January Existing Home Sales, Fed Minutes

Sales Bounce Back After December Dip

  • Existing Home Sales increased by 3.3 percent in January to a 5,690,000 unit annual rate.
  • Fed minutes show concern about communication strategy.

Existing home sales bounced back in January, gaining 3.3 percent, to a 5,690,000 unit rate. This is the fastest sales rate since February 2007. The January jump comes on the heels of a December slump, when existing home sales fell by an upwardly revised 1.6 percent. Weaker-than-expected December sales caught our attention because they were coincident with the increase in the short-term interest rates engineered by the Federal Reserve in December, and so they suggested some interest rate sensitivity in the housing market. This could still be an issue due to expected interest rate hikes later this year, and ongoing upward pressure on house prices, which together will put downward pressure on housing affordability. Housing affordability has declined from peak 2012 levels, but remains well above the historical average. The problem is that many of today’s first-time home buyers are not used to the historical average, and so a loss of affordability, even from a high level, can be a headwind for some buyers. Still, the January data suggests that housing markets remain resilient and very tight. The months’ supply of existing homes for sale has dwindled to 3.6 months’ worth over December and January, which ties the all-time low for that metric, set in January 2005. According to the National Association of Realtors, the median sale price of an existing home was up 7.1 percent in January over the previous 12 months. Today’s positive existing home sales data for January suggests upside potential for the new home sales data for January, which will be released this Friday.

The Federal Reserve released the minutes of the January 31/February 1 Federal Open Market Committee meeting. The minutes show concern by committee members over appropriate communications strategy as they prepare to raise the fed funds rate again this year. The minutes confirm the consensus view for ongoing gradual rate hikes this year and next. Further, some committee members stressed that a “gradual pace” means more than one or two rate hikes this year. We expect three rate hikes this year. The next rate hike could come as early as March 15, but financial markets are still discounting that possibility. So if the Fed does want to move in March they will need to communicate that soon in order to avoid a market disruption. We think that May 3 is the most likely date for the next fed funds rate hike, but June 14 is also in play. Interestingly, the minutes also show concern about the likelihood of a more expansionary fiscal policy from the Trump Administration, as well as the risk of a stronger dollar.

Market Reaction: U.S. equity markets dipped on the release of the Fed minutes. The 10-year Treasury bond yield fell to 2.42 percent. NYMEX crude oil is down to $53.58/barrel. Natural gas futures are down to $2.72/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Existing_Home_Sales_02222017.

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Comerica Economic Weekly

Lots of data, lots of Fedspeak, lots of commentary from the Trump Administration. We think that the net result will be positive for the U.S. economy, but it does give us a flashback to the Great Recession when uncertainty was high. For a discussion of economic uncertainty, please see page 2.

Janet Yellen delivered her semiannual testimony to House and Senate committees this week. Her monetary policy comments were somewhat hawkish. She said that “waiting too long to remove accommodation (raising interest rates) would be unwise…” Moreover, that line was echoed this week by Dallas Fed President Kaplan, Richmond Fed President Lacker and Boston Fed President Rosengren. We view this as a strong signal from the Fed that interest rates will be rising soon. By the end of this week, the implied probabilities from the fed funds futures market had shifted forward. The cumulative implied odds of a March 15 fed funds rate hike are now 18 percent. May 3 gets 44.1 percent. June 14 gets 67.4 percent. This distribution still feels too low. We would add about 10 percent to the odds for each meeting.

Along with monetary policy uncertainty, we are also in a period of fiscal policy uncertainty. Two major fiscal initiatives from the Trump Administration have yet to be defined: infrastructure spending and tax reform. We believe that both initiatives will result in positives for the U.S. economy, but scaling, timing and applying those positives to an economic forecast are still impossible. The final form of fiscal stimulus and tax reform will undoubtedly be different from the starting point, evolving as legislation works its way through Congress this summer.

Retail sales for January were stronger than expected, showing ongoing strength in most categories of consumer spending. Total retail sales increased by 0.4 percent, boosted by higher gasoline prices, which ramped up sales at service stations by 2.3 percent for the month. Hiring, wage growth, increasing consumer confidence, higher house prices and a climbing stock market are all positives for consumer spending this spring.

