by Calculated Risk on 7/12/2017 02:04:00 PM

Fed's Beige Book "This report was prepared at the Federal Reserve Bank of Kansas City based on information collected on or before June 30, 2017."

Economic activity expanded across all twelve Federal Reserve Districts in June, with the pace of growth ranging from slight to moderate. In addition, the majority of Districts expected modest to moderate gains in the months ahead. Consumer spending appears to be rising across a majority of Districts, led by increases in nonauto retail sales and tourism. However, many Districts noted some softening in consumer spending, particularly in auto sales which declined in half of the Districts. Manufacturing and nonfinancial services activity continued to grow, with most Districts reporting modest to moderate gains since the last report. Loan demand was steady to increasing in most Districts. Residential and nonresidential construction activity was flat to expanding in most Districts. Most Districts cited low home inventory levels in certain market segments which were constraining home sales in many areas.
...
Employment across most of the nation maintained a modest to moderate pace of expansion, although the Atlanta and St. Louis Districts noted flat employment levels. Labor markets tightened further for both low- and high-skilled positions, particularly in the construction and IT sectors. Contacts across a broad range of industries reported a shortage of qualified workers which had limited hiring. Wages continued to grow at a modest to moderate pace in most Districts, and many firms attributed these wage gains to tighter labor market conditions. Wage pressures generally trended with employment conditions, and rising wage pressures were noted among both low- and high-skilled positions. A few Districts also reported rising costs of benefits and variable pay.
emphasis added

And a few excerpts on real estate:

New York: Housing markets across the District have strengthened somewhat. Sales volume has picked up throughout the New York City area--particularly for moderately-priced, single-family homes in outlying areas. In contrast, sales activity has slowed a bit in parts of upstate New York, restrained by a lack of homes on the market.

A real estate contact in upstate New York State reported continued escalation in home prices, with homes in more sought-after areas often selling for above the list price. ...

San Franciso:

by Calculated Risk on 7/12/2017 09:09:00 AM

Excerpts from prepared statement from Fed Chair Janet Yellen: Semiannual Monetary Policy Report to the Congress

The Committee continues to expect that the evolution of the economy will warrant gradual increases in the federal funds rate over time to achieve and maintain maximum employment and stable prices. That expectation is based on our view that the federal funds rate remains somewhat below its neutral level--that is, the level of the federal funds rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel. Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance. But because we also anticipate that the factors that are currently holding down the neutral rate will diminish somewhat over time, additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion and return inflation to our 2 percent goal. Even so, the Committee continues to anticipate that the longer-run neutral level of the federal funds rate is likely to remain below levels that prevailed in previous decades.
emphasis added

And on the balance sheet:

Let me now turn to our balance sheet. Last month the FOMC augmented its Policy Normalization Principles and Plans by providing additional details on the process that we will follow in normalizing the size of our balance sheet. The Committee intends to gradually reduce the Federal Reserve's securities holdings by decreasing its reinvestment of the principal payments it receives from the securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps. Initially, these caps will be set at relatively low levels to limit the volume of securities that private investors will have to absorb. The Committee currently expects that, provided the economy evolves broadly as anticipated, it will likely begin to implement the program this year.

by Calculated Risk on 7/12/2017 07:00:00 AM

From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey

Mortgage applications decreased 7.4 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 7, 2017. This week’s results include an adjustment for the Fourth of July holiday.

... The Refinance Index decreased 13 percent from the previous week to the lowest level since January 2017. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. The unadjusted Purchase Index decreased 22 percent compared with the previous week and was 3 percent higher than the same week one year ago. ...

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($424,100 or less) increased to its highest level since May 2017, 4.20 percent, from 4.13 percent, with points decreasing to 0.31 from 0.32 (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 since 1990.

Refinance activity is near the low in January, and will not pick up significantly unless mortgage rates fall well below 4%.


The second graph shows the MBA mortgage purchase index.

According to the MBA, purchase activity is up 3% year-over-year.

by Calculated Risk on 7/11/2017 09:47:00 PM

Wednesday:
• At 7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 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.

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

by Calculated Risk on 7/11/2017 06:27:00 PM

This is a key housing market to follow since Phoenix saw a large bubble / bust followed by strong investor buying.

The Arizona Regional Multiple Listing Service (ARMLS) reports (table below):

1) Overall sales in June were up 6.5% year-over-year.

2) Active inventory is now down 10.2% year-over-year. 

More inventory (a theme in most of 2014) - and less investor buying - suggested price increases would slow sharply in 2014.  And prices increases did slow in 2014, only increasing 2.4% according to Case-Shiller.

In 2015, with falling inventory, prices increased a little faster.  Prices were up 6.3% in 2015 according to Case-Shiller.

With flat inventory in 2016, prices were up 4.8%.

This is the eighth consecutive month with a YoY decrease in inventory, and prices are rising a little faster this year (2.2% through April or 6.7% annual rate).

