October Industrial Production, Producer Prices

Production Stall Continues as Utility Output Falls, Producer Prices Flat

  • Industrial Production for October was unchanged as utility output fell.
  • The Producer Price Index for final demand was also unchanged in October.

Industrial production for October was unchanged after dipping slightly through August and September. Manufacturing output increased by 0.2 percent for the month. Mining output gained 2.1 percent, consistent with moderate gains in the drilling rig count. Utility output fell by 2.6 percent. The headline industrial production index levelled out in 2016 after sliding through 2015 with reduced oil field activity. The reset in energy markets has also spilled over into the manufacturing sector as reduced oil field activity means reduced demand for equipment and products. As of October, the headline index remains 2.3 percent below its November 2014 peak. With stabilizing oil prices and ongoing improvements to drilling efficiency, which are reducing marginal costs of production in key U.S. oil fields, we expect to see more support for the industrial production index from the energy sector going forward. However, modest gains from the energy sector may be offset by reduced production in the auto sector. U.S. auto sales appear to be peaking and U.S. nameplates are moving small car production to Mexico. So we do not expect to see resurgence in U.S. manufacturing activity in 2017. Piling on, the strong dollar also represents a headwind for U.S. manufacturing, likely through next year. A key focus of the incoming Trump administration is to support U.S. manufacturing through the renegotiation of trade deals and by labelling China as a currency manipulator. Trump has called for tariffs on Chinese goods and for U.S. trade officials to take action against China through the World Trade Organization. He has also criticized U.S. companies for moving production to Mexico, including U.S. automakers. So there is upside risk to our expectation of ongoing flattish industrial production if the Trump administration is able to take meaningful steps quickly.

The Producer Price Index for final demand was unchanged in October. On the goods side, increases in energy prices were muted by declining food prices. On the services side, declines in trade and other service prices reduced the services sub-index for the month. Over the previous 12 months the PPI for final demand was up by 0.8 percent. Excluding food, energy and trade, it was up by 1.6 percent over the year. We expect to see consistent year-over-year gains in the PPI going forward.

Market Reaction: Equity markets opened with losses. The yield on 10-Year Treasury bonds is down to 2.22 percent. NYMEX crude oil is down to $45.59/barrel. Natural gas futures are up to $2.92/mmbtu.


For a PDF version of this Comerica Economic Alert click here: Industrial Production 11-16-16.


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Florida Economy Gains Momentum Heading into 2017

The Florida economy continues to run hot in the second half of 2016, supported by an acceleration in employment growth in the third quarter. Employment growth for most major Florida metro areas continues to outpace the national average and gains are being seen across most major sectors. In particular, Florida manufacturing has been surprisingly strong. While the U.S. has seen stagnant to declining manufacturing employment growth over the past year, Florida manufacturing employment increased, up 4.4 percent in the 12 months ending in September. Earlier this year the state legislature passed House Bill 7099 in support of state manufacturers, which made existing sales and use tax exemptions of eligible industrial machinery and equipment permanent. The state tourism sector is weathering the drag from the strengthening U.S. dollar, which makes Florida vacations more expensive for international visitors. Year-over-year employment growth in leisure and hospitality remains above 4 percent. While the U.S dollar has appreciated by 24.4 percent against the U.K. pound in the 12-months ending in October, accelerated by the U.K.’s vote to leave the E.U., the U.S. broad trade weighted dollar has begun to stabilize, up just 3.2 percent. The housing sector began to cool off a bit with slower construction employment growth and a tick down in multifamily construction in the third quarter. However, we expect a rebound in residential housing due to strong home demand, supported by a robust labor market and population growth. The Florida economy will be firing on “most cylinders” heading into 2017.


For a PDF version of the complete Florida Economic Outlook, click here: FL Outlook 112016.


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Arizona Addresses Poverty and Education

Arizona’s economic rebound in the second half of the year has been more muted than originally thought. Arizona job growth continues to move in the right direction, but recent data has us dialing back our expectations for next year. Construction employment continued its win streak with above-trend growth, up 9.2 percent in the 12 months ending in September. This is following strong new home construction throughout Arizona. The much larger services sector is growing at a more moderate pace. Arizona economic growth will outpace the U.S. average over the next few years. However, we expect Arizona, much like the rest of the nation, to experience slower growth in the quarters ahead than historical averages.

