by Calculated Risk on 11/17/2016 04:41:00 PM

A few brief excerpts from analysis by Goldman Sachs economist Alec Phillips: A Fiscal Boost in 2017: How Much, How Fast?

Tax reform has political momentum, which is likely to increase the budget deficit... In light of the election result, we assume that the deficit will increase by more than previously expected. Specifically, we assume that fiscal policy choices under the next Congress will increase the budget deficit by around 0.75% of GDP, or around $150bn, in 2018, and similar amounts over the next few years.

... but the market is more focused on fiscal “stimulus” than Congress is. There are risks in both directions to our fiscal assumptions, but we note that financial markets appear to be more focused on fiscal “stimulus” than lawmakers are. ...

Both sides support some type of infrastructure program, but neither side seems enthusiastic. Although President-elect Trump has highlighted infrastructure among the priorities he hopes to address, the reaction from Congressional Republicans has been tepid. While some believe the inclusion of an infrastructure plan in the tax legislation that Congress is expected to consider in 2017 could increase Democratic support for the combined package, others are wary of proposals to use the proceeds from taxing the unrepatriated profits of US multinationals to pay for it. Instead, Republican lawmakers appear more inclined to use the bulk of the proceeds from taxing those overseas earnings to offset the budgetary effects of reducing statutory tax rates.

Obamacare “repeal” seems unlikely to change the fiscal picture for 2017 or even 2018. Congress will face a number of challenges in reforming the ACA in 2017, and we would expect that the process to devise a replacement plan will take until late 2017, if not 2018. We would also expect whatever replaces the current system to take effect after the midterm congressional elections, in 2019. This could lead to uncertainty regarding the changes that might be made, but we expect that whatever changes to the ACA might ultimately occur, they would probably not take effect until 2018 at the earliest and more likely 2019.

CR Note: The "infrastructure" proposal that many investors are focusing on is really a proposal for about $100+ billion in tax credits to spur private investment in infrastructure (I've seen some people talking about $1 trillion in infrastructure investment - but that is the projected size of the private investment, not the proposed government spending).  This proposal is actually very modest in terms of a fiscal boost.   More analysis to come when we see the actual proposals, but I think analysts might be overestimating the boost from government spending in 2017.

by Calculated Risk on 11/17/2016 01:45:00 PM

Earlier: Housing Starts increased to 1.323 Million Annual Rate in October

There was a sharp decline in multi-family starts in the previous month (September), and multi-family bounced back in October.

But the big story is single family starts were up again, and there were upward revisions to the prior two months combined.  As always, I wouldn't put too much emphasis on any one report, but the trend is positive!

This first graph shows the month to month comparison between 2015 (blue) and 2016 (red).

Click on graph for larger image.

Year-to-date starts are up 5.9% compared to the same period in 2015.  My guess was starts would increase 4% to 8% in 2016, and that still looks about right.

Multi-family starts are down 1.8% year-to-date, and single-family starts are up 10.1% year-to-date.

Below is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment).

These graphs use a 12 month rolling total for NSA starts and completions.

The blue line is for multifamily starts and the red line is for multifamily completions.

The rolling 12 month total for starts (blue line) increased steadily over the last few years, and completions (red line) have lagged behind - but completions have been catching up (more deliveries, although this has dipped lately).  Completions lag starts by about 12 months.

I think most of the growth in multi-family starts is probably behind us - in fact multi-family starts probably peaked in June 2015 (at 510 thousand SAAR) - although I expect solid multi-family starts for a few more years (based on demographics).   I also expect completions to move up some more (closer to starts).

The second graph shows single family starts and completions. It usually only takes about 6 months between starting a single family home and completion - so the lines are much closer. The blue line is for single family starts and the red line is for single family completions.

Note the exceptionally low level of single family starts and completions.  The "wide bottom" was what I was forecasting several years ago, and now I expect several years of increasing single family starts and completions.

A strong housing report.

by Calculated Risk on 11/17/2016 11:19:00 AM

The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.1% annualized rate) in October. The 16% trimmed-mean Consumer Price Index also rose 0.2% (2.2% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.4% (4.4% annualized rate) in October. The CPI less food and energy rose 0.1% (1.8% annualized rate) on a seasonally adjusted basis.

Note: The Cleveland Fed released the median CPI details for October here. Motor fuel was up 122% annualized in October!

Click on graph for larger image.

