by Calculated Risk on 12/28/2012 08:40:00 PM

From a Goldman Sachs research note today:

Q: Where do things stand now?

A: Talks have resumed, but as of this writing there is no agreement yet. President Obama and congressional leaders met this afternoon to discuss the possible next steps that might be taken to avoid the fiscal restraint set to take effect at year-end. It seems likely that Senate Majority Leader Reid (D-NV) will bring up legislation on the Senate floor at some point before the end of the year, but it is not yet clear whether that will be the product of a bipartisan compromise reached with Republican leaders and the President, which would have a chance of passing both chambers of Congress, or a proposal supported only by Democrats, which would be less likely to pass in either chamber, particularly the House.

Q: Will there be an agreement by year-end?

A: It is still possible but a retroactive deal in January looks more likely. With little time left before year end, there are two obvious obstacles to enacting an agreement by that time: the lack of a political agreement, and the short time left on the calendar to get any agreement that might be reached enacted into law. Reaching a political agreement is the tougher part. ...

Q: If an agreement is reached, what would it look like?

A: Probably a scaled-down deal. At this point, the most likely solution prior to year end (or in the first few days of 2013) would be enactment of a scaled-down agreement that addresses only the policy changes scheduled for year-end and leaves for later other issues, such as an increase in the debt limit or longer-term fiscal reforms. This might involve an extension of the 2001/2003 tax cuts for income under $400,000 or $500,000 (including capital gains and dividend tax rates at 15% for taxpayers with income under that level and a 20% rate above), relief from the alternative minimum tax (AMT) for 2012, and extension of emergency unemployment benefits, which are scheduled to expire at year end.

And comments from a WSJ article: Cliff Deal Hinges on Senators

"We had a good meeting down at the White House and we are engaged in discussions…in the hopes that we can come forward as early as Sunday" with a plan, said Senate Minority Leader Mitch McConnell (R., Ky.). "We'll be working hard to try to see if we can get there in the next 24 hours," he said, adding he was "hopeful and optimistic."

Senate Majority Leader Harry Reid (D., Nev.) agreed the meeting was "constructive." In a warning that seemed aimed at lawmakers in both parties, he said, "whatever we come up with is going to be imperfect."

Mr. Obama said Messrs. McConnell and Reid have the weekend to reach and pass a deal.

There is some chance a deal will be announced this weekend, but it will not be a big deal if it slips into early January.

by Calculated Risk on 12/28/2012 05:49:00 PM

Just an observation ... I think we are seeing a "bubble" in "cliffs" ...

From CNBC: Milk Futures Showing No Sign of 'Dairy Cliff'

From CNBC: 'Container Cliff' Avoided Until Early February

This reminds of the bubble in bubble reporting following the housing bubble.  Oh well ... it isn't as dumb as the "Risk on, risk off" meme.

Best to all!

by Calculated Risk on 12/28/2012 03:18:00 PM

Some interesting year end observations from Patrick Mayock at HotelNewsNow.com: ‘Unexpected strength’ marks 2012 performance. A few themes for 2012:

1. Record demand
“We are still selling more rooms than we ever have before and expect that growth to remain strong in 2013,” said Vail Brown, VP of global business development and marketing at STR ... The U.S. hotel industry set a record during July for the most roomnights ever sold in a single month with 105,954,122. The summer months of June and August were strong as well, both posting more than 100 million roomnights sold.

Through November, the most recent data available, U.S. hotels had sold approximately 1 billion roomnights, an increase of 2.9% from the same period in 2011.
...
2. Supply slowing creeping
“In the U.S., we are seeing a bump in construction year to date,” Brown said.
...
Preliminary data suggests 2012 in aggregate ended with a 0.5% increase in supply.

3. Rates returning to the peak
While the hotel industry still hasn’t reached its 2008 peak in average daily rate of $107.41, it’s beginning to make headway, Brown said.
...
Preliminary data also suggests the hotel industry in general finished the year with a 4.3% increase in ADR to $106.17.

Still, hoteliers have a lot of ground to make up on an inflation-adjusted basis, Brown said.

4. Group’s late-year surge
“We really haven’t seen a large fluctuation in demand this year as compared to last year—until October where we really saw group demand skyrocket past the prior two years,” Brown said.

Hoteliers sold 11.1 million group roomnights during the month, which was well above the “golden year” of 2007, she said.

by Calculated Risk on 12/28/2012 12:41:00 PM

It looks like auto sales are finishing strong in 2012, however the growth rate for auto sales will probably slow in 2013. This is important because auto sales have been a key growth sector over the last few years, and that contribution will probably slow going forward. 

