May Retail Sales, April Inventories, June UI Claims

Consumers Missing in Action Reappear in May

  • May Retail Sales surged by 1.2 percent as auto sales increased by 2.0 percent.
  • Ex-auto Retail Sales increased by a strong 1.0 percent.
  • Business Inventories for April increased by a moderate 0.4 percent.
  • Initial Claims for Unemployment Insurance gained 2,000 for the week ending June 6, to hit 279,000.

Retail sales bounced back after three consecutive monthly declines from last December through February. March sales gained a strong 1.5 percent. April was more moderate at a 0.2 percent increase, and in the latest numbers from May, we see another strong gain of 1.2 percent. May retail sales were fortified by the surge in unit auto sales to a 17.8 million unit annual rate. Retail (dollar) sales of autos and parts climbed 2.0 percent in May. Other sales categories were strong for the month, confirming the reappearance of the America consumer who was missing in action over the winter months. Gasoline stations sales gained 3.7 percent as prices firmed up. Crude oil, near $60 per barrel, brought national average gasoline prices up 23 cents to $2.68 per gallon in May. Building material sales were also strong in May, up 2.1 percent. Clothing store sales increased by 1.5 percent. May’s rebound in retail sales fits two stories. The first story is the spend-out of pent-up demand after the unusually bad winter weather. Second, is the possibility that consumers are adjusting to new patterns in their healthcare spending which may be an increasing drag on discretionary spending early in the year. Solid nominal gains in retail sales, with tame inflation numbers suggest that real consumer spending will be a support to Q2 real GDP growth. We expect Q2 real GDP growth to rebound to about 2.8 percent after falling at a -0.7 percent rate in Q1.

April business inventories increased by 0.4 percent, also supportive of Q2 GDP. Retailers accounted for the bulk of the inventory gains. The total business inventories-to-sales ratio remains elevated at 1.36, stepping up from about 1.25 in 2011. The gain in the inventory-to-sales ratio is usually not a good sign. However, there may be an oil component to the story which is not visible in the monthly business inventories report.

Initial claims for unemployment insurance increased inconsequentially, by 2,000, to hit 279,000 for the week ending June 6. This is still a very good number, consistent with ongoing tightening in the U.S. labor market. Continuing claims for the week ending May 30 increased by 61,000, to reach 2,265,000, also a very good number.

Market Reaction: Equity markets opened with gains. The 10-year Treasury yield is down to 2.43 percent. NYMEX crude oil is down to $60.47/barrel. Natural gas futures are down to $2.86/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Retail Sales 06-11-15.

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From the Desk of Robert Dye

Today we saw two more data points bolstering our view that labor markets bounced back from weaker hiring in March. The Job Openings and Labor Turnover Survey (JOLTS) for April showed an uptick in the rate of hiring, to a strong 3.7 percent. Also, the National Federation of Independent Business’s Small Business Optimism Index for May increased to 98.3 in May as hiring plans improved. Both data points are supportive of the first move in the Federal Reserve’s “crawl” toward a higher fed funds rate this year.

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Comerica Economic Weekly

280,000 was the number of net new payroll jobs created in the U.S. in May. Robust payroll job growth in May, following a solid April, put to rest fears of a jobs slowdown that appeared after a weak March jobs report that was matched by an unexpected decline in first quarter GDP. The May unemployment rate ticked up inconsequentially to 5.5 percent from 5.4 percent in April, as the labor force rebounded from earlier declines. The workweek was stable at 34.5 hours and earnings increased by 0.3 percent for the month.

Initial claims for unemployment insurance fell by 8,000 for the week ending May 30 to a very low 276,000.

Q1 productivity declined at a 3.1 percent annual rate. Measurement error in Q1 GDP could be a factor.

May auto sales zoomed ahead to a 17.8 million unit rate. Unit sales near the 18 million unit mark are probably not sustainable, but strong May sales suggest that the U.S. consumer is willing to spend again after weaker-than-expected retail sales and consumer spending reports since late last year. We expect June sales to settle back to a 16.5-17.0 million unit rate.

Personal income increased by 0.4 percent in April, but total consumer spending was flat.

The ISM Manufacturing Index for May increased to 52.8 percent as both new orders and the backlog of orders improved. A strong dollar and decreased oil drilling activity are drags for U.S. manufacturing, but a strong U.S. consumer sector (auto sales) is a plus. Also, supply chain problems stemming from the California port strike are resolving.

