Comerica Economic Weekly

We approach the end of the year with the price of oil, the health of the Russian economy and the Federal Reserve as hot topics this week. WTI crude oil traded in a range of about $54 to $58 per barrel this week. This hardly represents a firm bottom against the now six-month slide in global oil prices. We see the balance of risks on oil prices weighted to the downside given three fundamental assumptions. (1) Saudi Arabia continues to protect its market share, and therefore cuts prices in order to maintain sales volume. (2) Global oil production increases before it decreases. (3) Global oil demand does not rapidly increase even with rapidly-falling prices.

The oil and gas company known as Russia is buckling under the weight of economic sanctions and weak oil prices. We expect to see some volatility in global financial markets because of this, but we do not expect economic and financial events in Russia to have enough weight to grow into a significant headwind for the U.S. economy.

Looking past the transitory deflation due to lower oil prices and global economic and geopolitical uncertainty, the Federal Reserve took another step in its pivot toward policy normalization this week by changing its forward guidance on interest rates. “Patient” replaces “considerable time.” In her post-policy announcement press conference, FOMC chairwoman Janet Yellen bracketed the timing of interest rate lift-off by saying that the FOMC expects to see interest rate lift-off no earlier than April 2015, and no later than December 2015. Our expectations remain centered on a mid-year 2015 date for interest rate lift-off.

U.S. home construction remains range-bound near the 1 million units per year mark. Even though homebuilder sentiment is improving, builders will not get ahead of lackluster sales. Housing starts in November dipped by 1.6 percent to a 1,028,000 unit pace.

Industrial production, by contrast, had a banner month in November. The headline industrial production index increased by a strong 1.3 percent. Motor vehicle assemblies surged by 7.9 percent in November, supported by the strong 17.2 million unit sales rate for the month.

In the second week of December the Baker Hughes rotary rig count for the U.S. had the biggest one-week slide since March 2013, falling by 27 rigs to 1,893. Still a strong number, but clearly off the September peak.

The Conference Board’s Leading Economic Index increased by 0.6 percent in November. The Coincident Index and the Lagging Index were also up for the month.

The headline consumer price index eased by 0.3 in November as crude oil prices slid and gasoline followed suit. According to AAA, the national average price for regular unleaded is now down to $2.45 per gallon.

Initial claims for unemployment insurance fell by 6,000 for the week ending December 13, to hit 289,000. Continuing claims for December 13 fell by 147,000.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 12-19-14.

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November Leading Indicators, CPI, December UI Claims, Fedspeak

Solid Economic Data Supports Another Step in the Fed’s Pivot

  • The Leading Economic Index for November gained 0.6 percent.
  • The Consumer Price Index for November fell by 0.3 percent with lower gasoline prices.
  • Initial Claims for Unemployment Insurance fell by 6,000 for the week ending December 13 to 289,000.
  • FOMC keeps near-zero rates, tweaks forward guidance.

Even with higher financial market volatility and an increasing sense of uncertainty about the global economy and geopolitics, U.S. economic data continues to show momentum at year-end that will carry through to early 2015. According to yesterday’s FOMC monetary policy statement, U.S. economic activity is expanding at a moderate pace. Consistent with that analysis, the Conference Board’s Leading Economic Index increased by 0.6 percent in November. Eight out of 10 components of the LEI increased for the month. Of the two decreasing components, initial claims for unemployment insurance have since resumed their declining trend, and residential building permits are expected to rise through 2015. The Coincident Index and the Lagging Index were also up for the month.

Overall consumer prices eased in November as crude oil prices slid and gasoline followed suit. The consumer price index fell by 0.3 percent last month as the energy sub-index eased by 3.8 percent. According to AAA, the national average price for regular unleaded is now down to $2.48 per gallon. Many service stations in Texas are already below $2.00 per gallon. Food prices gained a moderate 0.2 percent in November. Core CPI (all items less food and energy) was up a modest 0.1 percent for the month, and is up 1.7 percent over the previous year. Core prices are being supported by gains in house prices and rents. Weaker year-over-year inflation may potentially complicate the Federal Reserve’s timing of interest rate lift off, but for now the Fed sees the deflationary effect of falling energy prices as a transitory phenomenon. They are looking through currently lower energy prices and seeing the potential for stronger wage inflation in 2015 as labor markets continue to tighten.

