Wednesday, September 30, 2015

Thursday: Vehicle Sales, ISM Mfg, Construction Spending, Unemployment Claims

by Bill McBride on 9/30/2015 10:10:00 PM

From the WSJ: Congress Passes Bill to Fund Government Through Dec. 11

Congress now confronts a new Dec. 11 deadline to try to strike a long-term budget deal at a time when House Republicans are losing their most experienced leader and remain split about how to negotiate with Mr. Obama and Democrats.

Moreover, the stopgap measure will end around the time when Congress also has to consider raising the debt ceiling, and one week before a key Federal Reserve meeting, at which many economists expect the central bank to raise interest rates for the first time in nearly a decade. Lawmakers also will contend with a long-term highway bill and expiring tax breaks at year’s end.
Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for 272 thousand initial claims, up from 267 thousand the previous week.

• At 10:00 AM, the ISM Manufacturing Index for September. The consensus is for the ISM to be at 50.5, down from 51.1 in August. The ISM manufacturing index indicated expansion at 51.1% in August. The employment index was at 51.2%, and the new orders index was at 51.6%.

• Also at 10:00 AM, Construction Spending for August. The consensus is for a 0.7% increase in construction spending.

• All day: Light vehicle sales for September. The consensus is for light vehicle sales to decrease to 17.5 million SAAR in September from 17.7 million in August (Seasonally Adjusted Annual Rate).

Fannie Mae: Mortgage Serious Delinquency rate declined slightly in August, Lowest since August 2008

by Bill McBride on 9/30/2015 05:27:00 PM

Fannie Mae reported today that the Single-Family Serious Delinquency rate declined slightly in August to 1.62% from 1.63% in July. The serious delinquency rate is down from 1.99% in August 2014, and this is the lowest level since August 2008.

The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.

Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure".

Fannie Freddie Seriously Delinquent RateClick on graph for larger image

The Fannie Mae serious delinquency rate has only fallen 0.37 percentage points over the last year - the pace of improvement has slowed - and at that pace the serious delinquency rate will not be below 1% until 2017.

The "normal" serious delinquency rate is under 1%, so maybe Fannie Mae serious delinquencies will be close to normal some time in 2017.  This elevated delinquency rate is mostly related to older loans - the lenders are still working through the backlog.

Restaurant Performance Index declines, Indicates slower expansion in August

by Bill McBride on 9/30/2015 12:51:00 PM

Here is a minor indicator I follow from the National Restaurant Association: Restaurant Performance Index Declined in August

As a result of softer same-store sales and customer traffic levels, the National Restaurant Association’s Restaurant Performance Index (RPI) declined in August. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 101.5 in August, down 1.2 percent from July and the lowest level in 11 months. Despite the decline, August represented the 30th consecutive month in which the RPI stood above 100, which signifies expansion in the index of key industry indicators.
...
“The RPI's August decline was the result of broad-based declines in the current situation indicators,” said Hudson Riehle, Senior Vice President, Research and Knowledge Group, National Restaurant Association. “Same-store sales and customer traffic softened from July’s strong levels, while the labor and capital spending indicators also dipped.

“Despite the declines, each of the current situation indicators were in expansion territory above 100, which indicates the restaurant industry remains on a positive growth trajectory,” Riehle added.
emphasis added
Restaurant Performance Index Click on graph for larger image.

The index decreased to 101.5 in August, up from 102.7 in July. (above 100 indicates expansion).

Restaurant spending is discretionary, so even though this is "D-list" data, I like to check it every month. Even with the decline in the index, this is a solid reading.

Even with this decline, the index is indicating expansion, and it appears restaurants are benefiting from lower gasoline prices.

Chicago PMI declined sharply in September

by Bill McBride on 9/30/2015 09:58:00 AM

Chicago PMI: Sep Chicago Business Barometer Down 5.7 Points to 48.7

The Chicago Business Barometer declined 5.7 points to 48.7 in September as Production growth collapsed and New Orders fell sharply.

The drop in the Barometer to below 50 was its fifth time in contraction this year and comes amid downgrades to global economic growth and intense volatility in financial markets which have slowed activity in some industries. The latest decline followed two months of moderate expansion, and while growth in Q3 accelerated a little from Q2, the speed of the September descent is a source of concern.
...
Chief Economist of MNI Indicators Philip Uglow said, “While activity between Q2 and Q3 actually picked up, the scale of the downturn in September following the recent global financial fallout is concerning. Disinflationary pressures intensified and output was down very sharply. We await the October data to better judge whether this was a knee jerk reaction and there is a bounceback, or whether it represents a more fundamental slowdown.“
emphasis added
This was well below the consensus forecast of 53.6.

ADP: Private Employment increased 200,000 in September

by Bill McBride on 9/30/2015 08:19:00 AM

From ADP:

Private sector employment increased by 200,000 jobs from August to September according to the September ADP National Employment Report®. ... The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis.
...
Goods-producing employment rose by 12,000 jobs in September, off from 15,000 the previous month. The construction industry added 35,000 jobs in September, almost double the 18,000 gained in August. Meanwhile, manufacturing dropped into negative territory losing 15,000 jobs in September, the worst showing since December 2010.

Service-providing employment rose by 188,000 jobs in September, up from 172,000 in August. ...

Mark Zandi, chief economist of Moody’s Analytics, said, “The U.S. job machine continues to produce jobs at a strong and consistent pace. Despite job losses in the energy and manufacturing industries, the economy is creating close to 200,000 jobs per month. At this pace full employment is fast approaching.”
This was above the consensus forecast for 190,000 private sector jobs added in the ADP report. 

The BLS report for September will be released Friday, and the consensus is for 203,000 non-farm payroll jobs added in September.

MBA: Mortgage Applications Decrease in Latest Weekly Survey, Purchase Applications up 20% YoY

by Bill McBride on 9/30/2015 07:03:00 AM

From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Surve

Mortgage applications decreased 6.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 25, 2015. ...

The Refinance Index decreased 8 percent from the previous week. The seasonally adjusted Purchase Index decreased 6 percent from one week earlier. The unadjusted Purchase Index decreased 6 percent compared with the previous week and was 20 percent higher than the same week one year ago.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.08 percent from 4.09 percent, with points remaining unchanged from 0.45 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added
Mortgage Refinance Index Click on graph for larger image.


The first graph shows the refinance index.

Refinance activity remains low.

2014 was the lowest year for refinance activity since year 2000, and refinance activity will probably stay low for the rest of 2015 (after the increase earlier this year).


Mortgage Purchase Index The second graph shows the MBA mortgage purchase index.  

According to the MBA, the unadjusted purchase index is 20% higher than a year ago.

Tuesday, September 29, 2015

Wednesday: Unlikely Government Shutdown, ADP Employment, Chicago PMI

by Bill McBride on 9/29/2015 07:54:00 PM

It seems likely a shutdown tomorrow will be avoided, but the votes will be at the last minute. Of course there might be a shutdown later this year.

From the WSJ: GOP leaders are negotiating with Obama on two-year budget deal; a stopgap measure is expected to be passed this week

Republican leaders, seeking to avoid repeated fiscal crises, have opened discussions with President Barack Obama about a two-year budget deal, aiming to avoid a spending fight in the middle of an election year.
...
The House and Senate are expected Wednesday to pass a stopgap spending measure to keep the government running through Dec. 11.
A shutdown in October 2016 would be a disaster for the GOP - one month before the election - so naturally they want a two year deal.

