Stress from Abroad Causes Miami to Look Inward

Strong Florida job growth is attracting new residents from across the country. Florida added over 350,000 residents in 2015. The state’s Governor, Rick Scott, is making headlines for his courting of companies from across the country, and even universities, to relocate to the Sunshine State. While South Florida continues to live up to its pricey, global reputation, Tampa, Jacksonville and Orlando remain attractive for their tamer costs of living and solid real estate and labor market growth. Tourism spending was up by almost nine percent in 2015, and other industries like construction, financial services, professional/business services and education/health services have maintained consistent positive momentum.

The focus of residential development in Miami is likely to shift, as the condo market approaches its peak. Condo sales dropped at the beginning of the year, and developers have been quick to downwardly adjust their required deposit amounts in response. Some development projects have withdrawn in the last few months, however, the Miami Association of Realtors reports that “85 percent of product currently under construction in Downtown Miami is sold.” International buyers remain around 36 percent of total dollar volume of residential real estate transactions for Miami. Area realtors have noted that a depreciation of the dollar would help their market. Single-family construction and existing home sales are improving, especially in the low and mid ranges. This growth will fuel the regional housing sector through at least this year. Development will continue to broaden outside of Miami, as bargains are sought outside the city limits.

Job growth in Miami, as in Florida, continues to outpace the national average. Construction jobs are booming, as big ticket development continues across the region. The high-paying financial activities and professional/business service sectors are seeing continued strength. As the area labor market continues to tighten in the area, Miami has seen prices increase more than the national average. This is currently being matched by stronger-than-national income growth, but a mismatch would make Miami even less affordable.

Miami’s international exposure has benefited its growth since the Great Recession, as wealthy Latin Americans snatched up deals while their currency was relatively strong. The future of Brazil will weigh heavily on the real estate and retail industries of Miami. The shift from luxury development to more single-family, accessible real estate will temper risks. The newly-opened doors to Cuba will surely bring more people and trade through Southern Florida, cementing PortMiami’s place among the nation’s fastest-growing ports.

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Click here for the complete Miami MSA Regional Economic Update: Miami 2016Q2.

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San Francisco MSA Economy Withstands Market Volatility

Current California economic activity measures are showing signs of a two-handed economy. On the one hand, overall job growth in non-manufacturing sectors continues to be a fundamental positive for the state’s economy. However, the state’s manufacturing sector is feeling the impact of the appreciation of the U.S. dollar compared to major trading partners and is contracting. Also, California’s technology sector has faced stagnant stock prices and squeezed corporate profits. We expect the California economy to continue to grow at a moderate pace this year, supported by firmer residential construction activity and a more positive outlook for the technology sector as we progress through 2016.

The San Francisco MSA labor market surprised to the upside in 2016Q1. Area nonfarm jobs were up 3.2 percent from 2015Q4. The rebound occurred even in the face of increased financial market volatility in the technology sector as the Mercury News Silicon Valley 150 index year-over-year growth declined for the first four months of 2016. Strong demand for construction workers helped to boost area job growth in Q1. The continued gains in the area’s labor market helped pull the San Francisco MSA unemployment rate down to 3.7 percent as of March. We expect that tighter labor markets will put upward pressure on area wages as businesses provide competitive compensation packages for labor talent this year.

San Francisco MSA housing market data were mixed in 2016Q1. Single-family home sales dropped in January and February. The decline in home purchase activity may have resulted from the increased uncertainty surrounding the macroeconomic environment and slowdown in overall financial markets at the beginning of the year. However, housing starts climbed to 15,200 in Q1 of 2016. This is the strongest Q1 housing starts rate since 2000. In 2000, housing starts were driven by single-family structures. Yet at the beginning of 2016, multifamily made up about two-thirds of total housing starts. The shift to multifamily structures may show increased demand to reside in core urban areas and the fact that area single-family structures may be financially out of reach for portions of the population.

