Announcement: New Publications

Beginning today, Comerica’s Economics Department will be rolling out a new series of publications, a “State Economic Outlook” for each of our five markets. These new publications, quarterly in frequency, will provide analysis and economic outlook for Arizona, California, Florida, Michigan and Texas with content, models, tables and forecasts that are consistent with those of our signature U.S. Economic Update. The new state-level publications will be forward-looking. They are designed to complement  our existing monthly State Economic Activity Indexes, which provide insight on current and historical economic conditions for each state. Our hope is that the new State Economic Outlook reports will further assist our readers with keeping current on economic data and trends at the state level, as well as assisting individuals and business owners with strategic planning and decision-making.

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Florida Labor Market Draws in Workers

Strong job growth in Florida continues to boost overall economic activity and draw people into the state. The state’s payroll jobs increased by 3.5 percent in 2015, well above the overall U.S. pace of 2.1 percent. Momentum continued into 2016 as Florida added another 113,000 jobs in the first six months of the year. This helped to boost the state’s real gross domestic product by 2.1 percent in the first quarter of 2016, which was more than double that of the U.S. at 0.8 percent. The relatively stronger economic activity has helped to pull into the state, on average, an additional 270,000 people per year over the last four years. Strong labor growth, combined with improving income and more people, is a recipe for a positive outlook for the Florida economy over the next year.

The surge in jobs, and better income growth, have supported the ongoing recovery of Florida’s hard-hit housing markets. According to the Federal Housing Finance Agency’s purchase-only home price index, home prices have rebounded 54 percent from the 2011 lows. This has helped homeowners regain some of the lost equity from the recession. However, Core Logic Inc. estimates that 15 percent of Florida mortgages remain under-water as of the first quarter of 2016. There is upside potential for Florida’s housing markets beyond job-driven demand. Baby boomers are retiring and Florida remains a popular destination for retirees. Recovered investment portfolios, the ability to sell their homes and kids who are finally moving out will increase the mobility of baby boomers.

FL Outlook 082016

For a PDF version of the complete Florida Economic Outlook, click here: FL Outlook 082016.

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Arizona’s Ties to the U.S. Consumer

The Arizona economy is expected to rebound in the second half of 2016. Real gross domestic product registered a relatively strong first quarter at 2.6 percent, but most likely took a leg down in the second quarter on weaker job growth. Questions regarding the strength of the U.S. consumer due to low U.S. economic performance and financial market volatility may have tapped the brakes on hiring from Arizona employers in the second quarter. The state’s professional and business services sector, linked to U.S. consumer spending, saw employment declines while the financial activities and information sectors saw a significant slowdown in hiring. The good news is that U.S. consumer spending is expected to improve for the remainder of the year. Therefore, we expect the Arizona economy to grow at a faster rate in the second half of 2016 on stronger employment growth.

Aiding in this growth is increased construction hiring, which has been on a tear over the past year. Construction employment was up 8.6 percent year-over-year in July, the fastest pace of growth since the economic downturn. This is consistent with gains in housing starts which also continue to trend upward. Improving incomes, increased credit availability and low mortgage rates will support demand for housing. Additionally, demand for Arizona housing will continue to improve as baby boomers continue to retire. The factors that dampened stronger demand from baby boomers such as a pushed back retirement age, support for an adult child living at home and the recovery of lost homeowner equity will begin to wane.

AZ Outlook 082016

For a PDF version of the complete Arizona Economic Outlook, click here: AZ Outlook 082016.

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Texas Economy Enters Critical Period in 2016H2

The Texas economy is entering a critical period in the second half of 2016 as the downdraft from the energy sector reset continues to roll through the state. Fortunately, to date, the drag on the overall state economy from reduced oil-field activity has not been as bad as we first thought. In July, the state added 23,600 payroll jobs, still up 1.5 percent over the previous 12 months. The climb in oil prices from the February low of $27 per barrel for WTI, to above $50 by early June was a cause for optimism, but the oil market got ahead of itself, and WTI fell below $40 per barrel by early August. Recent gains, to near $48, are again invigorating the optimists. The drilling rig count for Texas has firmed from a low of 173 rigs in late May to 238 rigs through mid-August. Also we see that new orders for mining equipment increased through May and June, but this was up from April, which was the worst month in the history of that series, dating back to 1992. We still show a mild recession for Texas in our forecast for this year. We believe that by the end of this year, the Texas economy will stabilize and then expand consistently through 2017. This forecast is based on our assumption that oil prices are stabilizing, and will gradually increase through next year, supporting moderately stronger oil field activity. Houston is still struggling and the metro area accounts for a quarter of all jobs in Texas. Almost all economic metrics for Houston are still showing signs of stress. Job growth in June and July was modest, but positive, after a net loss in May. We expect Houston to struggle with weak net job growth through the remainder of this year.

