by Calculated Risk on 2/01/2011 02:41:00 PM

I’ve been writing this blog for over six years now - and there are many people to thank - and I’m still enjoying the process. I use the blog to track economic data and occasionally post some analysis.

Of course I have no crystal ball, and I try to link to the source data, when available, so readers can draw their own conclusions (I'm well aware that many people disagree with my views).

I’m going to add a daily summary and analysis post, usually around 4 PM ET, although sometimes earlier, like today because the vehicle sales data will be available around 4 PM, and sometimes later because – well, sometimes I’m especially lazy.

For the U.S. economy, there have been two huge stories over the last 5 or 6 years. The first was the housing / credit bubble, followed by the housing bust and financial crisis ... and everything related. The second has been the sluggish and choppy recovery that started in the 2nd half of 2009 and is ongoing. Hopefully I’ve gotten both stories mostly right.

Some people question whether it is a real “recovery” with significant fiscal and monetary support, and with the unemployment rate at 9.4%. I understand. This is definitely a fragile recovery, but it does appear both GDP and employment (finally) are improving.

This will be a difficult transition from life support to a self-sustaining recovery, but it does appear that GDP and employment growth will be better in 2011 than in 2010. Here is my current economic outlook:

• GDP growth better in 2011 than in 2010, but still not strong recovery given the slack in the system. I expect real GDP growth of 3.5% to 4.0% this year.

• Similarly, I expect employment growth to be better in 2011 than in 2010. I’m forecasting something close to 200 thousand private sector jobs on average per month this year.

• I think the inflation rate (by the core measures) will stay below the Fed's 2% target throughout 2011.

• Also I don't think the Fed will raise rates in 2011. I do think the Fed will buy the entire $600 billion of LSAP (or QE2). As I mentioned yesterday, I think there is a good possibility that the Fed will taper off the QE2 program instead of ending it abruptly in June. I think the size will remain the same, but the purchase program will be decreased gradually over a few additional months (like through the end of Q3).

• There are several downside risks: European issues, state and local government budget cuts and some possible defaults, housing issues (falling house prices, more foreclosures), and rising commodity / oil prices.

For more, see the The Brighter Outlook (and the Ten Questions for 2011 at the bottom).

The data this morning is consistent with this outlook.

• ISM Manufacturing Index increases in January

This was a strong report and above expectations. The new orders and employment indexes were especially strong. Here is the graph of the ISM index.

• Private Construction Spending decreases in December

This was weak as expected. However the story with construction spending is that residential investment will probably pick up in 2011, adding to both GDP and employment for the first time since 2005. This is most obvious in the multi-family sector.

And non-residential investment will probably bottom mid-year, and the drag on GDP and employment is almost over from this sector. Earlier this morning I posted:

• Q4 Investment: Office, Mall, Lodging and Residential Components

Those graphs show that office, mall and lodging investment are probably near a bottom – I don’t think investment will fall much further. The second graph shows residential investment, and I expect both multi-family and single family to increase in 2011 (although single family growth will be sluggish because of the overhang of existing vacant homes). That is why the data from the Census Bureau yesterday is important:

• Q4 2010: Homeownership Rate Falls to 1998 Levels

It appears the number of excess housing units is declining. Finally, it takes over a year, on average, to complete a multi-family building. So even though investment will pick up in 2011, the number of units completed will be at record lows this year – and that will help absorb the excess units.

by Calculated Risk on 2/01/2011 12:45:00 PM

Catching up ... the Census Bureau reported this morning that overall construction spending decreased in December compared to November.

[C]onstruction spending during December 2010 was estimated at a seasonally adjusted annual rate of $787.9 billion, 2.5 percent (±1.3%) below the revised November estimate of $807.8 billion.

Private construction spending also decreased in December:

Spending on private construction was at a seasonally adjusted annual rate of $486.9 billion, 2.2 percent (±1.1%) below the revised November estimate of $498.0 billion. Residential construction was at a seasonally adjusted annual rate of $226.4 billion in December, 4.1 percent (±1.3%) below the revised November estimate of $236.1 billion. Nonresidential construction was at a seasonally adjusted annual rate of $260.5 billion in December, 0.5 percent (±1.1%)* below the revised November estimate of $261.9 billion.

