by Calculated Risk on 10/02/2013 07:34:00 PM

From Gavyn Davies at the Financial Times blog: Why have markets ignored Washington risk?

Turning to the latest political shenanigans in Washington, risk committees all over the financial world are undoubtedly thinking hard about how to hedge these risks. No-one believes that a temporary shut-down in some government activities is critical, but the debt ceiling is seen as a different matter entirely. A default by the US government on its debt payments could be very disruptive, and set in train a series of events which would be hard for the authorities subsequently to control.

However, the risk committees will have started with a strong pre-disposition to believe that the US democratic process will not entirely take leave of its senses, though much brinkmanship could be involved in the meantime. They will also know that the US political process has it within its power to end the uncertainty at very short notice when political calculations change. This is not a case of “can’t pay”, it is a case of “won’t pay”.

To a sensible outside observer, it seems improbable that enough members of Congress would act against the interests of the US to trigger a “won’t pay” catastrophe.
...
Hopefully, though, another feedback loop – between the politicians and their voters – will kick in before the markets need to react.

Thursday:
• Early, Reis Q3 2013 Mall Survey of rents and vacancy rates.

• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 313 thousand from 305 thousand last week.

• At 10:00 AM, the ISM non-Manufacturing Index for September. The consensus is for a reading of 57.0, down from 58.6 in August. Note: Above 50 indicates expansion, below 50 contraction.

• Also at 10:00 AM, the Manufacturers' Shipments, Inventories and Orders (Factory Orders) for August. The consensus is for a 0.2% increase in orders.

• Also at 10:00 AM, the Trulia Price Rent Monitors for September. This is the index from Trulia that uses asking house prices adjusted both for the mix of homes listed for sale and for seasonal factors.

by Calculated Risk on 10/02/2013 04:06:00 PM

There has always been a clear seasonal pattern for house prices, but the seasonal differences have been more pronounced in recent years.

Even in normal times house prices tend to be stronger in the spring and early summer than in the fall and winter. Recently there has been a larger than normal seasonal pattern because conventional sales are following the normal pattern (more sales in the spring and summer), but distressed sales (foreclosures and short sales) happen all year. So distressed sales have had a larger negative impact on prices in the fall and winter.

It is possible that we will see the Not Seasonally Adjusted (NSA) numbers show a decline in a few months. 

Click on graph for larger image.

This graph shows the month-to-month change in the CoreLogic and NSA Case-Shiller Composite 20 index since 2001 (Case-Shiller through July and CoreLogic through August).   The seasonal pattern was smaller back in the early '00s, and increased since the bubble burst.

Case-Shiller NSA and CoreLogic both turned slightly negative month-to-month last Fall, but only for a short period.  

The second graph shows the seasonal factors for the Case-Shiller composite 20 index. The factors started to change near the peak of the bubble, and really increased during the bust.

Note: I was one of several people to question this change in the seasonal factor - and this led to S&P Case-Shiller reporting the NSA numbers.

It appears the seasonal factor has stopped increasing, and I expect that over the next several years - as the percent of distressed sales decline - the seasonal factors will slowly move back towards the previous levels. 

by Calculated Risk on 10/02/2013 12:41:00 PM

The Depression led to an effort to enhance and expand data collection on employment, and I was hoping the housing bubble and bust would lead to a similar effort to collect better housing related data. From the BLS history:

[T]he growing crisis [the Depression], spurred action on improving employment statistics. In July [1930], Congress enacted a bill sponsored by Senator Wagner directing the Bureau to "collect, collate, report, and publish at least once each month full and complete statistics of the volume of and changes in employment." Additional appropriations were provided.
emphasis added

In the early stages of the Depression, policymakers were flying blind. But at least they recognized the need for better data, and took action. All business people know that when there is a problem, a key first step is to measure the problem. That is why I've been a strong supporter of trying to improve data collection on the number of households, vacant housing units, foreclosures and more.  Unfortunately that hasn't happened, and in fact there has been an effort to reduce the amount of data collected.

