by Calculated Risk on 1/11/2013 04:21:00 PM

From Wendy Chen at Nomura:

After slowing for seven straight quarters, we expect China's GDP growth to rebound to 8% in Q4 2012.

We expect real GDP growth to rebound to 8.0% y-o-y in Q4 from a low of 7.4% in Q3, underpinned by accommodative monetary and fiscal policies, inventory destocking coming to an end and a modest improvement in exports. Industrial production growth is likely to rise to 10.6% y-o-y in December from 10.1%, as a return to more normal inventories lifts production. We expect fixed asset investment to rise slightly to 20.8% y-o-y (ytd) in December from 20.7% in November, driven by infrastructure investment and possibly real estate investment. We expect retail sales to grow by 15.6% y-o-y in December from 14.9%, aided by easier financing conditions and rising asset prices.

The China data releases are scheduled for next Friday.

It appears China's growth is picking up in the short term, but growth will probably slow again. Michael Pettis wrote last month: Three cheers for the new data?

I expected that politics would require a jump in growth over the rest of this year and the beginning of the next, this “good growth” tells us nothing about the health of the underlying economy. It only tells us how difficult politically the transition is likely to be.
...
Growth rates in China will continue to slow dramatically in the next few years, and if there are temporary lulls, as there must be, these do not represent any sort of “bottoming out” at all. They simply represent the fact that Beijing cannot afford politically to allow the adjustment to taker place too quickly, and from time to time Beijing is are going to step on the investment accelerator to speed things up temporarily.

by Calculated Risk on 1/11/2013 10:46:00 AM

Last year I posted Ten Economic Questions for 2013. Here are my thoughts on the #1 question - and what I consider the #1 downside risk to the US economy in 2013.

Note: Here is a review of my 2012 Forecasts

1) US Policy: This is probably the biggest downside risk for the US economy in 2013. I assume some sort of fiscal agreement will be reached soon, but how much austerity will be included? What will happen with the Alternative Minimum Tax (AMT)? What about emergency unemployment benefits? What about extending the mortgage relief for debt forgiveness (important for short sales)?

And what about other policy in 2013 such as the "default ceiling" (aka debt ceiling)? In 2011, the threat of a US government default slowed the economy to almost a standstill for a month. Right now the White House is taking the Ronald Reagan approach (when the Democrats pulled a similar reckless stunt) and they are saying President Obama will only sign a clean debt ceiling bill. Good. Hopefully default is off the table, but you never know.

Comments: Since I posted this question, a fiscal agreement was reached to avert the "fiscal cliff". Although I would have structured the agreement differently, the key goal of reducing the amount of austerity in 2013 was achieved - unfortunately the media did a generally poor job of explaining the "fiscal cliff", and I suspect most people thought it was about reducing the deficit, when the main concern was reducing the deficit too quickly in 2013 and taking the economy back into recession.

As far as specifics that I mentioned in the question, the AMT was fixed long term, emergency unemployment benefits were extended, and the relief for mortgage debt forgiveness was extended for another year (important for short sales). These are all positives for the US economy.

Unfortunately there are still several fiscal issues remaining for this year. The "sequester" (automatic spending cuts) still needs to be resolved, the "debt ceiling" needs to be raised, and a “continuing resolution” needs to be passed or the government will be shut down.

The so-called "debt ceiling" is really just about paying the bills. Here are a few things to know:
1) The House will raise the debt ceiling before the deadline, and the US will pay the bills.

2) The House majority has no leverage on the "debt ceiling"; as I've noted before, the House majority holds a losing hand and everyone knows it. The sooner they fold (and raise the debt ceiling) the better for everyone. As we saw in 2011, there are real world consequences for waiting until the last minute.

3) Those thinking there are no consequences for missing the deadline, I suggest reading the new (January 7th) Debt Limit Analysis by analysts at the Bipartisan Policy Center. From a political perspective, missing the deadline will, in the words of Republican Senator Mitch McConnell, make the "Republican brand toxic".  It would be political suicide, so it will not happen.

Hopefully the House will fold their losing hand soon. If they are planning on taking the country to the brink, and betting voters will forget like after 2011, I think that is another losing bet.

