Comerica Economic Weekly

It was a light week for U.S. data. April home sales were soft. Q1 GDP was revised up and the Fed minutes revealed more about balance sheet reduction.

New home sales fell by 11.4 percent, to a 569,000 unit annual rate in April, the weakest sales rate since last December. The months’ supply of new homes for sale increased to 5.7 months’ worth, which is the highest inventory number since September 2015.

Existing home sales for April dipped by 2.3 percent, to a 5,570,000 unit annual rate. The inventory of existing homes for sale stayed tight at 4.2 months’ worth. The median sales price of an existing home this April was $244,800 or 6 percent higher than the previous April.

Mortgage applications for purchase have been soft through mid-May, down 0.8 percent for the week ending May 19.

First quarter real GDP growth was revised up from the first estimate of 0.7 percent to now 1.2 percent annualized growth. Consumer spending and business fixed investment were bumped up. The decline in state/local government spending was reduced. We still expect to see stronger growth in the current quarter.

New orders for durable goods decreased by 0.7 percent in April, after four consecutive monthly gains. Manufacturing conditions remain healthy by that measure. However, we will buy a little of that back by pointing out that shipments of manufactured durable goods have declined for three out of the last four months. Shipments drive the manufacturing component of GDP.

Initial claims for unemployment insurance increased inconsequentially by 1,000 for the week ending May 20, to hit 234,000. Continuing claims gained 24,000 for the week ending May 13, to hit 1,923,000, still a very low number.

Key takeaways from the minutes of the May 2/3 FOMC meeting: (1) The Fed views weak first quarter GDP growth as transitory. (2) The Staff economic forecast is supported by the assumption of expansive fiscal policy. (3) There is some concern that monetary policy normalization by the Fed could lead to financial strains in emerging markets. (4) FOMC members expect that conditions will continue to warrant gradual increases in the fed funds rate. This statement is consistent with a 25-basis-point increase in the fed funds rate range on June 14. (5) Balance sheet reduction will be executed in a gradual and predictable manner. (6) Caps on the dollar amount of securities that the Fed will roll off will be set low and then raised every three months. (7) Once ramped up, the caps will be maintained until the balance sheet has reached its targeted size. (8) The Fed’s Policy Normalization Principles and Plans will be updated soon. (9) The Fed will likely begin balance sheet reduction before the end of this year.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 05262017.

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April New and Existing Home Sales

 Sales Slip but Inventories of Existing Homes for Sale Remain Tight

  • New Home Sales decreased by 11.4 percent in April to a 569,000 unit annual rate.
  • Existing Home Sales fell by 2.3 percent in April to a 5,570,000 unit annual rate.

After a strong March, both new and existing home sales fell in April. The good news is that inventories of existing homes for sale remain very tight, and since that represents about 90 percent of all homes for sale, it is supportive of both the existing home and new home markets. Tight inventories represent both a short term positive for the overall housing market and a near-term constraint on sales. Demographic demand remains strong as household formation increases relative to population growth as economic conditions improve. And consumer conditions are positive. Solid labor market conditions will help to give reluctant millennials the confidence they need to jump into the housing market. Home builders’ confidence remains high, consistent with tight inventories. So we are building a case for ongoing gains in the single-family housing market, especially for new home sales, even though April was weak. Where might headwinds develop? One headwind will likely come from rising mortgage rates. We expect the Federal Reserve to increase the fed funds rate range by 25 basis points on June 14. If they do that, and perhaps follow up with another 25 basis point increase in September, that will put upward pressure on mortgages rates, reducing affordability. Also, balance sheet reduction by the Fed, expected to start late this year or early next year, may also put slight additional upward pressure on mortgage rates. Another headwind to home sales may come from declining consumer confidence if the political climate in Washington continues to deteriorate.