Click on graph for larger image.

Back in May, the House voted to kill the American Community Survey, a survey that is widely used by businesses and economists. Fortunately that vote was criticized across the political spectrum.

A couple of examples, first an editorial from the WSJ: Republicans try to kill data collection that helps economic growth

The House voted 232 to 190 to abolish the Census's American Community Survey, or ACS, which is the new version of the long-form questionnaire and is conducted annually. Republicans claim the long form—asking about everything from demographics to income to commuting times—is prying into private life and is unconstitutional.

In fact, the ACS provides some of the most accurate, objective and granular data about the economy and the American people, in something approaching real time. Ideally, Congress would use the information to make good decisions. Or economists and social scientists draw on the resource to offer better suggestions. Businesses also depend on the ACS's county-by-county statistics to inform investment and hiring decisions. As the great Peter Drucker had it, you can't manage or change what you don't measure.
...
Since the political class is attempting to define the GOP as insane and redefine "moderation" as anything President Obama favors, Republicans do themselves no favors by targeting a useful government purpose.

And AEI's Norman Ornstein at Roll Call: Research Cuts Are Akin to Eating Seed Corn

[S]ignificant was the House vote to eliminate the annual American Community Survey and the Economic Census to provide basic information on the state of businesses and industries in the country and data used for generating quarterly gross domestic product estimates.

If ever we need evidence of ideology run rampant, these actions become exhibit A. Learning about the population and about the economy are fundamental for a society to understand where it has been and where it is going ...

Once again the House is depriving us of data, and right now we are flying blind. In the short term this is a minor inconvenience compared to the widespread suffering related to the shutdown, but once again this shutdown is "evidence of ideology run rampant".

by Calculated Risk on 10/02/2013 09:50:00 AM

Reis released their Q3 2013 Office Vacancy survey this morning. Reis reported that the office vacancy rate declined to 16.9% in Q3 from 17.0% in Q2.  This is down from 17.2% in Q3 2012, and down from the cycle peak of 17.6%.

From Reis Senior Economist Ryan Severino:

Vacancies declined by 10 basis points during the third quarter to 16.9%. This is a marginal improvement after last quarter when the vacancy rate did not change. However, since the market began to recover in mid‐2011, the vacancy rate has been unable to decline by more than 10 basis points in any given quarter. While this is technically an improvement versus last quarter, it is nonetheless a weak result. On a year‐over‐year basis, the vacancy rate fell by just 30 basis points, in line with last quarter's year‐over‐year decline.
emphasis added

On new construction:

Occupied stock increased by 6.652 million SF in the third quarter. ... On the construction side, this quarter 4.099 million SF were completed, down from last quarter's mini‐spike of 8.049 million SF. While last quarter's bump in construction activity appears to be an aberration, construction activity for office has been slowly if inconsistently trending upward. Year‐to‐date, the market has developed 15.161 million SF. This is almost double the 8.820 million SF that were constructed through the third quarter of last year.

On rents:

Asking and effective rents both grew by 0.3% during the third quarter. This marks the third consecutive quarter in a row with slowing asking and effective rent growth. Though in reality, rental growth rates are so low that the quarter‐to‐quarter differences are rather minor and could simply be idiosyncratic. Nonetheless, asking and effective rents have now risen for twelve consecutive quarters. Yet, the simple truth is that with vacancy remaining elevated at 16.9%, it is far too high to be conducive to much rent growth. At that level of vacancy, landlords have little leverage to either increase face level asking rents or to remove concessions from leases. A meaningful acceleration in rent growth will not be possible until vacancy falls to pre‐recessionary levels.

Click on graph for larger image.

This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual).

Reis reported the vacancy rate declined to 16.9% in Q3 from 17.0% in Q2, and was down from 17.2% in Q3 2012. The vacancy rate peaked in this cycle at 17.6% in Q3 and Q4 2010, and Q1 2011.

