Houston Energy Sector in Consolidation

Houston’s energy sector is consolidating in response to the reset in the global oil market. Drilling, engineering and service companies are reducing operating budgets and reducing staff by the thousands. Not only are drilling crews idled, but everything from automobile sales to shipping activity is being affected.

U.S. crude oil production appears to be levelling out after ramping up sharply since 2009. Inventories of crude oil in storage are also levelling out. Both are positive signs for stabilizing crude oil prices. Interestingly, some Texas drillers are preparing to bring more rigs into play is response to recently higher crude oil prices, potentially changing the production/storage relationship. This feels like an oil market that is still searching for equilibrium in terms of both prices and drilling activity.

The impact of the radical changes to the energy sector on the Houston economy are still unfolding. So far, we have seen a one-way drag since rig counts started falling at mid-year 2014. Recently we have seen oil prices firming to near $60, but that does not reverse the shock to the oil and gas industry and will not be enough to turn the tide of energy sector consolidation. If oil prices stabilize at $60 per barrel, or increase, we expect to see global drilling activity firm up in 2016, as existing production from shale reservoirs follows a rapid decline curve.

The Houston metro area added an average of 9,000 net new payroll jobs per month through 2014. In January, 3,700 jobs were shed. February saw a gain of 7,000 and then 4,400 were lost in March. We expect to see greater jobs losses in the Houston metro area economy in the months ahead as energy industry consolidation continues. We are forecasting a regional recession beginning in the second quarter of 2015 and extending through the first quarter of 2016. The length and depth of a regional recession in Houston will be, in large part, determined by the price of oil. Our assumption is that oil prices firm up gradually over the second half of 2015, to hit about $65 by the end of the year. We assume that the firming oil prices would stabilize drilling activity by 2016, and give Houston-area companies more confidence in their hiring by mid-year 2016.


Click here for the complete Houston Regional Economic Update: Houston2015Q2.

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A Downshift in North Texas Job Growth

Following strong job growth from last October through January, payroll job gains have downshifted in North Texas. After adding nearly 11,000 jobs per month in 2014, only 2,800 jobs were added to the Dallas-Fort Worth metro area in February. In March the metro area lost 10,200 payroll jobs, the first monthly decline since a negligible dip in November 2010. The March job loss was the largest monthly decline since June 2009. One month of bad data does not make a trend, but it comes at a time when energy-related industries are under pressure from the significant slide in crude oil prices over the second half of last year into early 2015. Recent firming of crude oil prices is a good sign for the North Texas economy, but we are still in the early days of the near-$60 crude oil.

U.S. crude oil production appears to be levelling out after ramping up sharply since 2009. Inventories of crude oil in storage are also levelling out. Both are positive signs for stabilizing crude oil prices. Interestingly, some Texas drillers are preparing to bring more rigs into play is response to recently higher crude oil prices, potentially changing the production/storage relationship. So this feels like an oil market that is still searching for equilibrium in terms of both prices and drilling activity. The impact of the energy sector on the North Texas economy is also shifting. We have seen a one-way drag since the rig count started falling at mid-year 2014. We expect to see a consolidated energy sector with improved and stable drilling activity that will add support to the North Texas economy in 2016, if oil prices stabilize…still a big “if”.

There is a lot more to North Texas than the oil business. Commercial and residential property markets remain very active. The Case-Shiller House Price Index for Dallas was up 8.6 percent in February, over the previous year. Companies looking for a mid-continent location are still finding the North Texas area very attractive. Kubota Tractor and Credit Corporation has just announced that they will be moving their U.S. headquarters from Torrance, California to Grapevine, Texas, where they will employ 675 workers.


Click here for the complete North Texas Regional Economic Update: NorthTexas2015Q2.

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San Antonio’s Growth To Ease on Energy Sector Performance

We are starting to see the broader impact of oil price decline across the San Antonio economy as reflected in the March job numbers. We saw a net decline of 3,400 nonfarm payroll jobs in March 2015 in the metropolitan area, the worst monthly performance since June 2011. It is surprising to note that San Antonio lost 4,210 service producing jobs in March while adding 60 in the natural resources and mining sector. Yet, the area witnessed the highest quarterly year-over-year job growth (about 3.7%) in nearly a decade in 2015Q1. As San Antonio’s labor market tightens up and the energy sector consolidates, we expect job growth to moderate going forward in 2015 and 2016.

