February 2015, Comerica U.S. Economic Update

A consistent clear positive signal for the U.S. economy is coming from job growth. Payrolls in January registered a stronger-than-expected 257,000 net new jobs. The already strong November and December jobs numbers were revised up to a robust 423,000 and 329,000 jobs, respectively. The unemployment rate ticked up inconsequentially to 5.7 percent in January. We still expect the U.S. unemployment rate to trend down through this year, dropping to near 5.0 percent by December. Driving the small gain in the unemployment rate was an inexplicable 1,051,000 person gain in the labor force for January, the biggest one-month increase since January 2000. This was an artifact of the statistical machinery involved in the jobs numbers rather than a true reading on the economy.

Global growth leaves plenty to be desired. Fortunately, some forward looking indicators are turning positive for the Euro Zone. The Markit PMI, a broad-based diffusion index, is trending higher, indicating improving conditions for most industrial sectors. Auto sales are improving. Germany, France and Spain all posted gains in auto sales in January. A weaker euro relative to the dollar will help euro-zone exporters. January trade data for China was disappointing. Exports were down 3.3 percent from a year ago. Imports dropped by nearly 20 percent for the year ending in January. Japan slumped into technical recession in 2014Q3, with two consecutive quarters of GDP contraction. The good news is that the Japan PMI increased in January, which may turn out to be an indication of a short and shallow slump. The combination of aggressive federal deficit reduction and equally aggressive quantitative easing hopefully sets the stage for a stronger Japan later in 2015. Significantly lower crude oil prices are a threat to Russia. The ruble is under pressure, straining Russia’s financial sector, inflation is soaring and Russia’s federal deficit is widening. The World Bank recently downgraded the outlook for Russian GDP growth in 2015 to –2.9 percent.

Oil prices have stabilized, at least temporarily. The near $8 gain in West Texas Intermediate, from $45/barrel in late January, to $53/barrel in early February, was the biggest upswing in oil prices since last July. The oil market is still a reflection of global oversupply combined with the desire of Saudi Arabia to preserve market share and drive out high-cost producers. The geo-political leverage that Saudi Arabia has through oil, relative to Syria, Russia and Iran makes for tremendous intrigue, and little predictability with respect to a long-term trend for oil prices. For now, we assume near-term stabilization and modest increases in crude oil prices through 2016. Ask us again tomorrow.

The Federal Reserve upgraded their assessment of the U.S. economy with the January 28th monetary policy announcement. We look for the Fed to modify their forward guidance on interest rates in either March or April, to set expectations for interest rate lift-off this summer, possibly at mid-June.

 For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate_02_09_2015.

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Comerica Economic Weekly

U.S. economic data released in the first week of February was mixed, but capped by a strong jobs report. Payroll job growth in January registered a stronger-than-expected 257,000 jobs. The unemployment rate ticked up inconsequentially to 5.7 percent in January. We still expect the unemployment rate to trend down through this year, dropping to near 5.0 percent by December.

The ISM Manufacturing Survey dipped in January to 53.5 percent, still indicating expansion in U.S. manufacturing. However, the slowdown in freight handling at California ports is leading to delivery bottlenecks. Three out of 10 anecdotal comments published in the ISM Manufacturing Report refer to problems caused by slowdowns at West Coast ports.

The ISM Non-Manufacturing Index for January increased to 56.7, indicating that the service sector is expanding at a healthy pace.

Auto sales for January eased slightly to a still-strong 16.7 million unit sales rate. There is not a lot of upside left for auto sales in this cycle, but we expect to stay near a cyclical peak through 2015.

The Baker-Hughes rig count for the U.S. is keeling over quickly. The recent high was in mid-September, with a count of 1931 active rigs. The count stabilized in October and November, and then rolled over in December and January. The January 30th rig count was 1543, already a drop of 20 percent from September. We expect the rig count to fall much lower, possibly rivalling the June 2009 low of 876 rigs.

Personal income for December was up by 0.3 percent. Nominal spending decreased by 0.3 percent in December. Some of the drag on spending was due to falling petroleum prices.

Total construction spending in the U.S. increased by 0.4 percent in December. Private residential construction was positive for the month, up by 0.3 percent on strength in single-family projects.

