Southern California, Recovering and Transforming

Transformation is occurring in downtown Los Angeles with a number of mega-development projects underway or on the drawing boards. Greenland U.S. Holding Inc. broke ground this year on the first phase of the mega-project named Metropolis. The $1 billion project is a combined residential, retail and hotel urban development. The first phase consists of a 19-story hotel with the capacity for 350 rooms and a 38-story residential tower. Both structures are expected to be completed by 2016. Ongoing residential and commercial developments are expected to bring more workers into the downtown area, which will increase consumer spending.

Housing markets remain tight in Southern California, allowing home owners to continue gaining equity in their homes at a relatively fast pace. Case-Shiller home prices for Los Angeles and San Diego were up 16.8 percent and 18.9 percent, respectively, from a year ago in March. After peaking in 2006, home values in Southern California plummeted by around 42 percent. According to March’s Case-Shiller Home Price Index, single-family houses in Los Angeles still have to gain another 23 percent from current prices to attain their pre-recession peak. So, a recovering housing market remains an integral part of the economic story for Southern California for the next few years.

Southern California labor markets continue to improve. The construction sector grew 8.8 percent from a year ago in April, adding over 28,000 jobs to the area economy. Most sectors showed solid growth while financial activities and government-related industries have been a drag on area labor markets in the first part of 2014. Southern California nonfarm payrolls are expected to increase 2 percent or 150,000 jobs in 2014.

Southern CA 2014Q1

Click here for the complete Southern California Regional Economic Update: SouthernCA 2014Q1.

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Northern California, Looking Frothy

Some Northern California price metrics are looking frothy. Home price growth is strong, yet unsustainable. According to the Case-Shiller Home Price Index, San Francisco year-over-year single-family house price growth remained above 20 percent from March 2013 to March 2014. House price to household income ratios show that housing affordability has declined significantly in the region since 2011. The San Francisco Metropolitan Statistical Area (MSA) reading of 3.7 surpassed its long-run average for house price to income ratio in 2013, while the San Jose MSA was approaching its long-run average. However, these ratios remain below 2008 levels. We expect Northern California house price appreciation to begin moderating this year.

If 2013 was the year of tech IPOs, then 2014 is the year of high-valuations and uncertainty. A number of notable tech acquisitions occurred in early 2014 at above normal valuations. Reminiscent of the tech bubble of 1999-2001, investors and analysts are beginning to wonder how bubbly the tech sector has become. The Silicon Valley 150 saw a correction at the beginning of March, declining 15.2 percent before hitting its trough in April. But, companies are still sitting on a lot of cash, allowing for more acquisitions this year. Standard and Poor’s reported in April that 1,700 businesses increased their total cash and short-term investments by 11 percent in 2013, to a total of $1.53 trillion. The technology sector held about a third of all the cash and short term-investments.

Northern California labor markets continue to perform well. Year-over-year employment growth in the San Jose MSA has remained above 4 percent since June 2012. Most sectors have shown positive gains, particularly education and health services, which added over 18,000 jobs to the area in the 12 months ending in April. We expect gains in area employment to remain strong at around 3 percent in 2014.

Northern CA 2014Q1

Click here for the complete Northern California Regional Economic Update: NorthernCA 2014Q1.

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Miami Benefits from the Cold Winter and Improving Economic Outlook

Snowbirds flocked to Miami’s beautiful beaches in order to thaw out from this winter’s unusually cold weather. Miami’s warm weather drew in more domestic tourism in the first part of 2014, with total domestic passenger deplanements at Miami International Airport increasing 3.2 percent from a year ago in Q1. Hotel occupancy remained in solid territory in the Miami area, at 85.8 percent in March. It is not just the weather that is leading to improvements in Miami’s tourism industry. The improving overall U.S. economy continues to support growth in leisure and hospitality throughout the Miami area. Consumers are feeling the positive wealth effects from increasing home prices, improving 401ks and increasing incomes, leading to increased consumer spending.

