by Calculated Risk on 3/04/2015 10:40:00 AM

The Federal Reserve released the transcripts for the 2009 FOMC meetings today. Here is SF Fed President Janet Yellen in June 2009:

Thank you, Mr. Chairman. At our meeting in late April, we had begun to see hopeful signs of impending economic recovery, and subsequent economic and financial developments have strengthened the view that the economy is bottoming out. Even so, the outlook over the next several years remains disturbing. My modal forecast shows economic growth resuming next quarter, but I expect the recovery to be quite gradual. The output and employment gaps are, at a minimum, quite large, so it will take a long time to regain full employment under current monetary and fiscal policy settings. Although downside risks have diminished, I remain concerned that the recovery is still fragile.
...
And, of course, labor markets continue to deteriorate badly. It’s a sign of how bad things really are that near euphoria broke out with the announcement of 345,000 nonfarm jobs lost in May. The unemployment rate is soaring month by month, and, even worse, it appears to understate the true extent of the deterioration, given the unusually high incidence of permanent, as opposed to temporary, layoffs, and the unprecedented increase in involuntary part-time work. ...

My forecasts for output and employment are similar to the Greenbook’s, so I won’t go into the details. I do want to emphasize that I anticipate a rather sluggish recovery, not the rapid V-shaped recovery we have frequently seen following deep recessions in the past. The process of balance sheet repair that households and financial institutions are undergoing will result in subdued spending for an extended period, and monetary policies here and abroad are not able to play as big a role as usual in promoting recovery because of the constraint of the zero lower bound on short-term interest rates.

... [E]ven under the typical recovery simulation, which has much stronger growth than in the baseline, the unemployment rate remains well above the 5 percent NAIRU by the end of 2011, and inflation hovers around 1 percent. This outcome reflects the large unemployment and GDP gaps estimated for the first quarter. ...

So, to conclude, if the recovery is as slow as the Greenbook and I expect, it will take quite a number of years to get back to potential output. As a result, I expect core inflation to drift lower over the next few years, falling below the 2 percent rate that seems best to me.

Note that Yellen correctly forecast that the recovery was starting (this was June 2009), but that the recovery would be sluggish - not V-shaped - because of the need for "balance sheet repair" (I made the same argument in mid-2009), and that inflation would be low for some time. Many analysts were forecasting a strong recovery (ignoring the reasons for the recessions) and high inflation.

by Calculated Risk on 3/04/2015 10:00:00 AM

The February ISM Non-manufacturing index was at 56.9%, up from 56.7% in January. The employment index increased in February to 56.4%, up from 51.6% in January. Note: Above 50 indicates expansion, below 50 contraction.

From the Institute for Supply Management: February 2015 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in February for the 61st 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® (ISM®) Non-Manufacturing Business Survey Committee. "The NMI® registered 56.9 percent in February, 0.2 percentage point higher than the January reading of 56.7 percent. This represents continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased to 59.4 percent, which is 2.1 percentage points lower than the January reading of 61.5 percent, reflecting growth for the 67th consecutive month at a slower rate. The New Orders Index registered 56.7 percent, 2.8 percentage points lower than the reading of 59.5 percent registered in January. The Employment Index increased 4.8 percentage points to 56.4 percent from the January reading of 51.6 percent and indicates growth for the 12th consecutive month. The Prices Index increased 4.2 percentage points from the January reading of 45.5 percent to 49.7 percent, indicating prices contracted in February for the third consecutive month. According to the NMI®, 14 non-manufacturing industries reported growth in February. Comments from respondents have increased in regards to the affects of the reduction in fuel costs and the impact of the West Coast port labor issues on the continuity of supply. Overall, supply managers feel mostly positive about the direction of the economy."
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 56.5% and suggests slightly faster expansion in February than in January.  Overall this was a solid report.

by Calculated Risk on 3/04/2015 08:19:00 AM

From ADP:

Private sector employment increased by 212,000 jobs from January to February according to the February 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.
...
Goods-producing employment rose by 31,000 jobs in February, down from 45,000 jobs gained in January. The construction industry added 31,000 jobs, the same number as last month. Meanwhile, manufacturing added 3,000 jobs in February, well below January’s 15,000.

Service-providing employment rose by 181,000 jobs in February, down from 206,000 in January. ...

