Comerica Economic Weekly

This was a light week for U.S. data, dominated by the release of the minutes of the June 17/18 Federal Open Market Committee meeting. There are several important components of the minutes that shed some light on a still-murky Federal Reserve exit strategy.

In June, the FOMC discussed the role that the rate of interest on excess reserves (IOER) should play. Participants agreed that it should play a central role in policy normalization. It was generally agreed that the interest rate on overnight reverse repurchase agreements (ONRRP) would be set below the IOER rate, to provide a floor under money market interest rates. The appropriate spread between IOER and ONRPP was also discussed, with a consensus view of near or above 20 basis points.

Most participants thought that the fed funds rate should continue to play a role in the Federal Reserve’s operations and communication strategy. There may, however, be a change in the way that the fed funds rate is calculated, possibly affecting other interest rates linked to the fed funds rate. The FOMC is concerned that there will be consequences, potentially unintended, and by implication, unforeseen, in an expanded ONRRP facility.

The FOMC also discussed the appropriate time to change its current policy of rolling over maturing assets on its balance sheet. It appears likely that the program will continue after interest rate liftoff.

In its economic assessment, the minutes show that the FOMC is assuming a GDP bounce-back following the weak first quarter, implying that the weak first quarter did not significantly alter the trajectory of monetary policy. The committee also noted that tight credit supply was restricting housing markets. This suggests that the Federal Reserve is supportive of relaxing credit standards for residential mortgages.

It now appears likely that the FOMC will vote to eliminate its active asset purchase program at the end of this coming October. Also, the central tendency of the cluster diagram showing FOMC members’ assessment of the appropriate target rate for fed funds at the end of 2015 has shifted up slightly. This implies a slightly earlier start to interest rate lift-off. We have moved up our expectation for lift-off to 2015Q2.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 07-11-14.

 

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July 2014, Comerica U.S. Economic Update

The Story: A Mid-Cycle U.S. Economy in a Multi-Speed World

The endogenous growth story for the U.S. economy remains intact. There are two key channels of growth operating within the U.S. economy that have brought us through the recovery and into mid-cycle. One is the re-emergence of the household sector as a stabilizing force. Think of the household sector as a gyroscope that keeps the economy upright. With two-thirds of gross domestic product accounted for by consumer spending, the economic health of households is of paramount importance. Households are rapidly repairing their balance sheets. Rising home prices combined with still-low mortgage rates are allowing households to build equity in their homes at a strong rate. Homeowners’ equity is being augmented by strong job creation and by strong financial market performance. The second key channel for endogenous growth is the domestic energy sector and its impact on the manufacturing sector. Not only is the energy sector still generating strong job growth, it is fueling (literally) growth throughout the manufacturing sector by providing abundant energy at a low price.

Typically, in a mid-cycle economy, credit availability expands and risk appetite increases. We are seeing both now. Increasing credit availability and improving risk appetites will support business investment and bring the lagging edges of the economy into expansion mode. Ominously, we recall that credit expansion and risk appetite combined to fuel a strong expansion in the 2000s that ended in catastrophe. We do not anticipate a return to astronomical leverage ratios in systemically important financial institutions combined with the rapid  expansion of complex and toxic financial instruments worldwide.

To sustain the mid-cycle economy into 2015, we look for steady household spending, improved residential and business investment, the end of drag from tight controls on federal spending and improved demand globally for U.S. goods and services.

An important challenge to this sanguine outlook comes from outside the U.S. economy. Global growth remains unsteady. The multi-speed global economy is contributing to a de-coupling of central bank policy. Foreign exchange rates and sovereign bond spreads are vulnerable to the de-synchronization of asset purchases and interest rate policy among major central banks. We expect the Federal Reserve to keep tapering its asset purchase program in measured steps, meaning another $10 billion reduction in QE at the end of July. Even as the Fed loosens its grip on the long end of the yield curve, it will maintain the near-zero fed funds rates through the remainder of this year. We still expect interest rate lift-off to come by the third quarter of 2015.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate0714.

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Comerica Economic Weekly

The data dump ahead of the Fourth of July weekend yielded some good results, sending equity markets off to the races. The quality of recent U.S. economic data reinforces two points of view. First, the Q1 GDP stumble was an aberration not indicative of the overall direction of the economy. Second, this is a mid-cycle economy well past the early stages of recovery.

