by Bill McBride on 5/24/2013 09:25:00 PM

This morning I posted some comments from Michelle Meyer at Merrill Lynch on the likely path of the labor force participation rate. She wrote:

[W]e forecast the LFPR will slip slightly this year, but with a stronger recovery under way next year, the LFPR should start to level off some and potentially increase beginning in 2015.

The following table is an estimate of the unemployment rate in December 2013 and December 2014 assuming the LFPR stays close to the current level of 63.3% (I looked at 63.0%, 63.3% and 63.6%).  The current unemployment rate is 7.5%.

I also looked at three rates of payroll job growth, 167 thousand per month, 185 thousand per month and 200 thousand per month. I think it is possible that employment growth will pick up later this year, and if that happens, the unemployment rate will fall further in 2014.

Caveat: The payroll estimate is for the establishment survey, and the unemployment rate and participation rate are from the household survey - and this is just a rough estimate.

Looking at the table, the participation rate is very important for estimating the unemployment rate.  If the participation rate stays steady, the unemployment rate will probably be close to 7.1% in December at the current rate of payroll growth, and around 6.6% in December 2014.  If the participation rate dips further, the unemployment rate could fall below 7% this year and low 6%s at the end of 2014.

December 2013 Unemployment Rate
	Jobs added per month (000s)
Participation Rate	167	183	200
63.0%	6.8%	6.7%	6.6%
63.3%	7.2%	7.1%	7.1%
63.6%	7.6%	7.5%	7.4%
December 2014 Unemployment Rate
	Jobs added per month (000s)
Participation Rate	167	183	200
63.0%	6.4%	6.2%	6.0%
63.3%	6.8%	6.6%	6.4%
63.6%	7.2%	7.0%	6.7%

by Bill McBride on 5/24/2013 03:06:00 PM

From housing economist Tom Lawler:

Dataquick released its April report on Las Vegas home sales based on property records in Clark County, Nevada, and the report portrayed “mixed” news on the health of the Vegas housing market. Here are some summary stats on home sales and median prices, as well as various shares of sales in the report.

Selected Share of New And Resale Home Sales, Las Vegas
	Apr-12	Apr-13
Absentee Buyer Share of Total Sales	50.5%	53.1%
All-Cash Share of Total Sales	53.6%	56.6%
Foreclosure Share of Resales	43.7%	12.2%
Estimated Short-Sales Share of Resales	29.4%	30.3%

Las Vegas-Paradise, Nevada Home Sales
Number of sales	Apr-12	Mar-13	Apr-13	YOY % Change
Resale houses	3,233	2,998	3,309	2.4%
Resale condos	807	803	848	5.1%
New homes	510	684	712	39.6%
All homes	4,550	4,485	4,869	7.0%
Median sale price	Apr-12	Mar-13	Apr-13	YOY % Change
Resale houses	$122,000	$155,199	$160,000	31.1%
Resale condos	$60,000	$79,995	$84,948	41.6%
New homes	$197,320	$220,000	$234,981	19.1%
All homes	$119,000	$155,000	$160,000	34.5%

The report also included some stats on buyers of multiple homes, as well as median home prices for absentee-buyer and all-cash home sales.

Based on the share and other data in the report, here are some “derived” stats for home sales by various “cuts.” Also included are partial data for April 2011 based on last year’s report. (Note: The short-sales share for April 2011 is not available, because Dataquick revised its methodology for estimating short sales in the latter part of last year but has not released historical revisions to the public.)

From several perspectives the data suggest that the Vegas market has been “sizzlin’ hot,” mainly reflecting increased buying from investors despite huge declines in the number of “distressed” properties for sale. To others, however, the lack of any growth in homes purchased by folks who plan to live in the purchased home suggests that the Vegas market is disturbingly “cold.”

