Comerica Economic Weekly

U.S. economic data released in the middle of November was mixed. However, the Federal Reserve gave a clear signal in the minutes of the October 27-28 FOMC meeting that there is a good chance they will begin raising the fed funds rate on December 16. According to the CME Group, the fed funds futures market places a 73.6 percent chance of a December 16 rate hike as of today.

One of the criteria that the Fed is using to assess the timing of the first fed funds rate hike since July 2006 is inflation. We see in the October consumer price index signs of normalizing inflation. Headline CPI was up by 0.2 percent in October, and also shows a meager 0.2 percent increase over the prior 12 months. Core inflation, less food and energy, was also up 0.2 percent for the month, but has now increased by 1.9 percent over the previous 12 months.

The strong dollar, high storage volumes and greater-than-expected global production are still weighing on oil prices. Indeed, the current $40.20 price for WTI crude is within striking distance of the late-August low of $38.50 per barrel. While we may yet see even lower oil prices, the potential for a persistent downside drag to inflation from lower oil prices is significantly reduced compared to this time last year. Therefore, we expect overall inflation indicators to renormalize, supported by ongoing gains in core inflation. Housing starts for October were soft, dipping by 11 percent to a 1.060 million unit rate with a reset in multifamily. Permits increased by 4.1 percent to a 1.150 million unit rate. The National Association of Homebuilders confidence index fell in November to 62.

Industrial production dipped by 0.2 percent in October, after a similar 0.2 percent decline in September. Manufacturing output was up by 0.4 percent, however utility output showed a weather-related drop of 2.5 percent. Mortgage apps for purchase increased though November 13.

The Conference Board’s Leading Economic Index increased by 0.6 percent in October, with 9 out of 10 components up for the month. Leading the positives were interest rate spread, stock prices and building permits. The only negative component was the ISM new orders index. The coincident index gained 0.2 percent in October and the lagging index was also up by 0.2 percent for the month.

The Federal Reserve’s other key criterion for a fed funds rate increase is improvement in the labor market. In the unemployment insurance claims numbers we see very strong numbers. Initial claims for the week ending November 14 decreased by 5,000 to hit 271,000. Continuing claims for the week ending November 7 dipped by 2,000 to hit 2,175,000.

We will not issue a CEW next week.

Have a Happy Thanksgiving!

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 11-20-2015.


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Houston Faces Ongoing Energy Sector Consolidation

There is much more to the Houston economy than the price of oil, but the low price of oil continues to weigh heavily on the center of the North American oil market. Perversely, the Paris terrorist attacks may have provided some support for global oil prices, but downside momentum may continue as inventories of both crude and refined products increase. The price of West Texas intermediate crude oil is approaching $40/barrel and may retest the late-August low. Natural gas prices also remain exceptionally weak at $2.50 per mmbtu.

Job growth in the Houston metro area has clearly stepped down from the vigorous 8,100 net new payroll jobs per month average of 2014. Through September, the 2015 monthly average is a weak 656 net new jobs per month. And this disguises the four months of net job losses seen so far this year. We expect the Houston metro area economy to shed jobs on a net basis more consistently from the fourth quarter of 2015 through the second quarter of 2016, and the unemployment rate to increase through the third quarter of 2016.

Five smaller Houston-based energy companies appear on the Security and Exchange Commission’s list of distressed companies. The proposed Halliburton-Baker Hughes merger will likely not be approved by the Department of Justice until late-November. According to the Houston Business Journal, Halliburton could cut as many as 20,000 jobs worldwide after the deal is finalized. Houston office construction has already slowed down considerably, with new projects down 33 percent this fall from one year ago. We expect residential construction to also cool through next year.

Good news for Houston came from the University of Texas, which announced plans to build a 332 acre research facility in southwest Houston. Also, a high speed rail terminal site appears to be one step closer for Houston after the Federal Railroad Administration eliminated a downtown site, apparently favoring a site at the intersection of Highway 290 and Loop 610. Construction on the rail system could begin in 2017.


Click here for the complete Houston Regional Economic Update: Houston 2015Q4.

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Diverse North Texas Economy Bucking Energy Headwinds

While the Houston metro area economy has seen four months of net job losses so far this year, the Dallas/Fort Worth metro area economy has seen just two months of job losses. Job growth has clearly downshifted in North Texas, from the heady 10,800 job per month average of 2014, to 6,800 net new jobs per month through September of this year. Energy prices matter for the North Texas economy, but its economic diversity is paying dividends now. Looking ahead, we expect North Texas to dodge a regional recession even though job growth will cool down in 2016.