Inflation data showed the impact of higher energy prices. Both the Producer Price index and the Consumer Price index were hotter than expected in January. The Headline PPI gained 0.6 percent for the month, as did the headline CPI.

Industrial production fell by 0.3 percent in January, weighed down by a reset in utility output, which has been lurching due to weather. Manufacturing output was up by 0.2 percent for the second month in a row. Mining output gained 2.8 percent in January, reflecting higher rig counts and more oil drilling activity.

Housing starts dipped by 2.6 percent in January. Single-family starts rebounded from their December dip, up 1.9 percent in January. Multifamily starts went the other way, falling by 7.9 percent after surging in December. Forward-looking permits increased by 4.6 percent in January to a 1,285,000 unit annual rate as multifamily permits rebounded from a December slump.

Initial claims for unemployment insurance increased by 5,000 for the week ending February 11, to hit 239,000. Continuing claims eased, down by 3,000 to hit 2,076,000 for the week ending February 4. These are very good numbers that show tight labor market conditions.

The Conference Board’s Leading Economic Index increased by 0.6 percent in January. This was the strongest monthly increase since June 2015. The Coincident Index and the Lagging Index were also positive.

Small business optimism remained strong in February according to the NFIB.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 02162017.

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January Residential Construction, February UI Claims

Single-Family Rising, Multifamily Heading into Third Year Range-Bound

  • Housing Starts dipped in January by 2.6 percent to a 1,246,000 unit annual rate.
  • Permits for new residential construction increased by 4.6 percent to a 1,285,000 unit pace in January.
  • Initial Claims for Unemployment Insurance gained 5,000 for the week ending Feb. 11, to hit 239,000.

Housing starts have been somewhat choppy over the past few months, drawing attention to an important sector of the economy that is interest rate sensitive. We expect the Federal Reserve to raise short term interest rates at least twice this year, and possibly more times if inflation data heats up. That will also put upward pressure on home mortgage rates. So we will monitor housing-related data closely to see if demand holds up as affordability declines with higher interest rates and higher prices. Also, multifamily absorption is cooling due to strong supply in some areas. We believe that over the long-term, demand for multifamily housing will remain strong, but some markets have built too far ahead of themselves and are now rebalancing. In January total housing starts dipped by 2.6 percent. Single-family starts rebounded from their December dip, up 1.9 percent in January. Multifamily starts went the other way, falling by 7.9 percent after surging in December. So it looks like the upward trend in single-family construction remains in place. However, multifamily construction is still range-bound, essentially where it has been since early 2015. Forward-looking permits increased by 4.6 percent in January to a 1,285,000 annual unit rate as multifamily permits rebounded from a December slump.

Initial claims for unemployment insurance increased by 5,000 for the week ending February 11, to hit 239,000. Continuing claims eased, down by 3,000 to hit 2,076,000 for the week ending February 4. These are still very good numbers indicating tight labor market conditions.

The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey showed a strong increase in current activity for January, along with growing price pressure. Firms were asked to forecast changes in their own prices over the next year; the median forecast called for a 2 percent increase.

Market Reaction: Stocks were mixed at the open. The yield on 10-Year Treasury bonds is down to 2.46 percent. NYMEX crude oil is down to $52.78/barrel. Natural gas futures are down to $3.03/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Housing_Starts_021617.

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January Retail Sales, Consumer Price Index, Industrial Production

 Consumers Undeterred by Higher Prices

  • January Retail Sales increased by 0.4 percent, boosted by higher gasoline prices.
  • Retail Sales Ex-Autos increased by 0.8 percent in January.
  • The Consumer Price Index gained 0.6 percent in December, on higher energy prices.
  • Industrial Production in January declined by 0.3 percent as utility output reset.

