by Calculated Risk on 11/23/2017 08:19:00 AM

With a Hat Tip to Neil Irwin (he started doing this several years ago) ... here are five economic reasons to be thankful this Thanksgiving ...

1) Low unemployment rate.

The unemployment rate declined to 4.1% in October.  The unemployment rate is down from 4.8% in October 2016 (a year ago), and is down from the cycle peak of 10.0% in October 2009.

Click on graph for larger image.

This is the lowest level for the unemployment rate since December 2000.

Also, this is the largest decline in the unemployment rate, from cycle peak-to-trough, since the BLS started tracking the unemployment rate in 1948.  (In the early '80s, the unemployment rate declined from 10.8% to 5.0%; a decline of 5.8 percentage points.  The current decline from 10.0% to 4.1% is 5.9 percentage points!)

2) Low unemployment claims.

The number of new claims for unemployment insurance benefits is close to the lowest level in 40 years (with a much smaller population back then).  The four week average of new unemployment has fallen to 239,750, down from 251,000 a year ago, and down from the peak of 660,000 during the great recession.

Here is a graph of initial weekly unemployment claims.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims is at 239,750.

The low level of claims suggests relatively few layoffs.

3) Job Openings Near Record Levels.

There were 6.09 million job openings in September. This is close to the record high of 6.14 million in July 2017.

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

Job openings (yellow) have been above 5 million for 33 consecutive months.

Note that Quits are up 4% year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").

More job openings, and rising quits, are positive signs for the labor market.

4) Household Debt burdens are near record lows.

Household debt burdens have declined sharply over the last several years.

The Household debt service ratio was at 13.2% in 2007, and has fallen to under 10% now.

The graph, based on data from the Federal Reserve, shows the Total Debt Service Ratio (DSR), and the DSR for mortgages (blue) and consumer debt (yellow).

The overall Debt Service Ratio increased slightly in Q2 2017, and has been moving sideways and is near a record low.  Note: The financial obligation ratio (FOR) was unchanged in Q2 and is also near a record low (not shown).

The DSR for mortgages (blue) are near the low for the last 35 years.  This ratio increased rapidly during the housing bubble, and continued to increase until 2007. With falling interest rates, and less mortgage debt (mostly due to foreclosures), the mortgage ratio has declined significantly.

This data suggests aggregate household cash flow has improved.

5) New Home Sales are increasing - and will probably increase more.

The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.

New home sales were at 667 thousand SAAR (Seasonally Adjusted Annual Rate) in September, up from 570 thousand SAAR in September 2016, and up from the cycle low of 270 thousand SAAR in February 2011. This was the highest sales rate since October 2007.

Even with the increase in sales over the last several years, new home sales are still somewhat low historically and will probably increase over the next couple of years.

There are still problems, some people have not participated in the current expansion, wage growth has stalled in 2017 after picking up in 2015 and 2016, wealth and income inequality are at record extremes, and climate change is posing a real threat to the economy in the future - but there are economic reasons to be thankful this Thanksgiving.

Happy Thanksgiving to All!

by Calculated Risk on 11/22/2017 03:04:00 PM

A couple of key excerpts, the first on asset prices, and the second that low inflation might "prove more persistent".

From the Fed: Minutes of the Federal Open Market Committee, October 31-November 1, 2017:

In their comments regarding financial markets, participants generally judged that financial conditions remained accommodative despite the recent increases in the exchange value of the dollar and Treasury yields. In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances. They worried that a sharp reversal in asset prices could have damaging effects on the economy. It was noted, however, that elevated asset prices could be partly explained by a low neutral rate of interest. It was also observed that regulatory changes had contributed to an appreciable strengthening of capital and liquidity positions in the financial sector over recent years, increasing the resilience of the financial system to potential reversals in valuations.
...
Many participants observed, however, that continued low readings on inflation, which had occurred even as the labor market tightened, might reflect not only transitory factors, but also the influence of developments that could prove more persistent. A number of these participants were worried that a decline in longer-term inflation expectations would make it more challenging for the Committee to promote a return of inflation to 2 percent over the medium term. These participants' concerns were sharpened by the apparently weak responsiveness of inflation to resource utilization and the low level of the neutral interest rate, and such considerations suggested that the removal of policy accommodation should be quite gradual. In contrast, some other participants were concerned about upside risks to inflation in an environment in which the economy had reached full employment and the labor market was projected to tighten further, or about still very accommodative financial conditions. They cautioned that waiting too long to remove accommodation, or removing accommodation too slowly, could result in a substantial overshoot of the maximum sustainable level of employment that would likely be costly to reverse or could lead to increased risks to financial stability. A few of these participants emphasized that the lags in the response of inflation to tightening resource utilization implied that there could be increasing upside risks to inflation as the labor market tightened further.
emphasis added

by Calculated Risk on 11/22/2017 12:17:00 PM

The automakers will report November vehicle sales on Friday, Dec 1st.

