Comerica Economic Weekly

It was a fairly light week for data, but a heavy week for Fed-watching as the Federal Reserve Bank of Kansas City hosted their annual retreat in Jackson Hole, Wyoming, yesterday and today.

This morning, Janet Yellen delivered a speech   titled, “The Federal Reserve’s Monetary Policy Toolkit: Past, Present and Future.” The bulk of the speech focused on possible tools for the Fed for fighting the next recession. In her opening remarks, Janet Yellen made two key statements about the near-term outlook for interest rates.  First, she said, “the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time.”  Second, she continued with, “…the case for an increase in the federal funds rate has strengthened in recent months.” Yellen’s comments suggest the odds of a fed funds rate hike on September 21 have increased. We place them at about 33 percent, contingent on the August jobs data, due out next Friday.

New home sales in July beat expectations, surging by 12.4 percent to a 654,000 unit annual rate. This was the strongest sales rate since October 2007. Also, it was close to the historical monthly average of about 650,000 since the beginning of the series in 1963.

Existing home sales fell to a 5.39 million unit annual rate in July, near the series average since 1999. The months’ supply of existing homes on the market ticked up to 4.7 months’ worth, still indicative of a tight overall housing market. The median price of an existing home was up 5.3 percent in July over the previous 12 months.

Mortgage applications for refinance eased for the week ending August 19, but purchase apps were little changed after dropping by 3.9 percent for the prior week.

New orders for durable goods increased by a strong 4.4 percent in July, following a 4.2 percent drop in June. New orders for nondefense capital goods excluding aircraft (core orders) gained a healthy 1.6 percent.

Initial claims for unemployment insurance dipped by 1,000 for the week ending August 20, to hit 261,000. Continuing claims fell by 30,000 to hit 2,145,000 for the week ending August 13.

The good UI claims data suggests that August will be another solid month for job growth. The August jobs data is especially important given Janet Yellen’s speech today. We look for 175,000 jobs added, moderating after robust gains in June and July. If payroll gains remain very strong, say, north of 200,000, we believe that would significantly increase the likelihood of a fed funds rate hike on September 21.

Real GDP growth for the second quarter of 2016 was revised down slightly to a 1.1 percent annualized rate, from the previously reported 1.2 percent.

According to the University of Michigan, consumer sentiment eased slightly in August, but still remains within the “ok” range established this year.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  CMAEconWeekly 08-26-2016 1.

 

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From the Desk of Robert Dye

This morning at the annual Federal Reserve retreat at Jackson Hole, Wyoming, FOMC Chairwoman Janet Yellen delivered a speech titled “The Federal Reserve’s Monetary Policy Toolkit: Past, Present and Future.” The bulk of the speech was focused on possible tools the Fed could use to fight the next recession. In her opening remarks, Janet Yellen did make two key statements about the near-term outlook for Federal Reserve interest rate policy.  First, she said, “the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time.”  Second, she continued with, “…the case for an increase in the federal funds rate has strengthened in recent months.” Yellen’s second statement is consistent with several other recent statements by various FOMC members who said that they anticipate raising the fed funds rate in the not too distant future. So, Janet Yellen has reconfirmed her view on the appropriate path of interest rates (higher), and she has told us that we are approaching the conditions necessary for a rate hike. But she has not told us when the next rate hike will occur. The policy actions of the Yellen Fed remain highly data-dependent. I continue to believe that the August employment data, released next Friday, September 2, will be an important factor for the Fed to consider. If we see another strong month of job growth, after better-than-expected results for June and July, then the odds of a September 21 fed funds rate hike will increase. Conversely, a weaker-than-expected result next Friday would diminish the odds of a September rate hike. I believe that if we see payroll job growth north of 200,000 for August, then after the Labor Day holiday we will hear comments from various FOMC members that will more strongly hint at a September rate hike. According to the fed funds futures market, the odds of a September 21 fed funds rate hike are 18 percent. I believe that this is too low and I suggest that the odds are now closer to 33 percent.

