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Thursday, December 20, 2012

Friday: November Personal Income and Outlays, Durable Goods, Consumer Sentiment

by Calculated Risk on 12/20/2012 07:45:00 PM

On household formation from Cardiff Garcia at FT Alphaville: Another look at US household formation, and why it matters

James Sweeney of Credit Suisse has written one of the more optimistic (and convincing) notes we’ve come across about the near-term trajectory for US housing.

Its optimism is based mainly on its analysis of expected household formation growth, which Sweeney finds has been underestimated by most observers. The note includes a good discussion of the ways in which healthy household formation growth can have powerful multiplicative effects throughout the rest of the economy. ...

But the two really interesting points in the Sweeney note are that 1) household formation growth can grow meaningfully even under relatively pessimistic assumptions for the US economy, and 2) even modest assumptions of household formation growth can have an have an unexpectedly big impact on the rest of the economy.
And from the Credit Suisse research note:
So how many households will form? A reasonable estimate, in our view, is somewhere between the strong and base case views, meaning 6-8 million over the next five years. Demographics alone should create 5.7 million, with the rest driven by a labor market recovery that falls short of our strong scenario.

We need not assume such high numbers to demonstrate the powerful forces formation can unleash. Even the base case scenario of 5.7 million will drive a substantial pick-up in residential investment. The extremely low levels of housing starts and permits over the past few years means a large number of new housing units will likely need to be built.
I'll revisit household formation soon, but I think we will see even higher household formation than the Credit Suisse estimate. But even with 1.1 million households per year (plus 2nd home buying and demolitions), means housing starts will have to increase to 1.4 to 1.5 million in a few years (once the excess is absorbed).  That is almost double from the 770 or so thousand this year.

And here is Business Insider's list of the most important charts for 2012. They include two of my charts - the first showing the beginning of the recovery for housing, and the second that the drag from state and local governments is near the end.

Friday economic releases:
• At 8:30 AM ET, Durable Goods Orders for November from the Census Bureau. The consensus is for a 0.5% increase in durable goods orders.

• Also at 8:30 AM, Personal Income and Outlays for November. The consensus is for a 0.3% increase in personal income in November, and for 0.4% increase in personal spending. And for the Core PCE price index to increase 0.1%. This will give us a preliminary estimate for Q4 PCE.

• Also at 8:30 AM, the Chicago Fed National Activity Index for November. This is a composite index of other data.

• At 9:55 AM, the final Reuter's/University of Michigan's Consumer sentiment index for December. The consensus is for a reading of 75.0.

• At 10:00 AM, Regional and State Employment and Unemployment (Monthly) for October 2012.

• At 11:00 AM, Kansas City Fed regional Manufacturing Survey for December. The consensus is for a reading of -3, up from -6 in November (below zero is contraction).