Mid-December data says that labor markets are indeed still tightening. Initial claims for unemployment insurance fell by 6,000 for the week ending December 13, to hit 289,000. Continuing claims were down sharply, by 147,000, to hit 2,373,000 for the week ending December 6.

Yesterday’s Federal Reserve policy announcement and press conference by FOMC chairwoman Janet Yellen confirmed another step in the Fed’s pivot toward monetary policy normalization. As expected, the FOMC kept the fed funds rate near-zero. Also, the FOMC amended its forward guidance on interest rates, but in doing so they retained the “considerable time” phrase. In her post-FOMC announcement press conference, Yellen made four important statements regarding interest rate lift-off. (1) Almost all FOMC participants believe that it will be appropriate to see interest rate lift-off in 2015. (2) The FOMC is unlikely to begin interest rate normalization for at least the next couple of meetings. (3) The three prerequisites for interest rate lift-off are core inflation near current levels, inflation expectations remain anchored and improvement in labor market metrics. (4) Yellen stressed that when interest rate lift-off does occur there should not be an expectation of a measured pace of rate increases, namely, 25 basis points per meeting. There will be no “measured pace”. She stressed that the trajectory of the fed funds rate will be data dependent. We continue to expect interest rate lift-off near mid-year 2015.

Market Reaction: Equity markets like the economic data and they like the Fedspeak. Equity prices are up sharply in early trading. The 10-Year Treasury bond yield is up to 2.21 percent. NYMEX crude oil is showing some stability, up to $56.11/barrel. Natural gas futures are down to $3.64/mmBTU.

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Lower Oil Prices to Boost Southern California

Lower oil prices will support the Southern California economy. West Texas Intermediate spot prices have taken a sharp slide from $102 per barrel in June down to near $55 per barrel in mid-December. Lower oil prices are expected to persist heading into 2015, shifting economic activity from oil producing areas such as Texas, to energy consuming economies such as California. The lower price of oil will also support Southern California manufacturing which employs over 690,000 workers. Lower gas prices will increase non-energy spending amongst consumers, supporting the region’s service industries and retail sales in 2015.

Southern California housing markets remained muted as housing starts are set to improve by just 2.0 percent in 2014. Institutional buyers began exiting the region’s housing market in 2013, leaving traditional home buyers to fill the void. Thus far that has not happened as October home sales were down 4.4 percent from a year ago according to CoreLogic DataQuick. One source of untapped home demand is the millennials. Many U.S. young professionals are flocking to the nation’s major metro areas. However, millennials are the newest to the workforce, have lower levels of savings, high student debt obligations and are attempting to enter some of the most expensive markets for homeownership. As sustained income growth occurs and credit standards ease, millennials are expected to gradually increase home buying, supporting area housing markets.

We expect port activity to increase due to a strong U.S. economic outlook in 2015. The Port of LA indirectly supports around 896,000 jobs in the region and the Port of Long Beach supports 316,000. The twin ports’ total container activity was up a combined 3.0 percent from a year ago in October. The boost from the improving U.S. economy is balanced against the risk of competing ports as the expansion of the Panama Canal is completed in 2015 and opened in early 2016. The expansion will allow shippers to bypass West Coast ports.

SoCalRegional121714

Click here for the complete Southern California Regional Economic Update: SouthernCA 2014Q3.

