Comerica Bank's California Index's Growth Stalled in the Fall

Rhea-AI Summary

The Comerica California Economic Activity Index remained unchanged for two consecutive months through October, with a 1.6% increase from a year earlier. Employment rose by 34,500, but job growth has slowed, with continuing claims for unemployment insurance remaining elevated. Industrial electricity sales fell by 1.5% in October, and housing starts increased for the second consecutive month.

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• Job growth has slowed compared to the previous year's pace, with continuing claims for unemployment insurance remaining elevated. The unemployment rate has risen by 0.7% since December 2022. Industrial electricity sales fell by 1.5% in October, indicating a decline in industrial production. While housing starts rose for the second consecutive month, they were still below expectations.

Insights

Economist

The stagnation of the Comerica California Economic Activity Index suggests a plateauing in economic dynamics within the state, which can be an early indicator of broader economic trends. The mixed performance across the index's components reflects sectoral disparities. For instance, the rise in employment, albeit at a slower pace than the previous year, indicates continued job market expansion. However, the elevated unemployment claims and increased unemployment rate are signs of a potential slackening in labor market tightness.

From an economic standpoint, these labor market indicators suggest that businesses may face less wage pressure, which could improve profit margins in the short term. However, a cooling job market can lead to reduced consumer spending, impacting businesses reliant on domestic demand. The decline in industrial electricity sales, often correlated with industrial production, hints at a possible contraction in manufacturing activities, which could have ripple effects across supply chains and related sectors.

On the housing front, the uptick in housing starts is a positive sign for the construction industry and related sectors. Nevertheless, the long-term impact on the real estate market and broader economy depends on sustained growth in this area. Investors in the construction, real estate and home goods sectors should monitor these trends closely as they can affect demand for housing and related services.

Market Research Analyst

A nuanced understanding of the California economy is crucial for businesses operating within the state and investors with interests in companies exposed to California's economic fluctuations. The data indicating a slowdown in job growth, coupled with higher unemployment rates, may lead to changes in consumer behavior, which could affect retail, leisure and hospitality sectors. Companies in these industries might need to adjust their strategies to account for potentially decreased consumer spending.

Industrial electricity sales serve as a barometer for the health of the manufacturing sector. A decrease in these sales can signal a downturn in production, which may impact businesses in the industrial sector and their stock performance. Investors should consider diversifying their portfolios or seeking opportunities in industries less sensitive to economic downturns.

The information on housing starts is particularly relevant for investors in homebuilding companies, mortgage lenders and home improvement retailers. While the increase is modest, it could signal a continued demand for new housing, which is beneficial for these sectors. However, investors should remain vigilant for signs of sustained growth or decline, as the housing market is sensitive to broader economic conditions.

Financial Analyst

The economic indicators presented, such as employment figures and industrial electricity sales, are critical for forecasting the state's economic health and by extension, the performance of businesses within it. A slower job growth rate can affect consumer confidence and spending, which in turn impacts companies' revenues and earnings. The heightened unemployment claims point toward potential increases in labor supply, which might alleviate wage inflation but could also signal a weakening economy.

Investors should assess the impact of these indicators on the sectors they are invested in. For example, a decline in industrial production could negatively affect industrial stocks, while a cooling housing market might impact financial institutions and real estate investment trusts (REITs). It is important to analyze these developments within the context of broader market trends and the performance of individual companies.

Overall, while the report does not signal immediate alarm, it suggests caution. Investors should monitor subsequent reports for signs of either economic recovery or further deceleration. The long-term implications for the stock market will depend on the interplay of these economic indicators and the responses from businesses and policymakers.

DALLAS, Jan. 22, 2024 /PRNewswire/ -- The Comerica California Economic Activity Index was unchanged for a second consecutive month in the three months through October, and was up 1.6% from a year earlier. Six components of the index rose, while three declined.

