by Calculated Risk on 2/28/2011 02:08:00 PM

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

Click on graph for larger image in graph gallery.

The index declined to 100.2 in January, barely indicating expansion.

More "Blame it on the snow!"

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

From the National Restaurant Association: Restaurant Performance Index Declined in January Amid Weather-Dampened Sales and Traffic Levels

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 100.2 in January, down 0.8 percent from its December level. Despite the decline, January marked the fourth time in the last five months that the RPI stood above 100, which signifies expansion in the index of key industry indicators.
...
Due in large part to extreme weather conditions in some parts of the country, sales levels were dampened in January. Thirty-nine percent of restaurant operators reported a same-store sales gain between January 2010 and January 2011, down from 48 percent of operators who reported higher same-store sales in December.
...
Restaurant operators also reported a net decline in customer traffic levels in January.
...
For the fourth consecutive month, restaurant operators reported a positive outlook for staffing gains in the months ahead.

by Calculated Risk on 2/28/2011 11:31:00 AM

From the Dallas Fed: Texas Manufacturing Activity Picks Up

Texas factory activity increased in February, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose to 10 following a reading near zero in January.
...
Labor market indicators continued to reflect more hiring, a longer workweek and rising labor costs. The employment index came in at a reading of 11, up from 9 last month. The hours worked index was unchanged at 4, while the wages and benefits index fell from 15 to 9.
...
Prices continued to climb in February. The raw materials price index edged up from 62 to 63, with 64 percent of firms noting an increase in input costs compared with only 1 percent noting a decrease.

This is the last of the regional Fed surveys for February. 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 February), and averaged five Fed surveys (blue, through February) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through January (right axis).

The ISM index for February will released tomorrow, Mar 1st. The consensus is for a slight decrease to 60.5 from the strong 60.8 in January.

The regional surveys suggest the ISM manufacturing index will be around 60 (strong expansion). The 60.8 reading in January was the highest level since May 2004, and any reading above 61.4 would be the highest since 1983.

by Calculated Risk on 2/28/2011 10:00:00 AM

• From the Chicago Business Barometer™ Grew: The overall index increased to 71.2 from 68.8 in January. This was above consensus expectations of 68.0. Note: any number above 50 shows expansion.

"EMPLOYMENT continued to show expansion;". The employment index decreased to a still strong 59.8 from 64.1.

"NEW ORDERS nudged upward, still at the highest level since December 1983;". The new orders index increased to 75.9 from 75.7.

This was another strong report.

• From the NAR: Pending Home Sales Decline in January

The Pending Home Sales Index,* a forward-looking indicator, declined 2.8 percent to 88.9 based on contracts signed in January from a downwardly revised 91.5 in December [revised down sharply from 93.7]. The index is 1.5 percent below the 90.3 level in January 2010 when a tax credit stimulus was in place. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.

This suggests existing home sales in February and March will be somewhat lower than in January.

by Calculated Risk on 2/28/2011 08:30:00 AM

The BEA released the Personal Income and Outlays report for January:

Personal income increased $133.2 billion, or 1.0 percent ... Personal consumption expenditures (PCE) increased $23.7 billion, or 0.2 percent.
...
Real PCE -- PCE adjusted to remove price changes -- decreased 0.1 percent in January, in contrast to an increase of 0.3 percent in December.
...
The January change in disposable personal income (DPI) was affected by two large special factors. Reduced employee contributions for government social insurance ... boosted personal income in January by reducing the employee social security contribution rates ... The January change in DPI was affected by the expiration of the Making Work Pay provisions of the American Recovery and Reinvestment Act of 2009, which boosted personal current taxes and reduced DPI ... Excluding these two special factors ... DPI increased $11.4 billion, or 0.1 percent, in January

The following graph shows real Personal Consumption Expenditures (PCE) through January (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

Click on graph for larger image in graph gallery.

Real PCE declined in January after increasing sharply in Q4. Note: The quarterly change in PCE is based on the change from the average in one quarter, compared to the average of the preceding quarter - so this still shows growth over Q4.

Also personal income less transfer payments increased again in January. This increased to $9,427 billion (SAAR, 2005 dollars) from $9,325 billion in December.

This graph shows real personal income less transfer payments as a percent of the previous peak. This has been slow to recover, but has improved recently - and is still 3.2% below the previous peak.

The personal saving rate increased to 5.8% in January.

Personal saving as a percentage of disposable personal income was 5.8 percent in January, compared with 5.4 percent in December.

