by Calculated Risk on 2/05/2014 09:17:00 PM

From Tim Duy: No End To Tapering Yet. Excerpt:

I don't think the Fed believes that the end of asset purchases is impacting global markets because they are convinced that tapering is not tightening. If it is tightening, then why should global markets react? And even if it was tightening, the Fed wouldn't see it as their problem in the first place. ...

Bottom Line: The Fed isn't ready to change course. Recent turbulence is enough to peak their curiosity, not enough to suggest that tapering was premature.

We have seen a few weak economic reports recently such as the December employment report, auto sales in January, and the ISM manufacturing survey for January. But I don't think the recent weakness is a significant concern for the Fed - unless the weakness continues.

Thursday:
• Early: the Trulia Price Rent Monitors for January. 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 decrease to 337 thousand from 348 thousand.

• Also at 8:30 AM, the Trade Balance report for December from the Census Bureau. The consensus is for the U.S. trade deficit to increase to $36.0 billion in December from $34.3 billion in November.

by Calculated Risk on 2/05/2014 04:10:00 PM

From the Federal Reserve: The January 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices

The January 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months. Domestic banks, on balance, reported having eased their lending standards on many types of business and consumer loans and having experienced increases in loan demand, on average, over the past three months.

Regarding loans to businesses, the January survey results generally indicated that, on balance, banks eased their lending policies for commercial and industrial (C&I) loans to firms of all sizes and experienced stronger demand for such loans over the past three months. ...

On net, domestic institutions also reported having eased standards for most types of commercial real estate (CRE) loans and having experienced stronger demand for such loans.
...
Changes in standards and terms on, and demand for, loans to households were mixed. The survey results indicated that a modest fraction of large banks had eased standards on prime residential real estate loans, but a similar fraction of small banks had tightened standards on such loans. A moderate fraction of banks reported, on balance, weaker demand for prime mortgage loans to purchase homes, and a large net fraction reported weaker demand for nontraditional mortgage loans. Demand for home equity lines of credit (HELOCs) was little changed. Respondents indicated that they had eased standards on credit card loans, auto loans, and other consumer loans. emphasis added

Click on graph for larger image.

Here are some charts from the Fed.

This graph shows the change in lending standards and for CRE (commercial real estate) loans.

Banks are loosening their standards for CRE loans, and for various categories of CRE (right half of graph).

The second graph shows the change in demand for CRE loans.

Banks are seeing a pickup in demand for all categories of CRE.

This suggests that we will see an increase in commercial real estate development in the near future.

by Calculated Risk on 2/05/2014 12:54:00 PM

Friday at 8:30 AM ET, the BLS will release the employment report for January. The consensus is for an increase of 181,000 non-farm payroll jobs in January, and for the unemployment rate to be unchanged at 6.7%.

Something to keep in mind - the cold weather clearly impacted the December payroll report, and although the weather was unusually bad in January too, the weather was close to normal during the BLS reference week. Goldman Sachs economist Jan Hatzius wrote last Friday:

Although the month of January as a whole was quite cold, the payroll survey week was actually somewhat warmer than normal ... Even excluding the weather impact, the December employment gain looks to be about 50,000 below the recent trend. In our view, this is implausibly weak relative to other job market measures ... This could result in a bounceback to an above-trend pace even outside the weather impact, although it is also possible that the December reading will be revised up.

Here is a summary of recent data:

• The ADP employment report showed an increase of 175,000 private sector payroll jobs in January. This was close to expectations of 170,000 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 close to expectations.

• The ISM manufacturing employment index decreased in January to 52.3%, from 55.8% in December. A historical correlation between the ISM manufacturing employment index and the BLS employment report for manufacturing, suggests that private sector BLS manufacturing payroll jobs decreased about 7,000 in January. The ADP report indicated a 12,000 decrease for manufacturing jobs in January

The ISM non-manufacturing employment index increased in January to 56.4% from 55.6% in December. 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 243,000 in January.

Taken together, these surveys suggest around 236,000 jobs added in January - above the consensus forecast.

• Initial weekly unemployment claims averaged close to 333,000 in January. This was down from an average of 359,000 in December.   For the BLS reference week (includes the 12th of the month), initial claims were at 329,000; this was down sharply from 380,000 during the reference week in December.

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

• The final January Reuters / University of Michigan consumer sentiment index decreased to 81.2 from the December reading of 82.5. This is frequently coincident with changes in the labor market, but there are other factors too.

