Comerica Economic Weekly

We had several U.S. economic data points released this week, but the big news came from a source that is often just background information: the minutes of the Federal Open Market Committee.

In the minutes of the FOMC meeting of April 26/27, released on Wednesday, we see a key passage that has reset expectations about the path for short term interest rates this year. The passage reads, “Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s two percent objective, then it would likely be appropriate for the Committee to increase the target range for the fed funds rate in June.”

The fed funds futures market reset on the news. Currently, according to the CME Group, there is a 30 percent chance for a fed funds rate increase on June 15, well up from the previous odds at about eight percent. In our view, the futures market is slightly understating the odds, which we would place at around 40-45 percent. The Fed spelled out three requirements for a June rate hike. So far, economic data IS consistent with an increase in real GDP growth in the second quarter, versus the weak first quarter. Also, we expect labor indicators to remain consistent with strengthening conditions. A key test of that will come on June 3rd with the release of the May employment data, which we believe will show stronger payroll job growth than the weaker-than-expected 160,000 from April. Also, inflation indictors ARE already warming up with firmer crude oil prices. The consumer price index for April increased at a strong 0.4 percent rate, boosted by the 3.4 percent increase in the energy component.

In addition to the June 3rd employment data release, there are other important dates between now and June 15. On May 27, Janet Yellen will be speaking at Harvard and she could take the opportunity to clarify her position. Also, on June 6, Yellen is speaking in Philadelphia. That will be her last currently scheduled public event before the blackout week ahead of the June 14/15 FOMC meeting.

The Fed is also concerned about the potentially destabilizing impact of the June 23 BREXIT vote in the United Kingdom. Today, 33 days until the referendum, the Financial Times poll of polls shows 47 percent for STAY and 41 percent for LEAVE. Jean-Claude Juncker, head of the European Commission, fired a warning shot today, saying that “deserters will not be welcomed back with open arms,” perhaps not entirely helpful to the cause.

The FOMC’s vote on interest rates will come eight days before the U.K.’s BREXIT vote. The FOMC will not have a clearer crystal ball on that important issue than the rest of us. But, as of today, it looks like BREXIT will be a non-issue, and a non-disruptor of global financial markets. That could change if there is an event that significantly pushes British popular opinion over the next five weeks.

Even with no fed funds rate hike in June, the odds of two rate hikes this year have increased.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 05-20-2016.

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Houston’s Energy Downdraft Persists Even with Firmer Oil Prices

The Texas economy generally, and Houston’s in particular, are feeling a persistent downdraft from the beleaguered energy sector. In March, Texas lost a net of 12,000 jobs, just the second monthly loss since late 2010. This kept the state’s unemployment rate steady at 4.3 percent, well below the national average of 5.0 percent for the month. We expect job growth to cool statewide, stepping down from a 2.4 percent annual gain in 2015, to about 1.5 percent this year. Real state GDP lost momentum in 2015Q3, the last data point available, when it barely increased at a 0.1 percent annual rate, following a weak 0.5 percent gain in 2015Q2. Over the four quarters from 2015Q4 through 2016Q3, we show a moderate decline in Texas real GDP, driven by the worst drilling conditions since the mid-1980s. Fortunately, oil prices have found some footing, increasing from the February low of $26 per barrel for West Texas Intermediate crude oil, to near $45 by late April. We expect drilling activity to stabilize by late summer as long as recent price gains are durable. However, even with some support from firming oil prices, the downdraft in the energy sector will continue well into the second half of this year, if not longer.

Job growth in Houston essentially flatlined in early 2015, allowing the metro area unemployment rate to increase from 4.35 percent in January 2015, to 4.83 percent this March. In February and March of this year we saw two consecutive net job losses. We expect that worsening trend to continue. Our Q2 forecast for the Houston metro area shows net job losses in the five quarters from 2016Q2 though 2017Q2. We expect the energy sector to continue to shed jobs through that period as companies consolidate, operations are scaled back and new investment is delayed or curtailed. Outside of the energy sector, jobs will be cut in construction and in areas that depend on discretionary consumer spending, including retail sales and restaurants. Fortunately, Houston’s strong demographic momentum has created many jobs that will likely not be cut, including education and healthcare-related employment.

To date, Houston’s downstream energy sector has been a key support to the area’s economy as the upstream operations were cut back. Going forward there will be less support as large construction projects are completed in 2017. Also, rising oil prices will start to squeeze margins for refiners, reducing their profitability. We expect the Houston metro area economy to stabilize by the second half of 2017. Beyond 2017, we forecast Houston to return to only moderate job and income growth.

