In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Wednesday, December 31, 2014

Question #1 for 2015: How much will the economy grow in 2015?

by Calculated Risk on 12/31/2014 07:22:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'm adding some thoughts, and a few predictions for each question. Here is a review of the Ten Economic Questions for 2014.

1) Economic growth: Heading into 2015, most analysts are pretty sanguine. Even with contraction in the first quarter, 2014 was a decent year (GDP will grow around 2.4% in 2014). Will 2015 be the best year of the recovery so far? Could 2015 be the best year since the '90s? Or will 2015 disappoint again?

First, here is a table of the annual change in real GDP since 1999.  Since 2000, the fastest real GDP growth was 3.8% in 2004, and the fastest growth for the recovery was 2.5% in 2010.

Economic activity clearly picked up in 2014 after the first quarter, however - due to severe weather - the economy contracted in Q1 and the economy only grew around 2.4% for the year (estimated).

Perhaps 2015 will be the year with 3%+ growth!

Annual Real GDP Growth
YearGDP
19994.7%
20004.1%
20011.0%
20021.8%
20032.8%
20043.8%
20053.3%
20062.7%
20071.8%
2008-0.3%
2009-2.8%
20102.5%
20111.6%
20122.3%
20132.2%
201412.4%
1 2014 estimate.

All of the positives that led to the pickup in activity in 2014 are still present - the housing recovery is ongoing, state and local government austerity is over, household balance sheets are in much better shape and household deleveraging is over, and commercial real estate (CRE) investment (ex-energy) and public construction will both probably make positive contributions in 2015.

In addition, the sharp decline in oil prices should be a net positive for the US economy in 2015.  Plus the Federal government austerity is now ending (although there is the risk of more cuts).

A possible negative would be less exports due to the strong dollar.

Lower gasoline prices suggest an increase in personal consumption expenditures (PCE) excluding gasoline. And it seems likely PCE growth will be above 3% in 2015.  Add in some more business investment, the ongoing housing recovery, some further increase in state and local government spending, and 2015 should be the best year of the recovery with GDP growth at or above 3%.

Here are the ten questions for 2015 and a few predictions:
Question #2 for 2015: How many payroll jobs will be added in 2015?
Question #3 for 2015: What will the unemployment rate be in December 2015?
Question #4 for 2015: Will too much inflation be a concern in 2015?
Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
Question #6 for 2015: Will real wages increase in 2015?
Question #7 for 2015: What about oil prices in 2015?
Question #8 for 2015: How much will Residential Investment increase?
Question #9 for 2015: What will happen with house prices in 2015?
Question #10 for 2015: How much will housing inventory increase in 2015?

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

by Calculated Risk on 12/31/2014 05:22:00 PM

Fannie Mae reported today that the Single-Family Serious Delinquency rate declined slightly in November to 1.91% from 1.92% in October. The serious delinquency rate is down from 2.44% in November 2013, and this is the lowest level since October 2008.

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

Earlier this week, Freddie Mac reported that the Single-Family serious delinquency rate was unchanged in November at 1.91%. Freddie's rate is down from 2.43% in November 2013, and is at the lowest level since December 2008. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.

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

Fannie Freddie Seriously Delinquent RateClick on graph for larger image

The Fannie Mae serious delinquency rate has fallen 0.53 percentage points over the last year, and at that pace the serious delinquency rate will be under 1% in late 2016 - although the rate of decline has slowed recently.

Note: The "normal" serious delinquency rate is under 1%.

Maybe serious delinquencies will be close to normal in late 2016.

Question #2 for 2015: How many payroll jobs will be added in 2015?

by Calculated Risk on 12/31/2014 11:28:00 AM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'm adding some thoughts, and a few predictions for each question. Here is a review of the Ten Economic Questions for 2014.

2) Employment:  With one month to go, 2014 is already the best year for employment growth since the '90s.   Will 2015 be as strong?  Or will job creation slow in 2015?

There are some positives for employment heading into 2015. Economic activity has clearly picked up in the US, and there is solid momentum heading into the new year. The decline in oil prices will give a boost to many sectors, construction activity (non-energy related) should increase, and the pace of public hiring will probably increase in 2015.

There are also some negatives. The decline in oil prices will lead to layoffs in the energy sector and have a ripple effect in some communities. The strong dollar will probably impact exporters, and the lower unemployment rate will mean some companies will have difficulty finding qualified candidates.

