February U.S. International Trade

Fears of Big Drag from Trade on Q1 GDP Diminished with New Data

  • The Trade Gap narrowed by $4.6 billion in February, to -$43.6 billion.
  • Exports increased marginally by $0.4 billion, with slightly stronger exports of goods.
  • Imports fell by $4.3 billion, reversing the surge in goods imports in January.

Trade has been in the news, not only because of Trump Administration initiatives, but also because of all the moving parts and their impact on U.S. GDP and debt. A widening trade gap is a drag on GDP and it requires more borrowing. Conversely, a narrowing trade gap lifts GDP and requires less borrowing. A key moving part in the trade story is the value of the dollar. A strong dollar makes our exports expensive for other countries and it makes their imports to the U.S. cheaper, and so a strong dollar tends to widen the U.S. trade gap. To see the swings in the value of the dollar most broadly, we can look at an index like the Federal Reserve’s weighted average exchange value of the dollar adjusted for inflation. It shows the inflation adjusted value of the dollar weighted against the inflation adjusted currencies of our major trading partners. Since bottoming out in July 2011, the trade weighted value of the dollar has increased by nearly 25 percent, making imports cheaper and our exports more expensive. Relative economic performance between countries, inflation rates, interest rates and the supply and demand of internationally traded financial instruments (government debt is a big component) all influence the value of the dollar and, in turn, influence the trade gap. Global supply and demand for specific goods also influence the trade gap. The U.S. is increasing exports of crude oil and other energy products as the “shale gale” unleashes significant supplies. This will help to narrow the trade gap and support U.S. GDP.

In the February trade data we see a major $4.6 billion narrowing of the trade gap after it widened significantly in January. The narrowing came primarily from a reduction in imports, driven by consumer goods (cell phones and other goods) and by automotive vehicles and parts. The trade balance of goods tends to be more volatile than the trade balance of services, and goods are tracked more closely than services. So we can see that the average inflation adjusted trade balance in goods for January and February is about even with the average for the fourth quarter of 2016. In plain English, the bounce back in the trade data for February cancels out the fear of a big drag from trade in 2017Q1 GDP. We could still have a surprise for March that would shift the first quarter average, but that appears to have a low probability.

Market Reaction: U.S. equity markets are mixed. The yield on 10-Year Treasury bonds is up to 2.35 percent. NYMEX crude oil is up to $51.13/barrel. Natural gas futures are up to $3.26/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  International_Trade_04042017.

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March ISM-MF Index, February Construction Spending, Fed Balance Sheet

 Good Data Accompanies Discussion of Fed’s Balance Sheet

  • The ISM Manufacturing Index for March decreased to a still-positive 57.2, showing improving conditions.
  • Construction spending increased by 0.8 percent in March, boosted by private multi-family projects.

The ISM Manufacturing Index for March eased to a still-positive 57.2 in March, indicating ongoing improvement in the nation’s manufacturing sector. The new orders sub-index shows vigorous activity, easing slightly to 64.5. The production sub-index backed off a strong February reading, to a solid 57.6 in March. The employment sub-index increased to 58.9, good news for the March employment report, due out this Friday. There is some concern that March job gains might be soft, resetting from recent better-than-expected gains. However, the ISM report indicates that manufacturing hiring may remain engaged this spring, even after the robust 28,000 net job gain in the Bureau of Labor Statistics data for February. Of the 18 reporting industries in the ISM report, 17 expanded in March. The strongest growth was in electrical equipment, appliances and printing. Anecdotal comments were positive. One comment noted that “material inflation is now clearly upon us.” This sentiment was mirrored in the commodity price portion of the report, where 23 tracked commodities were up in price and none were down.

Construction spending for February increased by 0.8 percent. Private residential construction spending increased by 1.8 percent for the month, boosted by multi-family projects. Spending on private non-residential projects eased by 0.3 percent, with six out of 11 categories down for the month. Total public construction spending increased by 0.6 percent in February despite a dip in power-related projects.

Also noteworthy from Friday, the Wall Street Journal reported at the end of the day that the Federal Reserve is readying plans for balance sheet reduction. The article reports that under the emerging strategy, the Fed would increase short-term interest rates two more times this year, and then pause later in the year. During the pause in the interest rate cycle, the Fed would start winding down their portfolio “in a gradual and measured way.” This back-and-forth monetary strategy is justified, according to the article, by normalizing inflation metrics. We assume that the first phase of balance sheet run-off would be to stop reinvesting maturing assets. The drop in demand for bonds could result in lower prices, pushing up bond yields. The minutes of the March 14-15 Federal Open Market Committee meeting are due out this Wednesday, April 5. We expect to see additional discussion of balance sheet operations in the Fed minutes.