The following table shows annual light vehicle sales, and the change from the previous year.  Light vehicle sales have seen double digit growth for three consecutive years, but that will probably slow in 2013.

Light Vehicle Sales
	Sales (millions)	Annual Change
2005	16.9	0.5%
2006	16.5	-2.6%
2007	16.1	-2.5%
2008	13.2	-18.0%
2009	10.4	-21.2%
2010	11.6	11.1%
2011	12.7	10.2%
20121	14.5	13.5%
20132	15.0	3.7%
1Estimate, 2Forecast

Here are a couple of December forecasts:

TrueCar is forecasting: December 2012 New Car Sales Expected to Be Up 10 Percent According to TrueCar; December 2012 SAAR at 15.6M, Highest Since December 2007

For December 2012, new light vehicle sales in the U.S. (including fleet) is expected to be 1,370,658 units, up 10.3 percent from December 2011 and up 19.9 percent from November 2012 (on an unadjusted basis)
...
The December 2012 forecast translates into a Seasonally Adjusted Annualized Rate (“SAAR”) of 15.6 million new car sales, up from 13.6 million in December 2011 and up from 15.5 million in November 2012

From Edmunds.com: Edmunds.com Forecasts 1.36 Million New Cars Sold in December

Edmunds.com ... forecasts that 1,361,899 new cars and trucks will be sold in the U.S. in December for an estimated Seasonally Adjusted Annual Rate (SAAR) this month of 15.4 million light vehicles. This would bring total 2012 sales to 14.5 million light vehicles, which would be a 13.5 percent increase over 2011, and the highest annual total since 2007.

“December will be the icing on the cake for 2012 – it’s a strong close for a year that had significant auto sales growth throughout,” says Edmunds.com Senior Analyst Jessica Caldwell. “Along with the momentum of the improving economy, December car sales have been helped by compelling advertising, generous deals from most automakers, and the rush of demand unexpectedly and unfortunately caused by Hurricane Sandy.”

And for 2013: Edmunds.com Predicts 2013 Sales Trends: Growth of New Car Sales Will Slow, Used Car Prices Will Fall

Car sales will grow in 2013, but that growth will slow to a single-digit pace, says Edmunds.com ... Edmunds.com projects 15 million new car sales in 2013, a four percent increase over 2012.

by Calculated Risk on 12/28/2012 10:00:00 AM

• From the Chicago ISM:

December 2012:

The Chicago Purchasing Managers reported the Chicago Business Barometer was up for a third month, lumbering along since September's 3 year low. The Business Barometer was guided higher almost exclusively by a sizable advance in New Orders.

PMI: Increased to 51.6 from 50.4. (Above 50 is expansion).

Employment: at a three year low of 45.9, down from 55.2

New orders increased to 54.0 from 45.3.
 
This was above expectations of a reading of 51.0.

• From the NAR: November Pending Home Sales

The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 1.7 percent to 106.4 in November from a downwardly revised 104.6 in October and is 9.8 percent above November 2011 when it was 96.9. The data reflect contracts but not closings.
...
The index is at the highest level since April 2010 when it hit 111.3 as buyers were rushing to beat the deadline for the home buyer tax credit. With the exception of several months affected by tax stimulus, the last time there was a higher reading was in February 2007 when the index reached 107.9.

Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in December and January.  However, because of the increase in short sales that take longer to close, some of these contract signings are probably for a few months from now.  This was slightly below consensus expectations of a 1.8% increase.

by Calculated Risk on 12/27/2012 08:22:00 PM

First from Neil Irwin at the WaPo: Three ways Washington could mess up the recovery in 2013. A few excerpts:

Going off the cliff. This is the most scrutinized possibility, the one that has been widely analyzed (and, as of Thursday morning, at least, seemed like a growing possibility).
...
If the nation goes fully off the fiscal cliff, and stays there, the Congressional Budget Office estimates it would amount to a drag on gross domestic product of 2.9 percentage points in 2013 ...
...
A deal with too much austerity, too fast. Going off the fiscal cliff is probably not even the likeliest risk (though the odds are changing all the time). Another risk is that while there is a deal to avert the entirety of the cliff, it is a deal that calls for enough austerity in 2013 to seriously undermine the nation’s economic prospects.
...
Debt ceiling hijinks. If the nation goes over the fiscal cliff, the results would be bad, but not catastrophic; we’ve had recessions before, we’ll have them again. But in late February or early March comes a deadline with even more at stake: The legally mandated cap on how much debt the Treasury can issue will become a binding constraint, setting the stage for the same messy negotiations that walloped financial markets and business confidence in the summer of 2011.

From an economic perspective, the thing that makes debt ceiling negotiations so perilous is the threat that Congressional Republicans are making — in effect, to allow the U.S. government to default on its debts if they don’t get their way on major spending cuts.

