Comerica Bank’s Arizona Index Improves

Comerica Bank’s Arizona Economic Activity Index increased in December, up 0.5 percentage points to a level of 112.1. December’s index reading is 35 points, or 46 percent, above the index cyclical low of 77.0. The index averaged 110.2 points for all of 2016, three and three-tenths points above the average for 2015. November’s index reading was 111.6.

“The Comerica Bank Arizona Economic Activity Index increased in December for the seventh consecutive month. Further, the state index has only declined once out of the last 16 months, in May 2016. We have seen steady improvement in the Arizona economy primarily reflecting ongoing job growth and firming real estate markets. Positives for December were nonfarm employment, state exports, unemployment insurance claims (inverted) housing starts and house prices. State sales tax, hotel occupancy and enplanements were negatives. It is noteworthy that the three negative factors for December are all negatively impacted by a weak Mexican peso, which makes it more expensive for people coming in from Mexico to shop and stay in Arizona,” said Robert Dye, Chief Economist at Comerica Bank. “Still, we believe that the weak Mexican peso does not represent an existential threat to Arizona’s ongoing economic expansion.”

For a PDF version of the Arizona Economic Activity Index click here: Arizona_Index_0217.

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Comerica Bank’s Florida Index Gains

Comerica Bank’s Florida Economic Activity Index improved in December, up by 2.6 percentage points to a level of 161.9. December’s index reading is 84 points, or 107 percent, above the index cyclical low of 78.1. The index averaged 155.2 in 2016, seventeen points above the average for all of 2015. November’s index reading was 159.3.

“The Comerica Bank Florida Economic Activity Index climbed for the fourth consecutive month in December after stalling at mid-year. Positives for the month were nonfarm employment, state exports, unemployment insurance claims (inverted), housing starts, home prices and state sales tax receipts. Negatives were hotel occupancy and enplanements. The strong dollar is a headwind for international tourism in Florida, but a strong U.S. economy is a counterbalancing force. Both single-family and multifamily construction rates remain well below historical averages,” said Robert Dye, Chief Economist at Comerica Bank. “Oversupply has dampened the multifamily market, but we expect single-family construction to continue to increase in Florida this year.”

For a PDF version of the Florida Economic Activity Index click here: Florida_Index_0217.

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Comerica Bank’s California Index Up Slightly

Comerica Bank’s California Economic Activity Index improved by 0.1 percentage points in December to a level of 126.5. December’s reading is 42 points, or 51 percent, above the index cyclical low of 84.1. The index averaged 122.4 points for all of 2016, two and three-fifths points above the average for all of 2015. November’s index reading was 126.4.

“Our California Economic Activity Index increased in December for the ninth consecutive month. We said 10 months last time, but a data revision this month has changed the story. Most index components were positive for December, including nonfarm employment, state exports, housing starts, home prices and the technology stock price index. However, unemployment claims (inverted), defense spending and hotel occupancy dipped. State exports have generally been increasing but the strong dollar is a headwind for California’s international exports, while the weak Mexican peso is a specific headwind,” said Robert Dye, Chief Economist at Comerica Bank. “President Trump has announced his intention to significantly increase U.S. defense spending, which is a positive for the state economy.”

For a PDF version of the  California Economic Activity Index click here:  California_Index_0217.

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Comerica Bank’s Michigan Index Little Changed

Comerica Bank’s Michigan Economic Activity Index was down slightly in December by 0.1 percentage points to a level of 129.7. December’s reading is 56 points, or 75 percent, above the index cyclical low of 74.1. The index averaged 127.8 points for all of 2016, four and one-fifth points above the index average for 2015. November’s index reading was 129.8.

“The Comerica Bank Michigan Economic Activity Index was essentially unchanged in December, decreasing by just one-tenth of a percent. Five components were positive for the month, including nonfarm payrolls, housing starts, home prices, state sales tax receipts and hotel occupancy. The negative factors were state exports, unemployment insurance claims (inverted) and auto production. The strong dollar and uncertainty about U.S. trade agreements imply ongoing downside risk for Michigan’s international exports. However, a stronger domestic economy would be a counterweight to reduced global demand. Auto production also has downside risk with the expectation that U.S. auto sales will ease this year after the record pace of 2016. Again, a stronger U.S. economy could shift that expectation,” said Robert Dye, Chief Economist at Comerica Bank. “Higher interest rates this year are another potential headwind for Michigan, likely reducing both housing and auto affordability.”

For a PDF version of the Michigan Economic Activity Index click here:  Michigan_Index_0217.

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Comerica Bank’s Texas Index Advances

Comerica Bank’s Texas Economic Activity Index improved by 0.2 percentage points in December to a level of 91.8. December’s index reading is 19 points, or 26 percent, above the index cyclical low of 72.8. The index averaged 91.4 points for all of 2016, six and one-tenth points below the average for full-year 2015. November’s index reading was 91.6.

“The Comerica Bank Texas Economic Activity Index increased for the fourth consecutive month in December. This is the longest expansion streak for the Texas Index since mid-2014. Improving oil prices, more active oil fields and a stronger U.S. economy are the keys to better performance for the Texas economy this year. With oil prices firm through February we expect the Texas Index to continue to climb through early 2017. Even though the December increase in the Texas Index was small, most index components were positive for the month, including nonfarm employment, state exports, unemployment insurance claims (inverted), housing starts, drilling rig count, home prices and state sales tax. Only hotel occupancy declined for the month,” said Robert Dye, Chief Economist at Comerica Bank. “North Texas continues to grow strongly. As the year progresses, we expect oil-producing areas to turn the corner and join in.”

For a PDF version of the Texas Economic Activity Index click here: Texas_Index_0217.

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Comerica Economic Weekly

U.S. economic data remains positive at the end of a fairly quiet week. January housing data bounced back after a weak December. The Federal Reserve released the minutes of the January 31/February 1 Federal Open Market Committee. We heard more discussion of tax reform this week from Washington. President Trump plans to release his plan by mid-March. Treasury Secretary Mnuchin hopes to have a deal by the end of the summer.

Sales of new single-family houses increased in January by 3.7 percent, after falling in December. Still, at an annual rate of 555,000 units, new home sales in January 2017 were weaker than all but four months of 2016. Months’ supply of new homes stayed at 5.7 months’ worth. The median sales price of a new single-family house was 7.5 percent higher in January than a year ago.

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 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. The median sale price of an existing home was up 7.1 percent in January over the previous 12 months.

Labor markets remain tight. We expect average hourly earnings to reaccelerate in the February jobs data, to be released March 10. Initial claims for unemployment insurance increased inconsequentially, by 6,000, for the week ending February 18 to reach 244,000. Continuing claims fell by 17,000 to hit 2,060,000 for the week ending February 11.

The minutes of the January 31/February 1 FOMC meeting 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. 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. We expect the next fed funds rate hike to come on May 3. The fed funds futures market still slightly favors June 14.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  Comerica_Economic_Weekly_ 02242017.

 

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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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