Wednesday:
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 8:15 AM, The ADP Employment Report for September. This report is for private payrolls only (no government). The consensus is for 190,000 payroll jobs added in September, the same as in August.

• At 9:45 AM, Chicago Purchasing Managers Index for September. The consensus is for a reading of 53.6, down from 54.4 in August.

Zillow Forecast: Expect August Year-over-year Change for Case-Shiller Index Similar to July

by Bill McBride on 9/29/2015 05:14:00 PM

The Case-Shiller house price indexes for July were released this morning. 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 Forecast: Expect August's Data to Look a Lot Like July's

The July S&P/Case-Shiller (SPCS) data published today showed home prices dipping on a seasonally-adjusted monthly basis, with both the 10- and 20-city indices falling 0.2 percent from June to July.

On an annual basis, the 10-city index was up 4.5 percent from July 2014, while the 20-city index increased 5 percent over the past year. The U.S. National Index was up 4.7 percent year-over-year. We expect the August SPCS to show a second consecutive monthly decline in the 10-city index, down 0.1 percent from July to August, and the 20-city index to be flat over the same period (seasonally adjusted). The National Index is expected to grow 0.4 percent (seasonally adjusted) in August from July. We expect all three indices to show annual appreciation of less than 5 percent when August data is released next month.

All SPCS forecasts are shown in the table below. These forecasts are based on today’s July SPCS data release and the August 2015 Zillow Home Value Index (ZHVI), released September 21. The SPCS Composite Home Price Indices for July will not be officially released until Tuesday, October 27.
This suggests the year-over-year change for the August Case-Shiller National index will be about the same as in the July report.

Zillow Case-Shiller Forecast
  Case-Shiller
Composite 10
Case-Shiller
Composite 20
Case-Shiller
National
NSASANSASANSASA
July
Actual YoY
4.5%4.5%5.0%5.0%4.7%4.7%
August
Forecast
YoY
4.5%4.5%4.9%4.9%4.8%4.8%
August
Forecast
MoM
0.1%-0.1%0.1%0.0%0.3%0.4%

Shutdown Update

by Bill McBride on 9/29/2015 02:14:00 PM

From the LA Times: Congress moves closer to averting government shutdown with Senate vote

With Wednesday's funding deadline looming, the Senate overwhelmingly advanced the government funding bill by a 77-19 vote. More than half the Republicans in the Senate joined Democrats to break the filibuster by conservative Republicans, led by Sen. Ted Cruz of Texas ...

Final passage in the Senate is likely to come Tuesday. The House is expected to vote Wednesday.
If it doesn't pass the House by Wednesday night, the Government will shutdown.  It seems likely this will pass.

However, there is growing concern about a shutdown later this year - that might include Congress threatening (once again) to not pay the bills.

From Dara Lind at Vox: The next government shutdown fight, explained
The next funding bill is currently working its way through the Senate, and will come to the House sometime Wednesday. Congress was supposed to fund the government for the entire 2016 fiscal year, which begins on October 1. But instead, the Senate bill only funds the government through December 11.
The so-called "debt ceiling" will probably be reached in November, so both of these issues will be tied together (the "debt ceiling" is misleading - it sounds fiscally responsible, but it is actually about paying the bills - and not paying the bills would be irresponsible).

John Schoen at CNBC discusses this: How the government shutdown may be averted, for now
The debt issued by the Treasury is used to pay for spending that Congress has already authorized for goods and services the government has already provided. It would be like trying to control your household spending by not paying a credit card charge for a meal you've already eaten.

Freezing the debt ceiling does nothing to better manage future spending or make government do more with less money.

If anything, forcing the Treasury to default on its debt would only increase government spending because it would raise future borrowing costs. Just as a deadbeat consumer who doesn't pay legitimate credit card charges has to pay higher interest rates, investors in U.S. Treasurys would demand higher returns to offset the risk of Congress pulling this stunt again.
Right now it looks like there won't be a shutdown this week.

Real Prices and Price-to-Rent Ratio in July

by Bill McBride on 9/29/2015 11:42:00 AM

Yesterday, San Francisco Fed President John Williams said:

I am starting to see signs of imbalances emerge in the form of high asset prices, especially in real estate, and that trips the alert system. One lesson I have taken from past episodes is that, once the imbalances have grown large, the options to deal with them are limited. I think back to the mid-2000s, when we faced the question of whether the Fed should raise rates and risk pricking the bubble or let things run full steam ahead and deal with the consequences later. What stayed with me were not the relative merits of either case, but the fact that by then, with the housing boom in full swing, it was already too late to avoid bad outcomes. Stopping the fallout would’ve required acting much earlier, when the problems were still manageable. I’m not assigning blame by any means, and economic hindsight is always 20/20. But I am conscious that today, the house price-to-rent ratio is where it was in 2003, and house prices are rapidly rising. I don’t think we’re at a tipping point yet—but I am looking at the path we’re on and looking out for potential potholes.
emphasis added
Williams is looking at something like the third graph below. This shows the price-to-rent ratio is elevated, but nothing like during the housing bubble (and there are few signs of speculations).

Here is the earlier post: Case-Shiller: National House Price Index increased 4.7% year-over-year in July

The year-over-year increase in prices is mostly moving sideways now at between 4% and 5%.. In October 2013, the National index was up 10.9% year-over-year (YoY). In July 2015, the index was up 4.7% YoY.

Here is the YoY change since January 2014 for the National Index:

MonthYoY Change
Jan-1410.5%
Feb-1410.2%
Mar-148.9%
Apr-147.9%
May-147.0%
Jun-146.3%
Jul-145.6%
Aug-145.1%
Sep-144.8%
Oct-144.6%
Nov-144.6%
Dec-144.6%
Jan-154.4%
Feb-154.3%
Mar-154.3%
Apr-154.4%
May-154.5%
Jun-154.5%
Jul-154.7%

Most of the slowdown on a YoY basis is now behind us. This slowdown in price increases was expected by several key analysts, and I think it is good news for housing and the economy.

In the earlier post, I graphed nominal house prices, but it is also important to look at prices in real terms (inflation adjusted).  Case-Shiller, CoreLogic and others report nominal house prices.  As an example, if a house price was $200,000 in January 2000, the price would be close to $276,000 today adjusted for inflation (38%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

It has been almost ten years since the bubble peak.  In the Case-Shiller release this morning, the National Index was reported as being 7.0% below the bubble peak.   However, in real terms, the National index is still about 21% below the bubble peak.

Nominal House Prices

Nominal House PricesThe first graph shows the monthly Case-Shiller National Index SA, the monthly Case-Shiller Composite 20 SA, and the CoreLogic House Price Indexes (through July) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to June 2005 levels, and the Case-Shiller Composite 20 Index (SA) is back to February 2005 levels, and the CoreLogic index (NSA) is back to June 2005.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to June 2003 levels, the Composite 20 index is back to April 2003, and the CoreLogic index back to December 2003.

In real terms, house prices are back to 2003 levels.

Note: CPI less Shelter is down 1.2% year-over-year, so this is pushing up real prices.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to April 2003 levels, the Composite 20 index is back to December 2002 levels, and the CoreLogic index is back to November 2003.

This is the graph SF President John Williams mentioned yesterday.

In real terms, and as a price-to-rent ratio, prices are back to 2003 levels - and the price-to-rent ratio maybe moving a little sideways now.

