We are starting to see the effects of Hurricanes Harvey and Irma show up in some of the U.S. data. However, many of the storm effects are estimated by the data agencies involved. As field data is collected, these estimates will be revised in the coming months.

Retail sales data was mostly normal, but auto sales fell more than expected as South Texas auto dealers lost the last weekend of the month to the storm. Total retail sales for the U.S. dipped by 0.2 percent for the month. The dollar value of retail sales for autos fell by 1.6 percent. We expect to see stronger U.S. auto sales in September as Texas, Louisiana and Florida residents and businesses replace their storm damaged vehicles.

Industrial production dipped by 0.9 percent in August with declines across the three broad industry groups, manufacturing, mining and utilities. We expect to see more drag in manufacturing in September as refineries and petrochemical plants slowly resume normal operations. The lasting power outages in Texas, Louisiana and Florida (due to Harvey and Irma) will likely weigh on utility output in September.

The headline Consumer Price Index for August came in warmer than expected, increasing by 0.4 percent for the month. It was the strongest monthly gain since January. Energy prices provided a push as gasoline was up 6.3 percent for the month.

The Producer Price Index for Final Demand increased by 0.2 percent in August. The PPI for energy goods increased by 3.3 percent in August, reversing three consecutive monthly declines.

Initial claims for unemployment insurance fell by 14,000 for the week ending September 9, to hit 284,000. This comes after a surge in initial UI claims the previous week, gaining 62,000 after Hurricane Harvey hit South Texas. We expect to see another surge in weekly UI claims related to Hurricane Irma over the next couple of weeks.

Mortgage applications jumped for the week ending September 8, with gains in both purchase and refi apps. Purchase apps were up 10.9 percent for the week. Refi apps increased by 8.9 percent. According to the Mortgage Bankers Association, the rate for a 30-year fixed rate mortgage fell to 4.03 percent.

The Bank of England hinted that it would raise its benchmark lending rate soon. We expect the European Central Bank to announce the schedule for QE tapering in October.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 09152017.

The articles and opinions in this publication are for general information only, are subject to change, and are not intended to provide specific investment, legal, tax or other advice or recommendations. The information contained herein reflects the thoughts and opinions of the noted authors only, and such information does not necessarily reflect the thoughts and opinions of Comerica or its management team. We are not offering or soliciting any transaction based on this information. We suggest that you consult your attorney, accountant or tax or financial advisor with regard to your situation. Although information has been obtained from sources we believe to be reliable, neither the authors nor Comerica guarantee its accuracy, and such information may be incomplete or condensed. Neither the authors nor Comerica shall be liable for any typographical errors or incorrect data obtained from reliable sources or factual information.

August Data Looks Good

• The ISM Non-Manufacturing Index for August increased to 55.3, indicating good conditions.
• The U.S. International Trade Deficit widened to -$43.7 billion in July.
• Mortgage Applications for the week ending September 1 increased with stronger refi activity.

The ISM Non-Manufacturing Index for August increased to 55.3, indicating good and improving conditions for the bulk of the U.S. economy. The ISM Manufacturing index for August previously reported strong conditions for the nation’s manufacturing sector. Most non-manufacturing industries reported growth in August, including construction. Only two industries, agriculture/forestry/fishing and transportation/warehousing reported contraction for the month. Anecdotal comments were positive. All ten sub-indexes were above 50, indicating improving conditions. Together, the ISM Non-Manufacturing Index and the ISM Manufacturing Index capture the mood of the U.S. private sector economy and are consistent with a moderate GDP expansion for the third quarter. The data for both August ISM reports was largely collected before Hurricane Harvey flooded South Texas.

The U.S. international trade deficit widened slightly in July to -$43.7 billion. Exports eased by $0.6 billion for the month, due to weaker goods exports. Imports eased by $0.4 billion, with weaker imports of goods. If sustained through August and September, the Q3 trade deficit would narrow compared to Q2 and provide a boost to Q3 GDP growth. However, we may see some drag on exports in September due to the after effects of Hurricane Harvey. This could reduce Q3 GDP slightly. The Port of Houston is a major petroleum and petrochemical export facility.

The Mortgage Banker Association’s composite mortgage application index increased by 3.3 percent for the week ending September 1. Refi apps were strong, up 5.1 percent, as mortgage rates eased. According to the MBA, the rate for a 30-year fixed rate mortgage eased 4.06 percent. Purchase apps increased by 1.4 percent for the week after falling for the three previous weeks.

Market Reaction: U.S. equity markets are mixed. The yield on 10-Year Treasury bonds is up to 2.06 percent. NYMEX crude oil is up to $48.63/barrel. Natural gas futures are down to $2.97/mmbtu.

