We are starting to see the effects of Hurricanes Harvey and Irma show up in some of the U.S. data. However, many of the storm effects are estimated by the data agencies involved. As field data is collected, these estimates will be revised in the coming months.
Retail sales data was mostly normal, but auto sales fell more than expected as South Texas auto dealers lost the last weekend of the month to the storm. Total retail sales for the U.S. dipped by 0.2 percent for the month. The dollar value of retail sales for autos fell by 1.6 percent. We expect to see stronger U.S. auto sales in September as Texas, Louisiana and Florida residents and businesses replace their storm damaged vehicles.
Industrial production dipped by 0.9 percent in August with declines across the three broad industry groups, manufacturing, mining and utilities. We expect to see more drag in manufacturing in September as refineries and petrochemical plants slowly resume normal operations. The lasting power outages in Texas, Louisiana and Florida (due to Harvey and Irma) will likely weigh on utility output in September.
The headline Consumer Price Index for August came in warmer than expected, increasing by 0.4 percent for the month. It was the strongest monthly gain since January. Energy prices provided a push as gasoline was up 6.3 percent for the month.
The Producer Price Index for Final Demand increased by 0.2 percent in August. The PPI for energy goods increased by 3.3 percent in August, reversing three consecutive monthly declines.
Initial claims for unemployment insurance fell by 14,000 for the week ending September 9, to hit 284,000. This comes after a surge in initial UI claims the previous week, gaining 62,000 after Hurricane Harvey hit South Texas. We expect to see another surge in weekly UI claims related to Hurricane Irma over the next couple of weeks.
Mortgage applications jumped for the week ending September 8, with gains in both purchase and refi apps. Purchase apps were up 10.9 percent for the week. Refi apps increased by 8.9 percent. According to the Mortgage Bankers Association, the rate for a 30-year fixed rate mortgage fell to 4.03 percent.
The Bank of England hinted that it would raise its benchmark lending rate soon. We expect the European Central Bank to announce the schedule for QE tapering in October.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 09152017.
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Economic data this week are again consistent with a moderate rebound in U.S. GDP growth for the second quarter. The first estimate of Q2 GDP is due out on July 28.
Payroll employment increased by a strong 222,000 net jobs for the month. The civilian labor force showed even stronger growth, increasing by 361,000 workers for the month. This brought the unemployment rate up inconsequentially to 4.4 percent. The temporary increase in the unemployment rate is not a sign of a cooling labor market. We expect that that labor market will continue to tighten through the second half of this year. The average workweek inched up by one tenth of an hour to 34.5. Average hourly earnings increased moderately by 4 cents, or 0.2 percent.
Initial claims for unemployment insurance increased by 4,000 for the week ending July 1, to hit 248,000, staying in the very low range where they have been since the first of the year. Continuing claims gained 11,000 for the week ending June 24, to hit 1,956,000, still a very low number.
The ISM Non-Manufacturing Index increased from a positive 56.9 in May, to a strong 57.4 in June. All 10 sub-indexes were above 50, indicating improving conditions. The ISM Manufacturing Index also improved in June, climbing to 57.8, indicating strong and improving conditions in the manufacturing sector. Together, these two indexes cover a significant portion of the U.S. economy.
The U.S. international trade gap narrowed by $1.1 billion in May, to reach -$46.5 billion. Exports increased by $0.9 billion, while imports edged down by $0.2 billion. The average inflation-adjusted balance of trade in goods for April and May was a little above the first quarter average. This suggests that trade may be a modest drag on Q2 GDP growth.
Auto sales for June eased to a 16.5 million unit rate, the lowest sales rate since October 2014. The June data was not terrible, but it feeds the growing consensus that we are past peak auto for this business cycle.
Construction spending was steady in May. Declines in private residential and private non-residential projects were offset by gains in public projects.
Oil prices climbed in late June, but gave back ground in early July to hit $45 per barrel Friday morning. The U.S. drilling rig count leveled out in late June reflecting a growing expectation for “lower for longer” oil prices.
The Federal Reserve released the minutes of the June 13/14 Federal Open Market Committee meeting. The Fed minutes showed ongoing, but general, discussion about the timing of balance sheet roll-off. The minutes reinforced the consensus view that the Fed will take a pause on rate hikes until the end of this year. The next significant development is expected to be a September 20 announcement of the start of balance sheet reduction. We expect balance sheet reduction to begin in early October. The dollar amount of maturing assets not reinvested will start out low and then gradually increase over the following year.
