by Calculated Risk on 10/12/2015 11:28:00 AM

Here is another graph on framing lumber prices. Early in 2013 lumber prices came close to the housing bubble highs.

The price increases in early 2013 were due to a surge in demand (more housing starts) and supply constraints (framing lumber suppliers were working to bring more capacity online).

Prices didn't increase as much early in 2014 (more supply, smaller "surge" in demand).

In 2015, even with the pickup in U.S. housing starts, prices are down year-over-year.  Note: Multifamily starts do not use as much lumber as single family starts, and there was a surge in multi-family starts.

Overall the decline in prices is probably due to more supply, and less demand from China.

Click on graph for larger image in graph gallery.

This graph shows two measures of lumber prices: 1) Framing Lumber from Random Lengths through early October 2015 (via NAHB), and 2) CME framing futures.

Right now Random Lengths prices are down about 22% from a year ago, and CME futures are down around 35% year-over-year.

by Calculated Risk on 10/12/2015 09:27:00 AM

Columbus Day 2008 was a crazy time ... A few headlines on my blog from Monday, October 13, 2008:

• Paulson to Meet with Bank CEOs Today

The 3 p.m. meeting is being called while most of the banking chiefs are in Washington for meetings of the World Bank and the International Monetary Fund. Invited to attend were banking executives including Ken Lewis, CEO of Bank of America, Jamie Dimon, CEO of J.P. Morgan Chase, Lloyd Blankfein, CEO of Goldman Sachs Group; John Mack, CEO of Morgan Stanley; and Vikram Pandit, CEO of Citigroup.

... one person familiar with the matter said Secretary Paulson is expected to discuss details of his new plan to take equity stakes in financial firms ...

• Federal Reserve and other central banks announce unlimited liquidity

In order to provide broad access to liquidity and funding to financial institutions, the Bank of England (BoE), the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank (SNB) are jointly announcing further measures to improve liquidity in short-term U.S. dollar funding markets.

• Foreclosures in Orange County

MDA DataQuick, in a special report prepared for the Orange County Register, found that as of early September there were more than 3,300 unsold foreclosures in the county. DataQuick looked at all foreclosures for the year ended in June, and checked to see how many had resold. It found 40 percent were unsold.

• Paul Krugman Wins Nobel Economics Prize

by Calculated Risk on 10/11/2015 07:29:00 PM

The Bond Market and Banks will be closed Monday in observance of the Columbus Day Holiday. The stock market will be open.

An excerpt from an article by Tim Duy: Fed Struggles With The High Water Mark

So where does all of this leave Fed policy? Confused, I think, like September when economists saw the outcome of that meeting as a coin toss. Don't expect communications to become much clearer. October is off the table (despite what Lacker might believe). They first need to decide if the last two months of jobs data were aberrations or signals of slowing job growth. They can't do that before October. And I am not confident they can do so by December. If we get two more reports hovering around 200k a month between now and December, matched with generally consistent data across other indicators, then December is on the table. That would indicate the economy is not coming off its high water mark without some help from the Fed. If jobs growth slows to 100k a month, again with a broad swath of generally consistent data, then we are looking at deep into 2016 before any hike. Around 150k is the gray area. They won't know if the economy is poised to head lower on its own, or if that is sufficient to contain inflationary pressures. They don't know if they should be tapping on the breaks or not. Risk management under the assumption of constrained inflation suggests they push off action until January or March. But they would not send such a clear message. Indeed, I suspect that more numbers like the last two will make the December meeting much like September's. That I fear is my current baseline - another close call in which the Fed concludes to take a pass.

Weekend:
• Schedule for Week of October 11, 2015

From CNBC: Pre-Market Data and Bloomberg futures: currently S&P futures are flat and DOW futures are down 10 (fair value).

Oil prices were up over the last week with WTI futures at $49.84 per barrel and Brent at $52.65 per barrel.  A year ago, WTI was at $86, and Brent was at $89 - so prices are down more than 40% year-over-year (a year ago that prices were falling).

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.31 per gallon (down about $0.90 per gallon from a year ago).

by Calculated Risk on 10/11/2015 11:36:00 AM

A few excerpts from a research piece by Goldman Sachs economist David Mericle: What We Have Here Is a Failure to Participate

[W] now expect the participation rate to fall by about 0.2-0.25pp per year. The main reasons for the forecast change are that we have flattened the slope of the upward trend in participation rates for older workers and will see a smaller boost from declines in the now-lower stock of discouraged workers in the future. This implies that a given amount of GDP growth will put more downward pressure on the unemployment rate than we previously estimated, and we now expect the rate to fall below 4½% in coming years even as growth slows toward a trend rate. Exhibit 10 shows our new forecast paths.