To address the affordable housing issue, the San Francisco Board of Supervisors is looking to expand its authority to alter affordable housing requirements. Proposition C would more than double the affordable housing requirements tied to housing projects of 25 or more units. There are concerns over the efficacy of this initiative as it will have to balance reducing project profit margins and still incentivize development activity.

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Click here for the complete San Francisco MSA Economic Update: San Francisco 2016Q2.

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San Jose MSA Driving the Latest Generation of Technology

Current California economic activity measures are showing signs of a two-handed economy. On the one hand, overall job growth in non-manufacturing sectors continues to be a fundamental positive for the state’s economy. However, the state’s manufacturing sector is feeling the impact of the appreciation of the U.S. dollar compared to major trading partners and is contracting. Also, California’s technology sector has faced stagnant stock prices and squeezed corporate profits. We expect the California economy to continue to grow at a moderate pace this year, supported by firmer residential construction activity and a more positive outlook for the technology sector as we progress through 2016.

Major technology firms are partnering with major auto manufacturers to develop the 21st century automobile. What was once a hopeful dream of a sci-fi novel, the autonomous vehicle is now becoming a reality. Google announced that it will partner with Fiat Chrysler to develop an autonomous minivan. General Motors acquired the autonomous vehicle technology developer firm Cruise Automation earlier this year. Automated ride-sharing vehicles appear to be in the works as well. Additional industrial space throughout the region will be needed for developing these efforts. Tesla recently leased over one million square feet of space in Livermore as it prepare for increased production.

San Jose MSA job growth moderated in 2016Q1. Area nonfarm jobs were up only 1.6 percent from 2015Q4. The slowdown occurred as financial market volatility increased in the technology sector at the start of the year. The Mercury News Silicon Valley 150 index year-over-year growth declined for the first four months of 2016. To weed out some of the short term movements, we look at year-over-year job growth which remained at a strong 3.7 percent in 2016Q1. The San Jose MSA unemployment rate was down to 3.7 percent in March. As the unemployment rate continues to decline, there will either be stronger inward migration into the metro area or slower job growth as the pool of potential employees shrinks. We expect the latter.

Declining sentiment of Bay Area residents demonstrates the difficulty with drawing stronger migration into the region. According to a recent survey conducted by the Bay Area Council, 34 percent of those polled are planning to leave the region. High housing costs, traffic and overall high costs of living were cited for the discontent. High housing costs have cities searching for potential solutions. The San Jose city council recently capped annual rent increases at 5 percent for 44,000 rent controlled apartments built before 1979.

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The Greater Los Angeles Economic Data is Mixed in 2016Q1

Current California economic activity measures are showing signs of a two-handed economy. On the one hand, overall job growth in non-manufacturing sectors continues to be a fundamental positive for the state’s economy. However, the state’s manufacturing sector is feeling the impact of the appreciation of the U.S. dollar compared to major trading partners and is contracting. Also, California’s technology sector has faced stagnant stock prices and squeezed corporate profits. We expect the California economy to continue to grow at a moderate pace this year, supported by firmer residential construction activity and a more positive outlook for the technology sector as we progress through 2016.

Greater Los Angeles job growth moderated in 2016Q1. Area nonfarm jobs grew by only 0.8 percent from 2015Q4. This coincided with financial market volatility at the beginning of the year. Tech stocks slumped in 2016Q1 possibly leading to more cautious hiring from area companies. Job growth in construction continues to be a solid performer. The area unemployment rate is dropping towards its historical lower bound, down to 5.2 percent in March. This poses a conundrum in our forecast two to three years out. As we approach the lower bound for the unemployment rate we either need weaker job growth or stronger demographic shifts into the region. High housing and overall costs of living are keeping our demographic forecasts tempered.