TX Outlook 082016

For a PDF version of the complete Texas Economic Outlook, click here: TX Outlook 082016.

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Steady Michigan

Job growth in Michigan has been steady after allowing for the occasional bump, as occurred in May. In that month, state employment dipped by 20,400 jobs, contributing to a weak month for overall U.S. job growth. Like the U.S. numbers, Michigan job growth bounced back in June and July. For the 12 months ending in July, state payroll employment was up by 2.5 percent, well ahead of the U.S. average of 1.7 percent growth over the year. A resurgent auto sector has been a big part of the “steady growth” story for Michigan. In July, manufacturing employment ticked up to 604,200, the highest level since August 2007, stoked by the resurgent auto industry. We believe that U.S. auto sales likely peaked for this business cycle last fall, when annualized sales averaged 18.1 million units for September, October and November. For this coming fall (2016Q4) we forecast auto sales to average close to a 17.2 million unit pace. The last four business cycles (roughly the 1970s, 1980s, 1990s and the 2000s) all ended with a different pattern for auto sales. The 70s saw a sharp deterioration in sales into early 1982. In the 80s, the drop in auto sales was less steep into 1991. After the 90s, there was no dip in auto sales through the Recession of 2001. The slide into 2009 was devastating. We are assuming that auto sales follow the middle path at the end of this business cycle, and so we are forecasting a moderate deterioration of auto sales into 2018. Regardless of the eventual downward slope, our assumptions are consistent with eventual job losses in manufacturing. We look for gains in service-sector jobs to keep Michigan’s expansion steady through 2017.

MI Outlook 082016

For a PDF version of the complete Michigan Economic Outlook, click here: MI Outlook 082016.

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California Economy Buffeted by External Forces

The California economy headed into the latter half of 2016 with some momentum, after weathering a volatile start to the year. Even as tech-stocks lost value early in the year, California real GDP still grew at 2.0 percent in the first quarter, almost twice that of the U.S. average of 0.8 percent. Since then, tech-stocks saw a stronger than expected spring and summer rebound as global financial market conditions improved. Domestically, U.S. consumers shopped with a vengeance this spring as personal consumption of goods and services increased at a 4.2 percent annual rate in the second quarter. This is a bullish signal for the U.S. economy and it supports the outlook for tech-based industries for the remainder of the year. Internationally, central bank policies are divergent. The Bank of Japan and the Bank of England continue to pursue easing policies, making the Federal Reserve’s current monetary stance look relatively stronger, supporting the dollar even as the Fed does nothing. The broad dollar index strengthened after the June 23 BREXIT vote, to the detriment of export-oriented businesses. The dollar value of California exports has declined for 18 of the last 20 months. Lower oil prices have had some impact on this trend. We expect the state economy to weather the international crosswinds through the remainder of this year, growing moderately and adding enough jobs to keep the unemployment rate on a declining trend. The previously hot Northern California real estate market will cool as the manic pace of home buying eases due to declining affordability.

CA Outlook 082016

For a PDF version of the complete California Economic Outlook, click here: CA Outlook 082016.

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Comerica Economic Weekly

Lower energy prices kept consumer inflation at bay in July as the Consumer Price Index was unchanged. Core CPI (all items less food and energy) increased by 0.1 percent in July, the weakest increase since March. Over the year ending in July, core CPI was up by 2.2 percent, pushed up by housing and medical costs.

Oil prices firmed through mid-August, with WTI now trading above $48/barrel. Gasoline prices remain low with the national average for regular at $2.14 according to AAA. The recent increase in crude oil prices plus the flooding in Louisiana, which has shut down refineries, could push gasoline prices up at the end of the summer.

