by Calculated Risk on 11/01/2013 12:40:00 PM

Back in January I wrote: The Future's so Bright .... I started by writing that "It looks like economic growth will pickup over the next few years", although for 2013, I was expecting "another year of sluggish growth" due to fiscal policy.

My guess was "we can expect another year of sluggish growth in 2013 probably in the 2% range again".  Fiscal austerity probably subtracted 1.5% to 2.0% from GDP growth in 2013, and the foolish government shutdown probably subtracted a little more.

But even with contractionary fiscal policy, it looks like the US economy will grow in the 2% range this year. Ex-austerity (and ex-shutdown), we'd probably be looking at a decent year - maybe this would have been the best year since Clinton was President!

Right now it looks like 2014 will be a better than 2013 for a number of reasons:

1) The housing recovery should continue.

2) Household balance sheets are in much better shape.  See: NY Fed: Household Debt declined in Q2 as Deleveraging Continues and Fed: Household Debt Service Ratio near lowest level in 30+ years

3) State and local government austerity is over (in the aggregate).

4) There will be less Federal austerity in 2014 (hopefully the sequester cuts will be minimized). And a government shutdown is unlikely. From Ethan Harris at Merrill Lynch:

There was also a major silver lining with the shutdown: it gave the general public and moderate politicians a chance to clearly state their views on using a shutdown as a negotiating tactic. Public opinion polls strongly rejected the shutdown as a way to force changes in the Affordable Care Act (ACA) and the favorability rating of the Republican Party fell sharply.
...
All of this makes a shutdown next year unlikely. Our hope and expectation is that business and household confidence will slowly rebound as Washington falls off the radar screen. Of course, some headwinds remain, including uncertainty about the rollout of the Affordable Care Act, but with no new austerity and no major brinkmanship moments, the economy should improve.

5) And demographics are favorable going forward.

We will still some disappointing numbers related to the shutdown (I expect the unemployment rate to spike higher for October, but to be reversed in the November report). But right now, 2014 is looking solid.

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

The ISM manufacturing index indicated faster expansion in October. The PMI was at 56.4% in October, up from 56.2% in September. The employment index was at 53.2%, down from 55.4%, and the new orders index was at 60.6%, up from 60.5% in September.

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

Economic activity in the manufacturing sector expanded in October for the fifth consecutive month, and the overall economy grew for the 53rd 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 56.4 percent, an increase of 0.2 percentage point from September's reading of 56.2 percent. The PMI™ has increased progressively each month since June, with October's reading reflecting the highest PMI™ in 2013. The New Orders Index increased slightly in October by 0.1 percentage point to 60.6 percent, while the Production Index decreased by 1.8 percentage points to 60.8 percent. Both the New Orders and Production Indexes have registered above 60 percent for three consecutive months. The Employment Index registered 53.2 percent, a decrease of 2.2 percentage points compared to September's reading of 55.4 percent. The panel's comments are generally positive about the current business climate; however, there are mixed responses on whether the government shutdown and potential default have had any effect on October's results."
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 October.

by Calculated Risk on 11/01/2013 09:00:00 AM

The Markit PMI is at 51.8 (above 50 is expansion). This was down from 52.8 in September, and up from the October flash reading of 51.1.

From MarkIt: PMI at one-year low, as output growth eases sharply

The U.S. manufacturing sector grew at its slowest rate for a year in October, according to the final Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™). At 51.8, down from 52.8 in September, but above the earlier flash estimate of 51.1, the PMI suggested that the rate of expansion was only modest.
...
Manufacturing employment in the U.S. rose for the fourth consecutive month in October. Overall, the rate of job creation accelerated to a moderate pace, but was nonetheless weaker than at the start of the year.

“While better than the earlier flash reading, the final PMI data indicate that the U.S. manufacturing sector ground to a near standstill in October. [said Chris Williamson, Chief Economist at Markit]

“Encouragingly, it looks like companies are expecting the slowdown to be temporary, most likely linked to the government shutdown, as indicated by an upturn in the rate of job creation."
emphasis added

The ISM PMI for October will be released at 10 AM ET today.

by Calculated Risk on 10/31/2013 09:08:00 PM

From Freddie Mac: Fixed Mortgage Rates Decline for Second Consecutive Week

Freddie Mac (OTCQB: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates declining for the second consecutive week amid recent data showing softening in the housing market. Fixed mortgage rates are at their lowest levels since June.

