July Industrial Production, Leading Indicators, August UI Claims

Auto Assemblies Fall, but Leading Indicators are Positive

  • Industrial Production increased by 0.2 percent in July as vehicle assemblies fell.
  • The Conference Board’s Leading Economic Index increased by 0.3 percent in July.
  • Initial Claims for Unemployment Insurance fell by 12,000 for the week ending August 12, to hit 232,000.

Total industrial production increased by 0.2 percent in July, boosted by a rebound in utility output. A mid-summer heatwave raised utility output by 1.6 percent in July, after falling by 1.2 percent in June. Output in the mining sector increased by 0.5 percent in July, the fourth consecutive monthly increase. With a flat U.S. drilling rig count from early July through mid-August, we may see smaller gains in output going forward. Output in the manufacturing sector eased by 0.1 percent in July. Manufacturing accounts for about 76 percent of all industrial output, so the small decline there held down the headline index despite gains in utilities and mining. Durable goods manufacturing was the key drag as output in motor vehicles and parts dipped by 3.6 percent. Vehicle assemblies, counted on a unit basis, declined from an 11.07-million-unit rate in June, to 10.29 million in July, a 7 percent drop. This was the lowest assembly rate since July 2013. We expect vehicle assemblies to bounce back in August, but there is a clear declining trend from the peak rate of 12.94 million units set in July 2015. A cheaper dollar and a synchronized global expansion will help export oriented manufacturers, countering some of the drag on headline IP from waning auto sales. However, a cheaper dollar will also make imported parts and materials more expensive for all manufacturers.

The Conference Board’s Leading Economic Index increased by 0.3 percent in July, the 11th straight monthly increase for the series. The strongest positives came from the interest rate spread, new manufacturing orders and consumer expectations. The only negative contributor, out of 10 components, was building permits. The Coincident Index and the Lagging Index were also positive for the month, consistent with our expectations of ongoing moderate real GDP growth through the third quarter.

Labor indicators continue to point to tight conditions. Initial claims for unemployment insurance decreased by 12,000 for the week ending August 12, to hit 232,000. Continuing claims dipped by 3,000 for the week ending August 5, to hit 1,953,000. These are very good numbers, consistent with ongoing moderate payroll job growth through August.

Market Reaction: Equity markets opened with losses. The yield on 10-Year Treasury bonds is down to 2.21 percent. NYMEX crude oil is up to $46.90/barrel. Natural gas futures are up to $2.96/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  Industrial Production 08-17-17.

 

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Arizona’s Story: A Lagging Economy

While a lagging economy may sound like a bad thing, in the case of Arizona there may be a silver lining. Arizona has not seen consistent real GDP growth above 2 percent since 2007. Previous economic expansions in the state have been fueled by demographic expansion and employment growth in construction and services. In this cycle the state’s tepid economic recovery has absorbed some slack in the Phoenix labor market. But there is still some slack that can be absorbed, especially in Tucson, the state’s second largest metropolitan area. Tucson total nonfarm payrolls still remain below their pre-recession peak and are up just 0.4 percent in the 12 months ending in June. So there is upside potential from the ongoing economic recovery in southern Arizona. Looking at demographics, net migration into the state and overall population growth is improving. Arizona still represents a low-cost location for retiring baby boomers. Also, the ongoing economic expansion in the U.S. will support the state’s tourism industry. This will support demand for housing and other services and will help boost the state’s economy to above 2 percent real growth for both 2017 and 2018.

Arizona’s housing market remains tight. Taking the ratio of housing starts to household formation shows that for every 10 households forming, there are seven new houses. This is helping to bolster home prices, particularly in the Phoenix area. This trend is expected to persist over the next couple of years as builders face shortages of prime lots and of labor and increasingly expansive building materials.

For a PDF version of the complete Arizona Economic Outlook, click here:  AZ_Outlook_0817.

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Florida Economy to Remain Strong

Our expectations for the Florida economy through 2018 remain positive, supported by solid recent performance. Job growth for the state was up 2.9 percent for the year ending in June. Recent job gains helped push Florida’s unemployment rate down to 4.1 percent in June, the lowest since June 2007. State wages will continue to firm as labor markets tighten, supporting household wealth and consumer spending. Florida’s economy has also been supported by a U.S. economic expansion and improving international conditions. A synchronized global expansion and a declining value of the dollar are both positives for tourism and real estate conditions in The Sunshine State.

