December 2015, Comerica U.S. Economic Update

Janet Yellen’s speech of September 24 articulated her views on inflation, concluding that below-2-percent inflation was attributable to special factors that would prove transitory. We assume that she still has that view. Even with oil prices now below $40 per barrel, the potential downdraft on future inflation from oil diminishes as we approach the minimum for oil prices in this cycle. Recent job growth has been good. U.S. payrolls increased by 211,000 in November following a robust gain of 298,000 in October. The U.S. unemployment rate held at 5.0 percent in November and is set to go lower soon. The weaker-than-expected job growth of August and September has been revised up from initial estimates and now appears to be anomalous. International economic conditions could be better, but the financial market volatility that spread from China in August appears to have stabilized. So the Federal Reserve’s criteria for ending zero interest rate policy, and raising the fed funds rate for the first time since July 2006 appear to be satisfied. We look for a small increase in the fed funds rate to a range of 0.25 to 0.50 percent on December 16.

Looking further ahead, several Federal Reserve officials have recently cautioned against assuming that there will be a highly predictable straight line path of the fed funds rate through 2016. The next dot plot, issued with the December 16 policy announcement by the Fed will be very informative. We expect that the center of the cluster of dots showing the expected fed funds rate at the end of 2016 will shift down slightly, and the grouping around 1.25 percent will tighten. This would be consistent with expectations for a 25 basis point increase in the fed funds rate occurring about every other meeting through 2016, beginning in March 2016. However, data dependency will remain the Fed’s modus operandi through 2016. Several Fed officials have recently cautioned against using a ruler to make your fed funds forecast through 2016.

Janet Yellen’s counterpart at the European Central Bank, Mario Draghi, announced last week that the ECB will extend its asset purchase program until at least March 2017. Financial markets were expecting more. The ECB’s failure to increase the pace of asset purchases, beyond the current 60 billion euros per month, reset expectations about the strength of the dollar versus the euro. The dollar gave up its November gain against the euro on the news from the ECB. We expect the dollar/euro to stabilize at year end as both the Fed and the ECB do the expected. Deviations from expected monetary policy and from expected economic performance on either side of the Atlantic could reset the exchange rate. For now, it looks like strong dollar is here to stay, putting ongoing pressure on U.S. exporters and on U.S. companies that compete in the domestic market against imported goods and services.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate_12_2015.

Posted in General, Monthly, United States | Tagged , | Comments Off on December 2015, Comerica U.S. Economic Update

Comerica Economic Weekly

U.S. payroll job growth for November was a little stronger than expected, coming in at 211,000 net new jobs. The unemployment was unchanged at 5.0 percent and average hourly earnings ticked up by 0.2 percent for the month.

The solid jobs report for November removes a source of uncertainty for the Federal Reserve as the FOMC prepares for its upcoming meeting over December 15/16. We expect the FOMC to raise the fed funds rate to a range of 0.25 to 0.50 percent, representing the first increase since July 2006, when it was raised to 5.25 percent. The fed funds futures market currently shows an implied probability of 79.1 percent for a December 16 rate hike.

Financial market focus is shifting to 2016 and the expected path of later rate hikes. We can see in the most recent “dot plot” from the Federal Reserve, from September 17, that most of the FOMC expected at that time to see about 100 basis points of increase through 2016. The next dot plot, expected to be released on December 16, will be highly scrutinized for its forward looking implications. Right now it looks reasonable to expect a 25 basis point increase in the fed funds rate every other meeting in 2016, beginning in March 16. But Federal Reserve officials are taking pains to caution against a straight-line extrapolation of the fed funds rate through the year. Data dependence will remain the Fed’s modus operandi.

Other U.S. data released this week was mixed. The October U.S. international trade gap widened in the first month of the fourth quarter by a moderate $1.4 billion to reach $43.9 billion. The price adjusted balance of trade in goods for October was slightly more negative than the third quarter average, implying that there will be a slight drag from trade on Q4 real GDP growth.