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Click here for the complete Houston Regional Economic Update: Houston 2016Q2.

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Austin Leads Texas Economy

The Texas economy is feeling a persistent downdraft from the beleaguered energy sector. In March, Texas lost a net of 12,000 jobs, just the second monthly loss since late 2010. This kept the state’s unemployment rate steady at 4.3 percent, well below the national average of 5.0 percent for the month. We expect job growth to cool statewide, stepping down from a 2.4 percent annual gain in 2015, to about 1.5 percent this year. Real state GDP lost momentum in 2015Q3, the last data point available, when it barely increased at a 0.1 percent annual rate, following a weak 0.5 percent gain in 2015Q2. Over the four quarters from 2015Q4 through 2016Q3, we show a moderate decline in Texas real GDP, driven by the worst drilling conditions since the mid-1980s. Fortunately, oil prices have found some footing, increasing from the February low of $26 per barrel for West Texas Intermediate crude oil, to near $45 by late April. We expect drilling activity to stabilize by late summer as long as recent price gains are durable.

Although Texas as a whole is struggling from the energy sector havoc, the Austin area economy is standing out with a sustained outperformance of job growth over Texas since 2009. The area created over 40,000 jobs in the year ending 2016Q1 from a year ago. Consequently, the area’s unemployment rate fell to 3 percent by March 2016. Most of the jobs created in the interval came from trade, transportation, and utilities followed by leisure/hospitality and education/health services. Austin continues to be ranked among the top cities expected to prosper in the next decade and among the best cities for small business and job growth. We expect more companies to expand or relocate their businesses there over the next few years. In 2016Q1, companies like Comprehensive Healthcare Management, Hyperwallet Systems, Shopgate, Conde Nast, Eseye, and LKQ have relocated to Austin. Companies like Indeed, Mirna Therapeutics, Vast, Vyopta, Flint Hills Resources, Xeris Pharmaceuticals and many others have expanded their footprints in the area creating hundreds of jobs.

Austin’s real estate market is tight due to the need to accommodate its ever growing population and to satisfy growing office space demand. Single-family home sales grew by 9 percent in March 2016 from a year ago and median single-family home prices grew by 8 percent to $278,000 in the interval. Tighter vacancy rates to as low as 4 percent pushed multifamily apartment rents to grow by more than 6 percent in 2015Q4. Austin’s year-over-year office space vacancy rate dropped to 11.2 percent in 2016Q1 as the city’s positive net absorption decreased. We expect Austin’s home price growth to be around 7-8 percent in 2016/17.

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San Antonio’s Economy Resilient Amid Energy Concern

The Texas economy is feeling a persistent downdraft from the beleaguered energy sector. In March, Texas lost a net of 12,000 jobs, just the second monthly loss since late 2010. This kept the state’s unemployment rate steady at 4.3 percent, well below the national average of 5.0 percent for the month. We expect job growth to cool statewide, stepping down from a 2.4 percent annual gain in 2015, to about 1.5 percent this year. Real state GDP lost momentum in 2015Q3, the last data point available, when it barely increased at a 0.1 percent annual rate, following a weak 0.5 percent gain in 2015Q2. Over the four quarters from 2015Q4 through 2016Q3, we show a moderate decline in Texas real GDP, driven by the worst drilling conditions since the mid-1980s. Fortunately, oil prices have found some footing, increasing from the February low of $26 per barrel for West Texas Intermediate crude oil, to near $45 by late April. We expect drilling activity to stabilize by late summer as long as recent price gains are durable.

Following the energy downdraft, oil drilling activity cooled substantially in the San Antonio area. The oil and natural gas rig count in the Eagle Ford basin declined by 67/68 percent year-over-year by the first week of May, 2016. As a result, the region lost over 2,000 mining/logging jobs in the interval. Despite the energy shock, the area’s economy added more than 27,000 jobs in the year ending 2016Q1. Consequently, the region’s unemployment rate fell to 3.6 percent by March 2016. About 85 percent of the jobs created in the interval came from the service sector. A number of IT, biotech, and manufacturing companies have relocated or expanded their presence in the area, taking advantage of a favorable business environment. A German medical device company, Cytocentrics, relocated its international base to San Antonio in 2015. The company is expected to add over 300 high paying jobs in the next five years with over $15 million investment. Root9B, Holt Cat, Indo-MIM, and Alorica are expanding their footprints in the area adding hundreds of jobs. Alorica, an IT/Business Process Outsourcing company, added more than 1,400 jobs in the past 12 months.

