After a Weak Start, U.S. Economy Set to Finish 2016 on a Stronger Note
The recent upward revision to Q3 real GDP growth, to 3.2 percent, is a look in the rear-view mirror, but it does suggest that the U.S. economy entered the soon-to-be-complete fourth quarter with more momentum than previously thought. Inventories remain a key factor in the GDP calculation. Inventory accumulation was strong in 2015 and supported a moderate 2.6 percent real GDP growth for the year. In 2016, inventory accumulation was much weaker. In fact in the second quarter of 2016, inventories declined by $15 billion (nominal), the first decline in inventories since 2011Q3. Oil inventories were part of the story, as were manufactured goods. We expect U.S. oil stocks to continue to decline through 2017, but at a slower rate than they did this summer. Also, with firmer oil prices, and firming drilling activity, we expect that manufacturers who supported the oil and gas industry will have better control over their inventories in 2017 than they have for the past two years. In our U.S. forecast, inventories contribute positively to GDP growth from 2016Q3 through 2017Q4. This is a major assumption, and it could prove to be wrong, but if it is correct, it will result in above-potential GDP growth through 2017. There are several significant risks to our inventory outlook. U.S. crude oil inventories may fall through 2017 faster than expected. Lower oil prices could result in weaker-than-expected drilling activity. A strong dollar could stifle U.S. exports, as could the fallout from any challenges to existing trade deals. Finally, the auto sector is in play. We expect U.S. auto sales to gradually ease through 2017. If auto sales are worse than expected, auto-related manufacturers could reduce their inventories significantly.
Beyond GDP, other U.S economic metrics improved late in the year. The ISM-Manufacturing Index increased from a mildly contractionary 49.4 in August, to a moderately positive 53.2 in November. Despite the concern about the strong dollar and adverse consequences of trade negotiations, U.S. manufacturers are finishing the year with some momentum. The ISM Non-Manufacturing Index is also showing more momentum, having increased from its August low of 51.4 to November’s strong 57.2. Taken together, the two indexes are consistent with real GDP growth in the neighborhood of 3 percent or more in the fourth quarter.
Add a post-election stock market rally and rising consumer confidence into the mix and 2016 looks to end on a good note, which should carry over into early 2017. As the incoming Trump Administration launches its 100-day plan, we expect to see policy measures designed to boost economic growth, including some form of fiscal stimulus and corporate tax reform. These should help to sustain economic momentum through 2017. With stronger GDP growth and a widening federal deficit, inflation expectations should firm up through 2017. Oil markets will also factor into inflation expectations. The recent OPEC agreement to cut production is more marginal than radical, but it should support slightly higher prices. Stronger inflation, in turn, is an upside risk factor for our interest rate outlook. We continue to expect the Federal Reserve to increase the feds funds rate range by 25 basis points on December 14. We have maintained our call for two more interest rate hikes in 2017. However, we recognize that there is increasing upside risk to our interest rate forecast for 2017 and 2018, which needs to be balanced against the probability of recession in a late-cycle economy.
For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: useconomicoutlook1216.
The Florida economy continues to run hot in the second half of 2016, supported by an acceleration in employment growth in the third quarter. Employment growth for most major Florida metro areas continues to outpace the national average and gains are being seen across most major sectors. In particular, Florida manufacturing has been surprisingly strong. While the U.S. has seen stagnant to declining manufacturing employment growth over the past year, Florida manufacturing employment increased, up 4.4 percent in the 12 months ending in September. Earlier this year the state legislature passed House Bill 7099 in support of state manufacturers, which made existing sales and use tax exemptions of eligible industrial machinery and equipment permanent. The state tourism sector is weathering the drag from the strengthening U.S. dollar, which makes Florida vacations more expensive for international visitors. Year-over-year employment growth in leisure and hospitality remains above 4 percent. While the U.S dollar has appreciated by 24.4 percent against the U.K. pound in the 12-months ending in October, accelerated by the U.K.’s vote to leave the E.U., the U.S. broad trade weighted dollar has begun to stabilize, up just 3.2 percent. The housing sector began to cool off a bit with slower construction employment growth and a tick down in multifamily construction in the third quarter. However, we expect a rebound in residential housing due to strong home demand, supported by a robust labor market and population growth. The Florida economy will be firing on “most cylinders” heading into 2017.
