by Calculated Risk on 1/03/2018 10:04:00 AM

The ISM manufacturing index indicated expansion in December. The PMI was at 59.7% in December, up from 58.2% in November. The employment index was at 57.0%, down from 59.7% last month, and the new orders index was at 69.4%, up from 64.0%.

From the Institute for Supply Management: December 2017 Manufacturing ISM® Report On Business®

Economic activity in the manufacturing sector expanded in December, and the overall economy grew for the 103rd consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report on Business®.

The report was issued today by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee: “The December PMI® registered 59.7 percent, an increase of 1.5 percentage points from the November reading of 58.2 percent. The New Orders Index registered 69.4 percent, an increase of 5.4 percentage points from the November reading of 64 percent. The Production Index registered 65.8 percent, a 1.9 percentage point increase compared to the November reading of 63.9 percent. The Employment Index registered 57 percent, a decrease of 2.7 percentage points from the November reading of 59.7 percent. The Supplier Deliveries Index registered 57.9 percent, a 1.4 percentage point increase from the November reading of 56.5 percent. The Inventories Index registered 48.5 percent, an increase of 1.5 percentage points from the November reading of 47 percent. The Prices Index registered 69 percent in December, a 3.5 percentage point increase from the November reading of 65.5 percent, indicating higher raw materials prices for the 22nd consecutive month. Comments from the panel reflect expanding business conditions, with new orders and production leading gains; employment expanding at a slower rate; order backlogs expanding at a faster rate; and export orders and imports continuing to grow in December. Supplier deliveries continued to slow (improving) at a faster rate, and inventories continued to contract at a slower rate during the period. Price increases continued at a faster rate. The Customers’ Inventories Index declined and remains at low levels.”
emphasis added

Click on graph for larger image.

Here is a long term graph of the ISM manufacturing index.

This was above expectations of 58.0%, and suggests manufacturing expanded at a faster pace in December than in November.

A strong report.

by Calculated Risk on 1/03/2018 09:32:00 AM

Reis released their Q4 2017 Office Vacancy survey this morning. Reis reported that the office vacancy rate was unchanged at 16.3% in Q4, from 16.3% in Q3. This is up from 16.1% in Q4 2016, and down from the cycle peak of 17.6%.

From Reis Economist Barbara Denham:

Maintaining a steady balance between added supply and positive net absorption, the office market recorded no change in vacancy for the third quarter in a row. Currently at 16.3%, the national office vacancy rate has held steady most of the year climbing from a low of 16.1% at year-end 2016. Construction fell to 7.0 million square feet from 8.3 million last quarter and 10.7 million in the fourth quarter of 2016. Net absorption, or occupancy growth, was in line with construction at 5.2 million. Last quarter’s net absorption was 5.3 million square feet, while the fourth quarter of 2016 saw net absorption of 12.9 million square feet. Indeed, the fourth quarter generally sees the highest completion and net absorption numbers in the year; thus, this quarter’s lackluster results were especially noteworthy.
...
The sluggish occupancy growth numbers have kept a lid on rent growth. Although office rents increased 0.6% in the quarter – higher than previous quarters growth rates of 0.4% – asking and effective rents have both only increased 1.8% since the fourth quarter of 2016. This is the third straight quarter that saw a year-over-year effective rent growth rate below 2%.

Click on graph for larger image.

This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual).

Reis reported the vacancy rate was at 16.3% in Q4.  The office vacancy rate is moving sideways at an elevated level.

Office vacancy data courtesy of Reis.

by Calculated Risk on 1/03/2018 07:00:00 AM

From the MBA: Mortgage Applications Decrease Over Two Week Period in Latest MBA Survey

Mortgage applications decreased 2.8 percent from two weeks earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 29, 2017. The results include adjustments to account for the Christmas holiday.

... The Refinance Index decreased 7 percent from two weeks ago. The seasonally adjusted Purchase Index increased 1 percent from two weeks earlier. The unadjusted Purchase Index decreased 40 percent compared with two weeks ago 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) decreased to 4.16 percent from 4.20 percent, with points decreasing to 0.35 from 0.39 (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 3% year-over-year.

by Calculated Risk on 1/02/2018 07:29:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Begin New Year Under Pressure

Bond markets weakened somewhat quickly, thus raising the risk that early 2018 would indeed follow-through on the promise that's been broken time and again when the average 30yr fixed rate has attempted to move up from the 4% level. [30YR FIXED - 4.0%-4.125%]
emphasis added

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

• Early, Reis Q4 2017 Office Survey of rents and vacancy rates.