The ISM Non-Manufacturing Index for November fell more than expected, to a still-positive 55.9 percent, indicating ongoing moderate expansion in services and construction. The ISM Manufacturing Index fell for November fell into negative territory, at 48.6 percent. The strong dollar, weak energy sector and plateauing auto sector are all headwinds.

Auto sales for November held on to a robust 18.2 million unit rate for the third month in a row. Detroit remains optimistic about the endurance of strong auto sales into 2016 but we can say that upside potential from here is very limited.

Construction spending in October increased by 1.0 percent with the strongest gains coming from public projects for the month.

Also of note, OPEC remains unwilling and unable to curb production, putting downward pressure on world oil prices. The price of West Texas intermediate crude is testing the late August lows, dipping just below $40 per barrel.

The European Central Bank extended their asset purchase program without increasing the 60 billion euro per month rate. The dollar weakened on the news.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 12-4-2015.

Posted in General, United States, Weekly | Tagged , , , , , | Comments Off on Comerica Economic Weekly

November U.S. Employment, October International Trade

Solid Jobs Report Starts Countdown to Interest Rate Liftoff

  • November Payroll Employment increased by 211,000 jobs, a little above consensus expectations.
  • October and September payroll levels were revised up by a total of 35,000 jobs.
  • The Unemployment Rate for November held steady at 5.0 percent.
  • Average Hourly Earnings were up 2.3 percent from a year ago.

The October International Trade Gap widened to $43.9 billion. The November jobs report showed ongoing improvement in U.S. labor market conditions with 211,000 net payroll jobs added for the month, beating the consensus expectation of 200,000. Moreover, 35,000 jobs were added to September and October payrolls, bringing the October net gain up to a robust 298,000 jobs. The average workweek for all employees dipped by a tenth of an hour, to 34.5 hours. Average hourly earnings increased by 0.2 percent for the month, and were up 2.3 percent over the previous 12 months. Labor force growth has been strong, up 273,000 workers in November and up by 313,000 workers in October, and this has kept the unemployment rate steady at 5.0 percent. We expect the unemployment rate to dip below 5 percent by early 2016. The solid labor data for November starts the countdown for a fed funds rate increase by the Federal Reserve on December 16. We expect the Federal Reserve to raise the fed funds rate at the upcoming FOMC meeting over December 15/16 to a range of 0.25 to 0.50 percent. The fed funds futures market shows that the implied probability of a December rate hike is now up to 79.1 percent. With December liftoff now looking highly likely, the focus of financial markets is shifting toward the pace of interest rate hikes through 2016. We expect the Fed to hold the fed funds rate steady at the January 26/27 FOMC meeting, and then lift again, by 25 basis points, at the March 15/16 meeting.

Payroll job gains for November were widespread across nonmanufacturing industries with the exception of mining and logging. Cutbacks in oil drilling and production resulted in an 11,000 worker decline in the mining and logging category. Construction industries added a strong 46,000 workers in November. Manufacturing employment eased by 1,000 workers with losses in transportation equipment. Wholesale trade added 9,100 jobs, while retail trade added 30,700. Financial services employment increased by 14,000 for the month. Professional and business services added 27,000 jobs. Education and healthcare industries added 40,000 jobs. Leisure and hospitality employment was up by 39,000. The government sector added 14,000 jobs in November.

The October U.S. international trade report gives us a glimpse into fourth quarter GDP. The nominal trade gap widened in the first month of the quarter by a moderate $1.4 billion to reach $43.9 billion. Imports declined by $1.3 billion while exports declined by $2.8 billion for the month. The price adjusted balance of trade in goods for October was slightly more negative than the third quarter average, implying a slight drag from trade on Q4 real GDP growth.

Market Reaction: U.S. equity markets opened with gains. The 10-Year T-bond yield is down to 2.30 percent. NYMEX crude oil is up to $40.10/barrel. Natural gas futures are up to $2.19/mmbtu.

Alert_12_04_2015_Employment

For a PDF version of this Comerica Economic Alert click here: Employment 12-04-15.

