Comerica Economic Weekly

Despite the miss on the April payroll jobs numbers, U.S. economic data this week remained consistent with our expectation for a modest-to-moderate pick up in second quarter GDP growth after a weak first quarter.

April’s net payroll job gains of 160,000 was less than expected. The good news is that more people were employed, they worked longer hours and got paid more for it. The unemployment rate stayed even at 5.0 percent. We expect to see a stronger number when the May data is released on June 3rd.

Nonfarm business productivity decreased at a –1.0 percent annual rate for the first quarter. Over the last year productivity is up just 0.6 percent. Weak productivity growth is still a conundrum. Also, it is disconcerting because the flip side of weak productivity growth is high unit labor cost growth. In the first quarter ULC increased at a strong 4.1 percent annual rate, which will squeeze corporate profits.

Initial claims for unemployment insurance increased by 17,000 for the week ending April 30th, to 274,000, still a good number. Continuing claims declined by 8,000 for the week ending April 23, to hit 2,121,000.

The ISM Manufacturing Index for April improved to 50.8 percent, the second consecutive above-50 reading after five months in contraction territory. We will buy some of that back by saying that the gain in the index in April was supported by stronger prices. The price component was influenced by higher oil prices, making the improvement in the headline number less than meets the eye.

Likewise, the ISM Non-Manufacturing Index for April improved to 55.7 percent, with help from stronger prices. The employment sub-index for the non-mf survey improved to 53.0 percent, indicating ongoing hiring.

The value of construction put in place in March increased by 0.3 percent. Private residential construction was up 1.6 percent. Private nonresidential gained 0.7 percent and public projects declined by 1.9 percent on weaker power plant construction.

The U.S. international trade gap narrowed in March to $40.4 billion. This is not expected to cause a significant revision to the first estimate of Q1 real GDP growth, which was weak at 0.5 percent annualized. The improvement in the trade gap came for the wrong reasons as imports declined by $8 billion for the month.

Auto sales rebounded to a 17.4 million unit rate in April after dipping to 16.6 in March. The next couple of months of auto sales will be interesting. We do not expect sales to exceed the robust 18 million unit sales rate from last fall on a consistent basis. For the year, we expect to see about 17.2 million units sold.

Today’s jobs data reinforces the already low odds of a fed funds rate hike at the upcoming FOMC meeting over June 14/15. According to the fed funds futures market the odds of a fed funds rate hike at the FOMC meeting is a low 5.6 percent. The implied probability of at least one fed funds rate hike by December of this year now stands at 56 percent. Stronger oil prices would lift those odds.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 05-06-2016.

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April U.S. Employment

Less-Than-Expected, Not Terrible, Quirky

  • April Payroll Employment increased by a less-than-expected 160,000 jobs.
  • The Unemployment Rate for April was unchanged at 5.0 percent.
  • Average Hourly Earnings increased by 0.3 percent, showing moderate wage gains.
  • Average Weekly Hours were increased to 34.5.

April’s net payroll job gains of 160,000 was less than expected, but foreshadowed by Wednesday’s ADP report which showed a similar gain of 156,000 private-sector jobs for the month. The good news is that more people were employed, they worked longer hours and got paid more for it. Recent very strong gains in the labor force reversed themselves in April, as the labor force declined by 362,000 workers. This was not enough to bring the unemployment rate down at the first decimal place, so that stayed even at 5.0 percent. Average hourly earnings increased by 0.3 percent for the month, and are up 2.5 percent over the previous 12 months. The increase in the workweek by 0.1 hours to 34.5 came from nonmanufacturing establishments. The April job gain of 160,000 is not a terrible number, but it does show that the string of robust +200K job months that we have enjoyed recently will not continue indefinitely. Also, one month does not make a trend. We expect to see a stronger number when the May data is released on June 3rd. Today’s jobs data reinforces the already low odds of a fed funds rate hike at the upcoming FOMC meeting over June 14/15. According to the fed funds futures market, the odds of a fed funds rate hike at the FOMC meeting is a low 5.6 percent. The implied probability of at least one fed funds rate hike by December of this year now stands at 56 percent.

The establishment employment data for April was somewhat quirky. It was no surprise to see employment in mining and logging industries down by 8,000. It was a surprise to see construction employment up by only 1,000 workers for the month. Manufacturing as a whole gained 4,000 jobs. Retail trade surprisingly dropped 3,100 jobs for the month. Financial activities gained a stronger 20,000 jobs. Hiring in professional and business services was robust, with employment up by 65,000 jobs. Education and healthcare added a strong 54,000 jobs. Leisure and hospitality added a solid 22,000 jobs. The government sector surprisingly lost 11,000 jobs. April is often a quirky month for seasonally adjusted data as weather and holiday effects are significant. It is worth noting that if construction, retail and government would have behaved normally, this would have been another very solid report.