San Antonio’s real estate market is still solid with median home prices appreciating at the rate of 6 percent year-over-year by March 2016. In 2016Q1, the number of home sales increased by 10 percent compared to a year ago. According to RealtyTrac Inc., multifamily apartment rentals also climbed with an annual gross rental yield of 9.2 percent in Bexar County. Tighter home inventories and higher demand are driving the San Antonio’s real estate market. We expect the area’s home prices to grow by 5-7 percent in the remainder of 2016.

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Click here for the complete San Antonio MSA Regional Economic Update: SanAntonio 2016Q2.

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North Texas Showing East/West Split

The Texas economy is feeling a persistent downdraft from the beleaguered energy sector. In March, Texas lost a net of 12,000 jobs, just the second monthly loss since late 2010. This kept the state’s unemployment rate steady at 4.3 percent, well below the national average of 5.0 percent for the month. We expect job growth to cool statewide, stepping down from a 2.4 percent annual gain in 2015, to about 1.5 percent this year. Real state GDP lost momentum in 2015Q3, the last data point available, when it barely increased at a 0.1 percent annual rate, following a weak 0.5 percent gain in 2015Q2. Over the four quarters from 2015Q4 through 2016Q3, we show a moderate decline in Texas real GDP, driven by the worst drilling conditions since the mid-1980s. Fortunately, oil prices have found some footing, increasing from the February low of $26 per barrel for West Texas Intermediate crude oil, to near $45 by late April. We expect drilling activity to stabilize by late summer as long as recent price gains are durable. However, even with some support from firming oil prices, the downdraft in the energy sector will continue well into the second half of this year, if not longer.

In North Texas we are seeing the an increasing divergence in job creation between the western half of the Dallas-Fort Worth metro area and the eastern half. The divergence appears to have its roots in the energy sector. The overall Dallas-Fort Worth metro area is still showing strong job creation, with March payroll employment up a strong 3.8 percent over the previous 12 months. However, when we just look at the western half of the metro area, the Fort Worth-Arlington metropolitan division, year-over-year job growth has eased to 1.9 percent as of March. The eastern half of the metro area, the Dallas-Plano-Irving metro division has shown an increase in job growth to a 4.7 percent year-over-year rate as of this March. While Forth Worth is showing more evidence of the drag from weak oil prices, we expect that job growth in Dallas will also ease over the next year. However, the boom in residential, retail construction and office construction on the north side of the Dallas metro division will provide insulation from the downdraft in the energy sector for much of North Texas.

Despite the drag from weak oil prices, the Texas economy retains numerous advantages. Chief Executive Magazine ranked Texas as the best state in the country for businesses for the 12th consecutive year. Rounding out the top five states were Florida, North Carolina, Tennessee and Indiana. The strong business climate here is driving up the demand for commercial space, pushing rents up, particularly in the Dallas uptown area.

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Phoenix Poised for Steady Economic Growth

Arizona’s favorable business environment coupled with an affordable real estate market continues to attract businesses from around the globe. Caterpillar Inc. recently announced its plan to establish a new surface mining and technology office in Tucson. The project is expected to generate hundreds of jobs over the next five years with a multimillion-dollar impact in Southern Arizona. Retiring baby boomers and Canadians are flocking to the state, supporting the state’s job and real estate market. We expect Arizona’s economy to outperform the U.S. average with the rising business expansion and consequent population growth.

The Phoenix metropolitan area added more than 66,000 nonfarm payroll jobs between March 2015 and March 2016. Consequently, the region’s unemployment rate fell to 4.7 percent by March 2016. Favorable job growth has encouraged in-migration propelling the area’s total population up to 4.5 million. In 2015, the area added over 78,000 new residents, who accounted for more than 85 percent of the Arizona’s population growth for the year. Many businesses are expanding their footprints in the Phoenix area with a growing labor force. Orbital ATK, one of the world’s leading aerospace and defense technology firms, is adding 60,000 square feet to the existing satellite manufacturing facility in the Gilbert area. The project is expected to add more than 155 high paying jobs over the next five years to the state’s $38 billion aerospace and defense industry. A $3.5 billion global manufacturer, Carlisle Companies Incorporated, is relocating its North Carolina based Corporate headquarters to Phoenix in 2016Q2. The move is bolstering business confidence in the area.