Hurdles for the Arizona economy in the long run are household income and education attainment, which impact the propensity to spend and the access to qualified workers. According to the Census Bureau, Arizona had the eighth highest poverty rate in the nation in 2015, with 17.4 percent of people in the state living below the poverty level. The state legislature is attempting to address these issues. In November, voters passed Proposition 206 which incrementally increases the state’s minimum wage from the current rate of $8.05 per hour to $12.00 per hour by 2020, increasing with the U.S. Consumer Price Index thereafter. The law also guarantees paid sick leave to workers of non-exempted businesses and is expected to impact around 700,000 workers. Earlier this year, Arizona also passed Proposition 123, increasing education funding by $3.5 billion over the next 10 years.


For a PDF version of the complete Arizona Economic Outlook, click here: AZ Outlook 112016.

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Navigating California Growth into 2017

After a rocky start to 2016, the California economy has picked up momentum in the second half of the year. Stronger job prospects have drawn people into the state labor force at levels not seen in over a decade. California has pulled in an additional 379,000 potential workers into the state labor force in the 12 months ending in September, the strongest pace since January 2001. The improving California labor market has supported our expectations of moderate state economic growth this year. We expect California real gross domestic product to grow by 2.5 percent in 2016, outpacing our forecasted U.S. average growth of 1.6 percent.

While we expect California’s economy to continue to outpace the U.S. average in 2017, there are a number of uncertainties to our outlook over the next few years. At the local level, we are already seeing moderating year-over-year employment growth, off of 2015 highs, across the California major metropolitan areas. This is to be expected as the economic cycle matures. A tighter labor market can both limit the pool of job applicants and increase labor costs through upward pressure on wages, slowing down the pace of hiring. At the national and international level, the strong rhetoric on trade policy throughout the 2016 presidential election increases the uncertainty for industries tied to California imports and exports. Mexico, Canada, China and Japan are the top four markets for California exports, respectively. Therefore a shift in trade policy for NAFTA or future trade with China and the resolution to Trans-Pacific-Partnership could have a material impact on California regional economies.


For a PDF version of the complete California Economic Outlook, click here: CA Outlook 112016.

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Firmer Oil Prices Help Texas, But Recovery in Houston Will Be Slow

The price for West Texas Intermediate crude oil appears to be stabilizing in the range of $45 to $50 per barrel, providing a floor for drilling activity in Texas. The rig count for the state has bounced off the mid-May low of 173 active rigs, up to 268 by mid-November. Oil producers continue to gain efficiencies, pushing the marginal cost of production lower and so we expect to see ongoing moderate gains in the rig count and associated oil field activity through the end of this year and into early 2017. However, even as we write this, the spot price for WTI has slipped below $45, and there remains a worldwide glut of oil that may take a year or more to absorb, keeping downward pressure on prices. Oil storage in the U.S. is falling off its record peak from this past spring, but progress has been slow. Stronger-than-expected storage numbers in late October through early November brought prices down to $43 by mid-November. Fortunately for Texas, the state economy is fueled by more than just oil. Job growth over the last two years has been remarkably resilient, with just two months, March 2015 and March 2016, showing net job losses. This September the state added 38,300 jobs on net, which is above the monthly average for 2012 and 2013. The contrasting patterns in the state economy are seen in the comparison of the Dallas/Fort Worth metropolitan area and the Houston metropolitan area. Job growth in North Texas remains strong, up 3.8 percent in September over the previous 12 months. Job growth in the Houston MSA has slipped to just 0.5 percent year-over-year as of September. We look for a slow turnaround in Houston in 2017.


For a PDF version of the complete Texas Economic Outlook, click here: TX Outlook 112016.