Demand for single-family houses and condos remains strong throughout the Miami Metropolitan Statistical Area (MSA). Double-digit gains in house prices last year have encouraged more home owners to put their houses on the market. However, residential real estate markets remain tight. Miami house prices increased 16 percent or above year-over-year from November of 2013 through February 2014, according to the Case-Shiller Home Price Index. Improving U.S. and European economies will continue to drive both domestic and foreign demand for Miami real estate in 2014.

Miami MSA labor markets continue to improve. The Miami MSA labor force grew at a 4.1 percent annualized rate in Q1. This is a much stronger showing than the 0.7 percent labor force growth in 2013. Employment continues to advance in most industries throughout the MSA. According to the BLS, construction payrolls were up 7.8 percent, professional and business services were up 4.2 percent and leisure and hospitality were up 3.5 percent from a year ago in March. We expect the unemployment rate throughout the MSA to continue to decrease, creating tighter labor markets and putting upward pressure on wages in 2014.

Miami 2014Q1

Click here for the complete Miami MSA Regional Economic Update: Miami 2014Q1.

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Phoenix Ongoing Economic Development

Whether it’s the $136 million University of Arizona medical research building in downtown Phoenix or the 10-story office building in Tempe, economic development continues to be an integral part of the long-term strategy for the Phoenix Metropolitan Statistical Area (MSA).

Commercial real estate projects in Tempe are expected to draw in additional companies and workers. Developer, Ryan Companies, broke ground on a new Class A 10-story office building this year. This is the final phase of the Hayden Ferry development project which is a combined residential and business complex located on the southern portion of Tempe Town Lake. Next door to the Hayden Ferry development lays Marina Heights. This is the future site of a two million-square-foot project which will be a combination of retail activity, business activity and a lakeside plaza. The $600 million project, which broke ground in July of last year, will house a regional headquarters for State Farm Insurance. The dynamic developments are expected to bring new workers to the Tempe area, adding to consumer spending in the surrounding communities.

Residential development for the Phoenix MSA has been improving at a tepid pace in the early part of 2014. Phoenix total housing starts hovered at a 20,000 unit annual rate from December 2013 through March 2014. Our forecasts are for a population increase of 82,000 in 2014. If we take the population increase and divide it by the average persons per household, then the Phoenix area would need to build 32,000 units just to keep up with population growth. Therefore, a 20,000 unit annual rate for housing starts implies that residential vacancy rates are declining, and that housing markets are tightening in the Phoenix area. There is upside potential in construction activity for the area. Mortgage rates remain relatively low, aiding in housing affordability. Labor markets are improving, which can lead to increased household formation. Baby boomers are booming.

Phoenix 2014Q1

Click here for the complete Phoenix MSA Regional Economic Update: Phoenix 2014Q1.

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San Antonio Maintains Robust Economic Outlook

San Antonio, the staging point for the Eagle Ford Shale development, comprises about 8.0 percent of the total nonfarm payroll jobs in the entire state of Texas. In the first quarter of 2014, San Antonio added a net of 4,400 nonfarm payroll jobs, about 1,700 fewer than last year’s first quarter. Most of the jobs created in the beginning of the year came from the service-producing sector (3,500) followed by construction (410) and manufacturing (300). Although the job growth looks a bit softer compared to the same period last year, the region is doing reasonably well compared to the previous quarter in which San Antonio added 3,300 jobs. On a year-over-year basis the region’s payrolls grew around 2.5 percent in the first quarter of 2014. This was above the long-term annual job growth of 2.2 percent seen since the 1990s.

San Antonio’s unemployment rate declined to 5.3 percent in 2014Q1 from 5.7 percent of the previous quarter. The decline in the unemployment rate came with an increase in both employment and labor force, a positive signal for the economy. We expect the unemployment rate to decline continuously through 2014 due to a modest improvement in payroll jobs. San Antonio saw a decline in both single- and multifamily housing starts in the first quarter of 2014 after a strong surge in the previous quarter. We expect the total housing starts to rebound in the next quarter and grow moderately through 2014. House prices are expected to grow moderately, at par or slightly above the national average in 2014.

