Tuesday, October 31, 2017

Wednesday: FOMC Annoucement, ADP Employment, Vehicle Sales, ISM Mfg, Construction Spending

by Bill McBride on 10/31/2017 08:08:00 PM

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 October. This report is for private payrolls only (no government). The consensus is for 210,000 payroll jobs added in October, up from 135,000 added in September.

• At 10:00 AM, ISM Manufacturing Index for October. The consensus is for the ISM to be at 59.5, down from 60.8 in September. The PMI was at 60.8% in September, the employment index was at 60.3%, and the new orders index was at 64.6%.

• Also at 10:00 AM, Construction Spending for September. The consensus is for a 0.1% increase in construction spending.

• All Day, Light vehicle sales for October. The consensus is for light vehicle sales to be 17.5 million SAAR in October, down from 18.6 million in September (Seasonally Adjusted Annual Rate).

• At 2:00 PM, FOMC Meeting Announcement. The FOMC is expected to announce no change to policy at this meeting.

Zillow Case-Shiller Forecast: More Solid House Price Gains in September

by Bill McBride on 10/31/2017 05:52:00 PM

The Case-Shiller house price indexes for August 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 Svenja Gudell at Zillow: Case-Shiller August Results and September Forecast: Gains to the Horizon

The U.S. housing market has settled into a predictable rhythm that shows very few signs of changing. There is incredibly strong demand, driven by a largely healthy overall economy and aging millennials entering their home buying prime, and there is too-low inventory, driven by limited home building activity. Together, those two factors continue to push housing prices up.
...
Our home-price forecast for September, which Case-Shiller will not release until Nov. 28, is for more of the same: We expect the national index to maintain its 0.5 percent month-over-month trend, with both city composites climbing 0.4 percent month-over-month, which is slightly slower than they have been.
The year-over-year change for the Case-Shiller National index will be about the same in September as in August.

Zillow forecast for Case-Shiller

Real House Prices and Price-to-Rent Ratio in August

by Bill McBride on 10/31/2017 01:23:00 PM

Here is the earlier post on Case-Shiller: Case-Shiller: National House Price Index increased 6.1% year-over-year in August

It has been more than ten years since the bubble peak. In the Case-Shiller release this morning, the seasonally adjusted National Index (SA), was reported as being 4.3% above the previous bubble peak. However, in real terms, the National index (SA) is still about 13.3% below the bubble peak (and historically there has been an upward slope to real house prices).

The year-over-year increase in prices is mostly moving sideways now around 5% to 6%. In August, the index was up 6.1% YoY.

Usually people graph nominal house prices, but it is also important to look at prices in real terms (inflation adjusted).  Case-Shiller 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 $278,000 today adjusted for inflation (39%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

Nominal House Prices

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

In nominal terms, the Case-Shiller National index (SA) is at a new peak, and the Case-Shiller Composite 20 Index (SA) is back to November 2005 levels.



Real House Prices

Real House PricesThe second graph shows the same two 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 August 2004 levels, and the Composite 20 index is back to March 2004.

In real terms, house prices are back to mid 2004 levels.

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 and Composite 20 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 November 2003 levels, and the Composite 20 index is back to September 2003 levels.

In real terms, prices are back to mid 2004 levels, and the price-to-rent ratio is back to 2003 - and the price-to-rent ratio has been increasing slowly.

HVS: Q3 2017 Homeownership and Vacancy Rates

by Bill McBride on 10/31/2017 10:11:00 AM

The Census Bureau released the Residential Vacancies and Homeownership report for Q3 2017.

This report is frequently mentioned by analysts and the media to track household formation, the homeownership rate, and the homeowner and rental vacancy rates.  However, there are serious questions about the accuracy of this survey.

This survey might show the trend, but I wouldn't rely on the absolute numbers.  The Census Bureau is investigating the differences between the HVS, ACS and decennial Census, and analysts probably shouldn't use the HVS to estimate the excess vacant supply or household formation, or rely on the homeownership rate, except as a guide to the trend.

Homeownership Rate Click on graph for larger image.

The Red dots are the decennial Census homeownership rates for April 1st 1990, 2000 and 2010. The HVS homeownership rate increased to 63.9% in Q3, from 63.7% in Q2.

I'd put more weight on the decennial Census numbers - and given changing demographics, the homeownership rate has probably bottomed.

Homeowner Vacancy RateThe HVS homeowner vacancy increased to 1.6% in Q3. 

Once again - this probably shows the general trend, but I wouldn't rely on the absolute numbers.

Rental Vacancy RateThe rental vacancy rate increased to 7.5% in Q3.

The quarterly HVS is the most timely survey on households, but there are many questions about the accuracy of this survey.

Overall this suggests that vacancies have declined significantly, and my guess is the homeownership rate has bottomed - and that the rental vacancy rate has bottomed for this cycle.

Case-Shiller: National House Price Index increased 6.1% year-over-year in August

by Bill McBride on 10/31/2017 09:14:00 AM

S&P/Case-Shiller released the monthly Home Price Indices for August ("August" is a 3 month average of June, July and August 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: The S&P Corelogic Case-Shiller National Home Price NSA Index Reaches New High as Momentum Continues

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 6.1% annual gain in August, up from 5.9% in the previous month. The 10-City Composite annual increase came in at 5.3%, up from 5.2% the previous month. The 20-City Composite posted a 5.9% year-over-year gain, up from 5.8% the previous month.

Seattle, Las Vegas, and San Diego reported the highest year-over-year gains among the 20 cities. In August, Seattle led the way with a 13.2% year-over-year price increase, followed by Las Vegas with an 8.6% increase, and San Diego with a 7.8% increase. Nine cities reported greater price increases in the year ending August 2017 versus the year ending July 2017.
...
Before seasonal adjustment, the National Index posted a month-over-month gain of 0.5% in August. The 10-City and 20-City Composites reported increases of 0.5% and 0.4% respectively. After seasonal adjustment, the National Index recorded a 0.5% month-over-month increase in August. The 10-City Composite and 20-City Composite both posted 0.5% month-over-month increases. Nineteen of 20 cities reported increases in August both before and after seasonal adjustment.

“Home price increases appear to be unstoppable,” says David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “August saw the National Index annual rate tick up to 6.1%; all 20 cities followed in the report were up year-over-year while one, Atlanta, saw the seasonally adjusted monthly number slip 0.2%. Most prices across the rest of the economy are barely moving compared to housing. Over the last year the consumer price index rose 2.2%, driven largely by energy costs. Aside from oil, the only other major item with price gains close to housing was hospital services, which were up 4.6%. Wages climbed 3.6% in the year to August.