Note: There are 25 selling days in November 2017, there were also 25 selling days in November 2016.

From WardsAuto: November U.S. Forecast: Post Sales-Surge Market Will Hit 17.1 Million SAAR

A WardsAuto forecast calls for U.S. automakers to deliver 1.36 million light vehicles in November.
...
The report puts the seasonally adjusted annual rate of sales for the month at 17.1 million units, below last year’s 17.6 million and last month’s exceptionally high 18.0 million.
emphasis added

Sales had been below 17 million SAAR (Seasonally Adjusted Annual Rate) for six consecutive months, until September (18.5 million SAAR) and October (18.0 million SAAR), when sales spiked due to buying following Hurricane Harvey. Sales in November were probably also a little elevated due to the hurricanes.

Even with the pickup in sales in September and October, sales are still down about 2% through October compared to the same period in 2006.

by Calculated Risk on 11/22/2017 10:49:00 AM

From the Philly Fed:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for October 2017. Over the past three months, the indexes increased in 40 states, decreased in nine, and remained stable in one, for a three-month diffusion index of 62. In the past month, the indexes increased in 41 states, decreased in seven, and remained stable in two, for a one-month diffusion index of 68.
emphasis added

Note: These are coincident indexes constructed from state employment data. An explanation from the Philly Fed:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing by production workers, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

Click on map for larger image.

Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession, and all or mostly green during most of the recent expansion.

Recently several states have turned red.

Source: Philly Fed.

Note: For complaints about red / green issues, please contact the Philly Fed.

And here is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged).

In October, 42 states had increasing activity (including minor increases).

The downturn in 2015 and 2016, in the number of states increasing, was mostly related to the decline in oil prices.  

The reason for the mid-2017 sharp decrease in the number of states with increasing activity is unclear.

by Calculated Risk on 11/22/2017 09:39:00 AM

From the MBA: Mortgage Applications Slightly Increase in Latest MBA Weekly Surve

Mortgage applications increased 0.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending November 17, 2017.

... The Refinance Index decreased 5 percent from the previous week. The seasonally adjusted Purchase Index increased 5 percent from one week earlier. The unadjusted Purchase Index increased 1 percent compared with the previous week and was 4 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 4.20 percent from 4.18 percent, with points increasing to 0.42 from 0.40 (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 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 4% year-over-year.

by Calculated Risk on 11/22/2017 08:33:00 AM

The DOL reported:

In the week ending November 18, the advance figure for seasonally adjusted initial claims was 239,000, a decrease of 13,000 from the previous week's revised level. The previous week's level was revised up by 3,000 from 249,000 to 252,000. The 4-week moving average was 239,750, an increase of 1,250 from the previous week's revised average. The previous week's average was revised up by 750 from 237,750 to 238,500.

Claims taking procedures continue to be disrupted in the Virgin Islands. The ability to take claims has improved in Puerto Rico.
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 increased to 239,750.

This was close to the consensus forecast. The low level of claims suggest relatively few layoffs.

by Calculated Risk on 11/21/2017 07:19:00 PM

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

• At 8:30 AM, The initial weekly unemployment claims report will be released. The consensus is for 240 thousand initial claims, down from 249 thousand the previous week.

• Also at 8:30 AM, Durable Goods Orders for October from the Census Bureau. The consensus is for a 0.5% increase in durable goods orders.

• At 10:00 AM, University of Michigan's Consumer sentiment index (final for November). The consensus is for a reading of 97.9, up from the preliminary reading 97.8.

• At 2:00 PM, FOMC Minutes, Meeting of October 31- November 1, 2017

NYU Stern's "In Conversation with Mervyn King" Series Presents Janet Yellen, Tuesday, November 21, 2017

by Calculated Risk on 11/21/2017 04:57:00 PM

Note: This appears to be a leading indicator for industrial production.

