by Calculated Risk on 10/01/2013 08:31:00 AM

Reis reported that the apartment vacancy rate declined in Q3 to 4.2% from 4.3% in Q2.  In Q3 2012 (a year ago) the vacancy rate was at 4.7%, and the rate peaked at 8.0% at the end of 2009.

Some data and comments from Reis Senior Economist Ryan Severino:

Vacancy declined by 10 basis points during third quarter to 4.2%. Although vacancy compression has clearly slowed over the last few years, the decline of 10 basis points is an improvement versus last quarter when vacancy was unchanged. Over the last four quarters national vacancies have declined by 50 basis points, on par with last quarter's year‐over‐year decline in vacancy. More so than the magnitude of the vacancy compression, the simple fact that vacancy continues to compress despite such low vacancy rates speaks volumes about the ongoing demand for apartments. The national vacancy rate now stands 380 basis points below the cyclical peak of 8.0% observed right after the recession concluded in late 2009.

Almost four years removed from the advent of the apartment market recovery, demand for apartment units remains robust. The sector absorbed 40,392 units in the third quarter, well outpacing absorption from one year ago during 3Q2012 and up from the 33,634 units that were absorbed during the second quarter of 2013. Year to date, the sector has absorbed more units in 2013 than were absorbed through this point in 2012, but is well below the pace of net absorption during the early stages of the recovery in 2010 and 2011. Conversely, construction activity continues to increase. Completions during the third quarter were 34,834 units, an increase relative to last quarter's 28,891 units and the 21,237 units that were delivered during the third quarter of 2012. This is the highest level of quarterly completions since the fourth quarter of 2009. As we mentioned last quarter, it appears as if we are on the precipice of the relatively large surge in new supply that the market has been anticipating (though not seeing) for the last few years. ... Nonetheless, despite the increase in construction activity, robust demand continues to outpace new completions, intimating that most new units are being rapidly absorbed.

Asking and effective rents both by 0.9% and 1.0%, respectively, during the third quarter. ... Accelerating supply growth is not yet much of a factor in restraining rent growth, but that could change as construction activity surges over the next year. Nevertheless, even with tepid rent growth during the recovery period, national asking and effective rents once again reached all‐time high levels, at least on a nominal basis.
...
Despite supply growth accelerating, we do not expect there to be much change in the national vacancy rate during the fourth quarter due to continued strong demand. However, we anticipate that vacancy will slowly drift upward beginning in 2014, eventually reaching 4.9% by the end of 2017. This primarily should be a function of increased construction activity, not a fall off in demand, which should remain fairly robust.
emphasis added

Click on graph for larger image.

This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999). Note: Reis is just for large cities.

New supply is finally coming on the market and the decline in the vacancy rate has slowed.

Apartment vacancy data courtesy of Reis.

by Calculated Risk on 9/30/2013 08:15:00 PM

If there is a government shutdown, the August construction spending report might not be released on Tuesday (it is probably already prepared, so it might be released even with a shutdown).  The remaining reports Tuesday are all from private sources.

Tuesday:
• Early, Reis Q3 2013 Apartment Survey of rents and vacancy rates.

• At 9:00 AM ET, the Markit US PMI Manufacturing Index for September. The consensus is for the index to decrease to 52.9 from 53.1 in August.

• At 10:00 AM, the ISM Manufacturing Index for September. The consensus is for a decrease to 55.0 from 55.7 in August. The ISM manufacturing index was at 55.7% in August. The employment index was at 53.3%, and the new orders index was at 63.2%.

• Also at 10:00 AM, Construction Spending for August. The consensus is for a 0.4% increase in construction spending.