Although the negotiations on the "sequester" will be tough, I suspect something will be worked out (remember the goal is to limit the amount of austerity in 2013).  The issue that might blow up is the “continuing resolution", and that might mean a partial shut down of the government.  This wouldn't be catastrophic (like the "debt ceiling"), but it would still cause problems for the economy and is a key downside risk.

And a final prediction: If we just stay on the current path - and the "debt ceiling" is raised, and a reasonable agreement is reached on the "sequester", and the “continuing resolution" is passed - I think the deficit will decline faster than most people expect over the next few years.  Eventually the deficit will start to increase again due to rising health care costs (this needs further attention), but that isn't a short term emergency.

Here are the ten questions for 2013 and a few predictions:
• Question #1 for 2013: US Fiscal Policy
• Question #2 for 2013: Will the U.S. economy grow in 2013?
• Question #3 for 2013: How many payroll jobs will be added in 2013?
• Question #4 for 2013: What will the unemployment rate be in December 2013?
• Question #5 for 2013: Will the inflation rate rise or fall in 2013?
• Question #6 for 2013: What will happen with Monetary Policy and QE3?
• Question #7 for 2013: What will happen with house prices in 2013?
• Question #8 for 2013: Will Housing inventory bottom in 2013?
• Question #9 for 2013: How much will Residential Investment increase?
• Question #10 for 2013: Europe and the Euro

by Calculated Risk on 1/11/2013 08:51:00 AM

The Department of Commerce reported:

[T]otal November exports of $182.6 billion and imports of $231.3 billion resulted in a goods and services deficit of $48.7 billion, up from $42.1 billion in October, revised. November exports were $1.7 billion more than October exports of $180.8 billion. November imports were $8.4 billion more than October imports of $222.9 billion.

The trade deficit was much larger than the consensus forecast of $41.1 billion.

The first graph shows the monthly U.S. exports and imports in dollars through October 2012.

Click on graph for larger image.

Both exports and imports increased in November. US trade has slowed recently.

Exports are 10% above the pre-recession peak and up 3.3% compared to November 2011; imports are near the pre-recession peak, and up 2.5% compared to November 2011.

The second graph shows the U.S. trade deficit, with and without petroleum, through November.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

The increase in the trade deficit in November was due to non-petroleum products.

Oil averaged $97.45 in November, down from $99.75 per barrel in October. The trade deficit with China increased to $28.95 billion in November, up from $26.78 billion in November 2011. Most of the trade deficit is still due to oil and China.

The trade deficit with the euro area was $10.6 billion in November, up from $8.2 billion in November 2011. It appears the eurozone recession is still impacting trade.

Note: The trade deficit might have been skewed by the port strike that started in late November.

by Calculated Risk on 1/10/2013 09:09:00 PM

Friday economic releases:
• At 8:30 AM ET, the Trade Balance report for November from the Census Bureau. The consensus is for the U.S. trade deficit to decrease to $41.1 billion in November from $42.2 billion in October. Export activity to Europe will be closely watched due to economic weakness. Note: the strike at the ports of Long Beach and Los Angeles started in late November and impacted this report.

• Also at 8:30 AM, Import and Export Prices for December. The consensus is a 0.1% increase in import prices.

This seems crazy, from the WSJ: Can I Buy Your House, Pretty Please?

In an echo of the last housing boom, ardent pitch letters from eager home buyers are popping up again in hot U.S. real-estate markets like Silicon Valley, Seattle, San Diego, suburban Chicago and Washington, D.C., housing economists and real-estate brokers say.

The heartfelt missives, often accompanied by personal photos, aim to create an emotional bond that can give their writers an edge—especially in situations where multiple bidders are vying for the same house. ...

“The market has gotten so crazy that money alone doesn’t talk,’’ explained Glenn Kelman, chief executive of Redfin

Pitch letters?

by Calculated Risk on 1/10/2013 05:00:00 PM

Back in November I was interviewed by Joe Weisenthal at Business Insider. One of my comments during our discussion on state and local governments was:

I wouldn’t be surprised if we see all of a sudden a report come out, “Hey, we’ve got a balanced budget in California.”

