December ADP Jobs, ISM-Non MF, UI Claims, Auto Sales

Positive Data at Year-End Shows Momentum Heading into 2017. The Curse of Q1?

  • The December ADP Employment Report showed a gain of 153,000 private-sector jobs for the month.
  • The ISM Non-Manufacturing Index for December was unchanged at 57.2, showing ongoing improvement.
  • Initial Claims for Unemployment Insurance fell by 28,000 for the week ending December 31, to 235,000.
  • Auto Sales surged in December, hitting an 18.4 million unit sales rate as dealers pushed incentives.

The ADP Employment Report for December indicated that 153,000 private-sector jobs were added to the U.S. economy in December. This was a little short of expectations and suggests that the official job count, released tomorrow morning, will show about 163,000 net new payroll jobs. The ADP Report is not a perfect predictor of the BLS numbers, but it does suggest that payroll gains may fall below expectations for December and are trending lower, as expected. Still, something in the neighborhood of 163,000 net new jobs for December would not be a bad number. Also, we would not be surprised if the unemployment rate ticked up in December after falling three- tenths of a point in November to 4.6 percent. The combination of a disappointing payroll gain and an increase in the unemployment rate may be a sobering combination for financial markets tomorrow, but should not be interpreted as a loss of momentum for the U.S. economy. Still, we are mindful that first quarter GDP data has tended to be weaker than expected in the post-recession period. We will be publishing our updated January U.S. Economic Outlook early next week.

The ISM Non-Manufacturing Index for December was unchanged at 57.2, showing ongoing improvement in the broad non-manufacturing sector. Nine out of ten sub-indexes were above 50, indicating positive conditions in production, new orders and employment, amongst other areas. Out of 15 industries, 12 reported growth in December, including mining, retail trade, finance and insurance and information services. Three industries reported contraction in December. They were public administration, wholesale trade and agriculture. Anecdotal comments were generally positive. Noteworthy in both the ISM-Manufacturing and Non-Manufacturing Indexes for December, the price sub-indexes are increasing, suggesting that inflationary forces are building in the U.S. economy. The pace of inflation will be a key motivator for Federal Reserve interest rate policy this year.

Even if job growth was not robust in December, consumers felt confident in taking advantage of generous incentives at auto dealers. U.S. auto sales surged in December to an 18.4 million unit sales rate, the best monthly sales rate since July 2005. Strong sales in the fourth quarter pushed total sales for 2016 to 17.54 million units, a new record. We suspect that strong year-end sales will cannibalize sales from early 2017 and we will see a reset in auto sales at the start of this year. We have been bearish on auto sales for 2017, expecting them to gradually ease in a typical late-cycle pattern. However, we can also say that consumer spending on autos as a percentage of disposable income remains low, so consumers have some room to keep buying new wheels if they want to. Initial claims for unemployment insurance fell by 28,000 in the last week of 2016, to hit 235,000. This is an exceptionally low number, indicating that labor market conditions remain tight even as payroll job growth has eased off the robust +200K per month pace of 2014 through 2015. If we get 163,000 net new payroll jobs in December, with no revisions to history, we would end the year averaging 179,000 net new payroll job per month for 2016.

Market Reaction: U.S. equity markets have given up early gains. The yield in 10-Year T-bonds is down to 2.36 percent. NYMEX crude oil is down to $53.02/barrel. Natural gas futures are down to $3.19/mmbtu.

For a PDF version of this Comerica Economic Alert click here: ADP 01-05-17.

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Comerica Bank’s Arizona Index Continues to Improve

Comerica Bank’s Arizona Economic Activity Index was up 0.2 percentage points in October to a level of 111.0. October’s index reading is 34 points, or 44 percent, above the index cyclical low of 77.0. The index averaged 106.9 points for all of 2015, seven and one-fifth points above the average for 2014. September’s index reading was 110.8.