This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the January Personal Income report.

When the recession began, I expected the saving rate to rise to 8% or more. With a rising saving rate, consumption growth would be below income growth. But that 8% rate was just a guess. It is possible the saving rate has peaked, or it might rise a little further, but either way most of the adjustment has already happened.

The 1.0% increase in personal income was well above expectations of 0.4%, although spending only increased 0.2% (compared to expectations of 0.4%). The core price index for PCE increased 0.1 percent in January - slightly below expectations.

Overall this is a decent report. Even with the decline in real PCE, the 1.0% increase in income, the increase in the saving rate - and sharp increase in personal income less transfer payments - all were good news.

Weekend on U.S. economy:
• Schedule for Week of February 27th
• Summary for Week ending February 25th

by Calculated Risk on 2/27/2011 08:24:00 PM

Earlier on U.S. economy:
• Schedule for Week of February 27th
• Summary for Week ending February 25th

• From the Telegraph: Enda Kenny to call for bail-out to be renegotiated

Ireland's new leader [Enda Kenny] travels to Helsinki on Friday for a meeting ... with the German chancellor and French president over the EU and International Monetary Fund austerity programme.

He will plead with the EU for reduced interest rates .... [and] will also ask that investors, often other European financial institutions, take on some of an £85 billion debt burden of Irish banks, currently carried by taxpayers.

Watch the yield on Ireland's Ten Year bond today.

• After the Friday meeting in Helsinki on March 4th, there will be a special eurozone debt crisis summit on March 11th.

• Here are the Ten Year yields for Portugal, Spain, Greece, and Belgium (ht Nemo)

by Calculated Risk on 2/27/2011 03:38:00 PM

As a reminder, the weak payroll report for January was blamed on the snow. Usually I don't buy the weather excuses, but it did appear weather played a role this time. When the report was released, I wrote:

The 36,000 payroll jobs added was far below expectations of 150,000 jobs, however this was probably impacted by bad weather during the survey reference period. If so, there should be a strong bounce back in the February report.

That is a key reason the consensus is so high for February. Bloomberg has the consensus at 180,000, MarketWatch has 200,000, Goldman's forecast is 200,000, and I heard ISI is at 230,000).

It will be useful to average the two months to estimate the current pace of payroll growth - especially if weather played a role in January and there is a strong bounce back in February.

And we have to remember the numbers are grim:
• There are 7.7 million fewer payroll jobs now than before the recession started in December 2007.
• Almost 14 million Americans are unemployed.
• Of those unemployed, 6.2 million have been unemployed for six months or more.
• Another 8.4 million are working part time for economic reasons,
• About 4 million more have left the labor force since the start of the recession (we can see this in the dramatic drop in the labor force participation rate),
• of those who have left the labor force, about 1 million are available for work, but are discouraged and have given up.

A simple calculation: If the economy is adding 125,000 jobs per month (average over two months), it would take over 5 years to add back the 7.7 million lost payroll jobs - and that doesn't even include population growth. Grim is an understatement.

Earlier:
• Schedule for Week of February 27th
• Summary for Week ending February 25th

by Calculated Risk on 2/27/2011 08:29:00 AM

Earlier: Summary for Week ending February 25th

The key report for this week will be the February employment report to be released on Friday, March 4th.

Other key reports include the Personal Income and Outlays report on Monday, the ISM manufacturing index on Tuesday, vehicle sales on Tuesday, and the ISM non-manufacturing (service) index on Thursday. Also Fed Chairman Ben Bernanke will deliver the Semiannual Monetary Policy Report to the Congress on Tuesday (Senate) and Wednesday (House).

----- Monday, Feb 28th -----
8:30 AM: Personal Income and Outlays for January. The consensus is for a 0.4% increase in personal income and a 0.4% increase in personal spending, and for the Core PCE price index to increase 0.2%.

8:30 AM: New York Fed President William Dudley speaks on the economic outlook

8:45 AM: Boston Fed President Eric Rosengren, panel discussion, "Lessons Learned from the Global Meltdown."

9:45 AM: Chicago Purchasing Managers Index for February. The consensus is for a slight decrease to a still very strong 68.0 (down from 68.8 in January).

10:00 AM: Pending Home Sales for January. The consensus is for a slight decline in pending sales (a leading indicator for existing home sales).

10:30 AM: Dallas Fed Manufacturing Survey for February. The Texas production index was down sharply last month to 0.2 (from 15.3 in December), but is expected to show improvement in February.

