Comerica Economic Weekly

U.S. economic data from the end of February are consistent with an economy that expanded through the winter, but at a slower rate than we saw through the middle of last year.

Fourth quarter real GDP growth was revised down to 2.2 percent with the second estimate released today. The lead cause of the downward revision to growth was weaker inventory accumulation. Consumer spending was the biggest driver of growth, adding 2.8 percent to Q4 real GDP growth. Trade was a big drag, subtracting 1.2 percent from total GDP growth. The consumer spending component was juiced by health care services, related to the rollout of the Affordable Care Act, and so that will not be sustained. This clearer view on Q4 GDP allows us to bring our estimate of Q1 real GDP growth up to around 2.5 percent.

Existing homes sales dipped by 4.9 percent in January, to a 4.82 million unit rate. Bad weather was a factor. New home sales were essentially flat in January, easing by 0.2 percent to a 481,000 unit annual rate. Home price picked up in December. The Case-Shiller 20-City Composite Index gained a strong 0.9 percent for the month, resulting in a 4.5 percent gain over the previous 12 months.

Consumer prices fell in January, pulled down by gasoline. The headline CPI dropped by 0.7 percent. Gasoline prices were down almost 19 percent for the month. Over the previous 12 months, headline CPI dipped by 0.1 percent. Core CPI (less food and energy) gained 0.2 percent in January and showed a 1.6 percent gain over the previous 12 months.

New orders for durables goods increased by 2.8 percent in January, after falling through November and December. Both civilian and military aircraft have been somewhat volatile lately. A core measure, nondefense capital goods excluding aircraft, was up by 0.6 percent in January.

Initial claims for unemployment insurance increased by 31,000 for the week ending February 21, to hit 313,000. It still looks like we are trending just under 300,000, which is a very healthy number. Continuing claims dropped by 21,000 for the week ending February 14, to reach 2,401,000.

The Conference Board’s Consumer Confidence Index fell in January to 96.4, after surging in December. This does not look like a sudden downgrade in consumer attitudes, but rather reflects a reset after the December spike.

FOMC chairwoman Janet Yellen testified before House and Senate committees this week. She remained consistent in her approach to monetary policy normalization, giving herself plenty of wiggle room for the exact timing of interest rate lift-off later this year. We continue to look for a June move, with September as our second choice. We look for a further revision to forward guidance on interest rates on March 18.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 02-27-15.

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Comerica Bank’s Texas Steps down for Second Month

Comerica Bank’s Texas Economic Activity Index eased again in December, decreasing 0.2 percentage points to a level of 107.4. December’s reading is 35 points, or 48 percent, above the index cyclical low of 72.6. The index averaged 105.1 points for all of 2014, four and nine-tenths points above the average for full-year 2013. November’s index reading was 107.6.

“Our Texas Economic Activity Index declined slightly in December, following a small decline in November. The recent dip in the series clearly breaks the string of seven consecutive monthly gains beginning in April 2014. This dip in the Texas Index is consistent with the decline in crude oil and natural gas prices seen over the second half of last year and into early 2015. The drop in oil and gas prices has resulted in a significant reduction in planned expenditures for oil field development worldwide this year. Texas will share in that reduction in activity, and so we expect to see more evidence of the economic drag on Texas from lower oil prices in the months ahead,” said Robert Dye, Chief Economist at Comerica Bank. “Beyond the direct drag on oil field activity, we also expect to see more evidence of the indirect drag from lower oil prices on the rest of the Texas economy through 2015.”

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For a PDF version of the Texas Economic Activity Index click here: TexasIndex_0215.

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Comerica Bank’s Michigan Index Grows for Second Month

Comerica Bank’s Michigan Economic Activity Index grew in December, increasing 0.4 percentage points to a level of 120.0. December’s reading is 46 points, or 62 percent, above the index cyclical low of 73.8. The index averaged 117.3 points for all of 2014, three and one-tenth points above the index average for 2013. November’s index reading was 119.6.

“Our Michigan Economic Activity Index increased again in December, following a small increase in November. These two monthly gains put the Michigan Index back on an upward track after a one-month decline last October. Going forward we anticipate only limited gains from auto production driving the Michigan economy in 2015. However, we expect to see more improvement in housing markets, both in terms of residential construction and also in terms of house price gains in 2015,” said Robert Dye, Chief Economist at Comerica Bank. “Labor market conditions will continue to improve in 2015, providing a broadening base of support for the Michigan economy.”

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For a PDF version of the Michigan Economic Activity Index click here: Michigan_0215.

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Comerica Bank’s California Index Gains Momentum

Comerica Bank’s California Economic Activity Index grew in December, climbing 1.6 percentage points to a level of 118.3. December’s reading is 34 points, or 41 percent, above the index cyclical low of 83.8. The index averaged 113.4 points for all of 2014, seven and three-tenths points above the average for all of 2013. November’s index reading was 116.7.