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Michigan Growth to Ease as Short-Term and Long-Term Drags Align

A key challenge in describing and forecasting the current Michigan economy is how to make comparisons relative to pre-recession performance. The reason for the difficulty is that Michigan did not “just” have to endure the Great Recession of 2007/08. The recession in Michigan started in the summer of 2002 and lingered through 2009. With the pace of job growth currently levelling off, it appears that Michigan has “recovered” from the Great Recession, but total employment remains about 360,000 jobs shy of the April 2000 peak. With the cooldown in job growth visible in 2016, the state has entered a post-recovery phase. The auto industry has restructured and national auto sales are cresting in the vicinity of an 18 million unit annual rate. Going forward it looks like both short-term and long-term forces will keep growth in check for Michigan. In the short-term the state’s key auto industry is looking at stable-to-declining sales over the next few years. Also, both Ford and GM are moving small car production out of Michigan. GM has just announced 840 lay-offs at the Lansing Grand River plant in response to the expected cooler trend in sales. Over the long-term, Michigan’s demographics are a fundamental constraint to growth. By 2005, Michigan’s population growth had slowed to zero. Recent estimates show state population for 2015Q2 to be about 134,000 below the peak from 2004Q3. Since 2000, when job growth began sliding, net migration for Michigan has been persistently negative. We expect the negative trend in net migration to continue as retirees move south and job growth eases with a maturing auto industry cycle.


For a PDF version of the complete Michigan Economic Outlook, click here: MI Outlook 112016.

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October Retail Sales, NY Fed

Consumers Bought Cars, Drove Them

  • October Retail Sales increased by 0.8 percent, supported by autos and gasoline.
  • Ex-auto Retail Sales also increased by 0.8 percent.

Retail sales were solid in October, gaining 0.8 percent, after increasing by a strong 1.0 percent in September. Auto sales drove the numbers higher. Unit auto sales for the month reclaimed the 18.0 million unit mark, after a year’s absence. Retail sales of autos and parts accelerated by 1.1 percent for the month. Slightly higher gasoline prices also fueled the nominal retail sales total. For the month, retails sales at gasoline stations increased by 2.2 percent. Other retail sales categories were generally positive. Furniture stores sales sagged by 0.9 percent for the month, but remained up by 1.7 percent over the previous 12 months. Electronics and appliance stores sales edged up by 0.2 percent, but were down 4.0 percent over the past year, not exactly electrifying. Building materials stores saw their sales increase by a solid 1.1 percent. Over the previous year building materials sales hammered out a strong 6.5 percent increase, consistent with improving housing markets. Food and beverage stores baked in a 0.9 percent increase for the month and 3.7 percent over the previous year. Healthcare stores groomed a 0.8 percent increase in October and a strong 8.3 percent gain over the previous year. Clothing stores layered up a 0.6 percent increase for the month, gaining 2.3 percent for the year. Sporting goods powered a 1.3 percent increase for the month, but were up only 1.7 percent for the year. We expect holiday sales to be solid this year, supported by strong job growth over the past year, raising wages and increasing house prices. The post-election stock market rally is also helping. Also, we expect consumer confidence to increase as the acrimony over the general election fades. So it looks like consumers will do their part and support moderate Q4 real GDP growth. In our November U.S. Economic Outlook we called for growth in real consumer spending to ease a bit in Q4. If that goes the other way, Q4 real GDP growth could lift above our 2.9 percent forecast.

The Empire State Manufacturing Survey for November was stronger than expected, showing a pick-up in manufacturing activity for the New York region over the month.

Market Reaction: Equity markets opened with gains. The 10-year Treasury yield is up to 2.23 percent. NYMEX crude oil is up to $45.08/barrel. Natural gas futures are down to $2.96/mmbtu.


For a PDF version of this Comerica Economic Alert click here: Retail Sales 11-15-16.

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The Trump Presidency and the U.S. Economy

Expect Change, but Mind the Gap(s)

  • Donald J. Trump won the presidential election with 290 electoral votes to Clinton’s 228.
  • Trump received 47.3 percent of the popular vote to Clinton’s 47.8 percent.
  • The House of Representatives remains in Republican control, 239 seats to 193*.
  • The Senate also remains in Republican control, 51 seats to 48*.

