by Calculated Risk on 10/03/2013 01:17:00 PM

Reis reported that the vacancy rate for regional malls declined slightly in Q3 to 8.2%, down from 8.3% in Q2. This is down from a cycle peak of 9.4% in Q3 2011.

For Neighborhood and Community malls (strip malls), the vacancy rate was unchanged in Q3 at 10.5%, the same as in Q2. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011.

Comments from Reis Head of Economics Victor Calanog:

[Strip Malls] National vacancies remained unchanged in the third quarter for neighborhood and community centers. ... Vacancies for neighborhood and community centers now stand at 10.5%, down 30 basis points year over year, and just a paltry 60 basis points below the peak vacancy rate of 11.1% which was recorded two years ago, during the third quarter of 2011. By any measure this is a weak recovery; only 2.351 million SF of space was absorbed this period, the slowest rate of increase in occupied stock this year. And all this despite the fact that 1.472 million SF of new space came online, the largest number for quarterly additions from new construction in 2013.
...
[Regional] Malls have generally experienced a stronger recovery relative to their smaller brethren shopping centers; national vacancies peaked at 9.4% in the third quarter of 2011, and have descended at a faster pace than neighborhood and community center vacancies. Third quarter mall vacancies stand at 8.2%, down 10 basis points from the second quarter and down 50 basis points year over year. Asking rents grew by 0.4% in the third quarter and 1.4% from twelve months prior. This is the tenth consecutive quarter of rent increases at the national level for regional malls.

Click on graph for larger image.

This graph shows the strip mall vacancy rate starting in 1980 (prior to 2000 the data is annual). The regional mall data starts in 2000. Back in the '80s, there was overbuilding in the mall sector even as the vacancy rate was rising. This was due to the very loose commercial lending that led to the S&L crisis.

In the mid-'00s, mall investment picked up as mall builders followed the "roof tops" of the residential boom (more loose lending). This led to the vacancy rate moving higher even before the recession started. Then there was a sharp increase in the vacancy rate during the recession and financial crisis.

Mall vacancy data courtesy of Reis.

by Calculated Risk on 10/03/2013 10:00:00 AM

The August ISM Non-manufacturing index was at 54.4%, down from 58.6% in August. The employment index declined in September to 52.7%, down from 57.0% in August. Note: Above 50 indicates expansion, below 50 contraction.

From the Institute for Supply Management: September 2013 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in September for the 45th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee. "The NMI™ registered 54.4 percent in September, 4.2 percentage points lower than August's reading of 58.6 percent. This indicates continued growth at a slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased to 55.1 percent, which is 7.1 percentage points lower than the 62.2 percent reported in August, reflecting growth for the 50th consecutive month but at a significantly slower rate. The New Orders Index decreased by 0.9 percentage point to 59.6 percent, and the Employment Index decreased 4.3 percentage points to 52.7 percent, indicating growth in employment for the 14th consecutive month. The Prices Index increased 3.8 percentage points to 57.2 percent, indicating prices increased at a faster rate in September when compared to August. According to the NMI™, 11 non-manufacturing industries reported growth in September. The majority of the respondents' comments continue to be positive; however, there is an increase in the degree of uncertainty regarding the future business climate and the direction of the economy."
emphasis added

Click on graph for larger image.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

This was below the consensus forecast of 57.0% and indicates slower expansion in September than in August.

by Calculated Risk on 10/03/2013 08:37:00 AM

The DOL reports:

In the week ending September 28, the advance figure for seasonally adjusted initial claims was 308,000, an increase of 1,000 from the previous week's revised figure of 307,000. The 4-week moving average was 305,000, a decrease of 3,750 from the previous week's revised average of 308,750.

The previous week was revised up from 305,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.


The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 305,000.

The 4-week average is at the lowest level since May 2007 (before the recession started).  Claims were below the 313,000 consensus forecast.

Here is a long term graph of the 4-week average of weekly unemployment claims back to 1971.

The current level of weekly claims is consistent with a solidly growing economy.

Note: This information is collected by the states and will continue to be released.

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