Thursday, July 30, 2015

Friday: Employment Cost Index, Chicago PMI, Consumer Sentiment

by Bill McBride on 7/30/2015 08:46:00 PM

From Tim Duy: Fed Watch: GDP Report

The second quarter GDP report, while not a blockbuster by any measure, will nudge the Fed further in the direction of a September rate hike. At first blush this might seem preposterous - 2.3% growth is nothing to write home about in comparison to history. But history is deceiving in this case. It remains important to keep in mind that 2% is the new 4%.
Bottom Line: An unspectacular recovery, but sufficient to keep the Fed on track for raising rates this year. The case for September further strengthens.
• At 8:30 AM ET, the Q2 Employment Cost Index

• At 9:45 AM, the Chicago Purchasing Managers Index for July. The consensus is for a reading of 50.0, up from 49.4 in May.

• At 10:00 AM, the University of Michigan's Consumer sentiment index (final for July). The consensus is for a reading of 94.1, up from the preliminary reading of 93.3.

Zillow Forecast: Expect Case-Shiller National House Price Index up 4.3% year-over-year change in June

by Bill McBride on 7/30/2015 04:01:00 PM

The Case-Shiller house price indexes for May were released on Tuesday. Zillow forecasts Case-Shiller a month early, and I like to check the Zillow forecasts since they have been pretty close.

From Zillow: Case-Shiller Expected to Maintain Holding Pattern in June

The May S&P/Case-Shiller (SPCS) data published today showed home prices continuing to rise at an annual rate of five percent for the 20-city composite and 4.7 percent for the 10-city composite (seasonally adjusted). The national index has risen 4.4 percent since May 2014.

The non-seasonally adjusted (NSA) 10-City Index was up one percent month-over-month, while the 20-City index rose 0.8 percent (NSA) from April to May. We expect the change from May to June to show increases of 1 percent (NSA) for the 10-city index and 0.8 percent for both the 20-city and national indices.

All Case-Shiller forecasts are shown in the table below. These forecasts are based on today’s May SPCS data release and the June 2015 Zillow Home Value Index (ZHVI).The SPCS Composite Home Price Indices for June will not be officially released until Tuesday, August 25.
This suggests the year-over-year change for the June Case-Shiller National index will be about the same as in the May report.

Zillow Case-Shiller Forecast
Composite 10
Composite 20
Actual YoY

Q2 GDP: Investment

by Bill McBride on 7/30/2015 12:52:00 PM

The graph below shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter trailing average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

In the graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue.

The dashed gray line is the contribution from the change in private inventories.

Note: This can't be used blindly.  Residential investment is so low as a percent of the economy that the small decline early last year was not  a concern.

Investment ContributionsClick on graph for larger image.

Residential investment (RI) increased at a 6.6% annual rate in Q2.  Equipment investment decreased at a 4.1% annual rate, and investment in non-residential structures decreased at a 1.6% annual rate.   On a 3 quarter trailing average basis, RI is positive (red), equipment is slightly negative (green), and nonresidential structures are also negative (blue).

Note: Nonresidential investment in structures typically lags the recovery, however investment in energy and power provided a boost early in this recovery - and is now causing a decline.  Other areas of nonresidential are now increasing significantly.

I expect investment to be solid going forward (except for energy and power), and for the economy to grow at a decent pace for the remainder of 2015.

Residential Investment
The second graph shows residential investment as a percent of GDP.

Residential Investment as a percent of GDP has been increasing, but it still below the levels of previous recessions - and I expect RI to continue to increase for the next few years.

I'll break down Residential Investment into components after the GDP details are released.

Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

non-Residential InvestmentThe third graph shows non-residential investment in structures, equipment and "intellectual property products".  Investment in equipment - as a percent of GDP - is mostly moving sideways.  Other investment is generally trending up as a percent of GDP, except for investment in energy and power.

I'll add details for investment in offices, malls and hotels after the supplemental data is released.

Weekly Initial Unemployment Claims increased to 267,000

by Bill McBride on 7/30/2015 09:21:00 AM

The DOL reported:

In the week ending July 25, the advance figure for seasonally adjusted initial claims was 267,000, an increase of 12,000 from the previous week's unrevised level of 255,000. The 4-week moving average was 274,750, a decrease of 3,750 from the previous week's unrevised average of 278,500.

There were no special factors impacting this week's initial claims.
The previous week was unrevised.

The following graph shows the 4-week moving average of weekly claims since 1971.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 274,750.

This was lower than the consensus forecast of 272,000, and the low level of the 4-week average suggests few layoffs.

BEA: Real GDP increased at 2.3% Annualized Rate in Q2

by Bill McBride on 7/30/2015 08:33:00 AM

From the BEA: Gross Domestic Product: Second Quarter 2015 (Advance Estimate); Includes Historical Revisions

Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- increased at an annual rate of 2.3 percent in the second quarter of 2015, according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.6 percent (revised).
The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE), exports, state and local government spending, and residential fixed investment that were partly offset by negative contributions from federal government spending, private inventory investment, and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.4 percent in the second quarter, in contrast to a decrease of 1.6 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 1.1 percent, compared with an increase of 0.2 percent.

Real personal consumption expenditures increased 2.9 percent in the second quarter, compared with an increase of 1.8 percent in the first.
The advance Q2 GDP report, with 2.3% annualized growth, was below expectations of a 2.9% increase, however Q1 was revised up to 0.6% annualized growth (from a 0.2% decline).

Personal consumption expenditures (PCE) increased at a 2.9% annualized rate in Q2.

I'll have more on the annual revision later ...

Wednesday, July 29, 2015

Thursday: Q2 GDP and Revisions, Unemployment Claims

by Bill McBride on 7/29/2015 08:01:00 PM

The GDP revisions will be especially important this year.