“The Comerica Bank Arizona Economic Activity Index increased again in October, extending its winning streak to now five consecutive months. Index components were strong, with six out of eight categories gaining in October, including payroll employment, unemployment insurance claims (inverted), housing starts, home prices, hotel occupancy and enplanements. State sales tax revenues were stable for the month. Only state exports eased in October. The Arizona economy continues to make steady gains,” said Robert Dye, Chief Economist at Comerica Bank. “We look for positive momentum in the regional economic data through year-end 2016 and into early 2017.”

For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_1216.

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Comerica Bank’s Florida Index Climbs

Comerica Bank’s Florida Economic Activity Index increased by 1.9 percentage points in October to a level of 157.0. October’s index reading is 79 points, or 101 percent, above the index cyclical low of 78.1. The index averaged 138.2 in 2015, twenty and seven-tenths points above the average for all of 2014. September’s index reading was 155.1.

“The Comerica Bank Florida Economic Activity Index increased again in October after turning positive in September. The two-month climb pulls the Florida Index out of a summer stall that was caused, in part, by stagnant housing starts and an increase in unemployment insurance claims. In October, index gains were broad-based with six out of eight index components positive for the month. They were payroll employment, unemployment insurance claims (inverted), housing starts, home prices, sales tax revenues and hotel occupancy. State exports and enplanements were negatives for the month. We expect the Florida economy to continue to expand through early 2017,” said Robert Dye, Chief Economist at Comerica Bank. “Changing monetary and fiscal policies in 2017 are risk factors for the state as mortgage rates increase and the dollar remains strong. However, these downside risks may be mitigated by stronger overall economic performance at the state and national level.”

For a PDF version of the Florida Economic Activity Index click here:  FloridaIndex_1216.

 

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Comerica Bank’s Texas Index Improves for Second Consecutive Month

Comerica Bank’s Texas Economic Activity Index advanced by 0.4 percentage points in October to a level of 91.0. October’s index reading is 18 points, or 25 percent, above the index cyclical low of 72.8. The index averaged 97.5 points for all of 2015, seven and one-half points below the average for full-year 2014. September’s index reading was 90.6.

“The Comerica Bank Texas Economic Activity Index improved again in October, building on its September turn-around. Six out of eight index components were positive in October. They were nonfarm employment, state exports, unemployment insurance claims (inverted), rig count, home prices and hotel occupancy. Housing starts eased in October for the third consecutive month. State sales tax revenue eased as well. Job growth appears to be stabilizing for Texas, with gains seen for the last eight consecutive months. Also, the rig count continues to improve. As of the end of October, the Texas rig count had increased to 256 active rigs, well above the May 2016 low of 173,” said Robert Dye, Chief Economist at Comerica Bank. “The recent oil production cuts announced by Kuwait and Oman suggest that the early days of the OPEC production agreement have been successful and will support higher crude oil prices. We expect Texas drilling activity to continue to gradually improve through early 2017, contributing to a strengthening state economy.”

For a PDF version of the Texas Economic Activity Index click here: TexasIndex_1216.

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Comerica Bank’s Michigan Index Ticks Up

Comerica Bank’s Michigan Economic Activity Index grew in October, up 1.0 percentage point to a level of 128.4. October’s reading is 54 points, or 73 percent, above the index cyclical low of 74.1. The index averaged 123.6 points for all of 2015, five and four-fifths points above the index average for 2014. September’s index reading was 127.4.

“The Comerica Bank Michigan Economic Activity Index increased in October, breaking a three-month slide that started last July. Gains were visible across most indicators, with seven out of eight index components either improving or staying even in October. The gainers were nonfarm payrolls, state exports, unemployment insurance claims (inverted), housing starts, auto production and hotel occupancy. Home prices were unchanged, as they were in August and September. Only state sales tax revenue declined in October. Ford Motor Company announced that they are canceling plans to build a new plant in Mexico; instead, they will invest $700 million in the Flat Rock assembly plant,” said Robert Dye, Chief Economist at Comerica Bank. “Ford’s decision will add support to Michigan’s economy and increase their employment base in Michigan by 700 workers.”

For a PDF version of the Michigan Economic Activity Index click here: Michigan_1216.

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Comerica Bank’s California Index Gains

Comerica Bank’s California Economic Activity Index grew by 1.1 percentage points in October to a level of 125.4. October’s reading is 41 points, or 49 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. September’s index reading was 124.3.