“The ongoing rise in home prices poses questions of why prices are climbing and whether they will continue to outpace most of the economy. Currently, low mortgage rates combined with an improving economy are supporting home prices. Low interest rates raise the value of both real and financial longlived assets. The price gains are not simply a rebound from the financial crisis; nationally and in nine of the 20 cities in the report, home prices have reached new all-time highs. However, home prices will not rise forever. Measures of affordability are beginning to slide, indicating that the pool of buyers is shrinking. The Federal Reserve is pushing short term interest rates upward and mortgage rates are likely to follow over time, removing a key factor supporting rising home prices.”
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 5.8% from the peak, and up 0.5% in August (SA).

The Composite 20 index is off 3.1% from the peak, and up 0.4% (SA) in August.

The National index is 4.3% above the bubble peak (SA), and up 0.5% (SA) in August.  The National index is up 41.0% 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 5.4% compared to August 2016.  The Composite 20 SA is up 6.0% year-over-year.

The National index SA is up 6.1% year-over-year.

Note: According to the data, prices increased in 19 of 20 cities month-over-month seasonally adjusted.

I'll have more later.

Monday, October 30, 2017

Tuesday: Case-Shiller House Prices

by Bill McBride on 10/30/2017 07:12:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Lowest in a Week

Mortgage rates recovered even more of their recent losses today ... Whether this proves to be a turning point in the bigger picture remains to be seen.  Rates are in a well-established uptrend.  [30YR FIXED - 4.0-4.125%]
Tuesday:
• At 9:15 AM ET, S&P/Case-Shiller House Price Index for August. The consensus is for a 6.0% year-over-year increase in the Comp 20 index for August.

• At 9:45 AM, Chicago Purchasing Managers Index for October. The consensus is for a reading of 62.0, down from 65.2 in September.

• At 10:00 AM, the Q3 Housing Vacancies and Homeownership from the Census Bureau.

Are house prices a new bubble?

by Bill McBride on 10/30/2017 02:28:00 PM

Update: Here are five questions that people ask me all the time.
1. Are house prices in a bubble?
2. Is a recession imminent (within the next 12 months)?
3. Is the stock market a bubble?
4. Can investors use macro analysis?
5. Will Mr. Trump have a negative impact on the economy?

On Friday, I posted five economic questions I'm frequently asked. I'll post some thoughts on each of these topics over the next couple of weeks.

A common question is: Are house prices in a new bubble?  My short answer was: No.  Here is an explanation.

First, we need to define a bubble. Way back in April 2005, when I was very bearish on housing, I wrote: Housing: Speculation is the Key. From that post:

I have taken to calling the housing market a "bubble". But how do I define a bubble?

A bubble requires both overvaluation based on fundamentals and speculation. It is natural to focus on an asset’s fundamental value, but the real key for detecting a bubble is speculation - the topic of this post. Speculation tends to chase appreciating assets, and then speculation begets more speculation, until finally, for some reason that will become obvious to all in hindsight, the "bubble" bursts.
First, on valuation: two key measures are house prices to income, and real house prices. The Census Bureau released the Income, Poverty and Health Insurance Coverage in the United States: 2016 in September. The report showed a significant increase in the real median household income:
The U.S. Census Bureau announced today that real median household income increased by 3.2 percent between 2015 and 2016 ... Median household income in the United States in 2016 was $59,039, an increase in real terms of 3.2 percent from the 2015 median income of $57,230. This is the second consecutive annual increase in median household income.
The firs two graphs use annual averages of the Case-Shiller house price index - and the nominal median household income (and the mean for the fourth fifth income) through 2016.

House Prices and Median Household Income Click on graph for larger image.

This graph shows the ratio of house price indexes divided by the Median Household Income through 2016 (the HPI is first multiplied by 1000).

This uses the annual average National Case-Shiller index since 1976.

As of 2016, house prices were above the median historical ratio - but far below the bubble peak.

The second graph is similar but uses the mean of the fourth fifth household income (if we separate households into fifths, this is the second highest income group).

House Prices and WagesThese are key households since they are more likely to be homeowners (and home buyers).

Using this group, prices are well below the bubble peak.

By these measures, we could argue house prices are 15% to 20% too high, but this is a relatively small overvaluation compared to the 50%+ overpricing at the peak of the housing bubble.

Real House PricesThe third graph shows the monthly Case-Shiller National index SA, and the monthly Case-Shiller Composite 20 index SA (through July) in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

At first glance, this seems to suggest prices are 30% too high (and were maybe 50% to 60% too high during the bubble).  However there is an upward slope to real prices, see The upward slope of Real House Prices and Lawler: On the upward trend in Real House Prices.

After adjusting for the historical upward slope in real prices, I'd estimate prices are about 15% too high.

On Speculation: Back in 2005, it was easy to identify excess speculation.  There is currently some flipping activity, but this is more the normal type of flipping (buy, improve and then sell).  Back in 2005, people were just buying homes are letting them sit vacant - and then selling without significant improvements.  Classic speculation.

And even more dangerous during the bubble was the excessive use of leverage (all those poor quality loans).  Currently lending standards are decent, and loan quality is excellent.

So prices may be a little overvalued, but there is little speculation - and I wouldn't call house prices a bubble - and I don't expect house prices to decline nationally like during the bust.

Black Knight: House Price Index up 0.2% in August, Up 6.2% year-over-year

by Bill McBride on 10/30/2017 01:01:00 PM

Note: I follow several house price indexes (Case-Shiller, CoreLogic, Black Knight, Zillow, FHFA and more). Note: Black Knight uses the current month closings only (not a three month average like Case-Shiller or a weighted average like CoreLogic), excludes short sales and REOs, and is not seasonally adjusted.

From Black Knight: Black Knight Home Price Index: U.S. Home Prices Hit Another New Peak, Gaining 0.24 Percent in August 2017 With Year-Over-Year Growth Steady at 6.24 Percent

• The national-level HPI rose in August ($282K), marking another new high for U.S. home prices

• Home prices rose just 0.24 percent from July, while the annual rate of appreciation remained steady at 6.24 percent

• Year-to-date, U.S. home prices have gained more than six percent

• August’s rate of monthly appreciation fell to less than half that of July’s, marking five consecutive months of slowing growth

• Of the nation’s 40 largest metros, 14 hit new peaks – Boston, MA; Charlotte, NC; Cincinnati, OH; Dallas, TX; Houston, TX; Kansas City, MO; Los Angeles, CA; Nashville, TN; New York, NY; Portland, OR; San Antonio, TX; San Diego, CA; San Francisco, CA and San Jose, CA
The year-over-year increase in this index has been about the same for the last year (close to 6% range).

Note that house prices are above the bubble peak in nominal terms, but not in real terms (adjusted for inflation).  Case-Shiller for August will be released tomorrow.

