by Calculated Risk on 4/29/2016 08:33:00 AM

The BEA released the Personal Income and Outlays report for March:

Personal income increased $57.4 billion, or 0.4 percent, ... according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $12.8 billion, or 0.1 percent.
...
Real PCE -- PCE adjusted to remove price changes -- increased less than 0.1 percent in March, compared with an increase of 0.3 percent in February. ... The price index for PCE increased 0.1 percent in March, in contrast to a decrease of 0.1 percent in February. The PCE price index, excluding food and energy, increased 0.1 percent, compared with an increase of 0.2 percent.

The March PCE price index increased 0.8 percent from March a year ago. The March PCE price index, excluding food and energy, increased 1.6 percent from March a year ago.

On inflation: The PCE price index increased 0.8 percent year-over-year due to the sharp decline in oil prices. The core PCE price index (excluding food and energy) increased 1.6 percent year-over-year in March (slightly lower than in February).

by Calculated Risk on 4/28/2016 09:17:00 PM

From Merrill Lynch on April NFP:

Nonfarm payroll growth likely posted a solid 200,000 in April, driven once more by service-providing firms. Of this, government hiring likely contributed 5,000, which is a more modest clip than the 20,000 pop in March. ...

We look for the unemployment rate to hold at 5.0%, assuming the participation rate holds steady. However, there is a risk it heads higher, following the recent trend, which could boost the unemployment rate. The participation rate has seen an impressive recovery since September of last year, rising to 63% from 62.4%. A robust labor market has attracted many workers back into the labor market, and it is more likely than not that this trend generally continues in the near term. However, increased labor supply also means delayed wage pressures: we are looking for only 0.2% monthly growth in average hourly earnings. This would leave the yoy growth rate unchanged at 2.3%, though this is still greater than the 2% pace seen earlier in this cycle. ...

Friday:
• At 8:30 AM ET, Personal Income and Outlays for March. The consensus is for a 0.3% increase in personal income, and for a 0.2% increase in personal spending. And for the Core PCE price index to increase 0.1%.

• At 9:45 AM, Chicago Purchasing Managers Index for April. The consensus is for a reading of 53.4, down from 53.6 in March.

• At 10:00 AM, University of Michigan's Consumer sentiment index (final for April). The consensus is for a reading of 90.4, up from the preliminary reading 89.7.

by Calculated Risk on 4/28/2016 04:45:00 PM

Earlier today, the Census Bureau released the Residential Vacancies and Homeownership report for Q1 2016.

This report is frequently mentioned by analysts and the media to track household formation, the homeownership rate, and the homeowner and rental vacancy rates.  However, there are serious questions about the accuracy of this survey.

This survey might show the trend, but I wouldn't rely on the absolute numbers.  The Census Bureau is investigating the differences between the HVS, ACS and decennial Census, and analysts probably shouldn't use the HVS to estimate the excess vacant supply or household formation, or rely on the homeownership rate, except as a guide to the trend.

Click on graph for larger image.

The Red dots are the decennial Census homeownership rates for April 1st 1990, 2000 and 2010. The HVS homeownership rate decreased to 63.5% in Q1, from 63.8% in Q4.

I'd put more weight on the decennial Census numbers - and given changing demographics, the homeownership rate is probably close to a bottom.

The HVS homeowner vacancy declined to 1.7% in Q1. 

Once again - this probably shows the general trend, but I wouldn't rely on the absolute numbers.

The rental vacancy rate was unchanged at 7.0% in Q1.

I think the Reis quarterly survey (large apartment owners only in selected cities) is a much better measure of the rental vacancy rate, but this does suggest the rental vacancy rate might have bottomed.

The quarterly HVS is the most timely survey on households, but there are many questions about the accuracy of this survey.

Overall this suggests that vacancies and the homeownership rate are probably close to the bottom.

by Calculated Risk on 4/28/2016 01:45:00 PM

The graph below shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter trailing average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

In the graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue.

The dashed gray line is the contribution from the change in private inventories.

Click on graph for larger image.

Residential investment (RI) increased at a 14.8% annual rate in Q1.  Equipment investment decreased at a 8.6% annual rate, and investment in non-residential structures decreased at a 10.7% annual rate.   On a 3 quarter trailing average basis, RI (red) is positive,  equipment (green) is close to zero, and nonresidential structures (blue) is negative.

Nonresidential investment in structures typically lags the recovery, however investment in energy and power provided a boost early in this recovery - and is now causing a decline.  Other areas of nonresidential are now increasing significantly.  I'll post more on the components of non-residential investment once the supplemental data is released.

I expect investment to be solid going forward (except for energy and power), and for the economy to continue to grow at a steady pace.


The second graph shows residential investment as a percent of GDP.

Residential Investment as a percent of GDP has been increasing, but is only just above the bottom of the previous recessions - and I expect RI to continue to increase for the next few years.

I'll break down Residential Investment into components after the GDP details are released.

Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

The third graph shows non-residential investment in structures, equipment and "intellectual property products".  Investment in equipment - as a percent of GDP - has been moving sideways.  Other investment is generally trending up as a percent of GDP, except for nonresidential structures due to less investment in energy and power.

by Calculated Risk on 4/28/2016 11:00:00 AM

From the Kansas City Fed: Tenth District Manufacturing Activity Declined Modestly

The Federal Reserve Bank of Kansas City released the April Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity declined modestly.

