by Calculated Risk on 12/12/2012 12:30:00 PM

The thresholds are huge!

FOMC Statement:

Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since the summer, it remains elevated. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.

The projections will be released at 2:00 PM, and the press conference will be at 2:15 PM.

by Calculated Risk on 12/12/2012 10:02:00 AM

Note: The FOMC statement will be released around 12:30 PM ET today.

Neil Irwin at the WaPo lists Five things to look for out of the Fed today.

Here is the list:

1. More bond buying starting in January (after the expiration of Operation Twist). Most estimates are for an expansion of QE3 from $40 billion per month to around $85 billion per month.

2. "But what kinds of bonds?" Treasuries or Fannie / Freddie Mortgage Backed Securities (MBS) or some combination of both.

3. "What’s the threshold?". This probably will not happen at this meeting (setting thresholds for raising the Fed Funds rate based on the unemployment rate, inflation, and possibly other economic indicators). As Irwin notes, if they do announce thresholds it "would be a surprise and would be the big headline out of the meeting."

4. "What kind of year is 2013 going to be?" The projections will be released at 2:00 PM ET. Of course the projections depend on the "fiscal cliff" negotiations.

5. "What’s our potential?" This is the Fed's longer term projections for GDP growth, the unemployment rate, and inflation, and these will be included in the projections.

by Calculated Risk on 12/12/2012 07:01:00 AM

From the MBA: Mortgage Rates Drop to New Lows in Latest MBA Weekly Survey

The Refinance Index increased 8 percent from the previous week and is at its highest level since the week ending October 12, 2012. The seasonally adjusted Purchase Index increased 1 percent from one week earlier. ...

“Continued uncertainty due to the lack of resolution regarding the fiscal cliff led interest rates lower last week, with mortgage rates reaching a new low in our survey,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “Refinance activity increased, with the refinance index hitting its highest level in two months, and the refinance share reaching its highest level since January 2009. Applications for purchase increased for a fifth consecutive week, and are running almost ten percent above their level at this time last year.”
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.47 percent, the lowest rate in the history of the survey, from 3.52 percent, with points decreasing to 0.36 from 0.41 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Click on graph for larger image.

The first graph shows the refinance index.

The refinance activity is at the highest level in two months, and has been at a fairly high level all year.

The second graph shows the MBA mortgage purchase index.

As Fratantoni noted, purchase activity is up about 10% from a year ago. The purchase index has increased 10 of the last 12 weeks, and the 4-week average of the purchase index is at the highest level since 2010 (when the tax credit boosted application activity).

The 4-week average is up about 25% from the post-bubble low.

by Calculated Risk on 12/11/2012 08:52:00 PM

The FOMC will probably announce additional bond buying tomorrow that will start in January after the conclusion of Operation Twist. I don't expect the Fed to announce tomorrow a change to thresholds (using the unemployment rate and inflation) for the timing of the first Fed Funds rate hike.

On Sunday I posted a preview, and the September economic projections for review. The unemployment rate is lower than previously expected, but the other indicators are close.

Wednesday economic releases:
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. Recently the Purchase Index has been showing more purchase activity.

• At 8:30 AM, Import and Export Prices for November. The consensus is a 0.4% decrease in import prices.

• At 12:30 PM, the FOMC statement will be released. With Operation Twist ending in a few weeks, the FOMC will probably announce additional policy accommodation that will start in January.

• At 2:00 PM, The Federal Open Market Committee (FOMC) participants' quarterly economic projections.

• At 2:15 PM, Fed Chairman Ben Bernanke holds a press briefing following the FOMC announcement.

by Calculated Risk on 12/11/2012 07:17:00 PM

We are still waiting for a strong increase in construction employment, but we know it is coming (I expect construction employment will be revised up in the annual revision).

Michelle Meyer at Merrill Lynch wrote about this today (and more on housing): The housing market in 2013

We believe 2012 will go down in history as a year of transition for the housing market. Housing starts are on track to be up 25% and home prices are set to rise 5% over 2012. We believe the recovery will continue into 2013 for several reasons. Most importantly, household formation has started to turn higher, reflecting the shortfall of household creation over the prior five years. In addition, listed inventory is low, owing to extraordinarily slow construction and only a gradual reduction of the distressed pipeline. And specifically for prices, there has been a shift toward short sales as a means of disposing distressed properties. Moreover, investor demand is strong, particularly for distressed inventory.

We forecast housing starts to increase another 25% to an average of 975,000 and home prices to increase 3% in 2013.
...
The housing market is turning into an engine of growth once again. Housing construction will likely add 0.3pp to GDP growth in 2012 and 0.4pp to 2013 growth. ... The gain in homebuilding will support related sectors such as furniture, building material sales and financial companies. Moreover, construction jobs will finally come back, allowing some of the 2 million people who lost construction jobs to find employment in the field again.