----- Tuesday, Mar 1st -----
10:00 AM: ISM Manufacturing Index for February.

The consensus is for a decrease to 60.5 from the strong 60.8 in January. All of the regional manufacturing surveys showed strong improvement in February.

The PMI was at 60.8% in January, the highest level since May 2004. Some forecasts are as high as 63, and any reading above 61.4 would be the highest since 1983.

10:00 AM: Construction Spending for January. The consensus is for a 0.4% decrease in construction spending.

10:00 AM: Fed Chairman Ben Bernanke testimony, Semiannual Monetary Policy Report to the Congress, Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate

All day: Light vehicle sales for February. Light vehicle sales are expected to increase to 12.7 million (Seasonally Adjusted Annual Rate), from 12.6 million in January.

This graph shows light vehicle sales since the BEA started keeping data in 1967. The dashed line is the January sales rate.

Edmunds is forecasting: "Edmunds.com analysts predict that February's Seasonally Adjusted Annualized Rate (SAAR) will be 12.64 million, up from 12.54 in January 2011."

----- Wednesday, Mar 2nd -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. This index has declined over the last few weeks suggesting weak home sales through the first few months of 2011.

8:15 AM: The ADP Employment Report for February. This report is for private payrolls only (no government). The consensus is for +180,000 payroll jobs in February, down slightly from the 187,000 reported in January.

10:00 AM: Fed Chairman Ben Bernanke testimony, Semiannual Monetary Policy Report to the Congress, Before the Committee on Financial Services, U.S. House of Representatives

2:00 PM: Fed Beige Book, Informal review by the Federal Reserve Banks of current economic conditions in their Districts

2:15 PM: Atlanta Fed President Dennis Lockhart speaks on economic outlook

8:00 PM: Fed Chairman Ben Bernanke, "Challenges for State and Local Governments", At the Citizens Budget Commission Annual Dinner in New York

----- Thursday, Mar 3rd -----
8:30 AM: The initial weekly unemployment claims report will be released. The number of initial claims had been trending down over the last couple of months. The consensus is for a slight increase to 396,000 from 391,000 last week.

10:00 AM: ISM non-Manufacturing Index for February. The consensus is for a slight increase to 59.5 from 59.4 in January.

11:00 AM: Minneapolis Fed President Narayana Kocherlakota speaks on labor markets and monetary policy

2:15 PM: Atlanta Fed President Dennis Lockhart speaks on the economy and labor

----- Friday, Mar 4th -----
8:30 AM: Employment Report for February.

The consensus is for an increase of 179,000 non-farm payroll jobs in February, after the disappointing 36,000 jobs added in January.

This graph shows the net payroll jobs per month (excluding temporary Census jobs) since the beginning of the recession. The estimate for February is in blue.

The consensus is for the unemployment rate to increase to 9.1% from 9.0% in January.

The second employment graph shows the percentage of payroll jobs lost during post WWII recessions - aligned at maximum job losses.

This shows the severe job losses during the recent recession - there are currently 7.7 million fewer jobs in the U.S. than when the recession started.

10:00 AM: Manufacturers' Shipments, Inventories and Orders for January. The consensus is for a 2.2% increase in orders.

10:00 AM: Fed Vice Chair Janet Yellen, Panel Discussion, Improving the International Monetary and Financial System, At the International Symposium of the Banque de France, Paris, France

Best Wishes to All!

by Calculated Risk on 2/26/2011 08:06:00 PM

Earlier on U.S. economy: Summary for Week ending February 25th

UPDATE: from the WSJ: U.N. Imposes Sanctions on Gadhafi

The United Nations Security Council Saturday night unanimously imposed an arms embargo on Libya, referred its leaders to the International Criminal Court and slapped financial and trade sanctions on Col. Moammar Gadhafi and his inner circle in an effort to stop them from killing more Libyan civilians.

"Widespread and systematic attacks currently taking place in Libya against the civilian population may amount to crimes against humanity" and "those responsible for the attacks" must be held accountable, the resolution said.

• From the WaPo: Obama calls for Gaddafi to step down as leader of Libya

In a statement, the White House said Obama told Merkel that "when a leader's only means of staying in power is to use mass violence against his own people, he has lost the legitimacy to rule and needs to do what is right for his country by leaving now." Secretary of State Hillary Rodham Clinton issued a statement Saturday also demanding that Gaddafi step down.