Residential real estate conditions in the state are firm in most markets. The Case-Shiller Home price index for Tampa was up by 6.8 percent over the 12 months ending this May, well above the U.S. average of 5.6 percent. Miami was a little softer, under the U.S. average, at 5.3 percent. According to the Florida Association of Realtors, single-family home sales in Florida were up 4.3 percent in June, over the previous 12 months. Condo sales were up 4.9 percent. Parts of the condo market remain oversupplied, particularly in the Miami metro area. We expect that the pace of condo construction will slow in 2018, reflecting tighter lending conditions. Strong labor market conditions and baby boomer relocations will keep housing demand engaged. This will allow overbuilt markets to gradually rebalance, supporting rent and price gains in 2018 and 2019.

For a PDF version of the complete Florida Economic Outlook, click here:  FL_Outlook_0817.

 

 

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The California Economy Looks to Rebound After a Rocky Start to 2017

California economic activity slowed in the first half of 2017. The recently released official Bureau of Economic Analysis real gross domestic product for California came in well below expectations, eking out a barely positive 0.1 percent for the first quarter of 2017. The slowdown can be explained, in part, by the deceleration in job growth in Q1. We expect economic activity to improve for the remainder of 2017 as some of the components that dragged on Q1 GDP begin to abate. Employment growth in Silicon Valley and the Los Angeles metropolitan area is now showing positive momentum following consecutive monthly losses in the first half of 2017. Exchange rates will be more supportive to California exporters as the U.S. dollar has fallen against other major foreign currencies. The U.S. dollar has dropped 16.7 percent against the Mexican peso since January and is now below the May 2016 exchange rate. The Trump Administration is still working on trade policy, and this could be a major disruptor for the state. However, the recent tone of the Administration appears to be less combative on trade. This may reduce some uncertainty about the complex modern supply chains that many businesses in California require.

The International Olympic Committee is expected to officially announce Los Angeles as the host of the 2028 Summer Olympics. There will be a reduced need for building new facilities in the L.A. area compared to other recent Olympics sites. There will still be a boost to the area from increased tourism and business activity.

For a PDF version of the complete California Economic Outlook, click here: CA_Outlook_0817.

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The Oil Wave Reflated Texas, Now Leveling Off

The Texas economy has turned back to consistent expansion after limping through 2015 and the first half of 2016. Net monthly job growth statewide has been positive and strong every month since July 2016. Through the first seven months of this year, Texas has averaged 40,200 net new payroll jobs per months, above the strong 34,700 jobs per month pace of 2014. Rising oil prices through 2016 were a big part of the turnaround story as the drilling rig count increased. Energy companies put crews back to work and required goods and services from other companies in order to ramp up oil drilling. However, through the first six months of this year, oil prices slipped, dipping under $43 per barrel by mid-June. The state drilling rig count, which rose steadily from June 2016 through April 2017, stalled this year as profit margins were squeezed. Over the 13 weeks ending on August 11, the state rig count has been range-bond around 460 active rigs. We expect that the rate of job growth in the state’s important resource and mining sector is at a local peak, of about 4,000 jobs per month through the first half of this year, and will ease in the second half of this year with a less aggressive expansion of drilling activity. We have also seen an interesting regional dynamic in Texas related, in part, to oil. As job growth in the North Texas area eased early 2017, it picked up in the Houston metro area. We look for a leveling of job growth in Houston through the second half of 2017, in line with lower-for-longer oil prices. We except the DFW area to resume consistent strong job growth in 2017H2 fueled by non-energy companies, after stumbling this spring.

For a PDF version of the complete Texas Economic Outlook, click here:  TX_Outlook_0817.

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Even With Cooler Job Growth Labor Supply is Constrained for Michigan

This is a very exciting time in Michigan’s important auto sector as new technology is developed and delivered. However, it is also a very challenging time as U.S. auto sales drift down after a very strong year in 2016. Fortunately, July saw a small uptick in vehicle sales, to a 16.8 million unit rate, but the sales trend for 2017 still looks negative overall. We expect sales to total around 16.9 million units this year and ease further to around 16.4 million next year. Also, new technology for customers will require new investment for automakers, and increase the need and opportunities for productivity growth, meaning fewer workers per assembled car. In a sign of ongoing global pressures, a Chinese company has made a bid for Fiat Chrysler, potentially advancing the transition of one of the Detroit big three into a truly multinational and multi-continent company. Job growth in Michigan has begun to ease this year, stepping down from the 7,700 net new jobs per month average of 2016, to 2,350 per month through the first six months of 2017. We expect overall job growth to remain positive, but continue to ease through 2018. Regional and industry-specific labor markets will be complex in Michigan through next year. We expect auto makers to pare back on labor. But we also expect other manufacturers to continue to have a difficult time finding qualified workers. The unemployment rate for the Grand Rapids metro area has already broken below 3 percent, hitting 2.7 percent in June. Even with cooler statewide job growth, we expect Grand Rapids to continue to experience very tight labor market conditions with firms struggling to fill skilled jobs.

