Comerica Economic Weekly, August 9, 2019

August 9, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

The U.S./China trade war, and its fallout, dominated business news this week. Late last week the Trump Administration threatened to impose tariffs of 10 percent on $300 billion worth of previously untaxed imports from China. Earlier this week the Chinese renminbi lost value, breaking the 7 renminbi per dollar boundary.  

Adding to the growing international wall of worry, Germany posted weak industrial production data for June, showing a dip in output of 1.5 percent for the month, and a loss of 5.2 percent over the previous year. Some analysts predict another bad IP number for July. 

U.S. and global stock markets sold off this week and money piled into sovereign bonds. The yield for the 10-year Treasury bonds dipped to a low of 1.62 percent on Wednesday, near the monthly yields from the summer of 2016. A more steeply inverted yield curve added to concerns about the U.S. and global economy. 

As a result of increased financial market volatility this week, pressure is building on the Federal Reserve to follow up the late-July fed funds rate cut with another one in mid-September. 

According to the CME Group, the implied probability of a fed funds rate cut on September 18 is 100 percent, weighted about 2-to-1 in favor of another 25 basis point cut to a range of 1.75-2.00 percent, with the remainder expecting a 50 basis point cut. 

St. Louis Fed President James Bullard said on Tuesday that “additional policy action may be desirable.” Chicago Fed President Charles Evans’ comments on Thursday were supportive of another rate cut this year.

We continue to expect additional monetary policy easing by the Fed this year. Even though the fed funds futures market collectively expresses near certainty for a September rate cut, we believe that the Fed itself is not yet ready to make that call. 

Federal Reserve officials will meet at their annual Jackson Hole Economic Symposium over August 22-24. This will help them to get on the same page for their public commentary over the following two weeks. We await Fed commentary after Jackson Hole and prior to the ten-day blackout period for Fed communication which will begin on September 7. 

U.S. economic data was mixed again this week. 

The ISM Non-Manufacturing Index for July decreased from a moderate 55.1 to a still-positive 53.7. The trend in both the ISM Manufacturing and Non-Manufacturing Indexes has been down since late last year (see graph on page 2). The ISM Manufacturing Index may well go into negative territory before the end of this year. That would not necessarily imperil the ongoing economic expansion. However, if the ISM Non-Manufacturing Index were to drop below 50 that would be a very strong recessionary indicator. 

The Job Opening and Labor Turnover Survey (JOLTS) for June showed a small step down in the job openings rate, to 4.6 percent. It is too early to say that we are definitely past the peak rate for job openings, at 4.8 percent in late 2018, but that may end up being the case. The hiring rate was unchanged at a strong 3.8 percent. 

Initial claims for unemployment insurance fell by 8,000 for the week ending August 3, to hit 209,000. The level is low and the trend is down, so no problem here. Continuing claims dropped by 15,000, to hit 1,684,000 for the week ending July 27.

The Producer Price Index for Final Demand increased by a modest 0.2 percent in July. Both the PPI for Final Demand and Core PPI (less food, energy and trade) were up by 1.7 percent in the 12 months ending in July.

For a PDF version of this publication, please click here:  Comerica Economic Weekly, August 9, 2019

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.

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August 2019 Arizona Economic Outlook

August 7, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Arizona Maintains Momentum in Early 2019

    The Arizona economy grew at a solid pace in the first half of 2019. Real gross domestic product for the state is expected to post two consecutive quarters of near 4 percent growth. Arizona added 37,000 jobs so far in 2019, which is about the same amount of jobs created in the first six months of 2018. The state’s tourism industry is seeing more positive momentum as national parks visits and airport passenger traffic improved heading into early summer. Construction has been a key sector for the Arizona economy this year. ARMLS reported that home sales in the Phoenix metropolitan area were up 2.6 percent year-over-year in June. The supply of homes for sale was at a very low 2.1 months’ worth. Low housing inventories helped to bolster area home prices. Phoenix home prices were up 5.7 percent year-over-year in May, according to Core Logic Case-Shiller. Low inventories and solid home price appreciation are a positive indicator for construction activity. We expect Arizona to add roughly 33,500 new single-family units this year, slightly above the pace seen in 2018. The recent escalation of the U.S./China trade war amplifies downside economic risk for the state. Arizona businesses with global supply chains and global customers are facing heightened uncertainty. Also, an overall U.S. economic slowdown due to a decline in business and consumer confidence would likely spill over into Arizona. The manufacture of durable goods in Arizona accounts for around 8 percent of state GDP. Growth in Arizona’s durable goods manufacturing industries moderated from 10 percent year-over-year growth in 2018Q1 to 2.6 percent in 2019Q1.

For a PDF version of this publication, click here: August 2019 Arizona Economic Outlook

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.

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August 2019 Florida Economic Outlook

August 7, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Florida Economic Outlook Remains Positive

    The Florida economy continued to expand at a solid pace in the first half of 2019. Job growth rebounded in the second quarter, helping to allay concerns about a slowdown in the pace of hiring in Florida in Q1. We still expect job growth to moderate further in 2019, but at a much more gradual rate than what we saw at the beginning of the year. A tight labor market is limiting the ability of some Florida businesses to expand. Florida real gross domestic product is still on track to increase by near 3 percent this year. The state continues to see positive migration flows which increase demand for goods and services, including housing. Anecdotes support the idea that restrictions on state and local tax deductions from the Tax Cuts and Jobs Act of 2017 (which went into effect in early 2018) are leading to an exodus of property owners from high tax states, like New York and New Jersey, into Florida. However, we will not know if this trend is significantly different than past migration patterns until we see it in the data. We will get the 2018 one-year net-migration estimate in November. So far, the housing data available does not show an upside breakout in Florida housing activity this year. According to Florida Realtors, single-family home sales were up 2.1 percent and townhouse and condo sales were down 4.0 percent year-to-date in June compared to the same time period last year. Lower mortgage rates will provide additional support to Florida housing activity in the second half of the year. Domestic travel into Florida continues to see positive year-over-year gains, supporting the state’s vital tourism industry. Universal recently announced that it plans to open a new theme park in Central Florida. The exact timeframe for the project remains unclear.

For a PDF version of this publication, click here: August 2019 Florida Economic Outlook

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.

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August 2019 California Economic Outlook

August 7, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

California Economy Okay in Q2, Still Faces Headwinds in H2

    The California economy continued to expand at a moderate pace in the second quarter, boosted by stronger than expected job growth. The state added 116,400 jobs in Q2, making it the strongest quarter for job growth since 2017Q4. Nearly one in four jobs created in California in Q2 were in the construction industry. This rise in construction hiring may only be temporary as California housing data has been soft in recent months. According to the California Association of Realtors, existing single-family home sales were down 5.1 percent in the 12 months ending in June. Declines in existing home sales over the past year were seen across all of the state’s major regions. Weaker sales have led to a rise in housing inventory in recent months. Rising inventories, in-turn, have put downward pressure on area home prices. According to Core Logic Case-Shiller, year-over-year home prices were up 1.9 percent in L.A., 1.3 percent in San Diego and just 1.0 percent in San Francisco in May. Lower home prices and declining mortgage rates will support housing activity this year. Yet, we are already late into the economic cycle and housing demand is mostly spent out. Therefore, we expect limited upside potential in California housing activity going forward. The other risk factor for our California economic outlook is the uncertainty surrounding the escalation in international trade disputes. The price-adjusted value of California international trade (imports plus exports) in May remained 8.4 percent below its February 2018 high. The U.S. announced a new round of tariffs on an additional $300 billion worth of Chinese imports which will take place on September 1.

For a PDF version of this publication, click here: August 2019 California Economic Outlook

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.

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August 2019 Texas Economic Outlook

August 7, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Texas Driven by DFW

    The Texas economy is having a strong year in 2019. Most of the state’s major metropolitan areas are showing employment growth well above the national average. Texas was prominent in the June release of metropolitan area employment and unemployment data. According to the Bureau of Labor Statistics, the oil-rich Midland metro area tied for the second lowest unemployment rate in the country at 2.1 percent (nonseasonally adjusted). Of the 51 metro areas with a 2010 population greater than 1 million, Austin shared the honor of having the lowest unemployment rate, at 2.7 percent. The Dallas-Fort Worth (DFW) metro area had the second largest net job gain over the year ending in June, at 120,000, not far behind significantly larger New York City. Among the 51 largest metro areas, DFW had the third highest percent gain in employment over the year, at 3.2 percent. Within the DFW metro area, the eastern half, the Dallas-Plano-Irving metropolitan division, gained 97,000 jobs over the year ending in June, a 3.7 percent year-over-year increase. The Houston metro area was just behind DFW, posting a strong 2.9 percent increase in jobs over the last year. The North Texas area remains a very attractive location for companies seeking to establish a new national headquarters. We expect the red hot North Texas economy to cool a few degrees next year. A cooler national economy will induce more defensive behavior at the board room level, and likely slow the pace of corporate relocations to North Texas. We expect the 2020 Census to show a significant population gain for Texas. This will fuel organic growth for years to come.

