by Calculated Risk on 7/10/2017 11:59:00 AM

At the end of last year, I posted Ten Economic Questions for 2017. I followed up with a brief post on each question. The goal was to provide an overview of what I expected in 2017 (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 Q2 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 2017: Will housing inventory increase or decrease in 2017?

I was wrong on inventory last year, but right now my guess is active inventory will increase in 2017 (inventory will decline seasonally in December and January, but I expect to see inventory up again year-over-year in December 2017).   My reasons for expecting more inventory are 1) inventory is historically low (lowest for November since 2000), 2) and the recent increase in interest rates.

According to the May NAR report on existing home sales, inventory was down 8.4% year-over-year in May, and the months-of-supply was at 4.2 months. This was a smaller year-over-year decline than in April, but it appears inventory unlikely inventory will be up by year end.  This is a key metric to watch!

9) Question #9 for 2017: What will happen with house prices in 2017?

Inventories will probably remain low in 2017, although I expect inventories to increase on a year-over-year basis by December of 2017.  Low inventories, and a decent economy suggests further price increases in 2017.

Perhaps higher mortgage rates will slow price appreciation.  If we look back at the "taper tantrum" in 2013, price appreciation slowed somewhat over the next year - but that was from a high level.  In June 2013, the Case-Shiller National index was up 9.3% year-over-year.  By June 2014, the index was up 6.3% year-over-year.

If inventory increases year-over-year as I expect by December 2017, it seems likely that price appreciation will slow to the low-to-mid single digits.

If is early, but the Case-Shiller data released last month showed prices up 5.5% year-over-year in April.  The Case-Shiller year-over-year increase is about the same as the annual increase in 2016.

8) Question #8 for 2017: How much will Residential Investment increase?

Most analysts are looking for starts to increase to around 1.25 million in 2017, and for new home sales of around 600 to 650 thousand. This would be an increase of around 7% for starts and maybe 10% for new home sales.

I think there will be further growth in 2017, but I think a combination of higher mortgage rates, less multi-family starts, and not enough lots for low-to-mid range new homes will mean sluggish growth in 2017.

My guess is starts will increase to just over 1.2 million in 2017 and new home sales will be in the low 600 thousand range.

Through May, starts were up 3.2% year-over-year compared to the same period in 2016.  New home sales were up 12.2% year-over-year.

7) Question #7 for 2017: How much will wages increase in 2017?

As the labor market continues to tighten, we should see more wage pressure as companies have to compete for employees. I expect to see some further increases in both the Average hourly earning from the CES, and in the Altanta Fed Wage Tracker.  Perhaps nominal wages will increase more than 3% in 2017 according to the CES.

Through June 2017, nominal hourly wages were up 2.5% year-over-year. This is a pickup from last year, and so far it appears wages will increase at a faster rate in 2017.

6) Question #6 for 2017: Will the Fed raise rates in 2017, and if so, by how much?

Analysts are being cautious on forecasting rate hikes, probably because they forecasted too many hikes over the last few years. However, as the economy approaches full employment, and with the possibility of fiscal stimulus in 2017, it is possible that inflation will pick up a little - and, if so, the Fed could hike more than expected.

My current guess is the Fed will hike twice in 2017.

The Fed has already hiked twice in 2017, and they are still forecasting three hikes this year (and to slow reinvesting by the end of the year).    The third hike is currently expected in December.

5) Question #5 for 2017: Will the core inflation rate rise in 2017? Will too much inflation be a concern in 2017?

The Fed is projecting core PCE inflation will increase to 1.8% to 1.9% by Q4 2017.  However there are risks for higher inflation.  The labor market is approaching full employment, and the new administration is proposing some fiscal stimulus (tax cuts, possible infrastructure spending), so it is possible - as a result - that inflation will increase more than expected in 2017 and 2018.

Currently I think PCE core inflation (year-over-year) will increase further and be close to 2% in 2017, but too much inflation will still not be a serious concern in 2017.

Inflation has eased recently, and is below the Fed's target by most measures.

4) Question #4 for 2017: What will the unemployment rate be in December 2017?

Depending on the estimate for the participation rate and job growth (next question), it appears the unemployment rate will declining slightly by December 2017 from the current 4.7%.

The unemployment rate was at 4.4% in June - about the level I expected for the end of 2017.

3) Question #3 for 2017: Will job creation slow further in 2017?