The economic implications of Donald Trump’s surprise victory in the 2016 presidential contest will undoubtedly be many. Trump’s list of goals in his 100-day plan is very broad. Republican control of both houses of Congress insures that the first 100 days of the incoming Trump Administration will produce meaningful results. However, the actual outcomes will be difficult to predict and to quantify, in part because Donald Trump is an unknown political agent. He has no voting record, few political debts and (so far) no enduring support from his political base. However, he was the candidate of change, and that is what we expect to see from the incoming Trump Administration. The challenge of adjusting our economic outlook to the new politics of change is that there will be a gap between the rhetoric of the campaign trail and the actual outcomes that the administration will pursue and be able to achieve. There always is. In this case the gap may be wider than normal due to the particularly strident nature of the campaign rhetoric. There is another gap to consider. A federal budget gap (deficit) that is expected to widen in the years ahead may prove to be a limiting factor in both promised tax cuts and promised spending increases. Even with control of both houses of Congress, the Trump administration will still need to negotiate with fiscal conservatives within the Republican Party. So an emergent theme for all fiscal initiatives will be “revenue offsets,” meaning that seemingly separate budget initiatives may, in fact, be tightly linked due to the opposing pressures that they will place on an already constrained federal budget.

We have identified nine broad areas where Trump policies may meaningfully impact the economy. These align with his 100-day plan. (1) Federal spending. We expect to see increased federal spending in 2017 in the form of infrastructure projects that are designed to stimulate job growth. This could lead to an expansion of the debt ceiling which will be voted on this winter (the debt ceiling is expected to be reached by mid-March). (2) Tax reform. We look for revisions to both the personal and corporate tax code. A new corporate tax code will motivate the repatriation of offshore capital. This could be a revenue offset for fiscal stimulus. (3) Interest rates. With a wider federal deficit, long-term interest rates will likely increase. New fiscal stimulus could push the unemployment rate lower, into inflation-stoking territory, also pushing up long-term interest rates. (4) Healthcare. This could be job one for the new administration. Trump has already backed away from some of the sweeping campaign rhetoric. The healthcare system is a very large part of the U.S. economy and so a major reconfiguration of the system could have significant economic consequences. (5) International trade. Trump has promised to dismantle NAFTA and the TPP in order to support domestic industries. Increased trade barriers and tariffs could have a negative impact on global trade and could potentially stoke inflation. These negatives will need to be balanced against increased output and employment in some domestic industries. The Mexican economy, in particular, appears to be vulnerable to new U.S. policies. (6) Immigration. Tighter immigration policy could potentially constrain U.S. labor force growth leading to lower unemployment, higher wages and more inflation. (7) Financial regulation. Trump has voiced his intention to roll back Dodd-Frank, the mammoth set of regulations that have added significant compliance costs to the financial services industry. This could have a positive impact on financial market innovation and credit expansion. It could also result in a restructuring of the Consumer Financial Protection Bureau. (8) Energy and environmental policy. We expect to see a review of environmental regulation that could be positive for domestic energy projects. (9) The Federal Reserve. Janet Yellen’s term as chair of the Board of Governors of the Federal Reserve will expire in January 2018. We expect her to serve out her term and then retire from the Fed. Her successor would presumably be appointed by Trump. The still-vacant Vice-Chair for Supervision will also presumably be a Trump appointee. If that position is ever filled (it has been vacant since Dodd-Frank was ratified in July, 2010) it could further change the regulatory landscape for the financial services industry.

* A runoff election in Louisiana on December 10 will determine final results.

For a PDF version of this Comerica Economic Alert click here: Trump 11-14-16.

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Comerica Economic Weekly

It was a light week for economic data, but a tremendously weighty week for political events. The widespread expectation, supported by the majority of polling institutions, that Hillary Clinton would become the first female president of the United States, gave way Tuesday evening to the growing awareness that the world was changing in a different direction.

