by Calculated Risk on 12/22/2013 12:38:00 PM

Next week I'll post some economic questions for 2014, but first here is a review of my Ten Economic Questions for 2013.

After posting the list, I followed up with a discussion of each question. The goal was to provide an overview of what I was expecting 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).

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.

Correct: The Eurozone survived another year.  The good news is it is now obvious to almost everyone that "austerity" alone failed.  The bad news is that many policymakers remain blind to the obvious. 

Even with bad policies, eventually the European economies will start to grow again.   And it appears that is starting to happen now.  Of course many problems remain.

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.

Forecast was a little high: We have start data through November, and starts this year are up 19% over the same period in 2012.  New home sales are up 15% through the first ten months of 2013 compared to the same period in 2012.  This is a little below my forecast, but another solid year for housing.

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.

Correct: It appears inventory bottomed early in 2013, and inventory was up 5% year-over-year in November according to the NAR.  Inventory is still low, but this increase in inventory should slow the rate of house 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.

Forecast was too low: The Case-Shiller Comp 20 and National indexes both increased about 7% in 2012.  The seasonally adjusted Case-Shiller Comp 20 index was up 13.3% year-over-year in September, and the National Index is up 11% through Q3 . Other indexes show less appreciation - and 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.

Correct: The Fed kept their purchases steady all year, and will start to reduce QE asset purchases in January (announced at the meeting last week).

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.

Forecast was a little too high: 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).

Forecast was too high: The unemployment rate was at 7.0% in November.  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.

Correct: Through November 2013, the economy has added an average of 173 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.

Correct: It now looks like GDP will increase in the 2.2% to 2.4% range for 2013.

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.

Mostly Correct: The House did fold early this year, but I was wrong about the sequester (bad policy).  Unfortunately I was also correct about the government shutdown.

And I was definitely correct about the deficit decreasing faster than most people expected.  This has really surprised some policymakers (who unfortunately are still not paying attention).

Luckily 2014 is an election year, and with the recent budget agreement, I don't expect the House to be a huge downside risk next year (assuming Congress "pays the bills").

Overall 2013 unfolded about as expected.  I'm expecting Stronger Economic Growth in 2014, and longer term, the future's so bright ...

by Calculated Risk on 12/21/2013 04:44:00 PM

Here is a minor indicator that I follow, from ATA: ATA Truck Tonnage Index Jumped 2.7% in November

The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index increased 2.7% in November, after falling 1.9% in October. ... In November, the index equaled 128.5 (2000=100) versus 125.1 in October. November’s level is a record high. Compared with November 2012, the SA index surged 8.1% ...
...
“Tonnage snapped back in November, which fits with several other economic indicators,” said ATA Chief Economist Bob Costello. “Assuming that December isn’t weak, tonnage growth this year will be more than twice the gain in 2012.”

Tonnage increased 2.3% in 2012. Costello noted tonnage accelerated in the second half of the year, indicating that the economy is likely stronger some might believe.
emphasis added

Click on graph for larger image.

Here is a long term graph that shows ATA's For-Hire Truck Tonnage index.

The dashed line is the current level of the index.

The index is up solidly year-over-year. The monthly decline in October was probably related to the government shutdown, but the index bounced back in November to a record high.

by Calculated Risk on 12/21/2013 12:47:00 PM

The key reports this week are Personal Income and Outlays for November on Monday, and November New Home Sales on Tuesday.

For manufacturing, the Richmond Fed December survey will be released on Tuesday.

Merry Christmas and Happy Holidays to All!

----- Monday, December 23rd -----
8:30 AM ET: Personal Income and Outlays for November. The consensus is for a 0.5% increase in personal income, and for a 0.5% increase in personal spending. And for the Core PCE price index to increase 0.1%.

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

9:00 AM: Chemical Activity Barometer (CAB) for December from the American Chemistry Council. This appears to be a leading economic indicator.

9:55 AM: Reuter's/University of Michigan's Consumer sentiment index (final for December). The consensus is for a reading of 83.5, up from the preliminary reading of 82.5, and up from the November reading of 75.1.

----- Tuesday, December 24th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

8:30 AM: Durable Goods Orders for November from the Census Bureau. The consensus is for a 1.5% increase in durable goods orders.

9:00 AM: FHFA House Price Index for October 2013. This was original a GSE only repeat sales, however there is also an expanded index. The consensus is for a 0.4% increase.

10:00 AM: New Home Sales for November from the Census Bureau.

This graph shows New Home Sales since 1963. The dashed line is the October sales rate.

The consensus is for an increase in sales to 450 thousand Seasonally Adjusted Annual Rate (SAAR) in November from 444 thousand in October. 

10:00 AM: Richmond Fed Survey of Manufacturing Activity for December. The consensus is a reading of 10, down from 13 in November (above zero is expansion).