Payroll job growth in June was robust at +288,000. The unemployment rate fell to 6.1 percent. Average hourly earnings were up 2.0 percent over the previous 12 months, not inherently inflationary as long as productivity growth returns to a similar rate. We expect to see job growth ease next month, in part due to seasonal adjustment issues involving local government employment.

Initial claims for unemployment insurance for the week ending June 28 ticked up by 2,000 to hit 315,000. The low 300,000s are consistent with ongoing improvement in labor market conditions. The high 200,000s are consistent with rapid improvement.

The U.S. international trade gap narrowed in May, to -$44.4 billion. It looks like trade will be a small drag on Q2 GDP. We will be completing our July U.S. Economic Update next week. Q2 real GDP growth looks set to be in the vicinity of +2.5 percent.

Auto sales were off to the races in June, up to a 17.0 million unit annual rate. Seventeen million is a mid-cycle number. We expect to see stronger months over the remainder of 2014 and through 2015, but we should also expect to see some weaker months too.

The ISM Manufacturing Index for June dipped inconsequentially to 55.3, still a solid reading showing that manufacturing conditions continue to improve. The ISM Non-manufacturing Index also dipped slightly in June, to a still-strong 56.0.

The next scheduled meeting of the Federal Open Market Committee is July 29/30. We expect to see another $10 billion tapering of the Fed’s active asset purchase program and no change to interest rate policy. The next big event for the Fed may be the release of a new set of “exit principles” promised sometime later this year.

For now, enjoy the barbeque and fireworks. Have a happy and safe Fourth of July!

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 07-03-14.

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June U.S. Employment, May International Trade

Robust Job Growth Signals Ongoing Expansion for U.S. Economy

  • The June Payroll Employment Survey showed a gain of 288,000 jobs. April and May were revised up.
  • The Unemployment Rate for June fell to 6.1 percent.
  • Average Hourly Earnings increased by 0.2 percent in June and are up 2.0 percent over the last year.
  • The U.S. International Trade Gap narrowed in May to -$44.4 billion.
  • Initial Claims for Unemployment Insurance inched up by 2,000 for the week ending June 28, to 315,000.

For the fifth consecutive month, U.S. payroll employment has increased by more than 200,000 jobs. June payrolls increased by a robust 288,000 jobs. These are strong mid-cycle numbers, comparable to the height of the previous business cycle in 2005 and 2006. The June unemployment rate fell to 6.1 percent. We are seeing a decline in the unemployment rate of about 0.1 percentage points every two months, which puts us on pace for a 5.8 percent unemployment rate at the end of this year. The average workweek for June was 34.5 hours, unchanged for the fourth consecutive month. Average hourly earnings were up 0.2 percent for the month and 2.0 percent over the previous 12 months. As long as productivity growth gets back on track, this is not inherently inflationary. However, we expect to see more pressure on wages as labor markets continue to tighten up through the remainder of this year and into next year.

Job gains were widespread across industries. Construction added 6,000 jobs in June. Manufacturing employment was up by 16,000 jobs, with gains concentrated in transportation equipment. Wholesale trade gained 15,100 jobs while retail was up a strong 40,200. Transportation and warehousing added 16,600 jobs in June. Information was up 9,000. Financial services gained 17,000 jobs. Business and professional services employment was up a solid 67,000 jobs in June. Education and healthcare added 38,000. Leisure and hospitality services added 39,000 jobs for the month. Government employment was up by 26,000 in June, somewhat stronger than recent average performance. It looks like the bad winter weather may have extended school years into June, temporarily boosting local government employment. If so, we should see a correction in the July data. Even if we net out 18,000 local government education jobs, the net gain of 270,000 jobs for June is a strong number. Fun fact: We have already added more payroll jobs in the current expansion than we did in the last one, from June 2003 through January 2008.

Initial claims for unemployment insurance for the week ending June 28 ticked up by 2,000 to hit 315,000. Continuing claims for the week ending June 21 increased by 11,000 to hit 2,579,000. Claims numbers remain consistent with ongoing improvement to overall labor market conditions.

The U.S. international trade gap narrowed in May, to $44.4 billion. Exports increased by $2.0 billion for the month, while imports decreased by $0.7 billion. For April and May, the inflation-adjusted balance of trade for goods is below the first quarter average, implying a small drag from trade on Q2 GDP.

Market Reaction: U.S. equity markets opened with gains. The 10-Year T-bond yield is up to 2.66 percent. NYMEX crude is down to $103.82/barrel. Natural gas futures are down to $4.34/mmbtu.