Click on graph for larger image in graph gallery.

This graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted.

Both private residential and non-residential construction spending decreased in December.

Residential spending is 66.5% below the peak in early 2006, and non-residential spending is 37% below the peak in January 2008.

Sometime this year (in 2011), residential construction spending will probably pass non-residential spending. Although I expect the recovery in residential spending to be sluggish, residential investment will probably make a positive contribution to GDP and employment growth in 2011 for the first time since 2005. And that is one of the reasons I think growth (both GDP and employment) will be better in 2011 than in 2010.

by Calculated Risk on 2/01/2011 11:09:00 AM

Note: The real key is the seasonally adjusted annual sales rate (SAAR) compared to the last few months, not the year-over-year comparison provided by the automakers. But this is a strong increase for GM ...

From MarketWatch: GM's January U.S. sales jump 21.8%

[GM] said January U.S. sales rose 21.8% to 178,896 cars and trucks. Excluding discontinued brands, sales of GM's four core nameplates rose 23%.

Once all the reports are released, I'll post a graph of the estimated total January light vehicle sales (SAAR) - usually around 4 PM ET. Most estimates are for an increase to 12.6 million SAAR in January from the 12.5 million SAAR in December. Sales in December 2009 were at a 10.7 million SAAR.

I'll add reports from the other major auto companies as updates to this post.

Update from MarketWatch: Ford January U.S. sales rise 13.3%

Update from MarketWatch: Chrysler U.S. January sales up 22.7% to 70,118

by Calculated Risk on 2/01/2011 10:00:00 AM

PMI at 60.8% in January, up from 58.5% in December. The consensus was for a reading of 57.9%.

From the Institute for Supply Management: January 2011 Manufacturing ISM Report On Business®

The report was issued today by Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The manufacturing sector grew at a faster rate in January as the PMI registered 60.8 percent, which is its highest level since May 2004 when the index registered 61.4 percent. The continuing strong performance is highlighted as January is also the sixth consecutive month of month-over-month growth in the sector. New orders and production continue to be strong, and employment rose above 60 percent for the first time since May 2004. Global demand is driving commodity prices higher, particularly for energy, metals and chemicals."
...
ISM's New Orders Index registered 67.8 percent in January, which is an increase of 5.8 percentage points when compared to the seasonally adjusted 62 percent reported in December. This is the 19th consecutive month of growth in the New Orders Index.
...
ISM's Employment Index registered 61.7 percent in January, which is 2.8 percentage points higher than the seasonally adjusted 58.9 percent reported in December. This is the 16th consecutive month of growth in manufacturing employment. An Employment Index above 50.1 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.

Click on graph for larger image in new window.

Here is a long term graph of the ISM manufacturing index.

This was a strong report and above expectations. The new orders and employment indexes were especially strong.

by Calculated Risk on 2/01/2011 08:30:00 AM

The advance Q4 GDP report released last Friday showed a small annualized real increase of 0.8% for investment in non-residential structures. This broke a streak of nine straight quarterly declines. Note: this gain might be revised away.

With the release of underlying detail data yesterday - we can see that the reported small gain for non-residential structure investment in Q4 was mostly for power and petroleum mining structures.

If we look at just office, mall and lodging investment, non-residential structure investment continued to decline in Q4.

Click on graph for larger image in new graph gallery.

This graph shows investment in offices, malls and lodging as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q1 2008 and has declined sharply to a new series low as a percent of GDP (data series starts in 1959).

Investment in multimerchandise shopping structures (malls) peaked in 2007 and has fallen by two-thirds (note that investment includes remodels, so this will not fall to zero). Mall investment is also at a series low (as a percent of GDP).

The bubble boom in lodging investment was stunning. Lodging investment peaked at 0.32% of GDP in Q2 2008 and has fallen by over 70% already.

Notice that investment for all three categories typically falls for a year or two after the end of a recession, and then usually recovers very slowly (flat as a percent of GDP for 2 or 3 years). Something similar will probably happen again, and there will not be a recovery in these categories until the vacancy rates fall significantly.

The second graph is for Residential investment (RI) components. According to the Bureau of Economic Analysis (BEA), includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories (dormitories, manufactured homes).