Market Reaction: U.S. equity markets opened with losses. The 10-Year T-bond yield is up to 1.75 percent. NYMEX crude oil is up to $44.48/barrel. Natural gas futures are up to $2.09/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Employment 05-06-16.

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April ADP Jobs, ISM Non-MF, Auto Sales, March International Trade

Job Growth Eases, Service Sector Up, Autos Back on Track, Trade Gap Narrows

  • The April ADP Employment Report showed a less-than-expected gain of 156,000 private-sector jobs.
  • The ISM Non-Manufacturing Index increased in April to 55.7 on pricing and new orders.
  • Light Vehicle Sales for April increased to a 17.4 million unit rate.
  • The U.S. International Trade Gap narrowed in March to $40.4 billion as imports eased.

The April ADP Employment Report, which provides a preliminary view on private-sector employment, showed an increase of 156,000 jobs for the month, which was less than expected. The ADP data implies that the official Bureau of Labor Statistics jobs report for April, which is due out Friday morning at 7:30 Central time, will also fall below expectations. Consensus expectations for Friday’s payroll gain were about 205,000 as of yesterday. If we take the ADP number as a reasonable estimator and add our guess of about 5,000 government sector jobs for the month, that gives us an estimate of a net gain of 161,000 nonfarm payroll jobs for April. This will be viewed as a downside miss and likely reinforce the Federal Reserve’s ongoing caution in its interest rate policy. We believe that the Federal Reserve will have enough cause for pause to leave the fed funds rate unchanged at its upcoming FOMC meeting over June 14/15. Large businesses were the weak link in today’s ADP Report, adding 24,000 jobs in April. Small businesses did their part, adding 93,000 jobs. Medium-sized businesses (between 50 and 499 employees) added 39,000 jobs in April.

The ISM Non-Manufacturing Index for April improved to 55.7 from March’s 54.5. All ten sub-indexes were above 50, indicating improving conditions across the board. Thirteen reporting industries said they grew in April. Four said they contracted, including mining. Anecdotal comments were generally positive.

Auto sales accelerated in April from March’s 16.6 million unit pace to a 17.4 million unit rate. Sales of domestic trucks did the heavy lifting. Over the next few months we will see whether auto sales can regain their robust 18.2 million unit sales rate held from last September through November. We expect auto sales to total about 17.2 million units this year and ease going into 2017. Incentives can help drive sales in the latter stages of the sales cycle, but they eat into corporate profits and often cannibalize sales from subsequent months.

The U.S. international trade gap narrowed significantly in March from February’s -$47.0 billion, to -$40.4 billion. The big move came from imports of goods, which dropped by $8 billion for the month as non-auto consumer goods imports eased. We expect trade to continue to be a mild-to-moderate drag on GDP in the current second quarter.

Market Reaction: U.S. stock prices opened with losses. The yield in 10-Year T-bonds is down to 1.80 percent. NYMEX crude oil is up to $44.00/barrel. Natural gas futures are up to $2.14/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: ADP 05-04-16.

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Comerica Economic Weekly

As we close out first quarter U.S. data releases it has become obvious that the U.S. economy lost significant momentum over the winter.

First quarter 2016 real GDP growth was a weak 0.5 percent annualized growth. On a quarter-over-quarter basis, real Q1 GDP increased by just 0.1 percent. Weak oil and the strong dollar were key culprits. Business fixed investment was down as consolidation in the energy sector drained the structures and equipment components. Exports declined, pulling the trade gap wider. Despite the gathering gloom in some parts of the economy, other areas continued to perform well. Solid consumer spending on services supported overall consumer spending even as auto sales fell below the very strong 2015Q4 pace. Residential investment increased at a 14.8 percent annual rate in Q4. State and local government spending increased at a solid 2.9 percent annualized rate.

Nominal personal income increased by 0.4 percent in March while nominal consumer spending gained just 0.1 percent. The PCE price index gained 0.1 percent for the month. Going forward, higher energy prices will start to push inflation indicators up.

The price for West Texas Intermediate crude oil broke through $45 at the end of this week. Gasoline prices are up too. The national average for unleaded regular gasoline hit $2.13 for the week ending April 22, up 42 cents from the mid-February low.

Mortgage rates fell through April, with 30 year fixed rate mortgages hitting 3.5 percent. Anecdotal evidence suggests that mortgage apps for purchase and refi jumped. New home sales for March increased by 1.5 percent to a 511,000 unit rate. We expect to see more new homes sales in the April data.