So my forecast is for gains of 125,000 to 150,000 payroll jobs per month in 2017.  Lower than in 2016, but another solid year for employment gains given current demographics.

Through June 2017, the economy has added 1,079,000 thousand jobs, or 180,000 per month, down from 187,000 per month in 2016. I still expect employment gains to slow further this year.

2) Question #2 for 2017: How much will the economy grow in 2017?

There will probably be some economic boost from oil sector investment in 2017 since oil prices have increased (this was a drag last year).

The housing recovery is ongoing, however auto sales might have peaked.

And demographics are improving (the prime working age population is growing about 0.5% per year, compared to declining a few years ago).

All these factors combined will probably push GDP growth into the mid-to-high 2% range in 2017, but this will depend somewhat on which policies are enacted.

Once again, GDP was sluggish in Q1 - and it is way too early to tell if there will be any pickup in GDP growth this year.

1) Question #1 for 2017: What about fiscal and regulatory policy in 2017?

We are still waiting for the details. As far as the impact on 2017, my expectation is there will be both individual and corporate tax cuts - and some sort of infrastructure program. I expect that something will happen with the ACA (those that have insurance for 2017 will keep their insurance, but they might not have insurance in 2018 - and that impact would be in 2018). I think the negative proposals (immigration, trade) will impact the economy in 2018 or later - overall there will be a small boost to GDP in 2017.

A final comment:  The words of a President matter. Mr Trump has been impulsive, reckless and irresponsible with his comments, and that has continued since the election. One absurd comment could send the markets into a tailspin and negatively impact the economy (and that could happen at any time).

So far nothing has happened with the ACA, taxes, infrastructure, or trade.  Policy remains a wild card.

It is early in the year.  Currently it looks like 2017 is unfolding somewhat as expected.

by Calculated Risk on 7/10/2017 09:36:00 AM

Black Knight Financial Services (BKFS) released their Mortgage Monitor report for May today. According to BKFS, 3.79% of mortgages were delinquent in May, down from 4.25% in May 2016. BKFS also reported that 0.83% of mortgages were in the foreclosure process, down from 1.13% a year ago.

This gives a total of 4.62% delinquent or in foreclosure.

Press Release: Black Knight’s May Mortgage Monitor: Underwater Borrower Population Below Two Million for First Time Since 2006

Today, the Data and Analytics division of Black Knight Financial Services, Inc. released its latest Mortgage Monitor Report, based on data as of the end of May 2017. This month, Black Knight finds that rising home prices have both decreased the number of borrowers underwater on their mortgages while increasing the amount of tappable – or lendable – equity available to homeowners. As Black Knight Data & Analytics Executive Vice President Ben Graboske explained, continued growth in the equity landscape has also improved the net worth of many – but not all – homeowners with mortgages.

“The steady upward trajectory of home prices continues to improve the equity positions of many homeowners,” said Graboske. “This is plainly visible in the number of borrowers who are underwater on their mortgages, owing more than their homes are worth. Over the past year, we’ve seen a 35 percent decline in the total underwater population, with a 16 percent decline in that population over the first three months of 2017 alone. Home prices rose 2.3 percent in the first quarter, as compared to 1.8 percent over the same period last year, helping an additional 350,000 borrowers regain equity in their homes. As of today, there are 1.8 million underwater borrowers remaining, the first time this population has fallen below two million since 2006.

“What stands out is the disparity we see in this improvement. As has been the case for some time now, negative equity has become more and more a localized phenomenon. But it’s also becoming concentrated among a particular class of homeowner. Nearly half of all borrowers who remain underwater own homes in the lowest 20 percent of prices in their respective markets. While the nation as a whole now has a negative equity rate of just 3.6 percent, among owners in that lowest price tier, it’s over eight percent. In fact, these lowest-price-tier properties are more than twice as likely to be underwater as those in the next price tier up, and 6.5 times more likely to be underwater than those living in the top 20 percent of the market. This is the highest differential we’ve seen between high and low price tiers since we began keeping track in 2005. In some areas, the disparity between the lowest price tier and the highest is staggering. In Detroit, for example, borrowers whose homes are in the lowest 20 percent of prices are 50 times more likely to be underwater than those in the top 20 percent.”