New home sales fell by 11.4 percent, to a 569,000 unit rate in April, the weakest sales rate since last December. The months’ supply of new homes for sale increased to 5.7 months’ worth, which is the highest inventory number since September 2015. Existing home sales for April dipped by 2.3 percent, to a 5,570,000 unit annual rate. The inventory of existing homes for sale remains tight at 4.2 months’ worth. The median sales price of an existing home this April was $244,800, 6 percent higher than the previous April.

Market Reaction: U.S. equity markets opened with gains. The 10-year Treasury bond yield is up to 2.29 percent. NYMEX crude oil is down to $51.36/barrel. Natural gas futures are down to $3.30/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  New_Home_Sales_052417.

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Comerica Economic Weekly

U.S. economic data this week was generally positive and consistent with an increase in the pace of real GDP growth in the second quarter, following a weak first quarter.

Residential construction data was weaker than expected in April as total housing starts dipped by 2.6 percent to a 1,172,000 unit annual rate. Single-family starts were little changed for the month, easing slightly to an 835,000 unit rate. Multifamily starts (5+ units) dropped by 9.6 percent to a 328,000 unit rate. Multifamily construction has clearly lost momentum.

The National Association of Homebuilders’ Builder Confidence Survey for May showed increasing builder confidence, with expectations of future sales conditions very high.

Industrial production increased in April by 1.0 percent, looking strong in most industry groups and market groups. Manufacturing output increased by 1.0 percent in April as vehicle assemblies increased to an 11.9 million vehicle rate, the strongest assemblies rate so far this year. A sour note for manufacturing came from the Federal Reserve Bank of New York. Their Empire State manufacturing index dropped into negative territory in May, indicating a slight deterioration of regional manufacturing conditions. However, that was countered by the Philadelphia Fed’s manufacturing survey which remained solidly positive for the month.

Labor markets remain tight. Initial claims for unemployment insurance fell by 4,000, to hit 232,000 for the week ending May 13. Continuing claims fell by 22,000 for the week ending May 6, to reach an exceptionally low 1,898,000.

The Conference Board’s Leading Economic Index increased by 0.3 percent in April, as did both the coincident and the lagging indexes. Eight out of 10 components of the leading index were positive in April.

Mortgage applications for the week ending May 12 were soft as purchase apps fell 2.7 percent and refi apps fell 5.7 percent, according to the Mortgage Bankers Association. Their gauge of mortgage rates has been very steady, with a 30-year FRM at 4.23 percent.

U.S. oil inventories eased less than expected for the week ending May 12. Crude oil prices ended the week higher, with WTI crude hitting $50/barrel Friday morning.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  Comerica_Economic_Weekly_ 05192017.

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Arizona Economy On Positive Course Despite Q1 Slow Down

Revised Arizona payroll employment data were mixed. Starting with the positive, the Bureau of Labor Statistics annual revision indicated that Arizona added 69,700 jobs last year. This is twice the amount of jobs in 2016 than the original data implied. However, Arizona job growth unexpectedly slowed in the Q1 of 2017, growing at a 0.7 percent annualized rate. This is the slowest rate since Q3 of 2010 when job growth was negative. The primary culprit in Q1 was weaker-than-expected job growth for private service providers, which makes up about three-fourths of Arizona employment, held down by declines in the administrative and waste, information and retail trade sectors. The relative affordability of Arizona remains a strong incentive for businesses to setup shop inside the state. Therefore, we expect improving private services to support overall job growth for the rest of 2017.

Tourism indicators have also been mixed in Arizona as domestic demand fills in the gap left by international travelers. Total enplanements at Sky Harbor International Airport began trending down at the end of 2015, pulled down by year-over-year declines in international passengers. State hotel occupancy, seasonally adjusted, has remained range bound throughout the latter half of 2016 and the start of 2017. Visitors from Canada and Mexico have been impacted by the relative strengthening of the U.S. dollar against the Canadian dollar and the Mexican peso, which remain 22 and 41 percent, respectively, below their 2014 levels. Demand from domestic travelers will pick up as the overall U.S. economy improves this year, supporting the Arizona tourism industry.