The U.S. international trade gap widened to $46.6 billion in December. This was worse than the BEA assumed in their first estimate of 2014Q4 GDP, so we except to see a downward revision at the end of this month if all other GDP components are stable.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 02-06-15.

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January 2015 U.S. Employment

U.S. Jobs Machine in High Gear

  • The January Payroll Employment Survey showed a stronger-than-expected gain of 257,000 payroll jobs.
  • The Unemployment Rate for January ticked up to 5.7 percent.
  • Average Weekly Hours for all employees were steady at 34.6 hours.
  • Average Hourly Earnings were up by 12 cents in January, adding to the 2.2 percent year-over-year gain.

The U.S. jobs machine is in high gear. Payroll job growth in January registered a stronger-than-expected 257,000 net new jobs. The already strong November and December jobs numbers were revised up to a robust 423,000 and 329,000 jobs, respectively. These are very good numbers. The unemployment rate ticked up inconsequentially to 5.7 percent in January. We still expect the U.S. unemployment rate to trend down through this year, dropping to near 5.0 percent by December. Driving the small gain in the unemployment rate was an inexplicable 1,051,000 person gain in the labor force for January, the biggest one-month increase since January 2000. This was mostly an artifact of the statistical machinery involved in the jobs numbers rather than a true reading on the economy. Average weekly hours were steady at 34.6. Wages increased on average by 12 cents per hour. Average hourly earnings for all workers were up in January by 2.2 percent over the previous 12 months. This compares favorably with the gasoline-depressed 0.7 percent gain in the December Consumer Price Index over the previous year.

Payroll job gains were broad-based in January. However, we are starting to see the negative impact of lower oil prices on the resources and mining sector, which lost 3,000 jobs in January. Construction employment was up a strong 39,000 jobs for the month, with gains in both residential and nonresidential trades. Manufacturing employment was up a surprising 22,000 jobs, driven by hiring for transportation equipment. Wholesale trade gained 12,700 jobs while retail trade added a whopping 45,900 jobs in January. Transportation and warehousing industries shed 8,600 jobs, with minor losses in pipeline transportation. Information industries added 6,000 workers while financial services added a calculated 26,000. Professional and business services employment was up by 39,000 jobs. Education and healthcare gained 46,000. Leisure and hospitality industries gained 37,000 workers to help absorb the extra discretionary spending that lower gasoline prices bring. The government sector shed 10,000 jobs with cutbacks at the Postal Service.

The strong January labor market data keeps the Federal Reserve on track for interest lift-off between April and December of this year. We continue to place our best guess for lift-off on the June 16/17 FOMC meeting.

Market Reaction: U.S. equity markets opened with gains. The 10-Year T-bond yield is up to 1.91 percent. NYMEX crude is up to $51.77/barrel. Natural gas futures are up to $2.63/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Employment 02-06-15.

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January ADP Employment, ISM Non-Manufacturing Index, Auto Sales, Rig Count

January Numbers Point to Ongoing Momentum While Oil Patch Consolidates

  • The January ADP Employment Report showed an increase of 213,000 private-sector jobs.
  • The ISM Non-Manufacturing Index for December increased to a still-positive 56.7.
  • Light Vehicle Sales for January eased to a 16.7 million unit annual rate.
  • The Baker Hughes rotary rig count for the U.S. dropped in late January to 1,543 rigs.

The bulk of U.S. economic data shows ongoing momentum in early 2015. High-level labor data looks good. The January ADP report showed a gain of 213,000 private-sector jobs. We expect to see the official BLS payroll number for January near 230,000 on Friday morning. The ISM Non-Manufacturing Index for January increased to 56.7, indicating that the service sector is expanding at a healthy pace. Auto sales for January eased slightly to a still-strong 16.7 million unit sales rate. But we also see the pull that significantly lower oil prices are exerting on drilling and exploration activity in the U.S. The Baker-Hughes rig count for the U.S. is keeling over quickly. The recent high was in mid-September, with a count of 1931 active rigs. The count stabilized in October and November, and then rolled over in December and January. The January 30th rig count was 1543, already a drop of 20 percent from September. We expect the rig count to fall much lower, possibly rivalling the June 2009 low of 876 rigs. Along with the collapse of the rig count, job losses in drilling-related industries will increase and suppliers to those industries will feel the pinch. U.S. Steel has announced layoffs for their East Texas and Ohio plants that make tubular products for oil well drilling and production.