Because of the advancement in oil and gas drilling technologies such as hydraulic fracturing and horizontal drilling, both the rig count and productivity of oil drilling has increased substantially nationwide and in the area. However, the natural gas rig count continues to moderate. We expect San Antonio to add more jobs in construction, manufacturing, health care, tourism, and other service-producing sectors in 2014 than in petroleum production, as most of the jobs in the energy sector have already been added to the economy.

San Antonio 2014Q1

Click here for the complete San Antonio MSA Regional Economic Update: SanAntonio 2014Q1.

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A Robust North Texas Economy

Over the year ending this April, the Dallas-Fort Worth-Arlington metro area added 106,800 payroll jobs, the equivalent of a moderately-sized city. Strong job growth has lowered the unemployment rate for the area to 5.4 percent as of March, well below the national average of 6.7 percent for that month. The recent announcement that Toyota will be moving its North American headquarters to Plano, creating 4,000 new jobs for North Texas, adds to our expectations for ongoing strong job growth. The majority of the new jobs will not be filled until Toyota completes construction of their new headquarters by early 2017. Likewise, State Farm Insurance is moving a regional headquarters to Richardson, adding about 8,000 jobs when fully operational.

The State Farm and Toyota relocations are significant additions for North Texas and will spur more development on the northeast side of the Metroplex. Developer Vision5 is planning to build a 17-story condo and retail tower later this year in Plano. It will be the first high-rise condo north of the Bush Turnpike. The developer already has plans for a second tower. Dallas-Fort Worth International Airport is also expanding, with the addition of 10 new gates at the Terminal B concourse extension. The south side of the Metroplex will be getting some help from a new 212-acre Midlothian Business Park.

Ongoing progress of the Trinity River Corridor Project will spur additional development west of downtown Dallas. Plans continue to be formulated for a high-speed rail connection from Dallas to Fort Worth as well as from Dallas to Houston. Eighteen minutes from Dallas to Fort Worth, and 90 minutes from Dallas to Houston sounds very attractive in light of the certainty of increasing traffic congestion throughout the rapidly growing Texas metro areas.

North Texas 2014Q1

Click here for the complete North Texas MSA Regional Economic Update: NorthTexas 2014Q1.

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Houston Continues to Roll

The Houston metro area economy continues to be fueled by strong regional and international energy markets. With rising U.S. exports of petroleum products, the linkage between U.S. and international oil prices is strengthening, keeping the pressure on U.S. production and exploration. Payroll employment for the Houston MSA was up 3.0 percent in April from a year earlier, representing a total of 82,300 jobs gained. The area’s unemployment rate  was down to 5.4 percent as of March, well below the U.S. average of 6.7 percent for that month. The Houston economy is growing so rapidly that construction workers are reported as being in tight supply.

Also, Houston-area energy companies stand to gain from the opening up of Mexico’s energy sector. Pemex, Mexico’s state-owned petroleum exploration and production company, will soon relinquish its monopoly position. Private bidding on Mexican oil and gas leases is expected to begin by mid-2015. M&A activity in the energy sector is still heating up after a strong finish to 2013. Many energy giants are divesting non-core assets, creating opportunities for more nimble, smaller firms.

The very strong growth in Houston must be weighed against Stein’s Law, which says that if something can’t go on forever, it won’t. We are seeing slower year-over-year job growth now than a year ago. In April 2013, payroll employment for Houston was up 4.0 percent over the previous 12 months. However, for now, all signs are pointing to ongoing robust growth for the remainder of this year. With upstream supply rapidly being developed, downstream applications are coming to Houston. BASF and Yara have recently announced plans to build a “world scale” ammonia plant in nearby Freeport. Downstream companies may look to become more integrated with upstream supply, adding to the M&A boom.