Posted in Daily, General, United States | Tagged , , , | Comments Off on November U.S. Employment, October International Trade

November ISM Non-Manufacturing, UI Claims, Fedspeak and ECB

Nuanced Data, More Manifestations of the Desynchronization of Global Monetary Policy

  • The ISM Non-Manufacturing Index for November decreased more than expected to 55.9 percent.
  • Initial Claims for Unemployment Insurance gained 9,000 to hit 269,000 for the week ending Nov. 27.
  • In public remarks yesterday and today, Janet Yellen indicated that the Fed is ready to raise interest rates.
  • Mario Draghi said that the European Central Bank will extend quantitative easing into 2017.

The two U.S. data points released this morning were positive, but nuanced. The ISM Non-Manufacturing Index for November fell by more than expected, to a still-positive 55.9 percent, indicating ongoing moderate expansion in services and construction. The employment sub-index in the ISM Non-MF report fell from 59.2 in October to 55.0 in November, indicating good job growth through the fourth quarter. Nine of the ten sub-indexes were in expansion territory. Only the sub-index for new export orders fell below 50, just missing the break-even mark at 49.5 for November. Given the strong value of the dollar, it is not surprising to see that component giving some ground. Also noteworthy is the inventory sentiment sub-index, which increased to a very high 63.5 percent, indicating that many survey respondents thought that inventories were too high in November. This hints at a continued inventory correction in the GDP data beyond what we have already seen in the third quarter numbers. Inventory movements are a significant near-term lever in GDP growth.

Initial claims for unemployment insurance for the week ending November 28 increased by 9,000 to a still-very-low 269,000. Continuing claims for the week ending November 21 gained 6,000, showing normal volatility, to hit a very-low 2,161,000. The favorable readings on unemployment insurance combined with the good results of the ISM Non-MF employment sub-index and the solid 217,000 private-sector job gain shown in the ADP employment report for November all point to a good BLS jobs report for November, due out tomorrow morning at 7:30 CT. We expect to see an official Bureau of Labor Statistics payroll employment gain of about 220,000 in tomorrow’s data release.

Meanwhile, we see in statements by the heads of the Federal Reserve and the European Central Bank further examples of the desynchronization of global monetary policy. Why does this matter? It moves foreign exchange rates. FOMC chairwoman Janet Yellen, in a speech yesterday, and in congressional testimony today, said that she is ready to begin raising the fed funds rate at the upcoming FOMC meeting over December 15th and 16th.  Barring a much weaker-than-expected jobs report tomorrow, or an unexpected shock to the U.S. or global economy, we expect to see a small rate increase on December 16. Mario Draghi, President of the European Central Bank, said today that the ECB is lowering its deposit interest rate and will extend its asset purchase program through March 2017. Even though the ECB will extend its asset purchase program, financial markets generally expected the ECB to increase its monthly purchases of bonds beyond the current 60 billion euros per month. Because that was not announced as expected the euro immediately gained ground on the dollar. At 6 a.m. CT one euro bought 1.0542 dollars, by 7:40 a.m. the euro jumped to $1.0862, a 3 percent increase.

Market Reaction: U.S. equity markets opened with losses. The yield on 10-Year Treasury bonds is up to 2.30 percent. NYMEX crude oil is down to $40.72/barrel. Natural gas futures are down to $2.16/mmbtu.

Alert_12_03_2015_ISMNMF

For a PDF version of this Comerica Economic Alert click here: ISM-NMF 12-03-15.

Posted in Daily, General, United States | Tagged , , , | Comments Off on November ISM Non-Manufacturing, UI Claims, Fedspeak and ECB

Comerica Bank’s California Index Eases with Tech Stocks

Comerica Bank’s California Economic Activity Index declined in September, decreasing 0.2 percentage points to a level of 119.4. September’s reading is 35 points, or 42 percent, above the index cyclical low of 84.1. The index averaged 113.7 points for all of 2014, seven and one-half points above the average for all of 2013. August’s index reading was 119.6.