And today from Reuters: California Governor's budget has surprise: a surplus

The state expects $98.5 billion in revenues and transfers and plans spending $97.7 billion, according to the proposal published on the state Department of Finance website.

That leaves a surplus of $851 million for the year, in addition to a projected $785 million surplus for the current fiscal year, which ends in June, allowing the state to put $1 billion toward a rainy day fund.

Brown said he saw a balanced budget for the next four years.

Spending in the upcoming year is set to rise 5 percent, or $4.7 billion, from the current 2012-13 budget. Schools and universities will see a $4 billion boost, health care spending will rise $1.2 billion, while transfers to local government will drop $2.1 billion.

This is a tentative surplus, and there is plenty of debt, but this is another small positive step. The plan in California is to increase spending slightly in the upcoming year after several years of budget cuts.

As I mentioned in the previous post, moving from state and local budget cuts to some small increases will be a plus for the economy.

by Calculated Risk on 1/10/2013 01:30:00 PM

Note: Sometimes it is useful to jot down a few thoughts on how the economy is expected to perform. This isn't to test my forecasting skills; sometimes I learn more when I get something wrong!

Some years I make some big out-of-consensus calls, but my forecasts this year are mostly in line with the consensus.

Earlier I posted some questions for this year: Ten Economic Questions for 2013. I'll try to add some thoughts, and maybe some predictions for each question.

Note: Here is a review of my 2012 Forecasts

2) Economic growth: Heading into 2013 there are still significant downside risks from the European financial crisis and from U.S. fiscal policy. Will the U.S. economy grow in 2013? Or will there be another recession?

There are several positives for the economy at the beginning of 2013: residential investment is picking up (usually the best leading indicator for the economy), the state and local government layoffs and cutbacks appear to be ending, and a substantial amount of household deleveraging has already happened.

Here are a couple of graph on household debt (and debt service):

Click on graph for larger image.

This graph from the the NY Fed shows aggregate consumer debt decreased in Q3. This was mostly due to a decline in mortgage debt.

Household debt peaked in Q2 2008 and has been declining for over four years. There is probably more deleveraging ahead (mostly from foreclosures and distressed sales), but this suggests some improvement in household balance sheets.

The second graph is from the Fed's Household Debt Service and Financial Obligations Ratios. These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households.

The graph shows the DSR for both renters and homeowners (red), and the homeowner financial obligations ratio for mortgages and consumer debt. The overall Debt Service Ratio has declined back to early 1980s levels, and is near the record low - thanks to very low interest rates. The homeowner's financial obligation ratio for consumer debt is at 1994 levels.

The blue line is the homeowner's financial obligation ratio for mortgages (blue). This ratio increased rapidly during the housing bubble, and continued to increase until 2008. Now, with falling interest rates, and less mortgage debt (mostly due to foreclosures), the ratio is back to 2001 levels. This will probably decline further, but for many homeowners, the obligation ratio is low.

There are always downside risks from Europe and China, but usually with these positive trends I'd expect a pickup in US growth in 2013. However, the recent austerity (aka "fiscal cliff") - especially the payroll tax increase compared to 2012 - will be a drag on economic growth this year.

Here is a graph showing the rolling real GDP growth (over 4 quarters) since 2000 through Q3 2012. The rolling four quarter graph smooths out the quarterly up and downs, and show that the US economy has been growing at a little over 2% for the last few years.

We still don't know the size of the "sequester", but right now it appears the drag from austerity will probably offset the pickup in the private sector - and we can expect another year of sluggish growth in 2013 probably in the 2% range again.

Here are the ten questions for 2013 and a few predictions:
• Question #1 for 2013: US Fiscal Policy
• Question #2 for 2013: Will the U.S. economy grow in 2013?
• Question #3 for 2013: How many payroll jobs will be added in 2013?
• Question #4 for 2013: What will the unemployment rate be in December 2013?
• Question #5 for 2013: Will the inflation rate rise or fall in 2013?
• Question #6 for 2013: What will happen with Monetary Policy and QE3?
• Question #7 for 2013: What will happen with house prices in 2013?
• Question #8 for 2013: Will Housing inventory bottom in 2013?
• Question #9 for 2013: How much will Residential Investment increase?
• Question #10 for 2013: Europe and the Euro

by Calculated Risk on 1/10/2013 10:15:00 AM

From the BLS: Job Openings and Labor Turnover Summary

The number of job openings in November was 3.7 million, unchanged from October.
...
The level of total nonfarm job openings was 2.4 million at the end of the recession in June 2009.
...
The number of quits (not seasonally adjusted) was little changed over the 12 months ending in November for total nonfarm and total private.