Oil prices are weak, finishing the year by testing the late-August sub-40 lows. Perversely, the Paris terrorist attacks may have provided some support for global oil prices, but downside momentum may continue as inventories of both crude and refined products increase. Natural gas prices also remain exceptionally weak at $2.50 per mmbtu. In just one example of the energy drag to North Texas, Occidental Petroleum recently announced a consolidation of its Dallas operations and plans to relocate up to 100 employees to its new Houston headquarters.

Non-energy corporate activity in North Texas remains very positive. Defense giant Lockheed Martin landed a $1 billion contract to build 17 new C-130J transport aircraft for the U.S military. Lockheed also just closed its $9 billion acquisition of military helicopter builder Sikorsky. Corporate relocations to North Texas are expected to continue at pace through 2016. Approximately 9,000 California companies moved out of state over the past seven years, many to North Texas. The Dallas Regional Chamber expects that trend to continue. Commercial development on the north side of the metro area remains very active, pushing toward Oklahoma. The $1 billion Gates of Prosper project has begun utility and roadway construction.

North Texas 2015Q4

 Click here for the complete North Texas Regional Economic Update: NorthTexas 2015Q4.

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Austin’s Economy Still Strong

After creating nearly 40,000 jobs in 2013, Austin’s job growth is downshifting a bit. But compared to Texas as a whole, the area is still doing very well. The area is showing strong job growth even though some Texas regions such as Houston are facing headwinds from falling energy prices. The metro area added more than 7,200 nonfarm payroll jobs, about 15 percent of Texas jobs, in the third quarter of 2015. As a result, the unemployment rate fell to 3.0 percent in September 2015. That is about half of what was prevailing in December 2011. We expect job growth to be around 3.0 percent for 2015 and 2016.

The Austin area real estate market is ranked among the top in U.S. metro areas. Home prices grew by 10.6 percent year-over-year in 2015Q2. According to the Austin Board of Realtors, median home prices rose eight percent year-over-year to $258,000 and single-family home sales skyrocketed by seven percent year-over-years to 2,603 in September 2015. As housing demand increased steeply, housing starts also grew. After four quarters of strong growth, single-family housing starts declined in 2015Q3 while multifamily housing starts grew by 5.7 percent year-over-year in the interval. We expect Austin’s housing market to remain tight in 2016 albeit with an easing home price appreciation rate.

The Austin area still remains one of the top tech and business friendly metro areas in the country. Small Business Trends recently ranked Austin as one of the top metro areas among seven most business startup-friendly areas for 2016 because of its collaborative and supportive environment. According to Spectrum Locations Solutions, Austin was among the top investment destinations in Texas for about 9,000 businesses that left the State of California in the past seven years. We expect Austin to continue to attract businesses from around the country as the economic and demographic fundamentals remain favorable.

Austin 2015Q4

Click here for the complete Austin Regional Economic Update: Austin 2015Q4.

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San Antonio’s Economy Continues to Moderate

The San Antonio area, being the staging ground for Eagle Ford Shale development, is under significant economic pressure due to falling energy prices. As the profitability of less productive wells diminished, rig counts for both oil and natural gas fell. According to Baker Hughes, oil rig counts were down by an astounding 68 percent and natural gas rig counts were down by 15 percent by early November 2015 compared to a year prior in the Eagle Ford Basin. On the other hand, new well oil production per rig rose to nearly 800 barrels per day in the Basin, thereby contributing increased crude oil supply and further downward pressure on prices. With drilling activity substantially down in the region, both energy and non-energy jobs are at risk.

Despite the difficulties, the San Antonio metropolitan region managed to create more than 11,600 nonfarm payroll jobs in the third quarter of 2015 after a soft second quarter. More than 10,000 of those jobs came from the service sector. Consequently, the region’s unemployment rate fell to 3.5 percent by the end of September 2015 from 4.4 percent a year prior. However, the region’s labor force declined in the second and third quarters in 2015, not a good indication. If oil and gas prices remain weak, we expect a large number of energy workers to leave the area in the next year, causing a ripple effect on the already strained regional economy.

