by Calculated Risk on 9/29/2012 08:11:00 AM

The economic data was mostly weak last week. Q2 GDP growth was revised down to 1.3% annualized (from an already anemic 1.7%), durable goods orders declined sharply (although mostly due to the volatile transportation sector), personal income barely increased in August, and the September Chicago PMI declined to the lowest level in 3 years.

There were a few positives: Even though new home sales were slightly below expectations, sales are still up solidly from last year. House prices, according to Case-Shiller, are now up 1.2% year-over-year. Mortgage delinquencies continued to decline. And initial weekly unemployment claims declined in the previous week.

This suggests the economy is still growing sluggishly.

Here is a summary of last week in graphs:

• New Home Sales at 373,000 SAAR in August

Click on graph for larger image in graph gallery.

The Census Bureau reports New Home Sales in August were at a seasonally adjusted annual rate (SAAR) of 373 thousand. This was down slightly from a revised 374 thousand SAAR in July (revised up from 372 thousand). Sales in June were revised up.

The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. This was below expectations of 380,000, but this was another fairly solid report and indicates an ongoing sluggish recovery in residential investment.

"The seasonally adjusted estimate of new houses for sale at the end of August was 141,000. This represents a supply of 4.5 months at the current sales rate."

This graph shows the three categories of inventory starting in 1973: Completed, under construction and not started.

The inventory of completed homes for sale was at a record low 38,000 units in August. The combined total of completed and under construction is at the lowest level since this series started.

New Home Sales graphs
• Case-Shiller: House Prices increased 1.2% year-over-year in July

S&P/Case-Shiller released the monthly Home Price Indices for July (a 3 month average of May, June and July).

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 31.7% from the peak, and up 0.4% in July (SA). The Composite 10 is up 3.7% from the post bubble low set in March (SA).

The Composite 20 index is off 31.2% from the peak, and up 0.4% (SA) in July. The Composite 20 is up 4.0% from the post-bubble low set in March (SA).

The second graph shows the Year over year change in both indices.

The Composite 10 SA is up 0.6% compared to July 2011.

The Composite 20 SA is up 1.2% compared to July 2011. This was the second year-over-year gain since 2010 (when the tax credit boosted prices temporarily).

This was at the consensus forecast and the recent change to a year-over-year increase is significant.

• Real House Prices, Price-to-Rent Ratio

Real prices, and the price-to-rent ratio, are back to late 1999 to 2000 levels depending on the index.

This graph shows the Case-Shiller National index, Case-Shiller composite 20 and Corelogic 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 mid-1999 levels, the Composite 20 index is back to July 2000, and the CoreLogic index back to February 2001.

In real terms, most of the appreciation early in the last decade is gone.

Here is a graph of the price-to-rent ratio using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

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

On a price-to-rent basis, the Case-Shiller National index is back to Q3 1999 levels, the Composite 20 index is back to June 2000 levels, and the CoreLogic index is back to February 2001.

In real terms - and as a price-to-rent ratio - prices are mostly back to late 1990s or early 2000 levels.

All Current House Price Graphs
• Personal Income increased 0.1% in August, Spending increased 0.5%

The BEA released the Personal Income and Outlays report for August: "Personal income increased $15.0 billion, or 0.1 percent ... in August, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $57.2 billion, or 0.5 percent."

This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE.

Using the two-month method, it appears real PCE will increase around 1.3% annualized in Q3 - another weak quarter for GDP growth (June PCE was weak, so maybe PCE will increase 1.6%).

A key point is the PCE price index has only increased 1.5% over the last year, and core PCE is up only 1.6%. In August, core PCE increase at a 1.3% annualized rate.

• Regional Manufacturing Surveys mixed

From the Kansas City Fed: Growth in Tenth District Manufacturing Activity Slowed Somewhat

From the Dallas Fed: Texas Manufacturing Growth Picks Up

From the Richmond Fed: Manufacturing Activity Ticked Up in September; New Orders Turned Positive

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

The ISM index for September will be released Monday, Oct 1st, and these surveys suggest another weak reading close to 50.