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Northern California Economy Driven By Strong Labor Market Gains

Northern California has created around 400,000 jobs in the past four years, bringing area payroll employment back to 2001 levels at over 3.1 million nonfarm workers. Job gains have been widespread over the past 12 months, with a quarter of those jobs coming from construction, information services and manufacturing between October 2013 to October 2014. The strong job growth in the region will drive the unemployment rate down to near 5.0 percent by year end. Tighter labor markets are expected to drive wage and income growth next year.

The growing demand for housing has increased the cost of living in the Bay Area. The supply of housing remained constrained with housing starts expected to decline by 1.6 percent this year. This gap between supply and demand has led to strong home price and rent appreciation. People have looked for more affordable housing than available in San Francisco by crossing the bridge into Oakland, leading to a drastic increase in rent prices there. According to Zillow, rent in Oakland was up 21 percent in October from a year ago. Declining housing affordability will remain a headwind for the area single-family housing market in 2015 due to moderate gains in home prices and expected increases in mortgage rates. However, we expect stronger growth in multifamily housing starts next year due to strong rental demand.

The recent downward trend in oil prices will shift economic growth from the energy producing central portion of the U.S. to the energy consuming economies of the east and west coasts. Lower oil prices will help Northern California manufacturing, an industry that employs approximately 280,000 workers. Lower prices at the gas pumps will act as a reverse tax for consumers leading to increased non-energy spending. A little more money in consumers’ pockets will help support the region’s service industries and retail sales in 2015.

NoCalRegional121714

Click here for the complete Northern California Regional Economic Update: NorthernCA 2014Q3.

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Central West Michigan Boosted by Grand Rapids

The Central West Michigan economy is supported by the surprising strength of Grand Rapids. Grand Rapids was recently ranked as the fifth fastest growing city in terms of per capita growth from 2010 to 2013, according to the Bureau of Economic Analysis. Demand for office furniture is expected to improve through 2015 as the U.S. gains momentum, adding to regional economic activity. The regional economy is also linked to the auto industry, where U.S. sales have increased along with strong overall job growth, increasing consumer confidence and lower gasoline prices. According to the Western Michigan Purchasing Managers Survey, new orders for area manufacturers were positive in November after strong gains in October. Employment and production indexes continued to show growth. Expectations of future manufacturing conditions remain positive. In addition to its improving manufacturing base, the regional economy is benefitting from gains in high-tech industries, healthcare and business services.

Moderate job growth brought regional unemployment down to 5.6 percent in the third quarter of 2014, just below the U.S. average. We expect to see the unemployment rate continue to trend down below the U.S. average, reaching below five percent by the end of 2015. As labor markets tighten, real (after inflation) wages will increase, providing support to area retailers and to the housing market.

House construction, after seeing significant growth in 2013, is expected to show a more modest 6.3 percent increase in 2014. Currently low inventories are constraining home sales. According to Trulia, the average price per square foot for a home in Grand Rapids was $132 in December, up 8.2 percent from a year ago. Ongoing economic growth, accompanied by easing credit standards, will be supportive of area housing markets in 2015.

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Click here for the complete Central West Michigan Regional Economic Update:CentralWestMI 2014Q3.

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A Clearer View for Detroit

A clearer view for the Detroit metro area economy is developing as the City of Detroit exits bankruptcy. Officially, the City emerged from bankruptcy after 17 months as the calendar flipped over to December 11. On December 10, the City completed the sale of $1.28 billion in bonds. Proceeds from the sale will pay off creditors, refinance municipal debt and pay for improvements to public services. Authority for Detroit’s finances now reverts to the mayor and city council. Kevyn Orr, the emergency manager appointed by Governor Snyder, has stepped down.

As the City of Detroit reemerges from under the shadow of bankruptcy, the Motor City’s marquis industry is catching a tail wind. Crude oil prices have fallen dramatically from a late June high for West Texas Intermediate of $102 per barrel to now about $55 dollars per barrel. The national average price of gasoline has responded by falling to $2.55 per gallon. Falling gasoline prices, strong U.S. job growth and rising consumer confidence is a potent combination for U.S. auto sales. Light vehicle sales improved to a 17. 2 million unit pace in November. A 17 million unit sales rate is near the high water mark for this cycle of auto sales, which we believe will occur in 2015. Then sales will ebb moderately after that.