Case-Shiller: National House Price Index increased 4.7% year-over-year in July

by Bill McBride on 9/29/2015 09:15:00 AM

S&P/Case-Shiller released the monthly Home Price Indices for July ("July" is a 3 month average of May, June and July prices).

This release includes prices for 20 individual cities, two composite indices (for 10 cities and 20 cities) and the monthly National index.

Note: Case-Shiller reports Not Seasonally Adjusted (NSA), I use the SA data for the graphs.

From S&P: July Home Price Gains Concentrated in the West According to the S&P/Case-Shiller Home Price Indices

The S&P/Case-Shiller U.S. National Home Price Index, covering all nine U.S. census divisions, recorded a slightly higher year-over-year gain with a 4.7% annual increase in July 2015 versus a 4.5% increase in June 2015. The 10-City Composite was virtually unchanged from last month, rising 4.5% year-over-year. The 20-City Composite had higher year-over-year gains, with an increase of 5.0%.
...
Before seasonal adjustment, the National Index posted a gain of 0.7% month-over-month in July. The 10-City Composite and 20-City Composite both reported gains of 0.6% month-over-month. After seasonal adjustment, the National index posted a gain of 0.4%, while the 10-City and 20-City Composites were both down 0.2% month-over-month. All 20 cities reported increases in July before seasonal adjustment; after seasonal adjustment, 10 were down, nine were up, and one was unchanged.
...
“The S&P/Case Shiller National Home Price Index has risen at a 4% or higher annual rate since September 2012, well ahead of inflation. Most of the strength is focused on states west of the Mississippi. The three cities with the largest cumulative price increases since January 2000 are all in California: Los Angeles (138%), San Francisco (116%) and San Diego (115%). The two smallest gains since January 2000 are Detroit (3%) and Cleveland (10%). The Sunbelt cities – Miami, Tampa, Phoenix and Las Vegas – which were the poster children of the housing boom have yet to make new all-time highs. [says David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices.]
emphasis added
Case-Shiller House Prices Indices Click on graph for larger image.

The first graph shows the nominal seasonally adjusted Composite 10, Composite 20 and National indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 14.9% from the peak, and down 0.3% in July (SA).

The Composite 20 index is off 13.7% from the peak, and down 0.2% (SA) in July.

The National index is off 7.0% from the peak, and up 0.4% (SA) in July.  The National index is up 25.6% from the post-bubble low set in December 2011 (SA).

Case-Shiller House Prices Indices The second graph shows the Year over year change in all three indices.

The Composite 10 SA is up 4.6% compared to July 2014.

The Composite 20 SA is up 5.0% year-over-year..

The National index SA is up 4.7% year-over-year.

Prices increased (SA) in 9 of the 20 Case-Shiller cities in July seasonally adjusted.  (Prices increased in 20 of the 20 cities NSA)  Prices in Las Vegas are off 39.5% from the peak, and prices in Denver and Dallas are at new highs (SA).

Case-Shiller CitiesThe last graph shows the bubble peak, the post bubble minimum, and current nominal prices relative to January 2000 prices for all the Case-Shiller cities in nominal terms.

As an example, at the peak, prices in Phoenix were 127% above the January 2000 level. Then prices in Phoenix fell slightly below the January 2000 level, and are now up 52% above January 2000 (52% nominal gain in almost 16 years).

These are nominal prices, and real prices (adjusted for inflation) are up about 40% since January 2000 - so the increase in Phoenix from January 2000 until now is about 12% above the change in overall prices due to inflation.

Two cities - Denver (up 67% since Jan 2000) and Dallas (up 48% since Jan 2000) - are above the bubble highs (a few other Case-Shiller Comp 20 city are close - Boston, Charlotte, San Francisco, Portland).    Detroit prices are barely above the January 2000 level.

I'll have more on house prices later.

Monday, September 28, 2015

Today in Fed Speak

by Bill McBride on 9/28/2015 06:59:00 PM

Tuesday:
• At 9:00 AM ET, the S&P/Case-Shiller House Price Index for July. Although this is the July report, it is really a 3 month average of May, June and July prices. The consensus is for a 5.3% year-over-year increase in the Comp 20 index for July. The Zillow forecast is for the National Index to increase 4.6% year-over-year in July.

Today in Fed speak: This year, this year, and "middle of next year".

From NY Fed President William Dudley: Fed’s Dudley: Still Likely on Track for 2015 Rate Rise

“If the economy continues on the same trajectory it’s on…and everything else suggests that’s likely to continue…then there is a pretty strong case for lifting off” before 2015 ends, he said in a Wall Street Journal interview.
emphasis added
From SF Fed President John Williams: The Economic Outlook: Live Long and Prosper
Looking forward, I expect that we’ll reach our maximum employment mandate in the near future and inflation will gradually move back to our 2 percent goal. In that context, it will make sense to gradually move away from the extraordinary stimulus that got us here. We already took a step in that direction when we ended QE3. And given the progress we’ve made and continue to make on our goals, I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year. Of course, that view is not immutable and will respond to economic developments over time.
From Chicago Fed President Charles Evans: Thoughts on Leadership and Monetary Policy
Before raising rates, I would like to have more confidence than I do today that inflation is indeed beginning to head higher. Given the current low level of core inflation, some evidence of true upward momentum in actual inflation is critical to this assessment. I believe that it could well be the middle of next year before the headwinds from lower energy prices and the stronger dollar dissipate enough so that we begin to see some sustained upward movement in core inflation. After liftoff, I think it would be appropriate to raise the target interest rate very gradually. This would give us sufficient time to assess how the economy is adjusting to higher rates and the progress we are making toward our policy goals

ATA Trucking Index decreased 0.9% in August

by Bill McBride on 9/28/2015 05:08:00 PM

From the ATA: ATA Truck Tonnage Index Fell 0.9% in August

AAmerican Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index declined 0.9% in August, following a revised increase of 3.1% during July. In August, the index equaled 134.2 (2000=100), down from 135.3 in July. The all-time high of 135.8 was reached in January 2015.

Compared with August 2014, the SA index increased 2.1%, which was below the 4% gain in July. Year-to-date through August, compared with the same period last year, tonnage was up 3.3%.
...
After such a robust July, it is not too surprising that tonnage took a breather in August,” said ATA Chief Economist Bob Costello. “The dip after a strong gain goes with the up and down pattern we’ve seen this year.”

Costello said a few factors hurt August’s reading, including soft housing starts and falling factory output.

“As I said last month, I remain concerned about the high level of inventories throughout the supply chain. This could have a negative impact on truck freight volumes over the next few months,” he said.
emphasis added
ATA Trucking Click on graph for larger image.

Here is a long term graph that shows ATA's For-Hire Truck Tonnage index.

The dashed line is the current level of the index.

The index is now up only 2.1% year-over-year.

Freddie Mac: Mortgage Serious Delinquency rate declined in August, Lowest since October 2008

by Bill McBride on 9/28/2015 12:55:00 PM

Freddie Mac reported that the Single-Family serious delinquency rate declined in August to 1.45%, down from 1.48% in July. Freddie's rate is down from 1.98% in August 2014, and the rate in August was the lowest level since October 2008.

Freddie's serious delinquency rate peaked in February 2010 at 4.20%.

These are mortgage loans that are "three monthly payments or more past due or in foreclosure". 

Note: Fannie Mae will report their Single-Family Serious Delinquency rate for August later this week.

Fannie Freddie Seriously Delinquent RateClick on graph for larger image

Although the rate is declining, the "normal" serious delinquency rate is under 1%. 

