by Calculated Risk on 2/09/2018 09:20:00 AM

A few brief excerpts from a note by Merrill Lynch economists: The $1 trillion dollar budget deficit

The latest developments in Washington imply that the budget deficit will continue to swell in the coming years. The bipartisan Senate agreement would boost spending cap levels for defense and non-defense programs over the next two years by roughly $300bn. As a first pass at estimating the impact on the deficit forecast, we think it would [bring] deficits to $825bn and $1,070bn. This will translate to one of the largest budget deficits during an expansion and, by far, the largest when the economy is at full employment.
...
The Senate agreement also suspends the debt limit and staves off a potential Treasury default, which we projected would occur in early March without an increase. The “suspension” of the debt limit does not set a new level for the amount of debt outstanding, but instead sets a date on which the debt limit will be reinitiated. Press reports indicate that the debt limit will be suspended until March 2019, which removes this issue until Congress gets beyond the mid-term elections in November. ...

What do higher deficits mean for the economy and markets? The first order impact is greater Treasury supply ... [Merrill] expect the Treasury will look to boost its bill financing and see risks to more near-term supply due to a higher cash balance. These developments further the view of our rates strategy team for higher Treasury rates and a steeper curve. For the economy, a higher deficit will boost near term growth, though it will also threaten to “crowd out” private investment.

The US had trillion dollar deficits in the fiscal years during and just following the great recession. Those deficits peaked at close to 10% of GDP; this deficit will be around 5% of GDP, but still very high during the later stages of an expansion.

by Calculated Risk on 2/08/2018 07:55:00 PM

From CNBC: White House instructs government agencies to prepare for shutdown

The Trump administration instructed federal agencies to get ready for a possible government shutdown as Congress moved closer to the midnight Thursday deadline without passing a funding bill, CNBC confirmed.

An Office of Management and Budget official said the office is preparing for funding to lapse as a Senate stalemate drags on with only hours until current funding expires. The Trump administration supports the massive bipartisan budget deal working its way through Congress and wants lawmakers to pass it, the official said.

Some government agencies will run out of money and have to furlough workers if Congress lets funding lapse. A shutdown would be the second in less than a month.

Hundreds of thousands of workers would not go into work Friday if a shutdown takes place through the start of the day. Others would have to work without getting paid at first.

If the shutdown happens - and doesn't end quickly - several agencies will probably not release regular government reports. There are no major economic releases scheduled for tomorrow (Friday), so there will probably be no impact on data if the shutdown ends before Monday morning.

If the shutdown continues, the following week Housing Starts, CPI and Retail Sales will all probably be delayed.  Also, next week is the reference week for the February employment report, and that report will probably be delayed if the data isn't gathered on a timely basis.

Private data will still be released. All Federal Reserve data will continue to be released (separate funding).

Also, the DOL will continue to process unemployment claims and release the weekly initial unemployment claims report.

by Calculated Risk on 2/08/2018 04:37:00 PM

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

January wasn’t the best start of the year in terms of volume that railroads could hope for, but there’s certainly no reason to panic yet either. Total U.S. carloads were down 3.4%, or 42,431 carloads, in January 2018 from January 2017. The overall decrease was due largely to declines for coal (down 5.8%, or 25,083 carloads), motor vehicles and parts (down 10.1%, or 8,372 carloads), and grain (down 5.8%, or 6,917 carloads). ... Intermodal picked up where it left off last year (when it set a new annual record) with volume in January 2018 up 3.5%, or 44,183 containers and trailers, over January 2017 and marking the best January for intermodal in history. Winter weather negatively impacted rail traffic in January in many areas, but it’s impossible to precisely calculate how much, if any, of January’s decline is weather related.

Click on graph for larger image.

This graph from the Rail Time Indicators report shows U.S. average weekly rail carloads (NSA).  Light blue is 2018.