• The small business index from Intuit showed a 10,000 increase in small business employment in January. This is still pretty low.

• Conclusion: As usual the data was mixed. The ADP report was lower in January compared to December, the Intuit small business index showed sluggish hiring, and consumer sentiment decreased slightly in January.

However weekly claims for the reference week were down sharply, and the ISM surveys suggest a larger increase in payrolls.

There is always some randomness to the employment report, but my guess is the report will be over the consensus forecast of 181,000 nonfarm payrolls jobs added in January.   Note: I took the under in December, took the consensus in November (close), and over in October, so I'm probably due to be wrong!!

by Calculated Risk on 2/05/2014 10:00:00 AM

The January ISM Non-manufacturing index was at 54.0%, up from 53.0% in December. The employment index increased in January to 56.4%, up from 55.6% in December. Note: Above 50 indicates expansion, below 50 contraction.

From the Institute for Supply Management: January 2014 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in January for the 48th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, CPSM, C.P.M., CFPM, chair of the Institute for Supply Management® Non-Manufacturing Business Survey Committee. "The NMI® registered 54 percent in January, 1 percentage point higher than the seasonally adjusted reading of 53 percent registered in December. The Non-Manufacturing Business Activity Index increased to 56.3 percent, which is 2 percentage points higher than the seasonally adjusted reading of 54.3 percent reported in December, reflecting growth for the 54th consecutive month and at a faster rate. The New Orders Index increased to 50.9 percent, 0.5 percentage point higher than the seasonally adjusted reading of 50.4 registered in December. The Employment Index increased 0.8 percentage point to 56.4 percent from the December seasonally adjusted reading of 55.6 percent and indicates growth in employment for the 25th consecutive month and at a faster rate. The Prices Index increased 2.4 percentage points from the December seasonally adjusted reading of 54.7 percent to 57.1 percent, indicating prices increased at a faster rate in January when compared to December. According to the NMI®, eleven non-manufacturing industries reported growth in January. The majority of respondents' comments reflect an improvement in business conditions. Some of the respondents indicate that weather conditions have impacted their business. There remains a bit of uncertainty about the overall economy for some of the survey respondents; however, the majority feel positive about continued economic growth."
emphasis added

Click on graph for larger image.

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

This was close to the consensus forecast of 53.9% and indicates faster expansion in January than in December. 

The increase in the new orders index and the stronger employment index are positives.

by Calculated Risk on 2/05/2014 08:20:00 AM

From ADP:

Private sector employment increased by 175,000 jobs from December to January according to the January ADP National Employment Report®. ... The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis.
...
Mark Zandi, chief economist of Moody’s Analytics, said, "Cold and stormy winter weather continued to weigh on the job numbers. Underlying job growth, abstracting from the weather, remains sturdy. Gains are broad based across industries and company sizes, the biggest exception being manufacturing, which shed jobs, but that is not expected to continue.”

This was at the consensus forecast for 170,000 private sector jobs added in the ADP report. 

Note: ADP hasn't been very useful in directly predicting the BLS report on a monthly basis, but it might provide a hint. The BLS report for January will be released on Friday.

by Calculated Risk on 2/05/2014 07:03:00 AM

From the MBA: Mortgage Applications Increase Slightly in Latest MBA Weekly Survey

Mortgage applications increased 0.4 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 31, 2014. ...

The Refinance Index increased 3 percent from the previous week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier. ...
...
The average contract rate declined for all loan products in the survey. Contract rates were at their lowest level since November 2013, except for the 5/1 ARM, which was at the lowest level since December 2013.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.47 percent from 4.52 percent, with points decreasing to 0.25 from 0.40 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.


The first graph shows the refinance index.

The refinance index is down 67% from the levels in May 2013.

With the mortgage rate increases, refinance activity will be significantly lower in 2014 than in 2013.


The second graph shows the MBA mortgage purchase index.  

The 4-week average of the purchase index is now down about 14% from a year ago.

The purchase index is probably understating purchase activity because small lenders tend to focus on purchases, and those small lenders are underrepresented in the purchase index.

by Calculated Risk on 2/04/2014 07:47:00 PM

Here is an optimistic outlook from NAHB economist David Crowe:

"My single-family forecast for 2014 is pretty aggressive--822,000 starts which is likely 200,000 more than 2013," said NAHB Chief Economist David Crowe. "There are five key points to the turnaround. Consumers are back, pent-up demand is emerging, there is a growing need for new construction, distressed sales are diminishing and builders see it."

