Houston Works to Keep Up With Itself

Houston continues to expand at a strong rate. For the year ending in June, payroll employment was up by 3.2 percent, or slightly more than 90,000 jobs. Still, it is fair to say that the Houston-The Woodlands-Sugar Land metropolitan area is not growing as consistently fast in 2014 as it did at the end of 2012 and into early 2013. Strong job growth has brought Houston’s unemployment rate down to 5.0 percent as of June, and we expect it to continue to trend lower, dipping below 3.5 percent by the end of 2015. A key challenge in forecasting Houston’s unemployment rate (and other fast-growing Texas regions) is the balance between job growth and in-migration. We assume that job growth moderates in 2015, consistent with a stable oil price forecast. We also assume that in-migration remains strong, near recent highs, in the neighborhood of 80,000 people per year. Even with moderating job gains and still-strong in-migration, The Houston labor market will tighten up significantly over the next year and could ultimately be a constraint to future growth. Stronger-than-expected in-migration would relieve some of the scarcity of available workers and growing wage pressures.

Strong population growth is contributing to a residential building boom in the Houston area. The Woodlands, the huge 28,000 acre master-planned community is almost sold out of its 33,210 lots. A smaller, 2,000 acre community is in the works 13 miles north of the Woodlands, expecting to add more than 4,600 lots. Tight residential housing markets are leading to strong house price gains in the Houston area. According to Trulia, the national average asking price for houses was up 7.8 percent in July over the previous 12 months, while Houston was up 10.4 percent. Trulia said that Houston house price growth ranked 24th out of the top 100 metro area nationally. Despite the rapid pace of building, housing inventory in Houston is very tight. ZipRealty says that Houston is the fourth fastest-moving housing market in the U.S. Office space is tight, too.

Houston 2014Q2

Click here for the complete Houston MSA Regional Economic Update: Houston 2014Q2.

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Austin’s Economy Remains Strong

Year-over-year job growth in Austin remains well above the national average after peaking in June 2013. Payroll jobs grew by 12,600 in the first half of 2014 compared to 18,100 in the same period last year. Despite the softer job growth, Austin’s economy continues to be strong, mainly fueled by tech-and-services sector growth. Consequently, the unemployment rate dropped to 4.1 percent by June this year, about 1.2 percent down from last June. We expect job growth to be around 3.5 percent year-over-year through 2014 as the region still maintains a strong pro-business environment.

Austin saw a strong rebound in housing starts in the second quarter of 2014 with a surge in both single and multifamily housing starts. Strong in-migration and consequent population growth are keeping residential real estate markets tight. We expect housing starts to moderate in the next half of 2014 before rebounding again in 2015. Home price appreciation started moderating in 2014Q1 after peaking in the second half of last year. Home prices are expected to grow above the national average in the remainder of 2014 and 2015 as residential housing demand continues to pick up.

We expect continued job growth in forthcoming months fueled by expanding businesses and entrepreneurial activity in the area. Charles Schwab from San Francisco is planning to add over 800 jobs in Austin over the next several years. Austin approved a $3.3 million tax incentive to the company. Expanding grocery stores like Trader Joe’s, Whole Foods Market, and Sprouts are not only adding new jobs to the region’s economy, but also providing diversified products to customers. Despite the strong regional economy, poverty in the region remains a major challenge for economic development. According to the U.S. Census Bureau, about 19.4 percent of the population lives in poverty in the area compared to 17.4 percent in the entire state of Texas.

Austin 2014Q2

Click here for the complete Austin MSA Regional Economic Update: Austin 2014Q2.

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Detroit Adds Jobs in Q2

It sounds like faint praise, but for the Detroit metro any net job growth is good news. Payroll employment ticked up in May and June after stagnating in the second half of 2013, and declining in early 2014. Despite the job gains, the metro area unemployment rate increased to 8.4 percent after climbing in May as well. It would be premature to say that the second quarter net job gains are indicative of an upside breakout from Detroit’s stalled jobs machine. Still, the moderate net gains are a good sign that will hopefully be extended. We are forecasting weak, but improved job growth for the Detroit metro area through 2015. This will bring the unemployment rate down gradually over the year ahead, finishing 2015 at a still-elevated 7.2 percent.

The Southeast Michigan Purchasing Managers Index for July increased strongly to a very solid 60.0 percent, indicating rapidly improving economic conditions for area manufacturers. The employment sub-index was also strong. However, it is noteworthy that the SE Michigan employment sub-index was in positive territory even as overall payroll employment was flat-to-declining.