June Residential Sales and Inventory, Greater Phoenix Area, ARMLS
	Sales	YoY Change Sales	Cash Sales	Percent Cash	Active Inventory	YoY Change Inventory
June 2008	5,748	---	1,093	19.0%	53,8262	---
June 2009	9,325	62.2%	3,443	36.9%	38,358	---2
June 2010	9,278	-0.5%	3,498	37.7%	41,869	9.2%
June 2011	11,134	20.0%	5,001	44.9%	29,203	-30.3%
June 2012	9,133	-18.0%	4,272	46.8%	19,857	-32.0%
June 2013	8,150	-10.8%	3,055	37.5%	19,541	-1.6%
June 2014	7,239	-11.2%	1,854	25.6%	27,954	43.1%
June 2015	8,273	20.5%	2,005	23.0%	23,377	-16.4%
June 2016	8,986	8.6%	1,875	20.9%	24,898	6.5%
June 2017	9,571	6.5%	1,930	20.2%	22,358	-10.2%
1 June 2008 does not include manufactured homes, ~100 more 2 June 2008 Inventory includes pending

by Calculated Risk on 7/11/2017 01:14:00 PM

Earlier from the National Federation of Independent Business (NFIB): June 2017 Report: Small Business Optimism Index

The Index of Small Business Optimism fell 0.9 points to 103.6, but sustained the surge in optimism that started the day after the election. The Index peaked at 105.9 in January and has dropped 2.3 points to date, no doubt in part due to the mess in Washington, D.C. ... There isn’t much euphoria in the outlook for the second half of the year.
...
Small business owners reported an adjusted average employment change per firm of negative 0.04 workers per firm over the past few months, basically zero. This followed one of the best readings since 2008 posted in May. Ten percent (down 5 points) reported increasing employment an average of 3.4 workers per firm and 11 percent (up 2 points) reported reducing employment an average of 2.1 workers per firm (seasonally adjusted). Fifty-four percent reported hiring or trying to hire (down 5 points), but 46 percent reported few or no qualified applicants for the positions they were trying to fill. ...
emphasis added

Click on graph for larger image.

This graph shows the small business optimism index since 1986.

The index declined to 103.6 in June.

by Calculated Risk on 7/11/2017 10:08:00 AM

From the BLS: Job Openings and Labor Turnover Summary

The number of job openings decreased to 5.7 million on the last business day of May, the U.S. Bureau of Labor Statistics reported today. Over the month, hires increased to 5.5 million and separations increased to 5.3 million. Within separations, the quits rate was little changed at 2.2 percent and the layoffs and discharges rate was unchanged at 1.1 percent. ...

The number of quits increased to 3.2 million (+177,000) in May. The quits rate was 2.2 percent. The number of quits rose for total private (+159,000) and for government (+19,000).
emphasis added

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

This series started in December 2000.

Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for May, the most recent employment report was for June.

Click on graph for larger image.


Note that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of labor market turnover.  When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

Jobs openings decreased in May to 5.666  million from 5.967 in April.

The number of job openings (yellow) are up 2% year-over-year.

Quits are up 7% year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").

Job openings are mostly moving sideways at a high level, and quits are increasing.  This is another solid report.

by Calculated Risk on 7/10/2017 09:19:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Little-Changed Near Recent Highs

Mortgage rates improved somewhat today, on average, but the gains were modest.  Some lenders were unchanged from Friday afternoon's latest levels.  That leaves us essentially in line with the highest rates since early April, after having been at 8-month lows just 2 weeks ago.  From 8-month lows to 3-month highs is an abrupt move taken at face value, but it's made possible due to a narrow range persisting during that time (relative to other stretches of 8 months of time). [30YR FIXED - 4.125%]

Tuesday:
• At 6:00 AM ET: NFIB Small Business Optimism Index for June.

• At 10:00 AM, Job Openings and Labor Turnover Survey for May from the BLS. Jobs openings increased in April to 6.044 million from 5.785 million in March.

by Calculated Risk on 7/10/2017 04:04:00 PM

One of the metrics we'd like to follow is a ratio of house prices to incomes. Unfortunately most income data is released with a significantly lag, and there are always questions about which income data to use (the average total income is skewed by the income of a few people).

And for key measures of house prices - like Case-Shiller - we have indexes, not actually prices.

But we can construct a ratio of the house price indexes to some measure of income.

For this graph I decided to look at house prices and the National Average Wage Index from Social Security.

Click on graph for larger image.

This graph shows the ratio of house price indexes divided by the National Average Wage Index (the Wage index is first divided by 1000).

This uses the annual average National Case-Shiller index since 1976.

As of 2016, house prices were somewhat above the median historical ratio - but far below the bubble peak. 

Prices have increased further in 2017, but house prices relative to incomes are still below the 1989 peak (and way below 2006).

Going forward, I think it would be a positive if wages outpaced, or at least kept pace with house prices increases for a few years.

Notes: The national wage index for 2016 is estimated using the same increase as in 2015.

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.