by Calculated Risk on 1/09/2014 09:25:00 PM

The forecasts for the employment report have been moving up all week, although there is some concern about adverse weather in December, especially during the BLS reference week. We will know soon ...

Jon Hilsenrath has an interesting Q&A at the WSJ: Q&A: Fed’s Williams on Upbeat 2014 Outlook and What Keeps Him up at NightSome excerpts:

WSJ: WHAT WOULD IT TAKE FOR YOU TO START MOVING YOUR FORECASTS UP FOR THIS YEAR?

WILLIAMS: Investment spending is an interesting question. One of the things that still is surprisingly weak is business investment spending. Normally our macro models tell us that business investment tracks the economy pretty well. Yet right now business investment spending still seems pretty weak. I could see some upside surprises occurring. I’m not predicting them obviously. But a potential development would be seeing more business investment or a faster return on housing construction. I think the risks to our forecast are pretty balanced. I could easily think of scenarios where growth picked up to be well above 3%, as well as downside surprises.
...
WSJ: DO YOU WORRY ABOUT THE RISK OF REPEATING WHAT MIGHT OR MIGHT NOT HAVE BEEN A MISTAKE IN 2004 AND 2005, OF KEEPING RATES TOO LOW FOR TOO LONG? IF WE DON’T KNOW THE ANSWER TO WHAT CAUSES BUBBLES, HOW DOES IT AFFECT YOUR THINKING AS A POLICY MAKER NOW?

WILLIAMS: It is something that keeps me up at night and probably others too. Think about the asymmetry of risks. For the last few years I think we’ve been correctly focused on tail risks to the downside, like deflation or the economy getting stuck in a low growth or stagnating situation. My view now is there are some potential risks to the upside, growth picking up much faster than we expect. We have a lot of accommodation in place. We should always keep that in mind. The funds rate is zero. We have a balance sheet of trillions and trillions in dollars. That’s all in place. Whether we cut purchases by 10 billion a month or not, we still have a very accommodative stance of policy and that is going to stay with us for quite some time. That is where I worry. If the economy really picks up or inflation or risks to financial stability really do start to emerge in a serious way, we need to be able to move policy back to normal, or adjust policy appropriately, in a timely manner. It’s always a difficult issue. This time it is just a much greater risk because we’re in a much more accommodative stance of policy.

Friday:
• At 8:30 AM ET, the Employment Report for December. The consensus is for an increase of 200,000 non-farm payroll jobs in December, down from the 203,000 non-farm payroll jobs added in November. The consensus is for the unemployment rate to be unchanged at 7.0% in December.

• At 10:00 AM, the Monthly Wholesale Trade: Sales and Inventories for November. The consensus is for a 0.5% increase in inventories.

by Calculated Risk on 1/09/2014 03:54:00 PM

Yesterday I posted an employment preview. Even though the ISM indexes suggest around 245,000 payroll jobs added in December, and the ADP employment report was above expectations at 238,000 private sector jobs added - I still took the "under" (under the consensus forecast of 200,000). My key reason for a little pessimism was that unemployment claims spiked higher during the BLS reference week, possibly due to weather factors.

Here are a couple more positive outlooks:

From Tim Duy at Economist's View: Next Up: Employment Report

Since it worked well last time, my quick-and-dirty estimate is a 245k gain for nonfarm payrolls in December ... Use with caution, usual caveats apply. Forecasting the preliminary nonfarm payroll gain is akin to throwing darts. And my prior is that something that worked well last month probably will not work well this month. That said, while this technique might not predict the exact number, I think it tells us that:

   1. The labor market is improving modestly.
   2. Any large deviation from a gain of 245k - either positive or negative - is likely not indicative of the underlying trend in labor markets.

For comparison, this is a decidedly above consensus forecast. Consensus is for 200k with a range of 120k to 225k. 245k would be a large upward surprise.

From Kris Dawsey at Goldman Sachs (revised up from 175,000):

We forecast a gain of 200,000 nonfarm payroll jobs in December. Factors arguing for a solid print include the recent trend, an improvement in most employment indicators already released for the month, the compressed holiday hiring period, and a potential "couriers and messengers effect." On the negative side, cold weather is a downside risk.