For a PDF version of the complete Arizona Economic Outlook, click here:  AZ_Outlook_0517.

 

 

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Florida Economy Maintains Momentum in Early 2017

The Florida economy is on pace to expand in the first half of 2017 as state real gross domestic product growth improves, boosted by strong job and income growth. Construction employment alone, which is the third largest labor sector after private services and government, added 15,800 jobs in the first three months of 2017. The growth story is no longer just about tourism and retirees. Florida manufacturing employment has grown at an average of 3.3 percent over the past three years, well above the U.S. average of 0.9 percent. The state economy continues to diversify by attracting new businesses and effectively capitalizing on its large number of educational institutions that develop skilled workers. However, there are potential headwinds in the near term. The Florida legislature recently approved a budget which would cut funding for Enterprise Florida, the primary economic development organization for the state and Visit Florida, an organization focused on marketing tourism. While tourism is not the only show in town, the leisure and hospitality industry still makes up 14 percent of total state employment. Governor Scott still has to decide whether to veto or sign the budget into state law.

Florida tourism is also experiencing a shift from international traveler demand to domestic demand. The economic slowdown in Canada and Brazil, and the strengthening of the U.S. dollar versus global currencies, led to declining international travel to Florida last year. A stronger overall U.S. economy will continue to boost domestic tourism into Florida, helping to fill the gap and support state consumer spending in 2017.

For a PDF version of the complete Florida Economic Outlook, click here:  FL_Outlook_0517.

 

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California’s Aging Business Cycle and Trumponomics

The story for the California economy, now in its seventh year of economic expansion since the Great Recession, has remained relatively consistent over the past few years. The state is showing signs that it is maturing later into the economic cycle as employment growth moderates. The cost of doing business and living in California remains high as strong job growth, and even stronger income growth, drove up home prices and rents. States like Texas and Florida will likely continue to benefit from their relatively higher affordability, drawing in workers and businesses from the two coasts. Maintaining strong employment growth also becomes a challenge as labor markets tighten and the California unemployment rate drops, now at a current cycle low of 4.9 percent in March 2017. The state unemployment rate is expected to dip even further, down to 4.6 percent by year end.

The near term risk to the California economic outlook appears to be a political one. The California economy is on course to collide with the Trump administration’s agenda over the next few years. A change on H1B visas, NAFTA and immigration enforcement would have a material impact on California’s high-tech, logistics and agricultural industries. California total nominal trade (exports + imports) with Canada and Mexico equaled $115.6 billion in 2016, according to the Census Bureau. The Pew Research Center estimated the total number of unauthorized immigrants living in California at 2.35 million, or roughly 6 percent of the population, in 2014. This fuels a lot of demand for California goods and services, supporting state economic growth.

For a PDF version of the complete California Economic Outlook, click here:  CA_Outlook_0517.

 

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Michigan to Benefit from Automaker Investment

Michigan economy is at a crossroads. The economic recovery fueled by the rebounding auto sector has been a tremendous positive for the state, but that is largely played out. We expect auto sales in 2017 to step down from the record 17.6 million units of 2016, to about 17.2 million units in 2017. Manufacturing job growth in Michigan eased to barely positive as of this March. Looking ahead, we expect manufacturing industries to gradually shed jobs in the state as auto production eases and new technology drives productivity growth. Recently, Ford has announced that they will cut about 10,000 jobs worldwide, as they face pressure to bolster profitability. To date, manufacturing has been supportive of solid overall job growth in the state. This March, Michigan had 1.9 percent more payroll jobs than it did in March 2016, while the U.S. gained 1.5 percent. Despite stronger than average job growth, the state’s unemployment rate increased from a low of 4.8 percent in June 2016, to 5.1 percent this March, as the U.S. unemployment rate declined. Even with the rebound in the auto industry, net-migration to Michigan has remained negative since the late 1990s, meaning that more people leave the state every year than move to it. This data may be substantially revised with the 2020 census, but recent estimates show that Michigan lost a net of about 15,000 people in 2015 to other states and countries. Persistent negative net-migration has brought population growth down to a barely positive 0.1 percent estimated for 2017. Declining auto sales and weak population growth will pull job creation in the state back below the U.S. average.