April Home Sales, Las Vegas Region				April 2013 vs
	Apr-11	Apr-12	Apr-13	Apr-11	Apr-12
Total	4,490	4,550	4,869	8.4%	7.0%
New	399	510	712	78.4%	39.6%
Existing	4,091	4,040	4,157	1.6%	2.9%
Absentee Buyer	2,128	2,298	2,585	21.5%	12.5%
Primary Residence	2,362	2,252	2,284	-3.3%	1.4%
All-Cash	2,425	2,439	2,756	13.6%	13.0%
Mortgage Financed	2,065	2,111	2,113	2.3%	0.1%
Foreclosure Resales	2,279	1,765	507	-77.8%	-71.3%
Short-Sales Resales	N/A	1,188	1,260	N/A	6.1%
Distressed Resales	N/A	2,953	1,767	N/A	-40.2%
Ex-Foreclosure Resales	1,812	2,275	3,650	101.4%	60.4%
Ex-Distressed Resales	N/A	1,087	2,390	N/A	119.9%
Ex-Foreclosure Total	2,211	2,785	4,362	97.3%	56.6%
Ex-Distressed Total	N/A	1,597	3,102	N/A	94.2%
Multi-Home Buyers	N/A	454	813	N/A	79.1%
10+ Buyers	N/A	81	360	N/A	344.4%
Median Sales Price				April 2013 vs
	Apr-11	Apr-12	Apr-13	Apr-11	Apr-12
Resale Home	$125,000	$122,000	$160,000	28.0%	31.1%
Resale Condo	$61,000	$60,000	$84,948	39.3%	41.6%
New Home	$190,000	$197,320	$234,981	23.7%	19.1%
All Homes	$117,000	$119,000	$160,000	36.8%	34.5%
Absentee	$99,000	$96,000	$136,000	37.4%	41.7%
All-Cash	$90,000	$89,900	$135,000	50.0%	50.2%

The numbers that have gotten the most attention, of course, are the median sales prices, which are way up from their lows. This partly reflects the huge decline in foreclosure resales, but also reflects continued increases in “absentee” buyer (mostly investor) purchases of homes in Vegas, despite the plunge in the number of foreclosure (as well as overall “distressed”) home sales.

From the standpoint of overall home sales, the recent sales increase despite the sizable drop in “distressed” home sales -- “ex-distressed” home sales this April were up 94.2% from last April – seems rather remarkable. In addition, the sizable jump in new home sales both this year and last year – albeit from extremely low levels – is “encouraging.” What is equally remarkable but less encouraging (at least to some) is that purchases by buyers for their primary residence last month were virtually unchanged from last year, and down from two years ago. Homes purchased by absentee buyers (identified by buyers who indicated that the property tax bill would go to a different address than the property purchased) continued to increase, with the biggest increases coming from buyers who purchased one or more homes, with homes purchased by “entities” that purchased 10 or more homes jumping sharply. (Dataquick notes that some “individuals and partnerships” purchase homes under multiple names, so the “multi-home” buyer numbers may be understated).

CR Note: This was from Tom Lawler.

by Bill McBride on 5/24/2013 01:13:00 PM

By request, I've updated the graphs in this post with the most recent data. Last year when I wrote The Housing Bottom is Here and Housing: The Two Bottoms, I pointed out there are usually two bottoms for housing: the first for new home sales, housing starts and residential investment, and the second bottom is for house prices.

For the bottom in activity, I presented a graph of Single family housing starts, New Home Sales, and Residential Investment (RI) as a percent of GDP.

When I posted that graph, the bottom wasn't obvious to everyone. Now it is, and here is another update to that graph.

Click on graph for larger image.

The arrows point to some of the earlier peaks and troughs for these three measures.

The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.

For the recent housing bust, the bottom was spread over a few years from 2009 into 2011. This was a long flat bottom - something a number of us predicted given the overhang of existing vacant housing units.

We could use any of these three measures to determine the first bottom, and then use the other two to confirm the bottom. These measure are very important and are probably the best leading indicators for the economy. But this says nothing about house prices.

The second graph compares RI as a percent of GDP with the real (adjusted for inflation) CoreLogic house price index through February.

Although the CoreLogic data only goes back to 1976, look at what happened following the early '90s housing bust. RI as a percent of GDP bottomed in Q1 1991, but real house prices didn't bottom until Q4 1996 (real prices were mostly flat for several years). Something similar happened in the early 1980s - first activity bottomed, and then real prices - although the two bottoms were closer in the '80s.