The manufacturing story is diverging between the Los Angeles and Riverside metro areas. The Los Angeles metro area has continued its longrun trend of declining manufacturing employment after a two-year pause in 2012 and 2013. The decline correlates with a rebound in the U.S. dollar in 2014 as potential U.S. economic growth strengthened compared to other developed nations. However, manufacturing employment in the Riverside metro continues to grow at a moderate 2.8 percent year-over-year as of March 2016. Relatively more affordable land may be supporting Riverside manufacturers. Even with the gains in Riverside, the losses in Los Angeles manufacturing will be strong enough to be a drag on our regional employment forecast for 2016.

Port activity at the Ports of Los Angeles and Long Beach had a breakout 2016Q1. The twin ports combined reached 3,593,438 total 20-foot equivalent units, the standard industry measurement. This is the strongest first quarter combined port activity since 2007. Last year’s first quarter port activity was hit by slowdowns as contract negotiations were taking place. The newly automated Middle Harbor terminal at the Port of Long Beach will help to speed up processing of containers as phase one opens in 2016.

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Click here for the complete Greater Los Angeles Regional Economic Update: Los Angeles 2016Q2.

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San Diego MSA Economy Remains Positive in the Face of Uncertainty

Current California economic activity measures are showing signs of a two-handed economy. On the one hand, overall job growth in non-manufacturing sectors continues to be a fundamental positive for the state’s economy. However, the state’s manufacturing sector is feeling the impact of the appreciation of the U.S. dollar compared to major trading partners and is contracting. Also, California’s technology sector has faced stagnant stock prices and squeezed corporate profits. We expect the California economy to continue to grow at a moderate pace this year, supported by firmer residential construction activity and a more positive outlook for the technology sector as we progress through 2016.

San Diego MSA job growth continued to improve in 2016Q1, up 1.8 percent from 2015Q4. Recent gains in area job growth pushed the San Diego unemployment rate down to a nine-year low at 4.6 percent in March. The improvement in San Diego’s job growth occurred even as other major metro areas around the state struggled with financial market volatility at the start of the year. The S&P 500 Biotechnology sub-index was still down around 15 percent from the July 2015 high as of April. We expect to see the overall tech sector and related industries continue to stabilize as we move towards the second half of 2016. Market stabilization would support our current San Diego MSA outlook of improving area labor markets this year.

California’s new $15 minimum wage law is expected to impact 522,000 workers in the San Diego MSA by 2023, according to the UC Berkeley Labor Center. The law incrementally increases the minimum wage from 2017 to 2022 for businesses with 26 or more employees and from 2018 to 2023 for businesses with 25 or less employees. In 2014, the state’s minimum wage was raised from $8 an hour to $9. The new law will almost double the minimum wage in the course of eight years. There are social benefits to improving wages for lower paid workers. However, the San Diego MSA is already an expensive place to do business and this makes the “sunshine tax” for businesses that much higher.

There is increasing political uncertainty surrounding trade deals such as the North Atlantic Free Trade Agreement and Trans-Pacific Partnership. Changes in trade policy would have direct impacts on the San Diego trade industry. According to the International Trade Administration, San Diego exports totaled $18.6 billion and accounted for 10 percent of overall California exports in 2014. San Diego exports to NAFTA regions, Mexico and Canada, were $5.4 billion and $1.1 billion, respectively. China made up another $971 million.

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Detroit Stabilizing on Firmer Real Estate and Labor Markets

Michigan is enjoying widespread prosperity, as prolonged strength in automobile sales and the broader manufacturing complex has acted as a great stabilizing force in the state. It is widely understood that the pace of this improvement in the manufacturing sector will subside, testing the strength of the diversity of the state economy. The economic climate in the state is broadly positive, as housing markets continue to gather momentum, while maintaining affordability, and job growth remains diverse. As reported by the BLS, the strongest year-over-year job growth in Michigan for March was concentrated in the construction, financial activities, professional/business services, and leisure/hospitality sectors. This is an ongoing trend. In the coming year, it is the service sector, paired with improving real estate conditions, that will propel Michigan.

