by Calculated Risk on 10/30/2010 08:45:00 AM

This is one of several industry specific indexes I track each month.

Click on graph for larger image in new window.

Unfortunately the data for this index only goes back to 2002.

Note: Any reading above 100 shows expansion for this index.

From the National Restaurant Association (NRA): Restaurant Industry Outlook Improved in September as Restaurant Performance Index Rose Above 100 for First Time in Five Months

Driven by improving same-store sales and customer traffic levels, as well as growing optimism among restaurant operators, the outlook for the restaurant industry improved in September. The National Restaurant Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 100.3 in September, up a solid 0.8 percent from its August level. In addition, the RPI rose above 100 for the first time in five months, which signifies expansion in the index of key industry indicators.

“The RPI’s solid gain in September was the result of broad-based improvements among both the current situation and forward-looking indicators,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the National Restaurant Association. “Restaurant operators reported positive same-store sales and customer traffic levels for the first time in six months, which propelled the RPI’s Current Situation Index to its highest level in nearly three years.”
...
Restaurant operators reported a net increase in same-store sales for the first time in six months in September. ... Restaurant operators also reported a slight uptick in customer traffic levels in September.emphasis added

Restraurants are a discretionary expense, and this slight expansion is a little bit of good news.

by Calculated Risk on 10/29/2010 10:03:00 PM

From Buck Wargo at the Las Vegas Sun: Commercial real estate’s slide likely at an end

The commercial real estate market led by the office sector appears to have halted its slide ... analysts said.
...
With little construction and the demand for space outpacing those who are giving it up, it appears the office market isn’t going to worsen, [Jake Joyce, a project manager with Applied Analysis] said.

“While it’s easy to latch on to even the smallest bright spot, the return to more normal market conditions is years away, but must start somewhere,” Joyce said.

It is possible the office vacancy rate has peaked - or is near the peak as the the Reis vacancy data suggests - but it will take a long time to absorb all the excess office space. And that means non-residential investment in office buildings will be low for some time.

But you do have to start somewhere ...

by Calculated Risk on 10/29/2010 04:36:00 PM

Here is an excerpt from a previous post earlier this month and his probably worth repeating after the GDP report this morning. This relationship suggests the unemployment will rise with only 2% real GDP growth:

Click on graph for larger image.

Here is an update on a version of Okun's Law. This graph shows the annual change in real GDP (x-axis) vs. the annual change in the unemployment rate (y-axis).

Note: For this graph I used a rolling four quarter change - so all the data points are not independent. However - remember - this "law" is really just a guide.

The following table summarizes several scenarios over the next year (starting from the current 9.6% unemployment rate):

Real GDP Growth	Unemployment Rate in One Year
0.0%	11.0%
1.0%	10.5%
2.0%	10.0%
3.0%	9.6%
4.0%	9.1%
5.0%	8.7%

I expected a sluggish recovery in 2010, so I thought the unemployment rate would stay elevated throughout 2010 (that was correct).

Going forward, I think the recovery will stay sluggish and choppy for some time and I'd guess the unemployment rate will tick up in the short term and still be above 9% later next year. You can see why those expecting 1% to 2% growth next year (like Goldman Sachs) are expecting the unemployment rate to be close to 10%.

In general, the U.S. economy needs to grow faster than a 3% real rate to reduce the unemployment - and there is no evidence yet of a pickup in growth.

by Calculated Risk on 10/29/2010 01:06:00 PM

Real GDP is 0.8% below the pre-recession peak, so real GDP would have to grow at a 3.1% annualized pace in Q4 for the economy to be back at the pre-recession peak.

That is unlikely since growth in personal consumption expenditures (PCE) will probably slow in Q4, and the contribution from the change in private inventories will likely be much smaller or negative in Q4.

Probably the earliest the economy will be back to pre-recession levels for GDP would be in Q1 2011 and that requires a 1.6% annualized growth rate over the next two quarters. It might even take until Q2 2011 (my current forecast).

Note: The following graphs are all constructed as a percent of the peak in each indicator. This shows when the indicator has bottomed - and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%.

Click on graph for larger image in new window.

This graph is for real GDP through Q3 2010.

Real GDP is still 0.8% below the pre-recession peak.

Based on the June FOMC forecasts, real GDP would be close or above the pre-recession peak by now. So clearly those forecasts will be revised down next week.

And GDP has performed better than other indictors.

The second graph is for real personal income less transfer payments (also released today for Q3 as part of the GDP report).

Real personal income less transfer payments is still 5.5% below the pre-recession peak. Much of the growth in PCE over the last year has come from transfer payments - this includes people taking Social Security early, extended unemployment benefits, and other assistance programs - and it will be some time before this indicator returns to pre-recession levels.

And two more graphs to show two key monthly indicators:

This graph is for industrial production through Septmember.

Industrial production has been one of the stronger performing sectors because of inventory restocking and some growth in exports. However industrial production is still 7.5% below the pre-recession peak, and it appears export growth has slowed, and the inventory cycle is almost over.

One of the surprises in the GDP report today was the strong contribution from changes in private inventories. That will probably slow over the next few quarters - and may even turn negative. So it will probably be some time before industrial production returns to pre-recession levels.

The final graph is for employment. This is similar to the graph I post every month comparing percent payroll jobs lost in several recessions.

Payroll employment is still 5.6% below the pre-recession peak. And with below trend GDP growth, payroll employment growth will likely remain sluggish.

by Calculated Risk on 10/29/2010 09:55:00 AM

Two stories ...

Chicago PMI stronger than expected

From the Institute for Supply Management – Chicago: The overall index increased to 60.6 vs 60.4. Note: any number above 50 shows expansion. Employment index increased to 54.6 from 53.4 in September. The new orders index increased to 65.0 from 61.4.

