by Calculated Risk on 10/26/2018 08:36:00 AM

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

Real gross domestic product (GDP) increased at an annual rate of 3.5 percent in the third quarter of 2018, according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 4.2 percent.

The Bureau emphasized that the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see “Source Data for the Advance Estimate” on page 2). The "second" estimate for the third quarter, based on more complete data, will be released on November 28, 2018.
...
The increase in real GDP in the third quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, state and local government spending, federal government spending, and nonresidential fixed investment that were partly offset by negative contributions from exports and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP growth in the third quarter reflected a downturn in exports and a deceleration in nonresidential fixed investment. Imports increased in the third quarter after decreasing in the second. These movements were partly offset by an upturn in private inventory investment.
emphasis added

The advance Q3 GDP report, with 3.5% annualized growth, was close to expectations.

Note the Change in Private Inventories contributed 2.07 percentage points to GDP growth in Q3, and this will probably unwind in Q4.

Personal consumption expenditures (PCE) increased at 4.0% annualized rate in Q3, up from 3.8% in Q2.   Residential investment (RI) decreased 4.0% in Q3. Equipment investment increased at a 0.4% annualized rate, and investment in non-residential structures decreased at a 7.9% pace.

I'll have more later ...

by Calculated Risk on 10/25/2018 07:46:00 PM

Friday:
• At 8:30 AM ET, Gross Domestic Product, 3nd quarter 2018 (Advance estimate). The consensus is that real GDP increased 3.3% annualized in Q3, down from 4.2% in Q2.

• At 10:00 AM, University of Michigan's Consumer sentiment index (Final for October). The consensus is for a reading of 99.0.

Freddie Mac reported that the Single-Family serious delinquency rate in September was 0.73%, unchanged from 0.73% in August. Freddie's rate is down from 0.86% in September 2017.

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

This ties the lowest serious delinquency rate for Freddie Mac since January 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 (These are serious delinquencies, so it took three months late to be counted).  We will probably see another, smaller, bump following hurricanes Florence and Michael.

I expect the delinquency rate to decline to a cycle bottom in the 0.5% to 0.7% range - but this is close to a bottom.

Note: Fannie Mae will report for September soon.

by Calculated Risk on 10/25/2018 04:21:00 PM

CR Note: I've asked Brad Hunter for his thoughts on housing.  

Hunter has been in the economic forecasting business for 32 years, and has made a name for himself tracking and forecasting the homebuilding business. He led a nationwide team of consultants in advising home builders (and their financiers) during his long tenure at Metrostudy. 

He made several key calls of important turns (he warned his builder and financial clients of the dangers of overpaying for land in 2004/05, and he advised institutional investors to speculate heavily on land in 2009-2012). Here he lays out some of the key factors he sees driving the homebuilding business today. You can follow him at @bradleyhunter.

Home sales are reacting negatively to higher mortgage rates much the same way they did during the "Taper Tantrum" of 2013, when bond markets got the jitters and home sales dropped sharply as a result. Monthly-payment concern is about to become more of an issue for home sales.

A key question is how the home building companies will adjust to a rising-rate environment.

Homebuilders: "Lots" to Talk About

One of the main headwinds for homebuilding has been the supply (and therefore the price) of developed lots in locations where the builders want to build. The pace of lot development has not kept up with the need, particularly for builders who would like to build in a price range that middle-class people can afford.

Homebuilders are reporting fairly high levels of confidence these days, but they do say that lot prices are a major issue for them, as are material and labor costs. Most of these higher costs have been passed on to home buyers. At least so far. Lot costs have had the biggest negative effect on production of homes priced under $300,000, where there is the largest amount of under-served demand. I discuss this, along with the threat to affordability and home sales posed by tariffs, in my latest interview on Bloomberg Radio: Tariffs Are Big Concern For Homebuilders As Costs Rise (Radio)

My forecast of single-family home sales for the entire year 2018 is 613,000, virtually unchanged versus 2017, reflecting the rapid rate at which builders boosted prices this year. I am forecasting only a modest increase in single-family home sales and housing starts in 2019, reflecting increased affordability problems.