The housing market in the San Antonio region is currently at its peak. Home prices were up by 10.3 percent in 2015Q3 over the previous year. According to the San Antonio Board of Realtors, home sales grew at five percent year-over-year through October 2015, and on average, homes spent eight percent less time on the market than the same period last year. One striking feature of San Antonio’s real estate market is that there is more activity in single-family home construction than in multifamily. Single-family housing starts grew by five percent in 2015Q2 and 2015Q3 over the previous year. Multifamily housing starts have lost steam this year. Total housing starts are down 16.5 percent from a year ago so far in 2015.

san antonio 2015q4

Click here for the complete San Antonio MSA Regional Economic Update: SanAntonio 2015Q4.

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The Phoenix Economy Remains Steady

After losing more than 3,000 nonfarm payroll jobs in 2015Q2, the Phoenix economy added about 13,800 such jobs in the third quarter of 2015. In the meantime, the metropolitan area lost hundreds of construction jobs. The services providing sector added 12,300 jobs in the third quarter, followed by 1,830 in the government sector. Despite the moderate job gain, the unemployment rate in the metro area ticked up gradually from 5.0 percent in June 2015 to 5.3 percent in September. The uptick in the unemployment rate occurred despite the decline in the labor force in 2015Q3. Although there is some upside for construction jobs including Grand Canyon Education Inc’s $400 million construction project in 2016, we expect Phoenix area job growth to remain soft around 2.0 percent in 2016 and 2017.

The Phoenix area real estate market is still hot, with total housing starts growing by 32.6 percent year-over-year in 2015Q3. Both single and multifamily housing starts grew robustly in 2015Q3. Home price growth has been steady around six percent in the first half of 2015, after unsustainable double-digit growth in 2013 and the first quarter of 2014. As rents in Phoenix ramped up, construction of multifamily apartment complexes strengthened, increasing the supply of apartments. Home price growth is expected to be around four to five percent in 2016 and 2017 in Phoenix.

Real GDP in the Phoenix metropolitan area grew by 1.8 percent in 2014, well below the average for all U.S. metro areas of 2.3 percent, and above the state of Arizona’s 1.4 percent. Consumer spending is expected to boost the area’s GDP in 2015, supported partly by lower energy prices. However, investment spending may be a drag to the region’s GDP as construction and manufacturing activities have been subdued for most of 2015 compared to the previous year.

phoenix 2015q4

Click here for the complete Phoenix Regional Economic Update: Phoenix 2015Q4.

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San Jose MSA Sees Strong Growth with Affordability Headwinds

San Jose MSA’s strong job growth has a negative impact on housing affordability throughout the region. The area is posed to have it strongest year of job gains since 2000, adding another 53,000 jobs this year. The positive jobs outlook, supported by a stable tech sector, is driving the cost of living up throughout the metro area. Home prices in San Jose are expected to grow above 9.0 percent in 2015. This is the third consecutive year that area home prices have outpaced area income growth. While we expect to see home price growth to moderate over the coming years, the price for a single-family home remains exceptionally costly for first-time home owners. Millennials are having difficulty transitioning from multifamily to single-family dwellings. This will be a headwind for the area labor markets as workers seek higher wages or more affordable living.

Demand continues to grow for San Jose commercial real estate. The Samsung Electronic Device Solutions America headquarters formally opened in September. The 1.1 million square foot, 10-story building is located in North San Jose. As of September 700 employees worked at the new facility. However, that number is expected to grow to 2,000 employees. Apple secured a 202,000 square foot building and several other parcels of land in North San Jose. Apple could host between 18,000 to 20,000 workers if it developed the site to full capacity. This is in addition to the new 770,000 square foot campus in Sunnyvale, just miles away from its Cupertino headquarters. The new campus could have room for 3,000 employees.

Superbowl 50 is less than three months away. The game will be played at Levi’s Stadium in February. Events leading up to the game will bring additional tourists into the region and are expected to have a one-off impact on retail, hotel and restaurant spending in the first quarter of 2016.

san jose 2015Q4

Click here for the complete San Jose MSA Regional Economic Update: San Jose 2015Q4.

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San Francisco MSA November Ballots Benefitted Developers

The San Francisco labor market strengthened more than expected in Q3. The metro area’s unemployment rate ended the quarter at 4.0 percent. This is the lowest reading since April 2001. Area nonfarm payrolls were up 3.3 percent from a year ago in September.