Overall this was a positive report. The national ISM manufacturing index will be released on Monday.

Consumer Sentiment weaker than expected

From MarketWatch: Consumer sentiment falls in October to 67.7

Click on graph for larger image in new window.

This was a big story in July when consumer sentiment collapsed. Sentiment in October was slightly below the level in July - and this is the lowest level since late 2009.

Consumer sentiment is a coincident indicator and reflects the weak economy.

by Calculated Risk on 10/29/2010 08:30:00 AM

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.0 percent in the third quarter of 2010, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis.

Click on graph for larger image in new window.

This graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The dashed line is the median growth rate of 3.05%. The current recovery is very weak - the 2nd half slowdown continues.

A few key numbers:

"The change in real private inventories added 1.44 percentage points to the third-quarter change in real GDP after adding 0.82 percentage point to the second-quarter change. Private businesses increased inventories $115.5 billion in the third quarter, following increases of $68.8 billion in the second quarter and $44.1 billion in the first."

Without the boost in inventories, GDP would have been barely positive in Q3.

"Real personal consumption expenditures increased 2.6 percent in the third quarter, compared with an increase of 2.2 percent in the second."

This was a little stronger than expected, and PCE will probably slow over the next couple of quarters.

Investment: Nonresidential structures increased 3.9 percent, equipment and software increased 12.0 percent and real residential fixed investment decreased 29.1 percent.

As expected, residential investment declined sharply after the Q2 tax credit boost.

Overall this was a weak report and will not derail QE2 next wednesday (further easing from the Fed).

by Calculated Risk on 10/28/2010 09:49:00 PM

From Elizabeth Razzi at the WaPo: Title insurers drop demands on mortgage lenders in foreclosure cases

Three major title insurance companies - First American Financial, Old Republic International and Stewart Information Services - told Wall Street analysts in conference calls Thursday that they had decided not to demand written indemnifications from lenders re-selling foreclosed homes. Combined, the three companies account for 52 percent of the title insurance market.

This is means that the buyers of REO (lender Real Estate Owned) will be able to obtain title insurance, and that the new owner can sell the property. There was some concern that buyers would shy away from REOs.

by Calculated Risk on 10/28/2010 05:45:00 PM

Housing consultant John Burns presented this slide as part of the UCLA Anderson Forecast this week:

Click on graph for larger image in new window.

John Burns used median prices for this slide. It shows that the "biggest bubble markets" are back to 2000 to 2002 median prices, whereas some areas are still at 2006 prices.

And here is a timeline for the 20 Case-Shiller cities:

There is no y-axis because this is based on a price index (not median prices).

Detroit is back to 1995 prices, and some cities like Dallas, Portland and Seattle are only back to 2005 or 2006 prices (the bubble arrived later in the Northwest).

by Calculated Risk on 10/28/2010 02:31:00 PM

From Challenger, Gray & Christmas: Job Seeker Relocation Drops to Record Low

The percentage of unemployed managers and executives relocating for a new position fell to a record low in the third quarter of 2010, as a slightly improved job market and greatly depreciated home values combined to eliminate this option for most job seekers.

Just 6.9 percent of job seekers who found employment in the third quarter relocated for the new position. That was down from a relocation rate of 13.4 percent in the same quarter a year ago ...

“Continued weakness in the housing market is undoubtedly the biggest factor suppressing relocation. Job seekers who own a home – even if they are open to relocating for a new job – are basically stuck where they are if they are unable or unwilling to sell their homes without incurring a significant loss,” said John A. Challenger, chief executive officer of Challenger, Gray & Christmas.

Click on graph for larger image in new window.

Here is the quarterly data from Challenger, Gray. Mobility has been trending down for some time, but really declined over the last year.

It is tough to move when you can't sell your home. Sometimes the new employer will pick up the short fall for key executives and managers, but it is probably too expensive in many cases now.

This is no surprise. Here is what I wrote in 2007:

Less worker mobility [due to negative equity] is kind of like arteriosclerosis of the economy. It lowers the overall growth potential.

Perhaps as many as 15 to 20 million households will be saddled with negative equity by 2009. Even if most of these homeowners don't "walk away", there might still be a negative impact on the economy due to less worker mobility.

One of the strengths of the U.S. labor market has been the flexibility associated with labor mobility at all levels of employment - households could easily move from one region to another for better employment. The sharp decline in house prices, leaving homeowners with significant negative equity, appears to be limiting this flexibility.

by Calculated Risk on 10/28/2010 01:42:00 PM

Yesterday I mentioned that Bill Gross was calling the end "of a great 30-year bull market in bonds". I thought he was changing his view, but this isn't the first time (ht Erik):

From Bloomberg on March 27, 2010: Pimco’s Bill Gross Says Bonds Have Seen Best Days

“Bonds have seen their best days,” Gross said in a Bloomberg Radio interview ... Yields on two-year U.S. Treasury notes are likely to rise to 1.25 percent to 1.5 percent from 1.08 percent in the next year as the economy strengthens and the Federal Reserve begins to increase interest rates, Gross said.

On March 26, 2010 the Ten Year Treasury yield was 3.86% (now 2.65%)

And from Reuters in June 2007: Pimco's Gross says he's now a "bear market manager"

Gross forecast that benchmark Treasury yields will range higher than previously thought, prompting him to acknowledge he is now a "bear market manager" after a quarter of a century as the global bond market's most powerful bull.

On June 7, 2007, the ten year Treasury yield was 5.1%.

So Gross has called the end of the bond rally before. Nevermind.

The end of the "bull market in bonds" really depends on if the economy strengthens, and I don't see a pickup in economic growth any time soon.