• The Telegraph blog that is updated frequently: Libya protests: live

23.53 Our New York correspondent Jon swaine has been at the UN, where Libya's ambassador defected earlier today. Read his full report here.

23:42 The full UN Security Council is due to meet tomorrow at 4pm GMT (11am in NYC) to discuss possible sanctions against Gaddafi.

• From al Jazeera: Live Blog - Libya Feb 27

2:38am Al Jazeera understands the UN Security Council resolution will freeze the assets of six members of the Gaddafi family, including the Libyan leader - while 16 members of his administration will be slapped with a travel ban. Waiting on news of the vote...

• From the WSJ: Pro-Rebel Officers Vow Defense of Eastern Libya

• From the NY Times: Long Bread Lines and Barricades in Libya’s Capital

by Calculated Risk on 2/26/2011 02:36:00 PM

With the exception of housing, most of the U.S. economic data last week was fairly positive. We were also reminded of several potential downside risks to the U.S. economy, as falling house prices, higher oil prices, the European financial crisis, and state and local government cutbacks, were all in the news.

The focus last week was once again on the Middle East and North Africa, and especially on the historic and tragic events in Libya. These events have pushed U.S. oil prices to around $100 per barrel and have raised questions about the possible drag of higher oil prices on the U.S. economy.

The European financial crisis has been on the back burner, but yields are still elevated and there are key Euro Zone meetings scheduled in March. I expect this to be front page news again soon.

And a downward revision to state and local government spending contributed to the downward revision in the Q4 real GDP growth estimate, revised down to 2.8% from 3.2%. And several state budgets were in the news, especially the Wisconsin political battles.

The Case-Shiller house price index showed house prices are still falling – for the sixth consecutive month – and more house price declines are expected with the high levels of inventory and a high percentage of distressed sales. Eleven of the twenty Case-Shiller cities are now at new post-bubble lows: Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, New York, Phoenix, Portland (OR), Seattle and Tampa, and more will probably follow. Also new home sales remained weak in January.

These are all risks to 2011 economic growth.

But other economic news was more positive. On employment, all of the preliminary indicators suggested an increase in hiring. The four week average of initial weekly unemployment claims fell to the lowest level since 2008. The regional manufacturing surveys all suggest an increase in employment. The Reuters / University of Michigan consumer sentiment index was at the highest level in three years.

And growth in manufacturing continues to be strong. The Richmond Fed reported Manufacturing Activity Advanced at a Healthy Pace in February, and the the Kansas City Fed reported Manufacturing activity matched an all-time survey high in February. This suggests a strong ISM manufacturing report on March 1st.

Below is a summary of economic data last week mostly in graphs:

• Case-Shiller: National Home Prices Are Close to the 2009Q1 Trough

S&P/Case-Shiller reported that home prices are close to a post-bubble low.

Click on graph for larger image in graph gallery.

This graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 31.2% from the peak and still 2.4% above the May 2009 post-bubble bottom.

The Composite 20 index is also off 31.2% from the and only 0.8% above the May 2009 post-bubble bottom and will probably be at a new post-bubble low in January.

The next graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

From S&P:

Eleven MSAs posted new index level lows in December 2010, since their 2006/2007 peaks. These cities are Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, New York, Phoenix, Portland (OR), Seattle and Tampa.

Prices are now falling just about everywhere, and more cities are hitting new post-bubble lows. Both composite indices are still slightly above the post-bubble low, but the indexes will probably be at new lows in early 2011.

• New Home Sales decreased in January

The Census Bureau reports New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 284 thousand. This is down from a revised 325 thousand in December.

This graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. New home sales have averaged 293 thousand per month (annual rate) over the last nine months - all below the previous record low.

The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate).

In January 2010 (red column), 19 thousand new homes were sold (NSA). This is a new record low for the month of January.

The previous record low for January was 24 thousand in 2009 and 2010.

Starting in 1973 the Census Bureau broke down inventory into three categories: Not Started, Under Construction, and Completed.

The inventory of completed homes for sale fell to 78,000 units in January. And the combined total of completed and under construction is at the lowest level since this series started.

• January Existing Home Sales: 5.36 million SAAR, 7.6 months of supply

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in January 2010 (5.36 million SAAR) were 2.7% higher than last month, and were 5.3% higher than January 2010.

The next graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change. According to the NAR, inventory decreased to 3.38 million in January from 3.56 million in December.