For a PDF version of this publication, click here: August 2019 Texas Economic Outlook

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.

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August 2019 Michigan Economic Outlook

August 7, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Cooler Outlook for Michigan

    The Trump Administration’s recent threat to increase import tariffs on China signals a deteriorating relationship between the two largest global economies. This brings to mind an African proverb, “When elephants fight it is the grass that loses.” We saw an immediate threat of retaliation by China, along with a small dip in the exchange value of the Chinese currency against the dollar. The renminbi broke through the 7 barrier and U.S. and global stocks sold off with the news. It is our view that the U.S./China Trade War will likely not be quickly resolved. The situation will continue to require adroit planning for companies with global customers and global supply chains. Indirectly, the U.S/China Trade War could also weigh on U.S. consumer confidence if we see ongoing financial market volatility. This could turn into a headwind for auto sales. Auto sales ticked down for the second consecutive month in July, to a 17.0 million unit sales rate. This is not a bad sales rate at all, but it is clearly below the 18.4 million unit peak from September 2017. Contract negotiations between the United Auto Workers and General Motors began in July. GM’s second quarter profits increased by 1.6 percent, driven by strong SUV and truck sales. GM is also restructuring, idling four plants this year, cutting 4,000 white collar jobs and putting nearly 4,000 factory jobs in question. Trade tensions and late-cycle dynamics for the auto industry are two key risk factors for Michigan’s economy this year and next. We expect to see Michigan’s economic growth step down heading into 2020. Job growth will also step down, but it should be sufficient to keep the state’s unemployment rate very low through next year. Net out-migration remains a major risk factor for Michigan’s economy. The results of the 2020 census will be very important for understanding Michigan’s future.

For a PDF version of this publication, click here: August 2019 Michigan Economic Outlook

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.

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August 2019 U.S. Economic Outlook

August 5, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

In Uncharted Territory, Where There is Nothing New Under the Sun

    We have never been in a 122-month-long expansion before, and we have never had an expansion when the peak fed funds rate was less than 2.50 percent. Also, we have never been this far into a trade war in this post-modern globally interconnected economy.
    Yet the U.S. economy is still cyclical and subject to its own momentum. Its course is determined by a combination of positive and negative feedback mechanisms, fiscal and monetary policy, and other external factors (war, weather, and recently, trade policy). It is a complex adaptive system full of non-linearities. It is both fickle and impassive.
    The strongest part of the U.S. economy right now is the consumer sector. It is also the biggest part of the economy, accounting for two-thirds of gross domestic product. Fortunately, jobs are plentiful, wages are going up (but not as quickly as expected). Households are saving money at a higher rate than before the Great Recession. In June, the personal saving rate inched up to 8.1 percent. The recent revisions to historical GDP data raised the estimated saving rate. Consumer debt also appears to be well managed. The household financial obligations ratio remains near the very low mark set after the Great Recession. A strong consumer sector allows the U.S. economy to absorb unexpected events without a significant loss of momentum. Yet the household sector is not monolithic. Older households are saving for retirement. Their consumption patterns will change in the years ahead. Younger households may be saddled with student debt that is preventing them from entering the housing market.
    Another near-term positive for the U.S. economy is the new 2-year federal budget deal that the President signed on Friday. The deal removes the threat of a federal government shutdown this fall. It also removes the threat of a large cutback in federal government spending in FY2020 that might have been required under the Budget Control Act of 2011. However, the budget deal came with no offsets. Federal spending will increase without offsetting budget cuts or increased taxes. This increases federal deficit projections by $1.7 trillion over the next decade. The two-year budget deal will expire after the 10-year horizon of the Budget Control Act of 2011 expires, so the threat of automatic sequestration on future budget negotiations is effectively over.
    Monetary policy looks like it will also be a near-term positive for the U.S. economy. In addition to the 25 basis point cut to the fed funds rate range announced on July 31, the Fed also announced that it ended its balance sheet reduction program early. Financial markets are strongly positioned for another fed funds rate cut this year. According to the fed funds futures market, there is a near 100 percent implied probability of at least one more 25 basis point rate cut by December 11. We have kept another 25 basis point fed funds rate cut for December in our interest rate forecast.
    Ideally, the Fed would wait and see how its recent rate cut is impacting the economy before it would initiate another policy move. That strategy would take a rate cut at the next FOMC meeting, over September 17/18, off the table. However, the trade war with China is escalating. The Trump Administration has threatened to apply a new 10 percent tariff on $300 billion dollars worth of Chinese imports that are not currently taxed. The new tariff will start on September 1 unless meaningful progress on a trade deal is made. Meanwhile, the Chinese yuan hit a new low against the dollar, and the Trump Administration is accusing China of currency manipulation. U.S. stocks are selling off in mid-August. Significant stock market losses could motivate the Fed to cut rates sooner rather than later.

For a PDF version of this publication, please click here: August 2019 U.S. Economic Outlook

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.

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Comerica Economic Weekly, August 2, 2019

August 2, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Economic data was mixed again this week, consistent with an ongoing moderate GDP expansion in Q3. 

Labor data continues to look solid. U.S. payrolls expanded by 164,000 in July and the unemployment rate was unchanged at 3.7 percent. 

Initial claims for unemployment insurance increased by 8,000 for the week ending July 27, to hit 215,000. Continuing claims gained 22,000 for the week ending July 20, to hit 1,699,000, still a very low number. 

The ISM Manufacturing Index declined for the fourth consecutive month in July to 51.2, which is still a positive number, indicating a weak expansion. Comparable indexes for other countries have been below 50 for several months highlighting the risk of a global manufacturing contraction that may spill over into the U.S.

The Employment Cost Index (ECI) for Q2 showed that total compensation for civilian workers increased by 0.6 percent Q/Q. Over the previous 4 quarters, the ECI is up by a reasonable 2.7 percent. The Q2 ECI data is showing us that labor is getting more expensive. But given the fact that productivity looks like it is on an increasing trend this year, unit labor costs may remain contained.

Estimated U.S. auto sales eased for the second month, to a 17.0 million unit rate in July. Light truck sales increased to a 12.2 million unit rate, while auto sales dipped to a 4.8 million unit rate.

The U.S. international trade gap narrowed a bit in June, to -$55.2 billion. Exports eased by $4.4 billion for the month, while imports eased by $4.6 billion. This, along with weak construction spending for June, implies that there will be a slight downward revision to Q2 GDP. 

Yesterday, the Trump Administration threatened to increase tariffs on imports from China by an additional 10 percent on September 1. 

Total mortgage applications dipped by 1.4 percent for the week ending July 26. Refi apps were little changed for the week, up by 0.1 percent after falling the week before. Purchase apps were down by 3.0 percent, the third consecutive weekly drop. On a four-week moving-average basis, refi apps are up by 84.9 percent from a year ago, while purchase apps are up by 6.2 percent. According to the Mortgage Bankers Association, the rate for a 30-year fixed rate mortgage was stable at 4.08 percent. 

The Case-Shiller U.S. National Home Price Index for May showed a 3.4 percent year-over-year increase. This is the weakest yearly increase since September 2012.

June was the fourth consecutive month showing a 0.4 percent increase on nominal personal income. The Personal Consumption Expenditure Price Index (PCE), was tame in June, increasing by just 0.1 percent for the month, as it did in May. The core PCE Price Index (less food and energy) gained 0.2 percent in June. Over the previous 12 months, the headline PCE Price Index was up by just 1.4 percent, while the core PCE Price Index was up by 1.6 percent. Real disposable income increased by a moderate 0.3 percent in June. Real consumer spending notched up by 0.2 percent in June. The personal saving rate was strong at 8.1 percent. 

Consumer confidence increased at mid-summer according to The Conference Board. Their Consumer Confidence Index jumped from 124.3 in June, to 135.7 in July.

The Federal Reserve lowered the fed funds rate range by 25 basis points on Wednesday. They also ended their program of balance sheet runoff two months early. The Bank of Japan said this week that it would like to keep its current low interest rates unchanged until at least spring 2020. The Bank of England left the Bank Rate unchanged at 0.75 percent at the meeting ending July 31 as it looks ahead to a possible hard Brexit in October. 

For a PDF version of this publication, please click here: Comerica Economic Weekly, August 2, 2019

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.

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July 2019 U.S. Employment, Auto Sales, June International Trade

August 2, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Job Numbers Solid, but Manufacturing Sector Looks Vulnerable

*     Payroll Employment increased by 164,000 net new jobs in July.
*     The Unemployment Rate for July was unchanged at 3.7 percent.
*     Average Hourly Earnings gained 0.3 percent in July and were up 3.2 percent for the year.
*     The Average Workweek eased to 34.3 hours.
*     Auto Sales for July dipped to a 17.0 million unit pace.
*     The U.S. International Trade Gap narrowed slightly to -$55.2 billion in June.