Rising home prices are also increasing the amount of equity available for homeowners to borrow against. Looking solely at borrowers with at least 20 percent equity in their homes, Black Knight found that total tappable (or lendable) equity increased by $695 billion dollars over the last year.
emphasis added

Click on graph for larger image.

This graph from Black Knight shows the number of mortgage holders with negative equity over time.

From Black Knight:

• The steady upward trajectory of home prices – as well as ongoing foreclosure activity – has helped to consistently reduce the nation’s total number of underwater borrowers

• Over the past year, we’ve seen a 35 percent decline in the underwater population, with a 16 percent decline over the first three months of 2017 alone

• Home prices rose 2.3 percent in the first quarter, as compared to 1.8 percent over the same period last year, helping an additional 350K borrowers regain equity in their homes

• As of today, there are 1.8 million underwater borrowers remaining, the first time this population has fallen below 2M since 2006

• Negative equity is still well above 2005 levels, at the end of which only 750K borrowers owed more than their homes were worth

There is much more in the mortgage monitor.

by Calculated Risk on 7/09/2017 07:19:00 PM

Weekend:
• Schedule for Week of July 9, 2017

Monday:
• At 10:00 AM ET, The Fed will release the monthly Labor Market Conditions Index (LMCI).

• At 3:00 PM, Consumer credit from the Federal Reserve.  The consensus is for a $14.6 billion increase in credit.

From CNBC: Pre-Market Data and Bloomberg futures: S&P futures and DOW futures are mostly unchanged (fair value).

Oil prices were down over the last week with WTI futures at $44.44 per barrel and Brent at $46.71 per barrel.  A year ago, WTI was at $45, and Brent was at $45 - so oil prices are mostly unchanged year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.26 per gallon - a year ago prices were at $2.24 per gallon - so gasoline prices are mostly unchanged year-over-year.

by Calculated Risk on 7/09/2017 09:11:00 AM

From the Association of American Railroads (AAR) Rail Time Indicators. Graphs and excerpts reprinted with permission.

U.S. rail traffic in June 2017 was a mix of the good and the not so good. The good included intermodal, which was up 4.6% in June and 2.7% (179,515 containers and trailers) for the year to date. Year to-date intermodal volume through June was the highest ever. On the carload side, coal was up 13.2% in June and up 18.0% (326,783 carloads) for the first half. The first half of 2016 was a ridiculously bad period for coal, so the comparisons this year were pretty easy. As we go forward in 2017, the comps for coal will get much tougher. Carloads of crushed stone, gravel and sand were 18.5% higher in June and 12.8% higher in the first half. Thanks to surging sand shipments, this category set a year-to-date record this year. Year-to-date carloads of chemicals thorugh June were the highest ever too. The not so good included petroleum and petroleum products (down 15.2% in June, their 25th straight year-over-year decline) and motor vehicles and parts (down 7.9% in June for combined U.S. and Canadian carloads, their sixth straight monthly decline to match the six straight months in which new light vehicle sales have fallen). Total carloads in June 2017 were up 4.4% over last year; total carloads in the first half of 2017 were up 6.4% (404,078 carloads) over last year.

Click on graph for larger image.

This graph from the Rail Time Indicators report shows U.S. average weekly rail carloads (NSA).  Dark blue is 2017.

Rail carloads have been weak over the last decade due to the decline in coal shipments.

t’s all relative, but from a short term perspective, for now U.S. rail carloads are doing pretty well. In June 2017 totaled 1,065,976, up 4.4%, or 45,174, over June 2016. That’s the eighth straight year-over-year monthly increase following 21 straight year-over-year monthly declines. Average weekly carloads in June 2017 were 266,494, the most for any month since October 2016. While June 2017 compares favorably with June 2016, it doesn’t fare well against June in most other years — since our records begin in 1988, only 2009 and 2016 had lower weekly average total carloads in June.

The second graph is for intermodal traffic (using intermodal or shipping containers):

U.S. railroads originated 1,113,575 containers and trailers in June 2017, up 4.6% (49,425 units) over June 2016 and the second-best June in history in terms of weekly average volume (slightly behind 2015). In June, the number of intermodal units originated by U.S. railroads exceeded the number of carloads for the ninth straight month. The first time that ever happened was May 2015, but it’s common now.

by Calculated Risk on 7/08/2017 08:11:00 AM

The key economic reports this week are June Retail Sales and the Consumer Price Index (CPI).

For manufacturing, June industrial production will be released this week.