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

This series started in December 2000.

Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for November, the most recent employment report was for December.

Click on graph for larger image.

Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of turnover.  When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

Jobs openings increased slightly in November to 3.676 million, up from 3.665 million in October. The number of job openings (yellow) has generally been trending up, and openings are up about 12% year-over-year compared to November 2011.

Quits increased slightly in November, and quits are up 8% year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").

Not much changes month-to-month in this report, but the trend suggests a gradually improving labor market.

All current employment graphs

by Calculated Risk on 1/10/2013 08:37:00 AM

The DOL reports:

In the week ending January 5, the advance figure for seasonally adjusted initial claims was 371,000, an increase of 4,000 from the previous week's revised figure of 367,000. The 4-week moving average was 365,750, an increase of 6,750 from the previous week's revised average of 359,000.

The previous week was revised down from 372,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.


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 365,750.

Weekly claims are very volatile during and just after the holiday season, but even with the increase, the 4-week average is near the low for last year.

The recent spike was due to hurricane Sandy.

Weekly claims were above the 362,000 consensus forecast.


And here is a long term graph of weekly claims:

Note: There are large seasonal factors in December and January, and that can make for fairly large swings for weekly claims.


All current Employment Graphs

by Calculated Risk on 1/09/2013 09:04:00 PM

A few articles on Jack Lew (Obama's pick for Treasury Secretary).

From the NY Times: Obama’s Pick for Treasury Is Said to Be His Chief of Staff

President Obama will announce on Thursday that he intends to elevate his chief of staff and former budget director, Jacob J. Lew, to be his next secretary of Treasury ...

While Mr. Lew has much less experience than Mr. Geithner in international economics and financial markets, he would come to the job with far more expertise in fiscal policy and in dealing with Congress than Mr. Geithner did when he became secretary at the start of Mr. Obama’s term. That shift in skills reflects the changed demands of the times, as emphasis has shifted from the global recession and financial crisis of the president’s first years to the continuing budget fights with Republicans in Congress ...

From the WSJ: Obama Aide Is Treasury Pick

President Barack Obama plans to nominate Jacob Lew to be the 76th U.S. Treasury secretary, putting the White House's chief budget expert in a top economic post as it enters a grueling year of fiscal battles with Congress.
...
Mr. Lew, 57 years old, is a veteran of numerous Washington budget battles, stretching back to his work as a senior congressional aide in the 1980s. He would likely draw on that experience during the looming fights over the debt ceiling, government spending levels and a possible overhaul of the tax code.

From the WSJ: Jacob Lew, in His Own Words

2010 – confirmation hearing before Senate Budget Committee

“Throughout my career, I have tried to work collaboratively across partisan and ideological divides to cut through gridlock and to help solve what seem like intractable problems. If confirmed as OMB Director, I will work in that bipartisan fashion again–with the members of this Committee, the leadership of both chambers, and with all those committed to taking constructive steps to rejuvenating our Nation’s economy and its fiscal standing.”

Thursday economic releases:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 362 thousand from 372 thousand last week.

• At 10:00 AM, the Job Openings and Labor Turnover Survey for November will be released by the BLS. In general jobs openings have been trending up. Openings were up about 8% year-over-year in October.

• Also at 10:00 AM, the Monthly Wholesale Trade: Sales and Inventories report for November. The consensus is for a 0.3% increase in inventories.

by Calculated Risk on 1/09/2013 05:49:00 PM

Note: Near the beginning of the year, I find it useful to jot down a few thoughts on how I expect the economy to perform. This isn't to test my forecasting skills - some times I learn more when I miss a forecast (As an example, I've spent a significant amount of time looking at the participation rate and demographics since I've been overly pessimistic on the unemployment rate the last couple of years).