From Deutsche Bank economist Carl Riccadonna (via Business Insider):

We now look for +250K on nonfarm payrolls and 6.8% on the unemployment rate. It is worth noting that in our employment scorecard, there was really only one component which materially weakened last month — Chicago PMI employment. We are dismissing the signals from both initial and continuing jobless claims, because both series displayed erratic behavior throughout December. ...

As always during the winter months, we will pay close attention to workers who could not work or worked reduced hours due to inclement weather. We do not anticipate a significant weather distortion in December, based on utility statistics, but if the payroll print is unusual this series could provide clues.

Overall the trend is positive, but it is difficult to predict any one month.

by Calculated Risk on 1/09/2014 01:27:00 PM

From the Association of American Railroads (AAR): Freight Rail Traffic for 2013 Saw Record Intermodal Growth, Slight Dip in Carloads

The Association of American Railroads (AAR) today reported that U.S. rail traffic for 2013 saw record intermodal growth with a slight full year decrease in carloadings. U.S. rail intermodal volume totaled a record 12.8 million containers and trailers in 2013, up 4.6 percent or 564,276 units, over 2012. Carloads totaled 14.6 million in 2013, down 0.5 percent or 76,784 carloads, from 2012. Intermodal volume in 2013 was the highest on record, surpassing the record high totals of 2006 by 549,471 units.

In 2013, 11 of the 20 carload commodity categories tracked annually by AAR saw increases on U.S. railroads compared with 2012. The categories with sizable gains were: petroleum and petroleum products, up 167,868 carloads or 31.1 percent; crushed stone, gravel and sand, up 81,023 carloads or 8.3 percent; motor vehicles and parts, up 41,166 carloads or 5.1 percent, and waste and nonferrous scrap, up 14,472 carloads or 9.1 percent.

The commodities with the largest carload declines in 2013 compared with 2012 were: coal, down 256,751 carloads or 4.3 percent; grain, down 81,309 carloads or 8 percent, and metallic ores, down 37,068 carloads or 9.9 percent. However, excluding coal and grain, those U.S. rail carloads which are reflective of the economy were up 261,276 carloads or 3.4 percent in 2013 over 2012.

“2013 ended the way it began — strong intermodal, weak coal, and mixed performance for other commodities, resulting in a year for rail traffic that could have been much better but also could have been much worse,” said AAR Senior Vice President John T. Gray. “A variety of indicators seem to be saying that the economy is slowly strengthening; a trend we expect to continue in 2014.”
emphasis added

Click on graph for larger image.

This graph from the Rail Time Indicators report shows U.S. average weekly rail carloads (NSA).  Green is 2013.

In December 2013, U.S. railroads originated a total of 1,078,903 carloads, down 0.9% (9,978 carloads) from December 2012 and an average of 269,726 per week. That’s the lowest weekly average for a December since 2009 and the third lowest (behind 2008 and 2009) since 1988. ...

Blame coal. U.S. railroads originated 423,218 carloads of coal in December 2013, down 5.2% (23,159 carloads) from December 2012. For more on coal, see page 15. Excluding coal, U.S. carloads were up 2.1% (13,181 carloads) in December 2013

Graphs and excerpts reprinted with permission.

The second graph is for intermodal traffic (using intermodal or shipping containers):

Intermodal traffic set a record in 2013 and finished strong in December:

U.S. railroads originated 958,778 intermodal containers and trailers in December 2013, up 70,742 units (8.0%) over December 2012 and an average of 239,695 per week. That’s by far the highest weekly average for any December in history and is a fitting end to a great year for intermodal.

For all of 2013, U.S. rail intermodal volume totaled a record 12,831,692 containers and trailers, up 4.6% (564,276 units) over 2012 and 549,471 units more than the previous record set in 2006.

Rail traffic and the economy usually grow together, so this is a good sign for the overall economy.

by Calculated Risk on 1/09/2014 09:47:00 AM

From Trulia chief economist Jed Kolko: The Post-Crash Rebound, Not Job Growth, Drove 2013 Price Gains

In 2013, the housing markets with the biggest increases in asking prices were all rebounding from severe price drops in the housing bust. Home prices are still in rebound mode, but this effect will weaken in 2014. Job growth, in contrast, mattered little for price gains in 2013 but helped drive rent increases.