Houston 2014Q1

Click here for the complete Houston MSA Regional Economic Update: Houston 2014Q1.

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Austin Continues to Grow

Austin, one of the fastest growing tech metros in the U.S., comprises about 8.0 percent of the total nonfarm payroll jobs in Texas. In the first quarter of 2014, Austin added a net of 3,500 nonfarm payroll jobs, about 4,900 fewer jobs compared to the first quarter of 2013. Stated a different way, Austin created 3.8 percent of the total nonfarm jobs created in the state of Texas during the first quarter of 2014, compared to 10.5 percent in the first quarter of 2013. Although job growth looks a bit softer in early 2014, Austin is still one of the strongest performers in terms of job growth, beating the U.S. average by over 2.1 percent on a year-over-year basis in 2014Q1. We expect job growth to be around 4.0 percent on an annual basis through 2014 as the region attracts people and businesses from across the country because of its pro-business environment.

Austin’s unemployment rate declined to 4.6 percent in 2014Q1 from 5.0 percent of the previous quarter. As of March 2014, about 45,980 people are unemployed in the Austin area compared to 53,900 a year ago. The decline in unemployment came from an increase in both employment and labor force growth, a positive signal for the economy. We expect Austin’s unemployment to decline continuously through 2014 due to ongoing strong job creation. Austin saw a decline in housing starts in the beginning of 2014 because of weak multifamily starts after a strong surge in the previous quarter. We expect total housing starts to rebound this summer and grow steadily through 2014. House prices are expected to grow moderately above the national average in 2014 and 2015. House prices are already at a historic high in the area.

Moderate U.S. economic growth is expected to spur consumer and business demand for tech products and services such as computer equipment, communication equipment, software, information technology and telecommunication services. In turn, we expect Austin’s job growth to be strong in professional and business services, trade, transportation, warehousing, utilities, leisure/hospitality, and other service-producing sectors in 2014.

Austin 2014Q1

Click here for the complete Austin MSA Regional Economic Update: Austin 2014Q1.

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Comerica Bank’s Florida Index Falls in March

Comerica Bank’s Florida Economic Activity Index fell 1.6 percentage points in March, to a level of 116.1. March’s index reading is 36 points, or 44 percent, above the index cyclical low of 80.6. The index averaged 115 in 2013, 10 points above the average for all of 2012. February’s index reading was unchanged at 117.7.

“Our Florida Economic Activity Index fell in March as residential building permits reset following a strong February. Likewise, we saw hotel occupancy rates reset for the state following strong numbers in December and January. Fortunately, payroll employment for Florida did increase in March, supporting our view that the Florida economy will continue to improve through the second half of this year,” said Robert Dye, Chief Economist at Comerica Bank. “We expect to see both residential and nonresidential property markets firm up, to the benefit of the overall state economy.”

FL Index 0514

For a PDF version of the Florida Economic Activity Index click here: FloridaIndex_0514.

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Comerica Bank’s Arizona Index Eases in March

Comerica Bank’s Arizona Economic Activity Index fell slightly in March, declining 0.7 percentage points to a level of 103.7. March’s index reading is 32 points, or 45 percent, above the index cyclical low of 71.3. The index averaged 96 points for all of 2013, nine points above the average for full-year 2012. February’s index reading was unchanged at 104.4.

“Our Arizona Index eased in March, breaking a string of four consecutive monthly increases. However, nonfarm payroll employment for Arizona improved in March after decreasing in February. A major contributing factor to the dip in our Arizona Index in March was an increase in continuing claims for unemployment insurance for the month. That increase runs counter to the previously mentioned improvement in payroll jobs in Arizona in March,” said Robert Dye, Chief Economist at Comerica Bank. “We already know that continuing claims for unemployment insurance eased in April. So the March gain in continuing claims looks like an anomaly. We expect the Arizona economy to continue to improve through the second half of this year.”

AZ Index 0514

For a PDF version of the Arizona Economic Activity Index click here: ArizonaIndex_0514.

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