Payroll jobs increased by a healthy 164,000 in July. May and June payrolls were revised down by a total of 41,000 jobs. After a strong January, when we gained 312,000 net new jobs, the trend in job growth has stepped down this year. From February through July we are averaging 141,000 net new jobs per month, well below the average of 223,000 net new jobs per month for all of 2018. Labor force growth in July was strong, up by 283,000 workers, and so was household employment, up by 370,000 jobs. This brought the labor force participation rate up slightly, to 63.0 percent and left the unemployment rate unchanged at 3.7 percent. The average workweek eased to 34.3 hours as manufacturing hours declined by 0.6 percent. Average hourly earnings gained 0.3 percent for the month and were up by 3.2 percent over the previous 12 months.

Mining and logging gave up 5,000 jobs, consistent with a declining rig count. Construction employment increased by just 4,000 jobs. Manufacturing gained a solid 16,000 jobs for the month, but the industry looks vulnerable given the ongoing decline in the ISM Manufacturing Index for July. Wholesale trade added 6,700 jobs. Retail trade dropped 3,600 jobs. Transportation and warehousing was little changed, up 300 net new jobs in July. Utilities dropped 400 jobs. Information services gave up 10,000 jobs in July on net. Financial services gained a strong 18,000 jobs. Professional and business services added 38,000. Education and healthcare generated 66,000 net new jobs. Leisure and hospitality added 10,000. Government employment was up by 16,000 jobs mostly from local government.

Estimated U.S. auto sales eased for the second month, to a 17.0 million unit rate in July. Light truck sales increased to a 12.2 million unit rate, while auto sales dipped to a 4.8 million unit rate.

The U.S. international trade gap narrowed a little in June, to -$55.2 billion. Exports eased by $4.4 billion, while imports eased by $4.6 billion for the month. This, along with weak construction spending for June, implies that there will be a slight downward revision to Q2 GDP growth. Yesterday, the Trump Administration threatened to increase tariffs on imports for China by an additional 10 percent on September 1.

Market Reaction: U.S. equity markets opened with losses. The 10-Year T-bond yield is down to 1.87 percent. NYMEX crude oil is up to $55.62/barrel. Natural gas futures are down to $2.09/mmbtu.

For a PDF version of this publication, click here: July 2019 U.S. Employment, Auto Sales, June International Trade

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.

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July 2019 ISM Manufacturing Index, UI Claims, June Construction Spendi

August 1, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

U.S. Manufacturing Is Still Losing Momentum

*     The ISM Manufacturing Index for July eased again to a still-positive 51.2 percent.
*     Initial Claims for Unemployment Insurance climbed by 8,000 for the week ending July 27, to hit 215,000.
*     Construction Spending for June decreased by 1.3 percent.

The ISM Manufacturing Index declined for the fourth consecutive month in July, to 51.2 which is still a positive number, indicating a weak expansion. Many comparable indexes for other countries have been below 50 for several months highlighting the risk of a global manufacturing contraction that may spill over into the U.S. Several risk factors to U.S. manufacturing are aligning. First, global demand growth for U.S. products is easing. Second, trade wars are making supply chain management difficult for some companies. Third, the U.S. auto industry looks like it is past its peak and may be heading into a contentious period with UAW contract negotiations, currently underway. Fourth, oil field drilling activity is cooling in the U.S. Fifth, the construction industry appears to be cooling. Sixth, Boeing. If the U.S. manufacturing sector follows the global pattern and starts to contract, that does not necessarily mean that the entire U.S. economy will follow suit and enter a recession However, it would remove a key engine of growth and lead to a cooler overall U.S. economy.

In July, six out of 10 sub-indexes for the ISM Manufacturing Index were below 50, including inventories and backlog of orders. New orders and production were both barely positive at 50.8. Employment was still positive at 51.7. The difficulty of filling open positions for some companies may keep hiring engaged even though overall conditions are cooling. However, a contraction in the manufacturing sector would eventually be accompanied by net job losses. Nine out of eighteen reporting industries said that they were still expanding in July. The nine that reported contraction were: apparel, fabricated metals, primary metals, nonmetallic minerals, transportation equipment, paper products, miscellaneous manufacturing, electrical equipment, appliances and machinery. Anecdotal comments were mixed over a broad range from very positive to somewhat negative.

Initial claims for unemployment insurance increased by 8,000 for the week ending July 27, to hit 215,000. This is near the midpoint of the range in UI claims over the last 5 months. If anything, there may be some slight downward momentum in the series over the last 6 weeks, but we do not want to oversell that idea. Continuing claims gained 22,000 for the week ending July 20, to hit 1,699,000, still an extremely low level consistent with very tight labor markets.

The total value of construction put in place for June decreased by 1.3 percent. Private residential construction spending edged down by 0.4 percent with a decline in single-family projects. Private non-residential eased by 0.3 percent. Public construction spending fell by 3.7 percent in June. Over the past year, total construction spending has dipped by 2.1 percent.

Market Reaction: U.S. equity markets opened with gains. The yield on 10-Year Treasury bonds is down to 1.96 percent. NYMEX crude oil is down to $56.84/barrel. Natural gas futures are down to $2.21/mmbtu.

For a PDF version of this report, please click here: July 2019 ISM Manufacturing Index, UI Claims, June Construction Spending

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.

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Comerica Bank's Florida Index Improves

July 31, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Comerica Bank’s Florida Economic Activity Index increased in May to a level of 116.0. May’s index reading is 18 points, or 18 percent, above the index cyclical low of 98.5. The index averaged 114.8 in 2018, 1.7 points above the average for all of 2017. April’s index reading was revised to 115.8.

The Comerica Bank Florida Economic Activity Index improved in May after going unchanged in April. The Florida Index components were mixed in May. Five of the nine components were positive for the month. They included nonfarm employment, unemployment insurance claims (inverted), housing starts, industrial electricity demand and state sales tax revenues. Three components were negative in May including state total trade, hotel occupancy and total enplanements. House prices went unchanged for the month. Florida economic activity continues to grow in 2019. Florida’s real gross domestic product grew at a 2.9 percent annualized rate in the first quarter after growing at a more modest 2.0 percent in 2018Q4. Our Florida Index indicates that the Florida economy continued to expand in Q2 of this year. Tourism remains a positive factor for the state’s economy in 2019. According to Visit Florida, domestic tourism was up by 6.8 percent in 2019Q1 versus 2018Q1. Steady job gains and a positive economic outlook for the overall U.S. economy will support domestic travel into the state for the rest of 2019. A key ingredient for the Florida economy is residential real estate, which has not been a strong driving force in the state economy lately. Florida home sales have been range bound over the last two years. Our housing starts index for Florida turned positive in May, following three consecutive monthly declines. Housing indicators for Florida at mid-summer look soft.

For a PDF version of this report, please click here: Comerica Bank’s Florida Index Improves

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.
 

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Federal Reserve Monetary Policy

July 31, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Fed Cuts Funds Rate 25 Basis Points, Ends Balance Sheet Reduction Early

*     The Federal Reserve announced a 25-basis-point cut to the fed funds rate range to 2.00-2.25 percent.
*     The Fed also announced that they will end the program of balance sheet reduction immediately.
*     Fed Chair Jerome Powell said that this is not the start of a rate cutting cycle by the Fed.

Today, the Federal Reserve announced that they will cut the fed funds rate range by 25 basis points to 2.00-2.25 percent. This move was widely expected and comes as no surprise to financial markets. The fact that the Fed did not cut more aggressively, by 50 basis points, was a disappointment to a minority of analysts. Also, the Fed said that they will end their program of balance sheet reduction immediately, two months earlier than previously expected. This is a largely cosmetic move by the Fed that is meant to align with the rate cutting message.

The Fed’s assessment of economic conditions was unchanged from their statement from June 19. They cite a strong labor market and moderate economic activity for the U.S. Household spending has been strong, but business fixed investment has been soft. Inflation remains below the symmetric 2 percent objective.

Significantly, there were two dissenting votes in today’s FOMC decision. Esther George of the Kansas City Fed and Eric Rosengren of the Boston Fed both would have preferred no change in the fed funds rate.

In his post-meeting press conference, Fed Chair Jerome Powell said that he viewed this rate cut as a mid-cycle correction and it is not intended to indicate that the Fed is at the start of a rate cutting cycle.

Powell cited three justifications for today’s rate cut. (1) It will insure against downside risk from cooler global conditions and trade tensions. (2) It will support the U.S. economy and bolster consumer and business confidence. (3) It will support inflation. He also said that the Fed does not have a lot of experience in responding to trade tensions. Powell also said that other central banks are easing, implying that this is a factor in today’s move by the Fed.

Over the next few months, the Fed will watch to see if there is improvement in the global economy and stronger inflation-related metrics as a result of the rate cut. An unanswered question is what they will do in the absence of an improvement in the global economy and absent an improvement in inflation metrics.

