by Calculated Risk on 4/11/2011 06:21:00 PM

I've been asked for some links to comments about my blog, so I put together this quick and shameless puff piece. I hope you all don't mind ... best to all, Bill (CR)

1) Time.com 25 Best Financial Blogs, March 2011

“If you only follow one economics blog, it has to be Calculated Risk, run by Bill McBride. The site provides concise and very accessible summaries of all the key economic data and developments. One of the reasons McBride is able to do this so well is that he has an almost uncanny knack of recognizing which facts really matter. He began the blog in 2005 because he saw a disaster brewing in the form of the housing bubble, and tried his best to warn the rest of us of what was coming. I've followed him closely ever since, and I don't know if he's ever been wrong. My advice is, if you've come up with a different conclusion from McBride on how economic developments are going to unfold, you'd be wise to think it over again!”
Professor James Hamilton, Economics, University of California, San Diego

2) By John Carney Senior Editor, CNBC.com

"It’s very clear to me that this fact of the extension of unemployment benefits is widely misunderstood—and would have remained widely misunderstood if not for the meticulous and clarifying genius of Calculated Risk."

3) By Alen Mattich at the WSJ: The Best Economics Blogs

"Calculated Risk, produced by Bill McBride, is more focused on U.S. economic developments, particularly in the real-estate market. But investment banking research rarely gets to the nub of the issue as quickly or pithily as McBride following data releases and market developments. If you’re following U.S. macro trends, it’s a blog that demands frequent visits."

4) By David Weidner at the WSJ: Ten Wall Street Blogs You Need To Bookmark Now

5) Nobel economist Paul Krugman in the NY Times:
"Calculatedrisk, my go-to site on housing matters."

6) "[B]y far the broadest, deepest, and smartest coverage of the subprme crisis and housing meltdown comes not from any newspaper but rather from the blog Calculated Risk."
Felix Salmon, Condé Nast (now at Reuters)

7) "Calculated Risk, ... posts not only offer running commentary on the news but also break down the economics of the mortgage game. ... Some of the commentary can be a slog, but no other site offers this level of analysis."
Business Week

8) Recent mention in the NY Times:

"Consider this chart from the Calculated Risk blog (and revisit it regularly). As the picture shows so vividly, we are still waiting for employment to turn back up decisively. Compared with previous recessions, the delay is simply stunning."

9) More recent mentions in the WSJ (just excerpts from my blog):
Here and here.

by Calculated Risk on 4/11/2011 02:51:00 PM

An update to a couple of graphs ...

The first graph shows total housing starts and the percent vacant housing units (owner and rental) in the U.S.

Back in 2009, I used this chart to argue that there would be no "V shaped" recovery, and that housing starts wouldn't rebound rapidly. See: Housing Starts and Vacant Units: No "V" Shaped Recovery.

Note: Housing starts are through February, and the combined vacancy rate through Q4 based on the Census Bureau HVS vacancy rates for owner occupied and rental housing.

Click on graph for larger image in graph gallery.

The good news is the total vacancy rate is declining (and based on recent Reis' data, the vacancy rate will fall further in Q1 2011). We know that the homebuilders will complete a record low number of housing units in 2011, and the declining vacancy rate suggests more households are being formed than net housing units added to the housing stock, or in other words, the excess supply is being absorbed.

There will be some increase in building this year (mostly in multi-family), but the recovery in construction will remain sluggish until more of the excess supply is absorbed. I'd like to see this measure of vacancy down to 4.5% or even 4.0%.

Looking at the graph, the vacancy rate continued to climb even after housing starts fell off a cliff. Initially this was because of a significant number of completions. Then some hidden inventory (like some 2nd homes) probably became available for sale or for rent, and also some households doubled up because of tough economic times.

The second graph shows single family housing starts (through February) and the unemployment rate (inverted) through March. Note: there are many other factors too impacting unemployment, but housing is a key sector.

You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold.

Housing starts (blue) have declined recently - but have mostly moved sideways for the last two years. This is one of the reasons the unemployment rate has stayed elevated compared to previous recoveries.

The good news is residential investment should increase modestly this year, and that will help push down the unemployment rate. But I still think the labor market recovery will be sluggish until the excess housing supply is absorbed.

by Calculated Risk on 4/11/2011 12:15:00 PM

From Fed Vice Chair Janet Yellen: Commodity Prices, the Economic Outlook, and Monetary Policy. Yellen discusses the recent surge in commodity prices and the possible impact on underlying inflation. She doesn't think the increase in commodity prices will impede the economic recovery.

