Monday, March 30, 2015

Tuesday: Case-Shiller House Prices, Chicago PMI

by Bill McBride on 3/30/2015 07:51:00 PM

From the WSJ: Fed’s Fischer Floats Ideas for Regulating Shadow Banks

The Federal Reserve’s No. 2 official floated a series of ideas for regulating nonbank financial companies, the latest indication that top U.S. policy makers are focusing on risks in the so-called shadow banking sector.

“While there has been progress on the financial reform front, we should not be complacent about the stability of the financial system,” said Fed Vice Chairman Stanley Fischer in remarks prepared for a conference here hosted by the Federal Reserve Bank of Atlanta. He noted existing rules create an incentive for risky activities to move into less-regulated financial firms and said “we should expect that further reforms will certainly be needed down the road.”
Tuesday:
• 9:00 AM ET, the S&P/Case-Shiller House Price Index for January. Although this is the January report, it is really a 3 month average of November, December and January prices. The consensus is for a 4.6% year-over-year increase in the National Index for January. The Zillow forecast is for the National Index to increase 4.6% year-over-year in January, and for prices to increase 0.5% month-to-month seasonally adjusted.

• At 9:45 AM, the Chicago Purchasing Managers Index for March. The consensus is for a reading of 50.2, up from 45.8 in February.

Demographics and GDP: 2% is the new 4%

by Bill McBride on 3/30/2015 03:08:00 PM

Note: This is a repeat of a post I wrote early this year.  Based on some recent comments I've seen, I think this is worth repeating.

For amusement, I checked out the WSJ opinion page comments on the Q4 GDP report. As usual, the WSJ opinion is pure politics - but it does bring up an excellent point (that the WSJ conveniently ignores).

First, from the WSJ opinion page:

The fourth quarter report means that growth for all of 2014 clocked in at 2.4%, which is the best since 2.5% in 2010. It also means another year, an astonishing ninth in a row, in which the economy did not grow by 3%.
This period of low growth isn't "astonishing". First, usually following a recession, there is a brief period of above average growth - but not this time due to the financial crisis and need for households to deleverage. So we didn't see a strong bounce back (sluggish growth was predicted on the blog for the first years of the recovery).

And overall, we should have been expecting slower growth this decade due to demographics - even without the housing bubble-bust and financial crisis (that the WSJ opinion page missed).

One simple way to look at the change in GDP is as the change in the labor force, times the change in productivity. If the labor force is growing quickly, GDP will be higher with the same gains in productivity. And the opposite is true.

So here is a graph of the year-over-year change in the labor force since 1950 (data from the BLS).

Year-over-year Change Labor ForceClick on graph for larger image

The data is noisy - because of changes in population controls and the business cycle - but the pattern is clear as indicated by the dashed red trend line. The labor force has been growing slowly recently after declining for some time.

We could also look at just the prime working age population - I've pointed out before the that prime working age population has just started growing again after declining for a few years (see Prime Working-Age Population Growing Again)

Now here is a look at GDP for the same period.

Year-over-year Change GDPThe GDP data (year-over-year quarterly) is also noisy, and the dashed blue line shows the trend.

GDP was high in the early 50s - and early-to-mid 60s because of government spending (Korean and Vietnam wars).  As in example, in 1951, national defense added added 6.5 percentage points to GDP.  Of course we don't want another war ...

Now lets put the two graphs together.

Year-over-year Change Labor Force and GDPIt isn't a surprise. Other than the early period with a boost from government spending, the growth in GDP has been tracking the growth in the labor force pretty well.  The difference in growth between the dashed blue and red lines is due to gains in productivity.

The good news is that will change going forward (prime working age population will grow faster next decade).  The bad news is the political hacks will continue to ignore demographics.

Right now, due to demographics, 2% GDP growth is the new 4%.