• At 10:00 AM, ISM Manufacturing Index for December. The consensus is for the ISM to be at 58.0. The ISM manufacturing index was at 58.2% in November, the employment index was at 59.7%, and the new orders index was at 64.0%.

• At 10:00 AM, Construction Spending for November. The consensus is for a 0.6% increase in construction spending.

• All day, Light vehicle sales for December. The consensus is for light vehicle sales to be 17.5 million SAAR in December, up from 17.4 million in November (Seasonally Adjusted Annual Rate).

• At 2:00 PM, FOMC Minutes, Meeting of December 12 - 13, 2017

by Calculated Risk on 1/02/2018 04:00:00 PM

Note: I'll be on Bloomberg's #wdym today.

Here is a review of the Ten Economic Questions for 2017.

Here are my ten questions for 2018. See links at bottom for a follow up, with some thoughts on each of these questions.

The purpose of these questions is to provide a framework to think about how the U.S. economy will perform in 2018, and - when there are surprises - to adjust my thinking.

1) Economic growth: Heading into 2018, most analysts are pretty sanguine and expecting some pickup in growth due to the recent tax cuts.  From Goldman Sachs:

"We are adjusting our forecasts to reflect the final details of the tax bill, as well as the incremental easing in financial conditions and continued strong economic momentum to end the year. We are increasing our GDP forecasts for 2018 and 2019 by 0.3pp and 0.2pp, respectively, on a Q4/Q4 basis (to 2.6% and 1.7%)."

How much will the economy grow in 2018?

2) Employment: Through November, the economy has added just over 1,900,000 jobs this year, or 174,000 per month. As expected, this was down from the 187 thousand per month in 2016.  Will job creation in 2018 be as strong as in 2017?  Or will job creation be even stronger, like in 2014 or 2015?  Or will job creation slow further in 2018?

3) Unemployment Rate: The unemployment rate was at 4.1% in November, down 0.5 percentage points year-over-year.  Currently the FOMC is forecasting the unemployment rate will be in the 3.7% to 4.0% range in Q4 2018.  What will the unemployment rate be in December 2018?

4) Inflation: The inflation rate has increased a little recently, and some key measures are now close to the the Fed's 2% target. Will core inflation rate rise in 2018? Will too much inflation be a concern in 2018?

5) Monetary Policy:  The Fed raised rates three times in 2017 and started to reduce their balance sheet. The Fed is forecasting three more rate hikes in 2018.  Some analysts think there will be more, from Goldman Sachs:

"We expect the next rate hike to come in March with subjective odds of 75%, and we continue to expect a total of four hikes in 2018."

Will the Fed raise rates in 2018, and if so, by how much?

6) Real Wage Growth: Wage growth picked up in 2016 (up 2.9%), but slowed in 2017 (up 2.5% year-over-year in November).  How much will wages increase in 2018?

7) Residential Investment: Residential investment (RI) was sluggish in 2017, although new home sales were up solidly.  Note: RI is mostly investment in new single family structures, multifamily structures, home improvement and commissions on existing home sales.  How much will RI increase in 2018?  How about housing starts and new home sales in 2018?

8) House Prices: It appears house prices - as measured by the national repeat sales index (Case-Shiller, CoreLogic) - will be up over 6% in 2017.   What will happen with house prices in 2018?

9) Housing Inventory: Housing inventory declined in 2015, 2016 and 2017.  Will inventory increase or decrease in 2018?

10) Housing and Taxes A key change in the new tax law is limiting the deductibility of State and Local Taxes (SALT) and property taxes to $10,000. Many analysts think this will hit certain segments of the housing market in states like New York, New Jersey and California. The NAR noted their forecast today:

"Heading into 2018, existing-home sales and price growth are forecast to slow, primarily because of the altered tax benefits of homeownership affecting some high-cost areas."

Relative to the overall market, will sales slow, inventory increase, and price growth slow in these states?

There are other important questions, but these are the ones I'm focused on right now.