For a PDF version of the complete Michigan Economic Outlook, click here:  MI_Outlook_0517.

 

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More Evidence of a Turn in the Texas Economy

For the first time since the first quarter of 2015, Texas put together back-to-back quarters of positive state-level real GDP growth in the second half of 2016. We expect the string of real gains to state gross domestic product to continue through 2017 and 2018. Two factors are at work stabilizing the Texas economy. First is the momentum generated by the state in recent years that is non-energy-related. Strong in-migration leading to significant population growth and the expansion of non-energy employment and infrastructure has been a life preserver for the state. Second, oil prices have stabilized while oil producers have become much more efficient in their operations. This supportive combination of factors will allow for consistent moderate growth for the state economy even as the support from massive projects on the downstream side of the energy sector in the Houston area eases as they are completed this year and next. Oil prices have been soft this year with stubbornly high U.S. inventories. However, recently, prices have firmed, with WTI approaching $50 per barrel as OPEC ministers discuss the possible limited extension of OPEC production cuts. Meanwhile, the Texas drilling rig count continues to climb, reaching 451 active rigs by the middle of May. Employment in the state’s resources and mining sector has done a similar U-turn, following the rig count upward, adding 13,000 jobs over the six months ending in March 2017. The state’s unemployment rate has edged up from a low of 4.4 percent in July 2015, to 5.0 percent as of this March. We look for the unemployment rate to turn the corner this year and gradually decline through 2018.

For a PDF version of the complete Texas Economic Outlook, click here:  TX_Outlook_0517.

 

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April Housing Starts, Industrial Production, May Empire State and NAHB

Builder Confidence High but Construction Eased in April, Industrial Production Up

  • Housing Starts decreased in April by 2.6 percent to a 1,172,000 unit annual rate.
  • Permits for new residential construction decreased by 2.5 percent to a 1,229,000 unit pace in April.
  • Industrial Production increased by 1.0 percent in April, with stronger manufacturing output.

Residential construction data was weaker than expected in April as total housing starts dipped by 2.6 percent to a 1,172,000 unit annual rate. Single-family starts were little changed for the month, easing slightly to an 835,000 unit rate. Multifamily starts (5+ units) dropped by 9.6 percent to a 328,000 unit rate. Multifamily construction has clearly lost momentum after the strong expansion of multifamily units in recent years satisfied much of the pent up demand for apartments, resulting in slower absorption and softer pricing. The demand for single-family housing remains strong as millennials grow more confident and expand their families. Inventories of both new and existing single-family homes for sale remain very tight in most markets, giving builders ample incentive to increase single-family construction. The National Association of Homebuilders’ Builder Confidence Survey for May showed increasing builder confidence, with expectations of future sales conditions very high. Total permits for residential construction dipped by 2.5 percent in April. Permits for single-family houses fell by 4.5 percent, down to a 789,000 unit rate. Permits for new multifamily units (5+) gained 1.5 percent, to a 403,000 unit annual rate, still in the range where they have been for the last 2 years.

Industrial production increased in April by 1.0 percent, looking strong in most industry groups and market groups. The exception to that statement is, appropriately, construction, where output eased by 0.1 percent for the month. Manufacturing output increased by 1.0 percent in April as vehicle assemblies increased to an 11.9 million vehicle rate. That is the strongest assemblies rate so far this year. Output in mining industries increased by 1.2 percent in April, consistent with ongoing gains in the drilling rig count. Utilities output increased by 0.7 percent. We should be getting past the weather-related swings in utility output from this winter. One sour note for manufacturing came from the Federal Reserve Bank of New York. Their Empire State manufacturing index dropped into negative territory in May, indicating a slight deterioration of regional manufacturing conditions, for the first time since last October.