All US markets will close early.

----- Wednesday, December 25th -----
All US markets will be closed in observance of the Christmas Holiday.

----- Thursday, December 26th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 340 thousand from 379 thousand last week.

----- Friday, December 27th -----
No economic releases scheduled.

by Calculated Risk on 12/21/2013 09:24:00 AM

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

Here is the unofficial problem bank list for December 20, 2013.

Changes and comments from surferdude808:

As anticipated, the OCC released its update on enforcement action activity. Terminations by the OCC and merger activity led to the removal of eight institutions from the Unofficial Problem Bank List. After removal, the list holds 633 institutions with assets of $216.7 billion. A year ago, the list held 841 institutions with assets of $313.3 billion.

The OCC terminated actions against Tomatobank, National Association, Diamond Bar, CA ($409 million); Lincoln FSB of Nebraska, Lincoln, NE ($290 million); The First National Bank of Mercersburg, Mercersburg, PA ($174 million); and United Bank, Springdale, AR ($142 million). Four banks merged to find their way off the list including Citizens Financial Bank, Munster, IN ($1.1 billion Ticker: CITZ); Bank of Alameda, Alameda, CA ($272 million Ticker: NCLC); National Bank of Arkansas in North Little Rock, North Little Rock, AR ($183 million); and Colombo Bank, Rockville, MD ($140 million).

There could be a hiccup in the acquisition by Talmer Bancorp, Inc. of four banks controlled by Capitol Bancorp, Ltd. In a report by SNL Securities (Talmer threatens to walk on Capitol Bancorp deal if closing doesn't occur by New Year's Day), Talmer is not willing to waive its ability to terminate the purchase if the deal cannot close by New Year. Given the Wednesday holidays bisecting each of the next two weeks, the FDIC has likely shuttered its closing operations for the balance of the year. Should Talmer walk, the FDIC may have to deal with the banks controlled by Capitol Bancorp.

Next week, we anticipate the FDIC to release its enforcement action activity through November 2013. Along with those changes, we should be able to update the transition matrix for the fourth quarter. Until then, we wish all a Merry Christmas.

by Calculated Risk on 12/20/2013 10:15:00 PM

From Nick Timiraos at the WSJ: FHFA to Delay Increase in Mortgage Fees By Fannie, Freddie

Rep. Mel Watt (D., N.C.), the incoming director of the regulatory agency that oversees Fannie Mae and Freddie Mac, said Friday night he would delay an increase in mortgage fees charged by the housing-finance giants, which was announced earlier this month by that agency.

Mr. Watt ... is set to be sworn in on Jan. 6 ... Upon being sworn in, "I intend to announce that the FHFA will delay implementation" of the loan-fee increases "until such time as I have had the opportunity to evaluate fully the rationale for the plan," he said in a statement.

Good news on a Friday night!

by Calculated Risk on 12/20/2013 05:23:00 PM

From mortgage broker Lou Barnes:

Concealed by all the taper twitter: the last acts of a modern Scrooge. Since 2009 Edward DeMarco has been in charge of the FHFA and its duties as conservator of Fannie and Freddie (the GSEs) after their failure in the credit panic of 2008. In DeMarco's defense: no hotter potato was ever handed to anybody, Congress has been contradictory and undermining, and the White House and Treasury AWOL. DeMarco correctly saw his job as protecting taxpayers, but like so many pinched denizens of counting houses thought the best policy was skinflint.

In a credit disaster, one sure way to make it worse: choke what little credit remains. DeMarco has for five years recalibrated GSE underwriting to strangulation. Evidence: the default rate on new production has fallen 90% below pre-bubble levels.

In the well-intended effort to pay back Treasury assistance, and to risk adjust loan pricing, DeMarco brought us the hated Loan Level Pricing Adjustments. The GSEs now run large profits and have rebated their bailout to the Treasury. But this week DeMarco announced another round of LLPA hikes and increased the GSEs' securitization guarantee fee, now triple its pre-bubble percentage. ... Now we waterboard everybody, including supremely qualified investors, and in Libertarian zeal surcharge to death low-down borrowers.

DeMarco's replacement, Mel Watt, has already been confirmed by Congress. The Fed even post-taper, trying to keep rates low, is still buying nearly all net-new GSE production. Yet this week DeMarco, sitting in his chair as it is wheeled out to thankless retirement, gave orders to raise the cost of mortgages on the theory that if Fannie loans become expensive enough, private markets will take over. Total private-market securitization this year: about $13 billion, roughly one week of GSE-based production. The big housing question in 2014: will Mel Watt begin to reverse DeMarco's damage?
emphasis added

And from economist Tom Lawler:

On December 9 the FHFA announced that it was directing Fannie Mae and Freddie Mac to raise guarantee fees in three components:

• The base g-fee (or ongoing g-fee) for all mortgages will increase by 10 basis points;
• The up-front g-fee grid will be updated to better align pricing with the credit risk characteristics of the borrower; and
• The up-front 25 basis point adverse market fee that has been assessed on all mortgages purchased by Freddie Mac and Fannie Mae since 2008 is being eliminated except in the four states whose foreclosure carrying costs are more than two standard deviations greater than the national average.