“Our California Economic Activity Index increased nicely in December, showing ongoing improvement for the largest U.S. state economy. This was the ninth consecutive monthly gain for our California Index, and one that was broad-based, with seven out of eight index components increasing. We expect lower crude oil and gasoline prices to be a net benefit to the California economy, providing support to the state’s large consumer sector,” said Robert Dye, Chief Economist at Comerica Bank. “Gains in non-energy consumer spending and improving residential construction activity are pluses for the state in 2015. Also, the recent resolution of the labor dispute at California docks removes a key downside risk for the state economy.”

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For a PDF version of the California Economic Activity Index click here: CaliforniaIndex_0215.

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Comerica Bank’s Florida Index Maintains Strong Gains

Comerica Bank’s Florida Economic Activity Index improved in December, growing 1.5 percentage points to a level of 124.7. November’s index reading is 47 points, or 60 percent, above the index cyclical low of 78.0. The index averaged 117.9 in 2014, eight and eight-tenths points above the average for all of 2013. November’s index reading was 123.2.

“The Florida economy is showing solid, consistent growth as evidenced by the nine consecutive monthly gains in our Florida Economic Activity Index. All eight components of our Florida Index increased in December. This is the first time that we have seen across-the-board gains in all index components since May of 2014, demonstrating that Florida has reclaimed its place as a U.S. growth leader,” said Robert Dye, Chief Economist at Comerica Bank. “We expect housing markets to continue to improve through 2015 with ongoing gains in construction activity and firming prices. An improving U.S. economy and low gasoline prices are tailwinds for the Florida economy. However, the strong U.S. dollar will mitigate some of the gain expected from an improving global economy in 2015.”

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For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0215.

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Comerica Bank’s Arizona Index Shows Strong Gain

Comerica Bank’s Arizona Economic Activity Index grew in December, increasing 1.7 percentage points to a level of 104.0. December’s index reading is 27 points, or 36 percent, above the index cyclical low of 76.7. The index averaged 99.9 points for all of 2014, four and one-half points above the average for full-year 2013. November’s index reading was 102.3.

“Our Arizona Economic Activity Index increased again in December, for the seventh consecutive month. Moreover, the last two monthly increases in our Arizona Index have been very broad-based, with all eight components of the index improving. Job creation in Arizona remains about on par with the overall U.S. economy, which is unusually subdued at this point in the business cycle. The residential real estate market in Arizona, which historically has been a driver of above-average job growth for the state, has improved only slowly,” said Robert Dye, Chief Economist at Comerica Bank. “According to the latest Case-Shiller House Price Index, Phoenix house prices were up only 2.4 percent for the year ending in December. We expect to see stronger house price growth for Arizona in 2015.”

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For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0215.

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Comerica Economic Weekly

The short week produced mixed U.S. data. Signs continue to point to a weak, but positive, GDP reading for the first quarter of 2015. Even though the GDP data is seasonally adjusted, we have had a spate of weak Q1 reports coming off the Great Recession, including 2010Q1, 2011Q1, 2014Q1, and now 2015Q1. Sometimes patterns just happen, particularly when the underlying components of a series are complex.

Home construction remains range-bound near the 1 million units per year mark. Housing starts fell by 0.2 percent in January to a 1,065,000 unit annual rate, essentially where they have been through the second half of 2014. We can blame the weather a little bit. The National Association of Homebuilders’ Builder Confidence Survey fell 2 points in February, attributed to snow cover. Aside from the weather, new home sales were stuck near a 450,000 unit pace over the last two years, holding builders in check. Building permits eased slightly by 0.7 percent in January, to a 1,053,000 million unit pace.

The Producer Price Index for Final Demand fell by 0.8 percent in January, well beyond consensus expectations. Final demand goods prices were down by 2.1 percent. The energy index slid by 10.3 percent, the largest one-month drop since oil prices started falling last July. Food prices eased 1.1 percent with lower dairy product prices. Final demand services prices were lower by 0.2 percent with lower costs for outpatient care. Over the previous 12 months the PPI for final demand is unchanged.

The Industrial Production Index for January was up by 0.2 percent. Manufacturing output matched that gain, increasing by 0.2 percent. Motor vehicle assemblies eased by 1.4 percent to an 11.76 million unit rate, reflecting the step down in auto sales from November through January. Utility output rebounded off a December dip, gaining 2.3 percent in January.

The Conference Board’s Leading Economic Index for January gained just 0.2 percent, the weakest gain since last August. The coincident and lagging indexes were also up, indicating broad momentum in the U.S. economy.

Initial claims for unemployment insurance for the week ending February 14 decreased by 21,000 to hit 283,000. Continuing claims increased by 58,000, to 2,425,000 for the week ending February 7.

The minutes of the Federal Open Market Committee meeting of January 27-28 show a Fed deeply engaged in the process of figuring out the mechanics of interest rate lift off. We may see a further refinement of the Fed’s forward guidance on interest rates after either the March or April FOMC meetings. We expect the Fed to modify forward guidance this Spring in order to signal their intentions to lift the fed funds rate later this year. The June FOMC meeting still feels like a reasonable guess for the timing of interest rate lift-off.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 02-20-15.