This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.5%, the trimmed-mean CPI rose 2.0%, and the CPI less food and energy rose 2.1%. Core PCE is for September and increased 1.7% year-over-year.

On a monthly basis, median CPI was at 2.1% annualized, trimmed-mean CPI was at 2.2% annualized, and core CPI was at 1.8% annualized.

Using these measures, inflation has generally been moving up, and most of these measures are close to the Fed's 2% target (Core PCE is still below).

by Calculated Risk on 11/17/2016 09:26:00 AM

From Fed Chair Janet Yellen's testimony before the Joint Economic Committee, U.S. Congress, Washington, D.C.: The Economic Outlook

I will turn now to the implications of recent economic developments and the economic outlook for monetary policy. The stance of monetary policy has supported improvement in the labor market this year, along with a return of inflation toward the FOMC's 2 percent objective. In September, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent and stated that, while the case for an increase in the target range had strengthened, it would, for the time being, wait for further evidence of continued progress toward its objectives.

At our meeting earlier this month, the Committee judged that the case for an increase in the target range had continued to strengthen and that such an increase could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee's objectives. This judgment recognized that progress in the labor market has continued and that economic activity has picked up from the modest pace seen in the first half of this year. And inflation, while still below the Committee's 2 percent objective, has increased somewhat since earlier this year. Furthermore, the Committee judged that near-term risks to the outlook were roughly balanced.

Waiting for further evidence does not reflect a lack of confidence in the economy. Rather, with the unemployment rate remaining steady this year despite above-trend job gains, and with inflation continuing to run below its target, the Committee judged that there was somewhat more room for the labor market to improve on a sustainable basis than the Committee had anticipated at the beginning of the year. Nonetheless, the Committee must remain forward looking in setting monetary policy. Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee's longer-run policy goals. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.

The FOMC continues to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain maximum employment and price stability. This assessment is based on the view that the neutral federal funds rate--meaning the rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel--appears to be currently quite low by historical standards. Consistent with this view, growth in aggregate spending has been moderate in recent years despite support from the low level of the federal funds rate and the Federal Reserve's large holdings of longer-term securities. With the federal funds rate currently only somewhat below estimates of the neutral rate, the stance of monetary policy is likely moderately accommodative, which is appropriate to foster further progress toward the FOMC's objectives. But because monetary policy is only moderately accommodative, the risk of falling behind the curve in the near future appears limited, and gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years.
emphasis added

A rate hike in December is very likely.  The incoming data has been strong (see housing starts and unemployment claims today that were released after her comments were prepared).

by Calculated Risk on 11/17/2016 08:55:00 AM

The DOL reported:

In the week ending November 12, the advance figure for seasonally adjusted initial claims was 235,000, a decrease of 19,000 from the previous week's unrevised level of 254,000. This is the lowest level for initial claims since November 24, 1973 when it was 233,000. The 4-week moving average was 253,500, a decrease of 6,500 from the previous week's revised average. The previous week's average was revised up by 250 from 259,750 to 260,000.

There were no special factors impacting this week's initial claims. This marks 89 consecutive weeks of initial claims below 300,000, the longest streak since 1970.
emphasis added

The previous week was unrevised.

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 253,500.

This was lower than the consensus forecast. The low level of claims suggests relatively few layoffs.

by Calculated Risk on 11/17/2016 08:40:00 AM

From the Census Bureau: Permits, Starts and Completions

Housing Starts:
Privately-owned housing starts in October were at a seasonally adjusted annual rate of 1,323,000. This is 25.5 percent above the revised September estimate of 1,054,000 and is 23.3 percent above the October 2015 rate of 1,073,000.

Single-family housing starts in October were at a rate of 869,000; this is 10.7 percent above the revised September figure of 785,000. The October rate for units in buildings with five units or more was 445,000.

Building Permits:
Privately-owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 1,229,000. This is 0.3 percent above the revised September rate of 1,225,000 and is 4.6 percent above the October 2015 estimate of 1,175,000.

Single-family authorizations in October were at a rate of 762,000; this is 2.7 percent above the revised September figure of 742,000. Authorizations of units in buildings with five units or more were at a rate of 439,000 in October.
emphasis added

Click on graph for larger image.

The first graph shows single and multi-family housing starts for the last several years.

Multi-family starts (red, 2+ units) increased significantly in October compared to September.  Multi-family starts are up sharply year-over-year.