The serious delinquency rate has fallen 0.53 percentage points over the last year, and at that rate of improvement, the serious delinquency rate will not be below 1% until the second half of 2016.

So even though delinquencies and distressed sales are declining, I expect an above normal level of Fannie and Freddie distressed sales through 2016 (mostly in judicial foreclosure states).

Dallas Fed: "Texas Manufacturing Activity Remains Steady" in September

by Bill McBride on 9/28/2015 10:41:00 AM

From the Dallas Fed: Texas Manufacturing Activity Remains Steady

Texas factory activity was essentially flat in September, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, remained near zero (0.9), suggesting output held steady for a second month in a row after several months of declines.
...
Perceptions of broader business conditions remained weak in September. The general business activity index, which has been negative all year, rose 6 points to -9.5. The company outlook index plunged to -10.3 in August but recovered somewhat this month, climbing to -5.2.

Labor market indicators reflected employment declines and shorter workweeks. The September employment index posted a fifth consecutive negative reading, falling to -6.1.
emphasis added
This was the last of the regional Fed surveys for September. All of the regional surveys indicated contraction in September, mostly due to weakness in oil producing areas.

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 (yellow, through September), and five Fed surveys are averaged (blue, through September) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through August (right axis).

It seems likely the ISM index will be weak in September, and could possibly show contraction - a reading below 50. (although these regional surveys overemphasize oil producing areas).  The consensus is for a decrease to 51.2 for the ISM index, from 51.6 in August.

NAR: Pending Home Sales Index decreased 1.4% in August, up 6% year-over-year

by Bill McBride on 9/28/2015 10:02:00 AM

From the NAR: Pending Home Sales Retreat Again in August but Remain at Healthy Level

The Pending Home Sales Index, a forward–looking indicator based on contract signings, decreased 1.4 percent to 109.4 in August from 110.9 in July but is still 6.1 percent above August 2014 (103.1).
This was below expectations of a 0.5% increase.

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

Personal Income increased 0.3% in August, Spending increased 0.4%

by Bill McBride on 9/28/2015 08:42:00 AM

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

Personal income increased $52.5 billion, or 0.3 percent ... according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $54.9 billion, or 0.4 percent.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.4 percent in August, compared with an increase of 0.3 percent in July. ... The price index for PCE increased 0.3 percent in May, compared with an increase of less than 0.1 percent in April. The PCE price index, excluding food and energy, increased 0.1 percent in May, the same increase as in April.

The August price index for PCE increased 0.3 percent from August a year ago. The August PCE price index, excluding food and energy, increased 1.3 percent from August a year ago.
The following graph shows real Personal Consumption Expenditures (PCE) through August 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 lower than expected.  And the increase in PCE was above the 0.3% increase consensus.  Including upward revisions, this was a strong report.

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 1.3 percent year-over-year in August.

Using the two-month method to estimate Q3 PCE growth, PCE was increasing at a 3.5% annual rate in Q3 2015 (using the mid-month method, PCE was increasing 3.3%). This suggests the estimates for Q3 GDP will be revised up.

Sunday, September 27, 2015

Monday: Personal Income and Outlays, Pending Home Sales

by Bill McBride on 9/27/2015 07:52:00 PM

From the NY Times: John Boehner Says There Won’t Be a Government Shutdown

Speaker John A. Boehner said Sunday that he expects the House of Representatives to pass the Senate’s government funding measure with Democratic support this week, averting a shutdown that has looked increasingly less likely since he announced on Friday that he would resign.
...
Mr. Boehner delivered a clear message to conservative colleagues credited with forcing his hand: Holding the government hostage to achieve untenable policy goals was reckless and harmful to the institution itself.

“We have got groups here in town, members of the House and Senate here in town, who whip people into a frenzy believing they can accomplish things that they know, they know are never going to happen,” Mr. Boehner said in a live interview broadcast on CBS’s “Face the Nation.”

The speaker described these conservative members of his party as “false prophets,” who promise policy victories they cannot deliver. “The Bible says, beware of false prophets,” he said. “And there are people out there spreading noise about how much can get done.”
Who votes for these crazies? I hope Boehner is correct about no shutdown, but I'd like to see a backlash at the voting booth.

Weekend:
Schedule for Week of September 27, 2015

Monday:
• At 8:30 AM ET, Personal Income and Outlays for August. The consensus is for a 0.4% increase in personal income, and for a 0.3% increase in personal spending. And for the Core PCE price index to increase 0.1%.

• At 10:00 AM, Pending Home Sales Index for August. The consensus is for a 0.5% increase in the index.

• At 10:30 AM ET, Dallas Fed Manufacturing Survey for September.

From CNBC: Pre-Market Data and Bloomberg futures: currently S&P futures are down 12 and DOW futures are down 85 (fair value).

Oil prices were up slightly over the last week with WTI futures at $45.43 per barrel and Brent at $48.60 per barrel.  A year ago, WTI was at $94, and Brent was at $95 - so prices are down about 50% year-over-year (It was a year ago that prices started falling sharply).

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.29 per gallon (down over $1.00 per gallon from a year ago).

A few comments on Possible Government Shutdown

by Bill McBride on 9/27/2015 12:43:00 PM

There are two possible imminent government shutdowns by Congress. The first is related to a budget for the next fiscal year (starts October 1st) and the second is related to the so-called "debt ceiling" (really a question of paying the bills).

It is possible there will be a shutdown Wednesday evening due to disagreements on the budget. This will not have serious economic consequences, but it will have a negative impact on the economy, including (there would be much more) ...

Shutdowns cost money (there are no savings; shutdowns are fiscally irresponsible).

• A number of services will be shutdown (as example, there will be a negative impact on mortgage applications and the National Parks will close).

• Several economic releases will be delayed. First up will be the September employment report scheduled for Friday. Depending on how long the shutdown lasts, other reports that could be delayed include CPI, housing starts, new home sales, trade deficit and much more.

A more serious issue will be if Congress doesn't agree to "pay the bills".  The so-called "debt ceiling" will probably be reached in November, and failure to pay the bills would have serious economic consequences (that would start slow and build over time).  It would be absolutely irresponsible to not pay the bills.

Hopefully there will be no shutdowns this year.

Saturday, September 26, 2015

September 2015: Unofficial Problem Bank list declines to 276 Institutions, Q3 2015 Transition Matrix

by Bill McBride on 9/26/2015 04:36:00 PM

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for September 2015.

Changes and comments from surferdude808:

Update on the Unofficial Problem Bank List for September 2015. During the month, the list fell from 282 institutions to 276 after eight removals and two additions. Assets dropped by $683 million to an aggregate $82.0 billion. A year ago, the list held 432 institutions with assets of $136.8 billion.

Actions have been terminated against Virginia Community Bank, Louisa, VA ($215 million); US Metro Bank, Garden Grove, CA ($127 million); Freedom National Bank, Greenville, RI ($111 million); Amory Federal Savings and Loan Association, Amory, MS ($93 million Ticker: USMT); and Legacy Bank, Altoona, IA ($92 million).

Three banks found their way off the list by finding merger partners including Northwest Georgia Bank, Ringgold, GA ($286 million); The Patapsco Bank, Baltimore, MD ($219 million); and First Scottsdale Bank, National Association, Scottsdale, AZ ($96 million).