According to Baker Hughes, the Eagle Ford basin has lost more than 123 oil rigs in the past year. However, the gas rig count had more than doubled to 19 by the first week of May 2015 after bottoming out in the early August 2014. Oil production per rig is increasing to a record high (>700 barrels/day) and oil and natural gas production is levelling out in the Eagle Ford basin recently. Crude oil prices have rebounded to nearly $60/barrel after bottoming out in mid-March. It is still too early to declare that the forces of supply and demand have established equilibrium in the oil prices. However, if the prices stay around $55-$60/barrel or above, drilling activity will increase in the region, thereby helping expand the local economy.

San Antonio’s real estate market has been buoyed by strong job and income growth. Housing inventories are very tight, as in other major Texas metro areas, thereby compounding pressure on property values. San Antonio’s home prices are growing above the U.S. average, supported by tight supply and higher demand. We expect housing supply to grow, bringing home price appreciation rates down later this year and in 2016.


Click here for the complete San Antonio MSA Regional Economic Update: SanAntonio 2015Q2.

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Austin’s Growth To Moderate

The Austin metropolitan area has added more than 162,700 jobs since the end of Great Recession that ended in June 2009. As a result, the unemployment rate declined to 3.3 percent by March 2015. Austin had an extraordinary job creation rate of roughly 27,000 jobs per year, fueled by its business-friendly economic environment and healthy mix of skilled high-tech and less-skilled labor force growth. In recent months, the pace of job growth in the region has eased off slightly as the metropolitan area’s labor market tightened up. In March 2015, Austin lost a net of 400 non-farm payroll jobs month-over-month while the area still created an additional 22,800 jobs compared to March 2014. Most of the jobs came from education and health services (around 5,200) followed by trade, transportation and utilities (4,500), and then the leisure and hospitality industry (3,200). We expect Austin’s job growth to moderate this year before rebounding in 2016.

Although the labor market is tightening in the area, overall wage pressure is less than expected. As per the recent data from U.S. Bureau of Labor Statistics, average hourly earnings in the Austin area are around $23.2, with dentists getting the highest rate ($82.8) and fast food cooks getting the lowest ($8.7). The wage rate is about 0.52 percent higher than a year ago. Austin is one of the top-paying metro areas for high-skilled jobs, but not so for lower skilled jobs, thereby reducing overall wage gains.

Fueled by strong job and population growth, the area’s income growth has consistently outpaced the national average since 2009. Consequently, the housing market in Austin has gained significant momentum with home prices increasing by about 12 percent year-over-year in 2014. We expect home prices to appreciate at a slower pace moving forward with moderate job growth and increasing supply.


Click here for the complete Austin Regional Economic Update: Austin 2015Q2.

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April Leading Indicators, Existing Home Sales, May UI Claims, Fedspeak

Indicators Show Rebound After Weak Q1, Fed Rules Out June Lift-Off

  • The Conference Board’s Leading Economic Index for April increased by 0.7 percent.
  • Existing Home Sales for April declined by 3.3 percent to a 5.04 million unit annual rate.
  • Initial Claims for Unemployment Insurance rose by 10,000 for the week ending May 16 to 274,000.
  • The Philadelphia Fed’s Manufacturing Survey Current Activity Index fell to a still-positive 6.7 in May.
  • The FOMC minutes from April 28/29 show that the Fed is unlikely to lift the fed funds rate in June.

The April edition of the Conference Board’s Leading Economic Index increased by 0.7 percent, helping to reduce concern about the weak and somewhat controversial Q1 real GDP growth of +0.2 percent. We expect to see a negative revision, bringing real GDP growth down close to -0.5 percent for Q1. The strong gain in the leading indicators index for April reinforces expectations for a rebound in real GDP growth for Q2 and Q3. Building permits was the biggest positive factor in the leading index in April. The coincidence index and the lagging index also increased in April, showing the breadth of economic momentum.

Existing home sales for April dipped by 3.3 percent to a 5.04 million unit rate, after a strong March report.  We can’t say yet that existing home sales have broken out of their near-5.0 million unit range, where they were for most of 2014. The months’ supply of existing homes for sales increased from a tight 4.6 months’ worth in March to 5.3 months’ worth in April. The median sales price of an existing home is up 8.9 percent over the 12 months ending in April, according to the National Association of Realtors.

Labor data looks good halfway through the second quarter. Initial claims for unemployment insurance increased by 10,000 for the week ending May 16, to hit 274,000, still a very good number. Continuing claims for the week ending May 9 fell by 12,000 to reach 2,211,000.

Manufacturing activity in the Mid-Atlantic states increased modestly in May. The Federal Reserve Bank of Philadelphia’s regional manufacturing survey notched down, but to a still positive 6.7 in May.