Builders will have to consider land parcels that are farther from the traditional urban cores in order to continue to produce homes that large numbers of households can afford.

The household formation numbers are once again strong. The demand is there. The builders who figure out how to capture that demand are the ones that will come out on top.

Home Price Appreciation: Tapping the Brakes

New data from the S&P CoreLogic Case-Shiller Index of home prices shows that the pace of home price increase is still elevated, but is finally starting to slow, as expected. Appreciation is in the 6% range, according to this measure of home prices, still much higher than the rate of income growth.

Las Vegas, Seattle and San Francisco currently lead the pack, all with double-digit rates of home appreciation.

We are seeing the beginning of a larger slowdown in appreciation. Home prices and monthly payments cannot continue to outrun buyers’ incomes for much longer.

I hasten to clarify that what I see coming is a slower rate of increase; not a nationwide decline in home prices. While a few markets may see some price declines in the months ahead, the overwhelming majority will continue to appreciate, just at a much slower pace.

My prediction going forward is that income ratios and rising interest rates will drive a leveling off of home prices, particularly in the most expensive markets in the country. My forecast is for home price appreciation of existing homes to slow to 4% in 2019, and I believe it could fall to the 2% range shortly after, on average.

Apartment Construction Pace is Finally Easing (a Good Thing)

Apartment construction boomed during the past seven years, and it is slowing now, so as not to get into an overbuilt situation. The apartment market is much more cyclical than single-family housing, more prone to getting ahead of demand. The slowdown in apartment construction is a helpful shift, in that it will reduce the likelihood or impact of a downturn.

by Calculated Risk on 10/25/2018 01:48:00 PM

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

From the American Chemistry Council: Chemical Activity Barometer Begins To Cool At Start of 4th Quarter; Year-Over-Year Growth Continues To Ease

he Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), posted a 0.2 percent gain in October on a three-month moving average (3MMA) basis. The barometer is up 3.8 percent (3MMA) year-over-year. The pace of growth has slowed form earlier in the year. The unadjusted measure of the CAB declined 0.2 percent in October.
...
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 softened recently, suggesting further gains in industrial production in 2018 and early 2019, but at a slower pace.

by Calculated Risk on 10/25/2018 11:00:00 AM

From the Kansas City Fed: Tenth District Manufacturing Activity Expanded at a Slightly Slower Pace

The Federal Reserve Bank of Kansas City released the October 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, but at a slower pace. Expectations for future activity eased slightly, but remained positive.

“While regional factories reported another month of growth, a number of firms engaged in international trade noted negative effects of tariffs on supply chains,” said Wilkerson.
...
The month-over-month composite index was 8 in October, down from 13 in September and 14 in August. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. The decline in factory growth was driven by slower expansion at durable goods plants, especially for machinery, computer and electronic products, and transportation equipment, while activity at nondurable goods plants increased. Month-over-month indexes were mixed in September, but positive overall. The production and new orders indexes declined slightly, while the order backlog and new orders for exports indexes inched up. The shipments and employment indexes both increased. The materials inventory index declined and the finished goods inventory index was unchanged from last month’s reading.
emphasis added

This is the lowest level for this index since 2016. The regional surveys for October have mostly indicated slower growth in October as compared to September, and these surveys suggest the ISM index will still be solid, but could be close to the lowest level this year.

by Calculated Risk on 10/25/2018 10:04:00 AM

From the NAR: Pending Home Sales See 0.5 Percent Increase in September

Pending home sales rose slightly in September and saw substantial increases in both the West and Midwest, according to the National Association of Realtors.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, increased 0.5 percent to 104.6 in September from 104.1 in August. However, year-over-year, contract signings dropped 1.0 percent make this the ninth straight month of annual decreases.
...
The PHSI in the Northeast dropped 0.4 percent to 92.3 in September, and is now 2.7 percent below a year ago. In the Midwest, the index rose 1.2 percent to 102.4 in September and is 1.1 percent lower than September 2017.