Click on graph for larger image.

This graph from Goldman Sachs shows their projection for the labor force participation rate on the left. Goldman expects the participation rate to decline from the current 62.4% to around 61.8% in 2018.  Most of the expected decline over the next few years will be from retirement.

Note: Economist at the BLS expect the participation rate to continue to decline for the next couple of decades due to demographics.

The right side of the graph shows Goldman's forecast for the unemployment rate (previous forecast and revision).

Goldman expects the unemployment rate to decline to around 4.6% at the end of 2016, and to see further decline in 2017 and 2018.

by Calculated Risk on 10/10/2015 08:15:00 AM

The key economic reports this week is September retail sales on Tuesday.

For manufacturing, September Industrial Production will be released on Friday, and the October NY and Philly Fed manufacturing surveys will be released this week.

For prices, CPI will be released on Thursday.

----- Monday, October 12th -----
The Bond Market and Banks will be closed in observance of the Columbus Day Holiday. The stock market will be open.

----- Tuesday, October 13th -----
9:00 AM ET: NFIB Small Business Optimism Index for September.

2:00 PM: The Monthly Treasury Budget Statement for September (end of fiscal 2015).

----- Wednesday, October 14th -----
7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

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

8:30 AM ET: Retail sales for September will be released.

This graph shows retail sales since 1992 through August 2015. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). On a monthly basis, retail sales were up 0.2% from July to August (seasonally adjusted), and sales were up 2.2% from August 2014.

The consensus is for retail sales to increase 0.1% in September, and to decrease 0.1% ex-autos.

10:00 AM: Manufacturing and Trade: Inventories and Sales (business inventories) report for August.  The consensus is for no change in inventories.

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

----- Thursday, October 15th -----
8:30 AM ET: The initial weekly unemployment claims report will be released.  The consensus is for 270 thousand initial claims, up from 263 thousand the previous week.

8:30 AM: The Consumer Price Index for September from the BLS. The consensus is for a 0.2% decrease in CPI, and a 0.1% increase in core CPI.

8:30 AM: NY Fed Empire State Manufacturing Survey for October. The consensus is for a reading of -7.0, up from -14.7.

10:00 AM: the Philly Fed manufacturing survey for October. The consensus is for a reading of -1.0, up from -6.0.

----- Friday, October 16th -----
9:15 AM: The Fed will release Industrial Production and Capacity Utilization for September.

This graph shows industrial production since 1967.

The consensus is for a 0.3% decrease in Industrial Production, and for Capacity Utilization to decrease to 77.4%.

10:00 AM: Job Openings and Labor Turnover Survey for August from the BLS.

This graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Jobs openings increased in July to 5.753 million from 5.323 million in June

The number of job openings (yellow) were up 22% year-over-year, and Quits were up 6% year-over-year.

10:00 AM: University of Michigan's Consumer sentiment index (preliminary for October). The consensus is for a reading of 89.5, up from 87.2 in September.

by Calculated Risk on 10/09/2015 07:10:00 PM

During the recession, I started following the Sacramento market to look for changes in the mix of houses sold (equity, REOs, and short sales). For a few years, not much changed. But in 2012 and 2013, we saw some significant changes with a dramatic shift from distressed sales to more normal equity sales.

This data suggests healing in the Sacramento market and other distressed markets are showing similar improvement.  Note: The Sacramento Association of REALTORS® started breaking out REOs in May 2008, and short sales in June 2009.

In September, total sales were up 13.1% from September 2014, and conventional equity sales were up 18.5% compared to the same month last year.

In September, 6.9% of all resales were distressed sales. This was down from 7.8% last month, and down from 11.1% in September 2014.  This is the lowest percentage of distressed sales since they started breaking out distressed sales).

The percentage of REOs was at 4.1% in September, and the percentage of short sales was 2.7.

Here are the statistics.

Click on graph for larger image.

This graph shows the percent of REO sales, short sales and conventional sales. Distressed sales are so small, the font doesn't fit.

There has been a sharp increase in conventional (equity) sales that started in 2012 (blue) as the percentage of distressed sales declined sharply.

Active Listing Inventory for single family homes decreased 18.5% year-over-year (YoY) in September.  This was the fifth consecutive monthly YoY decrease in inventory in Sacramento (a big recent change).

Cash buyers accounted for 15.6% of all sales (frequently investors).

