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

Two weeks ago I wrote: Comment: Looking for Stronger Economic Growth in 2014

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) [updated link].

4) There will be less Federal austerity in 2014 (hopefully the sequester cuts will be minimized). And a government shutdown is unlikely. ...

5) And demographics are favorable going forward.

Here is some more analysis on 2014:

From Goldman Sachs economists Sven Jari Stehn and Kris Dawsey:

Looking beyond Q4, we continue to expect a meaningful acceleration of GDP growth―to 3% in 2014Q1 and 3.5% for the remainder of the year―as the economy moves over the "hump" of fiscal contraction.

From Merrill Lynch economists:

Getting the exact timing of the acceleration in growth is tough, but the case for better growth next year is strong. The economy has healed significantly since the 2008-9 crisis. In particular, the government, households, businesses and banks have gone a long way toward fixing their balance sheets, allowing them to slowly shift their focus from balance sheet repair to expansion.
...
We expect GDP growth to exceed 3% in the back half of next year as the federal fiscal drag drops from ~1.5pp in 2013 to ~0.5pp in 2014.

Right now it looks like 2014 will be a solid year.

by Calculated Risk on 11/11/2013 09:53:00 AM

Two years ago I posted a graph with projections of when payroll employment would return to pre-recession levels (see: Sluggish Growth and Payroll Employment from November 2011).

In 2011, I argued we'd continue to see sluggish growth (back in 2011 many analysts were forecasting another US recession - those forecasts were wrong).

  On the graph I posted two lines - one with payroll growth of 125,000 payroll jobs added per month (the pace in 2011), and another line with 200,000 payroll jobs per month.  The following graph is an update with reported payroll growth through October 2013.

The dashed red line is 125,000 payroll jobs added per month. The dashed blue line is 200,000 payroll jobs per month.  Both projections are from November 2011.

Click on graph for larger image.

So far the economy has tracked just below the blue line (200,000 payroll jobs per month).

Right now it appears payrolls will exceed the pre-recession peak in mid-2014.

Currently there are about 1.5 million fewer payroll jobs than before the recession started, and at the recent pace of job growth it will take about 8 months to reach the previous peak.  

Of course this doesn't include population growth and new entrants into the workforce (the workforce has continued to grow).

Note: There are 976 thousand fewer private sector payroll jobs than before the recession started. At the recent pace of private sector job growth, the private sector could be back at the pre-recession peak in the first few months of 2014.

by Calculated Risk on 11/10/2013 09:33:00 PM

Monday:
• Government offices, banks and the bond market will be closed in observance of the Veteran's Day holiday. Stock markets will be open.

Weekend:
• Schedule for Week of November 10th

• Update: Four Charts to Track Timing for QE3 Tapering

• State and local government austerity is over

The Nikkei is up about 1.3%.

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

Oil prices are mostly unchanged with WTI futures at $94.63 per barrel and Brent at $105.12 per barrel.

Below is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices have fallen to $3.20 per gallon.  If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent; gasoline prices in most of the U.S. are impacted more by Brent prices.

Orange County Historical Gas Price Charts Provided by GasBuddy.com

by Calculated Risk on 11/10/2013 12:19:00 PM

The BEA released the underlying details for the Q3 advance GDP report Friday.

The first graph is for Residential investment (RI) components as a percent of GDP. According to the Bureau of Economic Analysis, RI includes new single family structures, multifamily structures, home improvement, Brokers’ commissions and other ownership transfer costs, and a few minor categories (dormitories, manufactured homes).

A few key points:
1) Usually the most important components are investment in single family structures followed by home improvement. However home improvement has been the top category for twenty consecutive quarters, but that is about to change. Investment in single family structures should be the top category again soon.

2) Even though investment in single family structures has increased significantly from the bottom, single family investment is still very low - and still below the bottom for previous recessions. I expect further increases over the next few years.