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Strong Auto Industry Bolsters Detroit

Lower gasoline prices, strong job creation and improving consumer confidence are a potent combination for U.S. auto sales, and that is good news for Detroit. U.S. auto sales look like they are getting close to the top of the cycle, edging down to a 16.6 million unit rate in January. We forecast sales for 2015 to total 17.0 million units, slightly better than the top-of-the-cycle 16.9 million units sold in 2005. Auto production in Michigan will get a boost from the Bolt, General Motor’s new electric vehicle. GM will invest $200 million at its Orion Assembly plant and at its Pontiac Metal Center to support the Bolt. As GM hopes to get a bang from their Bolt, auto industry jobs will get a boost. According to the Anderson Economic Group, Southeast Michigan ranks first nationally in the number of advanced automotive industry jobs. However, the Motor City is getting more competition from Silicon Valley for leadership in transportation innovation. Apple is developing an electric vehicle and Google is pushing self-driving technology.

Much ink has been spilt about relatively weak wage growth in the aftermath of the Great Recession. As we progress through 2015, we expect to see more evidence of tightening labor markets and increasing wages. Wal-Mart has just announced a $1 billion pay and training package for its U.S. hourly workers. This will help to raise for the floor for minimum wage workers nationally. Unions are starting to reassert themselves as the U.S. economy improves. Dockworkers in California are making their presence felt. The United Auto Workers’ four-year contract expires this September 15.

The Southeast Michigan Purchasing Managers Index for January took a big step down to 50.0 indicating neither expansion nor contraction in area manufacturing. Some of the drop was due to lower commodity prices, which may be reflective of lower oil and natural gas prices and not indicative of increasing slack.

DetroitRegional_02_20_2015Click here for the complete Detroit Regional Economic Update: Detroit2014_Q4.

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Central West Michigan Gains Strength

The significant decline in gasoline prices and gains in house price have boosted consumer confidence all over the nation, especially in Central West Michigan, where the economy is tightly connected with auto industry. Sales of SUVs and light trucks have accelerated in the past few months as fuel prices dropped, helping manufacturing industries in Central West Michigan. According to the Bureau of Economic Analysis, growth in manufacturing in the third quarter exceeded growth in any other major economic sector in Michigan. Demand for office furniture is expected to stay strong throughout 2015, pushing furniture production to its highest since 2008. Increased furniture production, basically from middle-market furniture producers, along with strong job growth, lower gasoline prices and increased consumer confidence are expected to help strengthen the Michigan economy.

Moderately strong job growth has brought the CWM unemployment rate to 4.9 percent in the fourth quarter of 2014. We expect the regional unemployment rate to continue to trend lower through 2015 and 2016, putting upward pressure on wage rates, especially for skilled positions.

Housing markets in the Grand Rapids area remain tight. Both rental rates and purchase prices are increasing. However, house construction has remained modest. Limited in-migration is contributing to below-average population growth, constraining demand for housing. In February, Trulia listed an average price per square foot of home as $134, an increase of 6.3 percent from that same period last year. Current low inventories and harsh weather has constrained the housing market over the winter. Ongoing economic growth along with strengthening credit quality will support housing markets in 2015 and further in 2016. We expect homeowners to increase their wealth as prices rise in a low interest rate environment.

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Click here for the complete Central West Michigan Regional Economic Update: CentralWestMI2014_Q4.

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Phoenix Economy Shows Gradual, Sustainable Improvement

The Phoenix metro area ended 2014 with a 2.7 percent increase in total nonfarm employment. Growth occurred in most employment sectors, with particularly pronounced December-over-December changes in professional and business services and education and health services. These two industries alone accounted for over three-fifths of the total job growth for Phoenix in 2014. The region’s large construction sector continued its downward trend, with jobs numbers ending the year down by 3.6 percent. However, the anticipated stronger growth in high-paying sectors will help to reverse the trend of the city’s construction sector as millennials and boomerang buyers enter into the housing market.

Housing starts and prices have yet to regain their pre-recession levels. Conditions, however, are improving by many measures. Distressed sales composed almost 40 percent less of total units sold year-over-year for December. The number of days homes spent on the market increased in 2014, however inventory growth slowed. The area is moving towards a more normalized market, with institutional buyers slowing and traditional buyers finding their footing as the U.S. economy firms up. The region is still popular among second-home buyers and retirees, who will benefit from improving economic conditions over 2015. The continued decline of distressed property sales and foreclosures will help to stoke home prices in the upcoming years.

Reports on the net benefit of the Super Bowl have been mixed. However, even if the initial estimates were overblown, Phoenix still experienced a bump in consumer spending thanks to fans in town for the game. Phoenix will continue its moderate growth for 2015, but real estate prices and construction, key drivers to the area economy, will not be approaching pre-recession levels. Although Phoenix isn’t rebounding strongly, its sustainable growth and low cost of living will help to attract more business to the “Silicon Desert.”

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 Click here for the complete Phoenix Regional Economic Update: Phoenix2014_Q4.

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