In December, the year-over-year increase in asking home prices slowed for the first time since the price recovery began in early 2012: prices rose 11.9% year-over-year in December, compared with November’s 12.2% year-over-year increase. Asking prices rose 0.4% month-over-month, seasonally adjusted, the third straight month of gains less than 1%.
...
Overall, regression analysis shows that recent price gains are most strongly associated with the severity of the local housing bust. Markets where prices fell most during the bust (roughly 2006 to 2011, but varies by metro) offered bargains for investors and other buyers who have helped bid prices back up over the past two years. A second important factor is foreclosures: adjusting for other factors, metros with a higher foreclosure inventory today – including many in Florida – have slower price growth. Job growth, however, had little impact on local home price gains in 2013: the relationship between job growth and price gains was positive but not statistically significant.

Therefore, year-over-year price gains in December 2013 are still primarily a reaction to the housing bust, but this rebound effect is fading as we enter 2014. Looking at the quarter-over-quarter price changes throughout 2013, the relationship between the severity of the housing bust and the recent price recovery was stronger earlier in the year than later in the year. More specifically, the correlation between peak-to-trough price change (FHFA) and the Trulia Price Monitor quarter-over-quarter change was -.59 in March; -.45 in June; -.43 in September; and -.33 in December. This correlation is moving closer to zero, which signifies that the rebound effect is fading.

As the housing market continues to recover, factors other than the rebound effect – like job growth – will matter more for price gains. That means slower but more sustainable price increases. emphasis added

Note: These asking prices are SA (Seasonally Adjusted) - and adjusted for the mix of homes - and this suggests further house price increases, but at a slower rate, over the next few months on a seasonally adjusted basis.

by Calculated Risk on 1/09/2014 08:34:00 AM

The DOL reports:

In the week ending January 4, the advance figure for seasonally adjusted initial claims was 330,000, a decrease of 15,000 from the previous week's revised figure of 345,000. The 4-week moving average was 349,000, a decrease of 9,750 from the previous week's revised average of 358,750.

The previous week was revised up from 339,000.

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 349,000.

Weekly claims are frequently volatile during the holidays because of the seasonal adjustment.  The four-week should decline further next week.

by Calculated Risk on 1/08/2014 09:00:00 PM

From Jeffry Bartash at MarketWatch: What happens when jobless benefits are cut? North Carolina may offer clues

Last summer, North Carolina slashed the amount of cash it gave to people after they lost their jobs and the state also reduced the number of weeks they could receive benefits. Within several months, the unemployment rate fell a few ticks and by November it fell to a five-year low.
...
Government data also shows that more than 22,000 North Carolinians found work since the cutoff and the number of unemployed sank by nearly 73,000 to 344,000.

What the data doesn’t tell us, however, is what happened to all the people no longer classified as unemployed. While some found a job, others may have retired, ended up on welfare, moved in with family members, sought disability payments or fled to a nearby state with better benefits. We just don’t know.

If Congress fails to take action, I expect the national unemployment rate to fall as many people leave the labor force (the wrong reason for a decline in the unemployment rate). Hopefully Congress will extend the benefits as has happened every time before when this many people are suffering from long term unemployment (it is good policy and good economics) ...

Thursday:
• Early: Trulia Price Rent Monitors for December. 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.

• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decline to 331 thousand from 339 thousand.

by Calculated Risk on 1/08/2014 05:26:00 PM

This is a key distressed market to follow since Las Vegas has seen the largest price decline of any of the Case-Shiller composite 20 cities.

The Greater Las Vegas Association of Realtors reported GLVAR reports home prices rose in December, up 24 percent in 2013

GLVAR said the total number of existing local homes, condominiums and townhomes sold in December was 2,915, up from 2,694 in November, but down from 3,624 in December 2012....
...
GLVAR has been tracking fewer foreclosures and short sales – which occur when a lender agrees to sell a home for less than what the borrower owes on the mortgage. In December, 20.7 percent of all existing local home sales were short sales, down from 21 percent in November. Another 8.5 percent of all December sales were bank-owned properties, up from 7 percent in November.

Of the 40,242 existing residential properties sold in Southern Nevada during 2013, GLVAR reported that 62 percent were traditional sales. That’s a big jump from 2012, when only 37 percent of all 44,902 sales that year were traditional.

In December, GLVAR reported that 44.4 percent of all existing local homes sold were purchased with cash. That’s up from 43.7 in November but down from a peak of 59.5 percent set in February 2013. ...
The total number of properties listed for sale on GLVAR’s Multiple Listing Service decreased in December, with 13,303 single-family homes listed for sale at the end of the month. That’s down 6.6 percent from 14,240 single-family homes listed for sale at the end of November and down 8.9 percent from one year ago. GLVAR reported a total of 2,903 condos and townhomes listed for sale on its MLS in December, down 19.9 percent from 3,624 listed in November and down 16.5 percent from one year ago.