“Our California Economic Activity Index increased again in October, completing its ninth consecutive month without a decline. Positive stock market performance through the fourth quarter of 2016 is expected to keep the California Index growing at a moderate-to-strong rate through year-end. In addition to the October increase in the NASDAQ 100 Technology Stock sub-index, other components were generally favorable. Payroll employment, state exports, housing starts, home prices and hotel occupancy were also positive contributors for the month. Unemployment insurance claims (inverted) and defense spending eased in October,” said Robert Dye, Chief Economist at Comerica Bank. “We expect to see a strong dollar through 2017, supported by policies from the incoming Trump Administration. California is exposed to downside risks as a result of the potential for international trade disputes and a strong dollar; however, these risk factors may be offset by stronger domestic economic performance.”

For a PDF version of the  California Economic Activity Index click here: CaliforniaIndex_1216.

 

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December ISM-MF Index, November Construction Spending

Good Start for 2017, Major Uncertainties Ahead With Incoming Trump Administration

  • The ISM Manufacturing Index for December increased to 54.7, showing improving conditions.
  • Construction spending increased by 0.9 percent in November.

The ISM Manufacturing Index for December increased again to a solid 54.7, indicating improving conditions for U.S. manufacturers. This stands in contrast to expectations for cooler auto sales in 2017 and for cooler commercial aircraft orders. It also counters, at least in the near-term, concern about the strong dollar and potential for increasing dollar strength in 2017. Since dipping below the break-even 50 mark in August, the ISM Manufacturing Index has now registered four consecutive monthly gains, climbing back to a moderately strong 54.7 for December. The details in the December report are solid. The new orders sub-index jumped from 53.0 in November to 60.2 in December. Production also jumped to 60.3 and employment increased as well, to 53.1. Out of 18 reporting industries, 11 reported growth in December, including petroleum and coal products, primary metals, food and beverages, tobacco and apparel. Six industries reported contraction at year end, including plastics and rubber products, furniture, printing and textiles. Anecdotal comments were positive with most industries reporting strong demand through early 2017.

Construction spending for November increased by 0.9 percent as all three major segments reported gains. Private residential construction spending was up by 1.0 percent for the month, supported by new single-family construction. Private nonresidential construction spending gained 0.9 percent with gains in office construction. Total public construction spending was up by 0.8 percent in December, with a 1.1 percent increase in highway and street projects.

Good economic data and rising oil prices are supporting a good start to 2017 for U.S. equity markets. The price for West Texas Intermediate crude oil is close to $53 a barrel. Kuwait and Oman both announced production cuts, signaling that OPEC is at least taking the right first steps in attempting to reign in production in order to stabilize international oil markets. Looking ahead, we expect to see major announcements from the incoming Trump Administration early this year on tax reform, healthcare, regulatory rollback, fiscal stimulus and trade agreements. We expect the reflating U.S. economy to show a little stronger growth, more inflation, higher interest rates and a strong dollar in 2017.

Market Reaction: U.S. equity markets opened with gains. The yield on 10-Year Treasury bonds is up to 2.46 percent. NYMEX crude oil is down to $52.90/barrel. Natural gas futures down to $3.34/mmbtu.

For a PDF version of this Comerica Economic Alert click here: ISM-MF 01-03-17.

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Comerica Economic Weekly

U.S. economic data for the week was mixed. Most data was positive and consistent with near-3 percent real GDP growth for the fourth quarter. However, two data points for November were worse than expected, retail sales and housing starts. It appears that both data sets were quirky. However, they are reminders that the post-election surge in business and consumer confidence is not enough to support a lift to our fairly low potential GDP growth track. Post-election buoyancy in the U.S. economy will need to be supported by real action from the incoming Trump Administration. We expect to see meaningful tax reform and spending programs announced early this spring that will rationalize current expectations for stronger growth in 2017.

Also this week, the Federal Reserve announced only the second fed funds interest rate hike since July 2006. The commentary in the policy statement indicated that the Fed is feeling a little more positive about the U.S. economy at the end of this year. The economic projections of FOMC members also show that they are feeling a little more positive about the U.S. economy for next year.