This week Fannie Mae announced that, per FHFA’s direction, it was increasing all ongoing single-family guarantee fees by 10 basis points, and was removing its 25 bp upfront “adverse market delivery charge” for all SF deliveries save for mortgages in Connecticut, Florida, New Jersey, and New York. It also released upcoming changes in its “loan-level price adjustments” (what FHFA referred to as the “up-front g-fee grid) that for 30-year mortgages produces additional fee hikes for many potential borrowers.
...
So what does this mean? Well, for a borrower with a 720 credit score who plans to put down 20%, and get a 30-year fixed-rate loan, Fannie’s new pricing for that loan would include (1) a 10 bp/annum higher g-fee; (2) a net 50 bp higher up-front fee (+ 75 bp LLPA less elimination of 25 bp ADMC, provided the property is not in CT/FL/NJ/NY). If one “converted” this up-front fee hike to a per annum charge, this would mean that Fannie would be increasing the per annum cost to this borrower (if the loan were delivered to Fannie) by about 20 bp! Stated another way, the INCREASE in the fee for such a loan scheduled for next year is about what the TOTAL fee Fannie used to charge for such a loan many years ago.

It should be noted that (1) the decision to raise fees in this manner was NOT the decision of the GSEs, but instead was directed by its regulator; and (2) the fee hikes are designed NOT to ensure that the GSEs/taxpayers earn a “fair” return, but rather to encourage a “further return of private capital to the mortgage market.”

CR note: These fees are scheduled to take effect on April 1st. I expect the decision to be reviewed - and hopefully reversed.

by Calculated Risk on 12/20/2013 02:47:00 PM

From housing economist Tom Lawler:

Lennar Corporation reported that net home orders in the quarter ended November 30, 2013 totaled 4,498, up 12.9% from the comparable quarter of 2012. Home deliveries totaled 5,650 last quarter, up 27.2% from the comparable quarter of 2012, at an average sales price of $307,000, up 17.6% from a year ago. The company’s order backlog at the end of November was 4,806, up 18.6% from last November.

Lennar noted in its press release that “the political and interest rate environment and our previously initiated price increases tempered new sales orders,” though the company was “still pleased” with its overall performance last quarter, as the company appeared to continue to gain market share – a “strategic goal” of the company. In its quarterly conference call, officials said that orders “improved sequentially” in October and November from the weak orders seen in September, and officials noted that sales in late summer had been weaker than expected.

Lennar’s average sales concession as a % of sales price last quarter was 6.3%, down from 9.0% in the comparable quarter of 2012 but up from 6.0% in the previous quarter.

Lennar continued its aggressive land/lot acquisitions, and in its conference call the company said it owned/controlled about 154,000 lots at the end of November, up about 20% from a year ago.

Lennar noted that while its “aggressive” pricing strategies led to significant margin improvements, labor and construction material costs last quarter were up about 12% from a year ago, and that labor costs were up by “more” than material costs. Several home builders have cited “supply-chain” issues (including labor “shortages) as contributing to the slower-than-desired pace of developing communities (and starting homes!), though some of these issues have apparently eased a bit very recently (if one believes the November surge in SF housing starts).

KB Home reported that net home orders in the quarter ended November 30, 2013 totaled 1,556, down 0.7% from the comparable quarter of 2012. The company’s sales cancellation rate, expressed as a % of gross orders, s 36% last quarter, up from 35% a year ago. Home deliveries last quarter totaled 2,038, down 4.0% from the comparable quarter of 2012, at an average sales price of $301,100, up 11.2% from a year ago. The company’s order backlog at the end of November was 2,557, 0.8% from last November.

KB officials noted that the combination of higher interest rates, higher home prices, and a dip in consumer confidence had significantly dampened home buyer demand, but officials said they believed this “pause” was temporary. Officials also noted that they expected slower home price appreciation next year, which they said would be “healthy.”

As with many other home builders, KB Home’s “bullish” view of the housing outlook was reflected in its aggressive acquisitions of land/lots. In its conference call an official said that KB Home owned/controlled “over 61,095 lots at the end of November, up 36.5% from last November.

While the vast majority of large home builders noted a “significant” slump in home orders in late summer/early fall, several reported some improvement recently, and most expect a substantial increase in home sales in 2014 -- and most (though not all) have positioned themselves accordingly with “aggressive” land/lot acquisitions. Below is a comparison of the latest number of lots owned/controlled by each of the above builders, compared to a year earlier (note: some are estimated based on builder-provided charts/graphs).

