by Calculated Risk on 7/27/2018 10:17:00 AM

The first graph below shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter trailing average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

In the graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue.

The dashed gray line is the contribution from the change in private inventories.

Click on graph for larger image.

Residential investment (RI) was decreased in Q2 (-1.1% annual rate in Q2).  Equipment investment increased at a 3.9% annual rate, and investment in non-residential structures increased at a 13.3% annual rate.

On a 3 quarter trailing average basis, RI (red) is up slightly, equipment (green) is solidly positive, and nonresidential structures (blue) is also up.

Recently real RI has been soft.

I'll post more on the components of non-residential investment once the supplemental data is released.

The second graph shows residential investment as a percent of GDP.

Residential Investment as a percent of GDP decreased in Q2, however RI has generally been increasing.  RI as a percent of GDP is only just above the bottom of the previous recessions - and I expect RI to continue to increase for the next couple of years.

The increase is now primarily coming from single family investment and home remodeling.

I'll break down Residential Investment into components after the GDP details are released.

Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

The third graph shows non-residential investment in structures, equipment and "intellectual property products".  Investment in non-residential structures - as a percent of GDP - picked up.

by Calculated Risk on 7/27/2018 08:34:00 AM

Note: This release includes the 2018 Comprehensive Update to GDP, and includes revisions to previous GDP releases.

From the BEA: Gross Domestic Product: Second Quarter 2018 (Advance Estimate)

Real gross domestic product increased at an annual rate of 4.1 percent in the second quarter of 2018, according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.2 percent (revised).
...
The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, federal government spending, and state and local government spending that were partly offset by negative contributions from private inventory investment and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The estimates released today also reflect the results of the 15th comprehensive update of the National Income and Product Accounts (NIPAs). The updated estimates reflect previously announced improvements, and include the introduction of new not seasonally adjusted estimates for GDP, GDI, and their major components. For more information, see the Technical Note.
emphasis added

The advance Q2 GDP report, with 4.1% annualized growth, was close to expectations.

Personal consumption expenditures (PCE) increased at 4.0% annualized rate in Q2, up from 0.5% in Q1.   Residential investment (RI) decreased 1.1% in Q2. Equipment investment increased at a 3.9% annualized rate, and investment in non-residential structures increased at a 13.3% pace.

I'll have more later ...

by Calculated Risk on 7/26/2018 08:04:00 PM

On GDP, remember that the release will include the 2018 Comprehensive Update to GDP. In addition to revisions and changes in methodology, the entire series of GDP (annually all the way back to 1929, and quarterly back to 1947) will be updated with new seasonal adjustments.

Also the BEA will now release GDP Not Seasonally Adjusted. This will be interesting since every year GDP NSA declines in Q1.

And the final pre-release update from the Altanta Fed: GDPNow

The final GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2018 is 3.8 percent on July 26, down from 4.5 percent on July 18. [July 26 estimate]
emphasis added

Friday:
• At 8:30 AM ET, Gross Domestic Product, 2nd quarter 2018 (Advance estimate). The consensus is that real GDP increased 4.2% annualized in Q2, up from 2.0% in Q1.

• At 10:00 AM,: University of Michigan's Consumer sentiment index (Final for July). The consensus is for a reading of 97.2, up from 97.1.

by Calculated Risk on 7/26/2018 04:43:00 PM

Freddie Mac reported that the Single-Family serious delinquency rate in June was 0.82%, down from 0.87% in May. Freddie's rate is down from 0.85% in June 2017.

Freddie's serious delinquency rate peaked in February 2010 at 4.20%.

This is the lowest serious delinquency for Freddie Mac since April 2008.

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

Click on graph for larger image

The increase in the delinquency rate late last year was due to the hurricanes - no worries about the overall market (These are serious delinquencies, so it took three months late to be counted).

After the hurricane bump, maybe the rate will decline to a cycle bottom in the 0.5% to 0.8% range - but this is close to a bottom.

Note: Fannie Mae will report for June soon.

by Calculated Risk on 7/26/2018 02:35:00 PM

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

From the American Chemistry Council: Chemical Activity Barometer Continues to Signal Gains in U.S. Commercial and Industrial Activity

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), rose 0.1 percent in July on a three-month moving average (3MMA) basis, improving upon June and May performances which were essentially flat. The barometer is up 3.9 percent year-over-year (Y/Y/), a slower pace than of that earlier in the year. The unadjusted CAB also increased, notching a 0.2 percent gain, up from a 0.1 percent gain in June. July readings indicate a continued expansion of U.S. commercial and industrial activity well into the first quarter 2019.
...
Applying 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).

The year-over-year increase in the CAB has been solid over the last year, suggesting further gains in industrial production in 2018 and early 2019.

by Calculated Risk on 7/26/2018 11:00:00 AM

From the Kansas City Fed: Tenth District Manufacturing Activity Continued to Expand Solidly

The Federal Reserve Bank of Kansas City released the July Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity continued to expand solidly, and expectations for future growth remained strong.