Mark Zandi, chief economist of Moody’s Analytics, said, “Job growth is strong, but slowing from the torrid pace of recent months. Job gains remain broad-based, although the collapse in oil prices has begun to weigh on energy-related employment. At the current pace of growth, the economy will return to full employment by mid-2016.”

This was below the consensus forecast for 220,000 private sector jobs added in the ADP report. 

The BLS report for February will be released on Friday and the consensus is for 230,000 non-farm payroll jobs added in February.

by Calculated Risk on 3/04/2015 07:00:00 AM

From the MBA: Mortgage Applications Little Changed in Latest MBA Weekly Survey

Mortgage applications increased 0.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 27, 2015. ...

The Refinance Index increased 1 percent from the previous week. The seasonally adjusted Purchase Index decreased 0.2 percent from one week earlier.
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.96 percent from 3.99 percent, with points decreasing to 0.30 from 0.33 (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.

2014 was the lowest year for refinance activity since year 2000.

2015 will probably see more refinance activity than in 2014, but not a large refinance boom.

The second graph shows the MBA mortgage purchase index.  

According to the MBA, the unadjusted purchase index is essentially unchanged from a year ago.

by Calculated Risk on 3/03/2015 07:11:00 PM

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 February. This report is for private payrolls only (no government). The consensus is for 220,000 payroll jobs added in February, up from 213,000 in January.

• At 10:00 AM, the ISM non-Manufacturing Index for February. The consensus is for a reading of 56.5, down from 56.7 in January. Note: Above 50 indicates expansion.

• At 2:00 PM, Federal Reserve Beige Book, an informal review by the Federal Reserve Banks of current economic conditions in their Districts.

by Calculated Risk on 3/03/2015 02:36:00 PM

Based on a WardsAuto estimate, light vehicle sales were at a 16.16 million SAAR in February. That is up 5.4% from February 2014, and down 2.4% from the 16.55 million annual sales rate last month.  The comparison to February 2014 was easy (sales were impacted by the severe weather last year).

From John Sousanis at Wards Auto: February 2015 U.S. LV Sales Thread: SAAR Falls to 10-Month Low

U.S. automakers sold 1.252 million light vehicles in February, a 5.4% increase in daily sales that left the seasonally adjusted annual sales rate (SAAR) at a 10-month low of just 16.16 million-units.
...
Historic cold in parts of the country likely played a role in the shortfall, along with lower than expected fleet sales and some inventory shortages of key models.

GM was the No.1 auto seller in February, accounting for 18.5% of sales, followed by Toyota (14.4%) and Ford (14.1%).

Click on graph for larger image.

This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for February (red, light vehicle sales of 16.16 million SAAR from WardsAuto).

This was below the consensus forecast of 16.7 million SAAR (seasonally adjusted annual rate).

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Note: dashed line is current estimated sales rate.

Although below consensus, this was the tenth consecutive month with a sales rate over 16 million.

by Calculated Risk on 3/03/2015 12:29:00 PM

CR Note: The following is a post I wrote in January 2007 that is hopefully worth repeating.  I warned about always being short term bearish, even though most of my posts were very bearish back then!  I was predicting a recession would start in 2007 (the Great Recession started in December 2007), however I was still optimistic about the future.

In the comments, and occasionally via email, people have expressed surprise at my positive long term outlook. This reaction is probably understandable since most of my posts have a bearish economic tone.

In my view, both history and logic suggest that the economic future will be brighter. Economic growth has been the norm, and in the long term, the markets almost always reward the bullish investor.

It's human nature to be concerned about specific events, but historically the economy has recovered quickly from trauma. Concerned about the bird flu? Look at the 1918 flu pandemic that was followed by the Roaring '20s. Concerned about an economic Depression? The Great Depression was the worst economic event in recent times, and the economy was fine after WWII.

These are serious, but relatively short term events for the general economy.

Logically this makes sense. Economic growth is dependent on innovation and population growth. And innovation will almost certainly continue. In fact, the only real threats to the long term economy are massively destructive events (like a major meteor strike) and impediments to innovation.

It's not worth worrying about very low probability events like super volcanoes or meteor strikes. However higher probability events, like the potential impact from global warming, is probably a concern. But once again, even with global warming, innovation will most likely (hopefully) save the day.

I'll discuss possible impediments to innovation in a future post.