Dallas Fed: "Growth in Texas Manufacturing Activity Gains Momentum" in October

by Bill McBride on 10/30/2017 10:40:00 AM

From the Dallas Fed: Growth in Texas Manufacturing Activity Gains Momentum

Texas factory activity expanded at a faster pace in October, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose six points to 25.6 and reached its highest reading since April 2014.

Other measures of current manufacturing activity also indicated a pickup in growth. The new orders index climbed six points to a 10-year high of 24.8, and the growth rate of orders index moved up to 12.3. The capacity utilization index also pushed to its highest level in a decade at 22.5. Meanwhile, the shipments index moved down several points but remained positive and at a well-above-average level of 20.9.

Perceptions of broader business conditions improved in October. The general business activity index increased to 27.6, its highest reading since 2006. The company outlook index posted its 14th consecutive positive reading, holding steady at an elevated 25.8.

Labor market measures suggested solid employment growth and longer workweeks this month. The employment index came in at 16.7, unchanged from September and still well above average. Less than 5 percent of firms noted net layoffs—something that has only been seen five other times since the start of the survey more than 13 years ago. The hours worked index moved down but remained positive at 13.7, indicating a continuing lengthening of workweeks.
emphasis added
This was the last of the regional Fed surveys for October.

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

Based on these regional surveys, it seems likely the ISM manufacturing index will be strong again in October (to be released Wednesday, Nov 1st).

Personal Income increased 0.4% in September, Spending increased 1.0%

by Bill McBride on 10/30/2017 08:36:00 AM

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

Personal income increased $66.9 billion (0.4 percent) in September according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $53.0 billion (0.4 percent) and personal consumption expenditures (PCE) increased $136.0 billion (1.0 percent).
...
Real PCE increased 0.6 percent. The PCE price index increased 0.4 percent. Excluding food and energy, the PCE price index increased 0.1 percent.
The September PCE price index increased 1.6 percent year-over-year and the September PCE price index, excluding food and energy, increased 1.3 percent year-over-year.

The following graph shows real Personal Consumption Expenditures (PCE) through September 2017 (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 at expectations,  and the increase in PCE was slightly above expectations.

Sunday, October 29, 2017

Sunday Night Futures

by Bill McBride on 10/29/2017 09:20:00 PM

Weekend:
Schedule for Week of Oct 29, 2017

Monday:
• At 8:30 AM ET, Personal Income and Outlays for September. The consensus is for a 0.4% increase in personal income, and for a 0.9% increase in personal spending. And for the Core PCE price index to increase 0.1%.

• At 10:30 AM, Dallas Fed Survey of Manufacturing Activity for October. This is the last of the regional surveys for October.

From CNBC: Pre-Market Data and Bloomberg futures: S&P 500 future are down 3 and DOW futures are down 10 (fair value).

Oil prices were up over the last week with WTI futures at $53.98 per barrel and Brent at $60.54 per barrel.  A year ago, WTI was at $47, and Brent was at $46 - so oil prices are up solidly year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.45 per gallon. A year ago prices were at $2.20 per gallon - so gasoline prices are up 25 cents per gallon year-over-year.

October 2017: Unofficial Problem Bank list declines to 111 Institutions

by Bill McBride on 10/29/2017 08:14:00 AM

Note: Surferdude808 compiles an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for October 2017.

Here are the monthly changes and a few comments from surferdude808:

Update on the Unofficial Problem Bank List for October 2017.  The list declined by eight to 111 banks.  Aggregate assets dropped by $1.1 billion to $26.6 billion.  A year ago, the list held 173 institutions with assets of $54.9 billion.

Actions were terminated against First National Bank of Griffin, Griffin, GA ($260 million); Citizens Commerce National Bank, Versailles, KY ($223 million); First National Bank of Brookfield, Brookfield, IL ($175 million); Delanco Federal Savings Bank, Delanco, NJ ($126 million); Americana Community Bank, Sleepy Eye, MN ($110 million); Gunnison Valley Bank, Gunnison, UT ($81 million); and Citizens First State Bank of Walnut, Walnut, IL ($45 million).

The Farmers and Merchants State Bank of Argonia, Argonia, KS ($34 million) failed on October 13, 2017.  This is the seventh bank to fail this year and the 528th bank to fail in the wake of the Great Recession.  Of the 528 failures, ten have been in Kansas.

Saturday, October 28, 2017

Schedule for Week of Oct 29, 2017

by Bill McBride on 10/28/2017 08:09:00 AM

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

Other key indicators include Case-Shiller house prices for August, the October ISM manufacturing and non-manufacturing indexes, October auto sales and the September Trade deficit.

The FOMC meets on Tuesday and Wednesday, and no change to policy is expected at this meeting.

Also, the announcement of the new (or hopefully reappointed) Fed Chair is expected this week.

----- Monday, Oct 30th -----

8:30 AM: Personal Income and Outlays for September. The consensus is for a 0.4% increase in personal income, and for a 0.9% increase in personal spending. And for the Core PCE price index to increase 0.1%.

10:30 AM: Dallas Fed Survey of Manufacturing Activity for October. This is the last of the regional surveys for October.

----- Tuesday, Oct 31st -----

Case-Shiller House Prices Indices9:00 AM ET: S&P/Case-Shiller House Price Index for August.

This graph shows the nominal seasonally adjusted National Index, Composite 10 and Composite 20 indexes through the July 2017 report (the Composite 20 was started in January 2000).

The consensus is for a 6.0% year-over-year increase in the Comp 20 index for August.

9:45 AM: Chicago Purchasing Managers Index for October. The consensus is for a reading of 62.0, down from 65.2 in September.

10:00 AM: the Q3 Housing Vacancies and Homeownership from the Census Bureau.

----- Wednesday, Nov 1st -----

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

8:15 AM: The ADP Employment Report for October. This report is for private payrolls only (no government). The consensus is for 210,000 payroll jobs added in October, up from 135,000 added in September.

ISM PMI10:00 AM: ISM Manufacturing Index for October. The consensus is for the ISM to be at 59.5, down from 60.8 in September.

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

The ISM manufacturing index indicated expansion in September. The PMI was at 60.8% in September, the employment index was at 60.3%, and the new orders index was at 64.6%.

10:00 AM: Construction Spending for September. The consensus is for a 0.1% increase in construction spending.

Vehicle SalesAll day: Light vehicle sales for October. The consensus is for light vehicle sales to be 17.5 million SAAR in October, down from 18.6 million in September (Seasonally Adjusted Annual Rate).

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

2:00 PM: FOMC Meeting Announcement. The FOMC is expected to announce no change to policy at this meeting.