Economic Alert 070314

For a PDF version of this Comerica Economic Alert click here: Employment 07-03-14.

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June ADP Employment and Auto Sales, May Factory Orders

Workers Get Jobs and Buy Cars, Equity Markets Rally, Happy Fourth!

  • June’s ADP Employment Report showed a robust increase of 281,000 private-sector jobs.
  • June Auto Sales revved up to a 17.0 million unit annual rate.
  • Factory Orders decreased by 0.5 percent in May, but remain consistent with a Q2 GDP rebound.

U.S. labor markets are improving quickly. Employed and more confident consumers are buying cars. Equity markets are showing their enthusiasm, adding to wealth and confidence. Tomorrow, we will get the official count of jobs added in June. Right now it looks like we are set to fire up the Fourth of July barbeques with a balmy economic tailwind, a welcomed change from a brutal winter. The ADP employment report for June reported a robust net increase of 281,000 private-sector jobs for the month, well beyond consensus expectations of about 205,000 jobs. Small businesses, less than 50 employees, added the bulk of the new positions, up 117,000 jobs. So from this very high-level view we can see no obvious drag from the rollout of the Affordable Care Act, nor from the threat, or actuality, of higher minimum wages. Based on today’s data, we will increase our expectations for tomorrow’s release of the official BLS payroll numbers, to a guess of about 235,000 jobs for June. We continue to expect the unemployment rate to decrease to 6.2 percent.

Auto sales also shifted up a gear in June, reaching a 17.0 million unit annual rate for the first time since July 2006. While there is certainly potential to see auto sales improve from here, we are getting into the range of the plateau in sales from the previous expansion. The drop in auto sales to a 9 million unit sales rate during the depths of the recession implies that there is still some upside potential for auto sales, especially as household income and household wealth continue to improve. On the other hand (you knew that was coming), the drop in auto sales through the last recession was no worse than the drop we saw through the back-to-back recessions of the early 1980s. The monthly light vehicle sales rate did hit some lofty peaks following that recession, reaching 21.2 million in September 1986. But total annual sales peaked at a more sedate 16.1 million in 1986.

New orders for manufactured products fell by 0.5 percent in May. This broke a three-month improving streak. Factory orders remain consistent with moderate business investment through Q2, supportive of a turnaround in real GDP growth from the dismal -2.9 percent in Q1. We will be cooking up our July U.S. economic outlook early next week. Right now, it looks like we will be close to 2.5 percent real GDP growth for the just completed second quarter.

Market Reaction: U.S. stock markets are up in early trading. The yield on 10-Year Treasury bonds is up to 2.61 percent. NYMEX crude oil is down to $105.17/barrel. Natural gas futures are down to $4.36.

Economic Alert 070214

For a PDF version of this Comerica Economic Alert click here: ADP 07-02-14.

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June ISM Manufacturing, May Pending Home Sales, Construction Spending

U.S. Manufacturing Logs Another Strong Month, Europe Not So Much

  • The ISM Manufacturing Index for June ticked down to a still-strong 55.3 percent.
  • The Pending Home Sales Index for May increased by 6.1 percent.
  • May Construction Spending increased by 0.1 percent, as private residential projects dipped.

The U.S. manufacturing sector remains healthy, contributing to a rebound from weak first quarter GDP. The ISM manufacturing index eased slightly to a still-strong reading of 55.3 percent. A key manufacturing index for the Eurozone dipped closer to the break-even point in May. Meanwhile the British manufacturing purchasing managers’ index showed strong gains through the second quarter, highlighting the variable speed economic expansion framing the Atlantic. The Pacific Rim looks a little steadier as China registered the highest level in its key manufacturing index this year. The Chinese “mini-stimulus” package appears to be gaining traction. Japan showed a drop in business confidence in the second quarter, in reaction to the consumption tax increases that came as part of Prime Minister Abe’s “third arrow.”

As the world’s major economic blocks transition from post-crisis fire control, toward something that will eventually approximate normal, central bank policy is un-synchronizing. This is clearly visible across the Atlantic. The Bank of England has been discussing interest rate increases. The Federal Reserve is still unwinding QE in measured steps and appears to be about a year away from interest rate hikes. The European Central Bank is stepping harder on the monetary accelerator through negative interest rates and other measures to stimulate bank lending. We may also see the Fed and Bank of Japan moving in opposite directions, as the Fed pivots next year while the BOJ maintains aggressive QE.