House prices are still increasing. The Case-Shiller National House Price Index for February was up by 0.4 percent for the month and 5.3 percent over the previous 12 months.

Unemployment claims data remains solid. Initial claims for unemployment insurance increased by 9,000, to 257,000 for the week ending April 23rd. Continuing claims fell by 5,000 to hit 2,130,000 for the week ending April 16th.

New orders for durable goods gained 0.8 percent in March, bouncing back from a 3.1 percent decline in February. Manufacturing indicators have improved a little over the last month, but we do not expect to see a fundamental improvement in current soft conditions.

The Bank of Japan held key interest rates steady there this week despite expectations that they could go more negative. The yen surged on the news. Japan lead global stock markets down at the end of the week.

The Federal Reserve left key interest rates steady here, with no expectation that they would do anything else. The Fed’s assessment of current economic conditions went in two directions at once, saying that labor conditions have improved while economic activity slowed. The FOMC communique provided no hints that a rate hike is pending in June.

According to the CME Group, the fed funds futures market shows only a 15 percent probability that the FOMC will raise the fed funds rate at its next meeting over June 14 and 15. Fed funds futures show a 61 percent probability that there will be at least one 25 basis point fed funds rate increase by the end of this year. The odds of two 25 basis point rate hikes this year diminishes to about 20 percent, according to the CME group.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 04-29-2016.

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2016Q1 GDP, April UI Claims, FOMC

Weak First Quarter GDP Dragged Down by Business Investment, Inventories, Trade, Defense

  • Real Gross Domestic Product for 2016Q1 increased at a weak 0.5 percent annual rate.
  • Initial Claims for Unemployment Insurance increased by 9,000 to 257,000 for the week ending April 23.
  • The Federal Open Market Committee left short term interest rates unchanged.

First quarter 2016 real GDP growth was a weak 0.5 percent, held down by sagging business investment, a drop in inventory accumulation, a deteriorating trade balance and a drop in federal defense spending. The sag through Q1 comes on the heels of a soft 2015Q4, when real GDP growth increased by just 1.4 percent. For the most part, this is a backward-looking number. We expect real GDP growth to increase moderately in the current quarter and beyond. However, today’s weak GDP print shows how the strong dollar and soft global demand are weighing on the trade balance. Imports increased slightly from Q4, but exports declined for the second straight quarter, reducing real GDP growth by 0.34 percent in Q1. It also shows the dark side of the surge in inventories that we saw through the first half of 2015, which boosted GDP growth then. Now, as inventory accumulation declines appropriately, it is a drag on headline GDP growth, reducing it by 0.33 percent in Q1. Business fixed investment was weak across the board. The consolidating energy sector is a key factor in declining business investment in structures and in equipment. Declining fixed business investment pulled real GDP growth down by 0.76 percent. Finally, federal defense spending was a drag in Q1 GDP, subtracting 0.15 percent from topline growth. Previously, we have made the case that consumer spending will be a stabilizing force in the economy this year. That is exactly what happened in Q1. Despite the drag from declining auto sales, strong consumer spending on services kept GDP growth positive for the quarter.

Initial claims for unemployment insurance increased by 9,000, to 257,000 for the week ending April 23rd. Continuing claims fell by 5,000 to hit 2,130,000 for the week ending April 16th. Claims data remains solid.

Yesterday, as widely expected, the Federal Open Market Committee left the fed funds rate unchanged. The assessment of current economic conditions went in two directions at once, saying that labor conditions have improved while economic activity slowed. The FOMC communique provided no hints that a rate hike is pending in June. According to the CME Group, the fed funds futures market shows only a 15 percent probability that the FOMC will raise the fed funds rate at its next meeting over June 14 and 15. We will be revising our interest rate forecast in early May to show only one fed funds rate hike this year, of 25 basis points, coming in December.

Market Reaction: Equity markets opened with gains. The 10-year Treasury bond yield is up to 1.86 percent. NYMEX crude oil is up to $45.43/barrel. Natural gas futures are down to $2.08/mmbtu.

Alert_04_28_2016_2016Q1GDP

For a PDF version of this Comerica Economic Alert click here: GDP 04-28-16.

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Comerica Bank’s Texas Index Sees Lightest Decline Since Energy Downturn

Comerica Bank’s Texas Economic Activity Index fell in February, decreasing 0.1 percentage points to a level of 92.4. February’s reading is 20 points, or 27 percent, above the index cyclical low of 72.8. The index averaged 97.7 points for all of 2015, seven and three-fifths points below the average for full-year 2014. January’s index reading was 92.5.