----- Thursday, Nov 2nd -----

8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for 235 thousand initial claims, up from 233 thousand the previous week.

----- Friday, Nov 3rd -----

8:30 AM: Employment Report for October. The consensus is for an increase of 323,000 non-farm payroll jobs added in October, up from the 33,000 non-farm payroll jobs lost in September.

Year-over-year change employmentThe consensus is for the unemployment rate to increase to 4.3%.

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

In September the year-over-year change was 1.78 million jobs.  This was the smallest year-over-year gain since 2012.

A key will be the change in wages.

U.S. Trade Deficit 8:30 AM: Trade Balance report for September from the Census Bureau.

This graph shows the U.S. trade deficit, with and without petroleum, through August. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

The consensus is for the U.S. trade deficit to be at $43.4 billion in September from $42.4 billion in August.

10:00 AM: the ISM non-Manufacturing Index for October. The consensus is for index to decrease to 58.7 from 59.8 in September.

Friday, October 27, 2017

Oil Rigs "Rig counts rebounded modestly this week"

by Bill McBride on 10/27/2017 06:45:00 PM

CR Note: Oil prices increased today with WTI at $53.90 per barrel, and Brent at $60.55. If those prices hold, we might see a pick up in the rig count going forward.

A few comments from Steven Kopits of Princeton Energy Advisors LLC on Oct 27, 2017:

• After last week’s bloodbath, rig counts rebounded modestly this week

• Total US oil rigs were up 1 to 737

• Horizontal oil rigs were up 2 to 630
...
• The gap between Brent and WTI continues to widen, today standing at $6.60 / barrel, and both WTI and Brent were commensurately strong, with WTI adding $1.40 just today.

• I think we’re likely reaching a local peak for WTI, so I expect we’ll see some retrenchment in the next few weeks somewhere, but the numbers speak to substantially stronger global oil demand than analysts currently think.
Oil Rig CountClick on graph for larger image.

CR note: This graph shows the US horizontal rig count by basin.

Graph and comments Courtesy of Steven Kopits of Princeton Energy Advisors LLC.

Five Economic Questions I'm Frequently Asked

by Bill McBride on 10/27/2017 03:55:00 PM

Here are five questions that people ask me all the time.

1. Are house prices in a bubble? Short answer: No.

2. Is a recession imminent (within the next 12 months)? No.

3. Is the stock market a bubble? I rarely comment on the stock market directly ...

4. Can investors use macro analysis? Yes, but not frequently.

5. Will Mr. Trump have a negative impact on the economy? Maybe.

I'll post some thoughts on each of these topics over the next couple of weeks.

Hotel Occupancy Rate increases YoY

by Bill McBride on 10/27/2017 02:37:00 PM

From HotelNewsNow.com: STR: US hotel results for week ending 21 October

The U.S. hotel industry reported positive year-over-year results in the three key performance metrics during the week of 15-21 October 2017, according to data from STR.

In comparison with the week of 16-22 October 2016, the industry recorded the following:

Occupancy: +0.9% to 72.8%
• Average daily rate (ADR): +1.7% to US$131.58
• Revenue per available room (RevPAR): +2.6% to US$95.82

Among the Top 25 Markets, Houston, Texas, reported the largest year-over-year increases in occupancy (+23.7% to 86.6%) and RevPAR (+25.9% to US$103.34). Post-Hurricane Harvey demand continues to drive performance levels in the market.
emphasis added
The following graph shows the seasonal pattern for the hotel occupancy rate using the four week average.

Hotel Occupancy RateThe red line is for 2017, dash light blue is 2016, dashed orange is 2015 (best year on record), blue is the median, and black is for 2009 (the worst year since the Great Depression for hotels).

Currently the occupancy rate, to date, is ahead of last year, and tied with the record year in 2015.  The hurricanes will probably push the annual occupancy rate to a new record in 2017.

Data Source: STR, Courtesy of HotelNewsNow.com

Q3 GDP: Investment

by Bill McBride on 10/27/2017 11:11:00 AM

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

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

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

Investment ContributionsClick on graph for larger image.

Residential investment (RI) decreased at a 6.0% annual rate in Q3.  Equipment investment increased at a 8.6% annual rate, and investment in non-residential structures decreased at a 5.2% annual rate.

On a 3 quarter trailing average basis, RI (red) is slightly negative, equipment (green), and nonresidential structures (blue) are positive.

The slight dip in RI isn't concerning - as long as it doesn't continue!

I'll post more on the components of non-residential investment once the supplemental data is released.

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

Residential Investment as a percent of GDP decreased in Q3, but has generally been increasing.  RI as a percent of GDP is only just above the bottom of the previous recessions - and I expect RI to continue to increase for the next couple of years.

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

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

non-Residential InvestmentThe third graph shows non-residential investment in structures, equipment and "intellectual property products".  Investment in equipment - as a percent of GDP - picked up.

Investment in residential structures declined slightly in Q3.

BEA: Real GDP increased at 3.0% Annualized Rate in Q3

by Bill McBride on 10/27/2017 08:33:00 AM

From the BEA: Gross Domestic Product: Third Quarter 2017 (Advance Estimate)

Real gross domestic product (GDP) increased at an annual rate of 3.0 percent in the third quarter of 2017, according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.1 percent.
...
The increase in real GDP in the third quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, nonresidential fixed investment, exports, and federal government spending. These increases were partly offset by negative contributions from residential fixed investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased .

The deceleration in real GDP growth in the third quarter primarily reflected decelerations in PCE, in nonresidential fixed investment, and in exports that were partly offset by an acceleration in private inventory investment and a downturn in imports.
emphasis added
The advance Q3 GDP report, with 3.0% annualized growth, was slightly above expectations.

Personal consumption expenditures (PCE) increased at 2.4% annualized rate in Q3, down from 3.3% in Q2.   Residential investment (RI) decreased at a 6.0% pace. Equipment investment increased at a 8.6% annualized rate, and investment in non-residential structures decreased at a 5.2% pace.

I'll have more later ...

Thursday, October 26, 2017

Friday: GDP

by Bill McBride on 10/26/2017 05:44:00 PM

From the Altanta Fed: GDPNow (as of Oct 26th)

The final GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2017 is 2.5 percent on October 26, down from 2.7 percent on October 25. The forecast of the contribution of inventory investment to third-quarter GDP growth declined from 1.01 percentage points to 0.80 percentage points after this morning's Advance Economic Indicators report from the U.S. Census Bureau.
emphasis added
From the NY Fed Nowcasting Report (as of Oct 20th)
The New York Fed Staff Nowcast stands at 1.5% for 2017:Q3 and 2.6% for 2017:Q4.
From Merrill Lynch: (as of Oct 26th)
the decline in inventories more than offset, lowering our 3Q GDP tracking estimate back down to 3.0% from 3.2%.
Friday:
• At 8:30 AM ET, Gross Domestic Product, 3rd quarter 2017 (Advance estimate). The consensus is that real GDP increased 2.5% annualized in Q3.