The articles and opinions in this publication are for general information only, are subject to change, and are not intended to provide specific investment, legal, tax or other advice or recommendations. The information contained herein reflects the thoughts and opinions of the noted authors only, and such information does not necessarily reflect the thoughts and opinions of Comerica or its management team. We are not offering or soliciting any transaction based on this information. We suggest that you consult your attorney, accountant or tax or financial advisor with regard to your situation. Although information has been obtained from sources we believe to be reliable, neither the authors nor Comerica guarantee its accuracy, and such information may be incomplete or condensed. Neither the authors nor Comerica shall be liable for any typographical errors or incorrect data obtainedfrom reliable sources or factual information.

Last week saw the risk-off trade localized to the U.S. markets, as traders rolled back assumptions about the administration’s agenda. Despite stabilization in the oil market, the energy sector was again the weakest, falling 2.5%, followed by the consumer discretionary (-1.8%) and industrial (-1%) sectors. The somewhat defensive utilities sector posted the largest advance over the week, picking up 1.2%. The consumer staples managed to finish in the green (+0.2%) last week, thanks largely to the release of Walmart’s strong July quarter results. The bond market continues to attract investors, as last week’s report of lower-than-anticipated inflation in the U.K. further fanned deflation fears. The U.S. ten-year Treasury bond slipped to a 2.194% yield. The coupon area of the curve, the two-year to thirty-year maturities, slipped lower. The differential now stands at 1.47%, versus the 2.65% ten-year average. European markets rebounded last week posting a positive 1.2%, with markets in Asia widely disbursed, from a 1.3% loss for the Nikkei to a 1.9% advance in Shanghai.

The question about investing in emerging markets surfaced again last week in a meeting with customers and colleagues. In this meeting, the statement was made that the question comes down to your view on China (and judging by the nodding heads, many agreed with the comment). I pointed out that this year’s strongest emerging market is not China (+22%); it is Turkey and Latvia, both up 38%. In fact, most of the strongest market returns this year are not in Asia at all, but are to be found in neighboring former communist bloc countries. The Czech Republic, Hungary, Lithuania, Poland and Romania are not often talked about, but the opportunities exist nonetheless. There was a collective sigh of relief amongst investors in the group last week as Argentine voters did not embrace a return by former President, Cristina Fernandez de Kirchner. Shares on the Argentine exchange gained 6% following the results, further boosted another 2% by a rally in the currency.

NOTE: IMPORTANT INFORMATION

The S&P 500^® Index, S&P MidCap Index, S&P 600 Index and Dow Jones Wilshire 5000 (collectively, “S&P^® Indices”) are products of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”) and Standard & Poor’s Financial Services, LLC and has been licensed for use by Comerica Bank, on behalf of itself and its Affiliates. Standard & Poor’s^® and S&P^® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones^® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). The trademarks have been licensed to SPDJI and sublicensed for certain purposes by Comerica Bank, on behalf of itself and its Affiliates. Nothing herein is sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, any of their respective affiliates (collectively, “S&P Dow Jones Indices”) or Standard & Poor’s Financial Services LLC. Neither S&P Dow Jones Indices nor Standard & Poor’s Financial Services, LLC make any representation or warranty, express or implied, to the owners of the content herein, or any member of the public regarding the advisability of investing in securities generally or in particular strategies or the ability of any particular strategy to track general market performance. SPDJI and Standard & Poor’s Financial Services, LLC only relationship to Comerica Bank, on behalf of itself and its Affiliates with respect to the S&P® Indices is the licensing of the Indices and certain trademarks, service marks, and/or trade names of S&P Dow Jones Indices and/or its licensors. The S&P Indices are determined, composed and calculated by S&P Dow Jones Indices or Standard & Poor’s Financial Services, LLC without regard to Comerica Bank and its Affiliates or any of the content herein. S&P Dow Jones Indices and Standard & Poor’s Financial Services, LLC have no obligation to take the needs of Comerica and its Affiliates or the owners of any of the content herein into consideration in determining, composing or calculating the S&P Indices. Neither S&P Dow Jones Indices nor Standard & Poor’s Financial Serices, LLC are responsible for and have not participated in the determination of the prices, and amount of any particular strategy or the timing of the issuance or sale of any particular strategy or in the determination or calculation of the equation by which any particular strategy is to be converted into cash, surrendered or redeemed, as the case may be. S&P Dow Jones Indices and Standard & Poor’s Financial Services, LLC have no obligation or liability in connection with the administration, marketing or trading of any particular strategy. There is no assurance that any particular investment product based on the S&P Indices will accurately track index performance or provide positive investment returns. SPDJI is not an investment advisor. Inclusion of a security within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security, nor is it considered to be investment advice.