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

U.S. railroads originated 1,217,405 carloads in January 2018, down 3.4% (42,431 carloads) from January 2017. It’s the sixth year-over-year monthly decline in the past seven months and the largest percentage decline. Total carloads averaged 243,481 per week in January 2018; since 1988, when our U.S. data begin, only 2016 had a lower weekly average in January. This year, extreme cold and blizzards negatively impacted carloads in January in many parts of the country, though to be fair winter weather is a problem most years. It’s not possible to precisely determine how much of January’s decline might be attributable to the weather.

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

Following up on a record-setting 2017, 2018 started well for intermodal. Volume in January 2018 was 1.31 million containers and trailers, up 3.5%, or 44,183 units, over January 2017. Average weekly volume in January 2018 was 262,028 units, the most for a January in history.

by Calculated Risk on 2/08/2018 10:47:00 AM

From the MBA: Mortgage Delinquency Rate Up in 4th Quarter; Hurricanes Drive Up 60-Day and 90-Day Delinquencies

The delinquency rate for mortgage loans on one-to-four-unit residential properties increased to a seasonally adjusted rate of 5.17 percent of all loans outstanding at the end of the fourth quarter of 2017.

The delinquency rate was up 29 basis points from the previous quarter, and was 37 basis points higher than one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. The percentage of loans on which foreclosure actions were started during the fourth quarter was 0.25 percent, unchanged from the previous quarter, and three basis points lower than one year ago. Mortgage delinquencies increased across all loan types – FHA, VA and conventional – on a seasonally-adjusted basis.

The 30-day delinquency rate actually dropped by 15 basis points in the fourth quarter of 2017, as homeowners affected by Hurricanes Harvey, Irma and Maria either became current on their payments or moved to later stages of delinquency,” according to Marina Walsh, MBA’s Vice President of Industry Analysis. “However, while the earliest-stage delinquency rate dropped, the 60-day and 90-day delinquency rates did increase in the fourth quarter of 2017. Despite the hurricanes and these quarter-over-quarter results, most states are seeing overall mortgage delinquency rates at lower levels than a year ago.”

“The FHA overall delinquency rate in the fourth quarter of 2017 is higher compared to the fourth quarter of 2016 in all but three states. FHA borrowers appear to be impacted not only by the storms but other factors that could be stretching their ability to make payments,” Walsh continued. “Regardless of the hurricanes, an increase in delinquencies - particularly FHA delinquencies - off historic lows is not particularly surprising given the seasoning of the loan portfolio, expected higher interest rates, declining average credit scores on new FHA endorsements since 2014 and rising debt-to-income ratios. Mitigating factors include low unemployment and increasing home equity levels that provide homeowners with more options to cure a potential default.”

“Storm-related foreclosure moratoria continue to play a large factor in keeping foreclosure starts at bay, as the fourth quarter saw little movement in either foreclosure starts, or foreclosure inventory. As forbearance periods expire, an increase in the percent of loans in foreclosure is likely. We anticipate it will be several more quarters before the effects of the September hurricanes on the survey results dissipate, especially given extended forbearance periods.”
emphasis added

Click on graph for larger image.

This graph shows the percent of loans delinquent by days past due.

The percent of loans delinquent increased in Q4, primarily due to the hurricanes.

The percent of loans in the foreclosure process continues to decline, and is close to normal levels.

by Calculated Risk on 2/08/2018 08:34:00 AM

The DOL reported:

In the week ending February 3, the advance figure for seasonally adjusted initial claims was 221,000, a decrease of 9,000 from the previous week's unrevised level of 230,000. The 4-week moving average was 224,500, a decrease of 10,000 from the previous week's unrevised average of 234,500. This is the lowest level for this average since March 10, 1973 when it was 222,000.

Claims taking procedures in Puerto Rico and in the Virgin Islands have still not returned to normal.
emphasis added

The previous week was unrevised.

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 224,500. This is the lowest level for the 4-average since 1973.

This was lower than the consensus forecast. The low level of claims suggest relatively few layoffs.

by Calculated Risk on 2/07/2018 06:43:00 PM

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 230 thousand the previous week.


Click on graph for larger image.

By request, here is a stock market graph. This graph shows the S&P 500 since 1990 (this excludes dividends).

The dashed line is the closing price today. The market is essentially unchanged year-to-date, and down about 6.7% from the recent high.