With the high vacancy rate, growth in construction activity for offices will be sluggish.

Office vacancy data courtesy of Reis.

by Calculated Risk on 10/02/2013 08:19:00 AM

From ADP:

Private sector employment increased by 166,000 jobs from August to September, according to the September ADP National Employment Report®. ... August’s job gain was revised down from 176,000 to 159,000.
...
Mark Zandi, chief economist of Moody’s Analytics, said, "The job market appears to have softened in recent months. Fiscal austerity has begun to take a toll on job creation. The run-up in interest rates may also be doing some damage to jobs in the financial services industry. While job growth has slowed, there remains a general resilience in the market. Job creation continues to be consistent with a slowly declining unemployment rate.”

This was a little below the consensus forecast for 175,000 private sector jobs added in the ADP report. Note:  The BLS was to report on Friday, and the consensus was for an increase of 178,000 payroll jobs in September, on a seasonally adjusted (SA) basis.

Note: ADP hasn't been very useful in predicting the BLS report on a monthly basis. The BLS report will be delayed due to the shutdown.

by Calculated Risk on 10/02/2013 07:01:00 AM

From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey

Mortgage applications decreased 0.4 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 27, 2013. ...

The Refinance Index increased 3 percent from the previous week. The seasonally adjusted Purchase Index decreased 6 percent from one week earlier.
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.49 percent, the lowest rate since June 2013, from 4.62 percent, with points decreasing to 0.34 from 0.41 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.


The first graph shows the refinance index.

The refinance index is up sharply over the last three weeks as rates have declined.

However the index is still down 63% from the levels in early May.


The second graph shows the MBA mortgage purchase index.  

The 4-week average of the purchase index has fallen since early May, and the 4-week average of the purchase index is only up 1.4% from a year ago.

by Calculated Risk on 10/01/2013 07:45:00 PM

Still waiting for the House (the House remains the key downside risk for the economy).

From Merill Lynch:

Judging by today's positive market reaction it would appear that shutting down the government is a good thing. However, key to understanding the market reaction is that this forces Congress to deal with the issues now, as opposed to waiting until the last minute later this month when the country approaches the debt ceiling. Clearly Congress will now be under increasing pressure from constituents to find a solution and, as was discussed on a BofAML client conference call today, this likely means a lower probability of another fight later this month about the debt ceiling. Hence the fiscal uncertainties could be resolved quicker.

I hope they are correct. We can handle a shutdown, but not paying our bills is something else.

At least some "non-partisan" groups are recognizing one group is to blame as opposed to the usual "both parties". This is from Fixthedebt.org (Erskin, Bowles, Bloomberg, and other Republicans and Democrats):

"This avoidable outcome highlights a dysfunction that threatens to spill over to other areas – like raising the debt ceiling – where failure to reach agreement would not just be disruptive, but have disastrous economic consequences both at home and abroad.

“The focus of some House Republicans on policies unrelated to the central funding of government, instead of on policies to improve the debt, has diverted conversations from bipartisan solutions to keep the government open."
emphasis added

Voters will probably forget the shutdown - unfortunately - but there is real pain.  I'll be missing some key data like the employment report on Friday, or construction spending today, but that is nothing compared to the suffering of many others.  Why?

Wednesday:
• Early, Reis Q3 2013 Office Survey of rents and vacancy rates.

• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 8:15 AM, the ADP Employment Report for September. This report is for private payrolls only (no government). The consensus is for 175,000 payroll jobs added in September, down from 176,000 in August.

• At 3:30 PM, Speech by Fed Chairman Ben S. Bernanke, Brief Welcoming Remarks, At the Federal Reserve/Conference of State Bank Supervisors Community Banking Research Conference, Federal Reserve Bank of St. Louis

by Calculated Risk on 10/01/2013 02:47:00 PM

Based on an estimate from WardsAuto, light vehicle sales were at a 15.24 million SAAR in September. That is up 2.4% from September 2012, and down 4.9% from the sales rate last month. Some of the decline in September (and strong August) was related to the timing of the Labor Day holiday.