 

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July New and Existing Home Sales

Breakout Month for New Home Sales, Existing Home Sales Slump

  • Existing Home Sales decreased by 3.2 percent in July to a 5.39 million unit annual rate.
  • New Home Sales for July surged by 12.4 percent to a 654,000 unit annual rate.

Often, new and existing home sales move in the same direction in any given month, but it is not unusual to see a divergence. This July, new home sales zigged, surging by 12.4 percent, while existing home sales zagged, decreasing by 3.2 percent. Since new home sales are only about a tenth of total home sales, the count of total home sales in July decreased by 1.8 percent. This is consistent with the pattern of mortgage applications for purchase, which was soft in July. Existing home sales fell to a 5.39 million unit annual rate in July, near the series average since 1999. Sales dipped in the Northeast, Midwest and in the South, only increasing in the West. The months’ supply of existing homes on the market ticked up to 4.7 months’ worth, still indicative of a tight overall housing market. The median price of an existing home was up 5.3 percent in July over the previous 12 months.

New home sales in July beat expectations, surging by 12.4 percent to a 654,000 unit annual rate. This was the strongest sales rate since October 2007. Also, it was close to the historical monthly average of about 650,000 since the beginning of the series in 1963. Sales jumped in the Northeast by 40 percent in July, while the South increased by 18 percent. New home sales in the Midwest were up by 1.2 percent. The West was unchanged for the month.

With both new and existing home sales near their historical averages, we can say that the housing market has shown another normalized metric. We expect solid job and income growth plus available and cheap mortgages to continue to support new and existing home sales through the remainder of this year. There is ample potential for new and existing home sales to exceed their long-term averages in 2017, helping residential investment to

Market Reaction: U.S. equity markets opened with losses. The 10-year Treasury bond yield is up to 1.56 percent. NYMEX crude oil is down to $46.60/barrel. Natural gas futures  are down to $2.83/mmbtu.

NewHomeSales.8.16

For a PDF version of this Comerica Economic Alert click here: New_Home Sales 08-24-16.

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Announcement: New Publications

Beginning today, Comerica’s Economics Department will be rolling out a new series of publications, a “State Economic Outlook” for each of our five markets. These new publications, quarterly in frequency, will provide analysis and economic outlook for Arizona, California, Florida, Michigan and Texas with content, models, tables and forecasts that are consistent with those of our signature U.S. Economic Update. The new state-level publications will be forward-looking. They are designed to complement  our existing monthly State Economic Activity Indexes, which provide insight on current and historical economic conditions for each state. Our hope is that the new State Economic Outlook reports will further assist our readers with keeping current on economic data and trends at the state level, as well as assisting individuals and business owners with strategic planning and decision-making.

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Florida Labor Market Draws in Workers

Strong job growth in Florida continues to boost overall economic activity and draw people into the state. The state’s payroll jobs increased by 3.5 percent in 2015, well above the overall U.S. pace of 2.1 percent. Momentum continued into 2016 as Florida added another 113,000 jobs in the first six months of the year. This helped to boost the state’s real gross domestic product by 2.1 percent in the first quarter of 2016, which was more than double that of the U.S. at 0.8 percent. The relatively stronger economic activity has helped to pull into the state, on average, an additional 270,000 people per year over the last four years. Strong labor growth, combined with improving income and more people, is a recipe for a positive outlook for the Florida economy over the next year.

The surge in jobs, and better income growth, have supported the ongoing recovery of Florida’s hard-hit housing markets. According to the Federal Housing Finance Agency’s purchase-only home price index, home prices have rebounded 54 percent from the 2011 lows. This has helped homeowners regain some of the lost equity from the recession. However, Core Logic Inc. estimates that 15 percent of Florida mortgages remain under-water as of the first quarter of 2016. There is upside potential for Florida’s housing markets beyond job-driven demand. Baby boomers are retiring and Florida remains a popular destination for retirees. Recovered investment portfolios, the ability to sell their homes and kids who are finally moving out will increase the mobility of baby boomers.

FL Outlook 082016

For a PDF version of the complete Florida Economic Outlook, click here: FL Outlook 082016.