“Our composite index came down slightly from record highs in recent months,” said Wilkerson. “Many firms remain concerned about labor availability and tariffs, but optimism is still high.”
...
The month-over-month composite index was 23 in July, down from readings of 28 in June and 29 in May. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. Factory activity increased solidly at durable and nondurable goods plants, particularly for petroleum and coal products, minerals, fabricated metal, computers and electronics, and transportation equipment. Month-over-month indexes were mixed compared with the previous month, but most indexes remained at high levels. The employment index inched up while the order backlog and new orders for exports indexes were virtually unchanged. The production and shipments indexes fell moderately, and the new orders index eased somewhat. The raw materials index fell modestly and the finished goods inventory index also dipped slightly.
emphasis added

All of the regional surveys for July have been solid so far.

by Calculated Risk on 7/26/2018 10:06:00 AM

The Census Bureau released the Residential Vacancies and Homeownership report for Q2 2018.

This report is frequently mentioned by analysts and the media to track household formation, the homeownership rate, and the homeowner and rental vacancy rates.  However, there are serious questions about the accuracy of this survey.

This survey might show the trend, but I wouldn't rely on the absolute numbers.  The Census Bureau is investigating the differences between the HVS, ACS and decennial Census, and analysts probably shouldn't use the HVS to estimate the excess vacant supply or household formation, or rely on the homeownership rate, except as a guide to the trend.

Click on graph for larger image.

The Red dots are the decennial Census homeownership rates for April 1st 1990, 2000 and 2010. The HVS homeownership rate increased to 64.3% in Q2, from 64.2% in Q1.

I'd put more weight on the decennial Census numbers - given changing demographics, the homeownership rate has probably bottomed.

The HVS homeowner vacancy was unchanged at 1.5% in Q2. 

Once again - this probably shows the general trend, but I wouldn't rely on the absolute numbers.

The rental vacancy rate decreased to 6.8% in Q2.

The quarterly HVS is the most timely survey on households, but there are many questions about the accuracy of this survey.

Overall this suggests that vacancies have declined significantly, and my guess is the homeownership rate has bottomed - and that the rental vacancy rate has bottomed for this cycle.

by Calculated Risk on 7/26/2018 08:37:00 AM

The DOL reported:

In the week ending July 21, the advance figure for seasonally adjusted initial claims was 217,000, an increase of 9,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 207,000 to 208,000. The 4-week moving average was 218,000, a decrease of 2,750 from the previous week's revised average. The previous week's average was revised up by 250 from 220,500 to 220,750.
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 218,000.

This was at the consensus forecast. The low level of claims suggest few layoffs.

by Calculated Risk on 7/25/2018 08:38:00 PM

Thursday:
• At 8:30 AM ET, The initial weekly unemployment claims report will be released.  The consensus is for 217 thousand initial claims, up from 207 thousand the previous week.

• At 8:30 AM, Durable Goods Orders for June from the Census Bureau. The consensus is for a 3.2% increase in durable goods orders.

• At 10:00 AM, the Q2 2018 Housing Vacancies and Homeownership from the Census Bureau.

• At 11:00 AM, the Kansas City Fed manufacturing survey for July.

by Calculated Risk on 7/25/2018 04:02:00 PM

From the National Multifamily Housing Council (NMHC): July Apartment Market Conditions Show Improvement

Apartment market conditions improved across three of the four indexes measured by the July National Multifamily Housing Council (NMHC) Quarterly Survey of Apartment Market Conditions. The Sales Volume (55), Equity Financing (56) and Debt Financing Indexes (55) all increased to above the breakeven level of 50, while the Market Tightness Index came in at 46.

“The apartment industry is showing small, but unmistakable signs of improvement,” said NMHC Chief Economist Mark Obrinsky, “The Market Tightness Index continues to show some weakening. However, the number of respondents who reported looser conditions fell to 29 percent, the lowest share since January of 2016.”

“Of greater concern is that the demand for construction labor has been growing faster than supply, driving up costs and delaying some projects. In fact, the majority of firms reported that the availability of construction labor has declined over the past year, even accounting for increased compensation,” said Obrinsky.
...
At 46, the Market Tightness Index was the only index to remain below 50, marking the eleventh consecutive quarter of overall declining conditions. One-fifth of respondents reported tighter market conditions than three months prior, compared to 29 percent who reported looser conditions. Half of respondents felt that conditions were no different from last quarter.
emphasis added

Click on graph for larger image.

This graph shows the quarterly Apartment Tightness Index. Any reading below 50 indicates looser conditions from the previous quarter. This indicates market conditions were looser over the last quarter.

As I've mentioned before, this index helped me call the bottom for effective rents (and the top for the vacancy rate) early in 2010.

This is the eleventh consecutive quarterly survey indicating looser conditions - it appears supply has caught up with demand - and I expect rent growth to continue to slow.