The new “dot plot” released on Wednesday is consistent with three fed funds rate hikes in 2017. It is not a firm commitment to three rate hikes and it does not give us any information about the expected timing of rate hikes through the year. Right now it looks reasonable to expect that the FOMC will pause at their next meeting over January 31/February 1 and look at the data. March 14/15 also feels a little soon for the next rate hike. So we will be listening to the commentary by Fed officials after the winter holidays to see if their focus is coalescing on May 2/3 or June 13/14 for the next fed funds rate hike.

The motivation for the Fed for monetary policy tightening over 2017 will be inflation. We can think of inflation coming from two directions. One direction is the cost-push side, the other is the demand-pull side. Cost-push inflation is warming up as commodity markets reset. OPEC has reached an agreement to cap oil production and major non-OPEC producer Russia has agreed to cooperate and cap its production. This does not immediately resolve the global glut of oil, but it does suggest that excess inventories may be absorbed more quickly, supporting firmer oil prices sooner. Other commodities prices have also firmed up recently, including iron ore. Demand-pull inflation comes as businesses and consumers compete against each other for scarce resources, including labor. With the U.S. unemployment rate already low at 4.6 percent in November, any potential boost to the economy from Trump Administration policies, including tax reform and fiscal stimulus, would be expected to tighten labor markets further, tending to boost wages and other input prices.

The Fed will be watching inflation indicators closely this spring. There is potential for the Fed to tighten policy, providing a “monetary offset” to new fiscal policy.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  cmaeconweekly-12-16-2016.

 

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November Consumer Prices, Dec. UI Claims, NY Fed, BOE

No Surprises from Today’s Data as We Wind Down Economics Publications for the Year

  • The November Consumer Price Index increased by 0.2 percent, boosted by energy prices.
  • Core CPI also increased by 0.2 percent, and was up 2.1 percent over the previous 12 months.
  • The Bank of England voted to maintain their key lending rate at 0.25 percent and continue buying assets.
  • Initial Claims for Unemployment Insurance fell by 4,000 to hit 254,000 for the week ending Dec. 10.
  • The Federal Reserve Bank of New York’s Empire State Manufacturing Index increased in December.

Consumer price inflation was moderate in November as the headline CPI increased by 0.2 percent, about as expected. Gains in energy prices countered declines in food and apparel. The energy prices index was up by 1.2 percent in November. According to AAA, the national average gasoline price increased to $2.226 per gallon for today, up from their November average price of $2.157, suggesting that energy will boost the Consumer Price Index again in December. Over the 12 months ending in November, the headline CPI is up by 1.7 percent, well above the 0.4 percent year-over-year gain from last November. We expect to see a gradual increase in crude oil and refined product prices through 2017. The recent production agreement by OPEC sets the stage for a rebalancing of global oil supply and demand by the end of 2017, as long as production caps are adhered to. The core CPI (all items less fuel and energy) increased by 0.2 percent in November. Over the previous 12 months, core CPI is up by 2.1 percent. House prices and rents are still going up consistently and this supports core price gains. However, some markets are increasing multifamily housing supply very quickly, suggesting that rents may not increase as much next year. Inflation indicators will be watched carefully by the Federal Reserve next year as they plan to accelerate interest rate hikes. We had one fed funds rate hike at the end of 2015 and one at the end of 2016. According to the Fed’s new dot plot, released yesterday, they expect to approve three 25 basis point rate hikes spread across eight FOMC meetings in 2017.

The Bank of England voted today to maintain their key lending rate at 0.25 percent and to continue their asset purchase program. Over the next year, as the Federal Reserve tightens monetary policy in the U.S., it will be very instructive to watch other central banks as they converge with, or diverge from, Federal Reserve policy. This will be meaningful for the value of the dollar relative to other currencies, and will be a determining factor in our trade balance and overall GDP growth. We expect to see more strengthening of the dollar in early 2017 as a result of divergent monetary policy.