NEITHER S&P DOW JONES INDICES NOR STANDARD & POOR’S FINANCIAL SERVICES, LLC GUARANTEES THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE WAM STRATEGIES OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNCATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW JONES INDICES AND STANDARD & POOR’S FINANCIAL SERVICES, LLC SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES AND STANDARD & POOR’S FINANCIAL SERVICES, LLC MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES, OR MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY COMERICA AND ITS AFFILIATES, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P INDICES OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES OR STANDARD & POOR’S FINANCIAL SERVICES, LLC BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN S&P DOW JONES INDICES AND COMERICA AND ITS AFFILIATES, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES.

“Russell 2000^® Index” is a trademark of Russell Investments, licensed for use by Comerica Bank and World Asset Management, Inc. The source of all returns is Russell Investments. Further redistribution of information is strictly prohibited.

MSCI EAFE^® is a trade mark of Morgan Stanley Capital International, Inc. (“MSCI”).

Source: All statistics herein obtained from Bloomberg.

Private Sector Jobs Report Looks Good

• The July ADP Employment Report showed a solid net gain of 178,000 private sector jobs.
• Mortgage Applications fell by 2.8 percent for the last week of July.

Based on today’s release of the July ADP Employment Report, we expect to see another moderate gain of about 175,000 net new payroll jobs for the month when the official Bureau of Labor Statistics data for July is released on Friday morning. The ADP Report showed a net gain of 178,000 private sector jobs in June. Normally, we would add about 10,000 net new government jobs to the ADP private sector total to derive an estimate for the BLS numbers (which include the government sector). However, the Trump Administration’s freeze on federal hiring earlier this year has distorted the government sector jobs numbers. From January through May of this year, government sector net hiring added an average of 4,000 jobs per month to nonfarm payrolls. However, in June, the government sector added 35,000 net new jobs. We expect the July government sector number to be considerably weaker, and possibly show a net loss for the month. Therefore, we will stick to our initial estimate of about 175,000 net new nonfarm jobs added to the U.S. economy in July. This should be enough to bring the unemployment rate down to 4.3 percent.

The July ADP Report showed that most of the hiring in July was done by medium-sized businesses (50-499 employees), which added 83,000 employees. Small businesses added 50,000 employees on net and large businesses added 45,000. By sector, natural resources/mining added 3,000 workers. Construction employment was up by 6,000, which is a bit light. Manufacturing showed a net 4,000 job loss for the month. Professional/business services added a strong 65,000 workers. Education/healthcare employment gained 43,000 in July. Leisure/hospitality services added 15,000 net new jobs in July.

According to the Mortgage Bankers Association, applications for mortgages fell 2.8 percent for the week ending July 28.  Purchase apps fell 2.0 percent and refi apps were down by 3.8 percent. Purchase apps were down in three out of four weeks in July. This implies that the new and existing homes sales data for the month will be soft. The rate for a 30-year fixed rate mortgage was steady at 4.17 percent at the end of July.

Market Reaction: U.S. equity prices were down at the open. The yield in 10-Year T-bonds is down to 2.24 percent. NYMEX crude oil is up to $48.83/barrel. Natural gas futures are unchanged at $2.81/mmbtu.

For a PDF version of this Comerica Economic Alert click here: July ADP.

GDP Resumes Moderate Growth, as Expected. Employment Costs Edging Up

• Real Gross Domestic Product for 2017Q2 increased at a moderate 2.6 percent annualized rate.
• Worker Compensation increased by 2.4 percent for the 12 months ending in June.

 Real gross domestic product growth increased to a moderate 2.6 percent annualized rate in the second quarter, after a revised 1.2 percent growth rate for the first quarter of 2017. As expected some of the quirky factors that held back GDP in Q1 reversed in Q2. Still, it would be an exaggeration to say that GDP growth rebounded. It did not. Rather it resumed a moderate growth track that looks like it will continue through the current third quarter. Real consumer spending increased at a solid 2.8 percent annualized rate in Q2 after a weather-beaten Q1. Even as unit auto sales slowed, other consumer spending on durables and nondurables was strong. Real business fixed investment growth was reasonable at a 5.2 percent, held in check by subdued gains in intellectual property. Inventories were neutral for the quarter. Net exports were a small positive, adding 0.18 percentage points to Q2 growth after dragging on headline growth in Q1. Government spending added to GDP in Q2, growing at a 0.7 percent annual rate after shrinking in Q1. If we have a similar 2.5 percent (plus or minus a couple of tenths) growth rate in Q3, that will be enough to keep job growth engaged, putting more downward pressure on the unemployment rate. Today’s GDP report will keep the Federal Reserve on track as they prepare for balance sheet reduction this fall. Looking farther down the road, moderate GDP growth, leading to a lower unemployment rate, is expected to put upward pressure on labor costs. This is the Philips Curve relationship that has received a good deal of attention recently. Fed policy makers will be watching to see if the Phillips Curve holds up in this business cycle and inflation starts to accelerate in 2018.