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Arizona’s Ties to the U.S. Consumer

The Arizona economy is expected to rebound in the second half of 2016. Real gross domestic product registered a relatively strong first quarter at 2.6 percent, but most likely took a leg down in the second quarter on weaker job growth. Questions regarding the strength of the U.S. consumer due to low U.S. economic performance and financial market volatility may have tapped the brakes on hiring from Arizona employers in the second quarter. The state’s professional and business services sector, linked to U.S. consumer spending, saw employment declines while the financial activities and information sectors saw a significant slowdown in hiring. The good news is that U.S. consumer spending is expected to improve for the remainder of the year. Therefore, we expect the Arizona economy to grow at a faster rate in the second half of 2016 on stronger employment growth.

Aiding in this growth is increased construction hiring, which has been on a tear over the past year. Construction employment was up 8.6 percent year-over-year in July, the fastest pace of growth since the economic downturn. This is consistent with gains in housing starts which also continue to trend upward. Improving incomes, increased credit availability and low mortgage rates will support demand for housing. Additionally, demand for Arizona housing will continue to improve as baby boomers continue to retire. The factors that dampened stronger demand from baby boomers such as a pushed back retirement age, support for an adult child living at home and the recovery of lost homeowner equity will begin to wane.

AZ Outlook 082016

For a PDF version of the complete Arizona Economic Outlook, click here: AZ Outlook 082016.

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Texas Economy Enters Critical Period in 2016H2

The Texas economy is entering a critical period in the second half of 2016 as the downdraft from the energy sector reset continues to roll through the state. Fortunately, to date, the drag on the overall state economy from reduced oil-field activity has not been as bad as we first thought. In July, the state added 23,600 payroll jobs, still up 1.5 percent over the previous 12 months. The climb in oil prices from the February low of $27 per barrel for WTI, to above $50 by early June was a cause for optimism, but the oil market got ahead of itself, and WTI fell below $40 per barrel by early August. Recent gains, to near $48, are again invigorating the optimists. The drilling rig count for Texas has firmed from a low of 173 rigs in late May to 238 rigs through mid-August. Also we see that new orders for mining equipment increased through May and June, but this was up from April, which was the worst month in the history of that series, dating back to 1992. We still show a mild recession for Texas in our forecast for this year. We believe that by the end of this year, the Texas economy will stabilize and then expand consistently through 2017. This forecast is based on our assumption that oil prices are stabilizing, and will gradually increase through next year, supporting moderately stronger oil field activity. Houston is still struggling and the metro area accounts for a quarter of all jobs in Texas. Almost all economic metrics for Houston are still showing signs of stress. Job growth in June and July was modest, but positive, after a net loss in May. We expect Houston to struggle with weak net job growth through the remainder of this year.

TX Outlook 082016

For a PDF version of the complete Texas Economic Outlook, click here: TX Outlook 082016.

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Steady Michigan

Job growth in Michigan has been steady after allowing for the occasional bump, as occurred in May. In that month, state employment dipped by 20,400 jobs, contributing to a weak month for overall U.S. job growth. Like the U.S. numbers, Michigan job growth bounced back in June and July. For the 12 months ending in July, state payroll employment was up by 2.5 percent, well ahead of the U.S. average of 1.7 percent growth over the year. A resurgent auto sector has been a big part of the “steady growth” story for Michigan. In July, manufacturing employment ticked up to 604,200, the highest level since August 2007, stoked by the resurgent auto industry. We believe that U.S. auto sales likely peaked for this business cycle last fall, when annualized sales averaged 18.1 million units for September, October and November. For this coming fall (2016Q4) we forecast auto sales to average close to a 17.2 million unit pace. The last four business cycles (roughly the 1970s, 1980s, 1990s and the 2000s) all ended with a different pattern for auto sales. The 70s saw a sharp deterioration in sales into early 1982. In the 80s, the drop in auto sales was less steep into 1991. After the 90s, there was no dip in auto sales through the Recession of 2001. The slide into 2009 was devastating. We are assuming that auto sales follow the middle path at the end of this business cycle, and so we are forecasting a moderate deterioration of auto sales into 2018. Regardless of the eventual downward slope, our assumptions are consistent with eventual job losses in manufacturing. We look for gains in service-sector jobs to keep Michigan’s expansion steady through 2017.