GLVAR also reported fewer available homes listed for sale without any sort of pending or contingent offer. By the end of December, GLVAR reported 6,587 single-family homes listed without any sort of offer. That’s down 3.6 percent from 6,830 such homes listed in November, but still up 78.6 percent from one year ago.
emphasis added

There are several key trends that we've been following:

1) Sales were up in December, but down about 19.6% year-over-year.

2) Conventional sales are up solidly year-over-year.  In December 2012, only 44.7% of all sales were conventional.  This year, in December 2013, 70.8% were conventional.  That is an increase in conventional sales of about 27% year-over-year.

3) The percent of cash sales is declining (investor buying appears to be declining).

4) and most interesting right now is that non-contingent inventory (year-over-year) is now increasing rapidly.  Non-contingent inventory is up 78.6% year-over-year!

Inventory has clearly bottomed in Las Vegas (A major theme for housing last year).  And fewer distressed sales and more inventory means price increases will slow.

by Calculated Risk on 1/08/2014 02:00:00 PM

From the Fed: Minutes of the Federal Open Market Committee, December 17-18, 2013 . Excerpt:

In their discussion of monetary policy in the period ahead, most members agreed that the cumulative improvement in labor market conditions and the likelihood that the improvement would be sustained indicated that the Committee could appropriately begin to slow the pace of its asset purchases at this meeting. However, members also weighed a number of considerations regarding such an action, including their degree of confidence in prospects for sustained above-potential economic growth, continued improvement in labor market conditions, and a return of inflation to its mandate-consistent level over time. Some also expressed concern about the potential for an unintended tightening of financial conditions if a reduction in the pace of asset purchases was misinterpreted as signaling that the Committee was likely to withdraw policy accommodation more quickly than had been anticipated. As a consequence, many members judged that the Committee should proceed cautiously in taking its first action to reduce the pace of asset purchases and should indicate that further reductions would be undertaken in measured steps. Members also stressed the need to underscore that the pace of asset purchases was not on a preset course and would remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the efficacy and costs of purchases. Consistent with this approach, the Committee agreed that, beginning in January, it would add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. While deciding to modestly reduce its pace of purchases, the Committee emphasized that its holdings of longer-term securities were sizable and would still be increasing, which would promote a stronger economic recovery by maintaining downward pressure on longer-term interest rates, supporting mortgage markets, and helping to make broader financial conditions more accommodative. The Committee also reiterated that it will continue its asset purchases, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In the view of one member, a reduction in the pace of purchases was premature and, before taking such a step, the Committee should wait for more convincing evidence that economic growth was rising faster than its potential and that inflation would return to the Committee's 2 percent objective.

In their discussion of forward guidance about the target federal funds rate, a few members suggested that lowering the unemployment threshold to 6 percent could effectively convey the Committee's intention to keep the target federal funds rate low for an extended period. However, most members wanted to make no change to the threshold and instead preferred to provide qualitative guidance to clarify that a range of labor market indicators would be used when assessing the appropriate stance of policy once the threshold had been crossed. A number of members thought that the forward guidance should emphasize the importance of inflation as a factor in their decisions. Accordingly, almost all members agreed to add language indicating the Committee's anticipation, based on its current assessment of additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments, that it would be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's longer-run objective. It was noted that this language might appear calendar-based rather than conditional on economic and financial developments, and one member objected to having forward guidance that might be seen as relatively inflexible in response to changes in members' views about the appropriate path of the target federal funds rate. However, those concerns generally were seen as outweighed by the benefit of avoiding tying the Committee's decision too closely to the unemployment rate alone, while still being clear about the Committee's intention to provide the monetary accommodation needed to support a return to maximum employment and stable prices.
emphasis added

by Calculated Risk on 1/08/2014 11:41:00 AM

Friday at 8:30 AM ET, the BLS will release the employment report for December. The consensus is for an increase of 200,000 non-farm payroll jobs in December, and for the unemployment rate to be unchanged at 7.0%.