• At 10:00 AM, University of Michigan's Consumer sentiment index (final for October). The consensus is for a reading of 101.1, unchanged from the preliminary reading 101.1.

Goldman: "On Course for a December Hike"

by Bill McBride on 10/26/2017 01:46:00 PM

CR Note: The FOMC meets next week, and no change to policy is expected. However it appears another rate hike is coming at the December meeting.

A few brief excerpts from a piece by Goldman Sachs economist Spencer Hill: On Course for a December Hike

We expect the FOMC to keep policy unchanged next week and see few substantive changes to the statement.

We expect a slightly more upbeat tone on growth that acknowledges the disruptions from the hurricanes but characterizes them as temporary or in the past tense ... Despite the disappointing September CPI report, we do not expect a downgrade of the inflation assessment or outlook, reflecting broadly stable year-over-year inflation and the further decline in the unemployment rate.

We expect the statement to acknowledge that balance sheet normalization was “initiated” in October, but we do not expect further discussion of the topic, given the lack of adverse market reaction and the passive nature of the run-off. We also look for the characterization of current policy (“accommodative”) to remain unchanged.

Kansas City Fed: Regional Manufacturing Activity "Posts Strong Growth" in October

by Bill McBride on 10/26/2017 11:00:00 AM

From the Kansas City Fed: Tenth District Manufacturing Activity Posts Strong Growth

The Federal Reserve Bank of Kansas City released the October 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 posted strong growth and expectations about future activity improved further.

“Factory activity accelerated further in our region this month, posting its highest composite reading since 2011,” said Wilkerson. 
...
The month-over-month composite index was 23 in October, the highest since March 2011, up from 17 in September and 16 in August.  The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes.  Factory activity increased strongly at both durable and non-durable goods plants, particularly for food, plastics, computer and electronic products.  Month-over-month indexes were mostly higher.  The new orders index increased moderately, and the order backlog index increased to its highest reading since March 2011.  The employment and new orders for exports indexes increased slightly.  However, the shipments index was unchanged, and the production index eased somewhat but remained high.  The finished goods inventory index jumped back into positive territory, and the raw materials inventory index also increased moderately. 
emphasis added
All of the regional Fed surveys have been strong in October.

NAR: Pending Home Sales Index unchanged in September, Down 3.5% Year-over-year

by Bill McBride on 10/26/2017 10:06:00 AM

From the NAR: Pending Home Sales Flatten in September

Pending home sales were unchanged in September, but activity declined on an annual basis both nationally and in all major regions, according to the National Association of Realtors®.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, was at 106.0 in September (unchanged from a downwardly revised August figure). The index is now at its lowest reading since January 2015 (104.7), is 3.5 percent below a year ago, and has fallen on an annual basis in five of the past six months
...
The PHSI in the Northeast rose 1.2 percent to 94.5 in September, but is still 2.4 percent below a year ago. In the Midwest the index climbed 1.4 percent to 102.9 in September, but remains 2.5 percent lower than September 2016.

Pending home sales in the South decreased 2.3 percent to an index of 115.9 in September and are now 5.0 percent below last September. The index in the West grew 1.9 percent in September to 102.7, but is 2.9 percent below a year ago.
emphasis added
This was below expectations of a 0.5% increase for this index. Note: Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in October and November.

Weekly Initial Unemployment Claims increase to 233,000

by Bill McBride on 10/26/2017 08:34:00 AM

The DOL reported:

In the week ending October 21, the advance figure for seasonally adjusted initial claims was 233,000, an increase of 10,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 222,000 to 223,000. The 4-week moving average was 239,500, a decrease of 9,000 from the previous week's revised average. The previous week's average was revised up by 250 from 248,250 to 248,500.

Claims taking procedures continue to be severely disrupted in Puerto Rico and the Virgin Islands as a result of power outages and infrastructure damage caused by Hurricanes Irma and Maria.
emphasis added
The previous week was revised up.

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 239,500.

This was close to the consensus forecast.

Wednesday, October 25, 2017

Thursday: Unemployment Claims, Pending Home Sales

by Bill McBride on 10/25/2017 08:02:00 PM

From Matthew Graham at Mortgage News Daily: Rates Now Up an Eighth of a Point From Last Week

Mortgage rates continued higher at a relatively fast pace today, pushing farther into the highest levels since early July.  As of this afternoon, the average lender is right in line with those rate offerings from July.  Any higher and we'd have to go back another 2 months to see comparable rates.
...
In fact, for many lenders, the cost of offering a 30yr fixed rate of 3.875% last week now matches the cost of a 4.0% rate this week.  Clients who'd seen quotes of 4.0% are now seeing 4.125%.  The average is somewhere in between for top tier scenarios.
emphasis added
Thursday:
• At 8:30 AM ET, The initial weekly unemployment claims report will be released. The consensus is for 235 thousand initial claims, up from 222 thousand the previous week.

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

Philly Fed: State Coincident Indexes increased in 38 states in September

by Bill McBride on 10/25/2017 02:49:00 PM

From the Philly Fed:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for September 2017. Over the past three months, the indexes increased in 37 states and decreased in 13, for a three-month diffusion index of 48. In the past month, the indexes increased in 38 states, decreased in 10, and remained stable in two, for a one-month diffusion index of 56.
emphasis added
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 by production workers, 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 September, 39 states had increasing activity (including minor increases).

The downturn in 2015 and 2016, in the number of states increasing, was mostly related to the decline in oil prices.  

The reason for the recent sharp decrease in the number of states with increasing activity is unclear.

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 all or mostly green during most of the recent expansion.

Recently several states have turned red.

Source: Philly Fed. Note: For complaints about red / green issues, please contact the Philly Fed.

A few Comments on September New Home Sales

by Bill McBride on 10/25/2017 12:28:00 PM

New home sales for September were reported at 667,000 on a seasonally adjusted annual rate basis (SAAR). This was well above the consensus forecast, and the highest sales rate since October 2007. The three previous months were revised up slightly.

There was clearly some rebound following hurricane Harvey. Sales in the South were up sharply from August, and at the highest level since July 2007. Some contracts in the South, that would have been signed in August, were probably delayed until September.  Also some people who lost homes might have signed contracts for new homes in September (New home sales are counted when contracts are signed).

Sales were up 17.0% year-over-year in September.

Earlier: New Home Sales increase to 667,000 Annual Rate in September.