The declines in drilling activity are driven by lower oil prices. Beginning last Friday, oil prices rallied, sustaining the largest gains since prices started sliding last July. The spot price for West Texas intermediate crude oil bounced off a low of $44 per barrel, rising above $53 per barrel yesterday afternoon. Today, we already see prices easing, now below $51 per barrel. It appears premature to call for a bottom in oil prices. Fundamentals still suggest that there is ample downside pressure on oil prices. Even though the drilling of new wells is falling rapidly, production from existing wells is not. U.S. production appears set to increase through the first half of this year. Demand is still held in check by a cool global economy and by ongoing improvements to energy efficiency.

While the pain from lower oil prices is front-loaded, large, focused and visible, the gain from lower petroleum product prices is back-loaded, diffuse and less visible. On a net basis, lower oil prices are a positive for the U.S. economy but will cause economic dislocations across industries and regions.

Market Reaction: U.S. stock prices opened with losses. Long-term Treasury yields are up with the 10-Year T-bond rate at 1.82. NYMEX crude oil is down to $50.25/barrel. Natural gas futures are down to $2.68/mmBTU.

ALERT020415_ADPEMP

For a PDF version of this Comerica Economic Alert click here: ADP 02-04-15.

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January ISM Manufacturing, December Income and Construction Spending

Manufacturing Sector Still Expanding but West Coast Docks Problematic

  • The ISM Manufacturing Index for January decreased to a still-positive 53.5 percent.
  • December Personal Income increased by 0.3 percent with little help from wages and salaries.
  • December Personal Consumption Expenditures decreased by 0.3 percent as auto sales eased.
  • Construction Spending gained 0.4 percent in December with help from public projects.

The ISM Manufacturing Survey, a broad index of U.S. manufacturing activity, dipped in December to 53.5 percent, still indicating expansion in U.S. manufacturing. However, even with a strong domestic economy, U.S. manufacturing faces three headwinds. First, the strong dollar is making U.S. manufactured goods increasingly expensive overseas while driving the cost of imported alternatives down. Second, lower oil prices and the significant cool down in drilling activity is reducing demand for certain types of fabricated metal and equipment, including drilling pipe and well casings. Third, the slowdown in freight handling at California ports is leading to delivery bottlenecks. Three out of 10 anecdotal comments published in today’s ISM Manufacturing Report refer to problems caused by slowdowns at West Coast ports. Even with a strong U.S. economy, it should not come as a surprise to see a cooler ISM-MF Index in the months ahead as the U.S. economic expansion matures. The production, new orders, and employment sub-indexes all declined in December

Fourth quarter personal income and spending numbers were imbedded in the first estimate of Q4 GDP issued last week. Today, we got some more detail on December data. Personal income for the month was up by 0.3 percent. The strong jobs gains for the month did not translate into a strong gain in wage and salary income, which was up only by 0.1 percent in December. The gains in income came from proprietors’ income, up a strong 0.9 percent, and rental income, up by 0.8 percent for the month. Nominal spending decreased by 0.3 percent in December. However, some of the drag was due to falling petroleum prices. After adjusting for price changes, real consumer spending dipped by 0.1 percent. The personal saving rate, which eroded from 5.1 percent of disposable personal income last June, to 4.3 percent by November, rebounded to 4.9 percent in December.

Total construction spending in the U.S. increased by 0.4 percent in December. Private residential construction was positive for the month, up by 0.3 percent on strength in single-family projects. Private non-residential construction spending eased by 0.2 percent. Public construction spending increased by 1.1 percent with gains in office and power plant projects.

Market Reaction: U.S. equity markets opened with losses. The yield on 10-Year Treasury bonds is up to 1.69 percent. NYMEX crude oil is up to $49.10/barrel. Natural gas futures are down to $2.64/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: ISM-MF 02-02-15.