Some years I make some big calls. Not this year. Although I think parts of the economy are poised for more growth, I think austerity at the Federal level means another year of sluggish growth.  So my forecasts this year are mostly in line with the consensus (It is more fun being a contrarian - oh well).

Earlier I posted some questions for this year: Ten Economic Questions for 2013. I'll try to add some thoughts, and maybe some predictions for each question.

Note: Here is a review of my 2012 Forecasts

3) Employment: How many payroll jobs will be added in 2013? Will we finally see some pickup over the approximately 2 million private sector job creation rate of 2011 and 2012?

I've been hammering on two key positive themes: 1) the pickup in residential investment (RI), and 2) the end of state and local government layoffs. Both of these will be positive for employment next year (there seems to be a lag between increases in RI and employment).

The following table shows the annual change in State and Local government since 2008. The four years of declining employment appears to be ending.  Note: This doesn't include the benchmark revision to be released in February.  The preliminary revision showed even more government job losses.

State and Local Government, Annual Change in Payroll (000s)
Year	State Government	Local Government	Total
2008	50	108	158
2009	-41	-88	-129
2010	-20	-242	-262
2011	-80	-150	-230
2012	24	-50	-26

The second table shows the change in construction payrolls starting in 2006.

	Construction Jobs (000s)
2006	152
2007	-195
2008	-785
2009	-1,051
2010	-177
2011	69
2012	18

For construction jobs, the preliminary benchmark revision showed an increase in jobs - so 2011 and 2012 will both probably be revised upwards. It is also important to note that construction includes residential, commercial and public. Although residential is picking up (usually the largest category), public construction spending is still declining, and commercial is mostly moving sideways (energy construction is up).

Both state and local government and construction hiring should improve in 2013. Unfortunately there are other employment categories that will be hit by the austerity (especially the increase in payroll taxes). I expect that will offset any gain from construction and local governments.  So my forecast is close to the previous two years, a gain of about 150,000 to 200,000 payroll jobs per month in 2013.

Here are the ten questions for 2013 and a few predictions:
• Question #1 for 2013: US Fiscal Policy
• Question #2 for 2013: Will the U.S. economy grow in 2013?
• Question #3 for 2013: How many payroll jobs will be added in 2013?
• Question #4 for 2013: What will the unemployment rate be in December 2013?
• Question #5 for 2013: Will the inflation rate rise or fall in 2013?
• Question #6 for 2013: What will happen with Monetary Policy and QE3?
• Question #7 for 2013: What will happen with house prices in 2013?
• Question #8 for 2013: Will Housing inventory bottom in 2013?
• Question #9 for 2013: How much will Residential Investment increase?
• Question #10 for 2013: Europe and the Euro

by Calculated Risk on 1/09/2013 03:13:00 PM

Earlier I posted some questions for this year: Ten Economic Questions for 2013. I'll try to add some thoughts, and maybe some predictions for each question.

Note: Here is a review of my 2012 Forecasts

4) Unemployment Rate: The unemployment rate is still elevated at 7.7% in November [7.8% in the December report]. For the last two years I've been too pessimistic on the unemployment rate because I was expecting some minor bounce back in the participation rate. Instead the participation rate continued to decline.

Maybe 2013 will be the year the participation rate increases a little, or at least stabilizes. Economists at the SF Fed wrote about this last [month]: Will the Jobless Rate Drop Take a Break?

The recent recession was unusual in its depth and its duration. Labor market conditions have remained difficult for a long time. As a result, large numbers of discouraged workers have stopped looking for jobs. A big unknown is whether these workers will stay out of the labor force permanently or enter as the economy recovers. If these workers join the labor force, increasing participation could have a major impact on the unemployment rate in the coming years.

What will the unemployment rate be in December 2013?

Forecasting the unemployment rate includes forecasts for economic and payroll growth, and also for changes in the participation rate. Note: The participation rate is the percent of the working age population (16 and over) that is in the labor force.

We can be pretty certain that the participation rate will decline over the next couple of decades based on demographic trends, but it is unclear what will happen in 2013. The participation rate could bounce back (increase), as the Fed paper excerpted above suggests. Or the participation rate could decline further as has happened over the last few years

Here is a table showing the participation and unemployment rates for December since 2008.