• Weekly Initial Unemployment Claims decline to 359,000


And here is a long term graph of weekly claims:

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 374,000.

This was below the consensus forecast of 376,000.

Mostly moving sideways this year, but moving up recently.

All current Employment Graphs
• Consumer Sentiment in September at 78.3

The final Reuters / University of Michigan consumer sentiment index for September was 78.3, down from the preliminary reading of 79.2, and up from the August reading of 74.3.

This was below the consensus forecast of 79.0 and still fairly low. Sentiment remains weak due to the high unemployment rate, sluggish economy and higher gasoline prices.

• Other Economic Stories ...
• Chicago Fed: Economic Activity Weakened in August
• LPS: Mortgage delinquencies decreased in August
• Restaurant Performance Index increases in August
• DOT: Vehicle Miles Driven decreased 0.3% in July
• NAR: Pending home sales index declined 2.6% in August

by Calculated Risk on 9/28/2012 07:13:00 PM

Autumnal changes
Green leaves shift from gold to red
As have balance sheets
by Soylent Green is People
From the FDIC: Old Plank Trail Community Bank, National Association, New Lenox, Illinois, Assumes All of the Deposits of First United Bank, Crete, Illinois

As of June 30, 2012, First United Bank had approximately $328.4 million in total assets and $316.9 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $48.6 million. ... First United Bank is the 43rd FDIC-insured institution to fail in the nation this year, and the seventh in Illinois.

The FDIC has really slowed down!

by Calculated Risk on 9/28/2012 05:01:00 PM

Fannie Mae reported that the Single-Family Serious Delinquency rate declined in August to 3.44% from 3.50% July. The serious delinquency rate is down from 4.03% in August last year, and this is the lowest level since April 2009.

The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.

Freddie Mac reported that the Single-Family serious delinquency rate declined in August to 3.36%, from 3.42% in July. Freddie's rate is down from 3.49% in August 2011. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. This is the lowest level for Freddie since August 2009.

These are loans that are "three monthly payments or more past due or in foreclosure".

Click on graph for larger image

In 2009, Fannie's serious delinquency rate increased faster than Freddie's rate. Since then, Fannie's rate has been falling faster - and now the rates are at about the same level.

Although this indicates some progress, the "normal" serious delinquency rate is under 1% - and it looks like it will be several years until the rates back to normal.

by Calculated Risk on 9/28/2012 12:55:00 PM

From the National Restaurant Association: Stronger Sales, Traffic Bolster Restaurant Performance Index in August

The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 100.6 in August, up 0.4 percent from July and the first increase in five months. August represented the tenth consecutive month that the RPI stood above 100, which signifies continued expansion in the index of key industry indicators.

“Growth in the RPI was driven largely by improving same-store sales and customer traffic results in August,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the Association. “Six out of 10 restaurant operators reported positive same-store sales in August, while customer traffic readings bounced back from July’s net decline.”

“In contrast, the Expectations Index remained dampened compared to recent stronger levels, with restaurant operators retaining a cautious outlook for sales growth and the economy in the months ahead,” Riehle added.

Click on graph for larger image.

The index increased to 100.6 in August, up from 100.2 in July (above 100 indicates expansion).

Restaurant spending is discretionary, so even though this is "D-list" data, I like to check it every month.

by Calculated Risk on 9/28/2012 09:58:00 AM

Click on graph for larger image.

The final Reuters / University of Michigan consumer sentiment index for September was 78.3, down from the preliminary reading of 79.2, and up from the August reading of 74.3.

This was below the consensus forecast of 79.0 and still fairly low. Sentiment remains weak due to the high unemployment rate, sluggish economy and higher gasoline prices.

From the Chicago ISM:

The Chicago Purchasing Managers reported the Chicago Business Barometer fell to 49.7, its lowest level in three years.