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Comerica Economic Weekly

It was an important week for monetary policy, with the Federal Open Market Committee issuing a policy statement on Wednesday afternoon. The FOMC statement of January 28 reaffirmed our expectations set by the Fed’s December communications. The Fed maintained its view on the transitory nature of lower oil prices, while at the same time upgrading their overall view of U.S. economic activity from “moderate” to “solid”.

Our expectations remain centered on a June 17 announcement for interest rate lift-off. Of course, there is still a lot of time between now and June, and economic conditions and the Fed’s assessment of conditions may change. When assessing the possible timing of interest rate lift-off, it feels like the preponderance of risk is tilted toward a later than June announcement for interest rate lift-off, rather than an earlier than June announcement.

The first estimate of 2014Q4 real GDP growth showed that growth in the U.S. economy eased at the end of last year, after a strong Q2 and Q3. The report was mixed, showing pushes and pulls on the U.S. economy from many different angles. Overall consumer spending, accounting for two-thirds of gross domestic product, had the strongest quarterly increase since early 2006, as gasoline prices dropped, consumer confidence climbed and households went on a spending spree. Businesses did not. Real fixed business investment gained a cautious 1.9 percent after two strong quarters in Q2 and Q3.

Inventory accumulation was strong. Without the buildup of inventories, real GDP growth in 2014Q4 would have been 1.8 percent. This implies that inventories will be a drag on GDP growth in 2015H1. Trade subtracted 1 percentage point from Q4 growth as exports increased at a modest 2.8 percent rate while imports increased at an 8.9 percent annualized rate. Government spending was a big drag on Q4 GDP, subtracting 2.2 percentage points from growth. After surging in 2014Q3, federal defense spending fell at a 12.5 percent rate in Q4. The GDP price index was unchanged in Q4 reflecting lower oil prices.

The Q4 GDP numbers show that the U.S. economy can continue moderate growth into 2015. The surge in consumer spending that we saw in Q4 was not sustainable, but it doesn’t need to be. Even with more moderate gains in consumer spending, economic growth can be supported by normalizing business investment and normalizing government spending.

President Obama is proposing federal spending in excess of the limits set by the Budget Control Act of 2011. Until the 2016 federal budget is set there is added uncertainty about the future path of federal government spending, which accounts for about 7 percent of U.S. GDP.

Initial claims for unemployment insurance fell sharply, by 43,000, in the holiday shortened week ending January 24. Despite numerous anecdotal reports of oilrelated layoffs, they are not yet visible in the labor data.

 For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 01-30-15.

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2014Q4 GDP, January UI Claims

Fourth Quarter Real GDP Growth Eased to 2.6 Percent

  • Real Gross Domestic Product growth for 2014Q4 eased to 2.6 percent after 5 percent growth in Q3.
  • Inventories were stronger than expected, setting the stage for weaker gains in 2015Q1.
  • Real Consumer Spending increased at a strong 4.3 percent annual rate, spurred by rising confidence.
  • Nonresidential fixed investment was weak, growing by just 1.9 percent in the fourth quarter.

The first estimate of 2014Q4 real GDP growth showed that growth in the U.S. economy eased at the end of last year, after a strong second and third quarter. The report was mixed, showing pushes and pulls on the U.S. economy from many different angles. Overall consumer spending, accounting for two-thirds of gross domestic product, had the strongest quarterly increase since early 2006 as gasoline prices dropped, consumer confidence climbed and households went on a spending spree. Businesses did not. Real fixed business investment gained a cautious 1.9 percent after two strong quarters through the middle of 2014. Inventories were strong, increasing by $113.1 billion ($2009), and adding 0.8 percentage points to Q4 real GDP growth. Without the buildup of inventories, real GDP growth in 2014Q4 would have been 1.8 percent. This also implies that inventories will be a drag on headline GDP growth in the first quarter of 2015. Trade subtracted 1 percentage point from Q4 growth as exports increased at a modest 2.8 percent rate while imports increased at an 8.9 percent annualized rate. Government spending was a big drag on Q4 real GDP, subtracting 2.2 percentage points from growth. After surging in the third quarter of last year, federal defense spending fell at a 12.5 percent rate in the fourth quarter. The GDP price index was unchanged in the fourth quarter, reflecting lower oil prices.