“Our California Economic Activity Index marked its third consecutive decline in September, losing a slight 0.2 percentage points. Most components of the index rebounded after a weak August. Only one component of the index, the tech sector stock index, was negative in September. Tech stocks saw significant weakening in September, but regained ground through October. Exports and home prices broke their three-month losing streaks in September and hotel occupancy saw its first increase since February,” said Robert Dye, Chief Economist at Comerica Bank. “Job growth has remained solid in California, which will support personal income and real estate markets as the state economy continues to expand.”

state_indexes_California_11_2015

For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_1115.

Posted in California, General, Indices | Tagged , | Comments Off on Comerica Bank’s California Index Eases with Tech Stocks

Comerica Bank’s Michigan Index Stalls for First Time in Five Months

Comerica Bank’s Michigan Economic Activity Index was flat in September, maintaining a level of 127.5. September’s reading is 53 points, or 72 percent, above the index cyclical low of 74.0. The index averaged 117.4 points for all of 2014, three and three-tenths points above the index average for 2013. August’s index reading was 127.5.

“Our Michigan Economic Activity Index was unchanged in September, after growing for the previous five months. Four of the components of the index saw declines: nonfarm payrolls, exports, housing starts and house prices. U.S. vehicles sales were robust at an 18.2 million unit sales rate for September and October. The UAW has reached agreements with all Big Three auto manufacturers, allowing for more manufacturing flexibility. We expect auto sector employment to crest in Michigan by early 2016 and then gradually recede,” said Robert Dye, Chief Economist at Comerica Bank. “The strong U.S. dollar is a contributing factor to the announced shift in production of small cars to Mexico. Automakers will keep the production of higher-cost, higher-margin vehicles stateside.”

state_indexes_011_2015

For a PDF version of the Michigan Economic Activity Index click here: Michigan_1115.

Posted in General, Indices, Michigan | Tagged , | Comments Off on Comerica Bank’s Michigan Index Stalls for First Time in Five Months

Comerica Bank’s Texas Index Sees First Increase in Ten Months

Comerica Bank’s Texas Economic Activity Index grew in September, increasing 0.3 percentage points to a level of 95.5. September’s reading is 23 points, or 31 percent, above the index cyclical low of 72.8. The index averaged 105.2 points for all of 2014, four and nine-tenths points above the average for full-year 2013. August’s index reading was 95.2.

“Our Texas Economic Activity Index increased in September, marking its first expansion since October 2014. Six index components were positive or neutral, including an increase in payroll employment. The two negative components were exports and continuing claims for unemployment insurance. The Texas economy continues to feel the drag from oil and related industries. However, labor and housing indicators have mostly remained resilient at the state level,” said Robert Dye, Chief Economist at Comerica Bank. “This month’s gain does not represent a sea change for the state economy, but does show the strength of the state’s economic diversity. We expect economic conditions should stabilize through 2016 as oil and related industries adapt to the new lower price environment, while other industries continue to see a favorable business climate in the state.”

state_indexes_Texas_011_2015

For a PDF version of the Texas Economic Activity Index click here: TexasIndex_1115.

Posted in General, Indices, Texas | Tagged , | Comments Off on Comerica Bank’s Texas Index Sees First Increase in Ten Months

Comerica Bank’s Florida Index Still Climbing

Comerica Bank’s Florida Economic Activity Index grew in September, increasing 1.7 percentage points to a level of 140.2. September’s index reading is 62 points, or 79 percent, above the index cyclical low of 78.1. The index averaged 117.6 in 2014, eight and three-fifths points above the average for all of 2013. August’s index reading was 138.5.

“Our Florida Economic Activity Index for September saw its biggest increase since last April. This marks the 18th consecutive monthly gain for the index. Only two index components, exports and sales tax, decreased in September. The Florida economy is shining, supported by steady job growth and improving real estate markets. Low gasoline prices and the ongoing U.S. economic expansion are positives for domestic tourism. The growing wave of baby-boomer retirement is also benefitting the state,” said Robert Dye, Chief Economist at Comerica Bank. “Most of the news is good for Florida, but we remain concerned about the impact of the strong dollar on international tourism and foreign investment in Florida.”

state_index_florida_11_2015

For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_1115.