Market Reaction: U.S. equity markets opened with losses. The yield on 10-Year Treasury bonds is down to 2.33 percent. NYMEX crude oil is down to $50.16/barrel. Natural gas futures down to $3.14/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  ISM-MF_04032017.

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From the Desk of Robert Dye

Tactical Versus Strategic Thinking at the Fed

Last Monday I wrote that the Fed still has work to do in order to set monetary policy expectations for the second half of this year. This week, various Fed officials, including FOMC Chairwoman Janet Yellen, Vice-Chairman Stanley Fischer, and regional Fed presidents Williams, Evans, Rosengren, Dudley and Bullard all made comments that at least touched on expectations for monetary policy for the remainder of this year. Their comments collectively suggest that there is an active debate within the Fed about what to do in the second half of 2017. I have argued that the Fed is close to setting an expectation for a 25 basis point rate hike at every other FOMC meeting, beginning with the December 14, 2016 rate hike. Moreover, the pattern of rate hikes would coincide with FOMC meetings that include scheduled press conferences. If they skip May 3 and hike again on June 14, as implied by the fed funds futures market, they will be on that every-other-meeting cadence. If they stick to the three rates hikes, as implied by the March 15 “dot plot,” after hiking in June, then they will have to change the cadence of rate hikes in the second half of this year.

Most of this week’s Fed commentary indicated some comfort with three rate hikes for 2017 as implied by the December 14 “dot plot.” However, there was plenty of wiggle room for more or less than two more rate hikes this year, implying a feasible range of 2 to 4 rate hikes this year.  This suggests that the Fed collectively is watching the Trump Administration very closely, in order to gauge how the economy is reacting and will react in the future to the successes and failures of the Trump policy initiatives. I think they are watching oil prices too. The recent volatility in oil prices is having an effect on inflation indicators.

In this environment, the Yellen Fed will have to remain somewhat tactical, responding to current conditions and near-term expectations, rather than driving toward the strategic goal of policy normalization regardless of near-term economic and political volatility. A tactical Fed is all about communication. Failure to communicate and set appropriate expectations for financial markets could lead to financial dislocations, with possible adverse feedback, reminiscent of former chairman Bernanke’s Taper Tantrum. This suggests that the Fed itself could add to volatility in the months ahead if they take a tactical zig, when financial markets expect them to zag. Conversely, focusing on the strategic goal of renormalizing monetary policy, while not responding to near-term issues, also poses risks if the Fed would slavishly move toward a policy goal regardless of near-term volatility. As she considers what is likely her last year at the helm of the Fed, Janet Yellen still has challenges in front of her.

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Comerica Economic Weekly

Expectations for a fed funds rate hike at the upcoming May 2-3 Federal Open Market Committee meeting remain muted. According to the fed funds futures market, the implied probability of a 25 basis point rate hike on May 3 is just 6 percent. The FOMC ‘s June 13-14 meeting is in play for a rate hike, with the implied probability up to about 62 percent.

The Fed’s recent March 15 “dot plot” is consistent with two more 25 basis point rate hikes this year, for a total of three by year end. If we do have a June 14 rate hike, that will reinforce the cadence of one rate hike every other FOMC meeting, occurring on FOMC meetings that have a scheduled news conference. This cadence was established with the December 14, 2016 fed funds rate hike, followed by the March 15, 2017 rate hike.

This cadence is not set, but it shows that the Fed has some communication to do in order to establish expectations for the second half of the year since the cadence must change if they stick with only three rate hikes this year. Various Fed officials, including Chairwoman Janet Yellen, Vice-Chairman Stanley Fischer, and regional Fed presidents Williams, Evans, Rosengren, Dudley and Bullard all made comments this week. Their comments collectively suggest that there is an active debate within the Fed about what to do in the second half of 2017.

Inflation and inflation expectations figure large in that debate. The February income and spending data shows that a closely watched gauge of inflation, the personal consumption expenditure price index, increased by 0.1 percent in February after a large 0.4 percent gain in January. The core PCE price index (excluding food and energy) gained 0.2 percent in February. Over the previous 12 months the headline PCE price index was up by 2.1 percent and the core PCE price index was up by 1.8 percent. So it is fair to say that inflation indicators are closing in on the Fed’s near-2-percent target.