The fourth quarter GDP numbers show that the U.S. economy has enough momentum to continue moderate growth into 2015. The surge in consumer spending that we saw in Q4 was not sustainable, but it doesn’t need to be. Even with more moderate gains in consumer spending, economic growth can be supported by normalizing business investment and normalizing government spending. President Obama is proposing federal spending in excess of the limits set by the Budget Control Act of 2011. So until the 2016 federal budget is resolved there is some added uncertainty about the future path of federal government spending, which accounts for about 7 percent of U.S. GDP.

Initial claims for unemployment insurance fell sharply, by 43,000, in the holiday shortened week ending January 24. Continuing claims also fell significantly, by 71,000, for the week ending January 17, to hit 2,385,000. Despite growing anecdotal stories of oil-price-related layoffs, they are not yet visible in the official labor data. Key word is “yet”. We expect to see more signs of job losses in resources and mining, and in related industries, through 2015.

Market Reaction: Equity markets opened with losses. The 10-year Treasury bond yield is down to 1.7 percent. NYMEX crude oil is down to $45.33/barrel. Natural gas futures are down to $2.68/mmbtu.

Alert103014-2014Q3GDP

For a PDF version of this Comerica Economic Alert click here:GDP 01-30-15.

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Comerica Bank’s Texas Index Breaks Seven Month Streak

Comerica Bank’s Texas Economic Activity Index eased slightly in November, decreasing 0.2 percentage points to a level of 107.5. November’s reading is 35 points, or 48 percent, above the index cyclical low of 72.6. The index averaged 100.3 points for all of 2013, two and one-tenth points above the average for full-year 2012. October’s index reading was 107.7.

“After seven consecutive months of gains, our Texas Economic Activity Index dipped in November. We expect to see more evidence of the economic drag on Texas from lower oil prices in the months ahead. The Texas economy is large and diverse and it will not turn on a dime, but early indicators, including the weekly drilling rig count, are already showing the impact of the new oil price regime,” said Robert Dye, Chief Economist at Comerica Bank. “We expect to see a significant reduction in oil field activity in 2015. This will lead to more layoffs in the energy sector in 2015 and reduced local demand for non-energy industries. Fortunately, the broader U.S. economy is strong and this will buffer some of the downdraft from low-priced oil.”

StateIndex0115Texas

For a PDF version of theTexas Economic Activity Index click here: TexasIndex_0115.

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Comerica Bank’s California Index Continues Upward Trajectory

Comerica Bank’s California Economic Activity Index grew in November, climbing 0.7 percentage points to a level of 116.6. November’s reading is 33 points, or 39 percent, above the index cyclical low of 83.8. The index averaged 106.2 points for all of 2013, five and one-half points above the average for all of 2012. October’s index reading was 115.9.

“Our California Economic Activity Index gained in November, now for the eighth consecutive month. The California economy is showing good momentum heading into 2015. Lower gasoline prices are a significant boon to the state’s households and businesses. Real estate markets remain very active. Construction projects are visible throughout the state,” said Robert Dye, Chief Economist at Comerica Bank. “Volatility in foreign exchange rates represents a risk factor for California businesses in 2015. Also, slow port activity has the potential to stretch out delivery schedules.”

StateIndex0115California

For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0115.

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Comerica Bank’s Arizona Index Up Again

Comerica Bank’s Arizona Economic Activity Index grew in November, increasing 1.1 percentage points to a level of 102.2. November’s index reading is 25 points, or 33 percent, above the index cyclical low of 76.7. The index averaged 95.4 points for all of 2013, seven and four-tenths points above the average for full-year 2012. October’s index reading was 101.1.

“Our Arizona Economic Activity Index increased in November, showing improving economic conditions for the state in the fourth quarter of 2014. All eight components of our Arizona index were positive for the month. We expect these broad-based gains to carry over into 2015. Arizona is benefitting from a strong U.S. economy, lower gasoline prices and improving real estate markets,” said Robert Dye, Chief Economist at Comerica Bank. “Phoenix house prices increased by 0.4 percent in November, after being stagnant for much of 2014, according to the Case-Shiller data. Improved momentum in house prices in 2015 will add to economic activity in the state.”

StateIndex0115Arizona

For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0115.

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