven by building permits, interest rate spread and the rebound in stock prices. The coincident and the lagging indexes were also up for the month.

Initial claims for unemployment insurance fell by 11,000 to reach 271,000 for the week ending December 12. The dip in initial claims for the week reduces the probability that we are seeing a gradual uptrend that may have begun in October, but it does not eliminate it. Continuing claims for the week ending December 5 decreased by 7,000 to hit 2,238,000, a very good number.

Regional fed manufacturing surveys have been soft, including Philadelphia, Kansas City and New York.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 12-18-2015.

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FOMC Policy Announcement

Fed Does the Expected and Raises the Fed Funds Rate

  • The Federal Open Market Committee voted to raise the fed funds rate to a range of 25 to 50 bps.
  • Forward Guidance emphasizes a gradual approach to future rate hikes and ongoing data dependence.
  • The Dot Plot for year-end 2016 centered at 1.38 percent.

Today, Janet Yellen and the rest of the Federal Open Market Committee, in a unanimous decision, voted to increase the fed funds rate to a range of 25 to 50 basis points, launching a new monetary tightening cycle. This is exactly as expected and financial markets appear to be taking the information in stride. Major U.S. stock indexes ticked up on the news as did most Treasury bond yields. The Fed’s forward guidance concerning the expected path of the fed funds rate in the near term has been modified to emphasize only gradual increases going forward that will be dependent on labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.  In other words, future rate hikes remain data dependent. We expect the FOMC to keep the fed funds rate steady at the upcoming January 26/27 meeting, and then lift again at their March 15/16 meeting.

The policy statement also says that the Fed will maintain its existing policy of reinvesting maturing assets until normalization of the level of the fed funds rate is well underway. This implies that reinvestment policy is also data dependent and that the FOMC is in no hurry to change the current policy.

Along with today’s policy announcement a new dot plot was released, showing FOMC members’ expectations for the fed funds rate at the end of 2016, 2017, 2018 and over the long run. The cluster of dots for year-end 2016 lowered and narrowed, and showed the most dots, six, at 1.38 percent. This implies four rate hikes over the course of 2016, as long as data aligns with current expectations. Expectations for the fed funds rate over the long run remain centered at 3.50 percent.

The median of FOMC members’ projection of real GDP growth for 2016 is 2.4 percent (Q4 to Q4), and their median forecast for PCE inflation for 2016 (Q4 to Q4) is 1.6 percent. Their median forecast for the unemployment rate at the end of 2016 is 4.7 percent. In our December 2015 forecast we were at 2.5 percent, 2.3 percent and 4.4 percent, respectively. Recent declines in the price of oil will cause us to lower our inflation outlook for 2016.

In her press conference this afternoon, FOMC chairwoman Janet Yellen said that she remains confident that inflation will normalize over the medium term as the transitory drag of low energy prices dissipates and labor markets continue to tighten.

Market Reaction: U.S. stock indexes tended to tick up on the FOMC policy announcement. The yield on 10-Year Treasury bonds dropped to 2.28 percent. NYMEX crude oil is down to $35.84/barrel. Natural gas futures are down to $1.96/mmbtu.

For a PDF version of this Comerica Economic Alert click here: FOMC 121615.

 

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