Here is some discussion and a few predictions:

• Question #1 for 2018: How much will the economy grow in 2018?
• Question #2 for 2018: Will job creation slow further in 2018?
• Question #3 for 2018: What will the unemployment rate be in December 2018?
• Question #4 for 2018: Will the core inflation rate rise in 2018? Will too much inflation be a concern in 2018?
• Question #5 for 2018: Will the Fed raise rates in 2018, and if so, by how much?
• Question #6 for 2018: How much will wages increase in 2018?
• Question #7 for 2018: How much will Residential Investment increase?
• Question #8 for 2018: What will happen with house prices in 2018?
• Question #9 for 2018: Will housing inventory increase or decrease in 2018?
• Question #10 for 2018: Will the New Tax Law impact Home Sales, Inventory, and Price Growth in Certain States?

by Calculated Risk on 1/02/2018 02:14:00 PM

From HotelNewsNow.com: STR: US hotel results for week ending 23 December

The U.S. hotel industry reported positive year-over-year results in the three key performance metrics during the week of 17-23 December 2017, according to data from STR.

In comparison with the week of 18-24 December 2016, the industry recorded the following:

• Occupancy: +7.1% to 45.1%
• Average daily rate (ADR): +0.5% to US$106.97
• Revenue per available room (RevPAR): +7.6% to US$48.28

Among the Top 25 Markets, Houston, Texas, reported the largest increase in each of the three key performance metrics: occupancy (+33.5% to 50.9%), ADR (+17.3% to US$92.28) and RevPAR (+56.7% to US$47.00).
emphasis added

Note: The hurricanes continue to drive demand in Texas and Florida, especially in Houston.

The following graph shows the seasonal pattern for the hotel occupancy rate using the four week average.

The red line is for 2017, dash light blue is 2016, dashed orange is 2015 (now 2nd best year on record), blue is the median, and black is for 2009 (the worst year since the Great Depression for hotels).

Currently the occupancy rate, to date, is ahead of the record year in 2015.  The hurricanes will push the annual occupancy rate to a new record in 2017.

Data Source: STR, Courtesy of HotelNewsNow.com

by Calculated Risk on 1/02/2018 11:59:00 AM

Here is another update on framing lumber prices. Early in 2013 lumber prices came close to the housing bubble highs - and prices finished 2017 near the bubble highs.

This graph shows two measures of lumber prices: 1) Framing Lumber from Random Lengths through December 2017 (via NAHB), and 2) CME framing futures.

Prices in 2017 are up solidly year-over-year and will probably exceed the housing bubble highs in the Spring of 2018.  Note: CME prices hit an all time high briefly in November.

Click on graph for larger image in graph gallery.

Right now Random Lengths prices are up 20% from a year ago, and CME futures are up about 43% year-over-year.

There is a seasonal pattern for lumber prices. Prices frequently peak around May, and bottom around October or November - although there is quite a bit of seasonal variability.

It looks like we will see record prices in the Spring of 2018.

by Calculated Risk on 1/02/2018 09:45:00 AM

Notes: This CoreLogic House Price Index report is for November. The recent Case-Shiller index release was for October. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA).

From CoreLogic: CoreLogic Reports Fourth Consecutive Month with More Than 6 Percent Year-Over-Year Home Price Growth in November

CoreLogic® ... today released its CoreLogic Home Price Index (HPI™) and HPI Forecast™ for November 2017, which shows home prices are up both year over year and month over month. Home prices nationally increased year over year by 7 percent from November 2016 to November 2017, and on a month-over-month basis home prices increased by 1 percent in November 2017 compared with October 2017,* according to the CoreLogic HPI.

Looking ahead, the CoreLogic HPI Forecast indicates that home prices will increase by 4.2 percent on a year-over-year basis from November 2017 to November 2018, and on a month-over-month basis home prices are expected to decrease by 0.4 percent from November 2017 to December 2017. The CoreLogic HPI Forecast is a projection of home prices using the CoreLogic HPI and other economic variables. Values are derived from state-level forecasts by weighting indices according to the number of owner-occupied households for each state.

“Rising home prices are good news for home sellers, but add to the challenges that home buyers face,” said Dr. Frank Nothaft, chief economist for CoreLogic. “Growing numbers of first-time buyers find limited for-sale inventory for lower-priced homes, leading to both higher rates of price growth for ‘starter’ homes and further erosion of affordability.”
emphasis added

CR Note: The YoY increase has been in the 5% to 7% range for the last couple of years.  This is the top end of that range.

The year-over-year comparison has been positive for almost six consecutive years since turning positive year-over-year in February 2012.

by Calculated Risk on 1/01/2018 09:20:00 PM

Happy New Year!