Dallas Fed: Texas Manufacturing Activity Weakens

by Bill McBride on 3/30/2015 11:58:00 AM

From the Dallas Fed: Texas Manufacturing Activity Weakens

Texas factory activity declined in March, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, fell to -5.2, posting its first negative reading in nearly two years.

Other measures of current manufacturing activity also reflected contraction in March. The new orders index pushed further into negative territory, coming in at -16.1, and the growth rate of orders index remained negative for a fifth consecutive month but edged up to -15.3 in March. The shipments and capacity utilization indexes slipped to more negative readings, -8.7 and -6.4, respectively.

Perceptions of broader business conditions were rather pessimistic for a third month in a row. The general business activity index declined 6 points to -17.4 in March, while the company outlook index was largely unchanged at -4.

Labor market indicators reflected slight employment declines and shorter workweeks. The March employment index dipped to -1.8, its first negative reading since May 2013.
emphasis added
Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Fed Manufacturing Surveys and ISM PMI Click on graph for larger image.

The New York and Philly Fed surveys are averaged together (light blue, through March), and five Fed surveys are averaged (dark blue, through March) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through February (right axis).

Much of the recent regional weakness has been related to the declines in oil prices.  The ISM index is a national survey, however it seems likely the ISM index will be weaker in March.

The ISM Manufacturing Index for March will be released on Wednesday, April 1st, and the consensus is for a decrease to 52.5 from 52.9 in February.

NAR: Pending Home Sales Index increased 3.1% in February, up 12% year-over-year

by Bill McBride on 3/30/2015 10:08:00 AM

From the NAR: Pending Home Sales Rise in February Behind Solid Gains in Midwest, West

The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 3.1 percent to 106.9 in February from a slight downward revision of 103.7 in January and is now 12.0 percent above February 2014 (95.4). The index is at its highest level since June 2013 (109.4), has increased year-over-year for six consecutive months and is above 100 – considered an average level of activity – for the 10th consecutive month.
...
The PHSI in the Northeast fell 2.3 percent to 81.7 in February, but is 4.1 percent above a year ago. In the Midwest the index leaped 11.6 percent to 110.4 in February, and is now 13.8 percent above February 2014.

Pending home sales in the South decreased 1.4 percent to an index of 120.2 in February, but is still 10.8 percent above last February. The index in the West climbed 6.6 percent in February to 102.1 (highest since June 2013 at 111.4) and is now 18.3 percent above a year ago.
This was well above the consensus forecast, but as expected by housing economist Tom Lawler.

Note: Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in March and April.

Personal Income increased 0.4% in February, Spending increased 0.1%

by Bill McBride on 3/30/2015 08:30:00 AM

The BEA released the Personal Income and Outlays report for February:

Personal income increased $58.6 billion, or 0.4 percent ... in February, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE)increased $11.8 billion, or 0.1 percent.
...
Real PCE -- PCE adjusted to remove price changes -- decreased 0.1 percent in February, in contrast to an increase of 0.2 percent in January. ... The price index for PCE increased 0.2 percent in February, in contrast to a decrease of 0.4 percent in January. The PCE price index, excluding food and energy, increased 0.1 percent in February, the same increase as in January.

The February price index for PCE increased 0.3 percent from February a year ago. The February PCE price index, excluding food and energy, increased 1.4 percent from February a year ago.
The following graph shows real Personal Consumption Expenditures (PCE) through February 2015 (2009 dollars). Note that the y-axis doesn't start at zero to better show the change.

Personal Consumption Expenditures Click on graph for larger image.

The dashed red lines are the quarterly levels for real PCE.

The increase in personal income was higher than expected,   The increase in PCE was below the 0.2% increase consensus.

On inflation: The PCE price index increased 0.3 percent year-over-year due to the sharp decline in oil prices. The core PCE price index (excluding food and energy) increased 1.4 percent year-over-year in February.

Using the two-month method to estimate Q1 PCE growth, PCE was increasing at a 2.0% annual rate in Q1 2015 (using the mid-month method, PCE was increasing 0.8%). This is a slowdown in PCE.

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