• At around 2:00 PM ET, Light vehicle sales for September will be released all day. The consensus is for light vehicle sales to decrease to 15.8 million SAAR in September (Seasonally Adjusted Annual Rate) from 16.0 million SAAR in August. I will post an estimate of September SAAR around 2 PM ET.

by Calculated Risk on 9/30/2013 06:17:00 PM

Fannie Mae reported today that the Single-Family Serious Delinquency rate declined in August to 2.61% from 2.70% in July. The serious delinquency rate is down from 3.44% in August 2012, and this is the lowest level since December 2008.

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

Earlier Freddie Mac reported that the Single-Family serious delinquency rate declined in August to 2.64% from 2.70% in July. Freddie's rate is down from 3.36% in August 2012, and this is the lowest level since April 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.

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

Click on graph for larger image

The Fannie Mae serious delinquency rate has fallen 0.83 percentage points over the last year, and at that pace the serious delinquency rate will be under 1% in about 2 years. Note: The "normal" serious delinquency rate is under 1%.

Maybe serious delinquencies will be back to normal in late 2015 or 2016.

by Calculated Risk on 9/30/2013 05:20:00 PM

From the WSJ: Agencies Prepare to Send Workers Home as Shutdown Looms

With the clock ticking and no budget deal in sight, federal agencies prepared to send more than 800,000 workers home without pay, and large swaths of the government were set to temporarily close.
...
Absent an agreement, workers who are furloughed will have to report to their agencies Tuesday morning for a half-day of preparations for the shutdown. Most will have up to four hours to wrap things up, and then be sent home until further notice.

Those who are deemed essential, or—in the language of government, "excepted"—will be guaranteed back pay after the fact. In past shutdowns, Congress has agreed to pay those furloughed as well, but given the cost-cutting zeitgeist of 2013, that was hardly guaranteed this time.
...
A Wall Street Journal review of agencies' shutdown plans found that more than 800,000 workers would be furloughed. In all, the federal government employs just under 2.9 million civilian employees.

Bad policy, but the impact on the economy will be minimal if the shutdown is short.

As we've discussed for some time, the deficit is declining rapidly (more short term cuts are bad policy right now) and public employment has fallen sharply over the last 4+ years (a significant drag).   This is not helpful.

by Calculated Risk on 9/30/2013 01:06:00 PM

From the National Restaurant Association: Restaurant Performance Index Edged Down in August Amid Fading Operator Expectations

Due to a softer outlook among restaurant operators for sales growth and the economy, the National Restaurant Association’s Restaurant Performance Index (RPI) declined for the third consecutive month. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 100.5 in August, down 0.2 percent from July’s level of 100.7. Despite the recent declines, the RPI remained above 100 for the sixth consecutive month, which signifies expansion in the index of key industry indicators.

“The August decline in the RPI was due almost entirely to a dip in the expectations indicators, with restaurant operators becoming less bullish about sales growth and the economy in the months ahead,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the Association.

“In contrast, operators reported positive same-store sales and customer traffic levels in August, and a majority of operators reported capital expenditures for the fourth consecutive month,” Riehle added.
...
The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 100.7 in August – up 0.6 percent from July and the first increase in three months. In addition, the Current Situation Index stood above 100 for the fifth consecutive month, which signifies expansion in the current situation indicators.

A majority of restaurant operators reported positive same-store sales in August, and the overall results were an improvement over July’s performance. ... Restaurant operators also reported stronger customer traffic levels in August.
emphasis added

Click on graph for larger image.

The index declined to 100.5 in August from 100.7 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 9/30/2013 10:38:00 AM

From the Dallas Fed: Texas Manufacturing Activity Picks Up

Texas factory activity expanded in September, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose from 7.3 to 11.5, suggesting output increased at a slightly faster pace than in August. ... Perceptions of broader business conditions improved further in September. The general business activity index jumped nearly 8 points to 12.8, its highest reading in a year and a half.