Although inventory decreased from December to January, inventory increased 3.1% YoY in January. This is the sixth consecutive month of year-over-year increases in inventory, although the increase in January was lower than the previous months. But any increase is bad news with the high level of inventory.

Inventory should increase in February and March, and this is something to watch closely over the next few months.

This graph shows existing home sales Not Seasonally Adjusted (NSA).

The red column in January is for 2011. Sales NSA were about the same level as the last three years. January is usually the weakest month of the year for existing home sales (followed by February). The real key is what happens in the spring and summer.

The bottom line: Sales increased slightly in January (using the old method to estimate sales), apparently due to an increase in investor purchases of distressed properties at the low end. Inventory remains very high, and the year-over-year increase in inventory is very concerning.

Special Note: Back in January, I noted that it appeared the NAR had overestimated sales by 5% or so in 2007, and that the errors had increased since then (perhaps 10% to 15% or more in 2009 and 2010). The numbers released this week will probably be revised down significantly this summer.

• AIA: Architecture Billings Index shows no change in January

From the American Institute of Architects: Billings at Architecture Firms Hold Steady in January

This graph shows the Architecture Billings Index since 1996. The index showed billings were at the same level in January as in December (at 50).

Note: Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. So this indicator suggests the drag from CRE investment will end mid-year 2011 or so.

• Consumer Sentiment increases in February

The final February Reuters / University of Michigan consumer sentiment index increased to 77.5, the highest level in three years.

This was above the consensus forecast of 75.4.

In general consumer sentiment is a coincident indicator. This is still fairly low, but improving.

• Total REO decreased slightly in Q4

This graph from economist Tom Lawler shows an estimate of all the REO inventory. Lawler writes:

Based on the FDIC’s QBP report, as well as preliminary data on REO for private-label securities (using Barclay’s Capital data, as I don’t have data from my other source yet), REO inventory at “the F’s,” FDIC-insured institutions, and PLS would look as follows [see graph]

From CR: REO inventory is still below the levels in 2008 - but not much - and that was when prices were falling quickly. I think the various lenders are a little more careful disposing of REOs now, but the level of REOs suggest downward house price pressure.

• Other Economic Stories ...
• Q4 real GDP growth revised down to 2.8% annualized rate
• From Nick Timiraos: Home Sales Data Doubted
• From David Streitfeld at the NY Times: Shiller says house prices could fall 15% to 25%
• From MarketWatch: Consumer confidence jumps in February
• From the American Trucking Association: ATA Truck Tonnage Index Surged 3.8 Percent in January
• Unofficial Problem Bank list increases to 960 Institutions

Best wishes to all!

by Calculated Risk on 2/26/2011 12:24:00 PM

A few excerpts from Warren Buffett's annual letter to shareholders.

On Housing:

A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some point.

He wrote the same thing last year:

[W]ithin a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious.

Last year I disagreed, but now I think a recovery will probably "begin" within "a year or so".

On Clayton (manufactured homes):

At Clayton, we produced 23,343 homes, 47% of the industry’s total of 50,046. Contrast this to the peak year of 1998, when 372,843 homes were manufactured. (We then had an industry share of 8%.)

CR Note: This is close to the record low for manufacturing homes set in 2009 of 49.8 thousand units.

Clayton owns 200,804 mortgages that it originated. (It also has some mortgage portfolios that it purchased.) At the origination of these contracts, the average FICO score of our borrowers was 648, and 47% were 640 or below. Your banker will tell you that people with such scores are generally regarded as questionable credits.

Nevertheless, our portfolio has performed well during conditions of stress. ...

Our borrowers get in trouble when they lose their jobs, have health problems, get divorced, etc. The recession has hit them hard. But they want to stay in their homes, and generally they borrowed sensible amounts in relation to their income. In addition, we were keeping the originated mortgages for our own account, which means we were not securitizing or otherwise reselling them. If we were stupid in our lending, we were going to pay the price. That concentrates the mind.

If home buyers throughout the country had behaved like our buyers, America would not have had the crisis that it did. Our approach was simply to get a meaningful down-payment and gear fixed monthly payments to a sensible percentage of income. This policy kept Clayton solvent and also kept buyers in their homes.

... a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy. Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.

Note: The worst performing mortgages originated during the housing bubble were NOT protected by a government guarantee, instead they were the product of the Wall Street driven originate-to-distribute model. But I agree with Buffett's comments on how prudent lending "concentrates the mind", and about putting people into homes they can afford.