The Employment Cost Index for June increased by 0.5 percent over the previous three-month period. For the 12 months ending in June, compensation costs are up by 2.4 percent. This was a tame report, but it does show that the rate of increase in both wages/salaries and benefits is climbing off the lows of 2009-2013. The rate of increase remains less than previously expected, but it is now showing the kind of steady increase that we saw in the 1990s that caused the Federal Reserve to increase the fed funds rate to 6.5 percent by mid-2000. This increase in interest rates in turn contributed to the Recession of 2001.

Market Reaction: U.S. equity markets open with losses. The 10-year Treasury bond yield is down to 2.30 percent. NYMEX crude oil is up to $49.52/barrel. Natural gas futures are up to $2.97/mmbtu.

For a PDF version of this Comerica Economic Alert click here: 2017 Q2 GDP.

Last week saw the risk-off trade localized to the U.S. markets, as traders rolled back assumptions about the administration’s agenda. Despite stabilization in the oil market, the energy sector was again the weakest, falling 2.5%, followed by the consumer discretionary (-1.8%) and industrial (-1%) sectors. The somewhat defensive utilities sector posted the largest advance over the week, picking up 1.2%. The consumer staples managed to finish in the green (+0.2%) last week, thanks largely to the release of Walmart’s strong July quarter results. The bond market continues to attract investors, as last week’s report of lower-than-anticipated inflation in the U.K. further fanned deflation fears. The U.S. ten-year Treasury bond slipped to a 2.194% yield. The coupon area of the curve, the two-year to thirty-year maturities, slipped lower. The differential now stands at 1.47%, versus the 2.65% ten-year average. European markets rebounded last week posting a positive 1.2%, with markets in Asia widely disbursed, from a 1.3% loss for the Nikkei to a 1.9% advance in Shanghai.

The question about investing in emerging markets surfaced again last week in a meeting with customers and colleagues. In this meeting, the statement was made that the question comes down to your view on China (and judging by the nodding heads, many agreed with the comment). I pointed out that this year’s strongest emerging market is not China (+22%); it is Turkey and Latvia, both up 38%. In fact, most of the strongest market returns this year are not in Asia at all, but are to be found in neighboring former communist bloc countries. The Czech Republic, Hungary, Lithuania, Poland and Romania are not often talked about, but the opportunities exist nonetheless. There was a collective sigh of relief amongst investors in the group last week as Argentine voters did not embrace a return by former President, Cristina Fernandez de Kirchner. Shares on the Argentine exchange gained 6% following the results, further boosted another 2% by a rally in the currency.

NOTE: IMPORTANT INFORMATION

The S&P 500^® Index, S&P MidCap Index, S&P 600 Index and Dow Jones Wilshire 5000 (collectively, “S&P^® Indices”) are products of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”) and Standard & Poor’s Financial Services, LLC and has been licensed for use by Comerica Bank, on behalf of itself and its Affiliates. Standard & Poor’s^® and S&P^® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones^® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). The trademarks have been licensed to SPDJI and sublicensed for certain purposes by Comerica Bank, on behalf of itself and its Affiliates. Nothing herein is sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, any of their respective affiliates (collectively, “S&P Dow Jones Indices”) or Standard & Poor’s Financial Services LLC. Neither S&P Dow Jones Indices nor Standard & Poor’s Financial Services, LLC make any representation or warranty, express or implied, to the owners of the content herein, or any member of the public regarding the advisability of investing in securities generally or in particular strategies or the ability of any particular strategy to track general market performance. SPDJI and Standard & Poor’s Financial Services, LLC only relationship to Comerica Bank, on behalf of itself and its Affiliates with respect to the S&P® Indices is the licensing of the Indices and certain trademarks, service marks, and/or trade names of S&P Dow Jones Indices and/or its licensors. The S&P Indices are determined, composed and calculated by S&P Dow Jones Indices or Standard & Poor’s Financial Services, LLC without regard to Comerica Bank and its Affiliates or any of the content herein. S&P Dow Jones Indices and Standard & Poor’s Financial Services, LLC have no obligation to take the needs of Comerica and its Affiliates or the owners of any of the content herein into consideration in determining, composing or calculating the S&P Indices. Neither S&P Dow Jones Indices nor Standard & Poor’s Financial Serices, LLC are responsible for and have not participated in the determination of the prices, and amount of any particular strategy or the timing of the issuance or sale of any particular strategy or in the determination or calculation of the equation by which any particular strategy is to be converted into cash, surrendered or redeemed, as the case may be. S&P Dow Jones Indices and Standard & Poor’s Financial Services, LLC have no obligation or liability in connection with the administration, marketing or trading of any particular strategy. There is no assurance that any particular investment product based on the S&P Indices will accurately track index performance or provide positive investment returns. SPDJI is not an investment advisor. Inclusion of a security within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security, nor is it considered to be investment advice.