A few excerpts:

[T]he recent run-up in commodity prices is likely to weigh somewhat on consumer spending in coming months because it puts a painful squeeze on the pocketbooks of American households. In particular, higher oil prices lower American income overall because the United States is a major oil importer and hence much of the proceeds are transferred abroad. Monetary policy cannot directly alter this transfer of income abroad, which primarily reflects a change in relative prices driven by global demand and supply balances, not conditions in the United States. Thus, an increase in the price of crude oil acts like a tax on U.S. households, and like other taxes, tends to have a dampening effect on consumer spending.

The surge in commodity prices may also dampen business spending. Higher food and energy prices should boost investment in agriculture, drilling, and mining but are likely to weigh on investment spending by firms in other sectors. Assuming these firms are unable to fully pass through higher input costs into prices, they will experience some compression in their profit margins, at least in the short run, thereby causing a decline in the marginal return on investment in most forms of equipment and structures. Moreover, to the extent that higher oil prices are associated with greater uncertainty about the economic outlook, businesses may decide to put off key investment decisions until that uncertainty subsides. Finally, with higher oil prices weighing on household income, weaker consumer spending could discourage business capital spending to some degree.

Fortunately, considerable evidence suggests that the effect of energy price shocks on the real economy has decreased substantially over the past several decades. During the period before the creation of the Organization of the Petroleum Exporting Countries (OPEC), cheap oil encouraged households to purchase gas-guzzling cars while firms had incentives to use energy-intensive production techniques. Consequently, when oil prices quadrupled in 1973-74, that degree of energy dependence resulted in substantial adverse effects on real economic activity. Since then, however, energy efficiency in both production and consumption has improved markedly.

Consequently, while the recent run-up in commodity prices is likely to weigh somewhat on consumer and business spending in coming months, I do not anticipate that those developments will greatly impede the economic recovery as long as these trends do not continue much further.

And her conclusion:

In summary, the surge in commodity prices over the past year appears to be largely attributable to a combination of rising global demand and disruptions in global supply. These developments seem unlikely to have persistent effects on consumer inflation or to derail the economic recovery and hence do not, in my view, warrant any substantial shift in the stance of monetary policy.

by Calculated Risk on 4/11/2011 08:59:00 AM

From Bloomberg: Dudley Says Fed Shouldn’t Rush to Tighten Policy ‘Too Early’

“We’re probably going to have excess slack in the U.S. labor market at least through the end of 2012, and that’s one reason that colored my view that we shouldn’t be overly enthusiastic about tightening monetary policy too early,” [NY Fed President William] Dudley told a forum in Tokyo today.

It is extremely unlikely that the Fed will raise rates this year - and as Dudley notes - there will probably be excess slack in the labor markets next year too.

Weekend:
• Summary for Week ending April 8th
• Schedule for Week of April 10th

by Calculated Risk on 4/10/2011 08:19:00 PM

A couple of articles:
From the WSJ: Warning Signs for Copper Market (ht Brian)

Copper prices have almost quadrupled after a two-year rally ... evidence has recently surfaced of previously unreported copper stockpiles, a sign that much of the purchased copper hasn't been put to use.

And from the WSJ: Steel Price Softens As Supply Solidifies

The world's steelmakers are increasing output despite softer demand, pushing down prices. ... But U.S. prices—especially for hot-rolled steel, a key component used in most steel products—could be headed lower too

Lower commodity prices would definitely help - especially oil. Unfortunately WTI futures are up again to over $113 per barrel.

Earlier:
• Summary for Week ending April 8th
• Schedule for Week of April 10th

by Calculated Risk on 4/10/2011 02:45:00 PM

Earlier:
• Summary for Week ending April 8th
• Schedule for Week of April 10th

Just an update: My general outlook for 2011 remains the same ...
• GDP growth slightly above trend and strong than the 2.9% growth rate in 2010 (although Q1 2011 will be sluggish).
• Payroll employment growth to be better in 2011 than in 2010 (940 nonfarm payroll jobs added in 2010, 1.17 million private payroll jobs). My forecast is private payrolls will increase 2.4 million in 2011, although total payroll growth will be less because of state and local government layoffs. With 7.25 million fewer payrolls jobs than before the recession, this is still disappointing payroll growth.