The new orders index was 5, largely unchanged from its August level. ... Labor market indicators reflected continued employment growth but flat workweeks. The September employment index was 10, its third reading in a row in solidly positive territory.
...
Expectations regarding future business conditions remained optimistic in September. The indexes of future general business activity and future company outlook showed mixed movements but remained in strongly positive territory. Indexes for future manufacturing activity also remained solidly positive, and the index for future employment spiked 10 points to 21.9.
emphasis added

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Click on graph for larger image.

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).

Most of the regional surveys showed expansion in September (Richmond was at zero), and overall at about the same pace as in August.  The ISM index for September will be released tomorrow, October 1st.

by Calculated Risk on 9/30/2013 06:45:00 AM

From the Chicago ISM:

September 2013:

Led by gains in Production, New Orders and Supplier Deliveries, the Chicago Business BarometerTM gained 2.7 points in September to 55.7.

The Barometer has gained in each of the past three months, the longest run of monthly increases for more than three years. Activity has recovered from April’s three year low of 49.0, although is still only consistent with modest economic growth.
...
New Orders were up for the second consecutive month to the highest level since February. ...Employment softened for the third consecutive month and was the only barometer component to fall in September. Inventories continued to contract and Prices Paid fell substantially after rising in the past four months.

Commenting on the MNI Chicago Report, Philip Uglow, Chief Economist at MNI Indicators said, “Activity picked-up again in September close to trend supported by New Orders and Production.”

“While the pick-up is welcomed, growth is far from solid. The easing in the employment component is a notable setback this month, underlying the fragility of the recovery,” he added.

This was above the consensus estimate of 54.0.

by Calculated Risk on 9/29/2013 09:45:00 PM

It seems likely that the House will shutdown the government Monday night. From the NY Times:

The Senate is expected to reject decisively a House bill passed over the weekend that would delay the full effect of President Obama’s health care law as a condition for keeping the government running past Monday, as Senator Harry Reid, the Democratic majority leader, expressed confidence that he had public opinion on his side.
...
Polls show that the public is already deeply unhappy with its leaders in Congress, and the prospect of the first government shutdown in 17 years would be the latest dispiriting development.

If the House does shutdown the government, people will forget before the next election - as long as any shutdown is short. (Not to be confused with not "paying the bills" or "debt ceiling" - refusing to pay the bills would never be forgotten). 

Monday:
• 9:45 AM ET, the Chicago Purchasing Managers Index for September. The consensus is for an increase to 54.4, up from 53.0 in August.

• At 10:30 AM, the Dallas Fed Manufacturing Survey for September. This is the last of the regional manufacturing surveys for September. The consensus is a reading of 6.0, up from the reading of 5.0 in August (above zero is expansion).

Weekend:
• Schedule for Week of September 29th

• Q3 Review: Ten Economic Questions for 2013

The Nikkei is down about 2.0%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P futures are down 12 and DOW futures are down 100 (fair value).

by Calculated Risk on 9/29/2013 03:03:00 PM

Gasoline prices are down about 35 cents year-over-year at $3.42 per gallon nationally.

Some of the year-over-year price decline is related to slightly lower Brent oil prices, but most of decline is because there were refinery and pipeline issues last year at this time. In California, prices spiked last September, and are down about 80 cents year-over-year this September (put Los Angeles into the graph below to see the huge spike last year).

Prices are close to the current EIA forecast (from two weeks ago):

Monthly average crude oil prices increased for the fourth consecutive month in August 2013, as supply disruptions in Libya increased and concerns over the conflict in Syria intensified. The U.S. Energy Information Administration's (EIA) forecast for Brent crude oil spot price, which averaged $108 per barrel during the first half of 2013, averages $109 per barrel over the second half of 2013 and $102 per barrel in 2014, $5 per barrel and $2 per barrel higher than forecast in last month's STEO, respectively. Projected West Texas Intermediate (WTI) crude oil prices average $101 per barrel during the fourth quarter of 2013 and $96 per barrel during 2014. Energy price forecasts are highly uncertain and could differ significantly from the projected levels. The current values of futures and options contracts suggest the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in December 2013 at $86 per barrel and $131 per barrel, respectively.
...
EIA's forecast for the regular gasoline retail price averages $3.44 per gallon in the fourth quarter of 2013, 11 cents per gallon higher than in last month's STEO. The annual average regular gasoline retail, which was $3.63 per gallon in 2012, is expected to be $3.55 per gallon in 2013 and $3.43 per gallon in 2014. As in the case of crude oil, the current value of futures and options contracts suggests a wide uncertainty in market expectations.
emphasis added