Lots Owned/Controlled, Large Publicly-Traded Home Builders
Company	As of:	2013	2012	% Change
D.R. Horton	30-Sep	180,900	152,700	18.5%
PulteGroup	30-Sep	126,474	122,235	3.5%
NVR	30-Sep	55,533	51,938	6.9%
The Ryland Group	30-Sep	39,698	26,629	49.1%
Meritage Homes	30-Sep	25,046	16,000	56.5%
MDC Holdings	30-Sep	15,808	10,428	51.6%
Standard Pacific	30-Sep	35,643	30,154	18.2%
M/I Homes	30-Sep	18,133	10,428	73.9%
Beazer Homes	30-Sep	28,004	24,147	16.0%
Lennar*	30-Nov	154,000	128,484	19.9%
Toll	31-Oct	48,628	40,350	20.5%
Hovnanian	31-Oct	31,849	27,648	15.2%
KB Home	30-Nov	61,095	44,752	36.5%
Total		820,811	685,893	19.7%
*approximate, based on conference call

Given that (1) home builders have acquired significant land/lot positions; and (2) supply chain/other issues kept overall housing production lower than planned in 2013, it appears as if builders are planning that overall SF housing production will increase significantly in 2014. That increased production, combined with vastly-improved margins at most builders, is likely to dampen significantly new home price gains next year.

by Calculated Risk on 12/20/2013 01:39:00 PM

From Jordan Rappaport, Senior Economist at the Kansas City Fed: The Long-Term Outlook for U.S. Residential Construction. Here is the complete paper.

Excerpt:

Long-term demand for both single- and multifamily housing can be projected by considering the observed, historical housing choices of different demographic groups defined by age and gender. By combining this information with U.S. Census Bureau forecasts for the size and composition of the country's population through 2035, we project the long-term path of the number of occupied housing units in the United States. This projected trend is well above the current number of occupied units, especially for multifamily housing. Closing the gap between actual occupancy and the projected trend will require a significant rise in construction over the next few years.

However, the longer-term outlook for construction growth is significantly weaker. ...

Under a baseline projection, single family starts increase by 150 percent from 2012 to their peak in 2021 (Chart 1). The annual level of starts at this peak is about the same as in 2002, one year into the single-family construction boom. Single-family construction is then projected to fall over the subsequent decade ...

CR Note: I haven't looked at all Rappaport's assumptions for the longer-term, but I agree that demographics are favorable over the short term, and that we should expect single family starts to continue to increase over the next few years.

by Calculated Risk on 12/20/2013 10:14:00 AM

From the BLS: Regional and state unemployment rates were little changed in October

Regional and state unemployment rates were generally lower in November. Forty-five states and the District of Columbia had unemployment rate decreases from October and five states had no change, the U.S. Bureau of Labor Statistics reported today.
...
Nevada and Rhode Island had the highest unemployment rates among the states in November, 9.0 percent each. The next highest rates were in Michigan, 8.8 percent, and Illinois, 8.7 percent. North Dakota continued to have the lowest jobless rate, 2.6 percent.

Click on graph for larger image.

This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). All states are below the maximum unemployment rate for the recession.

The size of the blue bar indicates the amount of improvement - Michigan, Nevada and Florida have seen the largest declines and many other states have seen significant declines. 

The states are ranked by the highest current unemployment rate. No state has double digit unemployment and the unemployment rate is at 9% in two states: Nevada, and Rhode Island.

The second graph shows the number of states with unemployment rates above certain levels since January 2006. At the worst of the employment recession, there were 9 states with an unemployment rate above 11% (red).

Currently two states have an unemployment rate at or above 9% (purple), nine states at or above 8% (light blue), and 22 states at or above 7% (blue).

by Calculated Risk on 12/20/2013 08:39:00 AM

The BEA reports:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 4.1 percent in the third quarter of 2013 (that is, from the second quarter to the third quarter), according to the "third" estimate released by the Bureau of Economic Analysis. ... The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued on December 5, 2103. In the second estimate, the increase in real GDP was 3.6 percent ... With this third estimate for the third quarter, increases in personal consumption expenditures (PCE) and in nonresidential fixed investment were larger than previously estimated.

The upward revision to the percent change in real GDP primarily reflected upward revisions to personal consumption expenditures and to nonresidential fixed investment that were partly offset by a downward revision to residential fixed investment.

Here is a comparison of the second and third estimates of GDP. PCE was revised up from a 1.4% annualized increase to 2.0%.

Note: Analysts are also upping their forecasts for Q4 GDP. As an example, from Merrill Lynch:

The data continue to come in stronger than expected and so we have raised our forecast for 4Q GDP growth from 1.2 to 2.1%.