There will also be a jolt to the economy from the gain in home prices. An increase in home values lifts household net worth and boosts consumer confidence. If consumers perceive the gain in wealth to be permanent, they will increase their current consumption. But the rise in home prices can do something even more vital for the economy – it can spur credit creation, which then fuels housing demand and reinforces the gain in home prices. We are seeing the very early stages of a positive feedback loop between the housing market, credit market and real economy, which can be quite powerful in time.

I've wrote about the positive impact of prices early this year, see The economic impact of stabilizing house prices?

We are probably already seeing the impact of stabilizing prices on housing inventory. If potential sellers think prices will fall further, then they will rush to sell and list their homes right away. But if potential sellers think prices are stabilizing, and may even increase, they are more willing to wait for a better market or to sell when it is most convenient. I think we are seeing that right now.

More importantly, I think stabilizing prices will give hope to some “underwater” homeowners and we will probably see mortgage default rates fall quicker. And over time, buyers will gain confidence that prices have stopped falling, and I expect demand to increase – and also for more private lenders to reenter the mortgage market and help support that demand.

And this demand will also boost homebuilding and new home sales – since homebuilders will have a better idea of the pricing needed to compete in a market (falling prices makes it hard to plan).

And on construction employment: Back to work we go

There are several ways that the recovery in the housing market multiplies through the economy. One of the key channels is to create jobs in the construction industry and related fields. However, despite the 25% gain in housing starts this year, the construction sector has not added workers. Looking back at prior cycles, it appears that it is normal for construction jobs to lag output by about a year. We think we are on the verge of construction hiring.
...
As demand for housing continues to improve, construction companies will likely become more comfortable expanding their workforce. In addition, construction workers do not just focus on new construction; they can also find employment for renovations. Renovation spending has been on the rise and will likely receive a boost from Hurricane Sandy rebuilding. We think the future looks brighter for construction workers.

I also expect a pickup in construction employment in 2013.

by Calculated Risk on 12/11/2012 03:59:00 PM

Economist Tom Lawler sent me an update today of short sales and foreclosures for a few selected cities in November.

Note: Reno was corrected (the table yesterday used October numbers instead of November). There will be more cities added soon.

For all of these cities, the percentage of foreclosures is down from a year ago.   The percentage of short sales is up in Las Vegas and Reno, but down in Phoenix and in the mid-Atlantic area.

Look at the overall percent of distressed sales (combined foreclosures and short sales).  There is a large year-over-year decline in distressed sales in all of these cities. 

The two key numbers for real estate markets are 1) inventory, and 2) the percent of conventional sales (non-distressed sales).  Inventory is falling, and the percent of conventional sales is increasing - and those are positive signs.

	Short Sales Share		Foreclosure Sales Share		Total "Distressed" Share
	12-Nov	11-Nov	12-Nov	11-Nov	12-Nov	11-Nov
Las Vegas	41.2%	26.8%	10.7%	46.0%	51.9%	72.8%
Reno	41.0%	36.0%	9.0%	35.0%	50.0%	71.0%
Phoenix	23.2%	29.6%	12.9%	29.8%	36.1%	59.4%
Mid-Atlantic (MRIS)	11.9%	13.7%	8.7%	14.2%	20.6%	27.9%
Memphis*			24.3%	31.3%
Metro Detroit			33.6%	38.7%
*share of existing home sales, based on property records

by Calculated Risk on 12/11/2012 10:00:00 AM

From the BLS: Job Openings and Labor Turnover Summary

The number of job openings in October was 3.7 million, essentially unchanged from September.
...
The level of total nonfarm job openings in October was up from 2.4 million at the end of the recession in June 2009.
...
In October, the quits rate was unchanged for total nonfarm and total private, and little changed for government. The number of quits was 2.1 million in October compared to 1.8 million at the end of the recession in June 2009.

The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

This series started in December 2000.

Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for October, the most recent employment report was for November.

Click on graph for larger image.

Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of turnover.  When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

Jobs openings increased in October to 3.675 million, up from 3.547 million in September. The number of job openings (yellow) has generally been trending up, and openings are up about 8% year-over-year compared to October 2011.

Quits increased in October, and quits are up 4% year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").

The trend suggests a gradually improving labor market.

All current employment graphs

by Calculated Risk on 12/11/2012 08:30:00 AM

The Department of Commerce reported:

[T]otal October exports of $180.5 billion and imports of $222.8 billion resulted in a goods and services deficit of $42.2 billion, up from $40.3 billion in September, revised. October exports were $6.8 billion less than September exports of $187.3 billion. October imports were $4.9 billion less than September imports of $227.6 billion.

The trade deficit was smaller than the consensus forecast of $42.8 billion.