The minutes of the Federal Open Market Committee meeting of April 28/29 confirm that the Fed is unlikely to begin lifting the fed funds rate in June. We still think September is the most likely month for lift-off.

Market Reaction: Equity markets opened with gains. The 10-Year Treasury bond yield is down to 2.21 percent. NYMEX crude oil is up to $60.67/barrel. Natural gas futures are up to $3.05/mmBTU.


For a PDF version of this Comerica Economic Alert click here: Leading Indicators 05-21-15.

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Phoenix Targets Expansion

The Phoenix area’s labor market has yet to see the meteoric gains in employment that it experienced prior to the Great Recession. Total Nonfarm employment is still about a year away from the pre-bust high given current growth. High-paying jobs, however, are seeing moderate but solid growth in the area, amounting to sectors like finance, business services, education, health, leisure and hospitality approaching or exceeding their pre-bust levels. Construction sector jobs are still off almost 50 percent from their mid-2000s highs, but job gains in the sector have been strong this year. This sustainable rate of labor market improvement will provide the area a sub-5 percent unemployment rate by 2016.

The Phoenix housing market remains the slowest gainer in property values amongst major Western U.S. metro areas, but there is evidence of a changing tide. While retirees were once a boon to area real estate markets, they are still recovering from their recessionary losses. Canadians, the largest group of foreign buyers in the market, are priced out on currency fluctuations. Millennials and boomerang buyers are picking up the slack. Their entry to the market will fuel price gains of around 6 percent through 2016. The number of houses on the market as of March was 12 percent less than last year, and the number of sales was up 16 percent, placing more pressure on prices. Home permits increased over 40 percent this March from last year, along with demand and confidence. March condo sales spiked over 50 percent higher than their February number.

Phoenix is orienting itself as a job destination. The Greater Phoenix Chamber of Commerce announced its new development plan, “Phoenix Forward,” in an attempt to focus on the needs of existing area businesses, and to support their growth. The public-private initiative, “Velocity,” was also recently created to drive advanced industry growth in the region, further attesting to Phoenix’s dedication to its future.


Click here for the complete Phoenix Regional Economic Update: Phoenix 2015Q2.

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Southern California Positive Outlook Faces Headwinds

California’s drought, now in its fourth year, is a long-term issue for economic growth for Southern California, if it persists. California Governor Jerry Brown issued an executive order in April to reduce urban water usage by 25 percent statewide. Cuts for California cities are based upon per capita usage in 2013 and range between eight and 36 percent. The cities of Los Angeles and San Diego are required to reduce water usage by 20 and 16 percent, respectively. For now, using the per capita use of water as the measurement of conservation permits economic development, primarily in the form of home and business growth. While more people moving into an area creates more demand on the total water used in the short-run, most new residential buildings are equipped with energy saving technology allowing for more efficient use of future resources.

West Coast ports are renormalizing after the port shutdown ended in February. Total container counts in TEU’s (twenty-foot equivalent units) hit a recent high for the Ports of Long Beach and Los Angeles in March. This was primarily due to the clearing of backlogs that built up during negotiations. April showed a weaker, yet more normal volume of container counts. Strikes held by Southern California port truckers at the end of April did not have a major impact on the flow of cargo. The outlook for trade activity through the twin ports is positive in 2015. However, the expected completion of the Panama Canal in 2016 and the growing use of mega cargo ships will create more competition with East Coast Ports.

The City of Los Angeles voted to increase the city minimum wage from its current level at $9 to $15 an hour by 2020. Under the plan, those currently making the minimum wage would receive an annual increase in pay of about 16.7, 14.3 and 10.4 percent in 2016, 2017 and 2018, respectively. The increased pay will benefit workers. However, the strong increase in costs may incentivize some companies to relocate.


Click here for the complete Southern California Regional Economic Update: SouthernCA2015Q2.

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Northern California, Something’s Gotta Give

Northern California labor markets are rapidly tightening, putting additional pressure on business costs and demand for housing. Strong employment growth has driven down the area unemployment rate to 4.3 percent in March. The declining unemployment rate is coinciding with an increase in the labor force, indicating a strong and healthy labor market. As labor markets continue to tighten, this puts upward pressure on income growth as businesses use more competitive compensation packages to keep or gain workers. As compensation and job opportunities increase in Northern California, job seekers follow, boosting demand for homes. This reinforces a cycle of high costs of labor and high costs of living, to which both businesses and laborers are incentivized to find more affordable accommodations.