3) Look at the contribution from Brokers’ commissions and other ownership transfer costs. This is the category mostly related to existing home sales (this is the contribution to GDP from existing home sales). If existing home sales are flat, or even decline due to fewer foreclosures, this will have little impact on total residential investment.

Click on graph for larger image.

Investment in home improvement was at a $178 billion Seasonally Adjusted Annual Rate (SAAR) in Q3 (about 1.0% of GDP), still above the level of investment in single family structures of $172 billion (SAAR) (also 1.0% of GDP).  Single family structure investment will probably overtake home improvement as the largest category of residential investment very soon.

The second graph shows investment in offices, malls and lodging as a percent of GDP. Office, mall and lodging investment has increased recently, but from a very low level.

Investment in offices is down about 54% from the recent peak (as a percent of GDP).  There has been some increase in the Architecture Billings Index lately, so office investment might start to increase.  However the office vacancy rate is still very high, so any increase in investment will probably be small.

Investment in multimerchandise shopping structures (malls) peaked in 2007 and is down about 62% from the peak (note that investment includes remodels, so this will not fall to zero).   The vacancy rate for malls is still very high, so investment will probably stay low for some time.

Lodging investment peaked at 0.31% of GDP in Q3 2008 and is down about 65%.   With the hotel occupancy rate close to normal, it is possible that hotel investment will probably continue to increase.

These graphs show there is currently very little investment in offices, malls and lodging. And residential investment is increasing, but from a very low level.

by Calculated Risk on 11/10/2013 10:46:00 AM

On Friday, California State Controller John Chiang said

"[B]ecause higher-than-expected payroll withholdings and estimated payments are driving the good news [more state revenue], it signals that Californians are beginning to earn more, work more, and the Great Recession is becoming a faint image in the rear view mirror"

This "good news" is happening in many state and local areas (not all). This is a significant change from state and local governments being a headwind for the economy to becoming a slight tailwind.

Here are two graphs that show the aggregate austerity is over.

The first graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.

Click on graph for larger image.

The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has been adding added to GDP growth.

The red bars are the contribution from state and local governments.  Although not as big a drag as the housing bust, there was an unprecedented period of state and local austerity (not seen since the Depression). 

Now state and local governments have added to GDP for two consecutive quarters, and I expect state and local governments to continue to make small positive contributions to GDP going forward.

The second graph shows total state and government payroll employment since January 2007. State and local governments lost jobs for four straight years. (Note: Scale doesn't start at zero to better show the change.)

In 2013, state and local government employment is up 74 thousand through October.

Here is a table of the annual change in payrolls for state and local governments.

Year	Annual Change State and Local Government Payrolls (000s)
2002	204.0
2003	-2.0
2004	159.0
2005	181.0
2006	212.0
2007	262.0
2008	158.0
2009	-129.0
2010	-262.0
2011	-239.0
2012	-34.0
20131	74.0
12013 through October

I think most of the recession related state and local government layoffs are over, and it appears state and local government employment has bottomed.  Of course Federal government layoffs are ongoing, but it appears state and local government austerity is over (in the aggregate).

by Calculated Risk on 11/09/2013 04:43:00 PM

Here is an update of the four charts I'm using to track when the Fed will start tapering the QE3 purchases.

In general the year-end data might be "broadly consistent" with the June (and September) FOMC projections.

However I suspect the FOMC is very concerned about the low level of inflation, and also the decline in the employment participation rate.

The December FOMC meeting is on the 17th and 18th.

Click on graph for larger image.

The first graph is for the unemployment rate.

The current forecast is for the unemployment rate to decline to 7.1% to 7.3% in Q4 2013.

We only have data through October - and that data was muddled by the government shutdown - however so far the unemployment rate is tracking the FOMC forecast (lower is better). 

However, in July, Bernanke said that the unemployment rate "probably understates the weakness of the labor market." (He repeated this yesterday). He suggested he is watching other employment indicators too, and I suspect the FOMC will be looking closely at the participation rate in the November employment report.