The trial to determine the timing of the City of Detroit’s potential exit from bankruptcy was set to begin on August 21, as of our publication cut-off. Many creditors have already indicated their approval of the city’s plan to significantly reduce the $18 billion of debt, but the bankruptcy judge must rule that the plan is fair and feasible for it to be implemented. Bond insurers are expected to push back in the trial, as they stand to lose significantly if Detroit is allowed to default. The conclusion of the trial will diminish the pall of uncertainty enveloping Detroit and hopefully mark the passage into a new era of financial sustainability for the city.

Anecdotal reports suggest that boat sales are improving statewide. Boat purchases are usually highly discretionary, so they are a bellwether for improving consumer confidence at the regional level.

Detroit 2014Q2

Click here for the complete Detroit MSA Regional Economic Update: Detroit 2014Q2.

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Central West Michigan’s Economy Continues to Improve

The Central West Michigan (CWM) region, home to auto, manufacturing, and office furniture industries, grew better than expected, especially in the second quarter of 2014. Payroll jobs were up by 2.7 percent year-over-year, adding a net of 12,000 jobs in the first half of the year compared to 9,000 jobs in the same period last year. Consequently, the region’s unemployment rate declined to 5.6 percent ending in 2014Q2, down by 1.3 percent from the same period last year. The decline in unemployment came from a modest improvement in household employment. On the upside, the labor force also grew better than expected in 2014Q2, good news for the economy. However, a subdued net migration outlook and consequent low population growth remains one of the major concerns for the region going forward.

The housing market is picking up in the region with home prices growing above 5 percent year-over-year for three consecutive quarters from 2013Q3 to 2014Q1. We expect home prices to grow moderately below the national average for the remainder of the year. Total housing starts are up significantly in the second quarter fueled by a surge in both single and multifamily housing starts. As home builders’ confidence surged for the third consecutive month in August, we expect continued improvement in the housing market across the region.

Nationwide, auto sales peaked at 16.9 million units in June after a chilling winter. Motor vehicle assemblies were up 27 percent year-to-year in July, to a 13.2 million unit annual rate, indicating revitalized assembly lines across the nation. The U.S. office equipment manufacturing outlook is improving. We expect office furniture sales to increase over 2015, consistent with expected gains in business confidence and business investment.

CWMI 2014Q2

Click here for the complete Central West Michigan Regional Economic Update: CentralWestMI 2014Q2.

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Southern California Maintains Moderate Momentum

Southern California labor markets look positive this year. While gains in regional employment have moderated from the robust growth seen in early 2013, employment growth has remained steadily above the U.S. average in 2014. Area employment is expected to grow around 2.3 percent this year, while overall U.S. employment is expected to increase by 1.8 percent. The overall improvement in Southern California labor markets are expected to support gains in income growth at 5.1 percent for 2014.

Demand for single-family homes in the region is being dampened by rising home prices. May home prices for the L.A. and San Diego metropolitan areas remained 20.0 percent below their pre-recession peaks, according to the Case-Shiller Home Price Index. However, the robust growth in home prices seen over the last year in the Southern California region is leading to a decline in housing affordability. Area home sales dipped 12.4 percent from a year ago in July, according to CoreLogic DataQuick. From the demand side, rapid home price appreciation and tight credit standards are tempering the pool of potential traditional home buyers. From the supply side, current home owners may be holding off putting their houses onto the market until home prices have recovered further. As the overall economy improves, supporting sustained income growth, we expect Southern California housing markets to normalize.

California is on its way to quadrupling its annual allotment to subsidize tax credits for the film industry. The State Senate Appropriations Committee increased the state tax credit for film and TV productions to $400 million annually. The bill contains a 20 percent credit of qualified expenditures up to $100 million for motion pictures and TV shows. Proposed funding in Assembly Bill 1839 would begin in fiscal year 2015-2016. The amended bill has two more rounds of voting, first by the State Assembly, followed by the Senate.

Southern CA 2014Q2

Click here for the complete Southern California Regional Economic Update: SouthernCA 2014Q2.

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The Pluses and Minuses of Improving Northern California Home Prices

Recent Northern California housing market activity has its positives and negatives. For those owning a home prior to the housing crash, increasing home prices and the ability to refinance at lower rates have helped many reclaim most of the lost home equity. However, for some who missed the buyers’ market, home prices may be heating up a little too fast. There was a large difference between the 14.6 percent annual growth in home prices and 3.1 percent annual growth in income in 2013. This loss in housing affordability has continued into 2014 as home prices are expected to grow by 11.3 percent and income by 5.5 percent. High housing costs in the region may be constraining household formation, which is a key indicator for home builders.

Northern California labor markets continue to improve, although employment growth is beginning to moderate. Northern California labor markets have enjoyed strong employment growth for the past two years, with employment growing at around 4.0 percent in 2012 and 2013. While employment growth remains well above the U.S. average, it is expected to slow to 2.8 percent in 2014. Improvements in Northern California labor markets are expected to drive the area unemployment rate down to late-2007 levels at around 4.8 percent by the end of 2014.