NEITHER S&P DOW JONES INDICES NOR STANDARD & POOR’S FINANCIAL SERVICES, LLC GUARANTEES THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE WAM STRATEGIES OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNCATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW JONES INDICES AND STANDARD & POOR’S FINANCIAL SERVICES, LLC SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES AND STANDARD & POOR’S FINANCIAL SERVICES, LLC MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES, OR MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY COMERICA AND ITS AFFILIATES, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P INDICES OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES OR STANDARD & POOR’S FINANCIAL SERVICES, LLC BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN S&P DOW JONES INDICES AND COMERICA AND ITS AFFILIATES, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES.

“Russell 2000^® Index” is a trademark of Russell Investments, licensed for use by Comerica Bank and World Asset Management, Inc. The source of all returns is Russell Investments. Further redistribution of information is strictly prohibited.

MSCI EAFE^® is a trade mark of Morgan Stanley Capital International, Inc. (“MSCI”).

Source: All statistics herein obtained from Bloomberg.

One of today’s most pressing investment questions is the valuation level of the U.S. equity market. To understand the nature of the question, we review the relative valuation of competing asset classes, in particular, those that are comparable in terms of overall characteristics. In the table on page 2, we contrast other classes of equities against the dominant domestic benchmark, the Standard & Poor’s 500® Index. The point of this process is to identify more favorable risk versus potential return environments. As you can see from the two charts on the left, the domestic equity market, medium and small capitalization, has been remarkably homogeneous. This is particularly true since 2009, and an anomaly from a historical perspective. It really speaks more to the devastation of the financial crisis. So, there does not appear to be a broadly neglected and, thus, undervalued segment within the domestic equity sphere. But looking at the charts on the right, a very different situation becomes clear. Relative to the U.S. market,both the emerging and, in particular, the developed international markets have, until this year, underperformed.While the year-to-date performance of both the EAFE® and EM has been strong, they have considerable ground to cover to match the returns posted by U.S. stocks during the last decade.

I have repeatedly written about the level of complacency pervading the domestic market, so much so that the opportunities elsewhere may be overlooked. At the close of the recent earnings reporting season, the forecast for revenue growth of the S&P 500® Index was lifted to 7%, while the outlook for the EAFE® constituents was raised to 8% and 11%-12% for the EM. International investing does entail additional risks, such as currency fluctuations, liquidity and, of course, political. It is critical to be mindful of these challenges and have a time horizon sufficient toweather the increased volatility. At this time, two facts can be agreed upon: valuations ex-U.S. are lower and growth expectations are higher. The goal of investing is to be adequately compensated for the risk taken, and a lost opportunity is a risk as well.

The world continues to anticipate the priorities of the new administration. Investors have been quick to seize upon each executive order as though future economic results are all but guaranteed. To quote Warren Buffet, “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.” To that end, a quick review of the announcements thus far this earnings season should be somewhat sobering. With the exception of the extractive industries and other commodity-related sectors, we have seen a disconcerting number of earnings and, even worse, revenue misses. Drowned out by the rush to join the parade of domestic job creators are the announcements of store closings and job cuts in the retail space. The recent holiday season was not a tide lifting all boats. As Comerica’s Chief Economist, Robert Dye, points out, we will see unit labor cost rising this year due to minimum wage hikes, implementation of new overtime rules and the spike in health care costs for this year. Even the robust auto sales data masked some early warning signs as its composition reveals that the light truck sector drove unit sales. With fuel prices higher year-over-year, that is a performance that may prove tough to match.

Aside from the economic realities, we should also consider the market mechanics of what has been going on since Election Day. The prospect of interest rates mounting a sustained advance has led to a large scale portfolio rebalancing with investors moving from long duration fixed assets to shorter duration equities. Here it is critical to consider the relative scale. The $3 trillion in bonds sold between November 9th and the end of the year created only a modest ripple in the bond market, but the same cannot be said of what that amount did to stock prices. There was a term coined during the last rotation from large cap to small cap stocks – “buckets-into-thimbles.” Going from bonds to stocks is creating the same distortions. There are some crowded trades lingering, and this is where we need to be proactive. We should be unwinding any stretch for yield, regardless of asset class. With the rebound in commodity prices in the face of global overcapacity, it is important to address the size and composition of the alternative holdings. Perhaps one of the most difficult challenges will be addressing the exposure to emerging markets. There is evidence that many of these economies have begun the migration from export orientation to domestic consumption, with projected GDP growth in some cases double that of the developed economies. These markets are under-owned and have upside surprise potential that warrants consideration.