The ISM-Nonmanufacturing index for May eased to a still-positive 55.7 percent. There does not appear to be an overall theme to the slight loss of momentum in non-manufacturing industries.

The U.S. international trade gap narrowed significantly in April after widening in March. Labor issues at California ports have been blamed for some of the erratic behavior. Goods imports have been unpredictable, dipping in January and February, and then surging in March. April goods imports eased, but look like an undershot, so we may see another gain in May, widening the trade gap yet again. We expect trade to be positive for GDP in Q2 after subtracting almost 2 percent from Q1 real GDP growth.

Construction spending increased by 2.2 percent in April.

Yesterday, the IMF weighed in with its comment that the Fed should wait until 2016 to raise the near-zero fed funds rate. We believe that better recent U.S. data trumps the IMF’s concerns.

Fed Governor Stanley Fischer recently used the word “crawl” to describe the expected trajectory of the fed funds rate, eschewing the words “lift-off.” Today’s strong jobs data reinforces our expectation that September remains a reasonable expectation for the first step in the fed funds rate “crawl” toward normalcy.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 06-05-15.

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May U.S. Employment

Fear of a Job Slowdown Vanquished by Strong May Payroll Gain of 280,000

  • May Payroll Employment surged by 280,000, soft March numbers were revised up.
  • The Unemployment Rate for May ticked up to 5.5 percent on a labor force rebound.
  • Average Weekly Hours for all employees were unchanged at 34.5 hours.
  • Average Hourly Earnings were up by 0.3 percent for the month.

Robust payroll job growth of 280,000 in May, plus 221,000 net new jobs in April, put to rest fears of a jobs slowdown in March (now revised up to +119,000) that was matched by a weak first quarter GDP report. The strong April and May payroll job gains have coincided with very low unemployment insurance claims, so we can say confidently there has been no downshift in job creation. Today’s very positive jobs report for May counters at least some of the pressure that the International Monetary Fund is trying to exert on the Fed, coming in Christine Lagarde’s comment yesterday that the Fed should wait until 2016 to begin to increase the fed funds rate. The May unemployment rate did tick up to 5.5 percent from 5.4 percent in April, as the labor force rebounded from declines in February and March. The workweek was stable at 34.5 hours and earnings increased by 0.3 percent for the month.

Payroll job growth overall was strong, with some noteworthy variations by industry. Employment in resources and mining, which includes oil field activity, declined by 18,000 jobs in May, the fifth consecutive monthly job loss following three barely positive months. Construction employment was up by 17,000 jobs, a middling gain there. Manufacturing industries added 7,000 jobs in May. It looks like the rate of manufacturing job gains is easing off as the dollar strengthens and less demand comes from the oil patch. The strength of the May payroll job gains came from the service sector. Retail trade added a solid 31,400 jobs in May. Information services shed 3,000 jobs, while financial services gained 13,000. Interestingly, most of the gains in finance were in areas unrelated to real estate. Professional and business services added a sizeable 63,000 jobs in May. Education and healthcare was not to be outdone, ramping up by 74,000 jobs in a month. Leisure and hospitality increased by a strong 57,000 jobs. The government sector increased payrolls by 18,000 jobs.

Fed Governor Stanley Fischer has recently used the word “crawl” to describe the expected trajectory of the fed funds, eschewing the words “lift-off”. Today’s strong jobs data reinforces our expectation that September remains a reasonable expectation for the first step in the fed funds rate “crawl” toward  normalcy.

Market Reaction: U.S. equity markets opened with losses but bounced back. The 10-Year T-bond yield is up to 2.39 percent. NYMEX crude oil is down to $57.66/barrel. Natural gas futures are down to $2.59/mmbtu.

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For a PDF version of this Comerica Economic Alert click here: Employment 06-05-15.

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From the Desk of Robert Dye

Labor Markets and the Productivity Conundrum

According to the folks at Merriam-Webster, a conundrum is a confusing or difficult problem. It is also the 193rd most popular word on Merriam-Webster.com. I suspect that its popularity is rising, especially amongst economists. Former Fed Chairman Alan Greenspan famously used the word conundrum to describe bond market behavior in his February 2005 Senate testimony. In that same testimony, he also said that productivity is notoriously difficult to predict. It still is. Today we seem to have multiple conundrums associated with the U.S. economy. One of which is still productivity.