In the current era of Federal Reserve monetary policy, dating from February 1994 when the Fed first publicly announced its monetary policy decisions, the Fed has never broken a pause with a rate cut, and then not cut more later. However, the Fed is being very careful to neutralize any expectation of future rate cuts. They do not want to let their monetary policy options get boxed in by financial market expectations.

Market Reaction: U.S. equity prices dropped at the outset of Chair Powell’s press conference. The 3-month Treasury Bill yield dropped to 2.08 percent. The 10-year Treasury yield dropped to 2.02 percent. NYMEX crude oil futures increased to $58.10 per barrel. Natural gas futures increased to $2.24 mmbtu.

For a PDF version of this report, please click here: Federal Reserve Monetary Policy

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.

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Comerica Bank's Arizona Index Ticks Up

July 31, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Comerica Bank's Arizona Index Ticks Up May’s index reading is 15 points, or 15 percent, above the index cyclical low of 99.5. The index averaged 112.8 points for all of 2018, 1.8 points above the average for 2017. April’s index reading was revised to 113.8.

Comerica Bank’s Arizona Economic Activity Index ticked up in May after going unchanged in April. There were more index components up than down in May. The positive components included nonfarm employment, housing starts, house prices, total state trade, hotel occupancy and state sales tax revenues. The three negative components were unemployment insurance (inverted), industrial electricity demand and total enplanements. After recent historical data revisions, the slowdown in Arizona economic activity at the beginning of the year looks less pronounced. The revised data show a flattening of activity in early 2019 instead of a steady decline. The Arizona Index was still up 1.4 percent in the 12 months ending in May. This is consistent with an ongoing moderate expansion for the Arizona economy in 2019. In the near term, we expect tourism to be a positive factor for the state economy. Direct travel spending in the state increased to $24.4 billion in 2018, according to Dean Runyan Associates. After a rocky start to 2019, national park visitations in Arizona have steadily improved and were up 9.9 percent in April from a year ago. Another trend that will continue to play out over the next year or two is the positive net migration into the state. The recent surge in population growth is supporting state job growth through increased demand for Arizona housing and increased consumer spending.

For a PDF version of this report, please click here: Comerica Bank’s Arizona Index Ticks Up

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.

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Comerica Bank's California Index Up Again

July 31, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Comerica Bank’s California Economic Activity Index increased 0.2 percent in May to a level of 124.5. May’s reading is 27 points, or 27 percent, above the index cyclical low of 97.8. The index averaged 124.0 points in 2018, 2.8 points above the average for all of 2017. April’s reading was 124.2.

Comerica Bank’s California Economic Activity Index improved again in May and has now increased for three consecutive months. At the beginning of 2019, the majority of the subcomponents in the California Index were negative. Fortunately, this trend has reversed course in recent months. There were six positive components in May. They included nonfarm employment, housing starts, house prices, industrial electricity demand, total state trade and the Dow Jones Technology Index. Only two components were negative for the month, unemployment insurance claims (inverted) and hotel occupancy. Prior to May’s reading, our California Index had been range bound since January 2018. Over the last 17 months, the index has declined six times, gone unchanged three times and increased eight times. Steady job growth is moving from a stabilizing factor for California’s economy in 2018 to an accelerating factor in 2019. The state added 171,700 jobs in the first six months of 2019, a step up from the 154,000 jobs added in the first six months of 2018. Over half of the jobs created in 2019 can be attributed to the construction, healthcare and hospitality industries. There is a risk that stronger job growth may only be temporary. Most of the major metropolitan areas across the state are experiencing very low unemployment rates. Tight labor markets and flat to negative net migration for the state means limited upside potential for California job growth going forward.

For a PDF version of this report, please click here: Comerica Bank’s California Index Up Again

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.
 

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July 2019 ADP Jobs, Mortgage Apps, Q2 Employment Cost Index

July 31, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Good Employment Data for July will Not Delay a Fed Rate Cut

*     The ADP Employment Report for July showed an increase of 156,000 private sector jobs.
*     The Employment Cost Index for the second quarter increased by 0.6 percent.
*     Total Mortgage Applications eased for the fifth consecutive week in late July.

The ADP employment report for July came in near consensus expectations, showing a moderate net gain of 156,000 private sector jobs for the month. The positive report for July does not change the very high probability of a 25 basis point rate cut by Federal Reserve, expected to be announced this afternoon. We will write more about the Fed later today.

Small businesses, with less than 50 employees, added 11,000 jobs in July on net. Medium-sized businesses (50-499 employees) added 67,000. Large businesses added 78,000. According to ADP, natural resource businesses gave up 6,000 jobs. This is consistent with the falling drilling rig count. Construction added 15,000 jobs despite otherwise flattish construction data. Manufacturing added 1,000 jobs in July. Trade/transportation/utilities gained 27,000 jobs. Information services lost 5,000. Financial activities employment increased by 11,000. Professional/business services was up by 44,000. Eds and meds gained 37,000. Leisure/hospitality employment was up by 26,000. This was a solid report that bodes well for the official Bureau of Labor Statistics employment report for July, which will be released at 7:30 am central time this Friday morning.

The Employment Cost Index (ECI) for Q2 showed that total compensation for civilian workers increased by 0.6 percent Q/Q. Over the previous 4 quarters the ECI is up by a reasonable 2.7 percent. Wages are up 2.9 percent for the year while other benefit costs increased by 2.3 percent. The concept of the ECI is related to unit labor costs (ULC) by way of productivity. In a low productivity growth environment a high ECI tends to lead to a high ULC. Conversely, in a high productivity growth environment a high ECI can be associated with a low ULC. ULC is a key factor in overall profitability for a firm. The Q2 ECI data is showing us that labor is getting more expensive. But given that fact that productivity looks like it is on an increasing trend this year, unit labor costs may remain contained.

Total mortgage applications dipped by 1.4 percent for the week ending July 26. Refi apps were little changed for the week, up by 0.1 percent after falling the week before. Purchase apps were down by 3.0 percent, the third consecutive weekly drop. On a four-week moving-average basis, refi apps are up by 84.9 percent from a year ago, while purchase apps are down by 2.6 percent. According to the Mortgage Bankers Association, the rate for a 30-year fixed rate mortgage was stable at 4.08 percent.

Market Reaction: U.S. equity markets opened with gains. The yield on 10-Year T-bonds is up to 2.05 percent. NYMEX crude oil is up to $58.35/barrel. Natural gas futures are up to $2.29/mmbtu.

 

 


For a PDF version of this report, please click here: July 2019 ADP Jobs, Mortgage Apps, Q2 Employment Cost Index


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.

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Comerica Bank's Michigan Index Flattens

July 31, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Comerica Bank’s Michigan Economic Activity Index went unchanged in May at a level of 117.5. May’s reading is 20 points, or 20 percent, above the index cyclical low of 97.9. The index averaged 118.4 points for all of 2018, 0.1 points above the index average for 2017. April’s index reading was revised to 117.5.

Comerica Bank’s Michigan Economic Activity Index was unchanged for the second consecutive month in May. The headline index has clearly flattened out over the last year and a half. In fact, in the 17 months since January 2018, the Michigan Index has only increased in three months. It decreased in eleven months and was unchanged in three months. The good news for the state is that it continues to generate new jobs. However, it is fair to say that the pace of job growth is slipping. In May, Michigan payroll employment was up by 0.4 percent over the previous 12 months, well below the U.S. national rate of 1.6 percent. Other factors are holding down the Michigan Index. Unemployment insurance claims have been trending up this year. Housing starts have been declining for two years. Industrial electricity demand has also eased over the last 2 years. Auto production has slipped this year as well. In May, three factors were positive. They were house prices, total state trade and sales tax revenue. The six negatives for May were payroll employment (barely), unemployment insurance claims, housing starts, industrial electricity demand, auto and light truck production and hotel occupancy. Trade issues remain unsettled for the state. The USMCA trade deal was ratified by Mexico in June, but remains unratified by the U.S. and Canada. The U.S./China trade war is also unresolved with no clear prospects for a reduction in imports tariffs.

For a PDF version of this report, please click here: Comerica Bank’s Michigan Index Flattens

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.
 

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Comerica Bank's Texas Index Increases

July 31, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Comerica Bank’s Texas Economic Activity Index grew 0.8 percent in May to 139.0. May’s index reading is 44 points, or 46 percent, above the index cyclical low of 95.5. The index averaged 134.6 points for all of 2018, 5.7 points above the average for 2017. April’s index reading was revised to 137.9.