We are in an enviable position; the long post crisis advance has been stable and fairly uniform. It is early in a new tax year, enabling us to reposition portfolios to reduce downside risk and enhance prospective returns. Accounts with funds to invest domestically should look to small and mid-cap equities with a bias towards value and growth at a reasonable price (GARP). Accounts for which global exposure is appropriate should look first to emerging markets.

Note: Important Information

This is not a complete analysis of every material fact regarding any company, industry or security. The information and materials herein has been obtained from sources we consider to be reliable but Comerica Wealth Management does not warrant, or guarantee, its completeness or accuracy. Materials prepared by Comerica Wealth Management personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Comerica Wealth Management, including investment banking personnel.

The views expressed are those of the author at the time of writing and are subject to change without notice. We do not assume any liability for losses that may result from the reliance by any person upon any such information or opinions. This material has been distributed for general educational/informational purposes only, and should not be considered as investment advice or a recommendation for any particular security, strategy or investment product, or as personalized investment advice.

Past performance is not indicative of future results. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The investments and strategies discussed herein may not be suitable for all clients. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations.

Comerica Wealth Management consists of various divisions and affiliates of Comerica Bank, including Comerica Bank & Trust, National Association; World Asset Management, Inc.; Comerica Securities, Inc.; and Comerica Insurance Services, Inc. and its affiliated insurance agencies. World Asset Management, Inc. and Comerica Securities, Inc. are federally registered investment advisors. Registrations do not imply a certain level of skill or training. Comerica Bank and its affiliates do not provide tax or legal advice. Please consult with your tax and legal advisors regarding your specific situation.

Securities and other non-deposit investment products offered through Comerica are not insured by the FDIC; are not deposits or other obligations of, or guaranteed by, Comerica Bank or any of its affiliates; and are subject to investment risks, including possible loss of the principal invested.

Past performance is not indicative of future results. Information presented is for general information only and is subject to change.

We are starting to see the effects of Hurricanes Harvey and Irma show up in some of the U.S. data. However, many of the storm effects are estimated by the data agencies involved. As field data is collected, these estimates will be revised in the coming months.

Retail sales data was mostly normal, but auto sales fell more than expected as South Texas auto dealers lost the last weekend of the month to the storm. Total retail sales for the U.S. dipped by 0.2 percent for the month. The dollar value of retail sales for autos fell by 1.6 percent. We expect to see stronger U.S. auto sales in September as Texas, Louisiana and Florida residents and businesses replace their storm damaged vehicles.

Industrial production dipped by 0.9 percent in August with declines across the three broad industry groups, manufacturing, mining and utilities. We expect to see more drag in manufacturing in September as refineries and petrochemical plants slowly resume normal operations. The lasting power outages in Texas, Louisiana and Florida (due to Harvey and Irma) will likely weigh on utility output in September.

The headline Consumer Price Index for August came in warmer than expected, increasing by 0.4 percent for the month. It was the strongest monthly gain since January. Energy prices provided a push as gasoline was up 6.3 percent for the month.

The Producer Price Index for Final Demand increased by 0.2 percent in August. The PPI for energy goods increased by 3.3 percent in August, reversing three consecutive monthly declines.

Initial claims for unemployment insurance fell by 14,000 for the week ending September 9, to hit 284,000. This comes after a surge in initial UI claims the previous week, gaining 62,000 after Hurricane Harvey hit South Texas. We expect to see another surge in weekly UI claims related to Hurricane Irma over the next couple of weeks.

Mortgage applications jumped for the week ending September 8, with gains in both purchase and refi apps. Purchase apps were up 10.9 percent for the week. Refi apps increased by 8.9 percent. According to the Mortgage Bankers Association, the rate for a 30-year fixed rate mortgage fell to 4.03 percent.

The Bank of England hinted that it would raise its benchmark lending rate soon. We expect the European Central Bank to announce the schedule for QE tapering in October.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 09152017.

The articles and opinions in this publication are for general information only, are subject to change, and are not intended to provide specific investment, legal, tax or other advice or recommendations. The information contained herein reflects the thoughts and opinions of the noted authors only, and such information does not necessarily reflect the thoughts and opinions of Comerica or its management team. We are not offering or soliciting any transaction based on this information. We suggest that you consult your attorney, accountant or tax or financial advisor with regard to your situation. Although information has been obtained from sources we believe to be reliable, neither the authors nor Comerica guarantee its accuracy, and such information may be incomplete or condensed. Neither the authors nor Comerica shall be liable for any typographical errors or incorrect data obtained from reliable sources or factual information.