The additions this month were The National Capital Bank of Washington, Washington, DC ($420 million); and Anthem Bank & Trust, Plaquemine, LA ($136 million).
Unofficial Problem Banks
With it being the end of the third quarter, we bring an update on the transition matrix. Since the Unofficial Problem Bank List was first published on August 7, 2009 with 389 institutions, a total of 1,698 institutions have appeared on a weekly or monthly list at some point. There have been 1,422 institutions have come on and gone off the list. Departure methods include 785 action terminations, 393 failures, 230 mergers, and 14 voluntary liquidations. The third quarter of 2015 started with 309 institutions on the list, so the 25 action terminations during the quarter reduced the list by 8.1 percent. Of the 389 institutions on the first published list, 34 or 8.7 percent still remain six years later. The 393 failures are 23.1 percent of the 1,698 institutions that have appeared on the list. This failure rate is well above the 10-12 percent rate frequently cited in media reports on the failure rate of banks on the FDIC's official list.
Unofficial Problem Bank List
Change Summary
  Number of InstitutionsAssets ($Thousands)
Start (8/7/2009)  389276,313,429
 
Subtractions     
  Action Terminated157(59,896,817)
  Unassisted Merger39(9,713,878)
  Voluntary Liquidation4(10,584,114)
  Failures155(184,358,339)
  Asset Change(3,015,680)
 
Still on List at 9/30/2015  348,744,601
 
Additions after
8/7/2009
  24281,999,685
 
End (9/30/2015)  37687,456,390
 
Intraperiod Deletions1     
  Action Terminated628259,373,329
  Unassisted Merger19178,178,815
  Voluntary Liquidation102,324,142
  Failures238119,574,853
  Total1,067459,451,139
1Institution not on 8/7/2009 or 9/30/2015 list but appeared on a weekly list.

Schedule for Week of September 27, 2015

by Bill McBride on 9/26/2015 09:13:00 AM

Special Note: If Congress shuts down the government on Wednesday, the employment report will not be released on Friday.

The key report this week is the September employment report on Friday.

Other key indicators include the September ISM manufacturing index and September vehicle sales, both on Thursday.

There are several Federal Reserve speakers this week.

----- Monday, September 28th -----

8:30 AM ET: Personal Income and Outlays for August. The consensus is for a 0.4% increase in personal income, and for a 0.3% increase in personal spending. And for the Core PCE price index to increase 0.1%.

10:00 AM: Pending Home Sales Index for August. The consensus is for a 0.5% increase in the index.

10:30 AM: Dallas Fed Manufacturing Survey for September.

----- Tuesday, September 29th -----

Case-Shiller House Prices Indices 9:00 AM: S&P/Case-Shiller House Price Index for July. Although this is the July report, it is really a 3 month average of May, June and July prices.

This graph shows the nominal seasonally adjusted National Index, Composite 10 and Composite 20 indexes through the June 2015 report (the Composite 20 was started in January 2000).

The consensus is for a 5.3% year-over-year increase in the Comp 20 index for July. The Zillow forecast is for the National Index to increase 4.6% year-over-year in July.

----- Wednesday, September 30th -----

7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

8:15 AM: The ADP Employment Report for September. This report is for private payrolls only (no government). The consensus is for 190,000 payroll jobs added in September, the same as in August.

9:45 AM: Chicago Purchasing Managers Index for September. The consensus is for a reading of 53.6, down from 54.4 in August.

----- Thursday, October 1st -----

8:30 AM: The initial weekly unemployment claims report will be released.  The consensus is for 272 thousand initial claims, up from 267 thousand the previous week.

ISM PMI10:00 AM: ISM Manufacturing Index for September. The consensus is for the ISM to be at 50.5, down from 51.1 in August.

Here is a long term graph of the ISM manufacturing index.

The ISM manufacturing index indicated expansion at 51.1% in August. The employment index was at 51.2%, and the new orders index was at 51.6%.

10:00 AM: Construction Spending for August. The consensus is for a 0.7% increase in construction spending.

Vehicle SalesAll day: Light vehicle sales for September. The consensus is for light vehicle sales to decrease to 17.5 million SAAR in September from 17.7 million in August (Seasonally Adjusted Annual Rate).

This graph shows light vehicle sales since the BEA started keeping data in 1967. The dashed line is the August sales rate.

----- Friday, October 2nd -----

8:30 AM: Employment Report for September. The consensus is for an increase of 203,000 non-farm payroll jobs added in September, up from the 173,000 non-farm payroll jobs added in August.

The consensus is for the unemployment rate to be unchanged at 5.1%.

Year-over-year change employmentThis graph shows the year-over-year change in total non-farm employment since 1968.

In August, the year-over-year change was over 2.9 million jobs.

As always, a key will be the change in real wages - and as the unemployment rate falls, wage growth should pickup.

10:00 AM: Manufacturers' Shipments, Inventories and Orders (Factory Orders) for August. The consensus is a 1.3% decrease in orders.

Friday, September 25, 2015

Vehicle Sales Forecast for September: Over 17 Million Annual Rate Again

by Bill McBride on 9/25/2015 08:19:00 PM

The automakers will report September vehicle sales on Thursday, Oct 1. Sales in August were at 17.7 million on a seasonally adjusted annual rate basis (SAAR), and it appears sales in September will be over 17 million SAAR again.

Note:  There were 25 selling days in September, up from 24 in September 2014 (Also note: Labor Day was included in September this year).  Here are several forecasts:

From WardsAuto: Forecast: U.S. Automakers to Record Best September in Ten Years

A WardsAuto forecast calls for U.S. automakers to deliver 1.42 million light vehicles in September, an 11-year high for the month. The report puts the seasonally adjusted annual rate of sales for the month at 17.8 million units, slightly above last month’s 17.7 million SAAR and well ahead of the year-to-date SAAR through August (17.1 million).
From J.D. Power: Labor Day Propels New-Vehicle Retail Sales’ Strongest Growth So Far in 2015
Benefitting from an anomaly on the calendar, new-vehicle sales are headed to double-digit growth in September, with retail sales on pace for the strongest selling rate of any month in more than a decade, according to a monthly sales forecast developed jointly by J.D. Power and LMC Automotive.

For the first time since 2012, Labor Day weekend falls in the industry’s September sales month instead of August. Labor Day weekend is traditionally the biggest new-vehicle sales weekend of the year, as consumers take advantage of the holiday and model year-end sales promotions, as well as the availability of the new model-year vehicles arriving in showrooms. [17.7 million SAAR]
emphasis added
From Kelley Blue Book: Double-Digit New-Car Sales Growth Expected In September 2015, According To Kelley Blue Book
New-vehicle sales are expected to increase 12 percent year-over-year to a total of 1.39 million units in September 2015, resulting in an estimated 17.5 million seasonally adjusted annual rate (SAAR), according to Kelley Blue Book ...

"While the Volkswagen scandal will have a negative impact on sales, the affected models represent less than a quarter of their portfolio, and some dealers have already depleted their stock of those units," said Alec Gutierrez, senior analyst for Kelley Blue Book. "The larger issue is the hit the automaker's brand image and perceived trustworthiness, which may affect sales of their other models. We think the effects on September sales won't be too bad for Volkswagen Group's combined sales, but October and beyond could be another story."
Another solid month for auto sales, however Volkswagen sales might have fallen off a cliff at the end of the month.