Productivity is typically defined as nonfarm business sector output per hour of labor. Strong productivity growth allows wages to grow without pushing inflation. Low productivity growth means that real wage gains tend to come more at the expense of corporate profits, and lead to price inflation. We are now in a low productivity growth environment according to the data. Quarterly productivity data from the BLS begins in 1948. In the post-World War II era from 1948 to about 1975, productivity growth was strong, averaging 2.7 percent year-over-year. It stepped down to an average of 1.6 percent growth from 1976 through 1997. After 1997 productivity growth appeared to get more cyclical, ramping up in the late 1990s and more recently, settling back down. From 2010Q1 to 2015Q1, productivity growth has averaged a paltry 1.1 percent.

Coincident with weak productivity growth, recently we have had relatively strong job growth. Over the four quarters ending in 2015Q1 year-over-year productivity growth has averaged an anemic 0.6 percent. Real GDP growth has averaged 2.6 percent and payroll employment growth has average 2.1 percent. If we think that trend GDP growth is somewhere around 2 percent over the next few years, and productivity growth will increase, closer to its historical average of about 2 percent, that means that we will need no more new labor to increase output. Job growth goes to zero. Yet job growth has been strong and we think it will continue to be in the near term. So, productivity growth must remain weak, or GDP growth needs to increase.

The most direct measure in the productivity-GDP-labor mix is job growth. If we feel most confident about those numbers, then we may assume that there is measurement error associated either with productivity or with GDP, or both. Yesterday’s ADP labor report showed that 201,000 private sector jobs were created in May. Today’s initial claims for unemployment insurance declined by 8,000 for the week ending May 30, to hit a very low 276,000.  Tomorrow, we expect to see a solid payroll job gains for May reported by the BLS.  These solid labor market numbers suggest that recent GDP growth is stronger than estimated. An upward revision to GDP would lift productivity estimates as well.

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May ADP Employment, Auto Sales, ISM MF and Non-MF, April Trade

U.S. Data Improves, Consistent with 2015 GDP Ramp-Up After Dismal Q1

  • Private-Sector Employment increased by 201,000 jobs in May, according to ADP.
  • Light Vehicle Sales zoomed to a 17.8 million unit annual rate in May.
  • The ISM Manufacturing Index for May increased to 52.8 percent as new orders firmed up.
  • The ISM Non-Manufacturing Index for May eased to a still-positive 55.7 percent.
  • The U.S. International Trade Gap narrowed significantly in May to -$40.9 billion.
  • Personal Income gained 0.4 percent in April. Spending was flat.
  • April Construction Spending gained 2.2 percent with increased spending on public projects.

The bulk of U.S. data from early June point to improved real GDP growth in the current second quarter, after the dismal -0.7 percent real GDP growth rate of Q1. Ahead of this Friday’s official Bureau of Labor Statistics employment report for May, the ADP jobs report showed a solid gain of 201,000 jobs for the month. Small businesses (0-49 employees) accounting for over 60 percent of the hiring in May. If we add an estimated 10,000 government jobs to the private-sector total from ADP, that puts us at a forecast of 211,000 in May for the official non-farm count. That would be a healthy gain, but probably not enough to change the 5.4 percent unemployment rate from April. Consistent moderate-to-strong job growth in April and May would give us more confidence in saying that the weak March jobs data (+85,000), was an aberration, and not due to an enduring downshift in hiring. However, a downside miss on Friday’s jobs report for May would provoke speculation about a weaker U.S. economy.

Auto sales for May were even better than the strong whisper numbers. Sales zoomed ahead to a 17.8 million unit rate for the month, supportive of Q2 GDP.  Auto sales near the 18 million unit mark are probably not sustainable, but strong May sales suggest that the U.S. consumer is willing to spend again after weaker-than-expected retail sales and consumer spending reports since late last year. We expect June sales to settle back to a 16.5-17.0 million unit rate.

The ISM Manufacturing Index for May increased to 52.8 percent as both new orders and the backlog of orders improved. A strong dollar and decreased oil drilling activity are drags for U.S. manufacturing, but a strong U.S. consumer sector (auto sales) is a plus. Also, supply chain problems stemming from the California port strike are resolving. The ISM-Nonmanufacturing index for May eased to a still-positive 55.7 percent. There does not appear to be an overall theme to the slight loss of momentum in non-manufacturing industries.