The Bay Area tourism industry has benefitted from the vibrant local economy. According to STR Inc., hotel occupancy for the San Francisco market remained strong at 90.2 percent and the average daily rate climbed by 7.2 percent from a year ago in September. San Francisco International Airport also experienced gains this year. Calendar year-to-date total airport passengers have grown by 5.4 percent from the previous year as of September. International total enplanement and deplanements made up around a quarter of the overall airport passengers. A slowdown in some international markets and the strengthening of the U.S. dollar will be a headwind for the San Francisco economy heading into 2016. However, the tech industry remains strong. This will continue to support business demand and the area’s tourism industry.

San Francisco developers benefitted from the local elections in early November. Proposition A, a ballot regarding housing bonds, was approved. The proposition approved the issuance of $310 million in bonds for funding affordable housing projects. Voters also approved Proposition D, the development of multi-use space in Mission Rock. The development plans include between 1,000 to 1,950 residential units of which at least 33 percent will be affordable housing units. It also increased building height limits ranging between 40 to 240 feet on portions of the site. Finally, Proposition I failed. The ordinance would have put an 18-month moratorium on market-rate housing development in the Mission district and required an affordable housing plan.

San Fran 2015_Q4

Click here for the complete San Francisco MSA Economic Update: San Francisco 2015Q4.

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San Diego MSA Housing Affordability is a Constraint

There was positive news for the defense industry in the past few weeks as Congress passed a two year federal budget deal. The Bipartisan Budget Act of 2015 was signed into law in early November. The bill increases the FY2016 discretionary budget by $50 billion and FY2017 by $30 billion, to be split evenly between defense and non-defense spending. Additionally the government debt ceiling was raised until March 2017. Congress still has a December 11th deadline to pass a number of appropriations bills. A shutdown was averted in late September as a short-term funding bill was passed. The chances of a government shutdown has declined significantly now that there is a framework for spending. The San Diego economy is expected to benefit from defense related spending as the U.S. military pivots operations towards the Pacific.

Housing affordability remains a major issue for San Diego. Area home price growth has consistently outpaced income growth for the past three years and is expected to grow by another 5.7 percent in 2015. Using the American Community Survey and applying our forecast for income growth, median household income for the San Diego MSA is expected to be $69,170 this year. According to Core Logic Inc., the median existing single-family home for the metro area has averaged $454,610 in 2015. Therefore, the initial cost of a home, in addition to a rising mortgage rate and tight credit environment, continues to be a hurdle for prospective homebuyers. This is a long-term issue for San Diego as labor availability is dependent on affordable housing.

Water bills will rise as the San Diego city council approved rate hikes. The first rate increase of 9.8 percent will occur in January 2016, followed by another 6.4 percent in July 2016, 6.4 percent July 2017, 5.0 percent July 2018, and 7.0 percent July 2019. The monthly bill for a typical single-family will increase $21 by 2019.

San Diego_2015Q4

Click here for the complete San Diego MSA Regional Economic Update: San Diego 2015Q4.

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The Greater Los Angeles Aerospace Industry Scores a Win

Northrop Grumman won a contract from the Pentagon to build 21 next generation long-range bombers for the U.S. Air Force. The contractor beat out Boeing and Lockheed Martin for the contract which analysts value at around $20 billion. The new bombers will replace the older B-52 and B-1s. Much of the building of the planes is expected to occur at Air Force Plant 42 in Palmdale. This could bring an additional 1,400 jobs to the facilities and be a boost to area suppliers for manufactured parts. Boeing filed a formal protest to the Government Accountability Office regarding the contract. The GAO now has 100 days to review and issue a decision on the protest. The Air Force plans to purchase between 80 and 100 new bombers meaning that future contracts may grow in value of upwards to $80 billion.

Port activity has moderated at the Port of Long Beach and Port of Los Angeles in the months following the August rebound. However, 2015 has been a tale of divergent growth stories between the adjoining ports. As of October, Port of Los Angeles total container counts were down 1.6 percent from a year ago in October. The Port of Long Beach has told a story of growth in 2015. Total container counts were up 6.3 percent from a year ago. The trade weighted U.S. dollar which has appreciated by 12.5 percent since last October and the slowdown in the economies of Asian trade partners are headwinds to area ports heading into 2016.

Monthly home price growth for the Los Angeles Metropolitan Statistical Area has stalled in the third quarter. According to the Case Shiller Home Price Index, Los Angeles saw two monthly declines in home price growth of around -0.2 percent in July and August. Strong home price growth in the Riverside MSA has balanced our home price forecast for 2015. Area home prices are expected to improve with income growth next year.


Click here for the complete Greater Los Angeles Regional Economic Update: Los Angeles 2015Q4.

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