Posted in Florida, General, Indices | Tagged , | Comments Off on Comerica Bank’s Florida Index Still Climbing

Comerica Bank’s Arizona Index Sees Largest Gain in Six Months

Comerica Bank’s Arizona Economic Activity Index grew in September, increasing 0.5 percentage points to a level of 107.1. September’s index reading is 30 points, or 39 percent, above the index cyclical low of 77.0. The index averaged 99.7 points for all of 2014, four and one-fifth points above the average for full-year 2013. August’s index reading was 106.6.

“Our Arizona Economic Activity Index saw its largest increase in six months, adding 0.5 percentage points in September. For most of 2015, the Arizona economy has been a lackluster performer. It is premature to call the September gain in our Arizona Index a positive breakout, but we continue to expect stronger economic performance from the state, supported by increased domestic tourism and retirement relocations. Six out of eight of the index components, including nonfarm employment, exports, housing starts, house prices, hotel occupancy and enplanements, saw gains for the month. However, sales tax revenues declined lightly and initial claims for unemployment insurance increased,” said Robert Dye, Chief Economist at Comerica Bank. “Home prices in Phoenix are firming up, gaining 5.3 percent in September over the previous year, above the U.S. average of 4.9 percent.”

state_index_arizona_11_2015

For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_1115.

Posted in Arizona, General, Indices | Tagged , | Comments Off on Comerica Bank’s Arizona Index Sees Largest Gain in Six Months

Comerica Economic Weekly

U.S. economic data released in the middle of November was mixed. However, the Federal Reserve gave a clear signal in the minutes of the October 27-28 FOMC meeting that there is a good chance they will begin raising the fed funds rate on December 16. According to the CME Group, the fed funds futures market places a 73.6 percent chance of a December 16 rate hike as of today.

One of the criteria that the Fed is using to assess the timing of the first fed funds rate hike since July 2006 is inflation. We see in the October consumer price index signs of normalizing inflation. Headline CPI was up by 0.2 percent in October, and also shows a meager 0.2 percent increase over the prior 12 months. Core inflation, less food and energy, was also up 0.2 percent for the month, but has now increased by 1.9 percent over the previous 12 months.

The strong dollar, high storage volumes and greater-than-expected global production are still weighing on oil prices. Indeed, the current $40.20 price for WTI crude is within striking distance of the late-August low of $38.50 per barrel. While we may yet see even lower oil prices, the potential for a persistent downside drag to inflation from lower oil prices is significantly reduced compared to this time last year. Therefore, we expect overall inflation indicators to renormalize, supported by ongoing gains in core inflation. Housing starts for October were soft, dipping by 11 percent to a 1.060 million unit rate with a reset in multifamily. Permits increased by 4.1 percent to a 1.150 million unit rate. The National Association of Homebuilders confidence index fell in November to 62.

Industrial production dipped by 0.2 percent in October, after a similar 0.2 percent decline in September. Manufacturing output was up by 0.4 percent, however utility output showed a weather-related drop of 2.5 percent. Mortgage apps for purchase increased though November 13.

The Conference Board’s Leading Economic Index increased by 0.6 percent in October, with 9 out of 10 components up for the month. Leading the positives were interest rate spread, stock prices and building permits. The only negative component was the ISM new orders index. The coincident index gained 0.2 percent in October and the lagging index was also up by 0.2 percent for the month.

The Federal Reserve’s other key criterion for a fed funds rate increase is improvement in the labor market. In the unemployment insurance claims numbers we see very strong numbers. Initial claims for the week ending November 14 decreased by 5,000 to hit 271,000. Continuing claims for the week ending November 7 dipped by 2,000 to hit 2,175,000.

We will not issue a CEW next week.

Have a Happy Thanksgiving!

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 11-20-2015.

 

Posted in General, United States, Weekly | Tagged , , | Comments Off on Comerica Economic Weekly