Retail sales for January were stronger than expected and December sales were revised up, showing ongoing strength in most categories of consumer spending. Total retail sales increased by 0.4 percent, boosted by higher gasoline prices, which ramped up sales at service stations by 2.3 percent for the month. Other categories were also strong. Sales at electronics and appliance stores were up by 1.6 percent. Sales at sporting goods stores increased by 1.8 percent. General merchandise stores gained 0.9 percent. Restaurants and bars saw a 1.4 percent increase in January. The exception to the broad-based gains was in autos. Unit auto sales fell in January to a 17.6 million unit pace after hitting a supercharged 18.4 million unit pace in December. January retail sales (dollar value) of autos fell by 1.4 percent. Hiring, wage growth, increasing consumer confidence, higher house prices and a climbing stock market are all positives for consumer spending this spring.

Consumers were busy in January, and they were undeterred by higher prices. The Consumer Price Index increased by 0.6 percent in January, boosted by higher energy prices. Gasoline prices were up by 7.8 percent for the month and by 20.3 percent over the previous 12 months. Residential natural gas prices were also up, gaining 1.5 percent in January and 10.1 percent over the previous year. Other prices were up as well. Core CPI (excluding food and energy) increased by 0.3 percent in January, and is up by 2.3 percent over the past year.

Industrial production fell by 0.3 percent in January, weighed down by a reset in utility output, which has been lurching due to weather. Utility output declined for three consecutive months from September through November of last year due to a warm autumn. December was cold in many areas and utility output jumped by 5.1 percent. January was warm and utility output dropped by 5.7 percent. Manufacturing output was up by 0.2 percent for the second month in a row. Mining output gained 2.8 percent in January reflecting higher rig counts and more oil drilling activity.

The Federal Reserve Bank of New York’s Empire State Manufacturing Survey showed good and strengthening conditions in New York and northern New Jersey. The National Association of Homebuilders survey for February fell to 65 from January’s 67, still positive but a little less so. Mortgage applications for the week ending February 10 fell for both purchases and refis, not good news for February home sales. Manufacturing and trade inventories gained 0.4 percent in December. This is mostly a backward looking number that factors into Q4 GDP. However, a declining inventory-to-sales ratio through Q4 is good news for 2017.

Market Reaction: Equity markets opened with gains. The 10-year Treasury yield is up to 2.50 percent. NYMEX crude oil is down to $52.94/barrel. Natural gas futures are up to $3.05/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Retail_Sales_02152017.

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Arizona’s Economy Will Catch a Tailwind

Recently released data from the Census Bureau indicate that net migration into Arizona has been stronger than previously estimated. This is a positive sign for the state’s private services and housing sector activity outlook for 2017. An increasing population has a number of positive impacts on the state’s economy. First, it helps grow the state’s total labor force which is a key component of a growing economy. Second, it drives demand for housing and basic services, supporting jobs in those industries. The increased job growth in turn supports funding for infrastructure by increasing the overall tax base. While the state will likely continue to attract new residents over the next few years, migration and population growth is expected to remain well below the 2004 and 2006 highs. The Arizona economy will continue to see moderate growth over the next couple of years as job gains lead to higher wages and support consumer spending.

The improving sentiment regarding future tax and regulatory policies, that may be supportive of U.S. manufacturers, is helping to push along expansion projects of high-tech firms in the Silicon Desert. Intel Corp. recently announced that it plans to invest $7 billion into a manufacturing facility in Chandler to develop next-generation microprocessors. Intel Corp. CEO Brian Krzanich indicated that policies being pursued by the new administration “make it advantageous to do manufacturing in the U.S.” The company expects the project to create 3,000 high-tech manufacturing jobs and over 10,000 jobs in factory support roles.

For a PDF version of the complete Arizona Economic Outlook, click here: AZ _Outlook_0217.

