August Data Looks Good
• The ISM Non-Manufacturing Index for August increased to 55.3, indicating good conditions.
• The U.S. International Trade Deficit widened to -$43.7 billion in July.
• Mortgage Applications for the week ending September 1 increased with stronger refi activity.
The ISM Non-Manufacturing Index for August increased to 55.3, indicating good and improving conditions for the bulk of the U.S. economy. The ISM Manufacturing index for August previously reported strong conditions for the nation’s manufacturing sector. Most non-manufacturing industries reported growth in August, including construction. Only two industries, agriculture/forestry/fishing and transportation/warehousing reported contraction for the month. Anecdotal comments were positive. All ten sub-indexes were above 50, indicating improving conditions. Together, the ISM Non-Manufacturing Index and the ISM Manufacturing Index capture the mood of the U.S. private sector economy and are consistent with a moderate GDP expansion for the third quarter. The data for both August ISM reports was largely collected before Hurricane Harvey flooded South Texas.
The U.S. international trade deficit widened slightly in July to -$43.7 billion. Exports eased by $0.6 billion for the month, due to weaker goods exports. Imports eased by $0.4 billion, with weaker imports of goods. If sustained through August and September, the Q3 trade deficit would narrow compared to Q2 and provide a boost to Q3 GDP growth. However, we may see some drag on exports in September due to the after effects of Hurricane Harvey. This could reduce Q3 GDP slightly. The Port of Houston is a major petroleum and petrochemical export facility.
The Mortgage Banker Association’s composite mortgage application index increased by 3.3 percent for the week ending September 1. Refi apps were strong, up 5.1 percent, as mortgage rates eased. According to the MBA, the rate for a 30-year fixed rate mortgage eased 4.06 percent. Purchase apps increased by 1.4 percent for the week after falling for the three previous weeks.
Market Reaction: U.S. equity markets are mixed. The yield on 10-Year Treasury bonds is up to 2.06 percent. NYMEX crude oil is up to $48.63/barrel. Natural gas futures are down to $2.97/mmbtu.
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Private Sector Jobs Report Looks Good
- The July ADP Employment Report showed a solid net gain of 178,000 private sector jobs.
- Mortgage Applications fell by 2.8 percent for the last week of July.
Based on today’s release of the July ADP Employment Report, we expect to see another moderate gain of about 175,000 net new payroll jobs for the month when the official Bureau of Labor Statistics data for July is released on Friday morning. The ADP Report showed a net gain of 178,000 private sector jobs in June. Normally, we would add about 10,000 net new government jobs to the ADP private sector total to derive an estimate for the BLS numbers (which include the government sector). However, the Trump Administration’s freeze on federal hiring earlier this year has distorted the government sector jobs numbers. From January through May of this year, government sector net hiring added an average of 4,000 jobs per month to nonfarm payrolls. However, in June, the government sector added 35,000 net new jobs. We expect the July government sector number to be considerably weaker, and possibly show a net loss for the month. Therefore, we will stick to our initial estimate of about 175,000 net new nonfarm jobs added to the U.S. economy in July. This should be enough to bring the unemployment rate down to 4.3 percent.
The July ADP Report showed that most of the hiring in July was done by medium-sized businesses (50-499 employees), which added 83,000 employees. Small businesses added 50,000 employees on net and large businesses added 45,000. By sector, natural resources/mining added 3,000 workers. Construction employment was up by 6,000, which is a bit light. Manufacturing showed a net 4,000 job loss for the month. Professional/business services added a strong 65,000 workers. Education/healthcare employment gained 43,000 in July. Leisure/hospitality services added 15,000 net new jobs in July.
According to the Mortgage Bankers Association, applications for mortgages fell 2.8 percent for the week ending July 28. Purchase apps fell 2.0 percent and refi apps were down by 3.8 percent. Purchase apps were down in three out of four weeks in July. This implies that the new and existing homes sales data for the month will be soft. The rate for a 30-year fixed rate mortgage was steady at 4.17 percent at the end of July.