Weekend:
• Schedule for Week of Dec 31, 2017

• Question #1 for 2018: How much will the economy grow in 2018?
• Question #2 for 2018: Will job creation slow further in 2018?
• Question #3 for 2018: What will the unemployment rate be in December 2018?
• Question #4 for 2018: Will the core inflation rate rise in 2018? Will too much inflation be a concern in 2018?
• Question #5 for 2018: Will the Fed raise rates in 2018, and if so, by how much?
• Question #6 for 2018: How much will wages increase in 2018?
• Question #7 for 2018: How much will Residential Investment increase?
• Question #8 for 2018: What will happen with house prices in 2018?
• Question #9 for 2018: Will housing inventory increase or decrease in 2018?
• Question #10 for 2018: Will the New Tax Law impact Home Sales, Inventory, and Price Growth in Certain States?

Tuesday:
• At 10:00 AM. Corelogic House Price index for November.

From CNBC: Pre-Market Data and Bloomberg futures: S&P 500 are up 5, and DOW futures are up 48 (fair value).

Oil prices were up over the last week with WTI futures at $60.23 per barrel and Brent at $66.87 per barrel.  A year ago, WTI was at $53, and Brent was at $55 - so oil prices are up solidly year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.48 per gallon. A year ago prices were at $2.34 per gallon - so gasoline prices are up 14 cents per gallon year-over-year.

by Calculated Risk on 1/01/2018 07:25:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2018. I've added some thoughts, and a few predictions for each question.

1) Economic growth: Heading into 2018, most analysts are pretty sanguine and expecting some pickup in growth due to the recent tax cuts.  From Goldman Sachs:

"We are adjusting our forecasts to reflect the final details of the tax bill, as well as the incremental easing in financial conditions and continued strong economic momentum to end the year. We are increasing our GDP forecasts for 2018 and 2019 by 0.3pp and 0.2pp, respectively, on a Q4/Q4 basis (to 2.6% and 1.7%)."

How much will the economy grow in 2018?

First, since I'm always asked, I don't see a recession in 2018.

Note: The Trump administration projected 3.5% annual real growth over Mr. Trump's term: "Boost growth to 3.5 percent per year on average, with the potential to reach a 4 percent growth rate." (now removed from Trump website).

Here is a table of the annual change in real GDP since 2005.  Economic activity has mostly been in the 2% range since 2010.  Given current demographics, that is about what we'd expect: See: 2% is the new 4%.

Note: This table includes both annual change and q4 over the previous q4 (two slightly different measures).  In the quote above, Goldman Sachs economists are comparing Q4 over the previous Q4 (a slightly different calculation).  For 2017, I used a 3.0% annual growth rate in Q4 2017 (this gives 2.6% Q4 over Q4 or 2.3% real annual growth).

Real GDP Growth
Year	Annual GDP	Q4 / Q4
2005	3.3%	3.0%
2006	2.7%	2.4%
2007	1.8%	1.9%
2008	-0.3%	-2.8%
2009	-2.8%	-0.2%
2010	2.5%	2.7%
2011	1.6%	1.7%
2012	2.2%	1.3%
2013	1.7%	2.7%
2014	2.6%	2.7%
2015	2.9%	2.0%
2016	1.5%	1.8%
20171	2.3%	2.6%
1 2017 estimate based on 3.0% Q4 annualized real growth rate

It is possible that there will be a pickup in growth in 2018 due to a combination of factors.

The new tax policy should boost the economy a little in 2018, and there will probably be some further economic boost from oil sector investment in 2018 since oil prices have increased recently.  Also the housing recovery is ongoing, however auto sales are mostly moving sideways.

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 2018.  And a 3% handle is possible if there is some pickup in productivity.

Here are the Ten Economic Questions for 2018 and a few predictions:

• Question #1 for 2018: How much will the economy grow in 2018?
• Question #2 for 2018: Will job creation slow further in 2018?
• Question #3 for 2018: What will the unemployment rate be in December 2018?
• Question #4 for 2018: Will the core inflation rate rise in 2018? Will too much inflation be a concern in 2018?
• Question #5 for 2018: Will the Fed raise rates in 2018, and if so, by how much?
• Question #6 for 2018: How much will wages increase in 2018?
• Question #7 for 2018: How much will Residential Investment increase?
• Question #8 for 2018: What will happen with house prices in 2018?
• Question #9 for 2018: Will housing inventory increase or decrease in 2018?
• Question #10 for 2018: Will the New Tax Law impact Home Sales, Inventory, and Price Growth in Certain States?