So why are my posts generally bearish? Simple - because I am writing about the short term. And in the short term I'm concerned about the impact of the housing bust on the general economy. And a short term aberration (a recession) to the long term trend is interesting and worth discussing. Clearly I'm bearish in the short term, and I feel the "odds of a recession" in 2007 "are at least a coin flip".

But we have to guard against always being short term bearish and long term bullish. That doesn't work from an investment perspective, since we will always be cautious in each successive short term - and the sum of many short terms is the long term. Intelligent people can always make a strong short term bearish argument, so a pattern of always being short term bearish is a serious risk - just something to consider.

Luckily, as I've been noting for some time, we will probably know by mid-2007 if the housing bust is going to significantly impact the general economy. I believe it will, so the next few months should be interesting.

Best to all.

by Calculated Risk on 3/03/2015 10:05:00 AM

Notes: This CoreLogic House Price Index report is for January. The recent Case-Shiller index release was for December. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA).

From CoreLogic: Home Prices Up 5 Percent Year Over Year for December 2014

CoreLogic® ... today released its January 2015 CoreLogic Home Price Index (HPI®) which shows that home prices nationwide, including distressed sales, increased 5.7 percent in January 2015 compared to January 2014. This change represents 35 months of consecutive year-over-year increases in home prices nationally. On a month-over-month basis, home prices nationwide, including distressed sales, increased by 1.1 percent in January 2015 compared to December 2014.

Including distressed sales, 27 states and the District of Columbia are at or within 10 percent of their peak. Four states, New York (+5.6), Wyoming (+8.3 percent), Texas (+8.3 percent) and Colorado (+9.1 percent), reached new highs in the home price index since January 1976 when the index starts.

Excluding distressed sales, home prices increased 5.6 percent in January 2015 compared to January 2014 and increased 1.4 percent month over month compared to December 2014. ...

“We continue to see a strong and progressive uptick in home prices as we enter 2015. We project home prices will continue to rise throughout the year and into 2016,” said Anand Nallathambi, president and CEO of CoreLogic. “A dearth of supply in many parts of the country is a big factor driving up prices. Many homeowners have taken advantage of low rates to refinance their homes, and until we see sustained increases in income levels and employment they could be hunkered down so supplies may remain tight. Demand has picked up as low mortgage rates and the cut in the FHA annual insurance premium reduce monthly payments for prospective homebuyers.”
emphasis added

Click on graph for larger image.

This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.

The index was up 1.1% in January, and is up 5.7% over the last year.

This index is not seasonally adjusted, and this was a solid month-to-month increase.


The second graph is from CoreLogic. The year-over-year comparison has been positive for thirty five consecutive months suggesting house prices bottomed early in 2012 on a national basis (the bump in 2010 was related to the tax credit).

The YoY increase has mostly moved sideways over the last six months.

by Calculated Risk on 3/02/2015 07:58:00 PM

On mortgage rates from Matthew Graham at Mortgage News Daily: Mortgage Rates Back up to 3.875 Percent

What had been 3.75% on Friday is now 3.875% in terms of the most prevalent conventional 30yr fixed rates for top tier scenarios.

CR Note: The Ten Year yield increased to 2.08% today from 2.00% on Friday.

Tuesday:
• All day, Light vehicle sales for February. The consensus is for light vehicle sales to increase to 16.7 million SAAR in February from 16.6 million in January (Seasonally Adjusted Annual Rate).

• At 8:15 PM, Speech, Fed Chair Janet L. Yellen, Bank Regulation and Supervision, At the Citizens Budget Commission's Annual Awards Dinner, New York, New York

by Calculated Risk on 3/02/2015 03:13:00 PM

Fannie Mae reported today that the Single-Family Serious Delinquency rate declined slightly in January to 1.86% from 1.89% in December. The serious delinquency rate is down from 2.33% in January 2014, and this is the lowest level since September 2008.

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

Last week, Freddie Mac reported that the Single-Family serious delinquency rate was declined in January to 1.86%. Freddie's rate is down from 2.34% in January 2014, and is at the lowest level since December 2008. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.

Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure".

Click on graph for larger image

The Fannie Mae serious delinquency rate has fallen 0.47 percentage points over the last year - the pace of improvement has slowed - and at that pace the serious delinquency rate will be under 1% in late 2016.

The "normal" serious delinquency rate is under 1%, so maybe serious delinquencies will be close to normal at the end of 2016.  This elevated delinquency rate is mostly related to older loans - the lenders are still working through the backlog, especially in judicial foreclosure states like Florida.