June ISM Non-NMF, Auto Sales, May International Trade

Service Sector Gains Momentum at Mid-Year, June Employment Indicators Positive

  • The ISM Non-Manufacturing Index for June increased to 56.5 percent.
  • The U.S. International Trade Gap widened in May to -$41.1 billion.
  • U.S. Auto Sales for June dipped to a 16.7 million unit rate.

As we head into the second half of the year, the service sector of the U.S. economy is gaining momentum. The ISM Non-Manufacturing Index for May increased more than expected, to a solid 56.5 percent, indicating improving conditions. This is consistent with our expectation of stronger GDP growth for the just completed second quarter. Nine out of ten sub-components of the headline index were positive and eight out of nine of those were positive and improving. The only component below the break-even 50 mark was backlog of orders, which dipped to 47.5 percent. Overall business activity was strong at 59.5. New orders were also strong at 59.9. The employment sub-index flipped from a contracting 49.7 in May to an expanding 52.7 in June. That is supportive of a better payroll jobs number for June. Fifteen out of eighteen industries reported growth. Anecdotal comments were generally positive. The ISM Manufacturing Index for June, reported last Friday, also increased, climbing to a moderately expansive 53.2. The employment sub-index of the ISM MF increased to a barely positive 50.4 in June. The U.S. payroll data for June will be released this Friday morning. We expect to see a bounce back from the dismal 38,000 net new jobs added in May, to about 175,000 for June.

The U.S. international trade gap widened in May to -$41.1 billion as imports increased by $3.4 billion, while exports eased slightly, down $0.3 billion. For the year ending in May, nominal imports are down by 3.1 percent, largely reflecting the drop in oil prices from a year ago. Nominal exports are down 4.2 percent. After adjusting for price changes, the real balance of trade in goods went more negative in May. To date, trade looks to be a fairly neutral for GDP growth in the second quarter, but that could change with the June data and any revisions to May and April.

As reported last Friday afternoon, U.S. auto sales for June dipped to 16.7 million unit annual rate. This is not a bad number, but it is a clear step down from the robust 18 million unit rate from late last year. It adds weight to our characterization of peaking auto sales in the fourth quarter of last year. Also, the softer auto sales for June suggest that expectations for very strong consumer spending in the second quarter should be tempered. We expect real GDP growth in the neighborhood of 2.5 percent for Q2.

Market Reaction: U.S. equity markets opened with losses but have since recovered. The 10-year Treasury bond yield is down to 1.38 percent. NYMEX crude oil is down to $46.49/barrel. Natural gas futures are down to $2.77/mmbtu.

Economic Alert 070616

For a PDF version of this Comerica Economic Alert click here: Int Trade 07-06-16.

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Comerica Economic Weekly

This week we saw that the historic BREXIT was not the end of the world. But it was a wakeup call for global financial markets that were surprisingly complacent heading into the vote, and were surprised by the outcome. Given that it was a binary event with at least a reasonable chance of occurring, we thought that markets would be better positioned heading into the vote, but they were not. The good news is that U.S. and global equity prices are bouncing back. The sky is not falling. Now that the discreet political event has occurred with the vote, the follow-on economic events will be incremental and less disruptive. The UK is in no hurry to invoke Article 50 of the EU bylaws which starts the clock ticking for a 2-year limit to exit negotiations. They would prefer to wait until the next government is in place, possibly waiting until early next year.

U.S. economic data this week was generally positive. First quarter real GDP growth was revised up to 1.1 percent, more than double the first estimate. The Q1 GDP numbers are consistent with our expectation for a stronger GDP growth rate for the just-completed Q2, in the range of 2.5 to 3.0 percent. The cautionary note from the Q1 GDP report comes from the corporate profits numbers which are still somewhat weak. Corporate profits increased in Q1 but were 4.3 percent below the year-ago level. Profits have been impaired by weak oil prices. Energy sector profits will stabilize through the remainder of this year with firmer pricing.

Income and spending data for May were solid, building on good data for April, also supporting our expectations of a rebound in real GDP growth for Q2. Real spending gained a respectable 0.3 percent after growing by 0.8 percent in April. After adjusting for moderate inflation and a 0.2 percent increase in personal taxes, real disposable income was up by 0.1 percent for the month. With spending up more than income, the personal saving rate ticked down to 5.3 percent.

The ISM Manufacturing Index for June rose to 53.2 percent, indicating improving conditions for U.S. manufacturers. Nine out of ten sub-indexes were above 50.

U.S. construction spending declined by 0.8 percent in May. Private residential was flat, but private nonresidential and public construction both dipped.

The Case-Shiller U.S. house price index for April showed a 0.1 percent gain for the month, and was up 5.0 percent over the previous 12 months. Consistent house price appreciation is a fundamental support to the consumer sector.