The BLS reported that year-over-year job growth in the Detroit area was outpacing the national average, at 2.2 percent for the year ending in March. Ann Arbor’s employment grew by over four percent over the same period. Both financial services and professional/business services in the Detroit area saw annual growth exceeding four percent for this period. The construction sector remains strong, as development continues across the area. A pullback in auto sales, leading to more tepid manufacturing growth through the remainder of this cycle, means that the majority of job growth for the next year will emerge from the professional sectors currently gaining momentum.

Developers in Detroit are citing the widespread renovation of downtown’s buildings as a reason to build from scratch, like the newly announced Scott at Brush Park multi-use development, coming in at an estimated $65 million. Studies are being conducted on the East Riverfront to formulate a development plan, and Bedrock Detroit continues to snatch up buildings. Detroit home price growth continues to best the national average, but this pressure should cool as the currently strong construction numbers increase supply.

Waves are being made in the region by auto producers, for better and worse. FCA announced a cooperative partnership with Google in the development of automated driving technologies, and the investment of almost $75 million at its Trenton plant. This is on the heels of their layoffs in Sterling Heights. Ford plans to invest part of over $1 billion in its Livonia transmission plant, in addition to the construction of a massive new corporate campus. The thriving business environment is further evidenced by the re-development of two formerly closed hotels. The strength of this environment will be tested however, as auto sales moderate.

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Click here for the complete South East Michigan Regional Economic Update: SEMI 2016Q2.

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Central West Michigan Enjoying Cyclical Peaks

Michigan is enjoying widespread prosperity, as prolonged strength in automobile sales and the broader manufacturing complex has acted as a great stabilizing force in the state. It is widely understood that the pace of this improvement in the manufacturing sector will subside, testing the strength of the diversity of the state economy. The economic climate in the state is broadly positive, as housing markets continue to gather momentum, while maintaining affordability, and job growth remains diverse. As reported by the BLS, the strongest year-over-year job growth in Michigan for March was concentrated in the construction, financial activities, professional/business services, and leisure/hospitality sectors. This is an ongoing trend. In the coming year, it is the service sector, paired with improving real estate conditions, that will propel Michigan.

The Grand Rapids area saw an unemployment rate of 3.4 percent in March, well below the national rate of 5.0 percent. Since midyear 2015, the Grand Rapids area has been adding jobs at a faster pace than the U.S. average. The Grand Rapids Business Journal reports that salary growth in the region ranks seventh nationally. Labor markets are tight, and reports of difficulty in finding people to fill positions from restaurant staff to technical management are surfacing. Although almost one-in-five jobs in the region remains in manufacturing, there has been persistent strength in the construction, financial activities, education/health services, and leisure/hospitality sectors.

Following in step with labor markets, housing markets in Central West Michigan are becoming very tight. The Grand Rapids Association for Realtors reports that the average months of inventory for real estate so far this year is 1.6 months. Over the year ending in March, CoreLogic reports that Grand Rapids area home prices are up 7.7 percent. Commercial real estate remains tight as well, resulting in more new development.

Grand Rapids remains a bright spot in the larger Michigan economy, as its diversity and entrepreneurship show no signs of subsiding. The tech company Switch, who was lured to the area for its next data center, is beginning to hire some of the estimated 1,000 jobs it will add over the next decade. The Medical Mile continues to see new projects, and projects like Studio C!, expected to have a $369 million impact over the next decade, are coming closer to reality. Construction is slated to begin on the $380 million Red Cedar Renaissance development in Lansing this June. Commitment to attracting new industry and growing employment in the region is evident, as initiatives like SmartZones continue to gain footing throughout the region.

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Click here for the complete Central West Michigan Regional Economic Update: CentralWestMI 2016Q2.

 

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Comerica Economic Weekly

U.S. economic data through mid-May remained consistent with an economy that is expanding while it feels the pressures of low oil prices and increasing oil prices at the same time.