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Florida’s Virtuous Cycle and Real Estate Leasing Headwinds

Most of the underlying fundamentals of the Florida economy remained positive heading into the start of 2017. Driving the state’s economy is the virtuous cycle of job growth and population gains seen over the past few years. Florida employment was up 3.1 percent in the 12 months ending in December. This is about twice the pace of overall U.S. employment growth which was up 1.6 percent in December. Florida net migration has been robust with over 300,000 people per year migrating into the state since 2014. This is well above the 25 year average of a net addition of 241,000 people per year. This virtuous cycle fueled growth in the construction, information, waste management and healthcare sectors and boosted state gross domestic product to 3.6 percent in the third quarter of 2016. However, it appears that growth in the real estate rental and leasing industry has softened heading into the end of last year. This could be due in part to the economic downturn in parts of Latin America and the relative strengthening of the U.S. dollar compared to the British pound and Euro after last year’s “Brexit” referendum. According to Florida Realtors, closed sales of townhouses and condos were down 5.0 percent over the year ending in the fourth quarter of 2016. The total months’ supply of Florida townhouses and condos for sale ticked up to 6.0 months as total active listings grew 7.9 percent from a year earlier. This trend bears watching as the real estate rental and leasing industry makes up about 14.5 percent of the state’s real economy. We expect gains in Florida’s other major sectors to continue to drive economic growth in 2017.

For a PDF version of the complete Florida Economic Outlook, click here: FL_Outlook_0217.

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Persistent Risks to California Manufacturing Employment

California employment growth moderated in 2016. Employment data showed that California total nonfarm payrolls were up by 2.0 percent, or 332,500 jobs, in the 12 months ending in December. The first read on full-year 2016 California jobs numbers is positive, yet overall job growth moderated from 2015 when the state added 483,000 jobs. Most major sectors saw a slowdown in employment in 2016, except for the government sector, which actually increased. California’s manufacturing sector saw declines in jobs, down 7,600 jobs in 2016.

The Trump Administration has made growing manufacturing jobs in the U.S. a priority since taking office. However, we expect this objective to be particularly challenging for California manufacturers due to high costs of land, labor and the high regulatory burden. Most industries are tied to geographical areas; what economists refer to as industries of agglomeration. This includes access to things like ports, materials and workforce talent. The established infrastructure for the high-tech, bio-tech and defense manufacturing industries in California encourages businesses to remain in the state. However, the higher costs encourage state manufacturers to either automate or move operations out of state, ultimately pushing down manufacturing employment. A higher tax savings and increased federal spending on defense related manufacturing could boost California’s manufacturing jobs in the near term. However, the share of California manufacturing to overall California employment is on a two-and-a-half decade slide from 15.8 percent in 1990 to 7.7 percent in 2016 and this longrun trend is unlikely to change.

For a PDF version of the complete California Economic Outlook, click here: CA_Outlook_0217.

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Texas Is Turning the Corner, But It will Be a Slow Turn

Texas narrowly missed a technical recession over 2015 and 2016 as real state gross domestic product declined every other quarter from 2015Q2 through 2016Q2 (we define a technical recession as two or more consecutive quarters of declining real GDP). Moreover, the positive quarters separating the negative ones during that stretch were only weakly positive. That pattern broke in the third quarter of 2016, when real gross state product increased at a 4.3 percent annualized rate, above the surprisingly upbeat 3.5 percent annualized growth rate of U.S. GDP for that quarter. Our Texas State Index also began to turn up in the third quarter of 2016, posting three consecutive monthly gains so far, from September through November. WTI crude oil prices now look like they have support at more than $52 per barrel. The state drilling rig count has increased steadily since last May, reaching 362 rigs as of early February, more than double the May 27 low of 173 rigs. Despite the many positive signals, we are taking a cautious view and forecasting annual growth in Texas for 2017 at just below the U.S. average. One cautious signal comes from job growth. Texas had only two months of net job losses through 2015 and 2016, both occurring in March of those years. This past December, Texas came close to a third month of net job losses, posting a meager gain of only 800 net new jobs statewide. Also, we do not expect oil prices to return to the pre-2015 heights any time soon. Our year-end forecast for WTI is $58/bbl. Finally, Houston, a big part of the Texas economy, may take many more months to find its balance as large projects wind down this year.

For a PDF version of the complete Texas Economic Outlook, click here: TX_Outlook_0217.