Market Reaction: Stock indexes were mixed at the open. The yield on 10-Year Treasury bonds is down to 2.33 percent. NYMEX crude oil is up to $49.03/barrel. Natural gas futures are down to $3.34/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  Housing_Starts_051617.

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Comerica Economic Weekly

U.S. economic data this week showed stronger-than-expected inflation in April, ongoing positive labor market indicators, and positive news about U.S. consumers. Overall, the data were consistent with our expectation for improved GDP growth in Q2, after a weak Q1.

Upstream inflation was warmer than expected in April as the Producer Price Index for final demand registered a 0.5 percent month-to-month gain. Much of the increase in headline PPI came from final demand services which climbed by 0.4 percent in April. The energy price index also increased, rising by 0.8 percent in April, after falling by 2.9 percent in March. Over the 12 months ending in April, the Producer Price Index for final demand is up by 2.5 percent. Core PPI (final demand less food, energy and trade) was up 2.1 percent over the previous year.

The Import Price Index also increased by 0.5 percent in April. Higher imported fuel prices helped to drive the headline index higher. The dollar has been easing slightly relative to our trading partners’ currencies this year, supporting import prices.

Downstream inflation was about as expected as the Consumer Price Index registered a 0.2 percent increase for April. Gains in energy prices were offset by lower prices for new and used vehicles, apparel and medical care commodities. Over the previous 12 months, headline CPI was up by 2.2 percent while core CPI (less food and energy) was up by 1.9 percent.

Oil prices firmed this week after the EIA said that U.S. inventories of crude oil dropped more than expected.

Initial claims for unemployment insurance dipped by 2,000 for the week ending May 6, to hit 236,000. Continuing claims were extremely low for the week ending April 29, falling by 61,000, to reach 1,918,000.

The Job Opening and Labor Turnover Survey for March showed that the job opening rate (per existing employee) ticked back up to 3.8 percent. It has been in a range close to 3.8 percent since mid-2015, indicating good potential for ongoing hiring. The hiring rate remained elevated at 3.6 percent. The quits rate also stayed elevated at 2.1 percent, which is a positive economic metric indicating worker confidence in the job market.

Business inventories for March increased by 0.2 percent nominally. This feeds into the Q1 GDP calculation so it is not a first tier forward-looking indicator. However, it does show ongoing improvement in the inventory/sales ratio, compared with year-ago values. This is consistent with improving overall economic conditions.

Retail sales for April increased by 0.4 percent nominally. If we apply the 0.2 percent increase in the CPI for the month, that approximates a 0.2 percent increase in real consumer spending on durable and nondurable goods. Unit auto sales increased in April to a 16.9 million unit rate. This brought retail sales of autos and parts up by 0.8 percent. So despite the weak year-over-over comparisons showing a 3.0 percent drop in unit auto sales for April, the monthly numbers were positive, and supportive of Q2 GDP growth. Other components of retail sales were mixed. Furniture, food and clothing sales eased for the month. Building materials, drugstore, and sporting goods sales were up. Retail sales excluding autos increased by 0.4 percent in April.

The University of Michigan’s Consumer Sentiment Index increased to 97.7 in early May. The index has eased slightly from its post-election surge, but it remains well elevated compared to its pre-election level. Despite the stronger PPI and import price numbers for April, consumer expectations about inflation were little changed.

According to the fed funds futures market, expectations that the next increase in the fed funds rate range would happen on June 14 eased a little, back to 74 percent. Charles Evans, President of the Federal Reserve Bank of Chicago, said today that there is downside risk to the expectation of two more rate hikes this year. Evans is known as a more dovish member of the FOMC. We expect to see more discussion from the Fed over the summer about its intentions for balance sheet reduction. We look for that process to begin either late this year or early next year.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  Comerica_Economic_Weekly_ 05122017.

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