• EMPLOYMENT: 2 1/2 year low; [declined to 52.0 from 57.1 in August]
• NEW ORDERS, ORDER BACKLOGS, and SUPPLIER DELIVERIES: 3 month moving averages lowest since mid 2009; [new orders declined to 47.4 from 54.8]
• PRICES PAID: third consecutive monthly gain

The Chicago PMI was well below the consensus forecast of 53.1.

by Calculated Risk on 9/28/2012 08:45:00 AM

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

Personal income increased $15.0 billion, or 0.1 percent ... in August, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $57.2 billion, or 0.5 percent.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in August, compared with an increase of 0.4 percent in July. ... The price index for PCE increased 0.4 percent in August, compared with an increase of less than 0.1 percent in July. The PCE price index, excluding food and energy, increased 0.1 percent in August, the same increase as in July.
...
Personal saving -- DPI less personal outlays -- was $444.8 billion in August, compared with $492.2 billion in July. Personal saving as a percentage of disposable personal income was 3.7 percent in August, compared with 4.1 percent in July

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

Click on graph for larger image.

This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE.

Using the two-month method, it appears real PCE will increase around 1.3% annualized in Q3 - another weak quarter for GDP growth (June PCE was weak, so maybe PCE will increase 1.6%).

A key point is the PCE price index has only increased 1.5% over the last year, and core PCE is up only 1.6%. In August, core PCE increase at a 1.3% annualized rate.

by Calculated Risk on 9/27/2012 08:50:00 PM

The beatings continue in Europe ...

From the NY Times: Despite Public Protests, Spain’s 2013 Budget Plan Includes More Austerity

The Spanish government on Thursday presented a draft budget for 2013 with a package of tax increases and spending cuts that it said would guarantee the country could meet deficit-cutting targets agreed to with the rest of the euro zone.
...
The 2013 budget plan released Thursday is meant to help carry out a sweeping long-term austerity package outlined by Mr. Rajoy in July, which is aimed at reducing the central government’s budget deficit by 65 billion euros, or $84 billion, over two and a half years.

The plan involves an average cut of almost 9 percent in the spending of each government ministry next year. The salaries of civil servants will be frozen for a third consecutive year.

And from the NY Times: Greece Agrees on New Package of Budget Cuts and Taxes

The government of Prime Minister Antonis Samaras must now present the proposed actions — $15 billion in cuts to pensions, salaries and state spending, and at least $2.6 billion in new taxes — for further discussion with the foreign lenders, who have demanded them in return for releasing the next portion of aid to the stricken country.
...
The government did not release specifics of the agreement, though it is said to call for a rise in the retirement age to 67 from 65.

On Friday:
• At 8:30 AM ET, the Personal Income and Outlays report for August will be released. The consensus is for a 0.2% increase in personal income in August, and for 0.5% increase in personal spending. And for the Core PCE price index to increase 0.1%.

This will give us two months of data (July and August) to estimate consumer spending in Q3.

• At 9:45 AM, the Chicago Purchasing Managers Index for September. The consensus is for an increase to 53.1, up from 53.0 in August.

• At 9:55 AM, the Reuter's/University of Michigan's Consumer sentiment index (final for September). The consensus is for a reading of 79.0, down from the preliminary September reading of 79.2, and up from the August reading of 74.3.


A final question for the September economic prediction contest:

by Calculated Risk on 9/27/2012 05:57:00 PM

Another month, another record ...

From Freddie Mac today: All-Time Low: 30-Year Fixed-Rate Mortgage Averages 3.40 Percent

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing fixed mortgage rates breaking their previous average record lows ... All mortgage products, except the 5-year ARM, averaged new all-time record lows.

30-year fixed-rate mortgage (FRM) averaged 3.40 percent with an average 0.6 point for the week ending September 27, 2012, down from last week when it averaged 3.49 percent. Last year at this time, the 30-year FRM averaged 4.01 percent.

"Fixed mortgage rates continued to decline this week, largely due to the Federal Reserve's purchases of mortgage securities, and should support an already improving housing market." [said Frank Nothaft, vice president and chief economist, Freddie Mac]

Click on graph for larger image.

This graph shows the 15 and 30 year fixed rates from the Freddie Mac survey. The Primary Mortgage Market Survey® started in 1971 (15 year in 1991). Both rates are at record lows for the Freddie Mac survey. Rates for 15 year fixed loans are now at 2.73%.

by Calculated Risk on 9/27/2012 02:52:00 PM

There is plenty of focus on the downside risks to the US economy - the European crisis and recession, the slowdown in China, the US fiscal cliff and more - but there are at least two reasons to expect an increase in US economic activity.