“Our Texas Economic Activity Index declined in February, down for 15 out of the last 16 months. Four of the eight index components were positive for the month, including nonfarm employment, exports, unemployment insurance claims (inverted) and house prices. Housing starts, drilling rig count, sales tax revenue and hotel occupancy were negative factors. With oil prices firming, we expect to see the drilling rig count level out by the end of summer, so that major drag will start to dissipate. However, the state’s large energy sector will likely remain subdued through the course of this year,” said Robert Dye, Chief Economist at Comerica Bank. “Both Austin and North Texas will drive growth for the state in the near term, propelled by their ability to attract and incubate new non-energy businesses.”

State_Index_Texas_04_2016

For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0416.

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Comerica Bank’s California Index Flat on Stalling Tech Sector

Comerica Bank’s California Economic Activity Index was unchanged in February, maintaining a level of 119.7. February’s reading is 36 points, or 42 percent, above the index cyclical low of 84.1. The index averaged 119.8 points for all of 2015, six and two-fifths points above the average for all of 2014. January’s index reading was 119.7.

“Our California Economic Activity Index was unchanged in February, and has been range bound since April 2015. What our index shows is that California is a two-handed economy. On the one hand, overall job growth has been steady and that is a fundamentally positive indicator, supporting most non-manufacturing industries. On the other hand, tech sector stock prices have been stagnant, as have federal defense spending and housing starts in the state,” said Robert Dye, Chief Economist at Comerica Bank. “We expect to see an upside breakout in our California index in the months ahead, supported by the positive outlook for the tech sector and firmer residential construction activity.”

State_Index_California_04_2016

For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0416.

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Comerica Bank’s Arizona Index Continues to Gain

Comerica Bank’s Arizona Economic Activity Index grew in February, increasing 0.4 percentage points to a level of 110.1. February’s index reading is 33 points, or 43 percent, above the index cyclical low of 77.0. The index averaged 107.1 points for all of 2015, seven and two-fifths points above the average for full-year 2014. January’s index reading was 109.7.

“Our Arizona Economic Activity Index increased in February for the sixth consecutive month. Five out of eight index components were positive, including payroll employment, initial claims for unemployment insurance (inverted), house prices, housing starts and enplanements. State exports, sales tax revenue and hotel occupancy eased in February. Job growth in the state is accelerating above the national average, which has been the normal historical condition of the mid-cycle Arizona economy. In this expansion cycle it has taken longer than usual for the state to get there,” said Robert Dye, Chief Economist at Comerica Bank. “Real estate conditions are improving, but new home sales remain subdued. Higher affordability than California is a strong point for Arizona real estate.”

State_Index_Arizona_04_2016

For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0416.

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Comerica Bank’s Florida Index Continues Solid Performance

Comerica Bank’s Florida Economic Activity Index grew in February, increasing 1.7 percentage points to a level of 153.8. February’s index reading is 76 points, or 97 percent, above the index cyclical low of 78.1. The index averaged 138.0 in 2015, twenty and three-tenths points above the average for all of 2014. January’s index reading was 152.0.

“The Comerica Florida Economic Activity Index increased for the 23rd consecutive month in February. Five out of eight index components were positive for the month, including nonfarm employment, state exports, initial claims for unemployment insurance (inverted), housing starts and house prices. State sales tax revenue dipped, as did hotel occupancy and enplanements. Overall, the state economy remains very strong and real estate conditions, especially in the single-family market, are improving. However, the condo market is looking overbuilt in some areas, including Miami, where sales metrics are cooling,” said Robert Dye, Chief Economist at Comerica Bank. “Despite the potential for a near-term reset in the Florida condo market, we look for ongoing gains to the Florida economy this year.”

State_Indexes_Florida_04_2016

For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0416.

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Comerica Bank’s Michigan Index Returns to Gains

Comerica Bank’s Michigan Economic Activity Index improved in February, increasing 0.5 percentage points to a level of 127.0. February’s reading is 53 points, or 71 percent, above the index cyclical low of 74.0. The index averaged 124.4 points for all of 2015, seven points above the index average for 2014. January’s index reading was 126.4.

“Our Michigan Economic Activity Index increased in February after dipping in January. Six out of eight index components were positive in February, including nonfarm employment, exports, housing starts, house prices, auto production and hotel occupancy. Only unemployment insurance claims (inverted) and state sales tax revenues were drags in February. With the domestic auto sector near its cyclical peak and international demand for Michigan’s exports soft, the Michigan economy is in a new phase, where growth will be driven by non-manufacturing industries,” said Robert Dye, Chief Economist at Comerica Bank. “Steady gains in non-manufacturing employment and improving real estate conditions will be the hallmarks of the Michigan economy for the remainder of the year.”

State_index_Michigan_04_2016

For a PDF version of the Michigan Economic Activity Index click here: Michigan_0416.

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