The Comerica Bank Texas Economic Activity Index increased for the fifth consecutive month in May, consistent with an ongoing moderate-to-strong GDP expansion for the state in 2019. Recent job growth has accelerated. April and May saw net job gains of around 32,000 for Texas, noticeably above the average of around 20,000 per month from November through March. For the year ending in May, Texas payrolls were up by 2.4 percent, well ahead of the U.S. average of 1.6 percent. Payroll employment has been a positive for the Texas Index for 20 consecutive months. Other positives in May were unemployment insurance claims (inverted), housing starts, industrial electricity demand, total state trade, hotel occupancy and state sales tax revenues. House prices and the drilling rig count were negative factors in May. Even though oil production remains strong, the Texas rig count has been on a declining trend since peaking at 540 rigs last October. The latest numbers, for the end of July, show a steep decline to 454 rigs. Despite increasing military tension in the Persian Gulf, crude oil prices remain fairly stable in the range of $55 to $60 dollars per barrel for West Texas Intermediate crude. However, concerns about a cooling global economy are weighing on demand forecasts. Manufacturing indicators are in contraction for Europe and parts of Asia.


For a PDF version of this report, please click here: Comerica Bank’s Texas Index Increases

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.

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June 2019 Income & Spending, July Consumer Confidence, May House Price

July 30, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Income Numbers Are Solid, House Prices Less So

*     U.S. Nominal Personal Income increased by 0.4 percent in June.
*     After inflation and taxes, Real Disposable Income was up by 0.3 percent.
*     Real Consumer Spending increased by 0.2 percent in June.
*     The Personal Consumption Expenditure Price Index gained 0.1 percent in June.
*     The Conference Board’s Consumer Confidence Index increased to 135.7 in July.
*     The Case-Shiller U.S. National Home Price Index for May increased by 3.4 percent over the last year.

Gains to nominal personal income have been steady lately. June was the fourth consecutive month showing a 0.4 percent increase. Job growth was strong in June and wage rates increased, boosting total wages and salaries by 0.5 percent for the month. Wages and salaries account for about half of personal income. Inflation, as measured by the Personal Consumption Expenditure Price Index (PCE), was tame in June, increasing by just 0.1 percent for the month, as it did in May. The core PCE Price Index (less food and energy) gained 0.2 percent in June. Over the previous 12 months, the headline PCE Price Index was up by just 1.4 percent, while the core PCE Price Index was up by 1.6 percent. After accounting for inflation and taxes, real disposable income increased by a moderate 0.3 percent in June. Real consumer spending notched up by 0.2 percent in June, driven by purchases of durable goods. Durable goods purchases, including automobiles and recreational vehicles, were a positive factor for second quarter GDP growth. The personal saving rate remains strong at 8.1 percent in June. The saving rate was revised up a bit with the recent historical GDP revisions released with the Q2 GDP data. Strong labor markets, rising home equity and a solid saving rate are all supports to the household sector.

There is more good news for consumer spending. Consumer confidence increased sharply in July according to The Conference Board. Their Consumer Confidence Index jumped from 124.3 in June, to 135.7 in July.

There is good news and bad news in the Case-Shiller house price data for May. The good news is that rising household income, low mortgage rates and cooler home price gains are all positive for housing affordability. The bad news for home owners is that home price appreciation continues to cool. The U.S. National Home Price Index increased by 0.2 percent in May after seasonal adjustment. Over the previous 12 months, it is up by just 3.4 percent, the weakest 12-month gain since September 2012. Amongst the 20 key cities, Las Vegas is showing the strongest yearly increase, up 6.4 percent. Seattle is the weakest, down 1.2 percent.

Market Reaction: U.S. equity markets opened with losses. The yield on the 10-year Treasury bond is down to 2.06 percent. NYMEX crude is up to $57.20/barrel. Natural gas futures are down to $2.12/mmbtu.

For a PDF version of this publication, click here: June 2019 Income & Spending, July Consumer Confidence, May House Prices

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.

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Comerica Economic Weekly, July 26, 2019

July 26, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Economic data released this week confirmed a step down in overall economic growth in the second quarter as Q2 real GDP growth was reported at a 2.1 percent annualized rate. Late Q2 data looks consistent with an ongoing moderate economic expansion in Q3. 

Also, today with the Q2 GDP release we see the annual revision to historical GDP data. For this iteration of revisions, the GDP history was tweaked, but there are no wholesale changes. For the years 2014-2016 annual GDP growth has been unrevised and there are minor changes to the quarterly patterns for those years. For the year 2017, annual real GDP growth has been revised up to 2.4 percent from 2.2 percent. 

For 2018 annual real GDP growth is unrevised at 2.9 percent. The first quarter was revised up, but the subsequent three quarters were revised down. The fourth quarter of 2018 now looks weaker at 1.1 percent annualized growth versus the previously reported 2.2 percent.

Real GDP growth for 2019Q1 was unrevised at 3.1 percent. Q2 growth eased to 2.1 percent. Real consumer spending was strong in Q2, growing at an unsustainable 4.3 percent annual rate. Real business fixed investment eased to a 0.8 percent rate as investment in structures, including new oil wells, dropped. Inventory accumulation fell after a strong run, subtracting nearly one percentage point from Q2 GDP growth. The trade gap widened in Q2, subtracting 0.7 percentage points from topline growth. Government spending was unsustainably strong, increasing at a 5.0 percent annualized rate.  

New orders for durable goods increased by a larger-than-expected 2.0 percent in June to $246 billion. Core new orders (nondefense capital goods excluding aircraft) gained 1.9 percent in June after a 0.3 percent gain in May. 

Initial claims for unemployment insurance fell by 10,000 over the week ending July 20, to hit a very low 206,000. The trend in initial UI claims has been down since late June, indicating ongoing tight labor market conditions. Continuing claims fell by 13,000 for the week ending July 13, to hit a very low 1,676,000.

New home sales increased by 7.0 percent, to a 646,000 unit annual rate in June. The inventory of new homes for sale tightened to 6.3 months’ worth in June. The median sale price of a new home in June (unadjusted for square footage) increased to $310,400, about even with June 2018. 

Existing home sales fell by 1.7 percent in June, to a 5,270,000 unit annual rate. The good news in existing home sales is that the series looks like it has stabilized after sliding hard from a 5,640,000 unit pace in November 2017, to a 4,930,000 unit pace in January 2019.  Over the year ending in June, existing home sales were down by 2.2 percent. The months’ supply of existing homes for sale ticked up to 4.4 months’ worth, which is still reasonably tight. According to the National Association of Realtors, the median sale price of an existing home in June was 4.3 percent above the year-ago level.

Mortgage apps for purchase were up by 1.1 percent for the week ending June 28. This reversed a two-week decline. Refi apps dipped by 1.2 percent after a 3.2 percent increase the week before. The reported rate for a 30-year fixed rate mortgage inched up to 4.08 percent. 

The European Central Bank left its key monetary policy rates unchanged at its policy meeting on Thursday. Outgoing ECB President Mario Draghi expressed concern that inflation expectations may be moving downward. Slower economic growth and lower inflation expectations set the ECB up to ease their monetary policy stance at the September meeting.

For a PDF version of this report, please click here:  Comerica Economic Weekly, July 26, 2019

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.  

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June 2019 Durable Goods, Advance Indicators, July UI Claims, ECB

July 25, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

New Orders Tick Up, but Manufacturing Conditions are Cooling

* New Orders for Durable Goods increased by 2.0 percent in June.
* Initial Claims for Unemployment Insurance fell by 10,000, to hit 206,000 for the week ending July 20.

New orders for durable goods increased by a larger-than-expected 2.0 percent in June to $246 billion. The pattern of new orders has been weak so far in 2019. Several factors are converging that are weighing on new orders, including uncertainty due to trade wars, a cooling global manufacturing environment, Boeing’s problems with the 737 Max, declining U.S. auto sales and reduced oil field drilling activity. New orders look like they are trending south in 2019 after their recent peak in January. Many analysts have claimed that the Federal Reserve does not have a good reason to lower interest rates at the end of this month, but manufacturing conditions globally and in the U.S. are cooling. Lower capital costs would at least be marginally supportive of business investment, fortifying demand for durable goods. Total new orders in June were helped by communications equipment, up 4.0 percent, and by typical volatility in aircraft orders. Nondefense aircraft and parts orders increased by 75.5 percent in June after sliding through April and May. Core new orders (nondefense capital goods excluding aircraft) gained 1.9 percent in June after a 0.3 percent gain in May. On a year-to-date basis, headline new orders are unchanged this year from last year. Core new orders are down 5.4 percent compared with the first half of 2018. 

The Advance Indicators for June show that the merchandise trade deficit narrowed slightly from $75.0 billion in May to $74.2 billion in June. This is a positive for Q2 GDP. Wholesale inventories were up 0.2 percent in June, but retail inventories lost 0.1 percent for the month. This will be a negative for Q2 GDP. 

Initial claims for unemployment insurance fell by 10,000 over the week ending July 20, to hit a very low 206,000. The trend in initial UI claims has been down since late June, indicating ongoing tight labor market conditions. We are still in the middle of the summer season adjustment challenges for the series and we will not get a clean read until mid-September, but so far so good. Continuing claims fell by 13,000 for the week ending July 13, to hit a very low 1,676,000.