Foreign exchange rates are responding to the monetary policy decoupling. The British pound is at its highest level against the euro since late 2008. The dollar, too, has strengthened against the euro. Dollar/Yen has been relatively stable this year after the yen devalued significantly through 2013, but could see additional downward pressure on the yen next year. As the Federal Reserve winds down its asset purchase program late this year, foreign central bank purchases of U.S. Treasurys may also dial down, amplifying the drop in demand from the Fed, and putting upward pressure on U.S. interest rates and shifting spreads on sovereign bonds globally.

The National Association of Realtors Pending Home Sales Index increased by 6.1 percent in May, hitting its strongest level since September 2013. This report suggests that gains to May new and existing home sales will hold up into June. The total value of construction put in place in May increased slightly, up by 0.1 percent, as residential construction eased.

Market Reaction: U.S. equity prices are climbing. The yield on 10-Year Treasury bonds is up to 2.56 percent. NYMEX crude oil is down to $105.07/barrel. Natural gas futures are down to $4.43/mmbtu.

Economic Alert 070114

For a PDF version of this Comerica Economic Alert click here: ISM-MF 07-01-14.

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Comerica Economic Weekly

It was a fairly quiet week for U.S. economic data with one loud exception. The Bureau of Economic Analysis announced a sizeable downward revision to their estimate of 2014Q1 real GDP growth. The first estimate of Q1 GDP growth showed a paltry gain of just 0.1 percent annualized, held down by a confluence of transitory factors. The weather was very bad. The run-up in inventories that boosted 2013H2 GDP was unwinding. The federal budget sequester was still a drag on government spending. However, overall consumer spending was solid, due to an assumption about the rollout of the Affordable Care Act. The BEA assumed that consumer spending on services surged in Q1 due to pent-up demand for healthcare services.

The BEA’s second estimate showed that Q1 real GDP declined at a 1.0 percent annualized rate. Inventories were a bigger drag than first thought.

The BEA’s third estimate of Q1 real GDP showed sizeable contraction at a –2.9 percent annualized rate. Of the 268 quarters of GDP data, beginning in 1947Q2, 2014Q1 now ranks as the 17th worst quarter. Ninety-four percent of quarters since 1947Q2 were better. The reason for the large downward GDP revision from the second estimate centers on the healthcare assumption. In the third estimate, consumer spending on healthcare is no longer a major boost to GDP, but rather it is a small drag. Also, net trade, which was assumed to be a moderate drag in Q1 GDP in the first and second estimates, is now assumed to be a large drag.

The difference in real GDP growth of +0.1 percent in the first estimate, to –2.9 percent in the third estimate is huge. Prior to the Q1 estimates, the average revision from the first to the third estimate of GDP was 0.6 percent. Q1 was an exceptional quarter. Not only because it was the 17th worst GDP quarter since the end of World War II because of the unfortunate confluence of transitory events, but also because it was one of the most difficult for the BEA to estimate.

We continue to expect a rebound in real GDP growth for the current second quarter of around +2.5 percent.

Income and spending data for May are consistent with this complex characterization of the U.S. economy. Nominal personal income increased by 0.4 percent in May. The PCE price index was up 0.2 percent in May, the third month in a row at a 0.2 percent gain. After adjusting for inflation and taxes, real disposable income was up by 0.2 percent in May. Real consumer spending dipped by 0.1 percent, bringing the personal saving rate up to 4.8 percent.

New orders for durable goods decreased by 1.0 percent in May, following three consecutive increases.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 06-27-14.

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May Income and Spending, Q1 GDP Revision, June UI Claims

Q1 GDP Revised Down Again, May Income/Spending Data Consistent with Q2 GDP Rebound

  • U.S. Personal Income increased by 0.4 percent in May, with solid wage growth.
  • After accounting for inflation and taxes, Real Disposable Personal Income also gained 0.2 percent.
  • Real Personal Consumption Expenditures decreased by -0.1 percent in May.
  • First quarter Real GDP growth was revised down to a -2.9 percent annual rate.
  • Initial Claims for Unemployment Insurance for the week ending June 21 dipped by 2,000 to hit 312,000.