DOT: Vehicle Miles Driven increased 4.2% year-over-year in July, Rolling 12 Months at All Time High

by Bill McBride on 9/25/2015 03:01:00 PM

The Department of Transportation (DOT) reported:

Travel on all roads and streets changed by 4.2% (11.4 billion vehicle miles) for July 2015 as compared with July 2014.

Travel for the month is estimated to be 283.7 billion vehicle miles.

The seasonally adjusted vehicle miles traveled for July 2015 is 264.4 billion miles, a 3.9% (9.9 billion vehicle miles) increase over July 2014. It also represents a 0.8% change (2.1 billion vehicle miles) compared with June 2015.
The following graph shows the rolling 12 month total vehicle miles driven to remove the seasonal factors.

The rolling 12 month total is moving up - mostly due to lower gasoline prices - after moving sideways for several years.


Vehicle Miles Click on graph for larger image.

In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.

Miles driven (rolling 12) had been below the previous peak for 85 months - an all time record - before reaching a new high for miles driven in January.

The second graph shows the year-over-year change from the same month in the previous year.

Vehicle Miles Driven YoY In July 2015, gasoline averaged of $2.88 per gallon according to the EIA.  That was down significantly from July 2014 when prices averaged $3.69 per gallon.

Gasoline prices aren't the only factor - demographics is also key. However, with lower gasoline prices, miles driven - on a rolling 12 month basis - is setting new highs each month.

Black Knight's First Look at August: Mortgage "Delinquency Rate Sees Largest 12-Month Decline in Four Years"

by Bill McBride on 9/25/2015 11:59:00 AM

From Black Knight: Black Knight Financial Services' First Look at August Mortgage Data: Despite Monthly Rise, Delinquency Rate Sees Largest 12-Month Decline in Four Years

According to Black Knight's First Look report for August, the percent of loans delinquent increased 2.5% in August compared to July, and declined 18.2% year-over-year.

The percent of loans in the foreclosure process declined 2% in August and were down 24% over the last year.

Black Knight reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) was 4.83% in August, up from 4.71% in July.

The percent of loans in the foreclosure process declined in August to 1.37%.  This was the lowest level of foreclosure inventory since 2007.

The number of delinquent properties, but not in foreclosure, is down 548,000 properties year-over-year, and the number of properties in the foreclosure process is down 217,000 properties year-over-year.

Black Knight will release the complete mortgage monitor for August in early October.

Black Knight: Percent Loans Delinquent and in Foreclosure Process
  Aug
2015
July
2015
Aug
2014
Aug
2013
Delinquent4.83%4.71%5.90%6.20%
In Foreclosure1.37%1.40%1.80%2.66%
Number of properties:
Number of properties that are 30 or more, and less than 90 days past due, but not in foreclosure:1,582,0001,503,0001,8520001,836,000
Number of properties that are 90 or more days delinquent, but not in foreclosure:865,000886,0001,143,0001,288,000
Number of properties in foreclosure pre-sale inventory:696,000711,000913,0001,341,000
Total Properties3,142,0003,100,0003,908,0004,465,000

Final September Consumer Sentiment at 87.2

by Bill McBride on 9/25/2015 10:02:00 AM

The final University of Michigan consumer sentiment index for September was at 87.2, up from the preliminary reading of 85.7, and down from 91.9 in August.

This was at the consensus forecast of 87.1.

Consumer Sentiment

Q2 GDP Revised Up to 3.9% Annual Rate

by Bill McBride on 9/25/2015 08:35:00 AM

From the BEA: Gross Domestic Product: Second Quarter 2015 (Third Estimate)

Real gross domestic product -- the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes -- increased at an annual rate of 3.9 percent in the second quarter of 2015, according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.6 percent.

The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was 3.7 percent. With the third estimate for the second quarter, the general picture of economic growth remains the same; personal consumption expenditures (PCE) and nonresidential fixed investment increased more than previously estimated ...
emphasis added
Here is a Comparison of Third and Second Estimates. PCE growth was revised up from 3.1% to 3.6%. Residential investment was revised up from 7.8% to 9.3%.

Thursday, September 24, 2015

Friday: Q2 GDP (3rd estimate), Consumer Sentiment

by Bill McBride on 9/24/2015 07:21:00 PM

During her post FOMC press conference, Dr. Yellen declined to say whether she thought a rate hike was likely this year. However, in her speech today, Dr. Yellen included herself:

"Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter."
emphasis added
Barring a significant economic change, it seems likely there will be a rate hike in October, or more likely, December.

From Jon Hilsenrath and Ben Leubsdorf at the WSJ: Janet Yellen Says Fed Interest Rate Increase Still Likely This Year
Federal Reserve Chairwoman Janet Yellen laid out her most detailed case yet for the central bank to begin raising short-term interest rates later this year ...

Ms. Yellen made her case like a prosecutor making a courtroom closing argument. She presented it in a 40-page speech at the University of Massachusetts in Amherst, including 40 academic citations, 35 footnotes, nine graphs and an appendix.

Central to her argument was a belief that slack in the economy has diminished to a point where inflation pressures should start to gradually build in the coming years.

Those pressures aren’t asserting themselves yet, she argued, because a strong dollar and falling oil and import prices are placing temporary downward pressure on consumer prices. As those headwinds diminish, she predicted, inflation will gradually rise.
Friday:
• At 8:30 AM ET, Gross Domestic Product, 2nd quarter 2015 (third estimate). The consensus is that real GDP increased 3.7% annualized in Q2, the same as the second estimate.

• At 10:00 AM, University of Michigan's Consumer sentiment index (final for September). The consensus is for a reading of 87.1, up from the preliminary reading of 85.7.

Yellen: Anticipates Raising Fed Funds Rate this Year

by Bill McBride on 9/24/2015 05:05:00 PM

From Fed Chair Janet Yellen: Inflation Dynamics and Monetary Policy

Assuming that my reading of the data is correct and long-run inflation expectations are in fact anchored near their pre-recession levels, what implications does the preceding description of inflation dynamics have for the inflation outlook and for monetary policy?

This framework suggests, first, that much of the recent shortfall of inflation from our 2 percent objective is attributable to special factors whose effects are likely to prove transitory. As the solid black line in figure 8 indicates, PCE inflation has run noticeably below our 2 percent objective on average since 2008, with the shortfall approaching about 1 percentage point in both 2013 and 2014 and more than 1-1/2 percentage points this year. The stacked bars in the figure give the contributions of various factors to these deviations from 2 percent, computed using an estimated version of the simple inflation model I just discussed. As the solid blue portion of the bars shows, falling consumer energy prices explain about half of this year's shortfall and a sizable portion of the 2013 and 2014 shortfalls as well. Another important source of downward pressure this year has been a decline in import prices, the portion with orange checkerboard pattern, which is largely attributable to the 15 percent appreciation in the dollar's exchange value over the past year. In contrast, the restraint imposed by economic slack, the green dotted portion, has diminished steadily over time as the economy has recovered and is now estimated to be relatively modest.31 Finally, a similarly small portion of the current shortfall of inflation from 2 percent is explained by other factors (which include changes in food prices); importantly, the effects of these other factors are transitory and often switch sign from year to year.

Although an accounting exercise like this one is always imprecise and will depend on the specific model that is used, I think its basic message--that the current near-zero rate of inflation can mostly be attributed to the temporary effects of falling prices for energy and non-energy imports--is quite plausible. If so, the 12-month change in total PCE prices is likely to rebound to 1-1/2 percent or higher in 2016, barring a further substantial drop in crude oil prices and provided that the dollar does not appreciate noticeably further.