According to the fed funds futures market, there is only a 3 percent probability of a rate hike on July 26. September 20 stays low at 14 percent. November 1 barely climbs to 15 percent. The implied probability of a December 13 rate hike jumps to about 59 percent.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica Economic Weekly 07-07-2017.
Economic data this week are again consistent with a moderate rebound in U.S. GDP growth for the nearly complete second quarter. First quarter real GDP growth was revised up slightly to a modest 1.4 percent annualized rate. This is still a disappointing growth rate, but the third estimate of real GDP growth for Q1 has now doubled from the 0.7 percent growth of the first estimate.
Consumer spending added just 0.75 percentage points to Q1 real GDP growth. Warm winter weather was a factor, as was the inevitable decline in auto sales from the late-2016 peak. Business fixed investment was good, supported by the increase in oil drilling activity, adding 1.23 percent points to growth. Residential fixed investment was weaker, adding only 0.48 percentage points. Inventories were a big drag, pulling Q1 real GDP growth down by 1.11 percentage points. Net exports were a small positive in Q1, adding 0.23 percentage points. Government spending was another drag, subtracting 0.16 percentage points from Q1 real GDP growth.
We expect to see more support from consumer spending, inventories and government spending in Q2. The first estimate of second quarter gross domestic product is due out on July 28. We look for a moderate uptick in real GDP growth for Q2 to about 2.5 percent.
The income and consumer spending report for May is consistent with our expectations for increased real GDP growth in Q2. With the drop in energy prices in May, the personal consumption expenditure prices index fell by 0.1 percent. This means that the 0.4 percent nominal income growth for May translates into a solid 0.6 percent increase in real disposable income for the month. Real consumer spending increased by 0.1 percent in May. The April and May consumer spending numbers are consistent with a 2.5 to 3 percent growth rate for real consumer spending in Q2. This aligns with our estimate of 2.5 real GDP growth for Q2.
The Conference Board’s Consumer Confidence Index for June increased moderately to 118.9. Consumer confidence was trending up well before the November presidential election, then it spiked after the election. Consumer confidence has eroded in subsequent months, but it remains well into positive territory.
The Case-Shiller U.S. National Home Price Index was up by 5.5 percent for the year ending in April, below expectations. Fifteen of the 20 cities in the Case-Shiller 20-City Index showed price gains for the month, but Boston, Cleveland, San Francisco, Tampa and Washington did not. We expect tight inventories to keep upward pressure on house prices in most major markets.
New orders for durable goods decreased by 1.1 percent in May, weighed down by declining orders for both commercial and defense aircraft. Core orders, defense capital goods excluding aircraft, eased back by just 0.2 percent. New orders are an important leading indicator for the manufacturing sector, but they do not factor directly into the GDP calculation. The shipments data in the same report do factor into GDP through inventories and investment numbers. Shipments of durable goods increased by 0.8 percent nominally in May.
Initial claims for unemployment insurance increased inconsequentially by 2,000, to hit 244,000 for the week ending June 24. Continuing claims also ticked up slightly, gaining 6,000 for the week ending June 17, to reach 1,948,000.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_06302017.pdf
We attended the semi-annual meeting of the Economic Advisory Council of the American Bankers Association this week in Washington DC. This is a meeting of chief economists of major U.S. banks and financial institutions. The consensus expectation of this group was for ongoing moderate economic growth this year and next, with some boost from fiscal stimulus. The group expects that fiscal stimulus will come primarily in the form of tax reform early next year, but it will also include some net gain in government spending on infrastructure.
The EAC expects that the Federal Reserve will announce the beginning of its balance sheet reduction program in September, and will wait until December for the third and final fed funds rate increase this year. The group expects to see between two and four 25-basis-point fed funds rate increases in 2018, with some downside risk coming from lower-than-expected inflation.