Summary: This data suggests a more normal market with fewer distressed sales, more equity sales, and less investor buying.

by Calculated Risk on 10/09/2015 06:11:00 PM

Yesterday I posted some comments by Merrill Lynch economists on September CPI. Here is the take of economists at Nomura:

"Given the recent tightening in labor markets, higher wages in the health care sector and continued declines in the vacancy rate of rental houses, we think that the slowdown in core service inflation in August was temporary and still expect a gradual pick up in core inflation in the medium term. We expect a 0.17% m-o-m (1.8% y-o-y) gain in core CPI in September. We expect the continued decline in energy prices in September to weigh on the overall price index. As such, we expect headline prices to decline by 0.20% m-o-m (-0.1% y-o-y)."

CPI for September will be released next Thursday.

by Calculated Risk on 10/09/2015 04:35:00 PM

Joe Weisenthal and Alix Steel have invited me to be on Bloomberg's 'What'd You Miss?' today. We are going to discuss demographics and the impact on renting.

The title of this post is from a report by Oregon Office of Economic Analysis economist Josh Lehner on the Portland housing market. Josh was kind enough to allow me to use a couple of his graphs for my appearance on Bloomberg.

Here are the three graphs I'm planning on discussing:

Click on graph for larger image.

The first graph is from my post yesterday: Demographic Impacts: Renting vs. Owning, Labor Force Participation, GDP

This graph shows the long term trend for two key age groups: 20 to 29, and 30 to 39.

This graph is from 1990 to 2060 (all data from BLS: current to 2060 is projected).

We can see the surge in the 20 to 29 age group (red).  Once this group exceeded the peak in earlier periods, there was an increase in apartment construction.  This age group will peak in 2018 (until the 2030s), and the 25 to 34 age group (orange, dashed) will peak in 2023.  This suggests demand for apartments will soften starting around 2020 +/-.

Note: I used a similar graph five years ago to argue there would be a surge in rentals from both demographics, and also from people losing their homes to foreclosure.

For buying, the 30 to 39 age group (blue) is important (note: see Demographics and Behavior for some reasons for changing behavior).  The population in this age group is increasing, and will increase significantly over the next 10+ years.  

This demographics is positive for home buying, and this is a key reason I expect single family housing starts to continue to increase in coming years.

This graph from Josh Lehner shows the population in Portland by age. And the red line is the percent of the population that rents by age (for 2013).

Renting peaks when people are in their 20s, and then steadily falls off (behavior may change a little going forward).

The second graph from Lehner shows population projections for 2025.

 The peak in population has moved past the peak renting years.

This doesn't mean 2015 is "peak renter".  But this does suggest growth will slow for multi-family, but not a sharp decline.

The recent Reis survey on apartment vacancies and rents also suggests some slowdown, but overall the rental market is still very tight.

by Calculated Risk on 10/09/2015 01:05:00 PM

From HotelNewsNow.com: STR: US results for week ending 3 October

The U.S. hotel industry recorded positive results in the three key performance measurements during the week of 27 September through 3 October 2015, according to data from STR, Inc.

In year-over-year measurements, the industry’s occupancy increased 3.4% to 68.8%. Average daily rate for the week was up 8.0% to US$124.96. Revenue per available room increased 11.6% to finish the week at US$86.01.
emphasis added

The following graph shows the seasonal pattern for the hotel occupancy rate using the four week average.  Hotels are now in the Fall business travel season.

The red line is for 2015, dashed orange is 2014, blue is the median, and black is for 2009 - the worst year since the Great Depression for hotels.  Purple is for 2000.

Special Note: I added 2001 (yellow) to show the impact of 9/11/2001 on hotel occupancy.  Occupancy was already down in 2001 due to the recession, and really collapsed following 9/11.

For 2015, the 4-week average of the occupancy rate is solidly above the median for 2000-2007, and above last year.

Right now 2015 is above 2000 (best year for hotels), and 2015 will probably be the best year ever for hotels.

Occupancy Year-to-date:
1) 2015 67.5%
2) 2000 66.9%
3) 2014 66.3%

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 10/09/2015 09:15:00 AM

At the end of each year, I post Ten Economic Questions for the coming year. I followed up with a brief post on each question. The goal was to provide an overview of what I expected in 2015 (I don't have a crystal ball, but I think it helps to outline what I think will happen - and understand - and change my mind, when the outlook is wrong).

By request, here is a quick Q3 review. I've linked to my posts from the beginning of the year, with a brief excerpt and a few comments:

10) Question #10 for 2015: How much will housing inventory increase in 2015?

Right now my guess is active inventory will increase further in 2015 (inventory will decline seasonally in December and January, but I expect to see inventory up again year-over-year in 2015). I expect active inventory to move closer to 6 months supply this summer.

According to the August NAR report on existing home sales, inventory was down 1.7% year-over-year in August, and the months-of-supply was at 5.2 months.  I still expect inventory to increase in 2015, but it could be close.

9) Question #9 for 2015: What will happen with house prices in 2015?