For a PDF version of the complete Michigan Economic Outlook, click here:  MI_Outlook_0817.

 

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July Housing Starts, NAHB, Mortgage Apps

Residential Construction is Bifurcating, Multifamily Slumps

  • Housing Starts decreased by 4.8 percent in July to a 1,155,000 unit annual rate.
  • Permits for new residential construction decreased by 4.1 percent to a 1,223,000 unit pace in July.
  • Builder Confidence increased in early August.

The residential construction industry is bifurcating. Single-family construction has leveled out, but builder confidence remains good. The multifamily side is clearly losing steam. Total housing starts decreased by 4.8 percent in July to a 1,155,000 unit annual rate, weighed down by slumping multifamily construction. Single-family starts were little changed for the month, down by 0.5 percent to an 856,000 unit rate, still in the range established last February. Multifamily starts were down by 15.3 percent in July, to a 299,000 unit annual rate, well below the recent peak rate of 465,000 from September 2015. Permits tell the same story. Total residential construction permits were down by 4.1 percent in July. Single-family permits were unchanged for the month at an 811,000 unit annual rate. Multifamily permits were down by 11.2 percent to a 412,000 unit annual rate, well below the peak rate from mid-2015. According to the July 2017 edition of the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS), lending standards for commercial real estate loans for multifamily projects began tightening by early 2016. We can say that lending standards have now tightened significantly over the past year and a half. This is obviously resulting in cooler construction activity. Given that the July data from the SLOOS shows ongoing tightening of lending standards, we can expect that the slump in multifamily construction will continue. Meanwhile, standards for residential mortgage loans are easing, especially for prime loans. This will keep the single-family market engaged for the remainder of this year.

The National Association of Homebuilders says that builder confidence in the single-family market remains strong. The NAHB index increased 4 points in August, to a level of 68. The NAHB also says that builders continue to face shortages of lots and of labor, and they also face rising building material costs.

Mortgage applications for the week of August 11 were little changed, increasing slightly by 0.1 percent. Refi apps increased over the last two weeks, but purchase apps show no clear direction through July and early August. We expect new and existing home sales to be flat for July.

Market Reaction: Stock indexes were up at the open. The yield on 10-year Treasury bonds is down to 2.26 percent. NYMEX crude oil is down to $47.47/barrel. Natural gas futures are down to $2.92/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  Housing_Starts_08162017.

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July Retail Sales, Import Prices

Autos Pull Retail Sales Up in July

  • May Retail Sales increased by 0.6 percent, as auto sales gained 1.2 percent.
  • The Import Price Index increased by 0.1 percent in July.

Retail sales for July showed a solid 0.6 percent increase, aided in part by improved auto sales. Recall that unit auto sales increased slightly to a 16.8 million unit annual rate in July, up from 16.7 in June. Today we see that the nominal dollar value of auto sales increased by 1.2 percent in July. Excluding autos, retail sales were up 0.5 percent in July. Other categories were mostly positive, including building materials stores which saw sales improve by 1.2 percent for the month. Soft energy prices brought gasoline stations sales down by 0.4 percent in July, that should turn around in August with firmer gasoline prices. For the year ending in July, total retail sales are up 4.2 percent, implying a real gain of 2.5 percent given that the Consumer Price Index has increased by 1.7 percent during the same period. Strong job growth, improved consumer confidence, consistent house price gains and a bull run in stock prices have all helped consumer spending which is the primary support to gross domestic product. We look for ongoing strength in the consumer sector through the remainder of this year.

The U.S. Import Price Index increased by 0.1 percent in July after decreasing three out of the previous four months. A weaker dollar and firming oil prices helped to firm up the index. The price index for all imports excluding fuel still edged down by 0.1 percent in July. We expect that oil prices will gradually increase through year end and that the dollar will continue to ease, supporting import prices. Import prices are an important lever for overall inflation in the U.S. Inflation data will be closely studied this fall as the Federal Reserve adjusts monetary policy when it initiates balance sheet reduction.