The minutes of the July 26-27 FOMC meeting, along with comments by Bill Dudley of the New York Fed, created some buzz about the possibility of a fed funds rate increase in September. However, this is still a very divided FOMC. The minutes make clear that there is a significant faction within the FOMC that will not favor raising the fed funds rate in September. We see no reason why FOMC Chairwoman Janet Yellen would firm up her intention to raise the fed funds rate five weeks ahead of the next FOMC meeting. Rather, she will likely wait until she has had face-to-face discussions with FOMC members at the Fed’s annual retreat in Jackson Hole, Wyoming, next week and then wait further until after the August jobs data is released on September 2, before she sets her intentions for the September 20-21 FOMC meeting. According to the fed funds futures market, the odds of a rate hike in September are up to 18 percent. We continue to expect only one fed funds rate hike this year, in December.

Housing starts increased by 2.1 percent in July to a 1.211 million-unit pace. Most of the increase in July came from multifamily construction. Permits for new construction eased slightly by 0.1 percent in July, to a 1.152 million unit pace. According to the National Association of Home Builders, builder confidence increased by two points to 60.

U.S. industrial production increased by 0.7 percent in July. The heat wave on the East Coast boosted utility output by 2.1 percent for the month. Manufacturing output increased by 0.5 percent even as motor vehicle assemblies eased to a 12.16 million unit annual rate. Mining output also increased in July, up by 0.7 percent, consistent with the small gain in the drilling rig count.

Initial claims for unemployment insurance decreased by 4,000 to hit 262,000 for the week ending August 13. Continuing claims gained 15,000 to hit 2,175,000 for the week ending August 6th. We look for about 185,000 net new payroll jobs in August.

The Leading Economic Index increased by 0.4 percent in July, boosted by average weekly manufacturing hours, interest rate spread and stock prices.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 08-19-2016.

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July Consumer Prices, Housing Starts, Industrial Production

 Lower Oil Prices Cool Inflation Indicators

  • The July Consumer Price Index was unchanged as energy prices dropped.
  • The July Core CPI increased by 0.1 percent, and was up 2.2 percent over the previous 12 months.
  • Housing Starts for July gained 2.1 percent to hit a 1,211,000 unit annual rate.
  • July Industrial Production increased by 0.7 percent, boosted by a surge in utility output.

Lower energy prices kept consumer inflation at bay in July as the Consumer Price Index was unchanged for the month. Core CPI (all items less food and energy) increased by 0.1 percent in July, the weakest increase since March. Over the year ending in July, core CPI was up by 2.2 percent, pushed up by housing and medical costs. The energy price index eased by 1.6 percent in July. Oil prices retreated from a high of about $52/barrel for WTI crude in early June to below $40 per barrel by early August. Oil prices have firmed through mid-August, with WTI now trading above $45/barrel. We have lowered our forecast for year-end WTI to $48/ barrel, reflecting slower-than-expected inventory draw downs of both crude oil and petroleum products. The composite energy index was down 10.9 percent over the previous 12 months, reflecting a monthly average price of $50.90 from July 2015. Even though oil prices have bounced off their February bottom, we do not expect year-over-year changes in the energy price index to warm up until later this year. With headline CPI unchanged in July and the Producer Price Index for final demand down by 0.4 percent in July, the Federal Reserve is under no immediate pressure from inflation. Fed officials will compare notes at their annual retreat in Jackson Hole, Wyoming, next week. The next official Federal Open Market Committee meeting will be held over September 20/21. According to the fed funds futures market, the odds of a fed funds rate hike in September are up to 18 percent. We expect no changes to interest rate policy in September.

Housing starts increased by 2.1 percent in July to a 1.211 million-unit pace. Most of the increase in July came from multifamily construction. Permits for new construction eased slightly by 0.1 percent in July, to a 1.152 million unit pace. According to the National Association of Home Builders, builder confidence increased by two points to 60. Still, both housing starts and permits remain rangebound heading into 2016Q3, about where they were in 2015Q3. Recent strong job growth is supportive of new home sales and we expect to see gradual improvement in new home sales and construction through year-end.

U.S. industrial production increased by 0.7 percent in July. The heat wave on the East Coast boosted utility output by 2.1 percent for the month. Manufacturing output increased by 0.5 percent even as motor vehicle assemblies eased to a 12.16 million unit annual rate. Mining output also increased in July, up by 0.7 percent, consistent with the small gain in the drilling rig count. The U.S. rig count bottomed out at 404 rigs in late May. By mid-August it has increased to 481 rigs. We look for ongoing gradual gains in the rig count as long as oil prices stay firm.

Market Reaction: Equity markets opened with losses. The 10-Year Treasury bond yield is up to 1.58 percent. NYMEX crude oil is up to $46.33/barrel. Natural gas futures are up to $2.64/mmbtu

CPI.8.16

For a PDF version of this Comerica Economic Alert click here: CPI 08-16-16.