I also watch the downside risks carefully. Here is a brief update to a list from last month with my view if the risk to the economy is increasing or decreasing:

1) Higher oil prices and a possible supply shock. Risk increasing.

U.S. oil prices have risen to $112.79 per barrel. At the moment this appears to the be the top risk to the U.S. economy. With gasoline prices over $4 per gallon in some areas, this has to be starting to hurt.

2) Possible Federal government cutbacks (even shutdown). Risk increasing.

Although there was a budget deal reached on Friday, the fiscal cutting rhetoric has increased. There is even the possibility (remote) of the first default in history because of political ideology. The "debt ceiling" debate is just political grandstanding, but you never know what will happen. Even assuming the debt ceiling is raised, it appears there will be more cutting than originally expected - and that will be a drag on U.S. growth this year.

3) U.S. Housing Crisis. Same.

House prices are at new post-bubble lows and still falling. And there will be many foreclosures and more distressed supply coming on the market. But it does appear the excess supply is being absorbed (based on falling vacancy rates), but there is still a long way to go.

4) The European financial crisis. Same.

Portugal finally requested a bailout. That was expected. From Dow Jones: IMF Will Join In Assessment Of Portugal Tuesday

"Following a request by the Portuguese authorities, IMF experts will join European Commission and European Central Bank teams for a technical assessment of the current situation of the Portuguese economy," the statement said.

The assessment will serve as the basis for policy discussions scheduled to begin April 18, the IMF said.

European authorities are planning a bailout for Portugal. They are trying to close a deal by mid-May ...

If another European country, in addition to Greece, Ireland and Portugal, requests a bailout - or any of those countries default - the situation could get worse. Also the second round of bank stress tests might reveal additional problems.

5) State and local government cutbacks. Same.

6) Inflation (a two sided coin). Same.

Although I think core inflation will remain below the Fed's target in 2011, it is possible that inflation could pick up more - or that policymakers will overreact.

7) Risks from the earthquake in Japan. Risk Diminished.

This was a horrible tragedy for the people of Japan, however it appears the risks from the nuclear and supply disruption issues have diminished.

Overall the downside risks have increased over the last few weeks - especially from oil prices and government policy.

by Calculated Risk on 4/10/2011 08:35:00 AM

NOTE: The Schedule is available all week in the menu bar above.

Earlier:
• Summary for Week ending April 8th

The key reports this week are March Retail Sales on Wednesday, and the Consumer Price Index (CPI) on Friday. The monthly Trade Balance report will be released on Tuesday, and Industrial Production/Capacity Utilization on Friday. Also J.P. Morgan (Weds) and Bank of America (Fri) report Q1 results this week and they might provide comments on foreclosure issues.

----- Monday, April 11th -----
12:15 PM ET: Fed Vice Chair Janet Yellen speaks, "Commodity Prices, the Economic Outlook, and Monetary Policy", At the Economic Club of New York Luncheon, New York, New York

----- Tuesday, April 12th -----
7:30 AM: NFIB Small Business Optimism Index for March. This index has been showing some increase in optimism.

Click on graph for larger image in graph gallery.

This graph shows the small business optimism index since 1986. The index increased to 94.5 in February from 94.1 in January.

Although still fairly low, this is the highest level for the index since December 2007.

8:30 AM: Trade Balance report for February from the Census Bureau.

This graph shows the monthly U.S. exports and imports in dollars through January 2011.

Exports are up sharply and are now above the pre-recession peak. Imports have surged over the last two months, largely due to the increase in oil prices.

The consensus is for the U.S. trade deficit to be around $44.0 billion, down from $46.3 billion in January.

----- Wednesday, April 13th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. This index has been very weak over the last couple months suggesting weak home sales in spring 2011.

7:00 AM: J.P. Morgan First Quarter 2011 Financial Results

8:30 AM: Retail Sales for March.

This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline).

Retail sales are up 15.3% from the bottom, and now 1.9% above the pre-recession peak.

The consensus is for retail sales to increase 0.5% in March (0.7% increase ex-auto).

10:00 AM: Manufacturing and Trade: Inventories and Sales for February. The consensus is for a 0.8% increase in inventories.

