by Calculated Risk on 5/14/2015 06:43:00 PM

From Professor Tim Duy: Get Used To It

Bottom Line: We probably need to get used to the occasional negative GDP growth numbers in the context of overall expansion for the US economy. The concept of "stall speed" will need to be revised accordingly.

Yes, due to demographics, 2% GDP growth is the new 4%.

Friday:
• At 8:30 AM ET, the NY Fed Empire State Manufacturing Survey for May. The consensus is for a reading of 5.0, up from -1.2 last month (above zero is expansion).

• At 9:15 AM, the The Fed will release Industrial Production and Capacity Utilization for April. The consensus is for no change in Industrial Production, and for Capacity Utilization to be unchanged at 78.4%.

At 10:00 AM, the University of Michigan's Consumer sentiment index (preliminary for May). The consensus is for a reading of 95.8, down from 95.9 in April.

by Calculated Risk on 5/14/2015 03:21:00 PM

Earlier I mentioned that the 4-week moving average of weekly claims was the lowest since April 2000. And if the average falls just a little further, the average will be the lowest in over 40 years.

Of course that doesn't take into account the size of the labor force.

The following graph shows the 4-week moving average of weekly claims since 1967 as a percent of the labor force.


Click on graph for larger image.

As a percent of the labor force, weekly claims are at an all time record low.

Note: There is a general downward slope to weekly claims - interrupted by periods of recession.  The downward slope is probably related to changes in hiring practices - such as background checks and drug tests, and maybe better planning.

by Calculated Risk on 5/14/2015 01:11:00 PM

Here is a price index for commercial real estate that I follow. 

From CoStar: Property Prices Surge Upward In the First Quarter Of 2015

OMPOSITE PRICE INDICES CONTINUED TO RISE IN THE FIRST QUARTER OF 2015. ... The value-weighted U.S. Composite Index, which is influenced by high-quality assets in core markets, advanced by 4.7% in the first quarter of 2015 and is now 11% above the previous peak in 2007. The equal-weighted U.S. Composite Index, which weighs each transaction equally and therefore reflects the impact from more numerous smaller deals, rose 4.8% in the first quarter of 2015, although it remains 10% below its previous peak level.

ALL MAJOR PROPERTY TYPE AND REGIONAL INDICES ADVANCED AT DOUBLE- DIGIT ANNUAL RATES THROUGH MARCH 2015. As the CRE recovery extended to more markets and property types, all major property types and regional sectors posted double-digit annual gains through March 2015. The Multifamily Index has already fully recovered, eclipsing its previous peak, while the Retail and Industrial Indices advanced to within 10% of their previous peak levels and the Office Index remained 15% below its previous high-water mark in 2007. Among CCRSI’s regional indices, strong investor demand in core coastal metros propelled the Northeast Composite Index 6.1% above its prior peak, while the West Composite Index moved to within 8.4% of its prior peak in March 2015.
emphasis added

Click on graph for larger image.

This graph from CoStar shows the the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index indexes.

 The value weighted index is at a record high, but the equal weighted is still 10.0% below the pre-recession peak.

There are indexes by sector and region too.

The second graph shows the percent of distressed "pairs".

The distressed share is down from over 35% at the peak, but still a little elevated.

Note: These are repeat sales indexes - like Case-Shiller for residential - but this is based on far fewer pairs.

by Calculated Risk on 5/14/2015 09:55:00 AM

An FHFA paper from Alex Bogin, Senior Economist; Stephen Bruestle, Lecturer; William M. Doerner, Senior ​Economist How Low Can House Prices Go? Estimating a Conservative Lower Bound

The researchers have developed a conservative lower bound (CLB) for house prices. This tool could be used as part of stress testing banks (and could be applied to other countries like Canada and Australia that might have housing bubbles right now).

Abstract:

We develop a theoretically-based statistical technique to identify a conservative lower bound for house prices. Leveraging a model based upon consumer and investor incentives, we are able to explain the depth of housing market downturns at both the national and state level over a variety of market environments. This approach performs well in several historical back tests and has strong out-of-sample predictive ability. When back-tested, our estimation approach does not understate house price declines in any state over the 1987 to 2001 housing cycle and only understates declines in three states during the most recent financial crisis. This latter result is particularly noteworthy given that the post-2001 estimates are performed outof- sample. Our measure of a conservative lower bound is attractive because it (1) provides a leading indicator of the severity of future downturns and (2) allows trough estimates to dynamically adjust as markets conditions change. This estimation technique could prove particularly helpful in measuring the credit risk associated with portfolios of mortgage assets as part of evaluating static stress tests or designing dynamic stress tests.