Initial claims for unemployment insurance increased by 10,000 for the week ending June 25, to hit a still-low level of 268,000. Continuing claims dropped by 20,000 for the week ending June 18, to reach 2,120,000. June UI claims data are consistent with a rebound in payroll employment from the dismal May numbers.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 07-01-2016.

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Comerica Bank’s California Index Sees Spring Uptick

Comerica Bank’s California Economic Activity Index advanced 0.9 percentage points in April to a level of 120.6. April’s reading is 37 points, or 43 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. March’s index reading was 119.7.

“Our California Economic Activity Index increased in April after remaining unchanged through the first quarter of the year. Still, the April index remains close to the level established back in May 2015. The biggest weight to the index over the last year has been the tech-sector stock index, which remained below its June 2015 peak through April of this year. The most consistent positive for the overall index over the last year has been payroll job growth, which has been steady and stronger than the U.S. average. For the year ending in April, California payroll employment increased by 2.9 percent, compared to the U.S. gain of 1.9 percent,” said Robert Dye, Chief Economist at Comerica Bank. “We believe that the state economy will continue to expand through the second half of this year at a moderate pace, held in check by a cooler tech-sector expansion.”

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For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0616.

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Comerica Bank’s Texas Index Increases for First Time Since September 2015

Comerica Bank’s Texas Economic Activity Index improved in April, up 0.2 percentage points to a level of 92.1. April’s reading is 19 points, or 27 percent, above the index cyclical low of 72.8. The index averaged 97.5 points for all of 2015, seven and three-fifths points below the average for full-year 2014. March’s index reading was 91.9.

“Our Texas Economic Activity Index increased slightly in April, marking the first increase since September 2015. We view this as a positive sign for the Texas economy which is still weighed down by the beleaguered energy sector. With oil prices firming near $50 per barrel after bottoming out in February, we are seeing the first signs of stability in the rig count. The last four weekly rig count totals for Texas have increased modestly after the count bottomed out for the week ending May 20th at just 173 active rigs. Despite the positive recent news from the rig count, the overall Texas economy is still underperforming. Payroll job growth appears to be trending down with only 11,900 jobs added in April and 200 jobs added statewide in May,” said Robert Dye, Chief Economist at Comerica Bank. “Even with stronger oil prices, downward momentum in the Texas economy may take some months to dissipate.”

TX Index 0616

For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0616.

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Comerica Bank’s Michigan Index Ticks Up

Comerica Bank’s Michigan Economic Activity Index climbed 1.9 percentage points in April to a level of 129.1. April’s reading is 55 points, or 74 percent, above the index cyclical low of 74.0. The index averaged 124.5 points for all of 2015, six and seven-tenths points above the index average for 2014. March’s index reading was 127.2.

“Our Michigan Economic Activity Index increased in April after dipping in March. The state’s important auto sector is not expected to increase production significantly from current strong levels and so that boost to the Michigan economy will diminish going forward. We expect growth in the second half of this year to come from the household sector, supported by ongoing job creation in services and by firming real estate market conditions. Over the 12-month period ending in April, payroll jobs increased by 2.5 percent in Michigan, well above the U.S. average of 1.9 percent,” said Robert Dye, Chief Economist at Comerica Bank. “However, going forward, we expect Michigan job growth to ease back toward the U.S. average.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0616.

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Comerica Bank’s Florida Index Resumes Gains

Comerica Bank’s Florida Economic Activity Index improved 1.3 percentage points in April to a level of 154.2. April’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. March’s index reading was 152.9.

“The Comerica Florida Economic Activity Index increased again in April. This marks the 25th consecutive month that the Florida index has either increased or stayed constant. Payroll job growth increased in Florida in April, as it has for every month since June 2011. Florida remains a growth leader in job creation. Over the year ending in April, Florida payroll employment was up by 3.2 percent, well above the U.S. average of 1.9 percent. Other index components were mostly positive in April, including house prices,” said Robert Dye, Chief Economist at Comerica Bank. “A surge in supply in the South Florida condo market may weigh on pricing in the second half of this year.”

FL Index 0616

For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0616.

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Comerica Bank’s Arizona Index Advances

Comerica Bank’s Arizona Economic Activity Index improved in April, up 0.3 percentage points to a level of 110.0. April’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. March’s index reading was 109.7.

“Our Arizona Economic Activity Index increased in April, consistent with our expectations of stronger state and U.S. economic growth through the second quarter of 2016. Most index components were positive for the month. This includes payroll employment, which has expanded for 23 consecutive months through April. For most of the post-recession period, Arizona has grown jobs at close to the national average pace. Over the past 12 months, the performance gap has widened and Arizona is now showing better than average year-over-year job gains,” said Robert Dye, Chief Economist at Comerica Bank. “We expect the stronger performance of the state economy to continue through the second half of this year.”

