by Calculated Risk on 11/02/2017 07:43:00 PM

My October Employment Preview

and Goldman: October Payrolls Preview

Friday:
• At 8:30 AM ET, Employment Report for October. The consensus is for an increase of 323,000 non-farm payroll jobs added in October, up from the 33,000 non-farm payroll jobs lost in September. The consensus is for the unemployment rate to increase to 4.3%.

• Also at 8:30 AM, Trade Balance report for September from the Census Bureau. The consensus is for the U.S. trade deficit to be at $43.4 billion in September from $42.4 billion in August.

• At 10:00 AM, the ISM non-Manufacturing Index for October. The consensus is for index to decrease to 58.7 from 59.8 in September.

by Calculated Risk on 11/02/2017 02:43:00 PM

Update: Here are five questions that people ask me all the time.
1. Are house prices in a bubble?
2. Is a recession imminent (within the next 12 months)?
3. Is the stock market a bubble?
4. Can investors use macro analysis?
5. Will Mr. Trump have a negative impact on the economy?

Last Friday I posted five economic questions I'm frequently asked.  Earlier this week I discussed: Are house prices in a new bubble?

Another common question is: Is a recession imminent (within the next 12 months)? Once again my short answer was: No.

First, I use NBER to date recessions and expansions. The trough of the recent recession was in June 2009, and the current expansion has lasted for 101 months. This is already the 3rd longest expansion in NBER history (since mid-1800s), trailing only the '90s expansion (from March '91 to Mar '01), and the '60s (from Feb '61 to Dec '69).

However, just because this is a long expansion, doesn't mean the expansion will end soon. Expansions don't die of old age!  There is a very good chance this will become the longest expansion in history.

There are several reasons this has been a long expansion.  Recoveries from a financial crisis tend to be slow since it takes years to resolve all the excesses.  Also, there was an early pivot during the recovery to fiscal austerity that slowed the pace of recovery.   Importantly, the Federal Reserve didn't overtighten like in the '30s (a lesson learned).  And housing, always a key cyclical sector, didn't participate early in the recovery since there were so many foreclosures.  This delayed the usual boost from housing, but housing now a key driver of the expansion.

Usually there is a clear reason for a recession.  When I started this blog in January 2005, I was writing about the "housing bubble", and expressing concern that the then coming housing bust would lead the economy into a recession (and possibly a financial crisis).    But I wasn't forecasting an immediate recession, and at the beginning of 2006, I thought it was too early to call for a recession.  It wasn't until 2007 that I started forecasting a recession (just made it with the recession starting in December 2007).

This isn't to be self-congratulatory on my forecasting, but rather to point out there was a clear reason (housing bust), and that it took time for the housing bubble to burst, and more time for the bust to drag the economy into recession.

So what would be the reason now? Most of the post-WWII recessions were caused by the Fed tightening monetary policy to slow inflation. I think this is the most likely cause of the next recession. Usually, when inflation starts to become a concern, the Fed tries to engineer a "soft landing", and frequently the result is a recession. Since inflation is not an immediate concern, the Fed will probably raise rates slowly.

I see analysts express concern about the yield curve, the debt, war with North Korea, hyperinflation and more.   I don't think these are a concern.

Note: Incentives motivate Wall Street economic forecasters to always be optimistic about the future (just like stock analysts). Of course, for the media and bloggers, there is an incentive to always be bearish, because bad news drives traffic (hence the prevalence of yellow journalism).

If a recession happens quickly, it will probably be the result of an exogenous event, such as a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons. All of these events are possible, but they are unpredictable, and the probabilities are extremely low that they will happen in the next few years or even decades - so I just ignore these possibilities.

So what am I watching? Housing. (Housing starts, New home sales, Residential Investment). I've written extensively about how housing is usually the best leading indicator for the economy.

The following graph shows Single family housing starts, New Home Sales, and Residential Investment (RI) as a percent of GDP.

Click on graph for larger image.

The arrows point to the peaks and troughs for these three measures.

The purpose of this graph is to show that these three indicators generally reach peaks and troughs together.  And to show that housing usually turns down prior to a recession.

Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.

A key exception was the 2001 recession that was due to the bursting of the stock bubble and less business investment.   But that was easy to understand and forecast. 