In 2015, inventories will probably remain low, but I expect inventories to continue to increase on a year-over-year basis. Low inventories, and a better economy (with more consumer confidence) suggests further price increases in 2015. I expect we will see prices up mid single digits (percentage) in 2015 as measured by these house price indexes.

If is still early - house price data is released with a lag - but the Case Shiller data for July showed prices up 4.7% year-over-year. The year-over-year change seems to be moving mostly sideways recently in the mid single digits.

8) Question #8 for 2015: How much will Residential Investment increase?

My guess is growth of around 8% to 12% for new home sales, and about the same percentage growth for housing starts. Also I think the mix between multi-family and single family starts might shift a little more towards single family in 2015.

Through August, even with a weak start to the year, starts were up 11.3% year-over-year compared to the same period in 2014.   New home sales were up 24% year-over-year through August - better than expected, but the comparisons will be more difficult going forward.   So far this is a better than expected.

7) Question #7 for 2015: What about oil prices in 2015?

It is impossible to predict an international supply disruption - if a significant disruption happens, then prices will obviously move higher. Continued weakness in Europe and China does seem likely - and I expect the frackers to slow down with exploration and drilling, but to continue to produce at most existing wells at current prices (WTI at $55 per barrel). This suggests in the short run (2015) that prices will stay well below $100 per barrel (perhaps in the $50 to $75 range) - and that is a positive for the US economy.

WTI futures are close to $50 per barrel.

6) Question #6 for 2015: Will real wages increase in 2015?

As the labor market tightens, we should start seeing some wage pressure as companies have to compete more for employees. Whether real wages start to pickup in 2015 - or not until 2016 or later - is a key question. I expect to see some increase in both real and nominal wage increases this year. I doubt we will see a significant pickup, but maybe another 0.5 percentage points for both, year-over-year.

Through September, nominal hourly wages were up 2.2 year-over-year .  I still expect a little more pick up over the next three months.

Note: I was more pessimistic than most on wages, and that was about right.

5) Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?

The FOMC will not want to immediately reverse course, so the might wait a little longer than expected. Right now my guess is the first rate hike will happen at either the June, July or September meetings. 

June and September didn't happen.  It could even be late this year, or even next year.

4) Question #4 for 2015: Will too much inflation be a concern in 2015?

Due to the slack in the labor market (elevated unemployment rate, part time workers for economic reasons), and even with some real wage growth in 2015, I expect these measures of inflation will stay mostly at or below the Fed's target in 2015. If the unemployment rate continues to decline - and wage growth picks up - maybe inflation will be an issue in 2016.

So currently I think core inflation (year-over-year) will increase in 2015, but too much inflation will not be a serious concern this year.

Inflation was still low through August.

3) Question #3 for 2015: What will the unemployment rate be in December 2015?

Depending on the estimate for the participation rate and job growth (next question), it appears the unemployment rate will decline to close to 5% by December 2015. My guess is based on the participation rate staying relatively steady in 2015 - before declining again over the next decade. If the participation rate increases a little, then I'd expect unemployment in the low-to-mid 5% range.

The participation rate has mostly moved sideways this year, and the unemployment rate was 5.1% in September.  This is on track for close to 5% in December.

2) Question #2 for 2015: How many payroll jobs will be added in 2015?

Energy related construction hiring will decline in 2015, but I expect other areas of construction to be solid.

As I mentioned above, in addition to layoffs in the energy sector, exporters will have a difficult year - and more companies will have difficulty finding qualified candidates. Even with the overall boost from lower oil prices - and some additional public hiring, I expect total jobs added to be lower in 2015 than in 2014.

So my forecast is for gains of about 200,000 to 225,000 payroll jobs per month in 2015. Lower than 2014, but another solid year for employment gains given current demographics.

Through September 2015, the economy has added 1,779,000 jobs, or 198,000 per month.  I still expect employment gains to average 200,000 to 225,000 per month in 2015 (lower than 2014, but still solid).

1) Question #1 for 2015: How much will the economy grow in 2015?

Lower gasoline prices suggest an increase in personal consumption expenditures (PCE) excluding gasoline. And it seems likely PCE growth will be above 3% in 2015. Add in some more business investment, the ongoing housing recovery, some further increase in state and local government spending, and 2015 should be the best year of the recovery with GDP growth at or above 3%.

Once again the first quarter was disappointing due to the weather, cutbacks in the oil sector, the West Coast port slowdown and the strong dollar, but there was some bounce back in Q2.  It looks like GDP will be in the 2s again this year.  Based on the August Personal Income and Outlays report, PCE growth will probably be at or above 3% this year.

Overall, so far, 2015 is unfolding about as expected.