August Data Looks Good

• The ISM Non-Manufacturing Index for August increased to 55.3, indicating good conditions.
• The U.S. International Trade Deficit widened to -$43.7 billion in July.
• Mortgage Applications for the week ending September 1 increased with stronger refi activity.

The ISM Non-Manufacturing Index for August increased to 55.3, indicating good and improving conditions for the bulk of the U.S. economy. The ISM Manufacturing index for August previously reported strong conditions for the nation’s manufacturing sector. Most non-manufacturing industries reported growth in August, including construction. Only two industries, agriculture/forestry/fishing and transportation/warehousing reported contraction for the month. Anecdotal comments were positive. All ten sub-indexes were above 50, indicating improving conditions. Together, the ISM Non-Manufacturing Index and the ISM Manufacturing Index capture the mood of the U.S. private sector economy and are consistent with a moderate GDP expansion for the third quarter. The data for both August ISM reports was largely collected before Hurricane Harvey flooded South Texas.

The U.S. international trade deficit widened slightly in July to -$43.7 billion. Exports eased by $0.6 billion for the month, due to weaker goods exports. Imports eased by $0.4 billion, with weaker imports of goods. If sustained through August and September, the Q3 trade deficit would narrow compared to Q2 and provide a boost to Q3 GDP growth. However, we may see some drag on exports in September due to the after effects of Hurricane Harvey. This could reduce Q3 GDP slightly. The Port of Houston is a major petroleum and petrochemical export facility.

The Mortgage Banker Association’s composite mortgage application index increased by 3.3 percent for the week ending September 1. Refi apps were strong, up 5.1 percent, as mortgage rates eased. According to the MBA, the rate for a 30-year fixed rate mortgage eased 4.06 percent. Purchase apps increased by 1.4 percent for the week after falling for the three previous weeks.

Market Reaction: U.S. equity markets are mixed. The yield on 10-Year Treasury bonds is up to 2.06 percent. NYMEX crude oil is up to $48.63/barrel. Natural gas futures are down to $2.97/mmbtu.

The articles and opinions in this publication are for general information only, are subject to change, and are not intended to provide specific investment, legal, tax or other advice or recommendations. The information contained herein reflects the thoughts and opinions of the noted authors only, and such information does not necessarily reflect the thoughts and opinions of Comerica or its management team. We are not offering or soliciting any transaction based on this information. We suggest that you consult your attorney, accountant or tax or financial advisor with regard to your situation. Although information has been obtained from sources we believe to be reliable, neither the authors nor Comerica guarantee its accuracy, and such information may be incomplete or condensed. Neither the authors nor Comerica shall be liable for any typographical errors or incorrect data obtainedfrom reliable sources or factual information.

Last week saw the risk-off trade localized to the U.S. markets, as traders rolled back assumptions about the administration’s agenda. Despite stabilization in the oil market, the energy sector was again the weakest, falling 2.5%, followed by the consumer discretionary (-1.8%) and industrial (-1%) sectors. The somewhat defensive utilities sector posted the largest advance over the week, picking up 1.2%. The consumer staples managed to finish in the green (+0.2%) last week, thanks largely to the release of Walmart’s strong July quarter results. The bond market continues to attract investors, as last week’s report of lower-than-anticipated inflation in the U.K. further fanned deflation fears. The U.S. ten-year Treasury bond slipped to a 2.194% yield. The coupon area of the curve, the two-year to thirty-year maturities, slipped lower. The differential now stands at 1.47%, versus the 2.65% ten-year average. European markets rebounded last week posting a positive 1.2%, with markets in Asia widely disbursed, from a 1.3% loss for the Nikkei to a 1.9% advance in Shanghai.

The question about investing in emerging markets surfaced again last week in a meeting with customers and colleagues. In this meeting, the statement was made that the question comes down to your view on China (and judging by the nodding heads, many agreed with the comment). I pointed out that this year’s strongest emerging market is not China (+22%); it is Turkey and Latvia, both up 38%. In fact, most of the strongest market returns this year are not in Asia at all, but are to be found in neighboring former communist bloc countries. The Czech Republic, Hungary, Lithuania, Poland and Romania are not often talked about, but the opportunities exist nonetheless. There was a collective sigh of relief amongst investors in the group last week as Argentine voters did not embrace a return by former President, Cristina Fernandez de Kirchner. Shares on the Argentine exchange gained 6% following the results, further boosted another 2% by a rally in the currency.

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Private Sector Jobs Report Looks Good

• The July ADP Employment Report showed a solid net gain of 178,000 private sector jobs.
• Mortgage Applications fell by 2.8 percent for the last week of July.