Labor market indicators in December continue to look good. Initial claims for unemployment insurance fell by 4,000 to reach 254,000 for the week ending December 10. Continuing claims gained 11,000 to hit 2,018,000 for the week ending December 3. Regional manufacturing indicators are improving. The New York Fed’s Empire State Manufacturing Index climbed from mildly to moderately positive for December.

This will be the last daily economic alert that we issue this year. We will publish the Comerica Economic Weekly tomorrow for the last time this year. We are looking forward to some much needed holiday time with friends and family, and we hope that you can enjoy the same. We will be back in early January.

Market Reaction: Equity markets opened with gains. The 10-Year Treasury bond yield is up to 2.60 percent. NYMEX crude oil is down to $50.58/barrel. Natural gas futures are down to $3.53/mmbtu.

cpi-12-15-16

For a PDF version of this Comerica Economic Alert click here: cpi-12-15-16.

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Federal Reserve Monetary Policy

Fed Raises Short-Term Interest Rates 25 Basis Points As Expected

  • As widely expected, the Federal Reserve raised the target range of the fed funds rate by 25 basis points.
  • The vote of the Federal Open Market Committee was unanimous.
  • The new Dot Plot is consistent with three 25 basis point rate hikes in 2017 and 2018.
  • In her press conference Janet Yellen said that she intends to serve out her term as FOMC chair.

At the conclusion of the regularly scheduled Federal Open Market Committee meeting this afternoon, the FOMC announced that they are raising the range of the federal funds rate by 25 basis points to 0.50 – 0.75 percent. They are also raising the discount rate from 1.00 to 1.25 percent. The vote in the FOMC for these moves was unanimous. Today’s policy actions were widely anticipated by financial markets, and are not expected to result in any significant dislocations. The Fed’s announcement said that the economy has been expanding at a moderate pace since mid-year and labor market conditions continue to strengthen. According to the Fed, inflation indicators have moved up considerably, but are still below the 2 percent target. The announcement also said that the Fed will continue to reinvest principle payments from its assets and roll over maturing securities.

In addition to the policy announcement, the FOMC also released a new set of economic projections and a new “dot plot.” The economic projections show a slight increase in expected real GDP growth for 2017, and a slight decrease in the expected unemployment rate. Inflation expectations were unchanged from September. The new dot plot, which shows FOMC member’s expectations for the fed funds rate over the next few years, indicates that the FOMC now expects to raise the fed funds rate three times in 2017 and three times in 2018. It is purely speculative on our part to say that a reasonable pattern for the timing of fed funds rate increases for 2017 might be March 15, July 26 and December 13 of 2017. We will be adjusting our interest rate forecast for 2017 and 2018 upward slightly, based on today’s news from the Fed.

In her press conference, Janet Yellen indicated that her policy of data dependence would continue. That is to say that the fed funds rate is not on a predetermined course and that economic conditions could change and expectations of future interest rate hikes could change as well. She was careful not to specifically endorse a potential Trump Administration fiscal stimulus plan or tax reform strategy. Moreover, she was careful to restate previous statements about running a “hot economy.” She does not recommend letting the economy expand at a rate significantly above potential GDP growth for a period of time in order to absorb remaining slack. She restated her view that the Federal Reserve would eventually wind down its balance sheet by not reinvesting principle payments and rolling over maturing assets once the fed funds rate was well on its way toward normalization. We believe that condition will not be satisfied until late 2017 at the earliest, and more likely later.

Market Reaction: Equity markets dipped on the Fed news. There may be some feeling that Yellen’s apparent walk back of her “running the economy hot” statement could indicate that the potential for a “monetary offset” to new fiscal policy (that is to say, higher interest rates) could potentially limit the lift from fiscal stimulus. Also there is increasing commentary about the potential for a flattening of the yield curve, which could be an early warning signal for the next recession. We think that it is premature to incorporate that view into our near-term forecast. The 10-year Treasury yield is up to 2.56 percent. NYMEX crude oil is down to $50.89/barrel. Natural gas futures are up to $3.56/mmbtu.

For a PDF version of this Comerica Economic Alert click here: fomc-12-14-16.

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