Republican President-elect Donald John Trump will be supported by a slim majority in the Senate (51/48) and a stronger majority in the House of Representatives (239/192). Global financial markets swooned on the results. Fortunately, U.S. markets were closed in the early hours of Wednesday and could not reinforce the panic selling. Soon after U.S. markets opened on Wednesday morning, stock prices stabilized and then accelerated through the day. With now two days of strong U.S. financial market performance following the shock of Trump’s campaign victory, we do not expect to see a repeat of the Tuesday night swan dive.

This is important for a variety of obvious reasons, not the least of which is the upcoming Federal Open Market Committee meeting of December 13/14. As long as nothing unexpectedly falls out of bed, the odds of a December 14 feds funds rate hike look strong. Charles Evans, President of the Federal Reserve Bank of Chicago, and well known interest rate dove, said this week that he thinks that a December rate hike looks reasonable. According to the fed funds futures market, the implied odds of a December 14 rate hike are now 71.5 percent. We look for good economic data and financial market performance between now and mid-December to allow the Fed to fulfill widespread expectations for a year-end rate hike.

We currently have two rates hikes in our forecast for 2017, one in June and one in December. The balance of risk for our interest rate forecast for 2017 appears to have shifted marginally to the upside with the results of the 2016 general election. If we have fiscal stimulus from the Trump administration, combined with a widening federal deficit, a lower unemployment rate and stronger inflation, then it would be reasonable to expect a slightly steeper trajectory for future fed funds rate hikes, maybe three in 2017 rather than two.

Much depends on the new administration’s ability to follow through on the strong rhetoric of the campaign.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 11-10-2016.


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November 2016, Comerica Economic Outlook

U.S. Data Green Lights Fed for December Rate Hike

After a weak first half of the year, third quarter real GDP growth improved to a 2.9 percent annualized rate. The inventory sell-off that weighed heavily on GDP growth in H1 looks like it is reversing in late 2016 and should contribute to above-potential growth over the next few quarters. Payroll job growth in the third quarter was strong, averaging 206,000 net new jobs per month and the unemployment rate averaged 4.9 percent. The October employment data suggests that job growth is stepping down a little; only 161,000 jobs were added for the month. But that was enough to tighten the unemployment rate back to 4.9 percent. We look for the unemployment rate to bottom out somewhere around 4.6 to 4.7 percent in this cycle. Labor markets across the country are tightening and wages are going up, including some by mandate as minimum wage legislation in several states complements raises already granted by some major employers. Average hourly earnings increased by 0.4 percent in October and were up by 2.8 percent over the previous 12 months. With wages heading up, energy prices moving up, house prices and rents going up and medical costs still increasing, there is a whiff of inflation in the air. The September Consumer Price Index increased by 0.3 percent for the month, and was up 1.5 percent over the previous 12 months. We expect headline inflation indicators to continue to warm up through early next year.

At the recent Federal Open Market Committee meeting of November 1-2, the Fed did exactly as expected by not raising the fed funds rate while hinting that a rate hike at their next meeting, over December 13-14, is a strong possibility. According to the November 2 press release, the FOMC “judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress towards its objectives.” They received more evidence with the October jobs report, and we expect them to get even more evidence of tightening labor market conditions and increasing wage pressure with the release of the November jobs report on December 2. The implied probability of a fed funds rate hike is now about 76 percent according to the fed funds futures market. Expectations are set and the door is open for the Fed. All that is needed is another month of benign economic data. We also see hints that other central banks are expecting more inflation and preparing for eventual monetary policy tightening. The Bank of England modified its forward guidance in its Monetary Policy Summary of November 3, effectively taking another interest rate cut off the table. Likewise, the Bank of Japan refrained from adding more stimulus in their monetary policy statement of November 1.

The U.S. general election, and its aftermath, is still potentially market moving. The slide in major equity indexes, that began in September, accelerated through October. Solid Q3 GDP data and expectations for a repeat in Q4 are supportive of equities, but election uncertainty is high and anxiety about the aftermath of the election, on both sides of the political aisle, also appears to be high. This is obviously not a normal election, and so the expectation of a post-election bounce in equities that spills over into a generalized consumer bliss needs to be discounted. Still, we expect to see a well performing economy after the election and ongoing economic momentum through 2017.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicOutlook1116.

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