New Home Sales 2015 2016Click on graph for larger image.

This graph shows new home sales for 2016 and 2017 by month (Seasonally Adjusted Annual Rate).

For the first nine months of 2017, new home sales are up 8.6% compared to the same period in 2016.

This was a solid year-over-year increase through September.

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 several years.

Distressing GapThe "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through September 2017. This graph starts in 1994, but the relationship had been fairly steady back to the '60s.

Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales.   The gap has persisted even though distressed sales are down significantly, since new home builders focused on more expensive homes.

I expect existing home sales to move more sideways, 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. If not, then the gap will persist.

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 since the housing bust, 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.

New Home Sales increase to 667,000 Annual Rate in September

by Bill McBride on 10/25/2017 10:16:00 AM

The Census Bureau reports New Home Sales in September were at a seasonally adjusted annual rate (SAAR) of 667 thousand.

The previous three months combined were revised up slightly.

"Sales of new single-family houses in September 2017 were at a seasonally adjusted annual rate of 667,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 18.9 percent above the revised August rate of 561,000 and is 17.0 percent above the September 2016 estimate of 570,000."
emphasis added
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 over the last several years, new home sales are still somewhat low historically.

The second graph shows New Home Months of Supply.

New Home Sales, Months of SupplyThe months of supply decreased in September to 5.0 months from 6.0 month in August.

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

This is in the normal range (less than 6 months supply is normal).
"The seasonally-adjusted estimate of new houses for sale at the end of September was 279,000. This represents a supply of 5.0 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 September 2017 (red column), 52 thousand new homes were sold (NSA). Last year, 44 thousand homes were sold in September.

The all time high for September was 99 thousand in 2005, and the all time low for September was 24 thousand in 2011.

This was well above expectations of 555,000 sales SAAR, and the previous months were revised up slightly.   Some of the pickup was probably hurricane related (delayed signings). I'll have more later today.

MBA: Mortgage Applications Decrease in Latest Weekly Survey

by Bill McBride on 10/25/2017 07:00:00 AM

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

Mortgage applications decreased 4.6 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending October 20, 2017. The previous week’s results included an adjustment for the Columbus Day holiday.

... The Refinance Index decreased 3 percent from the previous week. The seasonally adjusted Purchase Index decreased 6 percent from one week earlier. The unadjusted Purchase Index increased 4 percent compared with the previous week and was 10 percent higher than the same week one year ago. ...

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($424,100 or less) decreased to 4.14 percent from 4.16 percent, with points remaining unchanged at 0.44 (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 since 1990.

Refinance activity will not pick up significantly unless mortgage rates fall well below 4%.


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

According to the MBA, purchase activity is up 10% year-over-year.

Tuesday, October 24, 2017

Wednesday: New Home Sales, Durable Goods

by Bill McBride on 10/24/2017 08:35:00 PM

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

• At 8:30 AM, Durable Goods Orders for September from the Census Bureau. The consensus is for a 1.0% increase in durable goods orders.

• At 9:00 AM, FHFA House Price Index for August 2017. This was originally a GSE only repeat sales, however there is also an expanded index.

• At 10:00 AM, New Home Sales for September from the Census Bureau. The consensus is for 555 thousand SAAR, down from 560 thousand in August.

Freddie Mac: Mortgage Serious Delinquency rate increased in September

by Bill McBride on 10/24/2017 05:09:00 PM

Freddie Mac reported that the Single-Family serious delinquency rate in September was at 0.86%, up from 0.84% in August.  Freddie's rate is down from 1.02% in September 2016.

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

This is the highest serious delinquency rate since May of this year.

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

In the short term - over the next several months - the rate will probably increase slightly due to the hurricanes.

After the hurricane bump, maybe the rate will decline another 0.2 to 0.3 percentage points or so to a cycle bottom, but this is pretty close to normal.

Note: Fannie Mae will report for September soon.

Vehicle Forecast: Sales Expected to Exceed 17 million SAAR in October

by Bill McBride on 10/24/2017 04:38:00 PM

The automakers will report October vehicle sales on Wednesday, Nov 1st.

Note: There are 25 selling days in October 2017, there were 26 selling days in October 2016.

From WardsAuto: U.S. Forecast: October Auto Sales Rate Flat with Prior-Year

A WardsAuto forecast calls for U.S. automakers to deliver 1.31 million light vehicles in October. A daily sales rate of 52,579 units over 25 days is nearly equivalent to like-2016’s 52,584 units for 26 days.
...
The report puts the seasonally adjusted annual rate of sales for October at 17.55 million units, behind year-ago’s 17.80 million and prior-month’s 18.48 million mark.
emphasis added
Sales had been below 17 million SAAR for six consecutive months, until September, when sales spiked due to buying following Hurricane Harvey. Sales in October were probably also elevated due to the hurricanes.

Chemical Activity Barometer "Bounces Back" in October

by Bill McBride on 10/24/2017 12:48:00 PM

Note: This appears to be a leading indicator for industrial production.

From the American Chemistry Council: Chemical Activity Barometer Bounces Back, Following Historic September Storms

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), notched an increase over September’s reading both on a three-month moving average (3MMA) basis and an unadjusted basis. The CAB was up 0.2 percent and 0.7 percent, respectively. The increases reflected a bounce back from the effects of Hurricanes Harvey and Irma. Compared to a year earlier, the CAB is up 3.0 percent on a 3MMA basis, a slower pace than the previous nine months, but one that continues to suggest further gains in U.S. business activity into 2018.
...
Applying the CAB back to 1912, it has been shown to provide a lead of two to fourteen months, with an average lead of eight months at cycle peaks as determined by the National Bureau of Economic Research. The median lead was also eight months. At business cycle troughs, the CAB leads by one to seven months, with an average lead of four months. The median lead was three months. The CAB is rebased to the average lead (in months) of an average 100 in the base year (the year 2012 was used) of a reference time series. The latter is the Federal Reserve’s Industrial Production Index.
emphasis added
Chemical Activity Barometer Click on graph for larger image.

This graph shows the year-over-year change in the 3-month moving average for the Chemical Activity Barometer compared to Industrial Production.  It does appear that CAB (red) generally leads Industrial Production (blue).

CAB increased solidly in early 2017 suggesting an increase in Industrial Production. The year-over-year increase in the CAB has slowed recently, but this still suggests further gains in industrial production in 2018.

Richmond Fed: "Manufacturing Activity Remained Positive in October"

by Bill McBride on 10/24/2017 10:03:00 AM

From the Richmond Fed: Reports on Fifth District Manufacturing Activity Remained Positive in October

Reports on Fifth District manufacturing activity remained positive in October, according to the latest survey by the Federal Reserve Bank of Richmond. The composite index dropped, affected by a notable decline in the shipments index, which fell from 22 to 9, but it remained positive across all components, indicating continued growth. While most manufacturing indexes fell in October, the wage index increased from 17 to 24, which is the highest it has been since May of 2000.