Excerpts from a research piece by Michelle Meyer at Merrill Lynch:

The moment of truth
• The annual revision to GDP growth on July 30th will adjust estimates of growth over the past few years. If growth is indeed revised higher it would help solve the puzzle of low productivity growth.

• This will also be the first release of the new GDP and GDI composite. This will show a stronger trend of growth given that GDI has outpaced GDP recently.

• Taking a step back and examining a range of indicators reveals an economy expanding at a mid-2% pace, largely consistent with the Fed’s forecasts.
On July 30th, along with the first release of 2Q GDP, the Bureau of Economic Analysis (BEA) will release the 2015 annual NIPA revision. We will be looking for the following:

1. Will GDP growth be revised higher over the past few years? If so, this would imply faster productivity growth, which has been puzzlingly slow.

2. How will the revision to seasonal factors adjust the “residual seasonality” issue to 1Q GDP growth over the years?

3. Will the new aggregated GDP and GDI figure take the spotlight away from GDP?

Although it is hard to say with any certainty, we believe GDP growth is likely to be revised up modestly. This will likely leave the Fed comfortable arguing that the economy is making progress closing the output gap, allowing a gradual hiking cycle to commence.
And on Q2:
The first estimate of 2Q GDP is likely to show growth of 3.0%, which would be a bounce from the contraction of 0.2% in 1Q. However, it is important to remember that the history will be revised along with this report.
A few excerpts from a research note by economists at Nomura:
Q2 GDP, first estimate (Thursday): Economic activity in Q2 bounced back after slowing in Q1. However, some factors such as low energy prices and the strong dollar likely continued to weigh on business activity. We expect the BEA to report that the rebound in activity was concentrated in the consumer, housing and government sectors. As such we forecast a 2.8% increase in Q2 GDP, with real final sales growing by 3.1% as we expect inventory investment to subtract 0.3pp from GDP growth.

The annual revisions to GDP will also be released. Revisions will be mostly applied to data between 2012 and Q1 2015. The most notable features the annual revisions will introduce are 1) the average of GDP, gross domestic income and final sales, 2) an upgrade to its presentation of exports and imports, and 3) improvements to seasonal adjustment of certain GDP components. Furthermore, our work suggests that there is material residual seasonality in top-line GDP in Q1, as it tends to be below trend due to strong seasonal patterns in defense spending. Therefore, we might see some revision to the distribution of GDP growth in the first part of this year. As such, there is more uncertainty around the Q2 GDP estimate than usual.
• At 8:30 AM ET, Gross Domestic Product, 2nd quarter 2015 (advance estimate); Includes historical revisions. The consensus is that real GDP increased 2.9% annualized in Q2.

• Also at 8:30 AM, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 272 thousand from 255 thousand.

Duy on FOMC: "Somewhat more hawkish as the Fed gears up to hike rates later this year"

by Bill McBride on 7/29/2015 03:41:00 PM

From Tim Duy: FOMC Recap

The July FOMC meeting yielded the widely expected outcome of no policy change. Very little change in the statement either - pulling out any useful information is about as easy as reading tea leaves or chicken bones. But that won't stop me from trying! On net, I would count it was somewhat more hawkish as the Fed gears up to hike rates later this year. By no means, however, did the statement make any definitive signal about September. The Fed continues to hold true to its promise to make the next move about the data. The era of handholding fades further into memory.
Bottom Line: All else equal, the next two labor reports will factor strongly into the Fed's decision in September. A continuation of recent labor trends is likely sufficient to induce them to pull the trigger. Further signs of stronger wage growth would make a September move a certainty.
emphasis added
There is much more in Professor Duy's piece. A rate hike in September is possible. It depends on the data.

FOMC Statement: No Change in Policy, No Clues for September

by Bill McBride on 7/29/2015 02:02:00 PM

FOMC Statement:

Information received since the Federal Open Market Committee met in June indicates that economic activity has been expanding moderately in recent months. Growth in household spending has been moderate and the housing sector has shown additional improvement; however, business fixed investment and net exports stayed soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey‑based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.

How large will the first Fed Funds Rate increase be?

by Bill McBride on 7/29/2015 11:49:00 AM

Just wondering ...

No one expects a rate hike from the FOMC today. And most of the focus has been on WHEN the first rate hike will happen - and also how quickly the Fed will subsequently raise rates. Note: Most analysts expect the first rate hike in either September or December - and some think the Fed will wait until 2016.

But how large will the first rate hike be? Most analysts seem to expect a 25 bps increase - but what does that mean?

In December 2008, the Fed lowered the Fed Funds rate from 1.0% to a range of 0.0% to 0.25%. From December 2008:

"The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent."
So is a 25 bps increase from zero to 0.25%?  Or is it from the top of the range to 0.5%?  

It seems unlikely the FOMC will increase the range to 0.25% to 0.5%.

Currently the effective Fed Funds rate is at 0.14%.   This bounces around every day, but it has been close to 1/8 percent on average.

So it is possible the FOMC will raise rates 25 bps to 3/8 percent (0.375%).

NAR: Pending Home Sales Index decreased 1.8% in June, up 8% year-over-year

by Bill McBride on 7/29/2015 10:02:00 AM

From the NAR: Pending Home Sales Dip in June

After five consecutive months of increases, pending home sales slipped in June but remained near May's level, which was the highest in over nine years, according to the National Association of Realtors®. Modest gains in the Northeast and West were offset by larger declines in the Midwest and South.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, fell 1.8 percent to 110.3 in June but is still 8.2 percent above June 2014 (101.9). Despite last month's decline, the index is the third highest reading of 2015 and has now increased year-over-year for ten consecutive months.
This was below expectations of a 1.0% increase.

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