WTI oil prices have been declining over the last month, with WTI at $102.87 per barrel.  Brent is at $108.63. A year ago, WTI was in the low $90s, and Brent was around $111 per barrel.

The following graph is from Gasbuddy.com. Note: If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent.

Orange County Historical Gas Price Charts Provided by GasBuddy.com

by Calculated Risk on 9/29/2013 11:20:00 AM

At the end of last year, I posted Ten Economic Questions for 2013. I followed up with a brief post on each question. The goal was to provide an overview of what I expected in 2013 (I don't have a crystal ball, but I think it helps to outline what I think will happen - and understand when I was wrong).

By request, here is a Q3 review.   I've linked to my posts from the beginning of the year, with a brief excerpt and a few comments:

10) Question #10 for 2013: Europe and the Euro

Even though I've been pessimistic on Europe (In 2011, I correctly argued that the eurozone was heading into recession), I was less pessimistic than many others. Each of the last two years, I argued the eurozone would stay together ... My guess is the eurozone makes it through another year without losing any countries or a serious collapse. Obviously several countries are near the edge, and the key will be to return to expansion soon.

Note: unless the eurozone "implodes", I don't think Europe poses a large downside risk to the US. If there is a breakup of the euro (something I do not expect in 2013), then the impact on the US could be significant due to financial tightening.

Three quarters of the way through 2013, it definitely looks like the Eurozone will stay together this year. Of course the news in Europe remains grim, although there has been a little bit of growth recently.  It is now obvious to everyone that "austerity" alone failed (except for some blind policymakers).  Hopefully there will be less fiscal tightening now that German Chancellor Angela Merkel has been reelected. 

9) Question #9 for 2013: How much will Residential Investment increase?

New home sales will still be competing with distressed sales (short sales and foreclosures) in many areas in 2013 - and probably even more foreclosures in some judicial states. Also I've heard some builders might be land constrained in 2013 (not enough finished lots in the pipeline). Both of these factors could slow the growth of residential investment, but I expect another solid year of growth.

... I expect growth for new home sales and housing starts in the 20% to 25% range in 2013 compared to 2012.

We have data through August, and starts this year are up 23% over the same period in 2012.  However the year-over-year increases have slowed recently, but it still appears starts will be up significantly in 2013. New home sales are up 20% through the first eight months of 2013 compared to the same period in 2012.  The year-over-year increase for new home sales have slowed too, but sales should be up close to 20% this year.

8) Question #8 for 2013: Will Housing inventory bottom in 2013?

If prices increase enough then some of the potential sellers will come off the fence, and some of these underwater homeowners will be able to sell. It might be enough for inventory to bottom in 2013.

Right now my guess is active inventory will bottom in 2013, probably in January. At the least, the rate of year-over-year inventory decline will slow sharply.

I track inventory weekly, and the year-over-year rate of decline has slowed sharply. My guess is that inventory did bottom in January 2013 (this should be a huge focus right now, since rising inventory will slow price increases).

7) Question #7 for 2013: What will happen with house prices in 2013?

Calling the bottom for house prices in 2012 now appears correct.

[E]ven though I expect inventories to be low this year, I think we will see more inventory come on the market in 2013 than 2012, as sellers who were waiting for a better market list their homes, and as some "underwater" homeowner (those who owe more than their homes are worth) finally can sell without taking a loss.