Retail sales increased in April by 1.3 percent, the strongest monthly gain since March 2015. Two forces were at work in April. First, auto sales bounced back after dipping in March. On a unit basis, auto sales fell from a 17.4 million unit rate in February, to a 16.6 million unit rate in March, and then rebounded to 17.3 in April. On a dollar basis, retail sales of autos and parts increased by a strong 3.2 percent in April. The second factor was the price of gasoline, which has increased from a low of $1.72 per gallon (national average for unleaded) in mid-February to $2.21 per gallon by the end of April. The nominal value of gasoline station retail sales increased by 2.2 percent in April. Other components of retail sales were generally positive in April, with the exception of building materials, which declined by 1.0 percent. Overall, this was a good report, but that should have been no surprise. After adjusting for price effects, there is a little less to the topline number than meets the eye.

The producer price index for final demand increased by 0.2 percent in April. The energy price index for final demand goods was up by 0.2 percent, following a 1.8 percent gain in March. On a year-over-year basis, the change in the PPI for final demand is back up to zero after an excursion into the negative, which began in February 2015. We expect firming oil prices to support further gains in inflation indicators through May.

The Job Openings and Labor Turnover Survey for March showed an uptick in the job opening rate to 3.9 percent. This tied the mark for the strongest job opening rate since the series began in December 2000.

However, weekly initial claims numbers for unemployment insurance have drifted up. For the week ending May 7, initial claims for unemployment insurance increased by 20,000, to hit 294,000. The April 16th initial claims number of 248,000 was a multi-decade low. The bounce off of the mid-April low was fed by an increase in manufacturing layoffs. This trend bears watching. We expect that initial claims will level out in the coming weeks.

Total business inventories increased by 0.4 percent in March as the nominal value of retail inventories gained 1.0 percent. Since this is a first quarter number, it does not impact our Q2 GDP estimate.

The National Federation of Independent Business’s Small Business Optimism Index for April increased to 93.6. The index has been on a generally downward trend since hitting a recent peak in December 2015.

The preliminary University of Michigan Consumer Sentiment Index for May increased to 95.8, despite rising gasoline prices.

According to the CME Group, there is only a 7.5 percent chance the Federal Reserve will increase the fed funds rate at the upcoming FOMC meeting over June 14/15. The implied odds of at least one rate hike this year are 62.4 percent.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 05-13-2016.

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May 2016, Comerica U.S. Economic Update

When you are flying close to the treetops, you have to watch out for the downdrafts. Clearly the U.S. economy was flying close to the treetops in the first quarter of this year. Real GDP growth registered a weak 0.5 percent annualized rate. That is about 0.1 percent quarter-to-quarter growth. The sagging energy sector was a major factor. Real business fixed investment declined at a 1.6 percent annual rate, weighed down by minimal oil drilling activity, minimal need for new oil field equipment and a sagging commercial real estate market in energy states. After adding significantly to GDP growth in early 2015, inventories have been a negative factor for the three consecutive quarters ending in 2016Q1. International trade has also been a consistent drag on GDP, subtracting from GDP growth in seven out of the last nine quarters, including 2016Q1. Oil is part of that story, too, as we are still importing a significant volume of crude oil. With the end of the federal restriction on crude oil exports at the end of last year, there is at least the potential for a more balanced energy trade in the future. Federal defense spending was also a drag on Q1 GDP growth. We are still operating under the federal spending sequester which limits federal discretionary spending. Consumer spending held up in Q1 despite the dip in auto sales. Consumer spending accounts for about two-thirds of GDP, and consumer spending on services accounts for about two-thirds of total consumer spending, and therefore about 45 percent of GDP. With an aging population, consumer spending on medical services, and on other services, is set to increase.