The European Central Bank left its key monetary policy rates unchanged at its policy meeting today. Euro area economic activity looks like it slowed through the first half of 2019. Manufacturing output in particular has been weak. Euro area inflation has also run well below the ECB's near 2 percent objective. Outgoing ECB President Mario Draghi expressed concern that inflation expectations may be moving downward. Slower economic growth and lower inflation expectations sets the ECB up to take on a more accommodative monetary policy stance at the September meeting.

We expect the Federal Reserve to make U.S. monetary policy more accommodative at the end of this month by lowering the fed funds rate by 25 basis points. 

Market Reaction: U.S. equity markets opened with losses. The 10-Year T-bond yield is up to 2.08 percent. NYMEX crude oil is up to $56.49/barrel. Natural gas futures are up to $2.22/mmbtu. 

For a PDF version of this report, please click here: June 2019 Durable Goods, Advance Indicators, July UI Claims, ECB      

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.  

 

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June 2019 New and Existing Home Sales

July 24, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Home Sales Zig and Zag in June

*     New Home Sales increased by 7.0 percent in June, to a 646,000 unit annual rate.
*     Existing Home Sales fell by 1.7 percent in June, to a 5,270,000 unit annual rate.

Total home sales have improved this year but remain below the recent peak from November 2017. New home sales increased by 7.0 percent, to a 646,000 unit annual rate in June. Sales were up by 50 percent in the West Census region following a very weak May report. The surge in the West in June still left sales below their March and April rates. The inventory of new homes for sale tightened to 6.3 months’ worth in June. The median sale price of a new home in June (unadjusted for square footage) increased to $310,400, about even with June 2018.

Existing home sales, which are the strong majority of all home sales, fell by 1.7 percent in June, to a 5,270,000 unit annual rate. The good news in existing home sales is that the series looks like it has stabilized after sliding hard from a 5,640,000 unit pace in November 2017, to a 4,930,000 unit pace in January 2019. Lower mortgage rates helped to break the downward momentum in existing home sales over the 15 month period. However, we remain skeptical about the ability of lower mortgage rates to motivate another upswing in home sales. Over the year ending in June, existing home sales were down by 2.2 percent. All four regions are down over the last year. The West is the worst at -5.2 percent. The months’ supply of existing homes for sale ticked up to 4.4 months’ worth, which is still reasonably tight. According to the National Association of Realtors, the median sale price of an existing home in June was 4.3 percent above the year-ago level.

Market Reaction: U.S. equity markets opened with gains. The 10-year Treasury bond yield is down to 2.05 percent. NYMEX crude oil is up to $57.34/barrel. Natural gas futures are down to $2.22/mmbtu.

For a PDF version of this report, please click here: June 2019 New and Existing Home Sales

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.

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Comerica Economic Weekly, July 19, 2019

July 19, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Economic data released this week was mixed, as it has been for most of this year. The biggest positive for the week came from stronger than expected retail sales for June. 

June retail sales increased by 0.4 percent for the month. Over the previous 12 months headline retail sales are up by 3.4 percent nominally. The dollar value of motor vehicle and parts sales increased by 0.7 percent in June despite a marginal decrease in unit auto sales from a 17.3 million unit annual rate in May to a 17.2 million unit rate in June. Retail sales excluding auto also increased by 0.4 percent in June. With lower gasoline prices, service station sales fell by 2.8 percent for the month. Electronic store sales eased by 0.3 percent. Most other major categories were positive in June. A strong job market, increasing homeowner equity and good consumer credit metrices are key positives for consumers and the overall U.S. economy heading into the second half of the year.

Another positive came from industrial production. Overall U.S. industrial production was unchanged in June. However, manufacturing output increased by 0.4 percent in June after gaining 0.2 percent in May. Motor vehicle assemblies increased to an 11.63 million unit annual rate in June. Utility output dipped by 3.6 percent in June after increasing by 2.4 percent in May. Mining output gained 0.2 percent in June, the same as it did in May.

Housing data was soft this week. Total housing starts in June were down slightly, dropping by 0.9 percent, and are still within the range seen over the last 12 months. Single-family starts increased by 3.5 percent, to an 847,000 unit annual rate. The overall trend for single-family starts still looks slightly down since late 2017. Multifamily starts fell by 9.2 percent for the month to a 406,000 unit annual rate.  Total permits dropped by 6.1 in June to a 1,220,000 unit annual rate. Single-family permits inched up by 0.4 percent, reaching an 813,000 unit rate. Multifamily permits fell by 16.8 percent in June, to a 407,000 annual rate. 

Total mortgage apps decreased by 1.1 percent for the week ending July 12. Purchase apps dipped by 3.8 percent after gaining through the previous two weeks. Refi apps notched up by 1.5 percent after falling through the previous two weeks. On a four-week moving average basis purchase apps are up 7.7 percent from this time last year. Refi apps are up 89.9 percent over the year. According to the Mortgage Bankers Association the rate for a 30-year fixed rate mortgage increased to 4.12 percent.

Another negative came from the Leading Economic Index, which declined by 0.3 percent in June. Drags came from residential building permits, new orders for manufacturing, initial claims for unemployment insurance and interest rate spread. The Leading Credit Index was still positive, as were average weekly manufacturing hours and stock prices. The Coincident Index recorded its second consecutive monthly gain after flatlining from January through April. It increased by a modest 0.1 percent in June, driven by payroll employment, personal income and manufacturing and trade sales. The Lagging Index reversed a May dip and increased by 0.6 percent in June. The biggest positives for the Lagging Index were duration of unemployment (inverted), commercial and industrial loans and inventory/sales ratio. 

We heard lots of fedspeak this week heading into the 10 day blackout period in front of the July 30/31 FOMC meeting. The press reported that New York Fed President John Williams made very dovish comments yesterday, consistent with an aggressive move coming up by the Fed. Today, the Fed walked those comments back.

For a PDF version of this report, please click here:  Comerica Economic Weekly, July 19, 2019

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.  

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June 2019 Leading Indicators, July UI Claims

July 18, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Leading Indicators Weak in June

*     The Conference Board’s Leading Economic Index for June decreased by 0.3 percent.
*     Initial Claims for Unemployment Insurance gained 8,000 for the week ending July 13, to hit 216,000.

The Conference Board’s Leading Economic Index for the U.S. declined by 0.3 percent in June. This is the first dip in the Leading Index since last December. It was unchanged in January and in May of this year. So for the first half of 2019 we can say that the Leading Index has been a weak positive indicator at best. Even though the topline index declined in June, six of the ten components were positive for the month. Drags came from residential building permits, new orders for manufacturing, initial claims for unemployment insurance and interest rate spread. The Leading Credit Index was still positive, as were average weekly manufacturing hours and stock prices. The Coincident Index recorded its second consecutive monthly gain after flatlining from January through April. It increased by a modest 0.1 percent in June, driven by payroll employment, personal income and manufacturing and trade sales. The Lagging Index reversed a May dip and increased by 0.6 percent in June. The biggest positives for the Lagging Index were duration of unemployment (inverted), commercial and industrial loans and inventory/sales ratio. Taken together, the Leading, Lagging and Coincident Indexes are consistent with a U.S. economy that is still expanding, but is showing less momentum this year than it did last year.

The weekly unemployment insurance claims data remains choppy in a very low range as it has been since late last year. It is normal to see some volatility in initial clams during the summer due to the annual summer closures of auto assembly plants for maintenance and retooling. These normal closures may shift up or back in the calendar and confound the seasonal adjustment process for the claims data this time of year. For the week ending July 13, seasonally adjusted initial claims increased by 8,000, to hit 216,000 which is still a very low level. Continuing claims dropped by 42,000, to hit 1,686,000. This is also an exceptionally low level, consistent with a very tight labor market.

Market Reaction: U.S. equity markets opened with losses. The 10-year Treasury bond yield is up to 2.06 percent. NYMEX crude oil is down to $55.21/barrel. Natural gas futures are up to $2.28/mmbtu.

For a PDF version of this report, please click here: June 2019 Leading Indicators, July UI Claims

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.

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June 2019 Housing Starts, July Mortgage Apps

July 17, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Residential Construction Trends Sideways Despite Lower Mortgage Rates

*     Housing Starts eased by 0.9 percent in June, to a 1,253,000 unit annual rate.
*     Housing Permits fell by 6.1 in June, to a 1,220,000 unit annual rate.
*     Mortgage Applications dipped by 1.1 percent for the week ending July 12.

Total housing starts in June were down slightly, dropping by 0.9 percent, and are still within the range seen over the last 12 months. Single-family starts increased by 3.5 percent, to an 847,000 unit annual rate. The overall trend for single-family starts still looks slightly down since late 2017. The recent peak for single-family starts came in January of this year at a 966,000 unit annual rate. Multifamily starts fell by 9.2 percent for the month to a 406,000 unit annual rate. This is well within the range established in early 2015. So we have seen no momentum in multifamily construction over the past four and a half years. Total permits dropped by 6.1 in June to a 1,220,000 unit annual rate. Single-family permits inched up by 0.4 percent, reaching an 813,000 unit rate. Multifamily permits fell by 16.8 percent in June, to a 407,000 annual rate. The decline in home mortgage rates this spring has not pulled the market out of the doldrums. At best we can say that the market would likely be a little softer without lower mortgage rates. We expect that there has been some opportunistic buying that might not otherwise have occurred. For now, housing remains absent from the U.S. growth story.