The U.S. international trade gap narrowed significantly in April after widening in March. Labor issues at California ports have been blamed for some of the erratic behavior. Goods imports have been unpredictable, dipping in January and February, and then surging in March. April goods imports eased, but look like an undershot, so we may see another gain in May, widening the trade gap yet again. Goods exports have been steadier. We expect trade to be positive for GDP in Q2 after subtracting almost 2 percent from Q1 real GDP growth.

Construction spending increased by 2.2 percent in April, supportive of Q2 GDP. Total public construction gained 3.3 percent. Private-nonresidential was also strong, up by 3.1 percent in April. Private residential construction spending increased by a more moderate 0.6 percent, but we expect to see gains there in the months ahead.

Better recent U.S. data also clears the path for the Federal Reserve to begin to increase the fed funds rate this year. We still look for a September 17 announcement from the FOMC signaling the beginning of the “crawl” to higher short-term interest rates.

Market Reaction: U.S. equity prices are up. The 10-year Treasury bond yield is up to 2.34 percent. NYMEX crude oil is up to $60.39/barrel. Natural gas futures are down to $2.65/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Int Trade 06-03-15.

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Comerica Economic Weekly

The forward-looking data from this week were positive. The backward-looking numbers, not so much.

U.S. real GDP growth for Q1 was revised to a -0.7 percent annual rate, about as expected. This is a backward looking number, and a number that has become controversial among data gnomes. Some argue that the seasonal adjustment factors of the components of GDP were not calculated correctly and that we actually had a modest gain in Q1 real GDP. As they stand now, the official numbers from the Bureau of Economic Analysis show modest real consumer spending growth, weak business fixed investment, a moderate gain from inventories, a big drag from trade and weak government spending. With the second estimate of Q1 GDP comes our first look at Q1 corporate profits. They were weak, declining at a 5.9 percent annual rate. The backstory to today’s GDP numbers involves the labor dispute at California ports skewing the trade data, very bad weather and low oil prices dragging business investment and corporate profits.

U.S. consumers’ outlook was better in May according to the Conference Board’s Consumer Confidence Index. The index increased moderately to 95.4 after slumping to 94.3 in April.

New home sales for April increased by 6.8 percent to hit an annual rate of 517,000 units after declining sharply in March. New home sales are still very low compared to historical averages. However, the data for 2015 so far supports an upside breakout from the range-bound sales that we saw through 2013 and 2014.

The Case-Shiller 20-City Composite House Price Index for March increased by 1.0 percent. Solid house price appreciation is a major support to households, who are seeing the equity in their homes increase at a 9.9 percent year-over-year rate as of 2014Q4.

New orders for durable manufactured goods eased in April, down 0.5 percent after a strong 5.1 percent increase the month before. The “core” measure of new orders shows more stability in the manufacturing sector. New orders for nondefense capital goods excluding aircraft gained 1.5 percent in March and then gained another 1.0 percent in April.

The Richmond Fed reported flat manufacturing activity for May. The Dallas Fed said that Texas manufacturing activity fell sharply again in May.

Initial claims for unemployment insurance increased by 7,000 initial claims for the week ending May 23, to hit a level of 282,000. This is still a very good number, consistent with ongoing tightening in overall labor market conditions.

Oil prices eased through the week, falling below $57 on Thursday on renewed concern about overproduction. Oil remains a wildcard for Federal Reserve monetary policy. A significant drop in oil prices from here would drag on inflation, potentially delaying the much discussed first increase in the fed funds rate since June 2006.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 05-29-15.

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From the Desk of Robert Dye

Weekly Unemployment Insurance Claims Increase, but Still Look Very Good

Labor market metrics continue to look good. Today’s data release of initial claims for unemployment insurance shows an increase of 7,000 initial claims for the week ending May 23, to hit a level of 282,000. This is still a very good number, consistent with ongoing tightening in overall labor market conditions. Also it is consistent with solid payroll job growth in May. The jobs report for May is due from the BLS next Friday morning, June 5 at 8:30 a.m. eastern time. I expect to see about 230,000 jobs added for the month, and the unemployment rate unchanged at 5.4 percent.

Labor markets look like they are again going in the right direction, after soft job growth in March. Assuming ongoing steady job growth, the Federal Reserve will feel satisfied about one of its two key criteria for interest rate lift-off. The second criterion is inflation returning to about a 2 percent year-over-year rate. A key part of the inflation outlook is the price of oil. Oil prices steady in the $55-60/bbl range will allow inflation to gradually pick up from its current near-zero year-over-year rate (as measured by headline CPI in April).