Unemployment and Participation Rate for December each Year
December of	Participation Rate	Unemployment Rate	Using December 2010 participation rate1
2008	65.8%	7.3%
2009	64.6%	9.9%
2010	64.3%	9.3%
2011	64.0%	8.5%	8.9%
2012	63.6%	7.8%	8.8%
1This is the estimated unemployment rate assuming the participation rate had stayed at the December 2010 level of 64.3%, and all of the additional participants were unemployed (same employment growth).

The last column shows what would have happened to the unemployment rate if the participation rate had held steady for the last two years. Clearly the declining participation rate played a key role in the decline in the unemployment rate.

I could make an argument for some bounce back in the participation rate (see Fed paper above), and then, with sluggish growth, we'd probably see an increase in the unemployment rate in 2013 to over 8%. However - as we've seen over the last couple of years - sluggish growth probably isn't sufficient to draw many people back into the labor force, and I could make an argument for another decrease in the participation rate.

My guess is the participation rate will remain around 63.6% in 2013, and with sluggish employment growth, the unemployment rate will be in the mid-to-high 7% range in December 2013 (little changed from the current rate).

Here are the ten questions for 2013 and a few predictions:
• Question #1 for 2013: US Fiscal Policy
• Question #2 for 2013: Will the U.S. economy grow in 2013?
• Question #3 for 2013: How many payroll jobs will be added in 2013?
• Question #4 for 2013: What will the unemployment rate be in December 2013?
• Question #5 for 2013: Will the inflation rate rise or fall in 2013?
• Question #6 for 2013: What will happen with Monetary Policy and QE3?
• Question #7 for 2013: What will happen with house prices in 2013?
• Question #8 for 2013: Will Housing inventory bottom in 2013?
• Question #9 for 2013: How much will Residential Investment increase?
• Question #10 for 2013: Europe and the Euro

by Calculated Risk on 1/09/2013 12:42:00 PM

Earlier I posted some questions for this year: Ten Economic Questions for 2013. I'll try to add some thoughts, and maybe some predictions for each question.

Note: Here is a review of my 2012 Forecasts

5) Inflation: The Fed has made it clear they will tolerate a little more inflation, but currently the inflation rate is running below the Fed's 2% target. Will the inflation rate rise or fall in 2013?

Here is a look at four key measures of inflation: core CPI (consumer price index), core PCE prices (Personal Consumption Expenditures), median CPI and the trimmed-mean CPI through November 2012.

Click on graph for larger image.

On a year-over-year basis, the median CPI rose 2.2%, the trimmed-mean CPI rose 1.9%, the CPI rose 1.8%, and the CPI less food and energy rose 1.9%. Core PCE is for October and increased 1.7% year-over-year. These measures suggest inflation is mostly below the Fed's target of 2% on a year-over-year basis.

Here is what I wrote last year on inflation:

There are some people who have been predicting an imminent rapid increase in inflation for almost 3 years - in their view, a sharp increase in inflation is always just around the corner. That view has consistently been wrong, although some people also claim the government measures are not correct and that inflation is much higher than reported.

However private measures show similar results as BEA and BLS measures (see The Billion Prices Project). ...

The bottom line is the inflation rate will probably stay low in 2012 with high unemployment and low resource utilization. I expect QE3 to be announced before mid-year, and that will probably keep the inflation rate near the Fed's target (as opposed to falling further). But I don't see inflation as a significant threat in 2012.

I could just repeat that post with a few of minor changes. The first change is QE3 has already been announced. A second change is that now some people who have been predicting an imminent rapid increase in inflation for almost 4 years! Always wrong, but never in doubt.

A third possible change is related to the recent FOMC statement that indicated the Fed will tolerate an inflation outlook "between one and two years ahead" of 2 1/2 percent. Given the Fed's tolerance for a little more inflation, we might see a little more inflation in 2013 than in 2012 - but I still expect inflation to be near the Fed's target. With high unemployment and low resource utilization, I don't see inflation as a threat in 2013.