The Phoenix real estate market is firming up. The steady influx of transplants from California and elsewhere is supporting residential construction activity. The area saw a 25 percent increase in the total housing starts mostly fueled by single-family starts in 2016Q1. Home sales grew by 37 percent year-over-year in the first quarter. However, multifamily housing starts declined in the consecutive two quarters starting in 2015Q4. Multifamily apartment permits also declined by 25 percent in 2015 compared to a year ago. Home prices grew as high as 10 percent in the second half of 2015, faster than personal income. The mismatch between income and home price growth indicates a tight housing market with declining affordability. There are anecdotal stories of a shortage of construction workers to accommodate the demand for residential construction in the area. We expect home prices to appreciate around 7-10 percent in 2016 to accommodate the growing population in a tight home inventory environment.

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Stress from Abroad Causes Miami to Look Inward

Strong Florida job growth is attracting new residents from across the country. Florida added over 350,000 residents in 2015. The state’s Governor, Rick Scott, is making headlines for his courting of companies from across the country, and even universities, to relocate to the Sunshine State. While South Florida continues to live up to its pricey, global reputation, Tampa, Jacksonville and Orlando remain attractive for their tamer costs of living and solid real estate and labor market growth. Tourism spending was up by almost nine percent in 2015, and other industries like construction, financial services, professional/business services and education/health services have maintained consistent positive momentum.

The focus of residential development in Miami is likely to shift, as the condo market approaches its peak. Condo sales dropped at the beginning of the year, and developers have been quick to downwardly adjust their required deposit amounts in response. Some development projects have withdrawn in the last few months, however, the Miami Association of Realtors reports that “85 percent of product currently under construction in Downtown Miami is sold.” International buyers remain around 36 percent of total dollar volume of residential real estate transactions for Miami. Area realtors have noted that a depreciation of the dollar would help their market. Single-family construction and existing home sales are improving, especially in the low and mid ranges. This growth will fuel the regional housing sector through at least this year. Development will continue to broaden outside of Miami, as bargains are sought outside the city limits.

Job growth in Miami, as in Florida, continues to outpace the national average. Construction jobs are booming, as big ticket development continues across the region. The high-paying financial activities and professional/business service sectors are seeing continued strength. As the area labor market continues to tighten in the area, Miami has seen prices increase more than the national average. This is currently being matched by stronger-than-national income growth, but a mismatch would make Miami even less affordable.

Miami’s international exposure has benefited its growth since the Great Recession, as wealthy Latin Americans snatched up deals while their currency was relatively strong. The future of Brazil will weigh heavily on the real estate and retail industries of Miami. The shift from luxury development to more single-family, accessible real estate will temper risks. The newly-opened doors to Cuba will surely bring more people and trade through Southern Florida, cementing PortMiami’s place among the nation’s fastest-growing ports.

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San Francisco MSA Economy Withstands Market Volatility

Current California economic activity measures are showing signs of a two-handed economy. On the one hand, overall job growth in non-manufacturing sectors continues to be a fundamental positive for the state’s economy. However, the state’s manufacturing sector is feeling the impact of the appreciation of the U.S. dollar compared to major trading partners and is contracting. Also, California’s technology sector has faced stagnant stock prices and squeezed corporate profits. We expect the California economy to continue to grow at a moderate pace this year, supported by firmer residential construction activity and a more positive outlook for the technology sector as we progress through 2016.

The San Francisco MSA labor market surprised to the upside in 2016Q1. Area nonfarm jobs were up 3.2 percent from 2015Q4. The rebound occurred even in the face of increased financial market volatility in the technology sector as the Mercury News Silicon Valley 150 index year-over-year growth declined for the first four months of 2016. Strong demand for construction workers helped to boost area job growth in Q1. The continued gains in the area’s labor market helped pull the San Francisco MSA unemployment rate down to 3.7 percent as of March. We expect that tighter labor markets will put upward pressure on area wages as businesses provide competitive compensation packages for labor talent this year.

San Francisco MSA housing market data were mixed in 2016Q1. Single-family home sales dropped in January and February. The decline in home purchase activity may have resulted from the increased uncertainty surrounding the macroeconomic environment and slowdown in overall financial markets at the beginning of the year. However, housing starts climbed to 15,200 in Q1 of 2016. This is the strongest Q1 housing starts rate since 2000. In 2000, housing starts were driven by single-family structures. Yet at the beginning of 2016, multifamily made up about two-thirds of total housing starts. The shift to multifamily structures may show increased demand to reside in core urban areas and the fact that area single-family structures may be financially out of reach for portions of the population.

To address the affordable housing issue, the San Francisco Board of Supervisors is looking to expand its authority to alter affordable housing requirements. Proposition C would more than double the affordable housing requirements tied to housing projects of 25 or more units. There are concerns over the efficacy of this initiative as it will have to balance reducing project profit margins and still incentivize development activity.