With ongoing moderate-to-strong job growth through the summer and stable-to-increasing oil prices, we still expect the Federal Reserve to announce the first increase in the fed funds rate in nine years on September 17.

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From the Desk of Robert Dye

Thoughts About Greece as the June 5 Payment Deadline Approaches

According to today’s Financial Times, Greece owes a 300 million euro payment to the International Monetary Fund on June 5. There is widespread concern in global financial markets about Greece’s ability to pay, and speculation about Greece’s future inside or outside of the European Union. Often, the many issues surrounding Greece debt payments are rolled up into one big question…can Greece stay in the European Union? This assumes that there is a mechanism for leaving the EU, which there is not, and that Greece would be a successful state if only they could free themselves of the fiscal (taxation and spending) and monetary (currency, interest rates and money supply) controls imposed by EU membership. That is a big “if.”

GREXIT draws attention to the possibility of a failed and unstable Europe. The financial reporting on the crisis in Greece often conflates several issues, rendering the analysis meaningless. Let’s untangle the issues first by saying that Greece’s willingness to make the payment on June 5 does not necessarily equal their ability to make the payment. It appears likely that Greece will need a deal in order to have the ability to make the payment. Second, even if they are willing and able to make this payment, there may be future struggles involving later payments.

Greece appears to have both a liquidity crisis and a solvency crisis. Being liquid enough to make the payment on June 5 does not guarantee that the country can remain solvent over the long-term. Fiscal controls (spending cuts and revenue collections) are needed to insure long-term solvency. Tighter fiscal controls for Greece, however, raise the possibility of political instability, an adverse feedback loop that could have spillover costs for all of Europe. So here we see the linkage between the financial issue and the political issue for Greece.

To better understand the progression toward GREXIT, let us assume that the near-term liquidity crisis cannot be solved. There is no deal between Greece and the troika of the IMF, the European Union and the European Central Bank. The willingness and ability of Greece to make the payment evaporates, and Greece holds onto its liquidity, but potentially remains long-term insolvent.  If Greece cannot fulfill its obligations to its creditors, then it defaults, which is a legal issue.

In order to analyze the consequences of a Greek default, we need make some assumptions about the type of default. A default could be structured, or negotiated, and not have catastrophic consequences for the creditors. Or a default could be unilateral and unstructured, with disastrous consequences for creditors and other counterparties. We assume that if Greece cannot make its payment to the IMF, then the IMF as an institution is not severely damaged. However, if Greece were to default on other obligations, such as on payments to holders of its sovereign debt, then individuals and institutions holding that debt could be damaged. A Greek default on its obligations would raise serious concerns about their ability to borrow money as an independent state after their exit from the EU.

Because we have no better way to assign odds to the process of GREXIT, let’s use the universal oddsmaker, a coin toss. Let’s set the probability of a missed payment on June 5 to be 50 percent. Let’s assume that the missed payment leads to a negotiated default and a restructuring of the loans by the IMF. Let’s assume that Greece does not default on its other sovereign obligations so that the damage from a Greek default is minimal. Let’s assume that a default on its IMF loan by Greece has a 50 percent chance of initiating the political process of a Greek exit from the EU. Then we can say that there is a 25 percent chance ( 0.50 times 0.50) that Greece will exit the EU soon.

While the ability to predict the final outcome of the Greek crisis is well beyond anyone’s ability, I hope that this brief discussion adds some value to your analysis of this very complex situation.

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Comerica Bank’s Texas Index Continues Decline on Oil

Comerica Bank’s Texas Economic Activity Index eased again in March, decreasing 3.4 percentage points to a level of 101.1. March’s reading is 29 points, or 39 percent, above the index cyclical low of 72.6. The index averaged 105.1 points for all of 2014, four and four-fifths points above the average for full-year 2013. February’s index reading was 104.6.

“The Texas economy has lost momentum due to the reset in oil prices. Our Texas Economic Activity Index has declined for five consecutive months, beginning in November of last year. We expect to see more declines over the coming months as consolidation in the state’s energy sector continues. Six out of eight index components declined in March. The exception was house prices, supported by the strong North Texas market,” said Robert Dye, Chief Economist at Comerica Bank. “Recent firming of crude oil prices to the $55-$60 range is a good sign. We expect drilling rig counts to level out by mid-summer after falling by almost 60 percent, and that will help to establish a floor for the energy sector.”

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For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0515.

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