To be reasonably confident that inflation will return to 2 percent over the next few years, we need, in turn, to be reasonably confident that we will see continued solid economic growth and further gains in resource utilization, with longer-term inflation expectations remaining near their pre-recession level. Fortunately, prospects for the U.S. economy generally appear solid. Monthly payroll gains have averaged close to 210,000 since the start of the year and the overall economy has been expanding modestly faster than its productive potential. My colleagues and I, based on our most recent forecasts, anticipate that this pattern will continue and that labor market conditions will improve further as we head into 2016.

The labor market has achieved considerable progress over the past several years. Even so, further improvement in labor market conditions would be welcome because we are probably not yet all the way back to full employment. Although the unemployment rate may now be close to its longer-run normal level--which most FOMC participants now estimate is around 4.9 percent--this traditional metric of resource utilization almost certainly understates the actual amount of slack that currently exists: On a cyclically adjusted basis, the labor force participation rate remains low relative to its underlying trend, and an unusually large number of people are working part time but would prefer full-time employment. Consistent with this assessment is the slow pace at which hourly wages and compensation have been rising, which suggests that most firms still find it relatively easy to hire and retain employees.

Reducing slack along these other dimensions may involve a temporary decline in the unemployment rate somewhat below the level that is estimated to be consistent, in the longer run, with inflation stabilizing at 2 percent. For example, attracting discouraged workers back into the labor force may require a period of especially plentiful employment opportunities and strong hiring. Similarly, firms may be unwilling to restructure their operations to use more full-time workers until they encounter greater difficulty filling part-time positions. Beyond these considerations, a modest decline in the unemployment rate below its long-run level for a time would, by increasing resource utilization, also have the benefit of speeding the return to 2 percent inflation. Finally, albeit more speculatively, such an environment might help reverse some of the significant supply-side damage that appears to have occurred in recent years, thereby improving Americans' standard of living.

Consistent with the inflation framework I have outlined, the medians of the projections provided by FOMC participants at our recent meeting show inflation gradually moving back to 2 percent, accompanied by a temporary decline in unemployment slightly below the median estimate of the rate expected to prevail in the longer run. These projections embody two key judgments regarding the projected relationship between real activity and interest rates. First, the real federal funds rate is currently somewhat below the level that would be consistent with real GDP expanding in line with potential, which implies that the unemployment rate is likely to continue to fall in the absence of some tightening. Second, participants implicitly expect that the various headwinds to economic growth that I mentioned earlier will continue to fade, thereby boosting the economy's underlying strength. Combined, these two judgments imply that the real interest rate consistent with achieving and then maintaining full employment in the medium run should rise gradually over time. This expectation, coupled with inherent lags in the response of real activity and inflation to changes in monetary policy, are the key reasons that most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective.

By itself, the precise timing of the first increase in our target for the federal funds rate should have only minor implications for financial conditions and the general economy. What matters for overall financial conditions is the entire trajectory of short-term interest rates that is anticipated by markets and the public. As I noted, most of my colleagues and I anticipate that economic conditions are likely to warrant raising short-term interest rates at a quite gradual pace over the next few years. It's important to emphasize, however, that both the timing of the first rate increase and any subsequent adjustments to our federal funds rate target will depend on how developments in the economy influence the Committee's outlook for progress toward maximum employment and 2 percent inflation.

The economic outlook, of course, is highly uncertain and it is conceivable, for example, that inflation could remain appreciably below our 2 percent target despite the apparent anchoring of inflation expectations. Here, Japan's recent history may be instructive: As shown in figure 9, survey measures of longer-term expected inflation in that country remained positive and stable even as that country experienced many years of persistent, mild deflation.34 The explanation for the persistent divergence between actual and expected inflation in Japan is not clear, but I believe that it illustrates a problem faced by all central banks: Economists' understanding of the dynamics of inflation is far from perfect. Reflecting that limited understanding, the predictions of our models often err, sometimes significantly so. Accordingly, inflation may rise more slowly or rapidly than the Committee currently anticipates; should such a development occur, we would need to adjust the stance of policy in response.

Considerable uncertainties also surround the outlook for economic activity. For example, we cannot be certain about the pace at which the headwinds still restraining the domestic economy will continue to fade. Moreover, net exports have served as a significant drag on growth over the past year and recent global economic and financial developments highlight the risk that a slowdown in foreign growth might restrain U.S. economic activity somewhat further. The Committee is monitoring developments abroad, but we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy. That said, in response to surprises affecting the outlook for economic activity, as with those affecting inflation, the FOMC would need to adjust the stance of policy so that our actions remain consistent with inflation returning to our 2 percent objective over the medium term in the context of maximum employment.

Given the highly uncertain nature of the outlook, one might ask: Why not hold off raising the federal funds rate until the economy has reached full employment and inflation is actually back at 2 percent? The difficulty with this strategy is that monetary policy affects real activity and inflation with a substantial lag. If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. In addition, continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability. For these reasons, the more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data.

Conclusion
To conclude, let me emphasize that, following the dual mandate established by the Congress, the Federal Reserve is committed to the achievement of maximum employment and price stability. To this end, we have maintained a highly accommodative monetary policy since the financial crisis; that policy has fostered a marked improvement in labor market conditions and helped check undesirable disinflationary pressures. However, we have not yet fully attained our objectives under the dual mandate: Some slack remains in labor markets, and the effects of this slack and the influence of lower energy prices and past dollar appreciation have been significant factors keeping inflation below our goal. But I expect that inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return to maximum employment and long-run inflation expectations remain well anchored. Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change.
emphasis added

Comments on August New Home Sales

by Bill McBride on 9/24/2015 11:59:00 AM

The new home sales report for August was above expectations and sales were at the highest level since early 2008.  New home sales are important for jobs and the economy, and the solid increase in sales this year is a positive sign.

Earlier: New Home Sales increased to 552,000 Annual Rate in August.

The Census Bureau reported that new home sales this year, through August, were 359,000, not seasonally adjusted (NSA). That is up 21.1% from 297,000 sales during the same period of 2014 (NSA). That is a strong year-over-year gain for the first eight months of 2015!

Sales were up 21.6% year-over-year in August.

New Home Sales 2013 2014Click on graph for larger image.

This graph shows new home sales for 2014 and 2015 by month (Seasonally Adjusted Annual Rate).

The year-over-year gain was strong through August, however I expect the year-over-year increases to slow over the remaining months - but the overall year-over-year gain should be solid in 2015.

And here is another update to the "distressing gap" graph that I first started posting a number of years ago to show the emerging gap caused by distressed sales.  Now I'm looking for the gap to close over the next few years.

Distressing GapThe "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through August 2015. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales.

I expect existing home sales to move sideways (distressed sales will continue to decline and be partially offset by more conventional / equity sales).  And I expect this gap to slowly close, mostly from an increase in new home sales.

However, this assumes that the builders will offer some smaller, less expensive homes.

Distressing GapAnother way to look at this is a ratio of existing to new home sales.

This ratio was fairly stable from 1994 through 2006, and then the flood of distressed sales kept the number of existing home sales elevated and depressed new home sales. (Note: This ratio was fairly stable back to the early '70s, but I only have annual data for the earlier years).