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Michigan to Benefit from Automaker Investment

The Michigan economy is much more than just autos and other durable goods manufacturing, but the auto sector still drives the state economy. Recent announcements of new investments in the state by automakers is good news for Michigan, but risks to the state economy from following the auto cycle are inherent. Auto sales surged at the end of 2016, hitting an 18.4 million unit pace in December and propelling total 2016 sales into the record books. Most automakers expect U.S. sales to ease this year. Even with tapering sales in 2017, the auto industry will remain an incubator of new economic activity as driverless and other new technologies are developed. Also, potentially impacting the auto industry is the Trump Administration’s desire to renegotiate the North America Free Trade Agreement. Michigan, perhaps more than any other state, is exposed to a restructured NAFTA in both directions, north to Canada, and south to Mexico. Negotiations with Canada and Mexico are expected to begin this spring. Given the integration of Mexican manufacturers with the U.S. auto industry, it would be extremely disruptive and extremely inefficient to attempt to quickly dismantle existing supply chains. We look for marginal changes to NAFTA that would seek to rebalance production costs between countries and thus reduce incentives for production relocation. If that is achieved, Michigan will benefit from a more stable manufacturing sector. The reality for manufacturers is the constant push to do more with less, particularly less labor. So even with stability in output, labor demand will gradually ease as automation pushes productivity gains.

For a PDF version of the complete Michigan Economic Outlook, click here: MI _Outlook_0217.

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January PPI, Small Business Confidence, Fedspeak

Producer Prices Hotter than Expected, Fed Hike Earlier?

  • The Producer Price Index for Final Demand increased by a greater-than-expected 0.6 percent in January.
  • Core Producer Prices gained a calmer 0.2 percent.
  • The NFIB’s Small Business Optimism Index remained high, at 105.9 in January, after surging in December.
  • FOMC Chair Janet Yellen began two days of testimony to Congress this morning.

The Producer Price Index for Final Demand was hotter than expected in January, increasing by 0.6 percent for the month. The push came from the goods side, where energy prices gained 4.7 percent for the month. Prices for services warmed up by 0.3 percent in January. Over the previous 12-month period, the headline Producer Price Index is up by 1.6 percent. Year ago comparisons for energy prices will be hot over the next few months reflecting the dive in oil prices to a daily low of $26 per barrel for WTI last February. Reports of production restraint by OPEC members are supporting WTI crude oil in the range of $52-$54 per barrel so far this year, a 100 percent year-over-year price gain. Core producer prices (final demand less food, energy and trade) gained 0.2 percent in January and were also up 1.6 percent over the previous 12 months. Energy price swings are often characterized as “transient,” so the Fed does not want to set interest rate policy solely based on higher energy prices. But higher energy prices will squeeze margins for a wide spectrum of industries, eventually resulting in a broader inflationary push.

The National Federation of Independent Business’s Small Business Optimism Index for January retained its elevated position from December. In December, the headline index shot up to 105.8 after years of grudging gains since the Great Recession. In January, the index ticked up to 105.9. The price changes index flipped to positive last October and has stayed there through January, indicating a positive net percent of businesses have raised their prices. This also adds a little heat to inflation expectations.

Dallas Federal Reserve Bank President Robert Kaplan released a thought piece this morning. He is a new voting member of the Federal Open Market Committee this year. According to Kaplan, inflation will reach the Fed’s target over the medium term. He favors taking small steps to normalize interest rates sooner rather than later so that the Fed’s removal of accommodation can remain gradual. In her prepared remarks, FOMC chairwoman Janet Yellen told the Senate Committee on Banking, Housing and Urban Affairs that further gradual increases in the fed funds rate will be warranted. Further, she said “waiting too long to remove accommodation would be unwise.” The combination of Yellen’s and Kaplan’s comments this morning should pull expectations for the next fed funds rate increased forward. According to the fed funds futures market, the implied probability of a March 15 fed funds rate hike have increased a bit to 13.3 percent. The cumulative probability for a May 3 rate hike is 37.4 percent. June 14 gets a cumulative probability of 72.0 percent.

Market Reaction: U.S. equity markets fell at the opening. The yield on 10-Year Treasury bonds is up to 2.48 percent. NYMEX crude oil is up to $53.37/barrel. Natural gas futures are down to $2.91/mmbtu.

For a PDF version of this Comerica Economic Alert click here: PPI _02142017.

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