by Calculated Risk on 1/14/2016 10:51:00 AM

From Tim Duy: So You Think A Recession Is Imminent, Employment Edition

The recession drumbeat grows louder. This is not unexpected. Most forecasters have an asymmetric loss function; the cost of being wrong by missing a recession exceeds the cost of being wrong on a recession call. Hence economists tend to over-predict recessions. Eight of the last four recessions or so the joke goes [1]. And while I don't believe a recession is imminent, there are perfectly good reasons to be wary that a recession will bear down on the economy in the not-so-distant future. Historically, when the Fed begins a tightening cycle, the clock is ticking for the expansion. By that time, the economy is typically in a late-mid to late-stage expansion, and you are looking at two to three years before the cycle turns, four at the outside.

Of course there are some not so good reasons for worrying about a recession. Like listening to an investor talking their book. Or someone who needs to whip up a never ending stream of apocalyptic visions to hawk gold.

So what I am looking for when it comes to a recession? It's not a recession until you see it economy wide in the labor markets. When it's there, you will see it everywhere. Clearly, we weren't seeing it in the final quarter of last year. But, you say, employment is a lagging indicator, so last quarter tells you nothing. Not nothing, I would say, but a fair point nonetheless. One would need to look for the leading indicators within the employment data.
...
Bottom Line: From a labor market perspective, I am not seeing conclusive evidence of an impending recession in manufacturing, let alone the overall economy. Might be at the tip of one, but even that will take a year to evolve. I have more sympathy for the view that the economy has evolved into a mid-late to late stage of the cycle, and the transition and associated uncertainty results in some not-surprising volatility in financial markets.

Dr. Duy is looking at labor indicators. My favorite leading indicators for a possible recession are housing starts and new home sales. No worries right now - I'm not even on recession watch.

[1] Duy added:

Greg Ip calls me out on the direction of forecast accuracy ... if you were to tell me that these recession callers were not on average "economists" I would concede the point. And forecasts from official agencies such as the IMF and the Federal Reserve always miss recessions (a point Larry Summers makes with regard to the IMF here.) So Ip's point is well taken.

by Calculated Risk on 1/14/2016 08:33:00 AM

The DOL reported:

In the week ending January 9, the advance figure for seasonally adjusted initial claims was 284,000, an increase of 7,000 from the previous week's unrevised level of 277,000. The 4-week moving average was 278,750, an increase of 3,000 from the previous week's unrevised average of 275,750.

There were no special factors impacting this week's initial claims.

The previous week was unrevised at 277,000.

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 increased to 278,750.

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

by Calculated Risk on 1/13/2016 07:53:00 PM

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for 275 thousand initial claims, down from 277 thousand the previous week.



Here is a graph (click on graph for larger image) from Doug Short and shows the S&P 500 since the 2007 high ... more graphs from Doug here: S&P 500 Snapshot: Down 2.50% for the Day and 11.29% Off Its Record Close

by Calculated Risk on 1/13/2016 03:32:00 PM

During the recession, I started following the Sacramento market to look for changes in the mix of houses sold (equity, REOs, and short sales). For a few years, not much changed. But in 2012 and 2013, we saw some significant changes with a dramatic shift from distressed sales to more normal equity sales.

This data suggests healing in the Sacramento market and other distressed markets are showing similar improvement.  Note: The Sacramento Association of REALTORS® started breaking out REOs in May 2008, and short sales in June 2009.

In December, total sales were up  19.6% from December 2014, and conventional equity sales were up 24.7% compared to the same month last year.  A very strong year-over-year increase.

In December, 7.6% of all resales were distressed sales. This was down from 8.3% last month, and down from 12.8% in December 2014.

The percentage of REOs was at 3.7% in December, and the percentage of short sales was 3.9%.

Here are the statistics.

Click on graph for larger image.

This graph shows the percent of REO sales, short sales and conventional sales.

There has been a sharp increase in conventional (equity) sales that started in 2012 (blue) as the percentage of distressed sales declined sharply.

Active Listing Inventory for single family homes decreased 27.9% year-over-year (YoY) in December.  This was the eighth consecutive monthly YoY decrease in inventory in Sacramento (a big recent change).

Cash buyers accounted for 14.3% of all sales (frequently investors).