Total mortgage application decreased by 1.1 percent for the week ending July 12. Purchase apps dipped by 3.8 percent after gaining through the previous two weeks. Refi apps notched up by 1.5 percent after falling through the previous two weeks. On a four-week moving average basis purchase apps are up 7.7 percent from this time last year. Refi apps are up 89.9 percent over the year. According to the Mortgage Bankers Association the rate for a 30-year fixed rate mortgage increased to 4.12 percent.

Market Reaction: Stock indexes opened with losses. The yield on 10-year Treasury bonds is down to 2.08 percent. NYMEX crude oil is up to $57.88/barrel. Natural gas futures are up to $2.33/mmbtu.

For a PDF version of this report, please click here: June 2019 Housing Starts, July Mortgage Apps

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.

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June 2019 Retail Sales, Industrial Production

July 16, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Shoppers Did What They Do Best

*     Retail Sales increased by 0.4 percent in June and are up 3.4 percent over the previous year.
*     Industrial Production was unchanged in June according to the Federal Reserve.

Despite the decline in consumer confidence in June, retail sales performed better than expected and increased by 0.4 percent for the month. Over the previous 12 months headline retail sales are up by 3.4 percent nominally. June data provided a good example of the difference between consumer confidence and consumer spending. Sometimes when the going gets tough, the tough go shopping. Despite increased concern about a cooler global economy and increasing downside risk factors for the U.S. economy, consumers continue to have money to spend and are spending it, providing stability for the overall U.S. economy. A strong job market, increasing homeowner equity and good consumer credit metrices are key positives for consumers and the overall U.S. economy heading into the second half of the year. The dollar value of motor vehicle and parts sales increased by 0.7 percent in June despite a marginal decrease in unit auto sales from a 17.3 million unit annual rate in May to a 17.2 million unit rate in June. Retail sales excluding auto also increased by 0.4 percent in June. With lower gasoline prices, service station sales fell by 2.8 percent for the month. Electronic store sales eased by 0.3 percent. Most other major categories were positive in June.

Overall U.S. industrial production was unchanged in June. Utility output dipped by 3.6 percent in June after increasing by 2.4 percent in May. Mining output gained 0.2 percent in June, the same as it did in May. Manufacturing output increased by 0.4 percent in June after gaining 0.2 percent in May. Capacity utilization notched up to 77.9 percent. Despite the two-month increase, manufacturing output for June is still below the peak from last December. Motor vehicle assemblies increased to an 11.63 million unit annual rate in June. Auto and light truck assemblies increased over May and June but remain well below the peak rate from June 2015. Heavy and medium truck assemblies eased over May and June but remain near their peak for this business cycle. It is fair to say that while manufacturing conditions remain good in the U.S., momentum is cooling.

Market Reaction: Equity markets opened mixed. The 10-year Treasury yield is up to 2.12 percent. NYMEX crude oil is up to $59.89/barrel. Natural gas futures are down to $2.34/mmbtu.

For a PDF version of this report, please click here: June 2019 Retail Sales, Industrial Production

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.

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Comerica Economic Weekly, July 12, 2019

July 12, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

The big economic news this week was Federal Reserve Chairman Jay Powell’s semi-annual two-day testimony before Congress. On Wednesday Powell’s prepared remarks to the House Committee on Financial Services contained a series of justifications for easing monetary policy soon. Practically, this means that the Fed has all but guaranteed to cut the fed funds rate on July 31. There are two remaining questions.

The first question is...how much of a cut? We expect the Fed to cut the fed funds rate by 25 basis points to a range of 2.00-2.25 percent. There is a reasonable chance that they may do more and cut by 50 basis points. We believe that a 25 basis point cut will allow the Fed to test market reaction to a rate cut without using up too much of its rate cutting ability. 

The second question is...will a July 31st rate cut be the start of a rate cutting cycle by the Fed? We believe that downside risk factors for the U.S. economy may intensify and potentially compound this fall and winter. Our forecast calls for another 25 basis point fed funds rate after the end of July and before the end of this year. So we will stop far short of calling this the start of a rate cutting cycle, but there is a chance that that pattern could eventually play out. 

Inflation data for June was benign, providing the Fed ample leeway for a late-July rate cut. The Producer Price Index for Final Demand increased by just 0.1 percent, for the second straight month in June. Over the 12 months ending in June, the PPI for Final Demand is up by 1.7 percent. Energy prices were a weight on the headline index in June, falling by 3.1 percent for the month. Core PPI (final demand less food, energy and trade) was unchanged in June and was up by 2.1 percent over the year.

The Consumer Price Index for June was also up by 0.1 percent. Over the previous 12 months headline CPI gained 1.6 percent. Excluding food and energy, core CPI was up by 0.3 percent, its strongest monthly gain since January 2018. Core prices were pushed by a jump in used car and truck prices, which were up by 1.6 percent for the month, reversing a four-month slide. Over the previous 12 months core CPI was up by 2.1 percent. 

Initial claims for unemployment insurance fell by 13,000 for the week ending July 6, to hit 209,000. Initial claims can be volatile in the summer due to the variability of the seasonal auto assembly plant closures. Continuing claims increased by 27,000 to hit 1,694,000 for the week ending June 29.

Total mortgage applications fell by 2.4 percent for the week ending July 5. Refi apps were down 6.5 percent while purchase apps gained 2.3 percent. On a four-week moving average basis Refi apps were up 88 percent from a year ago. Purchase apps were up 6.8 percent. According to the Mortgage Bankers Association the rate for a 30-year fixed-rate mortgage eased to 4.04 percent. 

The National Federation of Independent Business’s Small Business Optimism Index dipped 1.7 points to 103.3 in June. This is still a high level for the index but it is well below the peak of 108.8 from August 2018.

The Job Openings and Labor Turnover Survey for May showed a drop in the job openings rate to 4.6 percent. The hiring rate eased to 3.8 percent. These are still strong rates but the job openings rate is not quite as strong as the 4.8 percent peak from mid-2018 through early 2019. 

Railroad carloads for the week ending July 6 were 8.2 percent below their year-ago level. Iron and scrap steel carloads were down 16.5 percent from their year-ago level.

For a PDF version of this report, please click here:  Comerica Economic Weekly, July 12, 2019

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.  

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June CPI, July UI Claims

July 11, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Low Inflation Reinforces Fed Rate Cut Expectations

*     The June Consumer Price Index increased by 0.1 percent, as energy prices dropped.
*     Initial Claims for Unemployment Insurance fell by 13,000 for the week ending July 6, to hit 209,000.

Declining gasoline prices kept the Consumer Price Index in check in June as it gained just 0.1 percent. Over the previous 12 months headline CPI is up by 1.6 percent, well below the Federal Reserve’s near-2-percent target. In June, gasoline prices fell by 3.6 percent for the month and this pulled the overall energy price index down by 2.3 percent. So far in July it looks like energy will be a push on the CPI. The food price sub-index was flat for the month. Excluding food and energy, core CPI was up by 0.3 percent, its strongest monthly gain since January 2018. Core prices were pushed by a jump in used car and truck prices, which were up by 1.6 percent for the month, reversing a four-month slide. Apparel prices were up by 1.1 percent in July, their first gain in four months. Over the last 12 months core CPI is up by 2.1 percent.

Initial claims for unemployment insurance fell by 13,000 for the week ending July 6, to hit 209,000. Initial claims can be volatile in the summer due to the variability of the seasonal auto assembly plant closures. Continuing claims increased by 27,000 to hit 1,694,000 for the week ending June 29.

Federal Reserve Chairman Jay Powell continues his congressional testimony today, speaking to the Senate Banking Committee. We expect no market-moving news from today’s testimony. We continue to expect to see a 25 basis point cut in the fed finds rate on July 31.

Market Reaction: U.S. equity markets opened with gains. The 10-Year Treasury bond yield is up to 2.08 percent. NYMEX crude oil is up to $60.60/barrel. Natural gas futures are up to $2.47/mmbtu.

For a PDF version of this report, please click here: June CPI, July UI Claims

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.

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Fed Chair Powell Testimony and FOMC Minutes

July 10, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Written and Verbal Comments by the Fed Set the Stage for a July 31 Rate Cut

*     Federal Reserve Chairman Jay Powell began his two day testimony to Congress today.
*     In his prepared testimony Powell noted many factors that could justify a fed funds rate cut soon.
*     The minutes of the Federal Open Market Committee meeting of June 18/19 were released today.
*     The minutes showed support within the FOMC for a fed funds rate cut soon.