This was below the consensus forecast of 15.8 million SAAR (seasonally adjusted annual rate).

This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for September (red, light vehicle sales of 15.24 million SAAR from WardsAuto).


Click on graph for larger image.

This was the lowest sales rate since April, but followed a strong August - August was the first time the sales rate was over 16 million since November 2007.

The growth rate will probably slow in 2013 - compared to the previous three years - but this will still be another solid year for the auto industry.

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Note: dashed line is current estimated sales rate.

Unlike residential investment, auto sales bounced back fairly quickly following the recession and are still a key driver of the recovery.    Looking forward, growth will slow for auto sales.  If sales average the recent pace for the entire year, total sales will be up about 9% from 2012, not quite double digit but still strong.

by Calculated Risk on 10/01/2013 11:36:00 AM

Notes: This CoreLogic House Price Index report is for August. The recent Case-Shiller index release was for July. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA).

From CoreLogic: CoreLogic Reports Home Prices Rise by 12.4 Percent Year Over Year in August

Home prices nationwide, including distressed sales, increased 12.4 percent on a year-over-year basis in August 2013 compared to August 2012. This change represents the 18th consecutive monthly year-over-year increase in home prices nationally. On a month-over-month basis, including distressed sales, home prices increased by 0.9 percent in August 2013 compared to July 2013.

Excluding distressed sales, home prices increased on a year-over-year basis by 11.2 percent in August 2013 compared to August 2012. On a month-over-month basis, excluding distressed sales, home prices increased 1 percent in August 2013 compared to July 2013. Distressed sales include short sales and real estate owned (REO) transactions.

The CoreLogic Pending HPI indicates that September 2013 home prices, including distressed sales, are expected to rise by 12.7 percent on a year-over-year basis from September 2012 and rise by 0.2 percent on a month-over-month basis from August 2013. Excluding distressed sales, September 2013 home prices are poised to rise 12.2 percent year over year from September 2012 and by 0.7 percent month over month from August 2013.

Click on graph for larger image.

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

The index was up 0.9% in August, and is up 12.4% over the last year.  This index is not seasonally adjusted, and the month-to-month changes will be smaller for next several months.

The index is off 17.2% from the peak - and is up 23.4% from the post-bubble low set in February 2012.

The second graph is from CoreLogic. The year-over-year comparison has been positive for eighteen consecutive months suggesting house prices bottomed early in 2012 on a national basis (the bump in 2010 was related to the tax credit).

This is the largest year-over-year increase since 2006.

I expect the year-over-year price increases to slow in the coming months.

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

The ISM manufacturing index indicated faster expansion in September. The PMI was at 56.2% in September, up from 55.7% in August. The employment index was at 55.4%, up from 53.3%, and the new orders index was at 60.5%, down from 63.2% in August.

From the Institute for Supply Management: August 2013 Manufacturing ISM Report On Business®

Economic activity in the manufacturing sector expanded in September for the fourth consecutive month, and the overall economy grew for the 52nd consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The PMI™ registered 56.2 percent, an increase of 0.5 percentage point from August's reading of 55.7 percent. September's PMI™ reading is the highest of the year, leading to an average PMI™ reading of 55.8 percent for the third quarter. The New Orders Index decreased in September by 2.7 percentage points to 60.5 percent, and the Production Index increased by 0.2 percentage point to 62.6 percent. The Employment Index registered 55.4 percent, an increase of 2.1 percentage points compared to August's reading of 53.3 percent, which is the highest reading for the year. Comments from the panel are generally positive and optimistic about increasing demand and improving business conditions."
emphasis added

Click on graph for larger image.

Here is a long term graph of the ISM manufacturing index.

This was above expectations of 55.0% and suggests manufacturing expanded at a faster pace in September.