Market Reaction: U.S. equity prices were down at the open. The yield in 10-Year T-bonds is down to 2.24 percent. NYMEX crude oil is up to $48.83/barrel. Natural gas futures are unchanged at $2.81/mmbtu.
For a PDF version of this Comerica Economic Alert click here: July ADP.
GDP Resumes Moderate Growth, as Expected. Employment Costs Edging Up
- Real Gross Domestic Product for 2017Q2 increased at a moderate 2.6 percent annualized rate.
- Worker Compensation increased by 2.4 percent for the 12 months ending in June.
Real gross domestic product growth increased to a moderate 2.6 percent annualized rate in the second quarter, after a revised 1.2 percent growth rate for the first quarter of 2017. As expected some of the quirky factors that held back GDP in Q1 reversed in Q2. Still, it would be an exaggeration to say that GDP growth rebounded. It did not. Rather it resumed a moderate growth track that looks like it will continue through the current third quarter. Real consumer spending increased at a solid 2.8 percent annualized rate in Q2 after a weather-beaten Q1. Even as unit auto sales slowed, other consumer spending on durables and nondurables was strong. Real business fixed investment growth was reasonable at a 5.2 percent, held in check by subdued gains in intellectual property. Inventories were neutral for the quarter. Net exports were a small positive, adding 0.18 percentage points to Q2 growth after dragging on headline growth in Q1. Government spending added to GDP in Q2, growing at a 0.7 percent annual rate after shrinking in Q1. If we have a similar 2.5 percent (plus or minus a couple of tenths) growth rate in Q3, that will be enough to keep job growth engaged, putting more downward pressure on the unemployment rate. Today’s GDP report will keep the Federal Reserve on track as they prepare for balance sheet reduction this fall. Looking farther down the road, moderate GDP growth, leading to a lower unemployment rate, is expected to put upward pressure on labor costs. This is the Philips Curve relationship that has received a good deal of attention recently. Fed policy makers will be watching to see if the Phillips Curve holds up in this business cycle and inflation starts to accelerate in 2018.
The Employment Cost Index for June increased by 0.5 percent over the previous three-month period. For the 12 months ending in June, compensation costs are up by 2.4 percent. This was a tame report, but it does show that the rate of increase in both wages/salaries and benefits is climbing off the lows of 2009-2013. The rate of increase remains less than previously expected, but it is now showing the kind of steady increase that we saw in the 1990s that caused the Federal Reserve to increase the fed funds rate to 6.5 percent by mid-2000. This increase in interest rates in turn contributed to the Recession of 2001.
Market Reaction: U.S. equity markets open with losses. The 10-year Treasury bond yield is down to 2.30 percent. NYMEX crude oil is up to $49.52/barrel. Natural gas futures are up to $2.97/mmbtu.
For a PDF version of this Comerica Economic Alert click here: 2017 Q2 GDP.
New Home Sales are Trending Up, But Existing Home Sales are Stalled
- New Home Sales ticked up by 0.8 percent in June, to a 610,000 unit annual rate.
- Existing Home Sales decreased by 1.8 percent in June to a 5,520,000 unit annual rate.
- The Case-Shiller U.S. National Home Price Index was up 5.6 percent in May over the previous year.
New home sales ticked up by 0.8 percent in June to a 610,000 unit annual rate. This is still below the March peak of 638,000, but the trend looks positive. The month’s supply of new houses on the market also inched up, to 5.4 months’ worth. According to the Census Bureau, the median sales price of a new house in June was $310,800, about 3.4 percent lower over the previous 12 months. The drop in prices for new homes is due to builders increasingly focusing on downmarket segments.
Existing home sales eased by 1.8 percent in June, to a 5,520,000 unit annual rate. After trending up through 2015, existing home sales were range bound in 2016, near the 5.4 million unit mark. They appeared to gain some altitude in late 2016/early 2017, but over the past several months they once again look range bound near a 5.5 million unit pace. This is not a bad number. It approximates the pace of existing home sales before the big upswing in the mid-2000’s which was followed by the crash. However, it also shows that there is less momentum in housing than expected. It is fair to say that the single-family housing market is not leading the economy in this expansion, but following it, grudgingly. The inventory of available existing houses for sale inched up to 4.3 months’ worth in June, still showing a tight market. The median sales price of an existing house was up by 6.5 percent in June over the previous 12 months, according to the National Association of Realtors.