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Comerica Economic Weekly

U.S. data released this week were mixed on Q3 economic growth.

Labor market indicators remain positive this summer. The Job Openings and Labor Turnover report released by the Bureau of Labor Statistics showed that both the job openings rate and the hiring rate ticked up slightly in June. Total job openings sat at 5.6 million in June, while the number of total hires hit 5.1 million.

Initial claims for unemployment insurance dipped by 1,000 for the week ending August 6 to hit 266,000. Generally speaking, initial claims below 300,000 are consistent with steady gains in the overall U.S. labor market. Continuing claims ticked up by 14,000 to hit 2,155,000 for the week ending July 30.

Consumer spending got off to a slow start in early Q3. Retail sales were flat in July, remaining unchanged from June. This was much weaker than market expectations, which looked for a bigger boost from July’s breakout auto sales. Gasoline stations sales were a major drag on overall retail sales, dropping by 2.7 percent. This coincided with a decline in oil prices from the June highs.

The producer price index for final demand dipped by 0.4 percent in July, after a strong gain of 0.5 percent in June. Lower energy prices led the declines as the PPI for energy dipped by 1.0 percent in July. Over the past 12 months, the headline PPI for final demand was down by 0.2 percent. If we strip out the more volatile components of headline PPI and look at core PPI for final demand (less food and energy), that series is up only 0.7 percent over the past 12 months.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 08-12-2016.

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August 2016, Comerica U.S. Economic Update

The July jobs report put to rest lingering fears of a downshift in U.S. job growth that were amplified by a weak May employment report. A strong 255,000 net new jobs were added to the U.S. economy in July following a blowout 292,000 net new jobs added in June. Beyond the positive payroll data, most other key labor market metrics improved in July as well. Average hourly earnings increased, as did average weekly hours. So we can say that more workers worked longer hours and got paid better for it in July. This is the trifecta for income growth which, in turn, is supportive of consumer spending. We can also say that the labor market is pulling in more workers from the sidelines. The civilian labor force in July 2016 was 1.4 percent larger than it was in July 2015, well above estimated population growth of 0.8 percent. This has brought the total labor force participation rate up from a low of 62.4 percent in September 2015, to 62.8 percent in July 2016. Strong growth in the labor force kept the unemployment rate steady at 4.9 percent in July. The rate of decline in the unemployment rate is easing. We expect the lower bound to be in the neighborhood of 4.6 percent, but it could end up being one- or two-tenths of a percent higher, meaning we are getting close.

Despite the positive signals from labor-related data, the Federal Reserve still looks set to sit on their hands in September. As of this writing, the fed funds futures market places only an 18 percent chance for fed funds rate hike at the next Federal Open Market Committee meeting over September 20/21. Fed Governor Jerome Powell, speaking last week, urged patience for those anticipating higher interest rates. We are maintaining our expectation of only one fed funds rate hike this year, coming at the conclusion of the December 13/14 FOMC meeting.

Even by staying in place, Federal Reserve monetary policy is looking relatively tighter compared with other central banks. Both the Bank of Japan and the Bank of England have recently eased policy. The Bank of Japan’s Monetary Policy Committee voted on July 29 to leave their benchmark lending rate unchanged, but they did increase their pace of asset purchases, including exchange-traded stock funds. The yen, which had been gaining strength against the dollar through most of this year, has not weakened as Japanese officials may have wished, but it has stopped appreciating, at least temporarily. The Bank of England dropped its bank rate to an all-time low of 0.25 percent on August 5 and they started buying corporate bonds in addition to their existing program of UK government bond purchases. The British pound had been relatively stable this year against the dollar, but weakened significantly on the news. According to the BBC, tourist travel to the U.K. has already increased as a result of the weaker pound.

Another key reason why the Fed may choose to pause again in September is the less-than-expected inflationary push from oil prices. After peaking in early June above $52 per barrel, the price of WTI crude oil sank to below $40 per barrel by early August, before recovering to $43 per barrel as of this writing. Higher-than-expected inventories of both crude oil and refined products, particularly gasoline, have dampened expectations for higher crude oil prices by year- end. And that means less inflation and less need for the Fed to get out in front of rising inflation with an interest rate hike. We are using a year-end price of about $48 per barrel in our August U.S. forecast.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here:  USEconomicUpdate0816.

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