by Bill McBride on 11/20/2014 08:43:00 PM
Thursday, November 20, 2014
A few excerpts from a research piece on wages by economist Nathan Harris at Merrill Lynch:
After the deep freeze last winter, the labor market has steadily recovered over the last 10 months. Payrolls have averaged about 240,000 and the unemployment rate has dropped mainly for “good reasons”—because of solid jobs rather than falling participation. While it is very hard to pin down the inflation neutral (NAIRU) unemployment rate in real time, we seem to be in the neighborhood of NAIRU. At 5.8%, the official U-3 measure has dipped below its 30-year average of 6.1% and is approaching estimates of NAIRU from the FOMC (5.2 to 5.5%) and the Congressional Budget Office (5.5%). We like to focus on the broader U-6 measure. If the rate of decline over the last year continues, it will hit its historical average by next year and its pre-crisis average by early 2016.Friday:
What is missing from this labor lullaby is some sign of normal wage growth. There have been a number of head fakes—jumps in erratic second-tier indicators and pockets of pressure that never expanded. However, the two best gauges of pressure, total average hourly earnings (AHE) and the employment cost index (ECI) have shown few signs of life.
The good news is that while AHE are still stuck at 2%, there are now early hints of a pick-up in the ECI. After a very weak 1Q reading the index was solid in both 2Q and 3Q. Moreover, the pick-up is broad-based, including both wages and benefits and increases for most occupational groups and industries. Finally, just maybe, labor compensation is starting to pick up.
Before we get too excited about improved income or inflation, keep in mind that the recovery in both wage and price inflation is likely to be very slow.
At this stage, it is not clear whether the long-awaited rise in labor costs has arrived or will start sometime next year. Two things are clear. First, the rise is likely to be very slow. Second, the Fed’s initial response will be to breathe a sigh of relief and they will only view it as a threat to the inflation target if it gets above its historic norm of 3.5%.
• Early, the Black Knight Financial Services’ “First Look” at October 2014 Mortgage Data.
• At 10:00 AM ET, the Regional and State Employment and Unemployment (Monthly) report for October 2014.
• At 11:00 AM, the Kansas City Fed manufacturing survey for November.
by Bill McBride on 11/20/2014 05:55:00 PM
In addition to housing starts for October, the Census Bureau also released the Q3 "Started and Completed by Purpose of Construction" report yesterday.
It is important to remember that we can't directly compare single family housing starts to new home sales. For starts of single family structures, the Census Bureau includes owner built units and units built for rent that are not included in the new home sales report. For an explanation, see from the Census Bureau: Comparing New Home Sales and New Residential Construction
We are often asked why the numbers of new single-family housing units started and completed each month are larger than the number of new homes sold. This is because all new single-family houses are measured as part of the New Residential Construction series (starts and completions), but only those that are built for sale are included in the New Residential Sales series.However it is possible to compare "Single Family Starts, Built for Sale" to New Home sales on a quarterly basis.
The quarterly report released yesterday showed there were 125,000 single family starts, built for sale, in Q3 2014, and that was above the 111,000 new homes sold for the same quarter, so inventory increased in Q3 (Using Not Seasonally Adjusted data for both starts and sales).
The first graph shows quarterly single family starts, built for sale and new home sales (NSA).
Click on graph for larger image.
In 2005, and most of 2006, starts were higher than sales, and inventories of new homes increased. The difference on this graph is pretty small, but the builders were starting about 30,000 more homes per quarter than they were selling (speculative building), and the inventory of new homes soared to record levels. Inventory of under construction and completed new home sales peaked at 477,000 in Q3 2006.
In 2008 and 2009, the home builders started far fewer homes than they sold as they worked off the excess inventory that they had built up in 2005 and 2006.
Now it looks like builders are generally starting about the same number of homes that they are selling (although they started more in Q3 than they sold), and the inventory of under construction and completed new home sales is still very low.
Note: new home sales are reported when contracts are signed, so it is appropriate to compare sales to starts (as opposed to completions). This is not perfect because of the handling of cancellations, but it does suggest the builders are keeping inventories under control.
The second graph shows the NSA quarterly intent for four start categories since 1975: single family built for sale, owner built (includes contractor built for owner), starts built for rent, and condos built for sale.
Single family starts built for sale were up about 4% compared to Q3 2013.
Owner built starts were up 20% year-over-year. And condos built for sale are just above the record low.
The 'units built for rent' has increased significantly and is at the highest level since the mid-80s.
by Bill McBride on 11/20/2014 01:43:00 PM
• Once again housing economist Tom Lawler's forecast of 5.31 million SAAR was closer than the consensus (5.15 million) to the NAR reported sales (5.26 million).