10:00 AM: Job Openings and Labor Turnover Survey for February from the BLS. This report has been showing a general increase in job openings, but very little turnover in the labor market.

2:00 PM ET: The Fed Beige Book will be released. This is an informal review by the Federal Reserve Banks of current economic conditions.

----- Thursday, April 14th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for a decrease to 380,000 from 382,000 last week.

8:30 AM: Producer Price Index for March. The consensus is for a 1.0% increase in producer prices (0.2% core).

----- Friday, April 15th -----
7:00 AM: Bank of America First-Quarter Financial Results

8:30 AM: NY Fed Empire Manufacturing Survey for April. The consensus is for a reading of 17.0, down slightly from 17.5 in March.

8:30 AM: Consumer Price Index for March. The consensus is for a 0.5% increase in prices. The consensus for core CPI is an increase of 0.2%.

9:15 AM ET: The Fed will release Industrial Production and Capacity Utilization for March.

This graph shows industrial production since 1967. Production is still 5.2% below the pre-recession levels at the end of 2007.

The consensus is for a 0.5% increase in Industrial Production in March, and an increase to 77.4% (from 76.3%) for Capacity Utilization.

9:55 AM: Reuters/University of Mich Consumer Sentiment preliminary for April. The consensus is for a slight increase to 69.0 from 67.5 in March.

Best wishes to All!

by Calculated Risk on 4/09/2011 09:45:00 PM

Earlier:
• Summary for Week ending April 8th

From Sandra Jones at the Chicago Tribune: Slow housing market convinces owners to fix up rather than move out

Seasonal hiring at Lowe's Cos., the nation's No. 2 home improvement retailer, is up 15 percent this spring as homeowners, feeling more secure in their jobs, tackle maintenance projects delayed during the recession. Midwest regional chain Menard Inc. is expanding again. It plans to build 12 stores this year, up from four in 2010.

And Home Depot Inc., the largest home improvement retailer, reported in February its first annual sales increase since 2006, before the housing market crashed.

Some of this increase is maintenance and repairs - and some of the increase is due to people sprucing up their homes:

Kris and Dennis Cortes of Flossmoor are typical of the post-recession home remodelers, industry experts said. The parents of five children said they chose to stay in the home they bought 20 years ago and to give the house a face-lift. They are adding a couple gables to the roof, installing a new garage door and updating the landscaping.

The BuildFax remodeling index has been showing a strong rebound in remodeling too. Although new home construction is still struggling (usually the largest component of residential investment), two other key components of residential investment are increasing in 2011: multi-family construction and home improvement.

by Calculated Risk on 4/09/2011 06:26:00 PM

Earlier:
• Summary for Week ending April 8th

From Reuters: Fed's Yellen says too soon to start reversing policy

"Economic conditions do not yet call for the Fed to exit from its unconventional policies," Janet Yellen, Fed Vice Chair, said during a panel discussion at Yale University in New Haven, Connecticut.
...
Fed officials are aware of the need to ease up on the policy gas pedal at the appropriate time, and has a "suite of tools" to help, Yellen said.

In particular, purchases of securities beyond the level the Fed has committed to could raise doubts about the Fed's ability to exit gracefully.

"That could lead to an undesired rise in inflation expectations," she said. A precise communications strategy will be key to guiding market expectations, Yellen noted.

It is pretty clear that the Fed will complete the $600 billion QE2 as scheduled in June.

Note: I'd like to see the actual comments about additional purchases (this article just paraphrases Yellen). If the economy weakens later this year, I'm pretty sure Yellen would support additional purchases.

by Calculated Risk on 4/09/2011 11:15:00 AM

This was a light week for U.S. economic data mixed in with a little political theater in D.C. The ISM non-manufacturing index showed further expansion, but at a slower rate. Rail traffic increased in March, and house prices fell further in February (no surprise).

Reis reported their Q1 quarterly data for office, mall and apartment vacancy rates. The office vacancy rate declined slightly, the mall vacancy rate increased - but the big story was the sharp decline in the apartment vacancy rate.

In Europe, Portugal finally asked for a bailout. The package is estimated at €80 billion and the austerity will probably be severe.

Next week will be busy. Below is a summary of economic data last week mostly in graphs:

• ISM Non-Manufacturing Index indicates slower expansion in March

The March ISM Non-manufacturing index was at 57.3%, down from 59.7% in February. The employment index indicated slower expansion in March at 53.7%, down from 55.6% in February. Note: Above 50 indicates expansion, below 50 contraction.