Right now I don't see any reason for a recession in the near term (through at least 2018).

by Calculated Risk on 11/02/2017 01:24:00 PM

A few brief excerpts from a note by Goldman Sachs economist Spencer Hill:

We estimate that nonfarm payrolls increased 340k in October, above consensus of +310k and the 3-month average pace of +91k. Our forecast reflects solid underlying job growth and a sharp rebound in employment in hurricane-affected areas, as we estimate flooding and power outages reduced the level of September payrolls by approximately 180k.

We estimate the unemployment rate was unchanged at 4.2% ... we expect average hourly earnings to increase 0.2% month over month and 2.7% year over year.
emphasis added

by Calculated Risk on 11/02/2017 10:00:00 AM

On Friday at 8:30 AM ET, the BLS will release the employment report for October. A key question is how much did hurricanes Harvey and Irma impact employment in September - and how much will employment bounce back in October. Merrill Lynch economists expect the following:

We forecast that nonfarm payrolls increased by 350k in October fully reversing the decline owing to hurricanes in September. We look for the unemployment rate to edge back up to 4.3% after an unexpected drop in September. On wages, we expect average hourly earnings to increase by 0.3% mom bringing the year over year rate to 2.8%.

The consensus, according to Bloomberg, is for an increase of 325,000 non-farm payroll jobs in October (with a range of estimates between 200,000 to 371,000), and for the unemployment rate to be unchanged at 4.2%.

The BLS reported 33,000 jobs lost in October.

Here is a summary of recent data:

• The ADP employment report showed an increase of 235,000 private sector payroll jobs in October. This was above consensus expectations of 210,000 private sector payroll jobs added. The ADP report hasn't been very useful in predicting the BLS report for any one month, but in general, this suggests employment growth close to or above expectations.

• The ISM manufacturing employment index decreased in October to 59.8%%. A historical correlation between the ISM manufacturing employment index and the BLS employment report for manufacturing, suggests that private sector BLS manufacturing payroll increased about 35,000 in October. The ADP report indicated manufacturing jobs increased 22,000 in October.

The ISM non-manufacturing employment index for October has not been released yet.

• Initial weekly unemployment claims averaged 232,500 in October,  down sharply from 267,000 in September. For the BLS reference week (includes the 12th of the month), initial claims were at 223,000, down from 260,000 during the reference week in September.

The decrease during the reference week suggests a much stronger employment report in October than in September.

• The final October University of Michigan consumer sentiment index increased to 100.7 from the September reading of 95.1. Sentiment is frequently coincident with changes in the labor market, but there are other factors too like gasoline prices and politics.

• Conclusion:  The ADP report and weekly claims suggest a strong employment report.   My guess is the employment report is strong (well over 200,000), but might fall short of the consensus.

Note: The revisions to October will be interesting. In September 2005, after hurricane Katrina, the BLS initially reported 35,000 jobs lost (that was later revised up to a gain of 67,000 jobs). As I noted in The Record Job Streak: A couple of Comments, the record job streak might still be ongoing, if employment in October is revised up enough.

by Calculated Risk on 11/02/2017 08:33:00 AM

The DOL reported:

In the week ending October 28, the advance figure for seasonally adjusted initial claims was 229,000, a decrease of 5,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 233,000 to 234,000. The 4-week moving average was 232,500, a decrease of 7,250 from the previous week's revised average. This is the lowest level for this average since April 7, 1973 when it was 232,250. The previous week's average was revised up by 250 from 239,500 to 239,750.

Claims taking procedures continue to be severely disrupted in the Virgin Islands. The ability to take claims has improved in Puerto Rico and they are now processing backlogged claims.
emphasis added

The previous week was revised up.

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 232,500 - the lowest since 1973..

This was below the consensus forecast.

by Calculated Risk on 11/01/2017 07:01:00 PM

From Bloomberg: Trump Selects Powell for Fed Chairman, Replacing Yellen

President Donald Trump plans to nominate Federal Reserve Governor Jerome Powell to the top job at the U.S. central bank, three people familiar with the decision said.

Trump, who has said he’ll announce his pick Thursday, would be choosing a former private-equity executive who favors continuing gradual interest-rate increases and sympathizes with White House calls to ease financial regulations.