Corrections of 10% or so are usually fairly common (2017 was an unusual year), and this isn't  even 10%.

Still not scary - at least not yet.

by Calculated Risk on 2/07/2018 02:37:00 PM

Note: This index is possibly a leading indicator for new non-residential Commercial Real Estate (CRE) investment, except manufacturing.

From Dodge Data Analytics: The Dodge Momentum Index Falls as Year Begins

The Dodge Momentum Index dropped 5.1% in January to 143.7 (2000=100) from the revised December reading of 151.5. The Momentum Index is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year. The commercial component of the Momentum Index was 7.8% lower in the month, while the institutional component was down 0.9%. The fourth quarter of 2017 was particularly strong for the Momentum Index, and January’s retreat returns it to a more sustainable level. On a year-over-year basis, the Momentum Index is 7.7% higher, with both the commercial and institutional components showing growth over January 2017. This suggests that nonresidential building construction should continue to post moderate gains in 2018.
emphasis added

Click on graph for larger image.

This graph shows the Dodge Momentum Index since 2002. The index was at 143.7 in January, down from 151.1 in December.

The index is up 7.7% year-over-year.

According to Dodge, this index leads "construction spending for nonresidential buildings by a full year". This suggests further growth in 2018.

by Calculated Risk on 2/07/2018 12:40:00 PM

I haven't posted this in a few months.

The BLS diffusion index for total private employment was at 57.9 in January, down from 65.5 in December.

For manufacturing, the diffusion index was at 53.9, down from 60.5 in December.

Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS.  Above 60 is very good.  From the BLS:

Figures are the percent of industries with employment increasing plus one-half of the industries with unchanged employment, where 50 percent indicates an equal balance between industries with increasing and decreasing employment.

Overall both total private and manufacturing job growth was fairly widespread in January.

by Calculated Risk on 2/07/2018 09:40:00 AM

This is a key distressed market to follow since Las Vegas saw the largest price decline, following the housing bubble, of any of the Case-Shiller composite 20 cities.

The Greater Las Vegas Association of Realtors reported Southern Nevada home prices dip slightly in January, still up 11 percent from last year; GLVAR housing statistics for January 2018

Local home prices cooled off slightly in January but are still up more than 11 percent from one year ago, according to a report released today by the Greater Las Vegas Association of REALTORS® (GLVAR).
...
By the end of January, GLVAR reported 3,718 single-family homes listed for sale without any sort of offer. That’s down 36.5 percent from one year ago. For condos and townhomes, the 634 properties listed without offers in January represented a 21.8 percent drop from one year ago.

“That’s the lowest our condo inventory has been since 2004,” he added.

The total number of existing local homes, condos and townhomes sold during January was 2,812. Compared to one year ago, January sales were up 5.5 percent for homes and up 3.8 percent for condos and townhomes.
...
GLVAR reported that 29.2 percent of all local properties sold in January were purchased with cash, compared to 29.8 percent one year ago. That’s less than half of the February 2013 peak of 59.5 percent, indicating that cash buyers and investors are still active, but have been playing a smaller role in the local housing market in recent years.

At the same time, the number of so-called distressed sales continues to decline. GLVAR reported that short sales and foreclosures combined accounted for 4.3 percent of all existing local home sales in January, compared to 11 percent of all sales one year ago.
emphasis added

1) Overall sales were up 5% year-over-year from 2,675 in January 2017 to 2,812 in January 2018.

2) Active inventory (single-family and condos) is down sharply from a year ago, from a total of 6,663 in January 2017 to 4,352 in January 2018.

3) Fewer distressed sales.

by Calculated Risk on 2/07/2018 08:38:00 AM

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

Mortgage applications increased 0.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 2, 2018.

... The Refinance Index increased 1 percent from the previous week. The seasonally adjusted Purchase Index remained unchanged from one week earlier. The unadjusted Purchase Index increased 7 percent compared with the previous week and was 8 percent higher than the same week one year ago. ...

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) increased to its highest level since April 2014, 4.50 percent, from 4.41 percent, with points increasing to 0.57 from 0.56 (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 8% year-over-year.