San Francisco is looking to expand foreign direct investment through a new initiative called LatinSF. The publically and privately funded project will create an office which will recruit foreign companies from Latin America. According to a recent Brookings report, foreign-owned establishments in San Francisco employed around 89,000 workers in 2011. This was down from the 2001 high of 110,000 workers. Most of those employed were in the services industries. San Francisco currently has strong ties with Mexico and can expand its influence amongst Latin American markets by focusing on the technologies industries.

Northern CA 2014Q2

Click here for the complete Northern California Regional Economic Update: NorthernCA 2014Q2.

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July Existing Home Sales, Leading Indicators, August UI Claims

Coincident Data Good, Leading Indicators Better

  • Existing Home Sales for July increased by 2.4 percent, to an annual rate of 5.15 million units.
  • The Conference Board’s Leading Economic Index jumped by 0.9 percent in July.
  • Initial Claims for Unemployment Insurance fell by 14,000, hitting 298,000 for the week ending Aug. 16.

U.S. economic data continues to shine approaching the unofficial end of summer. Back-to-school season looks like it is setting up a solid back-to-work season for September and October. Existing home sales increased by 2.4 percent in July, to a 5.15 million unit annual rate. On a regional basis, sales were up moderately in the South, West and Midwest, but flat in the Northeast. The months’ supply of existing homes for sale was stable at a Goldilocks reading of 5.5 months’ worth, not too tight and not too loose. The median sales price of an existing home was up by 4.9 percent in July from a year earlier. On a regional basis, prices have increased the most in the West, up 6.3 percent, supported by red-hot Northern California markets.

The Conference Board’s Leading Economic Index was up by a stronger-than-expected 0.9 percent for the month, buoyed by better-than-expected residential building permits. In addition to permits, interest rate spread, unemployment insurance claims and manufacturers’ new orders were strong positives for the month. The Coincident and Lagging Indexes were both up by 0.2 percent for the month. When all three indexes are positive for the month, as they have been since February, that is a strong positive signal.

Initial claims for unemployment insurance dipped back below 300,000 to a very low reading of 298,000, down 14,000 for the week ending August 16. Continuing claims dropped by 49,000 for the week ending August 9, to hit an even 2,500,000. Just as initial claims below 300,000 is a very solid number, continuing claims below 2.5 million is also indicative of quickly improving labor conditions. The Philadelphia Federal Reserve Bank’s Business Outlook Survey for August said manufacturing conditions continue to improve for Mid-Atlantic companies. The current activity index jumped up to a very good 28.0 and the forward-looking Six Month Forecast Index hit the strongest mark since June 1992 at 66.4.

Market Reaction: U.S. equity markets are up. The 10-Year Treasury bond yield is down to 2.42 percent. NYMEX crude oil is up to $94.36/barrel. Natural gas futures are up to $3.88/mmbtu.

Economic Alert 080614

For a PDF version of this Comerica Economic Alert click here: Existing Home Sales 08-21-14.

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July Residential Construction, Consumer Prices

Construction Revved Up, Prices Tame

  • July Housing Starts were up significantly, by 15.7 percent to a 1,093,000 unit annual rate.
  • Permits for new residential construction increased in July by 8.1 percent to a 1,052,000 unit pace.
  • The Consumer Price Index increased by a tame 0.1 percent in July. Core CPI also gained 0.1 percent.

It was a good mix of U.S. data to start the day. House construction revved up in July after easing in June. Consumer prices in July were well contained. What’s not to like? Housing starts increased by a strong 15.7 percent to hit a 1,093,000 unit annual rate. Single-family starts gained 8.3 percent to hit their strongest rate this year. Multi-family starts were up by a robust 33.0 percent, hitting their best mark this side of the Great Recession. Permits numbers were also up, but they look a little tentative on the single-family side. Single-family permits increased by just 0.9 percent in July, and are now on par with last April. Multifamily permits were up by 23.6 percent, still well shy of April’s strong reading. Overall, it is a good residential construction report, reinforcing the July and August rebound in builders’ confidence reported by the National Association of Home Builders.

After three consecutive months of above-trend readings, the Consumer Price Index settled down in July, showing a tame 0.1 percent increase. The headline CPI is now up an even 2.0 percent over the past 12 months. Food prices were still warm in July, up 0.4 percent, boosted by the severe drought in California. However, a bumper corn harvest this year will have a mitigating effect on overall food prices. Countering the ongoing gains to food prices, consumer energy prices were down by 0.3 percent as crude oil and gasoline price eased. The core CPI (all items less food and energy) was also calm, gaining just 0.1 percent. Core CPI is up 1.9 percent over the past 12 months. Today’s CPI report for July will take some pressure off the Fed. As long as production and employment metrics are going in the right direction, and inflation looks tame, they will see no need to deviate from current expectations of an October end to QE and a mid-2015 rendezvous with interest rate lift-off.