The second graph is for GDP.

The current forecast is for GDP to increase between 2.0% and 2.3% (the FOMC revised down their forecast from 2.3% and 2.6% in June).  This is the increase in GDP from Q4 2012 to Q4 2013.

Currently GDP is tracking the FOMC forecasts, and real GDP only has to increase 1.5% annualized in Q4 to reach the lower forecast  (Edit: Corrected required Q4 growth rate, ht Michael)

The third graph is for PCE prices.


The current forecast is for prices to increase 1.1% to 1.2% from Q4 2012 to Q4 2013.  This was revised up from 0.8% to 1.2% in June.

So far PCE prices are close just below this projection - however this projection is significantly below the FOMC target of 2%. Clearly the FOMC expects inflation to pickup, and a key is if the recent decline in inflation is "transitory".

The fourth graph is for core PCE prices

The current forecast is for core prices to increase 1.2% to 1.3% from Q4 2012 to Q4 2013.

So far core PCE prices are just below this projection - and, once again, this projection is significantly below the FOMC target of 2%.

by Calculated Risk on 11/09/2013 08:51:00 AM

The key reports this week are the October Industrial Production and Capacity Utilization report and  the September Trade Balance report.

On Thursday, there will be a confirmation hearing for Janet Yellen as the new Fed Chair.  Yellen is  qualified, has an excellent track record (she has been "hawkish" when appropriate, and "dovish" when appropriate), and I expect she will be confirmed by a large majority.

----- Monday, November 11th -----
Government offices, banks and the bond market will be closed in observance of the Veteran's Day holiday. Stock markets will be open.

----- Tuesday, November 12th-----
7:30 AM ET: NFIB Small Business Optimism Index for October.

8:30 AM ET: Chicago Fed National Activity Index for September. This is a composite index of other data.

----- Wednesday, November 13th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

----- Thursday, November 14th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 330 thousand from 336 thousand last week.

8:30 AM: Trade Balance report for September from the Census Bureau.

Imports and export were mostly unchanged in August.

The consensus is for the U.S. trade deficit to increase to $39.1 billion in September from $38.8 billion in August.

10:00 AM: Confirmation Hearing, Nominee for Fed Chair Janet Yellen

11:00 AM: The Q3 2013 Quarterly Report on Household Debt and Credit will be released by the Federal Reserve Bank of New York.

----- Friday, November 15th -----
8:30 AM: NY Fed Empire Manufacturing Survey for November. The consensus is for a reading of 5.5, up from 1.5 in October (above zero is expansion).

9:15 AM: The Fed is scheduled to release Industrial Production and Capacity Utilization for October.

This graph shows industrial production since 1967.

The consensus is for a 0.1% increase in Industrial Production, and for Capacity Utilization to be unchanged at 78.3%.

10:00 AM: Monthly Wholesale Trade: Sales and Inventories for September. The consensus is for a 0.4% increase in inventories.

by Calculated Risk on 11/08/2013 10:38:00 PM

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for November 8, 2013.

Changes and comments from surferdude808:

Very quiet week for the Unofficial Problem Ban List with only one removal that pushes the institutions list count to 661 with assets of $228.8 billion. It has been since the middle of July 2013 when there was such few changes to the list.

A year ago, the list held 860 institutions with assets of $328.2 billion. Acacia Federal Savings Bank, Falls Church, VA ($631 million) found a merger partner in order to find a way off the list. Next week, we anticipate the OCC will release its enforcement action activity through mid-September 2013.

by Calculated Risk on 11/08/2013 05:11:00 PM

Earlier today I posted a graph showing that after 4 years of layoffs, state and local governments have started increasing employment again. Yesterday I noted that state and local governments are now adding to GDP growth.

Today from the California State Controller: Controller Releases October Cash Update

State Controller John Chiang today released his monthly report covering California’s cash balance, receipts and disbursements in October 2013. Revenues for the month totaled $5.3 billion, surpassing estimates in the state budget by $510.5 million, or 10.7 percent. Total revenue from the first four months of the fiscal year totaled $25.5 billion, beating year-to-date estimates by $603.7 million.