Also Fed Chair Janet Yellen will present the Semiannual Monetary Policy Report to the Congress.

----- Monday, July 10th -----
10:00 AM ET: The Fed will release the monthly Labor Market Conditions Index (LMCI).

3:00 PM: Consumer credit from the Federal Reserve.  The consensus is for a $14.6 billion increase in credit.

----- Tuesday, July 11th -----
6:00 AM ET: NFIB Small Business Optimism Index for June.

10:00 AM: Job Openings and Labor Turnover Survey for May 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 April to 6.044 million from 5.785 million in March.

The number of job openings (yellow) were up 7% year-over-year, and Quits were up 4% year-over-year.

----- Wednesday, July 12th -----
7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

10:00 AM: Testimony from Fed Chair Janet L. Yellen, Semiannual Monetary Policy Report to the Congress, Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C.

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

----- Thursday, July 13th -----
8:30 AM ET: The initial weekly unemployment claims report will be released. The consensus is for 245 thousand initial claims, down from 248 thousand the previous week.

8:30 AM: The Producer Price Index for June from the BLS. The consensus is for no change in PPI, and a 0.2% increase in core PPI.

10:00 AM: Testimony from Fed Chair Janet L. Yellen, Semiannual Monetary Policy Report to the Congress, Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.

----- Friday, July 14th -----
8:30 AM ET: Retail sales for June will be released.  The consensus is for a 0.1% increase in retail sales.

This graph shows retail sales since 1992 through May 2017.

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

9:15 AM: The Fed will release Industrial Production and Capacity Utilization for June.

This graph shows industrial production since 1967.

The consensus is for a 0.3% increase in Industrial Production, and for Capacity Utilization to increase to 76.8%.

10:00 AM: Manufacturing and Trade: Inventories and Sales (business inventories) report for May.  The consensus is for a 0.3% increase in inventories.

10:00 AM: University of Michigan's Consumer sentiment index (preliminary for July). The consensus is for a reading of 95.1, unchanged from 95.1 in June.

by Calculated Risk on 7/07/2017 05:18:00 PM

A few comments from Steven Kopits of Princeton Energy Advisors LLC on July 7, 2017:

• Total US oil rigs were up 7 to 763

• Horizontal oil rigs were up an impressive 9 to 657

• Since the beginning of June, much of the growth has come from less favored basins – the Bakken and Cana Woodford – and from ‘Other US’

• Similarly, Canada has gained relative to expectations

• These developments suggest operators outside the Permian and Eagle Ford are learning how to prosper with lower oil prices.

• Decidedly bearish – and the market couldn’t care less

Click on graph for larger image.

CR note: This graph shows the US horizontal rig count by basin.

Graph and comments Courtesy of Steven Kopits of Princeton Energy Advisors LLC.

by Calculated Risk on 7/07/2017 01:01:00 PM

Here is another update of tracking employment during Presidential terms.  We frequently use Presidential terms as time markers - we could use Speaker of the House, or any other marker.

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.

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.

The first graph shows the change in private sector payroll jobs from when each president took office until the end of their term(s). Presidents Carter and George H.W. Bush only served one 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.

Mr. Trump is in Orange (just five months).

The employment recovery during Mr. G.W. Bush's (red) first term was sluggish, and private employment was down 811,000 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 396,000 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 20,966,000 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 1,937,000 more private sector jobs at the end of Mr. Obama's first term.  At the end of his second term, there were 11,756,000 more private sector jobs than when Mr. Obama initially took office.

During the first five months of Mr. Trump's term, the economy has added 821,000 private sector jobs.

 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 declined significantly while Mr. Obama was in office (down 268,000 jobs).

During the first five months of Mr. Trump's term, the economy has gained 42,000 public sector jobs.

The third graph shows the progress towards the Trump goal of adding 10 million jobs over the next 4 years.

After five months of Mr. Trump's presidency, the economy has added 863,000 jobs, about 180,000 behind the projection.

by Calculated Risk on 7/07/2017 10:00:00 AM

The headline jobs number was above expectations, and there were combined upward revisions to the previous two months.  And the unemployment increased slightly.  

Earlier: June Employment Report: 222,000 Jobs, 4.4% Unemployment Rate

In June, the year-over-year change was 2.24 million jobs. This is decent year-over-year job growth.