Market Reaction: Equity markets opened with gains. The yield on 10-Year Treasury bonds is down to 2.38 percent. NYMEX crude oil is down to $95.90/barrel. Natural gas futures are down to $3.90/mmbtu.

Economic Alert 081914

For a PDF version of this Comerica Economic Alert click here: Housing Starts 081914.

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Comerica Economic Weekly

As we go to press financial markets are responding to an escalation in the Ukraine/Russia conflict. Indeed, financial markets have been buffeted recently by heightened geopolitical tensions in Eastern Europe and in the Middle East.

U.S. economic data for the week was mixed, dominated by a weak retail sales report for July, but also buoyed by a solid July industrial production.

Retail sales numbers were disappointing for July as total sales were unchanged from June, making for a slight real decline after adjusting for inflation. The weak start to Q3 real consumer spending reinforces our expectation that the Q2 rebound to 4.0 percent real GDP growth is not sustainable. Consumers are feeling more confident and secure in their jobs, but they are not tripping over themselves to rack up more credit card debt.

The National Federation of Independent Business’s Small Business Optimism Index is trending up, increasing to 95.7 in July. Both the actual compensation and the planned compensation components of the survey are up, pointing to current and future wage pressure.

Industrial production increased by 0.4 percent in July as manufacturing output gained a strong 1.0 percent. Overall IP was weighed down by moderate summer temperatures, contributing to a drop in utility output after seasonal adjustment. Utility output has either declined or stayed flat for six consecutive months, on the heels of the cold-weather- induced jump in utility output in January.

Initial claims for unemployment insurance increased by 21,000 to hit 311,000 for the week ending August 9. This looks like volatility in an otherwise very good trend. The job opening rate for June climbed smartly to 3.3 percent, consistent with other improving labor market metrics.

The Federal Reserve’s annual conference in Jackson Hole starts on August 21. Both Janet Yellen and the European Central Bank’s Mario Draghi will be speaking there, and no doubt talking to each other. European economic data looks soft, suggesting more desynchronization of monetary policy, as the Fed pivots toward eventual tightening, and the ECB is forced to double down on stimulus.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 08-15-14.

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July Retail Sales, NFIB, June JOLTS

Shoppers Feeling Good, Went on Vacation in July, Sales Soft 

  • Retail Sales for July disappointed, unchanged from June, providing a soft start to Q3 consumer spending.
  • Ex-auto Retail Sales gained just 0.1 percent, pushed by clothing, personal care and food/beverages.
  • The National Federation of Independent Business’s Small Business Optimism Index climbed in July to 95.7.
  • The Job Openings and Labor Turnover Survey for June showed another increase in the rate of openings.

Retail sales numbers were disappointing for July as total sales were unchanged from June, despite solid job creation over the past six months and generally improving consumer confidence trends. Headline retail sales registered a 0.0 percent change for the month, making for a slight real decline after adjusting for inflation. Not surprisingly, motor vehicles and parts sales were down 0.2 percent for the month, consistent with the drop in unit auto sales from a robust 16.9 million unit rate in June, to 16.5 million in July. Retail sales ex-autos showed a slight increase, gaining 0.1 percent, which likely did not keep up with the consumer price index for the month. The weak start to Q3 real consumer spending reinforces our expectation that the Q2 rebound to 4.0 percent real GDP growth is not sustainable. Consumers are feeling more confident and secure in their jobs, but they are not tripping over themselves to rack up more credit card debt. That is increasing, but moderately. Revolving consumer credit was up 2.5 percent in June over the previous 12 months.

The National Federation of Independent Business’s Small Business Optimism Index is trending up, increasing to 95.7 in July. Both the actual compensation and the planned compensation components of the survey are trending up, indicating some current and future wage pressure. We expect to see the U.S. unemployment rate continue to trend down this fall. Already, some regional and occupational indicators are showing tightening labor markets, setting the stage for accelerating wage gains over 2015.

The Job Openings and Labor Turnover Survey (JOLTS) for June showed improved labor market conditions through mid-summer. The job openings rate is showing ongoing gains, up in June for the fourth consecutive month. The Job openings rate for June stands at 3.3 percent, on par with the cyclical highs of the previous expansion from 2007.

Market Reaction: Equity markets opened with gains. The 10-year Treasury yield is down to 2.43 percent. NYMEX crude oil is up to $97.03/barrel. Natural gas futures are down to $3.91/mmbtu.

Economic Alert 081314

For a PDF version of this Comerica Economic Alert click here: Retail Sales 08-13-14.

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