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San Jose MSA Driving the Latest Generation of Technology

Current California economic activity measures are showing signs of a two-handed economy. On the one hand, overall job growth in non-manufacturing sectors continues to be a fundamental positive for the state’s economy. However, the state’s manufacturing sector is feeling the impact of the appreciation of the U.S. dollar compared to major trading partners and is contracting. Also, California’s technology sector has faced stagnant stock prices and squeezed corporate profits. We expect the California economy to continue to grow at a moderate pace this year, supported by firmer residential construction activity and a more positive outlook for the technology sector as we progress through 2016.

Major technology firms are partnering with major auto manufacturers to develop the 21st century automobile. What was once a hopeful dream of a sci-fi novel, the autonomous vehicle is now becoming a reality. Google announced that it will partner with Fiat Chrysler to develop an autonomous minivan. General Motors acquired the autonomous vehicle technology developer firm Cruise Automation earlier this year. Automated ride-sharing vehicles appear to be in the works as well. Additional industrial space throughout the region will be needed for developing these efforts. Tesla recently leased over one million square feet of space in Livermore as it prepare for increased production.

San Jose MSA job growth moderated in 2016Q1. Area nonfarm jobs were up only 1.6 percent from 2015Q4. The slowdown occurred as financial market volatility increased in the technology sector at the start of the year. The Mercury News Silicon Valley 150 index year-over-year growth declined for the first four months of 2016. To weed out some of the short term movements, we look at year-over-year job growth which remained at a strong 3.7 percent in 2016Q1. The San Jose MSA unemployment rate was down to 3.7 percent in March. As the unemployment rate continues to decline, there will either be stronger inward migration into the metro area or slower job growth as the pool of potential employees shrinks. We expect the latter.

Declining sentiment of Bay Area residents demonstrates the difficulty with drawing stronger migration into the region. According to a recent survey conducted by the Bay Area Council, 34 percent of those polled are planning to leave the region. High housing costs, traffic and overall high costs of living were cited for the discontent. High housing costs have cities searching for potential solutions. The San Jose city council recently capped annual rent increases at 5 percent for 44,000 rent controlled apartments built before 1979.

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The Greater Los Angeles Economic Data is Mixed in 2016Q1

Current California economic activity measures are showing signs of a two-handed economy. On the one hand, overall job growth in non-manufacturing sectors continues to be a fundamental positive for the state’s economy. However, the state’s manufacturing sector is feeling the impact of the appreciation of the U.S. dollar compared to major trading partners and is contracting. Also, California’s technology sector has faced stagnant stock prices and squeezed corporate profits. We expect the California economy to continue to grow at a moderate pace this year, supported by firmer residential construction activity and a more positive outlook for the technology sector as we progress through 2016.

Greater Los Angeles job growth moderated in 2016Q1. Area nonfarm jobs grew by only 0.8 percent from 2015Q4. This coincided with financial market volatility at the beginning of the year. Tech stocks slumped in 2016Q1 possibly leading to more cautious hiring from area companies. Job growth in construction continues to be a solid performer. The area unemployment rate is dropping towards its historical lower bound, down to 5.2 percent in March. This poses a conundrum in our forecast two to three years out. As we approach the lower bound for the unemployment rate we either need weaker job growth or stronger demographic shifts into the region. High housing and overall costs of living are keeping our demographic forecasts tempered.

The manufacturing story is diverging between the Los Angeles and Riverside metro areas. The Los Angeles metro area has continued its longrun trend of declining manufacturing employment after a two-year pause in 2012 and 2013. The decline correlates with a rebound in the U.S. dollar in 2014 as potential U.S. economic growth strengthened compared to other developed nations. However, manufacturing employment in the Riverside metro continues to grow at a moderate 2.8 percent year-over-year as of March 2016. Relatively more affordable land may be supporting Riverside manufacturers. Even with the gains in Riverside, the losses in Los Angeles manufacturing will be strong enough to be a drag on our regional employment forecast for 2016.

Port activity at the Ports of Los Angeles and Long Beach had a breakout 2016Q1. The twin ports combined reached 3,593,438 total 20-foot equivalent units, the standard industry measurement. This is the strongest first quarter combined port activity since 2007. Last year’s first quarter port activity was hit by slowdowns as contract negotiations were taking place. The newly automated Middle Harbor terminal at the Port of Long Beach will help to speed up processing of containers as phase one opens in 2016.

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