30-year fixed-rate mortgage (FRM) averaged 4.10 percent with an average 0.7 point for the week ending October 31, 2013, down from last week when it averaged 4.13 percent. A year ago at this time, the 30-year FRM averaged 3.39 percent.

"Fixed mortgage rates eased further leading up to the Federal Reserve's (Fed) October 30th monetary policy announcement. The Fed saw improvement in economic activity and labor market conditions since it began its asset purchase program, but noted the recovery in the housing market slowed somewhat in recent months and unemployment remains elevated. As a result, there was no policy change which should help sustain low mortgage rates in the near future." [said Frank Nothaft, vice president and chief economist, Freddie Mac].
emphasis added

30 year rates peaked this year at 4.58% on August 22nd in the Freddie Mac survey. This is the lowest level since late June.

Friday:
• All day, Light vehicle sales for October. The consensus is for light vehicle sales to increase to 15.4 million SAAR in October (Seasonally Adjusted Annual Rate) from 15.2 million SAAR in September.

• At 9:00 AM, the Markit US PMI Manufacturing Index for October.

• At 10:00 AM ET, the ISM Manufacturing Index for October. The consensus is for a decrease to 55.0 from 56.2 in September. The ISM manufacturing index indicated expansion in September at 56.2%. The employment index was at 55.4%, and the new orders index was at 60.5%.

NOTE: The employment situation report for October that was originally scheduled for release on November 1st has been delayed until the following Friday, November 8th.

by Calculated Risk on 10/31/2013 05:32:00 PM

Fannie Mae reported today that the Single-Family Serious Delinquency rate declined in September to 2.55% from 2.61% in August. The serious delinquency rate is down from 3.41% in September 2012, and this is the lowest level since December 2008.

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

Earlier this week, Freddie Mac reported that the Single-Family serious delinquency rate declined in September to 2.58% from 2.64% in August. Freddie's rate is down from 3.37% in September 2012, and this is at 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 0.86 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 10/31/2013 04:09:00 PM

The Case-Shiller house price indexes for August were released Tuesday. Zillow has started forecasting Case-Shiller a month early - and I like to check the Zillow forecasts since they have been pretty close.   It looks like another very strong month ...

From Zillow: Sept. Case-Shiller Expected to Continue Showing Eye-Popping Annual Appreciation

The Case-Shiller data for August came out this morning, and based on this information and the September 2013 Zillow Home Value Index (ZHVI, released Oct. 17), we predict that next month’s Case-Shiller data (September 2013) will show that both the non-seasonally adjusted (NSA) 20-City Composite Home Price Index and the NSA 10-City Composite Home Price Index increased 13.2 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from August to September will be 0.8 percent for both the 20-City Composite and the 10-City Composite Home Price Indices (SA). All forecasts are shown in the table below. Officially, the Case-Shiller Composite Home Price Indices for September will not be released until Tuesday, Nov. 26.
...
The Zillow Home Value index showed the first signs of moderation in home value appreciation, with several of the largest metros showing month-over-month declines in September. Case-Shiller indices have also shown slowdowns in monthly appreciation but have not yet recorded monthly declines.

The following table shows the Zillow forecast for the September Case-Shiller index.

Zillow September Forecast for Case-Shiller Index
		Case Shiller Composite 10		Case Shiller Composite 20
		NSA	SA	NSA	SA
Case Shiller (year ago)	Sept 2012	158.94	155.66	146.23	143.20
Case-Shiller (last month)	Aug 2013	178.75	174.59	164.53	160.55
Zillow Forecast	YoY	13.2%	13.2%	13.2%	13.2%
	MoM	0.6%	0.8%	0.6%	0.8%
Zillow Forecasts1		179.9	176.1	165.5	162.0
Current Post Bubble Low		146.45	149.63	134.07	136.87
Date of Post Bubble Low		Mar-12	Jan-12	Mar-12	Jan-12
Above Post Bubble Low		22.8%	17.7%	23.5%	18.3%
1Estimate based on Year-over-year and Month-over-month Zillow forecasts

by Calculated Risk on 10/31/2013 12:59:00 PM

Goldman Sach chief economist Jan Hatzius wrote today (research note): How Much Risk to Homebuilding? A few excerpts:

The housing news has deteriorated recently across a broad set of indicators, and the FOMC accordingly downgraded its assessment of the housing market in Wednesday's post-meeting statement. How much should we worry about our forecast that residential investment will continue to grow 10-15% and directly contribute 1/2 percentage point to real GDP growth next year?