For a PDF version of the complete Florida Economic Outlook, click here: FL Outlook 112016.
Arizona’s economic rebound in the second half of the year has been more muted than originally thought. Arizona job growth continues to move in the right direction, but recent data has us dialing back our expectations for next year. Construction employment continued its win streak with above-trend growth, up 9.2 percent in the 12 months ending in September. This is following strong new home construction throughout Arizona. The much larger services sector is growing at a more moderate pace. Arizona economic growth will outpace the U.S. average over the next few years. However, we expect Arizona, much like the rest of the nation, to experience slower growth in the quarters ahead than historical averages.
Hurdles for the Arizona economy in the long run are household income and education attainment, which impact the propensity to spend and the access to qualified workers. According to the Census Bureau, Arizona had the eighth highest poverty rate in the nation in 2015, with 17.4 percent of people in the state living below the poverty level. The state legislature is attempting to address these issues. In November, voters passed Proposition 206 which incrementally increases the state’s minimum wage from the current rate of $8.05 per hour to $12.00 per hour by 2020, increasing with the U.S. Consumer Price Index thereafter. The law also guarantees paid sick leave to workers of non-exempted businesses and is expected to impact around 700,000 workers. Earlier this year, Arizona also passed Proposition 123, increasing education funding by $3.5 billion over the next 10 years.
For a PDF version of the complete Arizona Economic Outlook, click here: AZ Outlook 112016.
After a rocky start to 2016, the California economy has picked up momentum in the second half of the year. Stronger job prospects have drawn people into the state labor force at levels not seen in over a decade. California has pulled in an additional 379,000 potential workers into the state labor force in the 12 months ending in September, the strongest pace since January 2001. The improving California labor market has supported our expectations of moderate state economic growth this year. We expect California real gross domestic product to grow by 2.5 percent in 2016, outpacing our forecasted U.S. average growth of 1.6 percent.
While we expect California’s economy to continue to outpace the U.S. average in 2017, there are a number of uncertainties to our outlook over the next few years. At the local level, we are already seeing moderating year-over-year employment growth, off of 2015 highs, across the California major metropolitan areas. This is to be expected as the economic cycle matures. A tighter labor market can both limit the pool of job applicants and increase labor costs through upward pressure on wages, slowing down the pace of hiring. At the national and international level, the strong rhetoric on trade policy throughout the 2016 presidential election increases the uncertainty for industries tied to California imports and exports. Mexico, Canada, China and Japan are the top four markets for California exports, respectively. Therefore a shift in trade policy for NAFTA or future trade with China and the resolution to Trans-Pacific-Partnership could have a material impact on California regional economies.
For a PDF version of the complete California Economic Outlook, click here: CA Outlook 112016.
The price for West Texas Intermediate crude oil appears to be stabilizing in the range of $45 to $50 per barrel, providing a floor for drilling activity in Texas. The rig count for the state has bounced off the mid-May low of 173 active rigs, up to 268 by mid-November. Oil producers continue to gain efficiencies, pushing the marginal cost of production lower and so we expect to see ongoing moderate gains in the rig count and associated oil field activity through the end of this year and into early 2017. However, even as we write this, the spot price for WTI has slipped below $45, and there remains a worldwide glut of oil that may take a year or more to absorb, keeping downward pressure on prices. Oil storage in the U.S. is falling off its record peak from this past spring, but progress has been slow. Stronger-than-expected storage numbers in late October through early November brought prices down to $43 by mid-November. Fortunately for Texas, the state economy is fueled by more than just oil. Job growth over the last two years has been remarkably resilient, with just two months, March 2015 and March 2016, showing net job losses. This September the state added 38,300 jobs on net, which is above the monthly average for 2012 and 2013. The contrasting patterns in the state economy are seen in the comparison of the Dallas/Fort Worth metropolitan area and the Houston metropolitan area. Job growth in North Texas remains strong, up 3.8 percent in September over the previous 12 months. Job growth in the Houston MSA has slipped to just 0.5 percent year-over-year as of September. We look for a slow turnaround in Houston in 2017.
For a PDF version of the complete Texas Economic Outlook, click here: TX Outlook 112016.