Summary: This data suggests a more normal market with fewer distressed sales, more equity sales, and less investor buying.

by Calculated Risk on 1/13/2016 02:03:00 PM

Fed's Beige Book "Prepared at the Federal Reserve Bank of Philadelphia and based on information collected on or before January 4, 2016."

Reports from the twelve Federal Reserve Districts indicated that economic activity has expanded in nine of the Districts since the previous Beige Book report and contacts in Boston were described as upbeat. Meanwhile, New York and Kansas City described economic activity in their Districts as essentially flat. Atlanta and San Francisco characterized the growth in their Districts as moderate; Philadelphia, Cleveland, Richmond, Chicago, St. Louis, Minneapolis, and Dallas described their Districts' growth as modest. Contacts' outlooks for future growth remained mostly positive in Boston, Philadelphia, Atlanta, Chicago, Kansas City, and Dallas.

And on real estate:

Residential real estate activity as measured in sales was generally positive in New York, Cleveland, Chicago, and St. Louis. Richmond experienced steady sales with pockets of strength, and Kansas City reported declines. Prices rose slightly to modestly overall in all reporting Districts, and inventories remained low in Boston, Richmond, and Minneapolis, and some parts of the New York District; however, New York City's rental vacancy rate increased. Though Boston contacts expected the market to perform well in 2016, contacts in Cleveland and Kansas City expressed concerns that higher interest rates may slow activity. Residential construction activity was described as modest or moderate in most Districts but was more subdued in New York, Atlanta, and Dallas overall. Multifamily construction continued to be strong in New York, Richmond, Minneapolis, and San Francisco and showed improvement in Chicago.

Most reporting Districts characterized nonresidential real estate activity as modest to moderate; Boston and New York indicated little change. Rental rates rose in more than half of the reporting Districts, and vacancy rates were mixed. Most Districts reported modest or moderate growth in commercial construction, and the Dallas District noted high levels of industrial construction in Dallas-Fort Worth. Contacts in the Atlanta District expect construction activity to increase slightly, while contacts in the Philadelphia, St. Louis, Minneapolis, and Richmond Districts expect overall commercial real estate activity to continue to strengthen at least modestly.
emphasis added

Real Estate growth was modest to moderate ...

by Calculated Risk on 1/13/2016 10:46:00 AM

One year ago today, I wrote Is Oil "Cheap"? Some people were arguing oil was "cheap" with Brent futures at $46 per barrel.

I pointed out that oil prices had still increased more than other key items since 1990 and 2000.

Below is an update to that table I posted comparing the change in headline CPI, Brent oil prices, Food, and Case-Shiller house prices since 1990 and 2000.

Things have changed now with Brent futures under $32 per barrel.

CPI is up 87% since 1990, but Brent is only up 51%.

Since 2000, CPI is up 41% and Brent is up 25%.

Change Since	1990	2000
CPI	87%	41%
Brent Oil	51%	25%
Food	91%	50%
Case-Shiller House Prices	127%	74%

So, compared to 1990 and 2000 prices, maybe oil is now "cheap".

Note: This is another way of saying that in real terms - inflation adjusted - oil prices are now below prices in 1990 and 2000.

by Calculated Risk on 1/13/2016 07:01:00 AM

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

Mortgage applications increased 21.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 8, 2016. The previous week’s results included an adjustment for the New Year’s holiday.
...
The Refinance Index increased 24 percent from the previous week. The seasonally adjusted Purchase Index increased 18 percent from one week earlier. The unadjusted Purchase Index increased 74 percent compared with the previous week and was 19 percent higher than the same week one year ago
...
“MBA’s purchase mortgage application index reached its second highest level since May 2010 on a seasonally adjusted basis last week, second only to the week prior to the implementation of the Know Before You Owe rules,” said Lynn Fisher, MBA’s Vice President of Research and Economics.

“Bolstered by strong fourth quarter growth in jobs and continuing low rates, the results are similar to levels we saw in early December, suggesting that the purchase market’s strong finish to 2015 may be continuing. While refinances also increased on a holiday-adjusted basis, refinance activity was down 38 percent relative to a year ago when rates dove below 4 percent,” Fisher continued.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.12 percent from 4.20 percent, with points decreasing to 0.38 from 0.42 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.