The first graph shows the monthly U.S. exports and imports in dollars through October 2012.

Click on graph for larger image.

Both exports and imports decreased in October. US trade has slowed recently.

Exports are 9% above the pre-recession peak and up 1.0% compared to October 2011; imports are 4% below the pre-recession peak, and down 0.8% compared to October 2011.

The second graph shows the U.S. trade deficit, with and without petroleum, through October.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Oil averaged $99.75 in October, up from $98.88 per barrel in September. The trade deficit with China increased to $29.5 billion in October, up from $28.1 billion in October 2011. Most of the trade deficit is still due to oil and China.

The trade deficit with the euro area was $8.9 billion in October, up from $7.1 billion in October 2011. It appears the eurozone recession is impacting trade.

by Calculated Risk on 12/10/2012 08:29:00 PM

The WSJ had a front page article on consumer spending yesterday: Consumer Spending Wobbles . The article starts with "U.S. consumer spending, a rare pillar of economic strength in recent months, is showing signs of weakening."

Tim Duy takes exception to both the "pillar of strength" and "signs of weakening": Wobbly Consumers?

I am not sure who exactly believed that the US consumer is a "rare pillar of economic strength," but I suspect they were somewhat delusional and perhaps overemphasizing the importance of consumer confidence surveys. I don't think the consumer is falling off the cliff, fiscal or otherwise, just yet, but household spending hasn't been exactly a source of strength for several months now. The fragility of the sector is not new.

Dr. Duy has a number of charts supporting his view.

I don't think we will see a huge surge in spending, but I think Duy is correct and we will see continued growth in consumer spending. As I mentioned on Friday, seasonal retail hiring is solid, and that is usually a good sign. The LA Times noted it today: Holiday retail hiring could break record set 12 years ago

Here is the chart I posted last Friday:

Click on graph for larger image.

Typically retail companies start hiring for the holiday season in October, and really increase hiring in November. Here is a graph that shows the historical net retail jobs added for October, November and December by year.

Retailers hired 465.5 thousand workers (NSA) net in November. The combined level for October and November is the highest ever. This suggests retailers are fairly optimistic about the holiday season. There is a decent correlation between retail hiring and retail sales, see: Retail: Seasonal Hiring vs. Retail Sales

As I wrote a month ago: "This is an old idea: Watch what they do, not what they say. And once again the retailers are hiring seasonal workers at a solid pace."

Tuesday economic releases:
• At 7:30 AM ET, the NFIB Small Business Optimism Index for November will be released. The consensus is for a decrease to 92.5 from 93.1 in October.

• At 8:30 AM, the Trade Balance report for October from the Census Bureau. The consensus is for the U.S. trade deficit to increase to $42.8 billion in October, up from from $41.5 billion in September. Export activity to Europe will be closely watched due to the European recession. Note: The strike at the ports of Long Beach and Los Angeles started in late November, and this report is for October.

• At 10:00 AM, the BLS will releases the Job Openings and Labor Turnover Survey for October. In general, job openings have generally been trending up.

• Also at 10:00 AM, the Monthly Wholesale Trade: Sales and Inventories for October. The consensus is for a 0.4% increase in inventories



Another question for the December economic prediction contest (Note: You can now use Facebook, Twitter, or OpenID to log in).

by Calculated Risk on 12/10/2012 05:51:00 PM

From Joe Weisenthal at Business Insider: Goldman's Top Economist Explains The World's Most Important Chart, And His Big Call For The US Economy

Hatzius is bullish on the U.S. economy starting in the second half of 2013, because finally he expects private releveraging to occur at a nice clip, and to not be counteracted by a fiscal drag. Says Hatzius:

"If the business sector is basically trying to reduce its financial surplus at a more rapid pace than the government is trying to reduce its deficit then you’re getting a net positive impulse to spending which then translates into stronger, higher, more income, and ultimately feeds back into spending."

He has a specific explanation and numbers in mind, to explain the private sector's inclination to reduce its savings, and spend more.

"Since mid-2009, that surplus has gradually come down as businesses and households have gotten closer to where they need to be from a long-term balance sheet perspective. They’ve paid down debt, they’ve eliminated the excess supply of housing, and that’s basically allowed them to reduce the financial surpluses that they run. They’re still running large surpluses – still 5.5 to 7 percent of GDP, but they’re no longer as large. We expect those figures to come down as the balance sheet adjustment process makes further strides and that’s an underlying source of boost to the economy that’s happening on the one side."

Of course, Hatzius's bullishness on the private sector's impulse to spend more is tempered by the fact that we're going to see some form of austerity early in 2013, even if there's a deal on the fiscal cliff.

The transcript of the interview is here, and check out the graph on Private Sector Surplus and Government Deficit.