Market Reaction: Equity prices are mixed. The 10-year Treasury yield is up to 2.26 percent. NYMEX crude oil is down to $47.22/barrel. Natural gas futures are down to $2.97/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Retail_Sales_08152017.

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Comerica Economic Weekly

Economic data for the week were consistent with an ongoing moderate GDP expansion through the third quarter. Inflation data, from the CPI and the PPI will be scrutinized this fall to see if there is a pickup in the rate of inflation. Weak energy prices are expected to gradually firm up as excess inventories are absorbed through 2018.

The headline Consumer Price Index increased by 0.1 percent in July, a little less than expected. Soft energy prices kept the headline number in check. Over the 12 months ending in July, the CPI is up by 1.7 percent.

Producer price inflation was also weaker than expected in July, held down by energy and services. The Producer Price Index for final demand declined by 0.1 percent in July. Over the previous 12 months, the headline index was up 1.9 percent, well below the peak year-over-year rate of 2.5 percent in April.

Initial claims for unemployment insurance gained 3,000 to hit 244,000 for the week ending August 5. Continuing claims dropped by 16,000, to reach 1,951,000 for the week ending July 29. The four-week moving averages for both series remain very low, indicating tight labor market conditions.

The Job Openings and Labor Turnover Survey for June also showed tight labor market conditions. The job openings rate returned to the all-time high of 4 percent. The separations rate remains lower than the openings rate, staying at 3.6 percent in June.

Labor productivity increased at a 0.9 percent annualized rate in the second quarter. This was an improvement from the very weak 0.1 percent gain in the first quarter, but it is still somewhat low. Over the year ending in Q2, labor productivity increased by 1.2 percent. Low productivity growth is correlated with low wage growth. It can also be a characteristic of a late-cycle economy.

Mortgage applications increased in the week ending August 4 as refi activity picked up. Purchase apps look soft since early July, implying lackluster new and existing home sales for the month. The rate on a 30-year fixed rate mortgage eased to 4.14 percent, down from 4.22 percent in mid-July, motivating refis.

The July 2017 Senior Loan Officer Opinion Survey from the Federal Reserve shows that lending standards for C&I loans were unchanged, but standards tightened for commercial real estate in the second quarter. Loan demand eased for most broad credit categories.

Consumer credit increased by $12.4 billion in June, driven by an $8.3 billion increase in nonrevolving credit. Gains in nonrevolving credit (including auto loans) are winding down. In June, nonrevolving consumer credit was up by 5.8 percent over the previous 12 months. The peak 12-month gain in this business cycle was 8.8 percent in February 2013.

According to the fed funds futures market, the implied probability of a December fed funds rate hike is about 44 percent.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 08112017.

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July PPI, August UI Claims

  Wholesale Inflation Weak, Claims Very Low

  • The Producer Price Index for Final Demand decreased by 0.1 percent in July.
  • Initial Claims for Unemployment Insurance gained 3,000 for the week ending August 5, to hit 244,000.

Producer price inflation remains weaker than expected, held down by energy and services. The PPI for final demand declined by 0.1 percent in July. Over the previous 12 months, the headline index was up 1.9 percent, well below the peak year-over-year rate of 2.5 percent in April. The energy sub-index declined by 0.3 percent for the month, held down by gasoline and natural gas prices. This was the fourth time in the last five months that the energy sub-index has declined. Firmer crude oil prices in August will end that trend. Outside of energy, prices for final demand services were also weak in July. Wholesalers operated on thinner margins in July. Transportation and warehousing prices also declined. Prices for intermediate demand were also soft, down 0.1 percent in July. These are prices for goods and services sold as inputs to production. With inflation weaker than expected, the Federal Reserve will have a harder time justifying increases to the fed funds rate. This is why we believe that there is downside risk to the expectation of four fed funds rate hikes between now and the end of 2018.

Initial claims for unemployment insurance gained 3,000 to hit 244,000 for the week ending August 5. Continuing claims dropped by 16,000, to reach 1,951,000 for the week ending July 29. The four-week moving averages for both series remain very low, indicating tight labor market conditions. The Job Openings and Labor Turnover Survey for June also showed tight labor market conditions. The job openings rate returned to the all-time high of 4 percent. The separations rate remains lower than the openings rate, staying at 3.6 percent in June.

Market Reaction: U.S. equity markets opened with losses. The yield on 10-Year Treasury bonds is down to 2.21 percent. NYMEX crude oil is up to $49.52/barrel. Natural gas futures are up to $2.89/mmbtu.

For a PDF version of this Comerica Economic Alert click here: PPI _08102017.

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