Also I expect more foreclosure in some judicial states, and I think the price momentum in Phoenix and other "bounce back" areas will slow.

All of these factors suggest further prices increases in 2013, but at a slower rate than in 2012.

The Case-Shiller Comp 20 and National indexes both increased about 7% in 2012.  The seasonally adjusted Case-Shiller Comp 20 index is up 8.5% through July, and the National Index is up 6.2% through Q2 . I expect price increases to slow, but my initial prediction for house prices this year was too low.

6) Question #6 for 2013: What will happen with Monetary Policy and QE3?

I expect the FOMC will review their purchases at each meeting just like they used to review the Fed Funds rate. We might see some adjustments during the year, but currently I expect the Fed to purchase securities at about the same level all year.

This still seems about right, however the Fed might start to taper this month or in December.  This depends on both incoming and the House of Representatives passing a Continuing Resolution (without absurd demands) and also agreeing to "pay the bills".  The House remains the biggest downside risk for the U.S. economy (see Question #1).

5) Question #5 for 2013: Will the inflation rate rise or fall in 2013?

I still expect inflation to be near the Fed's target. With high unemployment and low resource utilization, I don't see inflation as a threat in 2013.

Inflation has been below the Fed's target all year. This is a significant issue for the Fed, and it appears my inflation forecast was a little high.

4) Question #4 for 2013: What will the unemployment rate be in December 2013?

My guess is the participation rate will remain around 63.6% in 2013, and with sluggish employment growth, the unemployment rate will be in the mid-to-high 7% range in December 2013 (little changed from the current rate).

In August, the participation rate was at 63.2% (I was expecting the participation rate to move sideways this year at around 63.6%), and the unemployment rate was at 7.3%, down from 7.8% in December 2012.  I was too pessimistic on the unemployment rate because the participation rate has continued to decline.

3) Question #3 for 2013: How many payroll jobs will be added in 2013?

Both state and local government and construction hiring should improve in 2013. Unfortunately there are other employment categories that will be hit by the austerity (especially the increase in payroll taxes). I expect that will offset any gain from construction and local governments. So my forecast is close to the previous two years, a gain of about 150,000 to 200,000 payroll jobs per month in 2013.

Through August 2013, the economy has added an average of 180 thousand jobs per month - about as expected.

2) Question #2 for 2013: Will the U.S. economy grow in 2013?

[R]ight now it appears the drag from austerity will probably offset the pickup in the private sector - and we can expect another year of sluggish growth in 2013 probably in the 2% range again.

The economy grew at a 1.8% annualized rate in the first half of 2013.   This is about what I expected, however there was more austerity than I expected (sequester).

1) Question #1 for 2013: US Fiscal Policy

[T]the House will fold their [early 2013] losing hand [on the debt ceiling] soon. ...

Although the negotiations on the "sequester" will be tough, I suspect something will be worked out (remember the goal is to limit the amount of austerity in 2013). The issue that might blow up is the “continuing resolution", and that might mean a partial shut down of the government. This wouldn't be catastrophic (like the "debt ceiling"), but it would still cause problems for the economy and is a key downside risk.

And a final prediction: If we just stay on the current path ... I think the deficit will decline faster than most people expect over the next few years. Eventually the deficit will start to increase again due to rising health care costs (this needs further attention), but that isn't a short term emergency.

The House did fold early this year, but I was wrong about the sequester (bad policy).  But I was definitely correct about the deficit decreasing faster than most people expected.  This has really surprised some policymakers (who unfortunately are still ignoring the sharp decline).

Fiscal policy (specifically the U.S. House) remains the key downside risk for the U.S. economy this year.  We might see a government shutdown on Tuesday, and the House is once again threatening to not "pay-the-bills" starting in mid-October (I expect the House to fold again and "pay-the-bills").  Luckily 2014 is an election year, and the House will not pull these stunts again next year!

Overall 2013 is unfolding about as expected. Longer term, the future's so bright ...