AZ Index 0616

For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0616.

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May Income and Spending, April Case-Shiller HPI

Another Solid Spending Report Supports Expectations of Stronger Q2 GDP

  •  U.S. Personal Income increased by 0.2 percent in May.
  • After inflation and taxes, Real Disposable Income gained 0.1 percent for the month.
  • Nominal Consumer Spending increased by 0.4 percent in April. Real spending gained 0.3 percent.
  • The S&P/Case-Shiller U.S. National Home Price Index gained 0.1 percent in April.

Income and spending data for May were solid, building on good data for April, and supporting expectations of a rebound in real GDP growth for the nearly complete Q2 to about 2.5 percent. Nominal personal income for May increased by 0.2 percent as wages and salaries also gained 0.2 percent, not bad considering the very weak payroll employment growth in May of just 38,000 net new jobs. Inflation was moderate for the month as the PCE price index gained 0.2 percent. Over the previous 12 months, the PCE price index was up by 0.9 percent. The energy component of the PCE price index was up 1.4 percent in May after gaining 3.8 percent in April. Excluding food and energy, the core PCE price index increased by a moderate 0.2 percent in May, finishing the 12-month period up by 1.6 percent. After adjusting for moderate inflation and a 0.2 percent increase in personal taxes, real disposable income was up by 0.1 percent for the month. Nominal personal spending was up by 0.4 percent in May. Real spending gained a respectable 0.3 percent after growing by 0.8 percent in April. With spending up more than income, the personal saving rate ticked down to 5.3 percent.

According to the S&P Case-Shiller U.S. national house price index, house prices increased by 1.0 percent on average in April, and are up 5.0 percent nationwide over the last year. Most of the 20 cities covered showed gains for the month, and moderate-to-strong gains over the previous 12 months. Dallas house prices are up 8.6 percent over the last year. Detroit is up 5.7 percent. Los Angeles gained 5.9 percent. Miami, 6.4 percent. Phoenix, 5.5 percent. San Diego, 6.3 percent. San Francisco house prices are up 7.8 percent over the last year.

Both the income/spending and the house price reports are supportive of overall consumer spending, which accounts for two-thirds of U.S. GDP. With stronger U.S. GDP growth, domestic demand for crude oil will increase. We will be watching European and Asian economic indicators through the second half of the year to see if global demand for crude will continue to increase. BREXIT is obviously a challenge to the European economy, with possible spillover effects for the U.S. and Asia. Crude oil demand growth accompanied by declining non-OPEC crude production is still expected to tighten crude oil inventories this year and support firmer prices, and push on inflation. Stronger inflation in a stable U.S. and global economic environment could lead to one fed funds rate hike this year, likely not coming until December. But that scenario has been undercut by BREXIT. Meanwhile the U.S. election cycle will heat up, as well as the British election cycle, and this could keep a lid on consumer confidence this fall. With lots of economic and political levers in play, we retain our view that the U.S. economy will continue to show moderate growth into 2017. Stay tuned.

Market Reaction: U.S. equity markets opened with strong gains. The yield on the 10-year Treasury bond is down to 1.46 percent. NYMEX crude is up to $48.97/barrel. Natural gas futures are up to $2.86/mmbtu.

Alert 06_29_2016

For a PDF version of this Comerica Economic Alert click here: Personal Income 06-29-16.

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BREXIT

The World has Changed

  • The consequences of BREXIT will be felt over years.
  • The odds of a fed funds rate hike this year are significantly lower because of BREXIT.

In a stunning rebuke to transnationalism, the citizens of the United Kingdom have voted to leave the European Union. Global financial markets were clearly unprepared for what should have been a reasonably foreseeable event. The false positive signal of the Guardian poll just days before the election added to the complacency despite notoriously inaccurate British polling. BREXIT is no doubt a historic event, not only for the United Kingdom, but also for the European Union. The immediate impacts of the LEAVE vote are still playing out in global financial markets as they grope through the uncertainty. U.S. and global equity markets sold off on Friday. Fortunately, the weekend provided a much needed, although temporary, circuit breaker. Treasury bond yields dropped as investors crowded into lower risk assets. The dollar strengthened against the pound and the euro. Gold rallied. Oil sunk.