The first reason is a little addition by subtraction. Over the last 3+ years, state and local governments have lost over 700 thousand payroll jobs (including the preliminary estimate of the benchmark revision - assuming most of the additional government jobs lost were state and local).

The following graph is for state and local government employment. So far in 2012 - through August (and using the Benchmark estate) - state and local governments have lost about 78,000 jobs (61,000 not counting the revision). In 2011, state and local governments lost about 280,000 jobs (230,000 not counting revision). So the layoffs are ongoing, but have slowed.

Click on graph for larger image.

This graph shows total state and government payroll employment since January 2007. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, and 280,000 in 2011.

It looks like the layoffs are mostly over, although I don't expect much hiring over the next year. Just ending the drag from state and local governments will give a boost to GDP and employment growth

The second graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005 (including the Q2 GDP revision today).

The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has added to GDP growth for the last 5 quarters (through Q2 2012).

However the drag from state and local governments is ongoing. State and local governments have been a drag on GDP for eleven consecutive quarters. Although not as large a negative as the worst of the housing bust (and much smaller spillover effects), this decline has been relentless and unprecedented.

In real terms, state and local government spending is now back to Q4 2001 levels, even with a larger population.

The second reason I expect growth to pickup is I think the recovery in residential investment will pick up next year. I'm not as optimistic as the NAR (the NAR is forecasting housing starts will increase about 50% next year), but I do think there will be a large increase in housing starts and new home sales in 2013.

Here is a graph of residential investment (RI) as a percent of GDP. Currently RI is 2.4% of GDP; just above the record low.

I expect RI will increase to 4%+ of GDP over the next few years, and that will give GDP and employment a strong boost.

by Calculated Risk on 9/27/2012 11:36:00 AM

This morning the BLS released the preliminary annual benchmark revision showing an additional 386,000 payroll jobs as of March 2012. The final revision will be published next February when the January 2012 employment report is released on February 1, 2013. Usually the preliminary estimate is pretty close to the final benchmark estimate.

The annual revision is benchmarked to state tax records. From the BLS:

Establishment survey benchmarking is done on an annual basis to a population derived primarily from the administrative file of employees covered by unemployment insurance (UI). The time required to complete the revision process—from the full collection of the UI population data to publication of the revised industry estimates—is about 10 months. The benchmark adjustment procedure replaces the March sample-based employment estimates with UI-based population counts for March. The benchmark therefore determines the final employment levels ...

Using the preliminary benchmark estimate, this means that payroll employment in March 2012 was 386,000 higher than originally estimated. In February 2013, the payroll numbers will be revised up to reflect this estimate. The number is then "wedged back" to the previous revision (March 2011).

This means the BLS under counted payroll jobs by 386,000 as of March 2012. This preliminary estimate showed an additional 453,000 private sector jobs, but 67,000 fewer government jobs (as of March 2012).

For details on the benchmark revision process, see from the BLS: Benchmark Article and annual benchmark revision for the new preliminary estimate.

The following table shows the benchmark revisions since 1979.

Year	Percent benchmark revision	Benchmark revision (in thousands)
1979	0.5	447
1980	-0.1	-63
1981	-0.4	-349
1982	-0.1	-113
1983	*	36
1984	0.4	353
1985	*	-3
1986	-0.5	-467
1987	*	-35
1988	-0.3	-326
1989	*	47
1990	-0.2	-229
1991	-0.6	-640
1992	-0.1	-59
1993	0.2	263
1994	0.7	747
1995	0.5	542
1996	*	57
1997	0.4	431
1998	*	44
1999	0.2	258
2000	0.4	468
2001	-0.1	-123
2002	-0.2	-313
2003	-0.2	-122
2004	0.2	203
2005	-0.1	-158
2006	0.6	752
2007	-0.2	-293
2008	-0.1	-89
2009	-0.7	-902
2010	-0.3	-378
2011	0.1	162
2012	0.3	386
* less than 0.05%