by Bill McBride on 2/26/2015 08:13:00 PM
Thursday, February 26, 2015
[T]he idea of core inflation. Why do we need such a concept, and how should it be measured?Friday:
So: core inflation is usually measured by taking food and energy out of the price index; but there are alternative measures, like trimmed-mean and median inflation, which are getting increasing attention.
And people who say things like “That’s a stupid concept — people have to spend money on food and gas, so they should be in your inflation measures” are missing the point. Core inflation isn’t supposed to measure the cost of living, it’s supposed to measure something else: inflation inertia.
Think about it this way. Some prices in the economy fluctuate all the time in the face of supply and demand; food and fuel are the obvious examples. Many prices, however, don’t fluctuate this way — they’re set by oligopolistic firms, or negotiated in long-term contracts, so they’re only revised at intervals ranging from months to years. Many wages are set the same way.
The key thing about these less flexible prices — the insight that got Ned Phelps his Nobel — is that because they aren’t revised very often, they’re set with future inflation in mind. Suppose that I’m setting my price for the next year, and that I expect the overall level of prices — including things like the average price of competing goods — to rise 10 percent over the course of the year. Then I’m probably going to set my price about 5 percent higher than I would if I were only taking current conditions into account.
And that’s not the whole story: because temporarily fixed prices are only revised at intervals, their resets often involve catchup. ...
The standard measure tries to do this by excluding the obviously non-inertial prices: food and energy. But are they the whole story? Of course not ... Hence the growing preference among many economists for measures like medians and trimmed means, which exclude prices that move by a lot in any given month, presumably therefore isolating the prices that move sluggishly, which is what we want.
• At 8:30 AM ET, Gross Domestic Product, 4th quarter 2014 (second estimate). The consensus is that real GDP increased 2.1% annualized in Q4, down from the advance estimate of 2.6%.
• Also at 9:45 AM, the Chicago Purchasing Managers Index for February. The consensus is for a reading of 58.3, down from 59.4 in January.
• At 10:00 AM: University of Michigan's Consumer sentiment index (final for February). The consensus is for a reading of 94.0, up from the preliminary reading of 93.6, but down from the December reading of 98.1.
• Also at 10:00 AM, the Pending Home Sales Index for January. The consensus is for a 2.0% increase in the index.
• At 1:30 PM: Speech, Fed Vice Chairman Stanley Fischer, Conducting Monetary Policy with a Large Balance Sheet, At the 2015 U.S. Monetary Policy Forum, New York, New York
by Bill McBride on 2/26/2015 05:41:00 PM
Freddie Mac reported that the Single-Family serious delinquency rate declined in January to 1.86%, down from 1.88% in December. Freddie's rate is down from 2.34% in January 2014, and the rate in January was the lowest level since December 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 January next week.
Click on graph for larger image
Although the rate is generally declining, the "normal" serious delinquency rate is under 1%.
The serious delinquency rate has fallen 0.48 percentage points over the last year - and the rate of improvement has slowed recently - but at that rate of improvement, the serious delinquency rate will not be below 1% until late 2016.
Note: Very few seriously delinquent loans cure with the owner making up back payments - most of the reduction in the serious delinquency rate is from foreclosures, short sales, and modifications.
So even though distressed sales are declining, I expect an above normal level of Fannie and Freddie distressed sales for 2+ more years (mostly in judicial foreclosure states).
by Bill McBride on 2/26/2015 02:58:00 PM
The automakers will report February vehicle sales on Tuesday, March 3rd. Sales in January were at 16.6 million on a seasonally adjusted annual rate basis (SAAR), and it appears sales in February will be about the same, and will probably be the best February since 2002.