Income and spending data for May are consistent with a positive, but complex, characterization of the U.S. economy. Yesterday, we saw the big negative revision to 2014Q1 real GDP, down to a -2.9 percent annualized growth rate. Today, we see solid income numbers for the mid-point of Q2, supported by moderate-to-strong job growth through the first two months of the quarter. Nominal personal income increased by 0.4 percent in May. The wage and salary component of income also increased by 0.4 percent. Dividend income has also been strong lately, growing by 1.2 percent in May, extending a four-month streak. The PCE price index was up 0.2 percent in May, the third month in a row at a 0.2 percent gain. On a year-ago basis, the PCE price index was up by just 0.8 percent in February. In May it was up by 1.8 percent. So we see clear evidence of inflation starting to warm up. After adjusting for inflation and taxes, real disposable income was up by 0.2 percent in May. Real consumer spending dipped by 0.1 percent, bringing the personal saving rate up to 4.8 percent. The May decline in real spending was preceded by a 0.2 percent dip in April. The main drag on spending has been in the services component. The estimates for services spending are being complicated by the rollout of the Affordable Care Act earlier this year. We know that auto sales are doing well, with May unit sales up to a 16.8 million unit annual rate. We also know that both new and existing home sales picked up in May. So we can say that the discretionary component of consumer spending is in good shape. For the quarter, real consumer spending is on track to increase moderately at about a 1.5 percent annual rate. That rate of consumer spending would be consistent with a rebound in Q2 real GDP growth to about a 2.5 percent annualized rate. Recent estimates of 4.0 percent GDP growth in Q2 look too strong, but it still looks like we will see a GDP rebound in Q2 and a resumption of moderate real GDP growth, in the range of 2.5 to 3.0 percent, through the second half of the year.

The big downward revision to Q1 real GDP, to a -2.9 percent annual growth rate, was largely due to a muddled estimation of the service component of consumer spending by the Bureau of Economic Analysis, again, complicated by the rollout of the Affordable Care Act. A confluence of transitory events pulled the quarter down. Weather, an inventory correction and the federal spending sequester lined up in a bad way.  Other economic metrics are consistent with ongoing moderate economic expansion. This includes initial claims for unemployment insurance which remain low and consistent with a declining unemployment rate. Initial claims dipped by 2,000 for the week ending June 21, to hit 312,000. Continuing claims for unemployment insurance edged up by 12,000 to hit 2,571,000 for the week ending June 14.

Market Reaction: U.S. equity markets opened with losses. The yield on the 10-year Treasury bond is down to 2.53 percent. NYMEX crude is down to $105.63/barrel. Natural gas futures are down to $4.53/mmbtu.

Economic Alert 062614

For a PDF version of this Comerica Economic Alert click here: Personal Income 062614.

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Comerica Bank’s Arizona Index Advances in April

Comerica Bank’s Arizona Economic Activity Index climbed in April, advancing 5.0 percentage points to a level of 107.1. April’s index reading is 36 points, or 50 percent, above the index cyclical low of 71.2. The index averaged 97 points for all of 2013, ten points above the average for full-year 2012. March’s index reading was revised down to 102.1.

“Our Arizona Economic Activity Index climbed rapidly in April. Revised data now show that the index is up for the sixth consecutive month. Our Arizona Index is being supported by ongoing improvement in residential real estate markets. Both house prices and building permits have strengthened recently. However, the plateau in payroll jobs for the state, visible since last December, is cause for concern. Arizona payroll employment levels remain well below their pre-recession peak,” said Robert Dye, Chief Economist at Comerica Bank. “I expect to see the state adding jobs soon, consistent with the gains seen in other economic data.”

AZ Index 0614

For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0614.

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Comerica Bank’s Florida Index Slightly Down in April

Comerica Bank’s Florida Economic Activity Index declined by 0.3 percentage points in April, to a level of 115.6. April’s index reading is 35 points, or 44 percent, above the index cyclical low of 80.4. The index averaged 114 in 2013, nine points above the average for all of 2012. March’s index reading was revised down to 115.9.

“Our Florida Economic Activity Index dipped in April, continuing a soft entry into 2014. Tourism activity, as indicated by enplanements and hotel occupancy, may be levelling out after a strong run through the end of 2013. Fortunately, recent job growth has been above the U.S. average. As of April, payroll employment in the Sunshine State was up 3.3 percent from a year earlier, well above the 1.7 percent increase for the U.S. as a whole,” said Robert Dye, Chief Economist at Comerica Bank. “Firming property markets, plus expanding U.S. and global economies will keep the Florida economy on a growth track through the second half of the year.”

FL Index 0614

For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0614.

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