Multi-family is volatile, and this was a bounce back from the decline last month.

Single-family starts (blue) increased in October, and are up 22% year-over-year.  This is the highest level for single family starts since 2007.

The second graph shows total and single unit starts since 1968.

 The second graph shows the huge collapse following the housing bubble, and then - after moving sideways for a couple of years - housing is now recovering (but still historically low),

Total housing starts in October were above expectations - and at the highest level since 2007 - and August and September were revised up.  A strong report. I'll have more later ...

by Calculated Risk on 11/16/2016 08:38:00 PM

Thursday:
• At 8:30 AM ET, The initial weekly unemployment claims report will be released.  The consensus is for 257 thousand initial claims, up from 254 thousand the previous week.

• Also at 8:30 AM, The Consumer Price Index for October from the BLS. The consensus is for 0.4% increase in CPI, and a 0.2% increase in core CPI.

• Also at 8:30 AM, Housing Starts for October. The consensus is for 1.168 million, up from the September rate.

• Also at 8:30 AM, the Philly Fed manufacturing survey for November. The consensus is for a reading of 8.0, down from 9.7.

• At 10:00 AM, Testimony by Fed Chair Janet Yellen, The Economic Outlook, Before the Joint Economic Committee of Congress, U.S. Congress, Washington, D.C.

by Calculated Risk on 11/16/2016 03:21:00 PM

Earlier today from the Fed: Industrial production and Capacity Utilization

Industrial production was unchanged in October after decreasing 0.2 percent in September. Although the level of industrial production in September was the same as the previous estimate, revisions to the index for utilities raised the rate of change in total industrial production in August and lowered it in September. In October, manufacturing output increased 0.2 percent, and mining posted a gain of 2.1 percent for its largest increase since March 2014. The index for utilities dropped 2.6 percent, as warmer-than-normal temperatures reduced the demand for heating. At 104.3 percent of its 2012 average, total industrial production in October was 0.9 percent lower than its year-earlier level. Capacity utilization for the industrial sector edged down 0.1 percentage point in October to 75.3 percent, a rate that is 4.7 percentage points below its long-run (1972–2015) average.
emphasis added

Click on graph for larger image.

This graph shows Capacity Utilization. This series is up 8.7 percentage points from the record low set in June 2009 (the series starts in 1967).

Capacity utilization at 75.3% is 4.7% below the average from 1972 to 2015 and below the pre-recession level of 80.8% in December 2007.

Note: y-axis doesn't start at zero to better show the change.

The second graph shows industrial production since 1967.

Industrial production was unchanged in October at 104.2. This is 19.3% above the recession low, and is close to the pre-recession peak.

This was below expectations of a 0.1% increase.

by Calculated Risk on 11/16/2016 12:31:00 PM

Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.

From the AIA: Architecture Billings Index rebounds after two down months

After seeing consecutive months of contracting demand for the first time in four years, the Architecture Billings Index (ABI) saw a modest increase demand for design services.  As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the October ABI score was 50.8, up from the mark of 48.4 in the previous month. This score reflects a slight increase in design services (any score above 50 indicates an increase in billings).  The new projects inquiry index was 55.4, down sharply from a reading of 59.4 the previous month.

“There was a collective sense of uncertainty throughout the design and construction industry leading up to the presidential election,” said AIA Chief Economist, Kermit Baker, Hon. AIA, PhD.  “Hopefully we’ll get a sense of what direction we will be headed once we get a clearer read on how the new administration’s policies might impact the overall economy as well as the construction industry.”
...
• Regional averages: South (53.7), West (49.7), Northeast (47.3) Midwest (46.8)

• Sector index breakdown:  multi-family residential (51.2) commercial / industrial (49.8), mixed practice (49.5), institutional (49.1)
emphasis added

Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 50.8 in October, up from 48.4 in September. Anything above 50 indicates expansion in demand for architects' services.

Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction.  This index was positive in 8 of the last 12 months, suggesting a further increase in CRE investment through mid-2017.

by Calculated Risk on 11/16/2016 10:08:00 AM

The National Association of Home Builders (NAHB) reported the housing market index (HMI) was at 63 in November, unchanged from 63 in October. Any number above 50 indicates that more builders view sales conditions as good than poor.

This graph show the NAHB index since Jan 1985.

This was at the consensus forecast of 63, and is another solid reading.

Click on graph for larger image.