A few comments:
1) Dr. Janet Yellen has done an outstanding job as Fed Chair.

2) This breaks the historical pattern of setting politics aside and reappointing the Fed Chair (a shameful break in precedent).

3) I hope Dr. Yellen stays on the Fed until her term as governor expires in 2024.  Please stay!

Thursday:
• At 8:30 AM ET, The initial weekly unemployment claims report will be released. The consensus is for 235 thousand initial claims, up from 233 thousand the previous week.

by Calculated Risk on 11/01/2017 03:38:00 PM

Based on a preliminary estimate from WardsAuto, light vehicle sales were at a 18.0 million SAAR in October.

From WardsAuto:

Another month ended well beyond expectations, as replacement sales and inventory clear-out boosted the daily sales rate to a 15-year high.

U.S. automakers sold 1.35 million vehicles in October, resulting in a daily sales rate of 53,945, 2.6% above prior-year.

A 18.00 million SAAR was ahead of year-ago’s 17.80 million and behind prior-month’s exceptionally high 18.48 million mark.

That is up 1% from October 2016, and down 2.6% from last month.


Click on graph for larger image.

This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for October (red, light vehicle sales of 18.0 million SAAR mostly from WardsAuto).

This was above the consensus forecast of 17.5 million for October (Note: Hurricane Harvey pushed down sales at the end of August - and this was part of the bounce back).

Still, after two consecutive years of record sales, vehicle sales will be down in year-over-year in 2017.

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Note: dashed line is current estimated sales rate.

by Calculated Risk on 11/01/2017 02:42:00 PM

Fannie Mae reported that the Single-Family Serious Delinquency rate increased to 1.01% in September, from 0.99% in August. The serious delinquency rate is down from 1.24% in September 2016.

The increase in September is probably due to the hurricanes.

These are mortgage loans that are "three monthly payments or more past due or in foreclosure". 

The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.

Click on graph for larger image

By vintage, for loans made in 2004 or earlier (4% of portfolio), 2.75% are seriously delinquent. For loans made in 2005 through 2008 (7% of portfolio), 5.83% are seriously delinquent, For recent loans, originated in 2009 through 2017 (89% of portfolio), only 0.33% are seriously delinquent. So Fannie is still working through poor performing loans from the bubble years.

In the short term - over the next several months - the delinquency rate will probably increase slightly due to the hurricanes.  After the hurricane bump, maybe the rate will decline another 0.3 percentage points or so to a cycle bottom, but this is pretty close to normal.

Note: Freddie Mac reported earlier.

by Calculated Risk on 11/01/2017 02:02:00 PM

FOMC Statement:

Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate despite hurricane-related disruptions. Although the hurricanes caused a drop in payroll employment in September, the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft. On a 12-month basis, both inflation measures have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained 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. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant 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 balance sheet normalization program initiated in October 2017 is proceeding.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Jerome H. Powell; and Randal K. Quarles.
emphasis added

by Calculated Risk on 11/01/2017 11:24:00 AM

Earlier today, the Census Bureau reported that overall construction spending increased in September:

Construction spending during September 2017 was estimated at a seasonally adjusted annual rate of $1,219.5 billion, 0.3 percent above the revised August estimate of $1,216.0 billion. The September figure is 2.0 percent above the September 2016 estimate of $1,195.6 billion.

Private spending decreased, and public spending increased, in September:

Spending on private construction was at a seasonally adjusted annual rate of $942.7 billion, 0.4 percent below the revised August estimate of $946.2 billion. ...

In September, the estimated seasonally adjusted annual rate of public construction spending was $276.8 billion, 2.6 percent above the revised August estimate of $269.8 billion.
emphasis added

Click on graph for larger image.

This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted.

Private residential spending has been increasing, but is still 24% below the bubble peak.

Non-residential spending is now 3% above the previous peak in January 2008 (nominal dollars).

Public construction spending is now 15% below the peak in March 2009, and 5% above the austerity low in February 2014.

The second graph shows the year-over-year change in construction spending.

On a year-over-year basis, private residential construction spending is up 10%. Non-residential spending is down 4% year-over-year. Public spending is down 2% year-over-year.

This was above the consensus forecast of a 0.1% increase for September, however private spending for previous months was revised down slightly - and public spending revised up.