Now it appears activity bottomed in 2009 through 2011 (depending on the measure) and real house prices bottomed in early 2012.

by Bill McBride on 5/24/2013 10:29:00 AM

Last week I summarized some recent research on the labor force participation rate. The following piece from Michelle Meyer at Merrill Lynch argues the LFPR will likely move sideways over the next few years. Changes in the participation rate have important implications for the number of jobs needed to lower the unemployment rate.

An excerpt from Michelle Meyer's piece:

The future trajectory of the labor force participation rate (LFPR) is very important in gauging the trend in the unemployment rate and risks to wage inflation. In order to forecast the labor force participation rate, we must understand the drivers behind its recent sharp movements – to what extent is a long-term trend related to demographics (aging population) versus secular or cyclical dynamics?

We can isolate the effect of demographics on the LFPR by looking at the participation rates by age cohort. The aggregate LFPR is equal to the summation of each individual age cohort's LFPR weighted by its share of the population. ... This suggests that half of the 2.7pp decline in the LFPR since the onset of the recession can be explained simply from the aging population. In other words, holding all else equal – meaning no business cycle dynamics – the LFPR would be at 64.6% today compared to the actual rate of 63.3%. The remaining 1.4pp drop is due to some combination of secular and short-term cyclical factors.

The two primary secular trends are the decline in the LFPR among the youth population and the rise among 55+. The LFPR for 16 to 19 year olds plunged to 34.3% last year from 52% in 2000. While this may have been accelerated by the past two recessions, we believe this is a permanent trend. On the other end, the LFPR of the older population has increased, likely reflecting higher life expectancy, less confidence in social benefit programs and loss of wealth from the Great Recession.

... we still believe that there are some cyclical components. One way to gauge the cyclicality of the LFPR is to observe state-level variation in the relationship between the LFPR and the health of the economy. Based on work from a recent San Francisco Fed paper, we compare the percentage decline in state payrolls to the decline in the LFPR during the recession, both weighted by the relative size of its labor force. We find a positive relationship where larger declines in employment are associated with bigger drops in the LFPR. The paper does the same exercise for prior recessions and finds a positive relationship existed in each, with the exception of the 2000 cycle.

If the relationship holds on the downside, do we also observe it during the recovery? There is little evidence of such correlation in this recovery, but it does exist for prior cycles. In prior cycles, the positive correlation did not become apparent until the economy had exceeded the previous employment peak by a significant amount. This suggests that the cyclical pressure in the LFPR may not be observed until 2015, at the earliest.

We can simulate a future path for the LFPR based on our assessment of the drivers of the downturn in the LFPR. The first step is to account for the continued aging of the population using the Census Bureau's projections by age cohort. If we keep the LFPR by age group constant at 2007 levels and only allow for demographic adjustments, we find that the LFPR will fall by another 3.3pp by 2025 and then slip to 59.2% in 2050. ...

We also assume that the secular trends exhibited during the last decade persist, but at a slower pace, implying a modest downturn in the LFPR among the youth and an upward trajectory for the 55+ age group. ... Based on these rough assumptions, we forecast the LFPR will slip slightly this year, but with a stronger recovery under way next year, the LFPR should start to level off some and potentially increase beginning in 2015 (Chart 4).

The cyclical dynamics, in our view, are not strong enough to generate a pop higher in the LFPR given the downward pull from demographics. But at a minimum, we expect these dynamics can counter the downside pressure and allow the LFPR to move sideways once the recovery builds momentum.

by Bill McBride on 5/24/2013 09:06:00 AM

From the Department of Commerce: Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders April 2013

New orders for manufactured durable goods in April increased $7.2 billion or 3.3 percent to $222.6 billion, the U.S. Census Bureau announced today. This increase, up two of the last three months, followed a 5.9 percent March decrease. Excluding transportation, new orders increased 1.3 percent. Excluding defense, new orders increased 2.1 percent.

This was above expectations of a 1.1% increase. This report is difficult to predict and very noisy month-to-month.