Note: There were 24 selling days in February, the same as last year. Here are a couple of forecasts:
From J.D. Power: New-Vehicle Retail Sales in February Expected to Cross the Million Mark
New-vehicle retail sales in February 2015 are projected to reach 1,033,100 units, which is a 9 percent increase compared with February 2014 and the highest retail sales volume for the month as well as the first time that February retail sales are expected to exceed 1 million units since February 2002, when sales hit 1.1 million. ...And from TrueCar: TrueCar forecasts sustained U.S. auto sales expansion in February with 8.5% volume increase
Total new light-vehicle sales in February 2015 are expected to reach 1.3 million units, a 9 percent increase, compared with February 2014, and match the recent high for the month set in February 2002. [16.7 million SAAR] Fleet volume in February is projected to hit 264,000 units, accounting for 20 percent of total sales.
New-vehicle sales in early 2015 are continuing the robust pattern from the fourth quarter of 2014. As a result, LMC Automotive is increasing its 2015 forecast for both retail and total light vehicles by approximately 40,000 units, each still rounding to 14.0 million and 17.0 million, respectively.
"Strength at the start of 2015 is a key factor in keeping the industry on target to surpass annual vehicle sales of 17 million units for the first time since 2001," said Jeff Schuster, senior vice president of forecasting at LMC Automotive.
TrueCar, Inc. ... projects the pace of February auto sales expanded to a seasonally adjusted annualized rate (SAAR) of 16.7 million new units on continued strong consumer demand.Another strong month for auto sales.
New light vehicle sales, including fleet, should reach 1,295,600 units for the month, up 8.5 percent over a year ago. This same increase is expected on a daily selling rate (DSR) basis with 24 selling days this February versus a year ago.
"Strong February auto sales signal a very healthy U.S. economy," said Eric Lyman, vice president of industry insights for TrueCar. "Given this month's robust demand, the industry remains on track to hit TrueCar's 17 million-unit projection for the 2015."
by Bill McBride on 2/26/2015 12:18:00 PM
The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:
According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (1.9% annualized rate) in January. The 16% trimmed-mean Consumer Price Index rose 0.1% (1.3% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.Note: The Cleveland Fed has the median CPI details for January here. Motor fuel declined at a 92% annualized rate in January, following a 69% annualized rate decline in December, a 55% annualized rate decline in November, and a 31% annualized rate decline in October. However motor fuel will add to inflation in February.
Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers fell 0.7% (−7.8% annualized rate) in January. The CPI less food and energy rose 0.2% (2.2% annualized rate) on a seasonally adjusted basis.
Click on graph for larger image.
This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.2%, the trimmed-mean CPI rose 1.8%, and the CPI less food and energy rose 1.6%. Core PCE is for December and increased 1.3% year-over-year.
On a monthly basis, median CPI was at 1.9% annualized, trimmed-mean CPI was at 1.3% annualized, and core CPI was at 2.2% annualized.
On a year-over-year basis these measures suggest inflation remains below the Fed's target of 2% (median CPI is slightly above 2%).
The key question for the Fed is if these key measures will move back towards 2%.
Kansas City Fed: Regional Manufacturing Activity Expanded "Slightly" in February, Weaker Energy Sector
by Bill McBride on 2/26/2015 11:36:00 AM
From the Kansas City Fed: Tenth District Manufacturing Activity Rose Just Slightly
The Federal Reserve Bank of Kansas City released the February 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 rose just slightly from the previous month, but producers expected activity to pick up moderately in the months ahead.We are seeing some impact from lower oil prices - however, overall, lower prices is a positive for the economy.
“We saw a further slowing in growth this month, driven in part by weaker factory activity in our energy states”, said Wilkerson. “The raw materials prices index also fell for the first time in over five years.”
The month-over-month composite index was 1 in February, down from 3 in January and 8 in December. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. The overall slower growth was mostly attributable to large declines in primary metals and computer and electronics production. Looking across District states, the weakest activity was in Colorado, Oklahoma, and New Mexico. In contrast, production activity in the fabricated metals and machinery industries both increased moderately. ... the new orders index inched lower from 5 to 3, and the employment index fell for the second straight month.