I think a fiscal agreement will be reached in the next couple of weeks (points 1 & 2), but we will have to see the details before analyzing the drag on the US economy. I'm not worried about the "debt ceiling" (point 3) - as I noted in 2011, there have been threats to not pay the bills before (that is what the debt ceiling is about), and it would be political suicide to default - so a bill will be passed.

Friday economic releases:
• At 9:45 AM, the Chicago Purchasing Managers Index for December will be released. The consensus is for an increase to 51.0, up from 50.4 in November.

• At 10:00 AM, the Pending Home Sales Index for November. The consensus is for a 1.8% increase in the index.

Earlier on new home sales:
• New Home Sales at 377,000 SAAR in November
• New Home Sales graphs

by Calculated Risk on 12/27/2012 06:46:00 PM

Earlier I posted a graph that shows the "distressing gap" between new and existing home sales. I've argued that this gap has been mostly caused by distressed sales (foreclosures and short sales) and that eventually the gap would close.

Another way to look at this is a ratio of existing to new home sales.

This ratio was fairly stable from 1994 through 2006, and then the flood of distressed sales kept the number of existing home sales elevated and depressed new home sales. (Note: This ratio was fairly stable back to the early '70s, but I only have annual data for the earlier years).

Click on graph for larger image.

In general the ratio has been trending down, although it increased over the last few months with the recent pickup in existing home sales. I expect this ratio to trend down over the next several years as the number of distressed sales declines and new home sales increase.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

Earlier:
• New Home Sales at 377,000 SAAR in November
• New Home Sales graphs

by Calculated Risk on 12/27/2012 03:28:00 PM

From the Philly Fed:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for November 2012. In the past month, the indexes increased in 45 states and decreased in five states, for a one-month diffusion index of 80. Over the past three months, the indexes increased in 45 states, decreased in three, and remained stable in two, for a three-month diffusion index of 84. For comparison purposes, the Philadelphia Fed has also developed a similar coincident index for the entire United States. The Philadelphia Fed’s U.S. index rose 0.2 percent in November and 0.6 percent over the past three months.

Note: These are coincident indexes constructed from state employment data. From the Philly Fed:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

Click on graph for larger image.

This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged).

In November, 45 states had increasing activity, down slightly from 46 in October (including minor increases). This is the second consecutive year with a weak spot during the summer, and improvement towards the end of the year.


Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession.

The map was all green earlier this year, than started to turn red, and is mostly green again.

by Calculated Risk on 12/27/2012 01:50:00 PM

Two months ago I pointed out that there was no drop dead date for the "fiscal cliff" (more a slope than a cliff).

A few things to remember:

• There is no drop dead date. Online sites and TV channels with "fiscal cliff" countdown timers are an embarrassment and are just trying to scare viewers.

• The "fiscal cliff" is about too much austerity too quickly (cutting the deficit too quickly). The "cliff" is a combination of expiring tax cuts (income taxes, payroll taxes, and more will increase), and forced spending cuts (mostly for defense). This has NOTHING to do with other long term fiscal issues, primarily related to medicare.

• All along I've assumed an agreement would be reached in January. That timing is based on a two assumptions: 1) the tax cuts for high income earners would be allowed to expire, and 2) some politicians will not vote for any package that included a tax rate increase. After January 1st the politicians can vote for a tax cut for most Americans. That is obviously dumb, and makes extra work for many involved with payrolls and taxes, but that is politics.  It is possible an agreement could be reached in the next few days - but I still think January is more likely.  If it slips to February, I'll be concerned.

• We need the details of the fiscal agreement before we can estimate the drag on the US economy from all the austerity.

by Calculated Risk on 12/27/2012 11:49:00 AM

New home sales have averaged 363,000 on an annual rate basis through November. That means sales are on pace to increase 18%+ from last year. Most sectors would be pretty happy with an 18% increase in sales.

But even with the significant increase this year, 2012 will be the 3rd lowest year for New Home sales since the Census Bureau started tracking new home sales in 1963. This year will be above 2010 and 2011, but below the 375,000 sales in 2009. I expect new home sales to double from here within the next several years as distressed sales continue to decline.

I started posting the following graph four years ago when the "distressing gap" first appeared.

The "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through October. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

Click on graph for larger image.

Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales kept existing home sales elevated, and depressed new home sales since builders weren't able to compete with the low prices of all the foreclosed properties.

I don't expect much of an increase in existing home sales (distressed sales will slowly decline and be offset by more conventional sales). But I do expect this gap to close - mostly from an increase in new home sales.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

Earlier:
• New Home Sales at 377,000 SAAR in November
• New Home Sales graphs