This morning, Federal Reserve Chairman Jay Powell began two days of testimony before Congress. Today, he spoke to the House Committee on Financial Services. Tomorrow, Powell speaks to the Senate Banking Committee. In his prepared remarks this morning Powell listed many factors that could justify an upcoming fed funds rate cut. Powell noted a number of concerns specific to the U.S. economy: (1) inflation has been running below the FOMC’s symmetric 2 percent target, (2) inflation expectations may drop (related to #1 but forward-looking), (3) some demographic groups and some parts of the country still face economic challenges, (4) growth in business investment has slowed, (5) housing investment has declined, (6) manufacturing output has declined, (7) trade tensions remain unresolved, (8) labor force participation in the U.S. is lower than in other comparable economies, (9) boosting productivity growth should remain a high national priority, (10) the level of uncertainty has increased and (11) business confidence has declined. Also Powell noted that international economic conditions have deteriorated and there is cause for further concern about Brexit. Further, Powell said in his prepared testimony that in the last FOMC meeting, over June 18/19, that many FOMC participants saw that the case for more accommodative monetary policy has strengthened. Powell also reminded the House committee that the Fed is prepared to adjust any of the details of balance sheet normalization in light of economic and financial developments.

Powell’s prepared remarks make a strong case for a fed funds rate cute on July 31. We continue to believe that the Fed will enact a 25 basis point rate cut at the conclusion of the next FOMC policy meeting over July 30/31. It is also possible that we could see a reduction in the pace of balance sheet runoff, but we view that as less likely than a rate cut.

The minutes of the FOMC meeting of June 18/19 show that the Fed is focused on three key areas. First are the increased uncertainties in the U.S. economy due to ongoing trade conflicts. Second is the potential for further cooling in the global economy. Third is below-target inflation in the U.S. and the potential for a decline in inflation expectations. The FOMC judged that uncertainties and downside risk factors had increased significantly in the weeks before the mid-June meeting. Nearly all participants had revised their assessments of the appropriate path for the fed funds rate downward. Many participants judged that additional monetary policy accommodation (lower interest rates) would be necessary in the near term if recent developments were sustained. Several participants noted that a near term cut in the fed funds rate could help cushion the effects of future shocks to the economy and was therefore appropriate from a risk management point of view.

Market Reaction: U.S. equity prices increased after Chair Powell’s prepared remarks were released this morning. The 10-year Treasury yield dropped to 2.07 percent. NYMEX crude oil is up to $60.50 per barrel on news of lower than expected U.S. crude oil inventories. Natural gas futures are up to $2.48/mmbtu.

For a PDF version of this report, please click here: Fed Chair Powell Testimony and FOMC Minutes

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.

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July 2019 U.S. Economic Outlook

July 8, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Between Scylla and Charybdis (First Pass)

According to Homer, Scylla was a six-headed sea monster and Charybdis was a whirlpool. They occupied opposite sides of the Strait of Messina near modern Italy and are sometimes evoked when a person, or an organization, must navigate through a difficult passage. The Federal Reserve is on such an odyssey as it contemplates its next monetary policy move ahead of the July 30/31 Federal Open Market Committee meeting. 

Financial markets have been pushing hard on the Fed to begin easing monetary policy this year. The probabilities implied by the fed funds futures market for at least one 25 basis point rate cut this year are overwhelming. Pressure on the Fed is also coming from outside the U.S. Other central banks are easing. Mario Draghi, outgoing president of the European Central Bank has telegraphed what may be his final policy move before Christine Lagarde takes over (pending her final approval). With other central banks easing, the Fed will effectively tighten if it stands still and this would put pressure on the already strong dollar. 

The Fed’s “data dependence” is more complicated than ever. Recent U.S. data has been mixed. Job growth in May was soft, then it bounced back in June. Manufacturing indicators have been easing but auto sales were surprisingly strong in May and June. Global growth has cooled, in part due to international trade uncertainties. However, trade wars could be resolved quickly, or they could linger for years, if not decades.

The other dimension of the Fed’s data dependence is also ambiguous. In his speech at the Fed’s annual symposium in Jackson Hole last August, Fed chair Jay Powell noted the data “stars” by which the Fed navigates. R-star is the neutral rate of interest. Pi-star is the inflation objective. U-star is the natural rate of unemployment. A year later we wonder whether those stars are fixed beacons, or do they drift? The upcoming Jackson Hole Conference may provide more clues about how the Fed views its guiding stars. 

Political pressure on the Fed by the Trump Administration has been intense, compounding the potential for a lose-lose-lose-lose policy announcement by the Fed on July 31. With respect to interest rates, the Fed has four choices in front of it. The first possible outcome is that they raise the fed funds rate by 25 basis points. This is a very low probability event and would instantly trigger a financial market reset and intense pushback from many directions. The next choice is to do nothing with interest rates. The probability of doing nothing is also low, but it is higher than the zero probability assigned to it by the fed funds futures market. Again, the Fed would be courting financial market volatility and intense pushback if they leave the fed funds rate unchanged. The third option is to lower the fed funds rate by 25 basis points. This is not a win for the Fed in terms of financial market reaction because that move is already priced in. Further, it would disappoint those who favor a stronger move by the Fed. The fourth option is a 50 basis point rate cut. This would give the strongest jolt to the economy, and likely win praise from interest rate doves. But the Fed would risk using up a big chunk of its rate cutting potential for an uncertain upside gain at a time when the data is ambiguous. 

We believe that the Fed’s least bad policy choice is to make a 25 basis point rate cut at the end of July and then do nothing through at least the next FOMC meeting (over September 17/18) in order to gauge the response of the economy to marginally lower interest rates. A key risk of the least bad move is that a 25 basis point reduction at the end of July is not enough and leaves the Fed in a position later this fall that is similar to where it is right now. 

For a PDF version of this report, please click here: July 2019 U.S. Economic Outlook 

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Comerica Economic Weekly, July 5, 2019

July 5, 2019 by Robert A. Dye, Ph.D., Daniel Sanabria

Economic data was mostly positive this week, capped by a solid jobs report for June. 

A net 224,000 payroll jobs were added to the U.S. economy in June. April now shows a net gain of 216,000 jobs, while May payrolls are up by just 72,000. The three-month moving average through June is +171,000 jobs per month which is still a solid number. The unemployment rate ticked up in June to 3.7 percent, back to the rate first reached in September 2018. Average hourly earnings increased by 0.2 percent for the month and are up 3.1 percent over the previous 12 months. Wages are still increasing but they are not accelerating despite the scarcity of available workers. The average workweek was unchanged in June at 34.4 hours. The labor force participation rate of 62.9 percent has been stable over the last year. 

Initial claims for unemployment insurance fell by 8,000 for the week ending June 29, to hit 221,000. This is still a very low level, but it has been creeping up after a late-April trough. Continuing claims also dropped by 8,000 for the week ending June 22, to hit 1,686,000, also still a very low level. 

The ISM Manufacturing Index dipped to 51.7 in June, down from 52.1 in May. The June reading is still positive, but the index is trending down. Twelve of eighteen industries reported expansion for the month. The five industries reporting contraction were apparel, primary metals, wood products, transportation equipment and fabricated metals. Anecdotal comments featured concerns about trade tariffs for many industries.

The ISM Non-Manufacturing Index for June eased to a still-positive 55.1 indicating moderate ongoing expansion for the nation’s service sector. This is the weakest ISM Non-MF number since June 2017. In June, nine out of ten sub-indexes were positive, including business activity, new orders and employment. Imports were neutral for the month. Anecdotal comments were mixed, with concerns expressed about trade tariffs. Sixteen out of seventeen industries reported growth, only arts and entertainment reported contraction. 

The U.S. international trade gap widened in May to -$55.5 billion as imports surged. Imports increased by $8.5 billion with gains in automotive, industrial supplies and capital goods. Exports increased by $4.2 billion for the month with increases in capital goods, consumer goods and foods. Despite tariffs, the U.S. trade balance is still fighting the headwinds of a strong dollar and a cooler global economy. 

The total value of construction put in place in May fell by 0.8 percent as all three major categories declined. Construction spending has been flat over the last 12 months, weighed down by a falling trend in the value of private residential construction. In May, private residential construction fell by 0.6 percent, with weaker single-family home construction. Private non-residential construction dropped by 0.9 percent. Public construction also dipped by 0.9 percent in May. 

Total mortgage applications eased by 0.1 percent for the week ending June 28 as refi apps dipped by 1.2 percent. Purchase apps increased 1.1 percent. On a four-week moving average basis, refis were up by 90.3 percent over the previous year, fueled by lower mortgage rates. Purchases were up by 8.4 percent for the year. According to the Mortgage Bankers Association the rate for a 30-year fixed-rate mortgage notched up to 4.07 percent.

Vehicle sales were better than expected in June, holding up at a 17.2 million unit rate after a strong May rate of 17.4 million. Auto sales inched up for the month while light truck sales receded.



For a PDF version of this report, please click here: Comerica Economic Weekly, July 5, 2019
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