Conclusion:

Since the recent financial crisis, there has been an increasing focus on improving stress testing. Thus far, the stressed housing paths have been largely static in nature, essentially ignoring current market conditions. This paper proposes a conservative lower bound with a theoretical foundation that is supported by empirical evidence. Our CLB approach provides a dynamic path that would vary with market conditions. The regression results compare the efficacy of this approach relative to the historical precedent approach of Smith & Weiher across two different housing cycles where the underlying data cover house price transactions across the United States. As demonstrated, the CLB is able to adapt successfully to changing market conditions and acts as a leading indicator for future market downturns. In addition to accurately capturing the severity of downturns, it also allows estimated troughs to recover as markets return to baseline conditions. The approach performs well in both in-sample and out-of-sample historical back-testing. Although it is more complicated to implement than the Smith & Weiher method, the CLB reduces the potential for understating the extent of future state-level house price declines, allowing for more accurate stress testing.

I'd like to see state and local estimates of the CLB right now!

by Calculated Risk on 5/14/2015 08:36:00 AM

The DOL reported:

In the week ending May 9, the advance figure for seasonally adjusted initial claims was 264,000, a decrease of 1,000 from the previous week's unrevised level of 265,000. The 4-week moving average was 271,750, a decrease of 7,750 from the previous week's unrevised average of 279,500. This is the lowest level for this average since April 22, 2000 when it was 266,750.

There were no special factors impacting this week's initial claims.

The previous week was unrevised.

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 decreased to 271,750.

This was well below the consensus forecast of 276,000, and the low level of the 4-week average suggests few layoffs. This is the lowest 4-week average in 15 years (since April 2000).

Note: If the 4-week average falls to 266,000, it will be the lowest in 40 years!

by Calculated Risk on 5/13/2015 06:32:00 PM

File under "the beatings will continue until morale improves" ...

From Bloomberg: Greece’s Creditors Said to Seek 3 Billion-Euro Budget Cuts

Greece’s anti-austerity government needs to raise at least three billion euros ($3.4 billion) through additional fiscal measures by the end of this year to meet the minimum budget targets acceptable by creditors, an official with knowledge of the discussions said.

The reductions would bring the primary budget surplus in 2015 to just over 1 percent of gross domestic product, a target Greek Interior Minister Nikos Voutsis said today is acceptable. Without any change in fiscal policy, Greece would end 2015 with a budget deficit of about 0.5 percent of GDP, the official said.

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 276 thousand from 265 thousand.

• Also at 8:30 AM, the Producer Price Index for April from the BLS. The consensus is for a 0.2% increase in prices, and a 0.1% increase in core PPI.

by Calculated Risk on 5/13/2015 02:26:00 PM

By request, here is an update on an earlier post through the April employment report.

NOTE: Several readers have asked if I could add a lag to these graphs (obviously a new President has zero impact on employment for the month they are elected). But that would open a debate on the proper length of the lag, so I'll just stick to the beginning of each term.

Note: We frequently use Presidential terms as time markers - we could use Speaker of the House, or any other marker.

Important: There are many differences between these periods. Overall employment was smaller in the '80s, however the participation rate was increasing in the '80s (younger population and women joining the labor force), and the participation rate is generally declining now.  But these graphs give an overview of employment changes.

First, here is a table for private sector jobs. The top two private sector terms were both under President Clinton.  Reagan's 2nd term saw about the same job growth as during Carter's term.  Note: There was a severe recession at the beginning of Reagan's first term (when Volcker raised rates to slow inflation) and a recession near the end of Carter's term (gas prices increased sharply and there was an oil embargo).

Term	Private Sector Jobs Added (000s)
Carter	9,041
Reagan 1	5,360
Reagan 2	9,357
GHW Bush	1,510
Clinton 1	10,885
Clinton 2	10,070
GW Bush 1	-844
GW Bush 2	381
Obama 1	2,018
Obama 2	6,0441
127 months into 2nd term: 10,745 pace.

The first graph shows the change in private sector payroll jobs from when each president took office until the end of their term(s). President George H.W. Bush only served one term, and President Obama is in the second year of his second term.

Mr. G.W. Bush (red) took office following the bursting of the stock market bubble, and left during the bursting of the housing bubble. Mr. Obama (blue) took office during the financial crisis and great recession. There was also a significant recession in the early '80s right after Mr. Reagan (yellow) took office.

There was a recession towards the end of President G.H.W. Bush (purple) term, and Mr Clinton (light blue) served for eight years without a recession.

Click on graph for larger image.

The first graph is for private employment only.

The employment recovery during Mr. G.W. Bush's (red) first term was sluggish, and private employment was down 844,000 jobs at the end of his first term.   At the end of Mr. Bush's second term, private employment was collapsing, and there were net 463,000 private sector jobs lost during Mr. Bush's two terms. 

Private sector employment increased slightly under President G.H.W. Bush (purple), with 1,510,000 private sector jobs added.

Private sector employment increased by 20,955,000 under President Clinton (light blue), by 14,717,000 under President Reagan (yellow), and 9,041,000 under President Carter (dashed green).

There were only 2,018,000 more private sector jobs at the end of Mr. Obama's first term.  Twenty seven months into Mr. Obama's second term, there are now 8,062,000 more private sector jobs than when he initially took office.

 A big difference between the presidencies has been public sector employment.  Note the bumps in public sector employment due to the decennial Census in 1980, 1990, 2000, and 2010. 