Manufacturing firms remained optimistic about growth in the next six months. Most expectations indexes rose, with the exception of employment and average workweek, which both remained positive and were well above current values.
emphasis added
This suggests decent growth in October.

Monday, October 23, 2017

"Mortgage Rates Holding Recent Highs to Begin Week"

by Bill McBride on 10/23/2017 06:46:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Holding Recent Highs to Begin Week

Mortgage rates were generally unchanged today despite slight improvements in underlying bond markets.  As of last Friday, the average lender was quoting rates at or near the highest levels in more than 2 months, meaning today earns the same dubious distinction.  The saving grace is that in relative terms, the past 2-3 months have been historically less volatile than normal, and conventional 30yr fixed rates at 4% (or just under) are still widely available for top tier scenarios.
emphasis added
Tuesday:
• At 10:00 AM ET, 10:00 AM: Richmond Fed Survey of Manufacturing Activity for October.

NMHC: Apartment Market Tightness Index remained negative for Eighth Consecutive Quarter

by Bill McBride on 10/23/2017 02:19:00 PM

From the National Multifamily Housing Council (NMHC): Apartment Markets Decline Slightly in the October NMHC Quarterly Survey

Market conditions for the apartment industry remained soft in the National Multifamily Housing Council’s (NMHC) October Quarterly Survey of Apartment Market Conditions. While the Market Tightness (37), Sales Volume (45) and Equity Finance (46) Indexes remained below the breakeven level of 50 – with the Debt Financing Index (51) edging just above 50 – there was little change compared with three months earlier.

“The apartment market is headed into a seasonally slow leasing period with new deliveries easing upward pressure on rents and occupancy rates in many markets around the country,” said NMHC Chief Economist Mark Obrinsky. “The big increase in multifamily starts in 2015 and 2016 is finally filtering through to the marketplace on a broad basis.”

“Leasing activity appears to have picked up in Texas and Florida in the aftermath of Hurricanes Harvey and Irma. Some respondents also noted that fires on the West Coast may be pushing occupancy rates up,” said Obrinsky. “Elsewhere, new deliveries are leading to concessions becoming more commonplace.”

The Market Tightness Index decreased from 42 to 37, marking the eighth consecutive quarter of overall declining conditions. Forty percent of respondents reported looser conditions than three months prior, compared to just 14 percent who reported tighter conditions.
emphasis added
Apartment Tightness Index
Click on graph for larger image.

This graph shows the quarterly Apartment Tightness Index. Any reading below 50 indicates looser conditions from the previous quarter. This indicates market conditions were looser over the last quarter.

As I've mentioned before, this index helped me call the bottom for effective rents (and the top for the vacancy rate) early in 2010.

This is the eighth consecutive quarterly survey indicating looser conditions - it appears supply has caught up with demand - and I expect rent growth to continue to slow.

Duy's FedWatch: In Defense of the conventional Wisdom

by Bill McBride on 10/23/2017 02:05:00 PM

From Tim Duy at FedWatch: In Defense of the conventional Wisdom. Excerpt:

Altogether, looking at the history of the past sixty years or so, I think it is reasonable for a policymaker to conclude that while they may not yet have a perfect model to guide policy, they have a reasonable approximation to a perfect model that delivers outcomes that are generally consistent with their mandates. Moreover, are the potential gains of adopting a new framework such as, for example a nominal GDP target, worth the potential costs of abandoning the conventional wisdom? I think that is a reasonable question.

In short, while many, including myself, have criticized the Fed for living in the past and continuously re-fighting the inflation wars of the 1970s, I can argue that those criticisms fail to acknowledge the improvement of outcomes since the 1970s. We argue about 50bp of inflation, for example, when the real gains were made in the first 500bp. This issue is worth considering before dismissing the validity of the conventional wisdom among monetary policymakers. They have good reasons for maintaining that wisdom.

Update: For Fun, Stock Market as Barometer of Policy Success

by Bill McBride on 10/23/2017 11:48:00 AM

Note: This is a repeat of a June post with updated statistics and graph.

There are a number of observers who think the stock market is the key barometer of policy success.  My view is there are many measures of success - and that the economy needs to work well for a majority of the people - not just stock investors.

However, for example, Treasury Secretary Steven Mnuchin was on CNBC on Feb 22, 2017, and was asked if the stock market rally was a vote of confidence in the new administration, he replied: "Absolutely, this is a mark-to-market business, and you see what the market thinks."

And Larry Kudlow wrote in 2007: A Stock Market Vote of Confidence for Bush: "I have long believed that stock markets are the best barometer of the health, wealth and security of a nation. And today's stock market message is an unmistakable vote of confidence for the president."

Note: Kudlow's comments were made a few months before the market started selling off in the Great Recession. For more on Kudlow, see: Larry Kudlow is usually wrong

For fun, here is a graph comparing S&P500 returns (ex-dividends) under Presidents Trump and Obama:

Stock Market Performance Click on graph for larger image.

Blue is for Mr. Obama, Orange is for Mr. Trump.

At this point, the S&P500 is up 13.3% under Mr. Trump compared to up 34.3% under Mr. Obama for the same number of market days.

Chicago Fed "Index Points to a Pickup in Economic Growth in September"

by Bill McBride on 10/23/2017 09:04:00 AM

From the Chicago Fed: Index Points to a Pickup in Economic Growth in September

Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) moved up to +0.17 in September from –0.37 in August. All four broad categories of indicators that make up the index increased from August, and three of the four categories made positive contributions to the index in September. The index’s three-month moving average, CFNAI-MA3, was unchanged at –0.16 in September.
emphasis added
This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.

Chicago Fed National Activity Index Click on graph for larger image.

This suggests economic activity was close to the historical trend in September (using the three-month average).

According to the Chicago Fed:
The index is a weighted average of 85 indicators of growth in national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.
...
A zero value for the monthly index has been associated with the national economy expanding at its historical trend (average) rate of growth; negative values with below-average growth (in standard deviation units); and positive values with above-average growth.

Sunday, October 22, 2017

Sunday Night Futures

by Bill McBride on 10/22/2017 07:48:00 PM

Weekend:
Schedule for Week of Oct 22, 2017

Monday:
• At 8:30 AM ET, Chicago Fed National Activity Index for September. This is a composite index of other data.

From CNBC: Pre-Market Data and Bloomberg futures: S&P 500 future are up 3 and DOW futures are up 22 (fair value).