The Southeast Michigan Purchasing Managers Index for November increased to a solid 56.8 indicating improving conditions for area manufacturers. Even with solid economic metrics and more clarity for the City of Detroit, we have a cautious employment outlook for the Detroit metro area. Manufacturing remains a high productivity growth industry so strong output gains may have smaller impact on job growth in some industries. We expect payroll employment growth for the Detroit metro to firm up to a still-subdued 1.0 percent in 2015, well below the U.S. average, but enough to bring the regional unemployment down.

DetroitRegional121714

Click here for the complete Detroit MSA Regional Economic Update: Detroit 2014Q3.

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The Phoenix Economy Awaits Housing Rebound

Phoenix employment growth is on the right track, gaining ground in the services industries over the past few years. However, area employment has still not recovered to pre-recession levels. The primary culprit has been construction employment. The decline in construction employment made up about a third, or 80,000 jobs, of the total jobs lost in Phoenix from July 2007 to September 2010. Jobs in the construction sector have since regained only 10,000 jobs. This leaves plenty of upside potential to area labor markets once the housing sector rebounds, yet it is tempering the region’s current recovery.

Growth in Phoenix’s housing market relies partly upon economic conditions outside of Arizona. Underwater homes and the collapse of financial markets during the Great Recession has limited the ability of out-of-staters to buy homes in Arizona. Fortunately, household wealth is now increasing across the U.S. The Case-Shiller 20-City Home Price Index was 24 percent above its recession lows in September. Financial markets have improved, helping investors recover losses. This supports a strengthening Phoenix housing market as the overall U.S. economy improves next year.

Phoenix tourism will get a nice boost as the area is set to host this season’s Super Bowl at the University of Phoenix Stadium. The Arizona Cardinals led the NFC West with a record of 11-3 in week 15, clinching their playoff spot. This brings about an interesting discussion regarding the economic impact of the Super Bowl in Phoenix. If two outside teams make it to the Super Bowl, the economic impact is expected to match that of the 2008 Super Bowl played in Glendale, AZ, of around $500 million, as 90,000 fans pour into the metro area. It is less clear if the economic impact will be as strong if the home team makes it all the way to the big game. Either way, the city will be electrified come February 1.

PhoenixRegional121714

Click here for the complete Phoenix MSA Regional Economic Update:Phoenix 2014Q3.

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High-End Real Estate Development Boosts Miami

Real estate markets are gathering momentum in the Miami Metropolitan Statistical Area. Home prices in Miami continue to outpace the national average, with strong double-digit gains: the Case-Shiller Index for the city shows an almost 18 percent increase in home prices for September 2014 over September 2013. Residential real estate markets are still tight, with single-family homes staying on the market for about 43 days, and about 58 days for condominiums, according to the Miami Association of Realtors. Although these numbers have increased marginally over the past year, prices remain firm. As the U.S. economy shows resilience in the face of global headwinds, foreign investment in Miami is primed to increase. Strong investment is already being made in luxury retail and living development in the city core, with projects like Miami Worldcenter (expected investment of $2 billion) and Brickell City Center (expected investment over $1 billion).

Miami has consistently seen much stronger payroll employment growth than the national average since the beginning of 2011. As of October, payroll employment in Miami is up by 3.2 percent, while U.S. employment was up by 2.0 percent. We expect the unemployment rate in the Miami MSA to continue its downward trend, hitting 4.8 percent by the end of 2015, below our projection for the U.S. at 5.1 percent. The firmest employment growth for the region is in the construction, manufacturing, and the trade/transportation/utilities sectors.