The recent swing in energy prices will factor into inflation indicators through the summer. WTI crude oil dipped below $48 per barrel last week, hitting a daily average low of $47.70 on March 23. Since then we have seen a rally in oil prices back up to just over $50 per barrel. Higher oil prices would add to the pressure on broad inflation indicators, possibly tilting the Fed toward a total of 4 rate hikes this year. Weaker oil prices suggest the opposite, favoring just three rate hikes this year.

Also in the income and spending data for February we see that nominal income was up by 0.4 percent for the month, while inflation-adjusted after-tax income gained a moderate 0.2 percent. Consumers held on to their gains as inflation-adjusted spending fell by 0.1 percent in February, giving the personal saving rate its second straight monthly increase, hitting 5.6 percent. Consumer spending was weighed down by stable auto sales and by warm winter weather which held down spending on utilities.

Other economic data from this week was generally favorable. House prices remain strong (see graph next page). Unemployment insurance claims remain very low through March 25. Consumer confidence spiked in March according to the Conference Board which could factor into stronger than expected auto sales for the month.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  Comerica_Economic_Weekly_ 03312017.

 

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Comerica Bank’s Florida Index Rises Again

Comerica Bank’s Florida Economic Activity Index grew in January, up by 1.7 percentage points to a level of 163.8. January’s index reading is 86 points, or 110 percent, above the index cyclical low of 78.1. The index averaged 155.3 in 2016, seventeen and one-tenth points above the average for all of 2015. December’s index reading was 162.1.

“The Comerica Bank Florida Economic Activity Index climbed for the fifth consecutive month in January. Five index components were positive for the month, including nonfarm payrolls, state exports, unemployment insurance claims (inverted), housing starts and home prices. State sales tax revenue eased, as did hotel occupancy. Airport enplanements were unchanged. According to the State of Florida, overseas visitation to the state was down by 2.6 percent in 2016, including a large drop in visitors from Brazil. There is concern that tighter border controls could weigh on international visitation in 2017,” said Robert Dye, Chief Economist at Comerica Bank. “After increasing through the second half of 2016, the value of the dollar has been stable to down over the past three months, good news for Florida tourism.”

For a PDF version of the Florida Economic Activity Index click here:   Florida_Index_0317.

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Comerica Bank’s Arizona Index Eases

Comerica Bank’s Arizona Economic Activity Index declined 0.2 percentage points in January to a level of 112.3. January’s index reading is 35 points, or 46 percent, above the index cyclical low of 77.0. The index averaged 110.3 points for all of 2016, three and two-fifths points above the average for 2015. December’s index reading was 112.5.

“The Comerica Bank Arizona Economic Activity Index decreased slightly in January, breaking a string of seven consecutive monthly gains that began in June 2016. Three out of eight components increased in January, including initial unemployment claims (inverted), home prices and airport enplanements. State exports, housing starts and hotel occupancy all declined, while nonfarm employment and sales tax revenue were unchanged. The January Arizona Index reflects a mixed group of signals for the Arizona economy. After strong growth through most of 2016, the pace of net job creation in the state fell off from October through January,” said Robert Dye, Chief Economist at Comerica Bank. “We expect the Arizona economy to continue to expand at a moderate pace through 2017, but the mixed signals in January show that Arizona is still vulnerable to economic headwinds.”

For a PDF version of the Arizona Economic Activity Index click here:  Arizona_Index_0317.

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Comerica Bank’s California Index Improves

Comerica Bank’s California Economic Activity Index grew by 0.2 percentage points in January to a level of 127.0. January’s reading is 43 points, or 51 percent, above the index cyclical low of 84.1. The index averaged 122.4 points for all of 2016, two and three-fifths points above the average for all of 2015. December’s index reading was 126.8.

“Our California Economic Activity Index increased in January for the 10th month in a row. Graphically we can see that the pace of increase has slowed in recent months. Moreover, in January, index components were mixed, with five up and three down. Gainers for the month were nonfarm employment, state exports, defense spending, home prices and the tech stock index. Losers for the month were unemployment insurance claims (inverted), housing starts and hotel occupancy. Job growth is cooling in the state, with the year-over-year gain in January down to 2.1 percent, still above the U.S. average of 1.6 percent for January,” said Robert Dye, Chief Economist at Comerica Bank. “We expect to see ongoing moderate growth in the California economy this year supported by increased business investment in technology and a strengthening single-family housing market.”