Pending home sales in the South fell 1.4 percent to an index of 119.6 in September; however, that is 3.3 percent higher than a year ago. The index in the West increased 4.5 percent in September to 93.1 and plunged 7.4 percent below a year ago.
emphasis added

This was above expectations for this index. Note: Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in October and November.

by Calculated Risk on 10/25/2018 08:34:00 AM

The DOL reported:

In the week ending October 20, the advance figure for seasonally adjusted initial claims was 215,000, an increase of 5,000 from the previous week's unrevised level of 210,000. The 4-week moving average was 211,750, unchanged from the previous week's unrevised average of 211,750.
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 was unchanged at 211,750.

This was slightly higher than the consensus forecast. The low level of claims suggest few layoffs.

by Calculated Risk on 10/24/2018 08:45:00 PM

Thursday:
• At 8:30 AM ET, The initial weekly unemployment claims report will be released.  The consensus is for 212 thousand initial claims, up from 210 thousand the previous week.

• Also at 8:30 AM, Durable Goods Orders for September from the Census Bureau. The consensus is for a 1.4% decrease in durable goods orders.

• At 10:00 AM, Pending Home Sales Index for September. The consensus is for no change in the index.

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

by Calculated Risk on 10/24/2018 04:47:00 PM

Following the weak new home sales report, I'd like to update a couple of graphs.

For the economy, what we should be focused on are single family starts and new home sales. As I noted in Investment and Recessions "New Home Sales appears to be an excellent leading indicator, and currently new home sales (and housing starts) are up solidly year-over-year, and this suggests there is no recession in sight."

Since I wrote that post, new home sales and housing starts have weakened.

For the bottoms and troughs for key housing activity, here is a graph of 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 some of the earlier 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. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.

RI as a percent of GDP has been sluggish recently, mostly due to softness in multi-family residential.   And it is too early to say that single family housing starts and new home sales have turned down.

Also, look at the relatively low level of RI as a percent of GDP, new home sales and single family starts compared to previous peaks.   To have a significant downturn from these levels would be surprising.

The second graph shows the YoY change in New Home Sales from the Census Bureau.

Note: the New Home Sales data is smoothed using a three month centered average before calculating the YoY change. The Census Bureau data starts in 1963.

Some observations:

1) When the YoY change in New Home Sales falls about 20%, usually a recession will follow. The one exception for this data series was the mid '60s when the Vietnam buildup kept the economy out of recession.   Note that the sharp decline in 2010 was related to the housing tax credit policy in 2009 - and was just a continuation of the housing bust.

2) It is also interesting to look at the '86/'87 and the mid '90s periods. New Home sales fell in both of these periods, although not quite 20%. As I noted in earlier posts, the mid '80s saw a surge in defense spending and MEW that more than offset the decline in New Home sales. In the mid '90s, nonresidential investment remained strong.

Although new home sales were down sharply in September, the decline isn't that large historically (at least not yet).

by Calculated Risk on 10/24/2018 02:05:00 PM

Fed's Beige Book "This report was prepared at the Federal Reserve Bank of Richmond based on information collected on or before October 15, 2018. "

Economic activity expanded across the United States, with the majority of Federal Reserve Districts reporting modest to moderate growth. New York and St. Louis indicated slight growth, overall, while Dallas reported robust growth driven by strong manufacturing, retail, and nonfinancial services activity. On balance, manufacturers reported moderate output growth; however, several Districts indicated that firms faced rising materials and shipping costs, uncertainties over the trade environment, and/or difficulties finding qualified workers. Demand for transportation services remained strong. Labor shortages were broadly noted and were linked to wage increases and/or constrained growth. Reports on commercial and residential real estate were mixed, although several Districts saw rising home prices and low levels of inventory.

And some signs of weaker housing market, as an example:

Single-family home sales were steady to down modestly in the suburbs around New York, including northern New Jersey. One contact ascribed some of this weakness to changes in federal tax law that limit deductibility of homeowner costs.

The inventory of homes on the market has risen throughout most of the District--particularly for smaller units in New York City. Still, current inventory levels remain quite low, particularly in upstate New York. Home price trends have been mixed, with values continuing to rise in upstate New York, Long Island, and northern New Jersey, but holding steady across New York City and its northern suburbs. Prices of new condos in New York City, as well as prices at the high end of the condo market more generally, have weakened noticeably.
emphasis added