The public sector grew during Mr. Carter's term (up 1,304,000), during Mr. Reagan's terms (up 1,414,000), during Mr. G.H.W. Bush's term (up 1,127,000), during Mr. Clinton's terms (up 1,934,000), and during Mr. G.W. Bush's terms (up 1,744,000 jobs).

However the public sector has declined significantly since Mr. Obama took office (down 688,000 jobs). These job losses have mostly been at the state and local level, but more recently at the Federal level.  This has been a significant drag on overall employment.

And a table for public sector jobs. Public sector jobs declined the most during Obama's first term, and increased the most during Reagan's 2nd term.

Term	Public Sector Jobs Added (000s)
Carter	1,304
Reagan 1	-24
Reagan 2	1,438
GHW Bush	1,127
Clinton 1	692
Clinton 2	1,242
GW Bush 1	900
GW Bush 2	844
Obama 1	-702
Obama 2	301
127 months into 2nd term, 53 pace

Looking forward, I expect the economy to continue to expand through 2016 (at least), so I don't expect a sharp decline in private employment as happened at the end of Mr. Bush's 2nd term (In 2005 and 2006 I was warning of a coming recession due to the bursting of the housing bubble).

For the public sector, the cutbacks are clearly over at the state and local levels, and it appears cutbacks at the Federal level have slowed.  Right now I'm expecting some increase in public employment during Obama's 2nd term, but nothing like what happened during Reagan's second term.

Here is a table of the top three presidential terms for private job creation (they also happen to be the three best terms for total non-farm job creation).

Clinton's two terms were the best for both private and total non-farm job creation, followed by Reagan's 2nd term.

Currently Obama's 2nd term is on pace to be the 2nd best ever for private job creation.  However, with very few public sector jobs added, Obama's 2nd term is only on pace to be the third best for total job creation.

Note: Only 30 thousand public sector jobs have been added during the first twenty six months of Obama's 2nd term (following a record loss of 702 thousand public sector jobs during Obama's 1st term).  This is about 2% of the public sector jobs added during Reagan's 2nd term!

Top Employment Gains per Presidential Terms (000s)
Rank	Term	Private	Public	Total Non-Farm
1	Clinton 1	10,885	692	11,577
2	Clinton 2	10,070	1,242	11,312
3	Reagan 2	9,357	1,438	10,795
	Obama 21	6,044	30	6,074
	Pace2	10,745	53	10,798
127 Months into 2nd Term 2Current Pace for Obama's 2nd Term

The second table shows the jobs need per month for Obama's 2nd term to be in the top three presidential terms.

Average Jobs needed per month (000s) for Obama's 2nd Term
to Rank	Private	Total
#1	231	262
#2	192	249
#3	158	225

by Calculated Risk on 5/13/2015 12:04:00 PM

Another update ... during the recession, I wrote about the troubles in Las Vegas and included a chart of visitor and convention attendance: Lost Vegas.

Since then Las Vegas visitor traffic recovered to a new record high in 2014.

We only have data through March, but visitor traffic is slightly below the 2014 pace so far.

However convention attendance is only returning slowly. Here is the data from the Las Vegas Convention and Visitors Authority.  

Click on graph for larger image.

The blue bars are annual visitor traffic (left scale), and the red line is convention attendance (right scale). 

Through March, visitor traffic in 2015 is running 0.3% below 2014.

Convention traffic is up about 2% from last year, and is still way below the pre-recession peak.  In general, the gamblers are back - and the conventions are slowly returning.

It seemed like there were many housing related conventions during the housing bubble, so it may be some time before convention attendance hits a new high.

by Calculated Risk on 5/13/2015 08:41:00 AM

On a monthly basis, retail sales were unchanged from March to April (seasonally adjusted), and sales were up 0.9% from April 2014.

From the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $436.8 billion, virtually unchanged from the previous month, but 0.9 percent above April 2014. ... The February 2015 to March 2015 percent change was revised from +0.9 percent to +1.1 percent.

Click on graph for larger image.

This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).

Retail sales ex-gasoline were unchanged.

Retail sales ex-autos increased 0.1%. 

The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993.

Retail and Food service sales ex-gasoline increased by 3.6% on a YoY basis (0.9% for all retail sales).

The increase in April was below consensus expectations of a 0.2% increase, however March was revised up.

by Calculated Risk on 5/13/2015 07:00:00 AM

From the MBA: As Rates Climb, Refinance Applications Continue to Drop

Mortgage applications decreased 3.5 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 8, 2015. ...

The Refinance Index decreased 6 percent from the previous week. The seasonally adjusted Purchase Index decreased 0.2 percent from one week earlier. The unadjusted Purchase Index increased 0.1 percent compared with the previous week and was 12 percent higher than the same week one year ago.
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.00 percent, its highest level since March 2015, from 3.93 percent, with points increasing to 0.36 from 0.35 (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.

It would take much lower rates - below 3.5% - to see a significant refinance boom this year.

The second graph shows the MBA mortgage purchase index.  

According to the MBA, the unadjusted purchase index is 12% higher than a year ago.