The risks to our housing forecast are on the downside in the near term, but there are three reasons why we still take a positive view beyond the next 1-2 quarters. First, there is a clearly identifiable reason for the recent weakness, namely the sharp increase in mortgage rates. Some of this increase has reversed recently, and barring another shock the impact should be mostly complete by early 2014.

Second, the fundamental supply-demand picture for housing still looks positive. If the population grows at the rates projected by the Census Bureau and the size of the average household trends sideways to slightly lower--in line with historical trends--we estimate that household formation should climb to 1-1.3 million and steady-state housing demand to 1.3-1.6 million. This implies significant upside for housing starts from the current 900,000 level once the remaining excess supply has been eliminated

Third, while home sales and starts have disappointed recently, house prices have continued to rise at double-digit rates, with few signs of deceleration. This suggests that the supply/demand balance in the housing market still looks favorable. That said, we continue to expect that home price appreciation will slow over the next year.

Clearly housing has slowed recently. This has shown up in housing starts and new home sales, and the slowdown is also evident in home builder reports. However I think this slowdown is temporary, and I expect the housing recovery to continue in 2014.

Click on graph for larger image.

This graph shows single and total housing starts through August (the September and October reports will be both released on November 26th).

There has been a dip in housing starts recently, but I think starts are still closer to the bottom than the next cycle top.  I agree with Hatzius that starts will continue to increase over the next several years - and this will be a key driver for economic growth.

by Calculated Risk on 10/31/2013 09:48:00 AM

From the Chicago ISM:

October 2013:

The October Chicago Business Barometer rose to 65.9 in October from 55.7 in September, led by double digit gains in New Orders, Production and Order Backlogs. October’s gain placed the Barometer at the highest level since March 2011 with companies seemingly unaffected by the government shutdown.

New Orders soared to their highest level in nine years, adding to two prior months of gains while Production expanded to its highest level since February 2011.

Order Backlogs leapt out of a contractionary phase to the highest since March 2011. In line with expansion in New Orders and Production, Employment rose to its highest since June 2013, but remained well below the level of New Orders and Production.

Commenting on the MNI Chicago Report, Philip Uglow, Chief Economist at MNI Indicators said, “The government might have shut down but Chicago area companies powered ahead in October as orders and production surged.”

“While it is a little surprising to see such a large rise in activity, the consistent increase in the Barometer over the past four months suggests the recovery is gaining traction,” he added.

This was well above the consensus estimate of 55.0.

by Calculated Risk on 10/31/2013 08:34:00 AM

The DOL reports:

In the week ending October 26, the advance figure for seasonally adjusted initial claims was 340,000, a decrease of 10,000 from the previous week's unrevised figure of 350,000. The 4-week moving average was 356,250, an increase of 8,000 from the previous week's unrevised average of 348,250.

The previous week was unrevised at 350,000.

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 increased to 356,250 - the highest level since April.

Some of the recent increase was due to processing problems in California (now resolved) and some probably related to the government shutdown. The four-week average will probably decline next week.

by Calculated Risk on 10/30/2013 08:49:00 PM

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 335 thousand from 350 thousand last week.

• At 9:45 AM, the Chicago Purchasing Managers Index for October. The consensus is for a decrease to 55.0, down from 55.7 in September.

The Treasury released the Fiscal 2013 Final Monthly Treasury Statement. As expected, the Government ran a $75 billion surplus in September (end of fiscal year), and the budget deficit in 2013 declined sharply to 4.1% of GDP from 6.8% of GDP in fiscal 2012.

Click on graph for larger image.

This graph shows the actual (purple) budget deficit each year as a percent of GDP, and an estimate for the next nine years based on estimates from the CBO.  NOTE: This includes updated GDP estimates from the BEA. 

The deficit should decline further over the next couple of years (I think the CBO is pessimistic on 2014).

After 2015, the deficit will start to increase again according to the CBO, but there is no urgent need to reduce the deficit over the next few years.