The Conference Board’s Leading Economic Index increased by 0.3 percent in May, consistent with expectations for ongoing moderate GDP growth this year. Eight out of ten components of the LEI were positive, including the interest rate spread, the ISM new orders index, and consumer expectations for business conditions. Average weekly manufacturing hours were unchanged for the month. Residential building permits declined. The Coincident Economic index gained only 0.1 percent in May, consistent with easing expectations for growth in Q2. The Lagging Index also gained 0.1 percent.
Initial claims for unemployment insurance gained an inconsequential 3,000, to finish at 241,000 for the week ending June 17. Continuing claims increased by 8,000 to hit a still very low 1,944,000 for the week ending June 10.
Mortgage applications for purchase were strong in early May and then eased in the second half of the month. The data show a big jump in early June.
Existing home sales for May increased by 1.1 percent after falling in April. Existing home sales hit a 5,620,000 unit annual rate, near the long-term average. The series has been range bound since last November, showing no consistent upward momentum. The inventory of existing homes for sales inched up to a still-tight 4.2 months’ worth. Tight inventories will support ongoing price gains. The median sales price of an existing home was up by 5.8 percent over the previous 12 months.
New home sales for May also increased, gaining 2.9 percent for the month and hitting a 610,000 annual sale rate. New home sales are showing a little more upward momentum than existing home sales, but the May sales rate was still below the recent peak in February. The supply of new homes for sale remained at 5.3 months’ worth. Gains in median sales prices were looking softer this spring, but the May data shows a strong 16.8 percent increase in the median sales price of a new single-family home over the previous 12 months. This does not account for changes in the size of new homes being built.
The next meeting of the Federal Reserve’s Federal Open Market Committee is scheduled for July 25/26. We do not expect to see an interest rate hike announced at the upcoming meeting. According to the fed funds futures market, the implied probability of a July 26 rate hike is only 2.5 percent. We do expect the Fed to provide more guidance on the timing of balance sheet reduction in July. We expect the next rate hike to come in December.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica Economic Weekly 062317
We saw several important data releases this week and significant action and non-action by central banks. U.S. economic data for the week was generally softer than expected. However, data are still supportive of an increase in GDP growth in the second quarter.
Housing starts for May fell by 5.5 percent to a 1,092,000 unit annual rate. This is the weakest month since last September and the third consecutive monthly decline. It is also well below the rate of household formation indicating that ongoing tight supply conditions are likely in most residential real estate markets. Both single and multifamily starts fell in May. Permits fell by 4.9 percent in May, to a 1,168,000 unit annual rate. The bulk of the losses were in multifamily permits.
Even though residential construction numbers have been soft, builder confidence remains high. The National Association of Homebuilders’ Housing Market Index eased to a still-high 67 in early June. According to the NAHB, builders continue to express frustration about the shortage of skilled labor and buildable lots.
Industrial production for May was unchanged after surging by 1.1 percent in April. The May stall came as manufacturing output decreased by 0.4 percent, while utilities gained 0.4 percent and mining output increased by 1.6 percent. Vehicle assemblies eased from an 11.77 million unit annual rate in April to 11.54 in May.
With gasoline prices lower in May, the headline Consumer Price Index dipped by 0.1 percent. The energy price index was down by 2.7 percent. Excluding food and energy, core CPI increased by 0.1 percent. Over the previous 12 months, the headline CPI was up by 1.9 percent, while core CPI was up by 1.7 percent.
The Producer Price Index for final demand was unchanged in May. Over the previous 12 months, the PPI for final demand increased by 2.4 percent, and core PPI was up 2.1 percent.
The price of West Texas Intermediate crude oil dropped at the end of the week to below $45/barrel as inventories of crude oil and refined products remain high. This could set up weak inflation numbers for June.
Retail sales for May eased by 0.3 percent, in part due to lower gasoline prices. Service station sales were off by 2.4 percent for the month. Despite the soft nominal retail numbers for May, real (inflation adjusted) consumer spending in the second quarter looks like it is bouncing back after a weak first quarter, supportive of GDP growth.
Despite the soft data for May, small business optimism remains high. The National Federation of Independent Business said that their small business optimism index remained at a strong 104.5 in May.
The Federal Reserve raised the fed funds rate range to 1.00-to-1.25 percent on Wednesday. The Bank of England kept their key interest rate unchanged, as did the European Central Bank and the Bank of Japan. The dollar strengthened against a broad basket of currencies yesterday.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica Economic Weekly 06-16-2017