Following on the heels of barely-positive Q1 real GDP, Q2 GDP looks set to increase, but only moderately. We believe that the staggering oil and gas industry will continue to be a weight on GDP growth in the current second quarter. Consumer spending will again be an important counterweight to the energy sector downdraft. Federal government spending will flip back to the positive. Residential construction will continue to be a moderate boost.

The first employment report for Q2, containing the April jobs data, was weaker than expected with 160,000 net nonfarm jobs added for the month. The unemployment rate held steady at five percent. We expect two things out of the labor market over the next two years. First will be a bounce-back in net employment gains in May. The second will be a gradual decline in the pace of job growth, accompanied by a flattening-out of the unemployment rate by late 2017.

We look for tightening conditions in the global oil market through the second half of this year and into 2017. U.S. and other non-OPEC production is declining due to the dearth of drilling. We expect the U.S. rig count to bottom out by late summer. Global demand, including U.S. demand, for petroleum is increasing. Crude oil inventories will start to decline, supporting firmer pricing. Our year-end 2016 price for WTI is $50.

With high crude oil and petroleum product prices, U.S. and global inflation indicators will start to warm up. We have already seen a hint of that in the March import price index. Both the consumer price index and the producer price index for April will show the push from higher oil and product prices. The Fed will be caught between a soft economy and higher prices. We believe they will hold off on raising the fed funds rates until late this year, when the drag from the energy sector dissipates and GDP gains a little altitude.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate – May 2016.

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Comerica Economic Weekly

Despite the miss on the April payroll jobs numbers, U.S. economic data this week remained consistent with our expectation for a modest-to-moderate pick up in second quarter GDP growth after a weak first quarter.

April’s net payroll job gains of 160,000 was less than expected. The good news is that more people were employed, they worked longer hours and got paid more for it. The unemployment rate stayed even at 5.0 percent. We expect to see a stronger number when the May data is released on June 3rd.

Nonfarm business productivity decreased at a –1.0 percent annual rate for the first quarter. Over the last year productivity is up just 0.6 percent. Weak productivity growth is still a conundrum. Also, it is disconcerting because the flip side of weak productivity growth is high unit labor cost growth. In the first quarter ULC increased at a strong 4.1 percent annual rate, which will squeeze corporate profits.

Initial claims for unemployment insurance increased by 17,000 for the week ending April 30th, to 274,000, still a good number. Continuing claims declined by 8,000 for the week ending April 23, to hit 2,121,000.

The ISM Manufacturing Index for April improved to 50.8 percent, the second consecutive above-50 reading after five months in contraction territory. We will buy some of that back by saying that the gain in the index in April was supported by stronger prices. The price component was influenced by higher oil prices, making the improvement in the headline number less than meets the eye.

Likewise, the ISM Non-Manufacturing Index for April improved to 55.7 percent, with help from stronger prices. The employment sub-index for the non-mf survey improved to 53.0 percent, indicating ongoing hiring.

The value of construction put in place in March increased by 0.3 percent. Private residential construction was up 1.6 percent. Private nonresidential gained 0.7 percent and public projects declined by 1.9 percent on weaker power plant construction.

The U.S. international trade gap narrowed in March to $40.4 billion. This is not expected to cause a significant revision to the first estimate of Q1 real GDP growth, which was weak at 0.5 percent annualized. The improvement in the trade gap came for the wrong reasons as imports declined by $8 billion for the month.

Auto sales rebounded to a 17.4 million unit rate in April after dipping to 16.6 in March. The next couple of months of auto sales will be interesting. We do not expect sales to exceed the robust 18 million unit sales rate from last fall on a consistent basis. For the year, we expect to see about 17.2 million units sold.

Today’s jobs data reinforces the already low odds of a fed funds rate hike at the upcoming FOMC meeting over June 14/15. According to the fed funds futures market the odds of a fed funds rate hike at the FOMC meeting is a low 5.6 percent. The implied probability of at least one fed funds rate hike by December of this year now stands at 56 percent. Stronger oil prices would lift those odds.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 05-06-2016.

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