Oil prices were up over the last week with WTI futures at $52.15 per barrel and Brent at $58.01 per barrel.  A year ago, WTI was at $50, and Brent was at $50 - so oil prices are up year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.44 per gallon. A year ago prices were at $2.22 per gallon - so gasoline prices are up 22 cents per gallon year-over-year.

Hotel Occupancy Rate increases YoY, Just behind Record Year

by Bill McBride on 10/22/2017 09:53:00 AM

From HotelNewsNow.com: STR: US hotel results for week ending 14 October

The U.S. hotel industry reported positive year-over-year results in the three key performance metrics during the week of 8-14 October 2017, according to data from STR.

In comparison with the week of 9-15 October 2016, the industry recorded the following:

Occupancy: +2.4% to 72.3%
• Average daily rate (ADR): +5.3% to US$130.83
• Revenue per available room (RevPAR): +7.8% to US$94.58

STR analysts note that U.S. performance growth was lifted due to a comparison with a Jewish holiday time period last year.

Among the Top 25 Markets, Houston, Texas, reported the largest year-over-year increases in occupancy (+37.3% to 85.2%) and RevPAR (+57.0% to US$99.76).
emphasis added
The following graph shows the seasonal pattern for the hotel occupancy rate using the four week average.

Hotel Occupancy RateThe red line is for 2017, dash light blue is 2016, dashed orange is 2015 (best year on record), blue is the median, and black is for 2009 (the worst year since the Great Depression for hotels).

Currently the occupancy rate, to date, is ahead of last year, and just behind the record year in 2015.  The hurricanes might push the annual occupancy rate to a new record.

Data Source: STR, Courtesy of HotelNewsNow.com

Saturday, October 21, 2017

Schedule for Week of Oct 22, 2017

by Bill McBride on 10/21/2017 08:11:00 AM

The key economic reports this week are the advance estimate of Q3 GDP, and New Home sales for September.

----- Monday, Oct 23rd -----

8:30 AM ET: Chicago Fed National Activity Index for September. This is a composite index of other data.

----- Tuesday, Oct 24th -----

10:00 AM: Richmond Fed Survey of Manufacturing Activity for October.

----- Wednesday, Oct 25th -----

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

8:30 AM: Durable Goods Orders for September from the Census Bureau. The consensus is for a 1.0% increase in durable goods orders.

9:00 AM ET: FHFA House Price Index for August 2017. This was originally a GSE only repeat sales, however there is also an expanded index.

New Home Sales10:00 AM ET: New Home Sales for September from the Census Bureau.

This graph shows New Home Sales since 1963. The dashed line is the August sales rate.

The consensus is for 555 thousand SAAR, down from 560 thousand in August.

----- Thursday, Oct 26th -----

8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for 235 thousand initial claims, up from 222 thousand the previous week.

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

----- Friday, Oct 27th -----

8:30 AM: Gross Domestic Product, 3rd quarter 2017 (Advance estimate). The consensus is that real GDP increased 2.5% annualized in Q3.

10:00 AM: University of Michigan's Consumer sentiment index (final for October). The consensus is for a reading of 101.1, unchanged from the preliminary reading 101.1.

Friday, October 20, 2017

Yellen: "A Challenging Decade and a Question for the Future"

by Bill McBride on 10/20/2017 08:00:00 PM

From Fed Chair Janet Yellen: A Challenging Decade and a Question for the Future. Excerpt:

A Key Question for the Future

As the financial crisis and Great Recession fade into the past and the stance of monetary policy gradually returns to normal, a natural question concerns the possible future role of the unconventional policy tools we deployed after the onset of the crisis. My colleagues on the FOMC and I believe that, whenever possible, influencing short-term interest rates by targeting the federal funds rate should be our primary tool. As I have already noted, we have a long track record using this tool to pursue our statutory goals. In contrast, we have much more limited experience with using our securities holdings for that purpose.

Where does this assessment leave our unconventional policy tools? I believe their deployment should be considered again if our conventional tool reaches its limit--that is, when the federal funds rate has reached its effective lower bound and the U.S. economy still needs further monetary policy accommodation.

Does this mean that it will take another Great Recession for our unconventional tools to be used again? Not necessarily. Recent studies suggest that the neutral level of the federal funds rate appears to be much lower than it was in previous decades.  Indeed, most FOMC participants now assess the longer-run value of the neutral federal funds rate as only 2-3/4 percent or so, compared with around 4-1/4 percent just a few years ago.  With a low neutral federal funds rate, there will typically be less scope for the FOMC to reduce short-term interest rates in response to an economic downturn, raising the possibility that we may need to resort again to enhanced forward rate guidance and asset purchases to provide needed accommodation.

Of course, substantial uncertainty surrounds any estimates of the neutral level of short-term interest rates. In this regard, there is an important asymmetry to consider. If the neutral rate turns out to be significantly higher than we currently estimate, it is less likely that we will have to deploy our unconventional tools again. In contrast, if the neutral rate is as low as we estimate or even lower, we will be glad to have our unconventional tools in our toolkit.

The bottom line is that we must recognize that our unconventional tools might have to be used again. If we are indeed living in a low-neutral-rate world, a significantly less severe economic downturn than the Great Recession might be sufficient to drive short-term interest rates back to their effective lower bound.

Oil Rigs "The US oil rig count was crushed this week"

by Bill McBride on 10/20/2017 05:23:00 PM

A few comments from Steven Kopits of Princeton Energy Advisors LLC on Oct 20, 2017:

• The US oil rig count was crushed this week

• Total US oil rigs were down 7 to 736

• Horizontal oil rigs were down 10 to 638, the worst week for horizontal rigs since March 2016
...
• The loss of rigs is consistent with our lagged WTI model (below), but the scale of the decline this week was stunning.
Oil Rig CountClick on graph for larger image.

CR note: This graph shows the US horizontal rig count by basin.

Graph and comments Courtesy of Steven Kopits of Princeton Energy Advisors LLC.

Q3 GDP Forecasts

by Bill McBride on 10/20/2017 02:52:00 PM

From the Altanta Fed: GDPNow

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2017 is 2.7 percent on October 18, unchanged from October 13. The forecast of third-quarter real residential investment growth inched down from -4.1 percent to -4.3 percent after this morning's new residential construction release from the U.S. Census Bureau.
emphasis added
From the NY Fed Nowcasting Report
The New York Fed Staff Nowcast stands at 1.5% for 2017:Q3 and 2.6% for 2017:Q4
From Merrill Lynch:
We revise up our 3Q GDP forecast to 3.0% marking to market with our tracking estimate.
CR Note: The BEA is scheduled to release the advance estimate for Q3 GDP next week.  Based on the August report, PCE looks sluggish in Q3 (mid-month method at 1.7%).