I've seen estimates of around 50,000 layoffs in the energy sector related to lower oil prices.  There will be a ripple effect too that will probably double that number of job losses (businesses in oil producing areas will also lose employees).

Note: Those expecting 300+ thousand jobs per month in 2015 will probably be disappointed.  Too many people compare to the '80s and '90s, without thinking about changing demographics. The prime working age population (25 to 54 years old) was growing 2.2% per year in the '80s, and 1.3% per year in the '90s.  The prime working age population has actually declined slightly this decade.  Note: The prime working age population is now growing slowly again, and growth will pick up the '20s.

For review, here is a table of the annual change in total nonfarm, private and public sector payrolls jobs since 1997.  For private employment, 2014 was probably the best year since 1997.

Change in Payroll Jobs per Year (000s)
Total, NonfarmPrivatePublic
19973,4083,213195
19983,0032,734313
19993,1772,716461
20001,9461,682264
2001-1,735-2,286551
2002-508-741233
2003105147-42
20042,0331,886147
20052,5062,320186
20062,0851,876209
20071,140852288
2008-3,576-3,756180
2009-5,087-5,013-74
20101,0581,277-219
20112,0832,400-317
20122,2362,294-58
20132,3312,365-34
201412,9002,81090
1 2014 is estimated.

In 2014, public employment added to total employment, but at a fairly low level. Public hiring will probably pick up to 150,000+ in 2015.

The second table shows the change in construction payrolls starting in 2006.

Construction Jobs (000s)
2006152
2007-195
2008-789
2009-1,047
2010-192
2011144
2012114
2013156
20141215

Energy related construction hiring will decline in 2015, but I expect other areas of construction to be solid.

As I mentioned above, in addition to layoffs in the energy sector, exporters will have a difficult year - and more companies will have difficulty finding qualified candidates.  Even with the overall boost from lower oil prices - and some additional public hiring, I expect total jobs added to be lower in 2015 than in 2014.

So my forecast is for gains of about 200,000 to 225,000 payroll jobs per month in 2015.  Lower than 2014, but another solid year for employment gains given current demographics.

Here are the ten questions for 2015 and a few predictions:
Question #2 for 2015: How many payroll jobs will be added in 2015?
Question #3 for 2015: What will the unemployment rate be in December 2015?
Question #4 for 2015: Will too much inflation be a concern in 2015?
Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
Question #6 for 2015: Will real wages increase in 2015?
Question #7 for 2015: What about oil prices in 2015?
Question #8 for 2015: How much will Residential Investment increase?
Question #9 for 2015: What will happen with house prices in 2015?
Question #10 for 2015: How much will housing inventory increase in 2015?

NAR: Pending Home Sales Index increased 0.8% in November, up 4.1% year-over-year

by Calculated Risk on 12/31/2014 10:02:00 AM

From the NAR: Pending Home Sales Show Modest Gain in November

The Pending Home Sales Index, a forward-looking indicator based on contract signings, increased 0.8 percent to 104.8 in November from a slightly downwardly revised 104.0 in October and is now 4.1 percent above November 2013 (100.7) – the highest year-over-year gain since August 2013 (5.6 percent).
...
The PHSI in the Northeast rose 1.4 percent to 89.1 in November, and is now 7.0 percent above a year ago. In the Midwest the index decreased 0.4 percent to 100.0 in November, and is now 0.5 percent below November 2013.

Pending home sales in the South rose 1.3 percent to an index of 119.7 in November, and are 5.1 percent above last November. The index in the West increased 0.4 percent in November to 98.5, and is now 4.9 percent above a year ago.
Note: Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in December and January.

Weekly Initial Unemployment Claims increased to 298,000

by Calculated Risk on 12/31/2014 08:34:00 AM

The DOL reported:

In the week ending December 27, the advance figure for seasonally adjusted initial claims was 298,000, an increase of 17,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 280,000 to 281,000. The 4-week moving average was 290,750, an increase of 250 from the previous week's revised average. The previous week's average was revised up by 250 from 290,250 to 290,500.

There were no special factors impacting this week's initial claims
The previous week was revised up slightly.

The following graph shows the 4-week moving average of weekly claims since January 2000.

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 increased slightly to 290,750.

This was higher than the consensus forecast of 286,000, and the level suggests few layoffs.