Something to keep in mind - it is possible that the cold weather in December impacted the payroll report. Goldman Sachs economist Kris Dawsey wrote this week:

Adverse weather so far this winter―including record low temperatures set in parts of the country―has focused attention on the potential impact on economic data. For instance, our auto analysts note that disappointing December sales could in some part be attributed to unfavorable weather. Regarding the near-term data calendar, we expect that colder-than-normal weather during the survey period for the December payroll report probably pushed employment growth below its recent trend. (Our preliminary forecast is for a 175,000 gain in total payrolls to be released this Friday.)

Here is a summary of recent data:

• The ADP employment report showed an increase of 238,000 private sector payroll jobs in December. This was above expectations of 205,000 private sector payroll jobs added. The ADP report hasn't been very useful in predicting the BLS report for any one month. But in general, this suggests employment growth above expectations.

• The ISM manufacturing employment index increased in December to 56.9%, from 56.5% in November. A historical correlation between the ISM manufacturing employment index and the BLS employment report for manufacturing, suggests that private sector BLS manufacturing payroll jobs increased about 18,000 in November. The ADP report indicated a 19,000 increase for manufacturing jobs in December.

The ISM non-manufacturing employment index increased in December to 55.8% from 52.5% in November. A historical correlation between the ISM non-manufacturing index and the BLS employment report for non-manufacturing, suggests that private sector BLS reported payroll jobs for non-manufacturing increased by about 227,000 in December.

Taken together, these surveys suggest around 245,000 jobs added in December - above the consensus forecast.

• Initial weekly unemployment claims averaged close to 358,000 in December. This was up sharply from an average of 324,000 in November, but about the same as the 358,000 average in October.   For the BLS reference week (includes the 12th of the month), initial claims were at 380,000; the highest level since March.

This suggests more layoffs, and possibly fewer net payroll jobs added than the consensus forecast.

• The final December Reuters / University of Michigan consumer sentiment index increased to 82.5 from the October reading of 75.1. This is frequently coincident with changes in the labor market, but in this case sentiment is recovering from the government shutdown.

• The small business index from Intuit showed a 20,000 increase in small business employment in December. This is the largest increase in this index since May, and suggests a pickup in small business hiring.

• Conclusion: As usual the data was mixed. The ADP report was higher in December than in November, and the ISM surveys suggest a larger increase in payrolls.  Consumer sentiment increased (recovering from government shutdown).  Also the Intuit small business index showed a pickup in hiring.

However weekly claims for the reference week were at the highest level since March (possibly weather related), and this suggests weather impacted the December employment report.

There is always some randomness to the employment report, but my guess is the report will be under the consensus forecast of 200,000 nonfarm payrolls jobs added in December.

by Calculated Risk on 1/08/2014 09:42:00 AM

Reis reported that the vacancy rate for regional malls declined to 7.9% in Q4, down from 8.2% in Q3. This is down from a cycle peak of 9.4% in Q3 2011.

For Neighborhood and Community malls (strip malls), the vacancy rate was declined to 10.4%, down from 10.5% in Q3. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011.

Comments from Reis Senior Economist Ryan Severino:

[Strip Malls] The national vacancy rate for neighborhood and community shopping centers declined by 10 basis points during the fourth quarter. This was a slight improvement versus last quarter when vacancy was unchanged, but more or less in line with the pace of improvement since the market began to recover two years ago. ... Vacancies for neighborhood and community centers now stand at 10.4%, down 30 basis points during 2013, and down 70 basis points from the historical peak vacancy rate of 11.1% which was recorded over two years ago, during the third quarter of 2011. Yet there are some modestly hopeful signs.

Construction during the fourth quarter was the highest since the fourth quarter of 2011 while net absorption was the highest since the fourth quarter of 2007. The fact that net absorption exceeded construction by roughly 2.5 million SF during the quarter is certainly a heartening sign. This indicates that there is some semblance of demand for existing inventory and not simply the addition of pre‐leased space in the market.
...
[Regional] Malls continue to be the outperformers during the retail market recovery. As of the fourth quarter mall vacancies stand at 7.9%, down 30 basis points from the third quarter, down 70 basis points during 2013, and down 150 basis points from the historical high level reached during the third quarter of 2011.

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.

For strip malls, absorption has increased (highest since 2007), but new construction has increased too keeping the overall vacancy rate high.  Some areas of the country are recovering faster than others (malls aren't transportable!), so there are areas with new construction while other areas are still struggling.

Mall vacancy data courtesy of Reis.