Employment rose by 34,500, but the pace of job growth year-to-date has been roughly half of 2022's. Additional signs that the Golden State's job market is cooling include elevated continuing claims for unemployment insurance, holding above 400,000 for the sixth consecutive month, and a 0.7% rise in the unemployment rate since December 2022, to 4.8%. Seasonally-adjusted industrial electricity sales, a proxy for industrial production in the state, took a breather and fell by 1.5% in October after rising strongly in the prior three months. 

Housing starts rose for a second consecutive month in October, but were nonetheless about 7% lower in the first ten months of the year than in the same period of 2022. Led by sharp increases in California's three largest metro areas – Los Angeles, San Francisco, and San Diego – house prices rose for the ninth consecutive month in October. House prices have fully recovered from their decline in 2022 and are up 7.1% from their recent lows in January 2023. Housing supply constraints will continue to exert upward pressure on house prices. Seasonally-adjusted hotel occupancy declined on the month and also on the year, while air passenger traffic declined for the fourth consecutive month, pointing to softer activity in the critical tourism sector. Real state fiscal revenues are down sharply in the current fiscal year from the same period in the previous year, reflecting much lower personal income and corporate tax receipts.

California's real GDP grew robustly in the first three quarters of 2023 following modest 0.7% annual growth in 2022. But Comerica's California Index suggests the Golden State's economy likely lost momentum in the fall amid headwinds to housing, high interest rates, persistent inflation, and slowing consumer spending. On top of these issues weighing on the national economy, the tech slowdown is still an incremental negative for the Golden State.

The Comerica California Economic Activity Index is a monthly composite indicator of state economic activity. The Index provides a wholistic advance view of the state of California's economy, using economic data that are available about one quarter earlier than real GDP is released. The index is comprised of nine components: Nonfarm payroll employment, continuing claims for unemployment insurance, housing starts, house prices, industrial electricity sales, foreign trade, enplanements, hotel occupancy, and state revenues. All data are seasonally adjusted with nominal values converted to constant dollar values as appropriate. To filter out month-to-month volatility in the index components, the index is calculated from the three-month moving averages of its components. Values for a minority of components are projected from the prior months' release due to the timing of data releases.

Comerica Bank, a subsidiary of Comerica Incorporated (NYSE: CMA), is a financial services company headquartered in Dallas, Texas, and strategically aligned by three business segments: The Commercial Bank, The Retail Bank, and Wealth Management. Comerica focuses on building relationships and helping people and businesses be successful, providing more than 400 banking centers across the country with locations in Arizona, California, Florida, Michigan and Texas. Founded 175 years ago in Detroit, Michigan, Comerica continues to expand into new regions, including its Southeast Market, based in North Carolina, and Mountain West Market in Colorado. Comerica has offices in 17 states and services 14 of the 15 largest U.S. metropolitan areas, as well as Canada and Mexico. Comerica reported total assets of $85.8 billion at Dec. 31, 2023. Learn more about how Comerica is raising expectations of what a bank can be by visiting www.comerica.com, and follow us on Facebook, X (formerly known as Twitter), Instagram and LinkedIn.

To subscribe to our publications or for questions, contact us at ComericaEcon@comerica.com. Archives are available at http://www.comerica.com/insights.

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SOURCE Comerica Bank

FAQ

What is the Comerica California Economic Activity Index?

The Comerica California Economic Activity Index measures the economic activity in the state of California, analyzing various components such as employment, industrial production, and housing starts.

What is the current unemployment rate in California?

The current unemployment rate in California is 4.8%, which has risen by 0.7% since December 2022.

How much did industrial electricity sales fall in October?

Industrial electricity sales fell by 1.5% in October, indicating a decline in industrial production.

What is the trend in housing starts in California?

Housing starts rose for the second consecutive month in October, showing a slight improvement in the housing market despite being below expectations.

How has job growth in California performed compared to the previous year?

Job growth in California has slowed, with continuing claims for unemployment insurance remaining elevated, and the pace of job growth year-to-date being roughly half of 2022's.