“Factories reported a modest decline in activity in April, but expectations for future activity increased to their highest reading of the year”, said Wilkerson.
...
Tenth District manufacturing activity continued to decline modestly, while producers’ expectations for future activity improved considerably. Most price indexes moved slightly higher in April, but remained at low levels.

The month-over-month composite index was -4 in April, up from -6 in March and -12 in February ...
emphasis added

The Kansas City region was hit hard by lower oil prices and the stronger dollar, but the impact is fading.

This was the last of the regional Fed surveys for April.

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Click on graph for larger image.

The New York and Philly Fed surveys are averaged together (yellow, through April), and five Fed surveys are averaged (blue, through April) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through March (right axis).

It seems likely the ISM manufacturing index will show slow expansion again in April.

by Calculated Risk on 4/28/2016 08:45:00 AM

The DOL reported:

In the week ending April 23, the advance figure for seasonally adjusted initial claims was 257,000, an increase of 9,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 247,000 to 248,000. The 4-week moving average was 256,000, a decrease of 4,750 from the previous week's revised average. This is the lowest level for this average since December 8, 1973 when it was 252,250. The previous week's average was revised up by 250 from 260,500 to 260,750.

There were no special factors impacting this week's initial claims. This marks 60 consecutive weeks of initial claims below 300,000, the longest streak since 1973.

The previous week was revised up by 1,000.

Note: The following graph shows the 4-week moving average of weekly claims since 1971.

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 256,000.

This is the lowest level for the four-week average since 1973.

This was below the consensus forecast of 260,000. The low level of the 4-week average suggests few layoffs.

by Calculated Risk on 4/28/2016 08:36:00 AM

From the BEA: Gross Domestic Product: First Quarter 2016 (Advance Estimate)

Real gross domestic product -- the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes -- increased at an annual rate of 0.5 percent in the first quarter of 2016, according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 1.4 percent.
...
The increase in real GDP in the first quarter reflected positive contributions from personal consumption expenditures (PCE), residential fixed investment, and state and local government spending that were partly offset by negative contributions from nonresidential fixed investment, private inventory investment, exports, and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the first quarter reflected a larger decrease in nonresidential fixed investment, a deceleration in PCE, a downturn in federal government spending, an upturn in imports, and larger decreases in private inventory investment and in exports that were partly offset by an upturn in state and local government spending and an acceleration in residential fixed investment.
emphasis added

The advance Q1 GDP report, with 0.5% annualized growth, was below expectations of a 0.7% increase.

Personal consumption expenditures (PCE) increased at a 1.9% annualized rate in Q1, down from 2.4% in Q4.   Residential investment (RI) increased at a 14.8% pace. However equipment investment decreased at a 8.6% annualized rate, and investment in non-residential structures decreased at a 10.7% pace (due to the decline in oil prices).

The key negatives were investment in inventories (subtracted 0.33 percentage point), trade (subtracted 0.34 percentage point), nonresidential investment (subtracted 0.76 percentage points) and Federal government spending (subtracted 0.11 percentage points).

I'll have more later ...

by Calculated Risk on 4/27/2016 07:49:00 PM

Atlanta Fed GDP Now:

The final GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 is 0.6 percent on April 27, up from 0.4 percent on April 26.

New York Fed Nowcasting:

GDP growth prospects remain moderate for the first half of the year: the nowcasts stand at 0.8% for 2016:Q1 and 1.2% for 2016:Q2.

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released.  The consensus is for 260 thousand initial claims, up from 247 thousand the previous week.

• Also at 8:30 AM, Gross Domestic Product, 1st quarter 2016 (Advance estimate). The consensus is that real GDP increased 0.7% annualized in Q1.

• At 11:00 AM, Kansas City Fed Survey of Manufacturing Activity for April. This is the last of the regional Fed manufacturing surveys for April.

by Calculated Risk on 4/27/2016 05:07:00 PM

The April FOMC statement was very similar to the March statement. There was less emphasis on "global" risks in the April statement, and there was more emphasis on low inflation. Here are excepts from the April and March statements on inflation:

From the April FOMC statement:

Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports.
emphasis added

This was changed from the March FOMC statement:

Inflation picked up in recent months; however, it continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.

Note: I was expecting a change in the statement characterizing risks as "nearly balanced", but that wasn't included (I think that would have suggested a rate hike in June was more likely).

To hike in June, it seems the FOMC will be looking for decent employment reports for April and May, and for inflation to pickup (especially core PCE).

Click on graph for larger image.

This graph shows the year-over-year change for four key measures of inflation: Core PCE, core CPI, trimmed-mean CPI and median CPI (the last two from the Cleveland Fed). 

On a year-over-year basis in March, the median CPI rose 2.4%, the trimmed-mean CPI rose 2.0%, and the CPI less food and energy rose 2.2%.

Core PCE (green) is for February and increased 1.7% year-over-year.

Using these measures, inflation has been moving up, and most measures are close to the Fed's target - only core PCE is still below.

Core PCE for March will be released this Friday, and core PCE for April will be released on May 31st.  If core PCE moves up further, a rate hike in June would be more likely.

by Calculated Risk on 4/27/2016 02:03:00 PM

Not much change. Less mention of "global" risks.

FOMC Statement:

Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
emphasis added