Miami’s return to better-than-national performance across core economic metrics will also be fueled by lower prices at the gasoline pump. In addition to aiding consumer spending locally, this will increase tourism to the area, a key pillar of the local economy. The University of Florida’s Florida Consumer Sentiment Index is hitting post-recession highs, indicating stronger-than-expected retail performance to close the year.

MiamiRegional121714

Click here for the complete Miami MSA Regional Economic Update: Miami 2014Q3.

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Lower Oil Prices, a Sea Change for the Houston Economy

As of our mid-December publication date, by virtually any measure, the Houston metro area economy is flourishing. However, significantly lower crude oil prices, now dropping through $60/barrel, represent a sea change for Houston. We expect oil drilling and exploration activity to cool worldwide. Also, service work on existing wells will ease, reflecting the decreasing profitability of crude oil production. Houston, as both a global and regional energy center will be caught in the changing currents. Already, we have seen the Texas drilling rig count dip for three consecutive weeks into early December. We expect to see this important leading indicator cool significantly over 2015, reflecting our view that oil prices will remain weak through 2015.

Houston has a high concentration of energy sector jobs, and those jobs are also linked to many other jobs throughout the regional economy. We expect to see most of the Houston economy impacted by significantly lower oil prices. However, refiners, petrochemicals and other industries that use petroleum as an input will enjoy expanded profit margins and provide some counterbalance to reduced oil field activity.

Houston’s previously robust rate of job growth will be a casualty of lower oil prices. We expect job growth in the Houston metro area to diminish in 2015 and again in 2016. Reduced job creation will attract fewer migrants into the Houston area in the years ahead. With consolidation in the energy sector will come less demand for office space, weighing on commercial real estate markets. Reduced job and income growth will likewise weigh on residential property markets. This cautious outlook is shaped by our oil price assumption. Higher oil prices through 2015 translate into a stronger Houston economy. Lower oil prices translate into a weaker Houston economy. At this time we assume that the balance of risk is to the downside for oil prices, representing a significant risk to the Houston regional economy in 2015 and 2016.

HoustonRegional121714

Click here for the complete Houston MSA Regional Economic Update:Houston 2014Q3.

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San Antonio’s Oil-Fueled Growth To Ease

Eagle Ford shale oil development in the San Antonio region has spurred strong economic growth through the high multiplier effect of drilling activities on local businesses including manufacturing industries, transportation, grocery stores and restaurants. However, the recent decline of oil prices below $60 per barrel raises concern over the viability of the multibillion dollar economic impact of the Eagle Ford Shale oil on the region. With the decline in petroleum prices, oil and gas rig counts are moderating in recent weeks through early December. If oil prices remain low we expect to see ongoing evidence of declining oil field activity, dragging on the regional economy.

The San Antonio Metropolitan Statistical Area saw a robust housing market in the third quarter of 2014. Total housing starts grew at an annualized rate of 9.5 percent with a strong growth in multifamily housing starts. While the single-family housing starts slightly dampened in 2014Q3, home prices are growing at a strong 7.7 percent year-over-year rate, the highest since 2007. Nationwide, home builders’ confidence has increased in recent months fueled by strong job growth, favorable housing price momentum and low mortgage rates. We expect San Antonio’s real estate market to cool in 2015 and 2016 as drilling activity eases.

San Antonio’s unemployment rate has stalled near 4.8 percent during the seven month stretch from April to October this year. Payroll employment in San Antonio increased by 2.3 percent year-over-year in 2014Q3 which is still above the U.S. average for the period. Most of the new jobs in the third quarter, more than 4,480, came from the service-producing sector, followed by construction. With the volatility in oil prices, the regional employment in resources and mining appears to be plateauing. We expect to see job losses in the sector by early 2015 as petroleum drilling companies adjust to the new price regime. Although the region’s economy is diversified with a blend of industries like services and biotech, we expect San Antonio’s economic growth to moderate, reflecting reduced profitability on the upstream side of the oil business.

SanAnRegional121714

Click here for the complete San Antonio MSA Regional Economic Update: SanAntonio 2014Q3.

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