This graph shows the various components of RI as a percent of GDP for the last 50 years. Usually the most important components are investment in single family structures followed by home improvement.

Investment in home improvement was at a $151.6 billion Seasonally Adjusted Annual Rate (SAAR) in Q4 (about 1.0% of GDP), significantly above the level of investment in single family structures of $106.2 billion (SAAR) (or 0.7% of GDP).

Brokers' commissions increased slightly in Q4, but are near the lowest level (as a percent of GDP) since the early '80s. In dollar terms, brokers' commissions are back to the 1998 / 1999 levels.

And investment in multifamily structures has been bouncing along at a series low for the last few quarters, although this is expected to increase in 2011.

These graphs show there is currently very little investment in offices, malls and lodging - and also very little investment in most components of residential investment.

by Calculated Risk on 1/31/2011 11:54:00 PM

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

Click on graph for larger image in graph gallery.

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 Entering 2011 on Positive Note, as Restaurant Performance Index Posted Strong Gain in December

Driven by expanding same-store sales and customer traffic levels as well as growing optimism among restaurant operators, the outlook for the restaurant industry improved in December. 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 101.0 in December, up a strong 1.1 percent from its November level.
...
For the third time in the last four months, restaurant operators reported a net increase in same-store sales. ... Restaurant operators also reported a net increase in customer traffic levels in December.

by Calculated Risk on 1/31/2011 09:13:00 PM

Light vehicle sales for January - to be announced tomorrow - are expected to increase to 12.6 million (Seasonally Adjusted Annual Rate), from 12.5 million in December.

There were a couple of articles out today suggesting sales slowed at the end of the month.

From Bloomberg (ht jb):

Ford Motor Co. said the U.S. industrywide auto sales rate may be lower in January than December ...

From Reuters: Auto sales seen losing momentum in January

U.S. auto sales lost momentum in the final weeks of January, auto executives and a leading analyst cautioned on Monday ... J.D. Power forecast a January sales rate of between 11.5 million and 12 million vehicles, down sharply from the outlook for 12.2 million it had given just 10 days before.

... on Monday Chrysler Chief Executive Sergio Marchionne said that industry-wide sales had fallen off in the final weeks of the month, which typically account for the bulk of sales.

"We've seen a softening of the U.S. market in the last couple of weeks," Marchionne told reporters ...

We will know tomorrow. Blame it on the snow?

by Calculated Risk on 1/31/2011 04:40:00 PM

Some random thoughts ...

• QE2 Changes: I'm hearing speculation that the Fed might taper off the QE2 purchases of treasury securities to "promote a smooth transition in markets". Currently the plan is to purchase $600 billion in Treasury securities by the end of Q2 or about $75 billion per month. The speculation is that the size will remain the same ($600 billion), but that the Fed will taper off the purchases through the end of Q3 or so.

That is what the Fed did with previous purchase programs. In August 2009 for Treasury securities:

To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.

And the same decision in September 2009 for MBS:

Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.

• Egypt. I continue to read the Al Jazeera Egypt live blog (the link changes for each day Egypt time). Hopefully there will be a positive and peaceful outcome for the Egyptian people.

A common email question is about the impact on the U.S. economy. My view is this could impact the U.S. by pushing up oil prices, especially if 1) protests spreads to larger oil producers in the Middle East, or 2) the Suez canal is closed. Both seem unlikely in the short term, although my view could change with events. Oil prices have already risen, also from the WSJ: Brent Crude Tops $100. Here is some analysis from Professor Hamilton at Econbrowser: Geopolitical unrest and world oil markets

• Q4 2010: Homeownership Rate Falls to 1998 Levels

This is based on the Housing Vacancies and Homeownership survey. What is important about this survey is the trends for the homeownership rate, and homeowner and rental vacancy rates. This shows a sharp drop in the rental vacancy rate as many households move from owning to renting and also suggests the excess housing inventory is being absorbed.

In the Graph Gallery: Homeownership rate, Homeowner vacancy rate, Rental vacancy rate.

• The Chicago PMI was Strong, the Dallas Fed Index was Weak. The Chicago PMI is far more useful as an indicator for the economy the the Dallas Fed index, and the Chicago PMI was very strong (including for employment). I expect the ISM manufacturing index tomorrow to show strong expansion in January (similar to December).