The Case-Shiller U.S. National Home Price Index gained 0.2 percent in May, after seasonal adjustment, and was up 5.6 percent over the previous 12 months. Looking at the 20-city statistics reveals that 6 out of 20 cities saw slightly lower prices in May. Most of the 20 cities are showing solid year-over-year price gains. Chicago trails the list, up only 3.3 percent over the last year. Seattle is leading the pack, up 13.3 percent.
The Federal Reserve will release a monetary policy statement today at 1pm central time at the conclusion of the two-day Federal Open Market Committee meeting. Policy makers are expected to leave interest rates unchanged. Fed watchers will be looking for clues about a possible September announcement for the beginning of balance sheet reduction in October. They will also be looking for signs that the Fed may want to lower expectations from their previous dot plot which was consistent with four rate hikes between now and the end of 2018. We expect the next interest rate hike to come this December.
Market Reaction: U.S. equity markets opened with gains. The 10-year Treasury bond yield is down to 2.33 percent. NYMEX crude oil is up to $48.44/barrel. Natural gas futures are down to $2.89/mmbtu.
For a PDF version of this Comerica Economic Alert click here: June New and Existing Home Sales.
Indicators Point to Positive H2
- The Conference Board’s Leading Economic Index for June increased by 0.6 percent.
- Initial Claims for Unemployment Insurance fell by 15,000 for the week ending July 15, to hit 233,000.
The Conference Board’s Leading Economic Index increased by 0.6 percent in June, its 10th consecutive monthly increase, and the strongest monthly gain since January. Building permits was the strongest contributor to the LEI in June. Both the Coincident Index and the Lagging Index were up by 0.2 percent for the month. The solid increase across all three indexes for the month of June is a positive signal for the U.S. economy, reinforcing our expectations for moderate GDP growth through the second half of this year. The first estimate of second quarter GDP will be released on July 28.
The good LEI report for June should reassure the Federal Reserve as it begins a historic policy rotation toward balance sheet reduction this fall. We expect the Fed to leave the fed funds rate range unchanged at 1.00-1.25 percent at the conclusion of the upcoming Federal Open Market Committee meeting over July 25/26. They will likely reinforce expectations that the schedule for the beginning of balance sheet reduction will be announced at the conclusion of the September 19/20 FOMC meeting. Market expectations for future interest rate hikes over 2018 have cooled a bit with weaker inflation readings. It will be interesting to see if the Fed changes the language in their upcoming policy announcement to reflect a downshift in rate hike expectations. However, we look for the Fed to leave 2018 interest rate expectations unchanged next week, instead opting for maximum maneuvering room later this year. They are caught between lower than expected inflation now and the potential for more inflation later as the U.S. economy begins to run above the potential GDP trend line for the first time in this expansion cycle.
The European Central Bank today issued a policy announcement that implied that they are considering how and when to end their asset purchase program. The ECB left their ultra-low benchmark interest rates unchanged, but indicated that asset purchases will “run until the end of December 2017, or beyond.”
Labor market indicators remain positive. Initial claims for unemployment insurance decreased by 15,000 for the week ending July 15, to hit 233,000, a very low number. There may be some residual seasonality imbedded in the midsummer numbers due to the annual auto plant summer closures. Continuing claims increased by 28,000 for the week ending July 8, to hit 1,977,000, another very low number.
The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey’s current conditions index dipped to a still-positive 19.5, suggesting that manufacturing conditions in the mid-Atlantic area are still improving, but at a slower pace than last month. The New York Fed’s Empire State Manufacturing Survey was released on Monday. Its current condition index also eased, to a still-positive 9.8.
Market Reaction: Equity markets are mixed. The 10-Year Treasury bond yield eased to 2.24 percent. NYMEX crude oil is down to $46.89/barrel. Natural gas futures are up to $3.06/mmbtu.
For a PDF version of this Comerica Economic Alert click here: June 2017 Leading Indicators.