From the American Chemistry Council: Chemical Activity Barometer Continues Solid Gains Into 3rd Quarter

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), notched another solid increase over October’s reading both on a three-month moving average (3MMA) basis and an unadjusted basis. The CAB was up 0.4 percent and 0.3 percent, respectively. The increases continued a bounce back from the effects of Hurricanes Harvey and Irma. Compared to a year earlier, the CAB is up 3.3 percent on a 3MMA basis, a pace that continues to suggest further gains in U.S. commercial and industrial activity into 2nd quarter 2018.
...
pplying the CAB back to 1912, it has been shown to provide a lead of two to fourteen months, with an average lead of eight months at cycle peaks as determined by the National Bureau of Economic Research. The median lead was also eight months. At business cycle troughs, the CAB leads by one to seven months, with an average lead of four months. The median lead was three months. The CAB is rebased to the average lead (in months) of an average 100 in the base year (the year 2012 was used) of a reference time series. The latter is the Federal Reserve’s Industrial Production Index.
emphasis added

Click on graph for larger image.

This graph shows the year-over-year change in the 3-month moving average for the Chemical Activity Barometer compared to Industrial Production.  It does appear that CAB (red) generally leads Industrial Production (blue).

CAB increased solidly in early 2017 suggesting an increase in Industrial Production. The year-over-year increase in the CAB has slowed recently, but this still suggests further gains in industrial production in 2018.

by Calculated Risk on 11/21/2017 02:45:00 PM

The FDIC released the Quarterly Banking Profile for Q3 today:

Higher net interest income, reflecting modest growth in interest-bearing assets and wider net interest margins, helped earnings increase in the third quarter. Quarterly net income at the 5,737 commercial banks and savings institutions insured by the FDIC rose to $47.9 billion, an increase of $2.4 billion (5.2 percent) from third quarter 2016.1 The average return on assets (ROA) rose to 1.12 percent from 1.10 percent a year earlier. More than two out of every three banks—67.3 percent—reported year-over-year increases in earnings, and 59.8 percent reported higher quarterly ROAs. Only 3.9 percent of banks reported net losses for the quarter, compared with 4.6 percent in third quarter 2016.
...
The Deposit Insurance Fund (DIF) balance increased by $2.9 billion, to $90.5 billion, during the third quarter. ... The DIF’s reserve ratio (the fund balance as a percent of estimated insured deposits) rose to 1.28 percent on September 30, 2017, from 1.24 percent at June 30, 2017, and 1.18 percent four quarters ago. The September 30, 2017, reserve ratio is the highest for the DIF since June 30, 2005, when the reserve ratio was also 1.28 percent.
emphasis added

Click on graph for larger image.

The FDIC reported the number of problem banks declined slightly:

During the third quarter, mergers absorbed 50 insured institutions. Two new charters were added during the third quarter, and there were no bank failures. ... The number of banks on the FDIC’s “Problem Bank List” declined from 105 to 104 during the third quarter. Total assets of “problem” banks fell from $17.2 billion to $16 billion.

The dollar value of 1-4 family residential Real Estate Owned (REOs, foreclosure houses) declined from $3.30 billion in Q2 2017 to $3.08 billion in Q3. This is the lowest level of REOs since Q4 2006.

This graph shows the nominal dollar value of Residential REO for FDIC insured institutions. Note: The FDIC reports the dollar value and not the total number of REOs.

Since REOs are reported in dollars, and house prices have increased, it is unlikely FDIC institution REOs will get back to the $2.0 to $2.5 billion range back that happened in 2003 to 2005.    FDIC REOs will probably bottom close to the current level.

by Calculated Risk on 11/21/2017 12:43:00 PM

Earlier: NAR: "Existing-Home Sales Grow 2.0 Percent in October"

My view is a sales rate of 5.48 million is solid. In fact, I'd consider any existing home sales rate in the 5 to 5.5 million range solid based on the normal historical turnover of the existing stock. As always, it is important to remember that new home sales are more important for jobs and the economy than existing home sales. Since existing sales are existing stock, the only direct contribution to GDP is the broker's commission. There is usually some additional spending with an existing home purchase - new furniture, etc. - but overall the economic impact is small compared to a new home sale.

Inventory is still very low and falling year-over-year (down 10.4% year-over-year in October). Inventory has declined year-over-year for 29 consecutive months.  I started the year expecting inventory would be increasing year-over-year by the end of 2017. However it looks like 2017 will be another year of declining inventory.

Inventory is a key metric to watch.  More inventory would probably mean smaller price increases, and less inventory somewhat larger price increases.

The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Click on graph for larger image.

Sales NSA in October (458,000, red column) were above sales in  October 2016 (445,000, NSA) and at the highest level for October since 2006.

Sales NSA are now slowing seasonally, and sales NSA will be lower through February.