• Personal Income and Outlays Report for December. Includes graph for Real PCE, Personal Saving and Real Personal Income less Transfer Payments. Personal consumption has been increasing faster than personal income - that probably isn't sustainable.

• From the Federal Reserve The January 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices. In general banks have stopped tightening standards (they are already very tight), and demand has stopped falling (there is little demand for loans) - and a special question showed banks are more "upbeat" on delinquencies and charge-offs in 2011 ...

• Some research from the San Francisco Fed: Estimating the Macroeconomic Effects of the Fed's Asset Purchases

• Some research from the Cleveland Fed: High Unemployment after the Recession: Mostly Cyclical, but Adjusting Slowly

And from the weekend:
• Summary for Week ending January 29th
• Schedule for Week of January 30th
• BLS Employment Revisions on Feb 4th

by Calculated Risk on 1/31/2011 02:00:00 PM

In general banks have stopped tightening standards (they are already very tight), and demand has stopped falling (there is little demand for loans) - and a special question showed banks are more "upbeat" on delinquencies and charge-offs ...

From the Federal Reserve The January 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices

Overall, the January survey indicated that a modest net fraction of banks continued to ease standards and terms for commercial and industrial (C&I) loans over the fourth quarter while banks reported small mixed changes in their lending policies for other types of loans to businesses and households. Similarly, the respondents reported a moderate increase in demand for C&I loans but little change, on balance, in demand for other types of loans.

And here is a special question "on banks' outlook for asset quality in 2011":

The January survey included a set of special questions that asked banks about their outlook for delinquencies and charge-offs across major loan categories in the current year, assuming that economic activity progresses in line with consensus forecasts. This special question has been asked once each year during the past five years. In the January survey, expectations were significantly more upbeat than in past years. Moderate to large net fractions of banks reported that they expected improvements in delinquency and charge-off rates during 2011 in every major loan category.

The responses indicated that banks were least likely to expect improvement in the quality of residential real estate loans this year. About 20 percent of banks, on net, reportedly expect improvement in nontraditional closed-end loans, and about 35 percent of banks indicated they expect improvement in HELOCs. Almost 40 percent of respondents expected improvement for prime closed-end loans. Large banks were somewhat more likely than small banks to report expectations of improvement in the quality of residential real estate loans.

The survey also found that about 50 percent of banks, on net, expected improvement this year in the quality of consumer loans, including both credit card loans and other consumer loans. Similarly, about 55 percent of banks, particularly large banks, expected improvement in the quality of CRE loans.

Here is the full report.

by Calculated Risk on 1/31/2011 12:05:00 PM

From earlier this morning ...

• From the Chicago Business Barometer™ Gained: The overall index increased to 68.8 from 66.8 in December. This was above consensus expectations of 65.0. Note: any number above 50 shows expansion.

"EMPLOYMENT strengthened to a height not seen since May 1984". The employment index increased sharply to 64.1 from 58.4.

"NEW ORDERS increased to the highest point since December 1983". The new orders index increased to 75.7 from 71.3.

This was a strong report.

• From the Dallas Fed: Texas Manufacturing Activity Flat but Six-Month Outlook Improves

Texas factory activity held steady in January, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, came in at zero, suggesting output was unchanged from December.
...
Labor market indicators continued to reflect expansion, although increases in employment and hours worked abated. The employment index came in at a reading of 9 [down from 16.1 in December], with 21 percent of firms reporting hiring compared with 12 percent reporting layoffs. The hours worked index fell from 14 to 4, while the wages and benefits index rose.

This is the last of the regional Fed surveys for January. The regional surveys provide a hint about the ISM manufacturing index, as the following graph shows.

Click on graph for larger image in graph gallery.

The New York and Philly Fed surveys are averaged together (dashed green, through January), and averaged five Fed surveys (blue, through January) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through December (right axis).

The regional surveys suggest the ISM manufacturing index will in the mid-to-high 50s (fairly strong expansion). The ISM index for January will released tomorrow, Feb 1st. The consensus is for an increase to 57.9 from 57.0 in December.