Note that June has been the strongest month for job growth over the three previous years, followed by July and November.  This is the 4th consecutive solid job gain in June:  304 thousand in June 2014, 206 in June 2015, 297 thousand in June 2016, and now 222 thousand in June 2017. 

Average Hourly Earnings

Click on graph for larger image.

This graph is based on “Average Hourly Earnings” from the Current Employment Statistics (CES) (aka "Establishment") monthly employment report. Note: There are also two quarterly sources for earnings data: 1) “Hourly Compensation,” from the BLS’s Productivity and Costs; and 2) the Employment Cost Index which includes wage/salary and benefit compensation.

The graph shows the nominal year-over-year change in "Average Hourly Earnings" for all private employees.  Nominal wage growth was at 2.5% YoY in June.

Wage growth has generally been trending up.

Employment-Population Ratio, 25 to 54 years old

Since the overall participation rate has declined recently due to cyclical (recession) and demographic (aging population, younger people staying in school) reasons, here is the employment-population ratio for the key working age group: 25 to 54 years old.

In the earlier period the participation rate for this group was trending up as women joined the labor force. Since the early '90s, the participation rate moved more sideways, with a downward drift starting around '00 - and with ups and downs related to the business cycle.

The 25 to 54 participation rate was unchanged in June at 81.7%, and the 25 to 54 employment population ratio increase to 78.5%.

The participation rate has been trending down for this group since the late '90s, however, with more younger workers (and fewer older workers), the participation rate might move up some more.

Part Time for Economic Reasons

From the BLS report:

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers), at 5.3 million, changed little in June. These individuals, who would have preferred full-time employment, were working part time because their hours had been cut back or because they were unable to find a full-time job.

The number of persons working part time for economic reasons increased in June. The number working part time for economic reasons suggests a little slack still in the labor market.

These workers are included in the alternate measure of labor underutilization (U-6) that increased to 8.6% in June.

Unemployed over 26 Weeks

This graph shows the number of workers unemployed for 27 weeks or more.

According to the BLS, there are 1.66 million workers who have been unemployed for more than 26 weeks and still want a job. This was essentially unchanged from May.

This is generally trending down, but still a little elevated.

Although U-6, the number of persons employed part time for economic reasons, and the number of long term unemployed are still a little elevated, it appears the economy is nearing full employment.

Overall this was a solid report.

by Calculated Risk on 7/07/2017 08:41:00 AM

From the BLS:

Total nonfarm payroll employment increased by 222,000 in June, and the unemployment rate was little changed at 4.4 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in health care, social assistance, financial activities, and mining.
...
The change in total nonfarm payroll employment for April was revised up from +174,000 to +207,000, and the change for May was revised up from +138,000 to +152,000. With these revisions, employment gains in April and May combined were 47,000 more than previously reported.
...
In June, average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents to $26.25. Over the year, average hourly earnings have risen by 63 cents, or 2.5 percent.
emphasis added

Click on graph for larger image.

The first graph shows the monthly change in payroll jobs, ex-Census (meaning the impact of the decennial Census temporary hires and layoffs is removed - mostly in 2010 - to show the underlying payroll changes).

Total payrolls increased by 222 thousand in June (private payrolls increased 187 thousand).

Payrolls for April and May were revised up by a combined 47 thousand.

This graph shows the year-over-year change in total non-farm employment since 1968.

In June the year-over-year change was 2.24 million jobs.  This is a decent year-over-year gain.


The third graph shows the employment population ratio and the participation rate.

The Labor Force Participation Rate increased in June to 62.8%. This is the percentage of the working age population in the labor force.   A large portion of the recent decline in the participation rate is due to demographics.

The Employment-Population ratio increased to 60.1% (black line).

I'll post the 25 to 54 age group employment-population ratio graph later.

The fourth graph shows the unemployment rate.

The unemployment rate increased in June to 4.4%. 

This was above expectations of 170,000 jobs, and the previous two months were revised up.  A solid report.

I'll have much more later ...

by Calculated Risk on 7/06/2017 08:01:00 PM

Earlier:

My June Employment Preview

and Goldman: June Employment Preview

Friday:
• At 8:30 AM ET, Employment Report for June. The consensus is for an increase of 170,000 non-farm payroll jobs added in June, up from the 138,000 non-farm payroll jobs added in May. The consensus is for the unemployment rate to be unchanged at 4.3%.