In general the ratio has been trending down, and this ratio will probably continue to trend down over the next several years.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

Kansas City Fed: Regional Manufacturing Activity Declined Again in September

by Bill McBride on 9/24/2015 11:00:00 AM

From the Kansas City Fed: Tenth District Manufacturing Activity Declined at a Similar Pace

The Federal Reserve Bank of Kansas City released the September Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity declined at a similar pace as in previous months, while expectations for future activity dropped considerably.

Survey respondents continued to blame a strong dollar and weak energy activity for declining factory activity”, said Wilkerson. “This month their future outlook also weakened after holding steady in recent months.”
...
Tenth District manufacturing activity declined at a similar pace as in previous months, while expectations for future activity dropped considerably. Producers continued to cite weak oil and gas activity along with a strong dollar as key reasons for the sluggish activity. Most price indexes fell from the previous survey.

The month-over-month composite index was -8 in September, largely unchanged from -9 in August and -7 in July ... employment index inched up from -10 to -7, and the new orders for exports index also moved slightly higher.
emphasis added
The recent decline in the Kansas City region manufacturing has probably been mostly due to lower oil prices, although respondents also blame the strong dollar.

New Home Sales increased to 552,000 Annual Rate in August

by Bill McBride on 9/24/2015 10:19:00 AM

The Census Bureau reports New Home Sales in August were at a seasonally adjusted annual rate (SAAR) of 552 thousand.

The previous three months were revised down by a total of 8 thousand (SA).

"Sales of new single-family houses in August 2015 were at a seasonally adjusted annual rate of 552,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 5.7 percent above the revised July rate of 522,000 and is 21.6 percent above the August 2014 estimate of 454,000"
New Home SalesClick on graph for larger image.

The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.

Even with the increase in sales since the bottom, new home sales are still fairly low historically.

The second graph shows New Home Months of Supply.

New Home Sales, Months of SupplyThe months of supply decreased in August to 4.7 months.

The all time record was 12.1 months of supply in January 2009.

This is now in the normal range (less than 6 months supply is normal).
"The seasonally adjusted estimate of new houses for sale at the end of August was 216,000. This represents a supply of 4.7 months at the current sales rate."
New Home Sales, InventoryOn inventory, according to the Census Bureau:
"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."
Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.

The third graph shows the three categories of inventory starting in 1973.

The inventory of completed homes for sale is still low, and the combined total of completed and under construction is also low.

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

In August 2015 (red column), 46 thousand new homes were sold (NSA). Last year 36 thousand homes were sold in August.  This is the highest for August since 2007.

The all time high for August was 110 thousand in 2005, and the all time low for August was 23 thousand in 2010.

This was well above expectations of 516,000 sales in August, and new home sales are on pace for solid growth in 2015.  I'll have more later today.

Weekly Initial Unemployment Claims increased to 267,000

by Bill McBride on 9/24/2015 08:33:00 AM

The DOL reported:

In the week ending September 19, the advance figure for seasonally adjusted initial claims was 267,000, an increase of 3,000 from the previous week's unrevised level of 264,000. The 4-week moving average was 271,750, a decrease of 750 from the previous week's unrevised average of 272,500.

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 271,750.

This was below the consensus forecast of 275,000, and the low level of the 4-week average suggests few layoffs.

Wednesday, September 23, 2015

Thursday: Yellen Speech, New Home Sales, Unemployment Claims, Durable Goods and More

by Bill McBride on 9/23/2015 06:11:00 PM

Dr. Yellen's speech tomorrow could give hints on how close the Fed is to the first rate hike. There has been "some further improvement" in the labor market, but inflation is still below the Fed's target. Yellen's speech on Thursday is title "Inflation Dynamics and Monetary Policy"; she addresses the key topic!

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for 275 thousand initial claims, up from 264 thousand the previous week.

• Also at 8:30 AM, Durable Goods Orders for August from the Census Bureau. The consensus is for a 2.2% decrease in durable goods orders.

• Also at 8:30 AM, Chicago Fed National Activity Index for August. This is a composite index of other data.

• At 10:00 AM, New Home Sales for August from the Census Bureau. The consensus is for an increase in sales to 515 thousand Seasonally Adjusted Annual Rate (SAAR) in August from 507 thousand in July.

• At 11:00 AM, the Kansas City Fed manufacturing survey for August.

• At 5:00 PM, Speech by Fed Chair Janet Yellen, "Inflation Dynamics and Monetary Policy", At the University of Massachusetts Amherst, Amherst, Massachusetts

Philly Fed: State Coincident Indexes increased in 41 states in August

by Bill McBride on 9/23/2015 03:12:00 PM

From the Philly Fed:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for August 2015. In the past month, the indexes increased in 41 states, decreased in five, and remained stable in four, for a one-month diffusion index of 72. Over the past three months, the indexes increased in 44 states, decreased in five, and remained stable in one, for a three-month diffusion index of 78.
Note: These are coincident indexes constructed from state employment data. An explanation from the Philly Fed:
The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.
Philly Fed Number of States with Increasing ActivityClick on graph for larger image.

This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged).

In August, 43 states had increasing activity (including minor increases).

The worst performing states over the last 6 months are West Virginia (coal), North Dakota (oil), Alaska (oil), Oklahoma (oil), New Mexico, and Kansas (self inflicted policy errors).


Philly Fed State Conincident Map Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession, and is mostly green now.

Note: Blue added for Red/Green issues.

China: Buiter and Krugman Views

by Bill McBride on 9/23/2015 12:10:00 PM

First, excerpts from Citi's Willem Buiter's: Is China Leading the World into Recession?

In the Global Economics team, however, we believe that a moderate global recession scenario has become the most likely global macroeconomic scenario for the next two years or so. That does not mean that a moderate recession as described in this paper, starting in the second half of 2016, has a likelihood of more than 50%. We do believe that a recession is the most likely outcome during the next few years, but it is important to distinguish between a moderate recession without a regional or global financial crisis and a deep or severe recession accompanied by a regional or global financial crisis.
...
In our view, the probability of some kind of recession, moderate or severe, is therefore 55%. A global recession of some kind is our modal forecast. A moderate recession is our modal forecast if we decompose recession outcomes into moderate and severe ones and assign separate probabilities to them.

In this publication, we analyse how, starting from where we are now, the world economy could slide into recession, defined as an extended period of excess capacity: the level of potential output exceeds the level of actual output, or the actual unemployment rate is above the natural rate or Nairu. The recession scenario is that of a recession of moderate depth and duration, without a major regional or global financial crisis. We conclude that if the global economy slides into a recession of moderate depth and duration during 2016 and stays there for most of 2017 before staging a recovery, it will most likely be dragged down by slow growth in a number of key emerging markets (EMs), and especially in China. We see such a scenario as increasingly likely. Indeed, we consider China to be at high and rapidly rising risk of a cyclical hard landing.
And excerps from Professor Krugman: Chinese Spillovers
China is clearly in economic trouble. But how worried should we be about spillovers from China’s woes to the rest of the world economy? I have in general been telling people “not very”, although it’s a bigger issue for Japan and Korea. But Citi’s Willem Buiter suggests that it could be a quite big deal, leading to a global recession. And Willem is a very smart guy; read his “Alice in Euroland“, from 1998 (!), warning of the dangers of EMU’s “lender of last resort vacuum.” So could he be right?
...
Overall, I’m not convinced of the Buiter thesis; China still seems to me not big enough to bring down the rest of the world. But I’m not rock-solid in that conviction, largely because we’ve seen so much contagion in the past. Stay tuned.
CR comment: China is a major concern, but I think a recession in the US in 2016 is very unlikely.