• The most important number in the NAR report each month is inventory. This morning the NAR reported that inventory was up 5.2% year-over-year in October. It is important to note that the NAR inventory data is "noisy" and difficult to forecast based on other data. However this increase in inventory has slowed price increases.
The headline NAR inventory number is not seasonally adjusted, even though there is a clear seasonal pattern. Trulia chief economist Jed Kolko has sent me the seasonally adjusted inventory. NOTE: The NAR does provide a seasonally adjusted months-of-supply, although that is in the supplemental data.
Click on graph for larger image.
This shows that inventory bottomed in January 2013 (on a seasonally adjusted basis), and inventory is now up about 11.7% from the bottom. On a seasonally adjusted basis, inventory was up 0.1% in October compared to September.
Important: The NAR reports active listings, and although there is some variability across the country in what is considered active, many "contingent short sales" are not included. "Contingent short sales" are strange listings since the listings were frequently NEVER on the market (they were listed as contingent), and they hang around for a long time - they are probably more closely related to shadow inventory than active inventory. However when we compare inventory to 2005, we need to remember there were no "short sale contingent" listings in 2005. In the areas I track, the number of "short sale contingent" listings is also down sharply year-over-year.
And another key point: The NAR reported total sales were up 2.5% from October 2013, however normal equity sales were even more, and distressed sales down sharply. From the NAR (from a survey that is far from perfect):
Distressed homes – foreclosures and short sales – increased slightly in September to 10 percent from 8 percent in August, but are down from 14 percent a year ago. Seven percent of September sales were foreclosures and 3 percent were short sales.Last year in October the NAR reported that 14% of sales were distressed sales.
A rough estimate: Sales in October 2013 were reported at 5.13 million SAAR with 14% distressed. That gives 718 thousand distressed (annual rate), and 4.41 million equity / non-distressed. In October 2014, sales were 5.26 million SAAR, with 10% distressed. That gives 526 thousand distressed - a decline of about 27% from October 2013 - and 4.73 million equity. Although this survey isn't perfect, this suggests distressed sales were down sharply - and normal sales up around 7%..
The following graph shows existing home sales Not Seasonally Adjusted (NSA).
Click on graph for larger image.
Sales NSA in October (red column) were at the highest level for October since 2006.
This was another solid report.
• Existing Home Sales in October: 5.26 million SAAR, Inventory up 5.2% Year-over-year
by Bill McBride on 11/20/2014 11:57:00 AM
The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:
According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.6% annualized rate) in October. The 16% trimmed-mean Consumer Price Index rose 0.1% (1.8% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.Note: The Cleveland Fed has the median CPI details for October here. Motor fuel declined at a 31% annualized rate in October!
Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers did not change (0.0% annualized rate) in October. The CPI less food and energy rose 0.2% (2.5% annualized rate) on a seasonally adjusted basis.
Click on graph for larger image.
This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.3%, the trimmed-mean CPI rose 1.9%, and the CPI less food and energy rose 1.8%. Core PCE is for September and increased just 1.5% year-over-year.
On a monthly basis, median CPI was at 2.6% annualized, trimmed-mean CPI was at 1.8% annualized, and core CPI increased 2.5% annualized.
On a year-over-year basis these measures suggest inflation remains at or below the Fed's target of 2%.
by Bill McBride on 11/20/2014 10:11:00 AM
Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 1.5 percent to a seasonally adjusted annual rate of 5.26 million in October from an upwardly-revised 5.18 million in September. Sales are at their highest annual pace since September 2013 (also 5.26 million) and are now above year-over-year levels (2.5 percent from last October) for the first time since last October. ...Click on graph for larger image.
Total housing inventory at the end of October fell 2.6 percent to 2.22 million existing homes available for sale, which represents a 5.1-month supply at the current sales pace – the lowest since March (also 5.1 months). Unsold inventory is now 5.2 percent higher than a year ago, when there were 2.11 million existing homes available for sale.
This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.
Sales in October (5.26 million SAAR) were 1.5% higher than last month, and were 2.5% above the October 2013 rate.
The second graph shows nationwide inventory for existing homes.
According to the NAR, inventory decreased to 2.22 million in October from 2.28 million in September. Headline inventory is not seasonally adjusted, and inventory usually increases from the seasonal lows in December and January, and peaks in mid-to-late summer.
The third graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.
Inventory increased 5.2% year-over-year in October compared to October 2013.
Months of supply was at 5.1 months in October.
This was above expectations of sales of 5.15 million. For existing home sales, the key number is inventory - and inventory is still low, but up year-over-year. I'll have more later ...