Consumer confidence has returned to pre-recession levels and household balance sheets are on the mend. ...

Meanwhile, new-home sales are averaging just 8.7 percent of total home sales, barely half the historical average of 16.1 percent. ...

NAHB is forecasting 1.15 million total housing starts in 2014, up 24.5 percent from last year's total of 928,000 units.

Single-family production is projected to rise 32 percent in 2014 to 822,000 units and surge an additional 41 percent to 1.16 million units next year.

NAHB is anticipating 333,000 multifamily starts in 2014, up 9 percent from 306,000 last year.

Single-family home sales are projected to hit 584,000 this year, a 35.9 percent increase above last year's 430,000 sales

For 2012, Crowe forecast 360 thousand new home sales (actual was 368 thousand) and 501 single family starts (actual was 535 thousand). For 2013, Crowe forecast 447 thousand new home sales (actual was 428 thousand), and 641 thousand single family starts (actual was 618 thousand).  So he has been pretty close ... but his 2014 forecast is "pretty aggressive"!

Wednesday:
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 8:15 AM, the ADP Employment Report for January. This report is for private payrolls only (no government). The consensus is for 170,000 payroll jobs added in January, down from 238,000 in December.

• At 10:00 AM, the ISM non-Manufacturing Index for January. The consensus is for a reading of 53.9, up from 53.0 in December. Note: Above 50 indicates expansion, below 50 contraction.

by Calculated Risk on 2/04/2014 05:14:00 PM

The BEA released the underlying details for the Q4 advance GDP report.

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 one 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 $177 billion Seasonally Adjusted Annual Rate (SAAR) in Q4 (about 1.0% of GDP), still above the level of investment in single family structures of $174 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 53% 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 56% 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 64%.   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 - but that investment is starting to increase. And residential investment is increasing, but from a very low level.

by Calculated Risk on 2/04/2014 12:18:00 PM

Here is another weekly update on housing inventory ... for the 16th consecutive week housing inventory is up year-over-year (but not by much).  This suggests inventory bottomed early in 2013.

There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then usually peaking in mid-to-late summer.

The Realtor (NAR) data is monthly and released with a lag (the most recent data was for December).  However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years.

Click on graph for larger image.

This graph shows the Housing Tracker reported weekly inventory for the 54 metro areas for 2010, 2011, 2012, 2013 and 2014.

In 2011 and 2012, inventory only increased slightly early in the year and then declined significantly through the end of each year.

Inventory in 2014 is now 2.7% above the same week in 2013 (red is 2014, blue is 2013).

Inventory is still very low - and barely up year-over-year - but this increase in inventory should slow house price increases. 

Note: One of the key questions for 2014 will be: How much will inventory increase?  My guess is inventory will be up 10% to 15% year-over-year by the end of 2014 (inventory would still be below normal).

by Calculated Risk on 2/04/2014 10:52:00 AM

The Congressional Budget Office (CBO) released their new The Budget and Economic Outlook: 2014 to 2024

The federal budget deficit has fallen sharply during the past few years, and it is on a path to decline further this year and next year. CBO estimates that under current law, the deficit will total $514 billion in fiscal year 2014, compared with $1.4 trillion in 2009. At that level, this year’s deficit would equal 3.0 percent of the nation’s economic output, or gross domestic product (GDP)—close to the average percentage of GDP seen during the past 40 years.

As it does regularly, CBO has prepared baseline projections of what federal spending, revenues, and deficits would look like over the next 10 years if current laws governing federal taxes and spending generally remained unchanged. Under that assumption, the deficit is projected to decrease again in 2015—to $478 billion, or 2.6 percent of GDP. After that, however, deficits are projected to start rising—both in dollar terms and relative to the size of the economy—because revenues are expected to grow at roughly the same pace as GDP whereas spending is expected to grow more rapidly than GDP. In CBO’s baseline, spending is boosted by the aging of the population, the expansion of federal subsidies for health insurance, rising health care costs per beneficiary, and mounting interest costs on federal debt. By contrast, all federal spending apart from outlays for Social Security, major health care programs, and net interest payments is projected to drop to its lowest percentage of GDP since 1940 (the earliest year for which comparable data have been reported).
emphasis added

The CBO projects the deficit will decline further in 2014 and 2015, and be below 3% of GDP for the next four years.

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 ten years based on estimates from the CBO.

After 2015, the deficit will start to increase again according to the CBO.

From a policy perspective and using these projections, further short term deficit reduction is not a priority.