The first graph shows the refinance index since 1990.

Refinance activity was higher in 2015 than in 2014, but it was still the third lowest year since 2000.

Refinance activity will probably stay low in 2016, and will probably be lower than in 2014 and 2015.



The second graph shows the MBA mortgage purchase index.  

According to the MBA, the unadjusted purchase index is  19% higher than a year ago.

by Calculated Risk on 1/12/2016 08:34:00 PM

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

• At 2:00 PM, the Federal Reserve Beige Book, an informal review by the Federal Reserve Banks of current economic conditions in their Districts.

• At 2:00 PM, The Monthly Treasury Budget Statement for December.

On Phoenix:

This is a key distressed market to follow since Phoenix saw a large bubble / bust followed by strong investor buying.

For the thirteen consecutive month, inventory was down year-over-year in Phoenix. This is a significant change from the prior year.

The Arizona Regional Multiple Listing Service (ARMLS) reports (table below):

1) Overall sales in December were up 4.3% year-over-year.

2) Cash Sales (frequently investors) were down to 23.9% of total sales.

3) Active inventory is now down 8.0% year-over-year.  

More inventory (a theme in 2014) - and less investor buying - suggested price increases would slow sharply in 2014.  And prices increases did slow in 2014, only increasing 2.4% according to Case-Shiller.

With falling inventory, prices increased a little faster in 2015 (something to watch if inventory continues to decline).   Prices are already up 4.6% through October according the Case-Shiller (about double the pace for 2014).

December Residential Sales and Inventory, Greater Phoenix Area, ARMLS
	Sales	YoY Change Sales	Cash Sales	Percent Cash	Active Inventory	YoY Change Inventory
Dec-08	5,524	---	1,665	30.1%	53,7921	---
Dec-09	7,661	38.7%	3,008	39.3%	39,709	-26.2%1
Dec-10	8,401	9.7%	3,939	46.9%	42,463	6.9%
Dec-11	7,843	-6.6%	3,635	46.3%	24,712	-41.8%
Dec-12	7,071	-9.8%	3,211	45.4%	21,095	-14.6%
Dec-13	5,930	-16.1%	2,053	34.6%	25,511	20.9%
Dec-14	6,475	9.2%	1,893	29.2%	25,052	-1.8%
Dec-15	6,756	4.3%	1,617	23.9%	23,053	-8.0%
1 December 2008 probably includes pending listings

by Calculated Risk on 1/12/2016 02:54:00 PM

From the WSJ: U.S. Oil Prices Sink Below $30 a Barrel, First Time Since ’03

Oil tumbled below $30 a barrel on Tuesday, underscoring the global economy’s difficulty with absorbing a relentless flood of crude supplies.
...
The benchmark U.S. oil contract has dropped from $40 a barrel to $30 in just one month, and the pace of the selloff has rattled stock, bond and currency markets from Moscow to Riyadh to New York. Oil is down more than 70% since last trading in the triple digits, back in June 2014.

Click on graph for larger image

This graph shows WTI and Brent spot oil prices from the EIA. (Prices today added).  According to Bloomberg, WTI is at $30.20 per barrel today, and Brent is at $30.60

Prices really collapsed at the end of 2014 - and then rebounded a little - and have collapsed again.  There are many factors pushing down oil prices - more global supply (even as some shale producers cut back), global economic weakness (slowing demand), strong dollar, and warm weather in the US (less heating demand) to mention a few.

by Calculated Risk on 1/12/2016 12:55:00 PM

The following graph shows heavy truck sales since 1967 using data from the BEA. The dashed line is the December 2015 seasonally adjusted annual sales rate (SAAR).

Heavy truck sales really collapsed during the recession, falling to a low of 181 thousand in April 2009 on a seasonally adjusted annual rate basis (SAAR). Since then sales increased more than 2 1/2 times, and hit 492 thousand SAAR in November 2015 - even with weakness in the oil sector.

Heavy truck sales declined in December to 440 thousand SAAR.

The level in November 2015 was the highest level since December 2006 (9 years ago). Sales have been above 400 thousand SAAR for 18 consecutive months, are now above the average (and median) of the last 20 years.


Click on graph for larger image.