Saturday, February 26, 2011

Summary for Week ending February 25th

by Bill McBride on 2/26/2011 02:36:00 PM

With the exception of housing, most of the U.S. economic data last week was fairly positive. We were also reminded of several potential downside risks to the U.S. economy, as falling house prices, higher oil prices, the European financial crisis, and state and local government cutbacks, were all in the news.

The focus last week was once again on the Middle East and North Africa, and especially on the historic and tragic events in Libya. These events have pushed U.S. oil prices to around $100 per barrel and have raised questions about the possible drag of higher oil prices on the U.S. economy.

The European financial crisis has been on the back burner, but yields are still elevated and there are key Euro Zone meetings scheduled in March. I expect this to be front page news again soon.

And a downward revision to state and local government spending contributed to the downward revision in the Q4 real GDP growth estimate, revised down to 2.8% from 3.2%. And several state budgets were in the news, especially the Wisconsin political battles.

The Case-Shiller house price index showed house prices are still falling – for the sixth consecutive month – and more house price declines are expected with the high levels of inventory and a high percentage of distressed sales. Eleven of the twenty Case-Shiller cities are now at new post-bubble lows: Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, New York, Phoenix, Portland (OR), Seattle and Tampa, and more will probably follow. Also new home sales remained weak in January.

These are all risks to 2011 economic growth.

But other economic news was more positive. On employment, all of the preliminary indicators suggested an increase in hiring. The four week average of initial weekly unemployment claims fell to the lowest level since 2008. The regional manufacturing surveys all suggest an increase in employment. The Reuters / University of Michigan consumer sentiment index was at the highest level in three years.

And growth in manufacturing continues to be strong. The Richmond Fed reported Manufacturing Activity Advanced at a Healthy Pace in February, and the the Kansas City Fed reported Manufacturing activity matched an all-time survey high in February. This suggests a strong ISM manufacturing report on March 1st.

Below is a summary of economic data last week mostly in graphs:

Case-Shiller: National Home Prices Are Close to the 2009Q1 Trough

S&P/Case-Shiller reported that home prices are close to a post-bubble low.

Case-Shiller House Prices Indices Click on graph for larger image in graph gallery.

This graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 31.2% from the peak and still 2.4% above the May 2009 post-bubble bottom.

The Composite 20 index is also off 31.2% from the and only 0.8% above the May 2009 post-bubble bottom and will probably be at a new post-bubble low in January.

The next graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Case-Shiller Price Declines From S&P:

Eleven MSAs posted new index level lows in December 2010, since their 2006/2007 peaks. These cities are Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, New York, Phoenix, Portland (OR), Seattle and Tampa.
Prices are now falling just about everywhere, and more cities are hitting new post-bubble lows. Both composite indices are still slightly above the post-bubble low, but the indexes will probably be at new lows in early 2011.

New Home Sales decreased in January

New Home Sales and RecessionsThe Census Bureau reports New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 284 thousand. This is down from a revised 325 thousand in December.

This graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. New home sales have averaged 293 thousand per month (annual rate) over the last nine months - all below the previous record low.

New Home Sales, NSAThe last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate).

In January 2010 (red column), 19 thousand new homes were sold (NSA). This is a new record low for the month of January.

The previous record low for January was 24 thousand in 2009 and 2010.

Distressing GapStarting in 1973 the Census Bureau broke down inventory into three categories: Not Started, Under Construction, and Completed.

The inventory of completed homes for sale fell to 78,000 units in January. And the combined total of completed and under construction is at the lowest level since this series started.

January Existing Home Sales: 5.36 million SAAR, 7.6 months of supply

Existing Home Sales This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in January 2010 (5.36 million SAAR) were 2.7% higher than last month, and were 5.3% higher than January 2010.

The next graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change. According to the NAR, inventory decreased to 3.38 million in January from 3.56 million in December.

Year-over-year Inventory Although inventory decreased from December to January, inventory increased 3.1% YoY in January. This is the sixth consecutive month of year-over-year increases in inventory, although the increase in January was lower than the previous months. But any increase is bad news with the high level of inventory.

Inventory should increase in February and March, and this is something to watch closely over the next few months.

Existing Home Sales NSA This graph shows existing home sales Not Seasonally Adjusted (NSA).

The red column in January is for 2011. Sales NSA were about the same level as the last three years. January is usually the weakest month of the year for existing home sales (followed by February). The real key is what happens in the spring and summer.

The bottom line: Sales increased slightly in January (using the old method to estimate sales), apparently due to an increase in investor purchases of distressed properties at the low end. Inventory remains very high, and the year-over-year increase in inventory is very concerning.

Special Note: Back in January, I noted that it appeared the NAR had overestimated sales by 5% or so in 2007, and that the errors had increased since then (perhaps 10% to 15% or more in 2009 and 2010). The numbers released this week will probably be revised down significantly this summer.

AIA: Architecture Billings Index shows no change in January

From the American Institute of Architects: Billings at Architecture Firms Hold Steady in January

AIA Architecture Billing Index This graph shows the Architecture Billings Index since 1996. The index showed billings were at the same level in January as in December (at 50).

Note: Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. So this indicator suggests the drag from CRE investment will end mid-year 2011 or so.

Consumer Sentiment increases in February

Consumer SentimentThe final February Reuters / University of Michigan consumer sentiment index increased to 77.5, the highest level in three years.

This was above the consensus forecast of 75.4.

In general consumer sentiment is a coincident indicator. This is still fairly low, but improving.

Total REO decreased slightly in Q4

Total REO Inventory This graph from economist Tom Lawler shows an estimate of all the REO inventory. Lawler writes:
Based on the FDIC’s QBP report, as well as preliminary data on REO for private-label securities (using Barclay’s Capital data, as I don’t have data from my other source yet), REO inventory at “the F’s,” FDIC-insured institutions, and PLS would look as follows [see graph]
From CR: REO inventory is still below the levels in 2008 - but not much - and that was when prices were falling quickly. I think the various lenders are a little more careful disposing of REOs now, but the level of REOs suggest downward house price pressure.

Other Economic Stories ...
Q4 real GDP growth revised down to 2.8% annualized rate
• From Nick Timiraos: Home Sales Data Doubted
• From David Streitfeld at the NY Times: Shiller says house prices could fall 15% to 25%
• From MarketWatch: Consumer confidence jumps in February
• From the American Trucking Association: ATA Truck Tonnage Index Surged 3.8 Percent in January
Unofficial Problem Bank list increases to 960 Institutions

Best wishes to all!