Here are the ten questions for 2013 and a few predictions:
• Question #1 for 2013: US Fiscal Policy
• Question #2 for 2013: Will the U.S. economy grow in 2013?
• Question #3 for 2013: How many payroll jobs will be added in 2013?
• Question #4 for 2013: What will the unemployment rate be in December 2013?
• Question #5 for 2013: Will the inflation rate rise or fall in 2013?
• Question #6 for 2013: What will happen with Monetary Policy and QE3?
• Question #7 for 2013: What will happen with house prices in 2013?
• Question #8 for 2013: Will Housing inventory bottom in 2013?
• Question #9 for 2013: How much will Residential Investment increase?
• Question #10 for 2013: Europe and the Euro

by Calculated Risk on 1/09/2013 09:19:00 AM

Reis reported that the vacancy rate for regional malls declined to 8.6% in Q4 from 8.7% in Q3. This is down from a cycle peak of 9.4% in Q3 2011.

For Neighborhood and Community malls (strip malls), the vacancy rate declined to 10.7% in Q4, down from 10.8% in Q3. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011.

Comments from Reis Senior Economist Ryan Severino:

[Strip mall] Vacancy declined by only 10 bps during the fourth quarter. This was an improvement versus the third quarter when the vacancy rate was unchanged. On a year‐over‐year basis, the vacancy rate declined by only 30 bps. During the quarter absorption exceeded construction by a sufficient enough margin to lower the vacancy rate, but only marginally. With only 915,000 square feet delivered, more robust demand would cause vacancy to compress expeditiously. But even with so few completions occurring, the economy is not generating enough demand for space.
...
Asking and effective rents grew by 0.2% and 0.1%, respectively, during the quarter. This was only a negligible increase versus the third quarter when both metrics increased by just 0.1%. It was the fifth consecutive quarter that asking and effective rents have increased.
...
[New construction] With tepid retail sales and scant demand for space, new construction remained near record‐low levels during the quarter. 915,000 square feet were delivered during the fourth quarter, versus 723,000 square feet during the third quarter. However, this is a slowdown compared to the 2.951 million square feet of retail space that were delivered during the fourth quarter of 2011. In fact, 915,000 square feet is the fifth‐lowest figure on record since Reis began tracking quarterly data in 1999.
...
[Regional] Malls continue to outperform their neighborhood and community shopping center comrades. The vacancy rate declined by another 10 basis points during the quarter. This is the fifth consecutive quarter with a vacancy decline. Asking rent growth declined slightly versus last quarter, growing by another 0.2%. This was the seventh consecutive quarter of asking rent increases. The improvement in mall subsector remains consistent if not exhilarating.

Click on graph for larger image.

This graph shows the strip mall vacancy rate starting in 1980 (prior to 2000 the data is annual). The regional mall data starts in 2000. Back in the '80s, there was overbuilding in the mall sector even as the vacancy rate was rising. This was due to the very loose commercial lending that led to the S&L crisis.

In the mid-'00s, mall investment picked up as mall builders followed the "roof tops" of the residential boom (more loose lending). This led to the vacancy rate moving higher even before the recession started. Then there was a sharp increase in the vacancy rate during the recession and financial crisis.

The yellow line shows mall investment as a percent of GDP through Q3. This has increased from the bottom because this includes renovations and improvements. New mall investment has essentially stopped.

The good news is, as Severino noted, new square footage is near a record low, and with very little new supply, the vacancy rate will probably continue to decline slowly.

Mall vacancy data courtesy of Reis.

by Calculated Risk on 1/08/2013 09:10:00 PM

Over there ... from the NY Times: Unemployment Rises to New High in Euro Zone

The euro zone jobless rate rose to 11.8 percent in November from 11.7 percent in October, according to Eurostat, the statistical agency of the European Union. Eurostat estimated that 18.8 million people in the euro zone were unemployed in November, two million more than a year earlier.

... on Tuesday, the Federal Statistics Office in Berlin said that German exports declined 3.4 percent while imports slid 3.7 percent in November from a month earlier. The weakness narrowed Germany’s trade surplus to €14.6 billion ...

Austerity at work. The beatings will continue until morale improves.