MI Outlook 082016

For a PDF version of the complete Michigan Economic Outlook, click here: MI Outlook 082016.

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California Economy Buffeted by External Forces

The California economy headed into the latter half of 2016 with some momentum, after weathering a volatile start to the year. Even as tech-stocks lost value early in the year, California real GDP still grew at 2.0 percent in the first quarter, almost twice that of the U.S. average of 0.8 percent. Since then, tech-stocks saw a stronger than expected spring and summer rebound as global financial market conditions improved. Domestically, U.S. consumers shopped with a vengeance this spring as personal consumption of goods and services increased at a 4.2 percent annual rate in the second quarter. This is a bullish signal for the U.S. economy and it supports the outlook for tech-based industries for the remainder of the year. Internationally, central bank policies are divergent. The Bank of Japan and the Bank of England continue to pursue easing policies, making the Federal Reserve’s current monetary stance look relatively stronger, supporting the dollar even as the Fed does nothing. The broad dollar index strengthened after the June 23 BREXIT vote, to the detriment of export-oriented businesses. The dollar value of California exports has declined for 18 of the last 20 months. Lower oil prices have had some impact on this trend. We expect the state economy to weather the international crosswinds through the remainder of this year, growing moderately and adding enough jobs to keep the unemployment rate on a declining trend. The previously hot Northern California real estate market will cool as the manic pace of home buying eases due to declining affordability.

CA Outlook 082016

For a PDF version of the complete California Economic Outlook, click here: CA Outlook 082016.

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Comerica Economic Weekly

Lower energy prices kept consumer inflation at bay in July as the Consumer Price Index was unchanged. Core CPI (all items less food and energy) increased by 0.1 percent in July, the weakest increase since March. Over the year ending in July, core CPI was up by 2.2 percent, pushed up by housing and medical costs.

Oil prices firmed through mid-August, with WTI now trading above $48/barrel. Gasoline prices remain low with the national average for regular at $2.14 according to AAA. The recent increase in crude oil prices plus the flooding in Louisiana, which has shut down refineries, could push gasoline prices up at the end of the summer.

The minutes of the July 26-27 FOMC meeting, along with comments by Bill Dudley of the New York Fed, created some buzz about the possibility of a fed funds rate increase in September. However, this is still a very divided FOMC. The minutes make clear that there is a significant faction within the FOMC that will not favor raising the fed funds rate in September. We see no reason why FOMC Chairwoman Janet Yellen would firm up her intention to raise the fed funds rate five weeks ahead of the next FOMC meeting. Rather, she will likely wait until she has had face-to-face discussions with FOMC members at the Fed’s annual retreat in Jackson Hole, Wyoming, next week and then wait further until after the August jobs data is released on September 2, before she sets her intentions for the September 20-21 FOMC meeting. According to the fed funds futures market, the odds of a rate hike in September are up to 18 percent. We continue to expect only one fed funds rate hike this year, in December.

Housing starts increased by 2.1 percent in July to a 1.211 million-unit pace. Most of the increase in July came from multifamily construction. Permits for new construction eased slightly by 0.1 percent in July, to a 1.152 million unit pace. According to the National Association of Home Builders, builder confidence increased by two points to 60.

U.S. industrial production increased by 0.7 percent in July. The heat wave on the East Coast boosted utility output by 2.1 percent for the month. Manufacturing output increased by 0.5 percent even as motor vehicle assemblies eased to a 12.16 million unit annual rate. Mining output also increased in July, up by 0.7 percent, consistent with the small gain in the drilling rig count.

Initial claims for unemployment insurance decreased by 4,000 to hit 262,000 for the week ending August 13. Continuing claims gained 15,000 to hit 2,175,000 for the week ending August 6th. We look for about 185,000 net new payroll jobs in August.

The Leading Economic Index increased by 0.4 percent in July, boosted by average weekly manufacturing hours, interest rate spread and stock prices.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 08-19-2016.

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