For a PDF version of the  California Economic Activity Index click here:  California_Index_0317.

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Comerica Bank’s Michigan Index Inches Up

Comerica Bank’s Michigan Economic Activity Index grew just 0.1 percentage points in January to a level of 130.1. January’s reading is 56 points, or 76 percent, above the index cyclical low of 74.1. The index averaged 127.8 points for all of 2016, four and one-fifth points above the index average for 2015. December’s index reading was 130.0.

“The Comerica Bank Michigan Economic Activity Index increased just slightly in January, and is essentially stagnant at a value of 130 from November through January. Index components were about evenly matched in January, with four up and four down. The gainers were nonfarm employment, state exports, home prices and state sales tax revenues. The losers were unemployment insurance claims (inverted), housing starts, automobile production and hotel occupancy. Automakers are revving up their plans for reinvestment in the state, which is great news. However, we view this as a force for employment stability, not necessarily for net job growth in the state. Manufacturing employment in Michigan rebounded from 2010 through 2015, supported by rebounding auto sales. However, since early 2016, Michigan manufacturing employment has flat-lined,” said Robert Dye, Chief Economist at Comerica Bank. “The surge in U.S. consumer confidence this spring may provide some near term support for auto sales.”

For a PDF version of the Michigan Economic Activity Index click here: Michigan_Index_0317.

 

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Comerica Bank’s Texas Index Sees Strongest Monthly Gain Since 2014

Comerica Bank’s Texas Economic Activity Index ticked up by 1.3 percentage points in January to a level of 93.1. January’s index reading is 20 points, or 28 percent, above the index cyclical low of 72.8. The index averaged 91.3 points for all of 2016, six and one-tenth points below the average for full-year 2015. December’s index reading was 91.8.

“The Comerica Bank Texas Economic Activity Index increased for the fifth consecutive month in January. We believe that the recent positive performance of the index represents a fundamental turning point in the Texas economy. The state’s important energy sector is growing again in a low oil price environment as well-seasoned energy companies utilize new technologies and capture new efficiencies in their operations. Seven out of eight index components were positive in January, including nonfarm employment, state exports, unemployment insurance claims (inverted), drilling rig count, home prices and hotel occupancy. Only the state sales tax sub-index declined for the month,” said Robert Dye, Chief Economist at Comerica Bank. “We expect stabilizing conditions in the Houston area will gradually give way to renewed growth this year, eliminating a key drag on the Texas economy.”

For a PDF version of the Texas Economic Activity Index click here:  Texas_Index_0317.

 

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Comerica Economic Weekly

U.S. economic data showed mixed trends in housing and ongoing improvement in the manufacturing sector. The biggest economic news came from financial markets with some profit taking in stocks on Tuesday and from Washington where political power struggles are challenging healthcare reform.

The stall in healthcare reform suggests there is some downside risk to the pro-growth Trump Administration agenda. Healthcare impacts the budget. The budget impacts tax reform. Tax reform impacts trade policy. All the above impact the Administration’s ability to pull off a major infrastructure program.

Existing home sales fell in February by 3.7 percent to hit a 5,480,000 unit annual rate. With weaker sales, very tight inventories increased a bit, to a still tight 3.8 months’ worth. The median sales price was up 7.7 percent in February over the previous 12 months.

New home sales were better than expected in February, increasing by 6.1 percent to a 592,000 unit annual rate in a continuation of the upward trend in new home sales that began in 2011.

Initial claims for unemployment insurance for the week ending March 18 increased by 15,000, to hit 258,000, which is still a very low number. Continuing claims for the week ending March 11 fell by 39,000, to hit an even two million. Continuing claims look like they are levelling out near the late-cycle lows of 1988 and 2000.

New orders for durable goods increased by 1.7 percent in February after a 2.3 percent gain in January. Commercial aircraft orders were strong in both months. The core measure, nondefense capital goods excluding aircraft, was little changed in January and February.

U.S. and global economic fundamentals continue to look good, which should provide a floor for downward momentum in stocks.

Oversupply in the U.S. and globally is putting downward pressure on oil prices. WTI crude oil fell from over $53 per barrel in early March to about $49 in mid-March, and fell again to $47.50 at mid-week. Lower oil prices reduce inflationary pressure, suggesting marginal downside potential for Fed rate hikes.

We believe that the Fed still needs to set expectations for the second half of the year. Those expectations will be shaped in part by oil and politics.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 03242017.

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