Click on graph for larger image in graph gallery.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

This was below expectations of 59.5%.

• CoreLogic: House Prices declined 2.7% in February, Prices now 4.1% below 2009 Lows

From CoreLogic: CoreLogic Home Price Index Shows Year-Over-Year Decline for Seventh Straight Month

This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.

The index is down 6.7% over the last year, and off 34.5% from the peak.

This is the seventh straight month of year-over-year declines, and the eighth straight month of month-to-month declines. The index is now 4.1% below the previous post-bubble low set in March 2009, and I expect to see further new post-bubble lows for this index over the next few months.

• House Prices: Nominal, Real, Price-to-Rent

This graph shows the quarterly Case-Shiller National Index (through Q4 2010), and the monthly Case-Shiller Composite 20 (through January release) and CoreLogic House Price Indexes (through February release) in nominal terms (as reported).

In nominal terms, the National index is back to Q1 2003 levels, the Composite 20 index is slightly above the May 2009 lows, and the CoreLogic index back to January 2003.

This graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter).

Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to Q1 2000 levels, the Composite 20 index is back to January 2001, and the CoreLogic index back to January 2000.

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph through January 2011 using the Case-Shiller Composite 20 and CoreLogic House Price Index.

This graph shows the price to rent ratio (January 1998 = 1.0).

An interesting point: the measure of Owners' Equivalent Rent (OER) is at about the same level as two years - so the price-to-rent ratio has mostly followed changes in nominal house prices since then. Rents are starting to increase again, and OER will probably increase in 2011 - lowering the price-to-rent ratio.

On a price-to-rent basis, the Composite 20 index is just above the May 2009 levels, and the CoreLogic index is back to January 2000.

• Reis: Office, Mall and Apartment Vacancy Rates in Q1

On Offices from Bloomberg: Office Market in U.S. Begins Recovery as Vacancy Rate Declines

Reis is reporting the vacancy rate was at 17.5% in Q1 2011, down slightly from 17.6% in Q4 2010, and up from 17.3% in Q1 2010. This was a small decline in the vacancy rate - but it was the first decline since 2007.

This graph shows office investment in real dollars (left axis in blue) seasonally adjusted annual rate (SAAR), and the office vacancy rate from Reis (right axis in red).

The two arrows point at two previous periods when investment picked up as the vacancy rate declined. In the mid-'90s, it isn't clear if we should say investment picked up at the beginning of '95 or '96, but it was when the vacancy rate was around 13% or 14% and falling.

On Apartments from Reuters: U.S. apartment vacancies fall in Q1, rents edge up

"Reis Inc's quarterly report showed the vacancy rate dropped to 6.2 percent in the first three months of the year, down from 6.6 percent in the fourth quarter. It was the steepest fall since the commercial real estate research firm began tracking the market in 1999."

This is a very large decline from the record vacancy rate set a year ago at 8%.

On Malls from Bloomberg: Mall Vacancies Climb to Highest in Decade as U.S. Retailers Close Stores

"The vacancy rate [at U.S. regional malls] climbed to 9.1 percent from 8.9 percent a year earlier and 8.7 percent in the fourth quarter, [Reis reported]. It was the highest since Reis began publishing data on regional malls in the beginning of 2000.

At neighborhood and community shopping centers, which usually are anchored by discount and grocery stores, the vacancy rate rose to 10.9 percent from 10.7 percent a year earlier. The rate was unchanged from the three previous quarters and the highest since it reached 11 percent in 1991, according to Reis."

The previous record for regional malls was 9.0% in Q2 2010 (Reis started tracking regional malls in 2000). The record vacancy rate for strip malls was in 1990 at 11.1%.

• Other Economic Stories ...
• AAR: Rail Traffic increases in March
• From Reuters: Portugal's Finance Minister: We Now Need EU Aid After All
• From the Irish Times: Portugal told to implement reforms ahead of bailout
• FOMC Minutes: Some Disagreement, Worry about Oil Prices, No Tapering of QE2
• Bernanke in Q&A: "Inflation will be transitory"
• Consumer Bankruptcy filings decrease in Q1 2011
• Unofficial Problem Bank list at 982 Institutions

Best wishes to all!