Based on today’s release of the July ADP Employment Report, we expect to see another moderate gain of about 175,000 net new payroll jobs for the month when the official Bureau of Labor Statistics data for July is released on Friday morning. The ADP Report showed a net gain of 178,000 private sector jobs in June. Normally, we would add about 10,000 net new government jobs to the ADP private sector total to derive an estimate for the BLS numbers (which include the government sector). However, the Trump Administration’s freeze on federal hiring earlier this year has distorted the government sector jobs numbers. From January through May of this year, government sector net hiring added an average of 4,000 jobs per month to nonfarm payrolls. However, in June, the government sector added 35,000 net new jobs. We expect the July government sector number to be considerably weaker, and possibly show a net loss for the month. Therefore, we will stick to our initial estimate of about 175,000 net new nonfarm jobs added to the U.S. economy in July. This should be enough to bring the unemployment rate down to 4.3 percent.

The July ADP Report showed that most of the hiring in July was done by medium-sized businesses (50-499 employees), which added 83,000 employees. Small businesses added 50,000 employees on net and large businesses added 45,000. By sector, natural resources/mining added 3,000 workers. Construction employment was up by 6,000, which is a bit light. Manufacturing showed a net 4,000 job loss for the month. Professional/business services added a strong 65,000 workers. Education/healthcare employment gained 43,000 in July. Leisure/hospitality services added 15,000 net new jobs in July.

According to the Mortgage Bankers Association, applications for mortgages fell 2.8 percent for the week ending July 28.  Purchase apps fell 2.0 percent and refi apps were down by 3.8 percent. Purchase apps were down in three out of four weeks in July. This implies that the new and existing homes sales data for the month will be soft. The rate for a 30-year fixed rate mortgage was steady at 4.17 percent at the end of July.

Market Reaction: U.S. equity prices were down at the open. The yield in 10-Year T-bonds is down to 2.24 percent. NYMEX crude oil is up to $48.83/barrel. Natural gas futures are unchanged at $2.81/mmbtu.

For a PDF version of this Comerica Economic Alert click here: July ADP.

GDP Resumes Moderate Growth, as Expected. Employment Costs Edging Up

• Real Gross Domestic Product for 2017Q2 increased at a moderate 2.6 percent annualized rate.
• Worker Compensation increased by 2.4 percent for the 12 months ending in June.

 Real gross domestic product growth increased to a moderate 2.6 percent annualized rate in the second quarter, after a revised 1.2 percent growth rate for the first quarter of 2017. As expected some of the quirky factors that held back GDP in Q1 reversed in Q2. Still, it would be an exaggeration to say that GDP growth rebounded. It did not. Rather it resumed a moderate growth track that looks like it will continue through the current third quarter. Real consumer spending increased at a solid 2.8 percent annualized rate in Q2 after a weather-beaten Q1. Even as unit auto sales slowed, other consumer spending on durables and nondurables was strong. Real business fixed investment growth was reasonable at a 5.2 percent, held in check by subdued gains in intellectual property. Inventories were neutral for the quarter. Net exports were a small positive, adding 0.18 percentage points to Q2 growth after dragging on headline growth in Q1. Government spending added to GDP in Q2, growing at a 0.7 percent annual rate after shrinking in Q1. If we have a similar 2.5 percent (plus or minus a couple of tenths) growth rate in Q3, that will be enough to keep job growth engaged, putting more downward pressure on the unemployment rate. Today’s GDP report will keep the Federal Reserve on track as they prepare for balance sheet reduction this fall. Looking farther down the road, moderate GDP growth, leading to a lower unemployment rate, is expected to put upward pressure on labor costs. This is the Philips Curve relationship that has received a good deal of attention recently. Fed policy makers will be watching to see if the Phillips Curve holds up in this business cycle and inflation starts to accelerate in 2018.

The Employment Cost Index for June increased by 0.5 percent over the previous three-month period. For the 12 months ending in June, compensation costs are up by 2.4 percent. This was a tame report, but it does show that the rate of increase in both wages/salaries and benefits is climbing off the lows of 2009-2013. The rate of increase remains less than previously expected, but it is now showing the kind of steady increase that we saw in the 1990s that caused the Federal Reserve to increase the fed funds rate to 6.5 percent by mid-2000. This increase in interest rates in turn contributed to the Recession of 2001.

Market Reaction: U.S. equity markets open with losses. The 10-year Treasury bond yield is down to 2.30 percent. NYMEX crude oil is up to $49.52/barrel. Natural gas futures are up to $2.97/mmbtu.

For a PDF version of this Comerica Economic Alert click here: 2017 Q2 GDP.