Comerica’s index climbs for third consecutive month

February reading showed rapidly reflating U.S. economy, but supply chain constraints dampened manufacturing.
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Comerica Bank’s Michigan Economic Activity Index showed the state is continuing to benefit from the rebounding U.S. economy, but challenges remain.

The bank’s Michigan index, which it reported April 29, increased in February to a level of 104. February’s reading was 21% higher than the historical low reached in June 2020. The index averaged 99.9 points for all of 2020, 9.1 points below the index average for 2019. January’s index reading was 102.9.

This month, Comerica rolled out new methodology for its state economic activity indexes, making some adjustments to the subcomponents and their weights in order to better align with state-level gross domestic product. The bank also rebased the subcomponents of its indexes to average 100.

Comerica’s new Michigan Economic Activity Index increased for the third consecutive month in February.

The Michigan Economic Activity Index consists of nine variables: nonfarm payroll employment, continuing claims for unemployment insurance, housing starts, house price index, industrial electricity sales, auto assemblies, total trade, hotel occupancy and sales tax revenue. All data are seasonally adjusted. Nominal values have been converted to constant dollar values. Index levels are expressed in terms of three-month moving averages.

Six out of nine components were positive for the month, including nonfarm payrolls, unemployment insurance claims (inverted), house prices, industrial electricity demand, hotel occupancy and sales tax revenue.

The three components retreating in February were housing starts, light vehicle production and total state trade. The bank said it expects Michigan to continue to benefit from the rapidly reflating U.S. economy this spring; however, the auto industry, along with other manufacturing and construction industries, is being held in check by supply chain constraints, including a global shortage of computer chips.

Several assembly plants in Michigan temporarily shut down this spring and/or throttled back production. Chip manufacturers are ramping up production, and Comerica expects computer chips to remain in tight supply through the summer and possibly later.

Payroll employment gains in March were subdued, as the manufacturing sector gave up some jobs.

Robert Dye, senior vice president and chief economist for Comerica, spoke to the Business Journal this month about the index.

“There are two central issues in Michigan right now,” Dye said. “First, that the state is participating in the lift from the reflating U.S. economy, demand for Michigan products is increasing, and so businesses are renormalizing — so it’s very nice to see that — but at the same time, the durable goods manufacturing sector is being held in check right now because of a very tight supply chain: the computer chip problem is well-documented, (and it’s) holding back production of automobiles, leading to some factories/assembly plants to throttle back production or to close down for brief periods. So, it’s a mix.”

Dye said the computer chip shortage is partly due to the freezing weather in Texas that occurred in February, knocking out power and shutting down two major factories in Austin that produce computer chips for global markets. It’s also partly due to production slowdowns or shutdowns that happened when COVID-19 first hit the U.S.

He said state trade is always one of the more volatile components of the index, and it retreated when Michigan did not have as many goods to export due to production pauses.

Robert Dye. Courtesy Comerica Bank

Dye said housing supply continues to be a problem, as existing home sales pulled back in March, and new housing starts are sluggish due to lumber prices nearly doubling from a year ago, plus appliances and other components required to build homes are backlogged due to COVID-19. He said it is still a “fundamentally positive” sign that consumer confidence is high enough that demand for housing is strong, and demand for autos is strong.

“The bad news is Michigan can’t participate in meeting that demand to the extent that you would like because of supply chain issues. It is a ‘good news economy’ fundamentally, but good news is creating the bad news on the supply chain side.”

Dye cited the economic theory that supply chain constraints will eventually solve themselves because as prices for commodities like homes, lumber, autos and computer chips go up, producers will be motivated to ramp up production.

“There’s a balancing act that is currently underway, and my expectation is that as we get into the fall and certainly by the end of this year, we’re going to see more balance in supply chains,” he said. “We’re going to see that … producers who had to shut down last spring and created some of these very tight conditions now will be ramping up.”

Heading into summer, Dye said there will be a long sorting-out process about what parts of the economy can return to business as usual and what constraints will remain due to COVID-19. He said this economic rebalancing or adjustment process we’re in now is incredibly unusual and complex due to the pandemic and the massive and rapid federal fiscal stimulus and planned infrastructure spending that have been enacted and/or proposed, leading to a rapid reflation of the economy even while uncertainty lingers.

“An example of that is back-to-office,” he said. “What percentage of employees are actually coming back to the office? And the impact on retail trade? We went through a very strong movement toward online shopping, and will some of that revert? (There’s been changes) in housing patterns impacting the commercial real estate market, and the multi-family housing market is in a state of flux right now. So there (are) an awful lot of unsettled conditions that are going to take a year, two, maybe even three or longer in certain parts of the economy to really know what ‘steady state’ looks like coming out of COVID.”

He added the vaccine program has positively affected the economy, as April was the second month in a row that saw strong consumer confidence, with more people on the road, more people in stores, and more people going about their business and spending money.

“It is my hope and belief that the worst of COVID is behind us, and states can continue to make progress toward renormalization, but there are always risk factors out there that happen, and perhaps a further hybridization of COVID could be an issue, but that’s the downside risk,” Dye said. 

“The upside risk is, again, this is a very unusual economic environment, this rapid reflation, (and with) this very strong fiscal support, the very strong monetary policy support — we could see very strong economic numbers well through 2022 and beyond. It simply is a case of we just haven’t been here before, so it’s always an interesting challenge forecasting an economy with completely new conditions.”

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