Initiatives in San Francisco are attempting to address the issue of affordable housing within the city. Strada Investment Group along with site owner Local 38 Plumbers and Pipefitters Union and non-profit Community Housing Partnership have submitted paperwork on a development project in the Mid-Market area. This project will combine both market price housing units and supportive housing units for those who are exiting homelessness. If this project is successful, it can serve as a catalyst for future projects between private development groups and non-profits to attempt to address the housing needs of the city’s impoverished. Another initiative will go to the polls this November. Mayor Ed Lee proposed a $250 million housing bond. The majority of the funds would be allocated toward low-income and public housing. Approximately $25 to $100 million would be used to support subsidizing new middle-income rental and housing.

Governor Jerry Brown issued an executive order to reduce urban water usage. San Francisco must reduce per capita water usage by eight percent while San Jose is using water rationing to hit a 30 percent reduction.


Click here for the complete Northern California Regional Economic Update: NorthernCA2015Q2.

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Miami Real Estate Heats Up

Miami area real estate prices shows no sign of relenting. Commercial spaces in Brickell are seeing record sales prices, and home price growth in the area has exceeded eight percent in year-over-year gains since October 2012. The $2 billion mega-development, Miami Worldcenter, one of the largest urban real estate projects underway in the country, moved one step closer to its 2015Q3 groundbreaking as the City of Miami approved its first phase. In addition to bringing more retail and living space to the downtown area, the project will add a convention center, drawing even more visitors. Miami’s housing supply has responded to demand pressures in a timely manner, forcing the months’ supply of condos to reach the upper bound of what is considered to be a “healthy” market: nine months. Single-family units remain at a tight 5.3 months’ supply; this disparity is reflected by markedly stronger pricing for single-family units.

Miami will continue to experience above-average job growth, holding around three percent for 2015. The unemployment rate for the area continues to tighten, and will drop below five percent in the coming quarters. Miami is adding high-paying jobs. Construction jobs continue to be added at a near-10-percent year-over year rate, while the financial activities, professional/business services, leisure and hospitality, and education and health sectors are adding jobs at around a four percent year-over-year rate. This strong labor market will bolster migration into the Miami metro area.

The strength of the dollar remains a concern for Miami, as their luxury condo market is driven by foreign cash buyers. Miami is currently around 30 percent more expensive versus a year ago for Russians, and growth in Latin America is slowing down. Currently, the perception of relatively stronger economic conditions in the U.S. is still shoring up safe-haven real estate demand in Miami, but that demand is subject to currency risk.


Click here for the complete Miami MSA Regional Economic Update: Miami2015Q2.

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Detroit in Transition

Job growth in the Detroit metro area is moderately above the U.S. average through the first three months of 2015. On a year-ago basis, Detroit added jobs at a 2.4 percent rate in March, while the U.S. as a whole added jobs at a 2.2 percent rate. A key support to job growth in Detroit has been the manufacturing sector. Employment in Detroit area manufacturing is up a strong 4.8 percent over the past year, significantly above the U.S. average of 1.6 percent growth. The employment component of the Southeast Michigan Purchasing Managers Index was very strong at 76.3 in April.

A key question for Detroit is how sustainable is the strong performance in manufacturing employment? We believe that manufacturing employment will stabilize in the area, and that job gains for Detroit will ultimately be driven by non-manufacturing industries. Since peaking in July 2000 at 397,000, the Detroit MSA has lost 148,000 manufacturing jobs. Michigan manufacturing employment faces headwinds. First, U.S. auto sales are already near the cyclical peak of the previous expansion cycle. In April, U.S. light vehicle sales dipped to a 16.5 million unit annual rate, after posting a 17.0 million unit sales pace in March. These rates are already very close to the 16.9 million units sold in 2005, so there is only limited upside potential for more auto sales. Second, a strong U.S. dollar suggests that less U.S. manufactured goods will be sold overseas, and more foreign manufactured goods will be sold in the U.S. Third, as the business cycle matures, it becomes more difficult to sustain corporate profits. Labor costs are a huge part of total business costs and so hiring typically slows in the late stages of the business cycle.

Detroit’s role as a key gateway for U.S./Canada trade is slated to expand in 2020 with the completion of the $2.1 billion, 6-lane Gordie Howe International Bridge over the Detroit River, funded almost entirely by Canada. Because of the lopsided funding for the bridge, we expect relatively little of the economic benefit of construction to land on the Detroit side.


Click here for the complete Detroit Regional Economic Update: Detroit2015Q2.

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