"State revenues are more than $600 million ahead of projections following a second straight month of strong collections," said Chiang. "Importantly, because higher-than-expected payroll withholdings and estimated payments are driving the good news, it signals that Californians are beginning to earn more, work more, and the Great Recession is becoming a faint image in the rear view mirror."
emphasis added

From Joshua Dennerlein at Merrill Lynch today:

After three years of being a headwind to economic growth, state and local (S&L) governments are beginning to show signs of life. While it is early in the story, S&L spending may be a slight tailwind to the economy in 2014. ... The recovery in the state and local sector presents an upside risk to our 2014 forecasts.

by Calculated Risk on 11/08/2013 04:17:00 PM

From Fed Chairman Ben Bernanke: The Crisis as a Classic Financial Panic. A few excerpts:

The recent crisis echoed many aspects of the 1907 panic. Like most crises, the recent episode had an identifiable trigger--in this case, the growing realization by market participants that subprime mortgages and certain other credits were seriously deficient in their underwriting and disclosures. As the economy slowed and housing prices declined, diverse financial institutions, including many of the largest and most internationally active firms, suffered credit losses that were clearly large but also hard for outsiders to assess. Pervasive uncertainty about the size and incidence of losses in turn led to sharp withdrawals of short-term funding from a wide range of institutions; these funding pressures precipitated fire sales, which contributed to sharp declines in asset prices and further losses. Institutional changes over the past century were reflected in differences in the types of funding that ran: In 1907, in the absence of deposit insurance, retail deposits were much more prone to run, whereas in 2008, most withdrawals were of uninsured wholesale funding, in the form of commercial paper, repurchase agreements, and securities lending. Interestingly, a steep decline in interbank lending, a form of wholesale funding, was important in both episodes. Also interesting is that the 1907 panic involved institutions--the trust companies--that faced relatively less regulation, which probably contributed to their rapid growth in the years leading up to the panic. In analogous fashion, in the recent crisis, much of the panic occurred outside the perimeter of traditional bank regulation, in the so-called shadow banking sector.

The responses to the panics of 1907 and 2008 also provide instructive comparisons. In both cases, the provision of liquidity in the early stages was crucial. In 1907 the United States had no central bank, so the availability of liquidity depended on the discretion of firms and private individuals, like Morgan. In the more recent crisis, the Federal Reserve fulfilled the role of liquidity provider, consistent with the classic prescriptions of Walter Bagehot.6 The Fed lent not only to banks, but, seeking to stem the panic in wholesale funding markets, it also extended its lender-of-last-resort facilities to support nonbank institutions, such as investment banks and money market funds, and key financial markets, such as those for commercial paper and asset-backed securities.

In both episodes, though, liquidity provision was only the first step. Full stabilization requires the restoration of public confidence. Three basic tools for restoring confidence are temporary public or private guarantees, measures to strengthen financial institutions' balance sheets, and public disclosure of the conditions of financial firms. At least to some extent, Morgan and the New York Clearinghouse used these tools in 1907, giving assistance to troubled firms and providing assurances to the public about the conditions of individual banks. All three tools were used extensively in the recent crisis: In the United States, guarantees included the Federal Deposit Insurance Corporation's (FDIC) guarantees of bank debt, the Treasury Department's guarantee of money market funds, and the private guarantees offered by stronger firms that acquired weaker ones. Public and private capital injections strengthened bank balance sheets. Finally, the bank stress tests that the Federal Reserve led in the spring of 2009 and the publication of the stress-test findings helped restore confidence in the U.S. banking system. Collectively, these measures helped end the acute phase of the financial crisis, although, five years later, the economic consequences are still with us.

Bernanke places too much blame on "subprime" (Alt-A mortgages were a real disaster too), but this is an interesting comparison to 1907.