Short Term: We expect to see ongoing, but diminishing, volatility in global financial markets in coming weeks. BREXIT was a game changer, but it does not appear to be a Lehman moment. There is not a huge avalanche of potential energy behind the vote waiting to pull down primary financial institutions in very short order. The Bank of England and the European Central Bank stand ready to provide liquidity as needed. Prime Minister David Cameron has announced his intention to step down, launching a new election cycle in the U.K. and increasing political uncertainty there. We assume that the next Prime Minister will invoke Article 50 of the EU bylaws which is the mechanism for exiting the EU. U.S. and other foreign owned corporations that have maintained a presence in the U.K. as an entry point to the EU will start shifting resources and operations toward the continent.

Medium Term: Article 50 negotiations will be contentious. The EU will be eager to make BREXIT painful in order to discourage other countries from following the example of the U.K. The U.K. will retaliate where possible, but their leverage is limited. Article 50 imposes a two-year time limit for negotiating a withdrawal from the EU, so there is a hard break if negotiations fail. Scotland may seek another referendum on independence from England. Northern Ireland faces a much thicker border with the Republic of Ireland. There could be consequences for NATO in a more contentious Europe.

Long Term: BREXIT is a fundamental challenge to the founding principles of the EU. It may no longer be meaningful to talk of an ever closer Europe. If other countries, such as the Czech Republic and the Netherlands, decide to leave the EU, setting the stage for still more departures, then Germany faces a prisoners’ dilemma. Do they try to hold together a crippled EU and face a greater burden for revenue sharing? Or do they move toward an EU Light with reduced financial obligations, or even a two-tiered EU?

Implications for the U.S.: Near term global financial market volatility puts even more pressure on the Federal Reserve to be cautious. We think that there is very little chance that the FOMC will vote to raise the fed funds rate at their next meeting over July 26/27. If the U.K. falls into recession this year without the EU following, global headwinds will be small. However, if the U.K. plus the EU fall back into recession, slower global demand growth would be a headwind for the U.S. and for Asia. An Asian recession would have very serious global consequences. Oil prices might not lift in that environment and inflationary pressure would be very weak. Central banks, including the Federal Reserve, would have to abandon their intention of eventually raising interest rates. There would be no new normal; normal would be something else. Because of increased global risk as a result of BREXIT, we believe that the Federal Reserve will be very cautious through the end of this year. For now, we are leaving one fed funds rate hike in our interest rate forecast, coming in December, but that is not a sure thing. The fed funds futures market places only a 15.5 percent change of at least one fed funds rate hike by December 14th and an equal probability of a rate cut by then.

For a PDF version of this Comerica Economic Alert click here: BREXIT 06-27-16.

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Comerica Economic Weekly

U.S. data released this week were consistent with an economy that has warmed up a bit after a chilly Q1.

Retail sales beat expectations for the second month, increasing in May by 0.5 percent. Already strong April retail sales growth was revised up to 1.3 percent. In both months headline sales were supported by higher prices at gasoline stations. Most categories were positive in May, including gasoline station sales which were up by 2.1 percent.

The National Federation of Independent Business’s business optimism index ticked up in May to 93.8, still somewhat low by historical standards. Expectations for the economy improved by becoming less negative and hiring plans gained strength.

The import price index rose for the third consecutive month in May, up by 1.4 percent as prices for fuel imports rose by 16.2 percent. Both the fuel and nonfuel component added to overall inflation in May.

The producer price index for final demand increased by a strong 0.4 percent in May, boosted by energy prices which gained 2.8 percent. Over the last 12 months the final demand PPI was up by just 0.8 percent.

Lower food prices kept the consumer price index in check, gaining 0.2 percent in May, below expectations. The energy sub-index was up 1.2 percent for the month after increasing by 3.4 percent in April. The food index, which represents around 14 percent of the total basket, about double the weighting for energy, declined by 0.2 percent in May. Over the last 12 months headline CPI is up by 1.0 percent, still weak, but trending up.

Initial claims for unemployment insurance increased by 13,000 for the week ending June 11, to hit 277,000. Continuing claims gained 45,000 for the week ending June 4, reaching 2,157,000.

Business inventories increased by 0.1 percent in April, led by wholesale inventories which increased by 0.6 percent as petroleum prices increased.

Industrial production fell by 0.4 percent in May as manufacturing output dipped and utilities reset after surging in April. Mining output increased for the first time in nine months. The U.S. drilling rig count is flattening out.

Housing starts were little changed in May, supported by a gain in the West. Permits were up just slightly.

The Federal Reserve kept the fed funds rate unchanged at the June 14/15 FOMC meeting. The dot plot, showing the expectations of the fed funds rate by FOMC members, was revised lower yet again. Expectations are now consistent with one-to-two fed funds rate hikes this year. We think that one rate hike is the mostly likely outcome, and that will not come until December.

The BREXIT vote on June 23 is casting a darker shadow over financial markets, suppressing long term interest rates. The potential for easier monetary policy from other central banks is weighing on the Fed.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 06-17-2016.

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