Wednesday economic releases:
• Early: Reis Q4 2012 Mall survey of rents and vacancy rates. In Q3 Reis reported the regional mall vacancy rate declined to 8.7%, from 8.9% in Q2. The vacancy rate peaked at 9.4% in Q3 2011. For Neighborhood and Community malls (strip malls), the vacancy rate was unchanged at 10.8% in Q3. For strip malls, the vacancy rate peaked at 11.0% in Q2 2011.

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

by Calculated Risk on 1/08/2013 04:27:00 PM

This is a key distressed market to follow since Las Vegas has seen the largest price decline of any of the Case-Shiller composite 20 cities.

From the GLVAR: GLVAR reports home prices increased 24 percent in 2012,ranking as third best sales year ever

GLVAR said the total number of local homes, condominiums and townhomes sold in December was 3,624. That’s up from 3,293 in November, but down from 4,250 total sales in December 2011. Compared to November, single-family home sales during December increased by 10.4 percent, while sales of condos and townhomes increased by 8.5 percent. Compared to one year ago, home sales were down 14.3 percent, while condo and townhome sales were down 16.5 percent.
...
The total number of homes listed for sale on GLVAR’s Multiple Listing Service declined in December, with a total of 14,601 single-family homes listed for sale at the end of the month. That’s down 6.6 percent from 15,637 homes listed for sale at the end of November and down 24.1 percent from one year ago. ...

[T]he number of available homes listed for sale without any sort of pending or contingent offer by the end of December, GLVAR reported 3,688 single-family homes listed without any sort of offer. That’s down 4.2 percent from 3,849 such homes listed in November and down 58.2 percent from one year ago.
...
GLVAR’s statistics through December 2012 show a dramatic transition from foreclosures to short sales – which occur when a lender agrees to sell a home for less than what the borrower owes on the mortgage. The percentage of existing homes sold as part of a short sale set a new record in December, accounting for 45.8 percent of all sales. Foreclosures, which made up more than half of all sales a few years ago, accounted for only 9.5 percent of all sales in December 2012.

A few key points:
• Inventory decreased in December, and inventory is down 24.1% from Decmeber 2011.  For single family homes without contingent offers, inventory is down sharply from a year ago (down 58.2% year-over-year).

• Short sales are more than four times foreclosures now. The GLVAR reported a record 45.8% of sales were short sales in December, and only 9.5% foreclosures. We've seen a shift from foreclosures to short sales in most areas (not just in areas with new foreclosure laws).  Note: Some of the surge in short sales might have been to beat the expiration of the Mortgage Debt Relief Act of 2007.  The Act  was extended as part of the fiscal deal, so the number of short sales should remain high in 2013.

• The decline in overall sales is because of fewer foreclosure sales (Las Vegas had a record number of real estate sales in 2011, even higher than at the peak of the bubble in 2005, because of all the distressed sales!). As the market slowly recovers, the number of distressed sales should fall and the number of conventional sales should rise. This has been happening in Las Vegas, although distressed sales were up some in December compared to November due to seasonal factors.

Overall this is a slowly improving distressed market. Note: I ignore the median price because that is impacted by the mix.

by Calculated Risk on 1/08/2013 01:35:00 PM

Earlier I posted some questions for this year: Ten Economic Questions for 2013. I'll try to add some thoughts, and maybe some predictions for each question.

Note: Here is a review of my 2012 Forecasts

6) Monetary Policy: Currently the Fed is planning to buy $85 billion in Treasury and agency mortgage-backed securities per month as part of the open-ended QE3. Will the Fed continue all year at this pace? Or will the Fed increase their purchase rate? Or will the Fed decrease their purchase rate, stop these purchases, or even sell some securities?

First - I wrote this question before the recent FOMC minutes were released. The minutes revealed that several FOMC members expect QE3 to end in 2013. Of course the level of QE3 purchases in 2013 will be data dependent - if the economy remains sluggish, the unemployment rate remains high,  and inflation expectations remain stable, the FOMC will continue to purchase $85 billion per month all year. If the economy picks up, or inflation expectations increase - the FOMC will probably slow or stop their purchases.

It is important to note that slowing or stopping the purchases doesn't mean the Fed is tightening. Policy will remain accomodative all year (I doubt the Fed will purchase securities and reduce their balance sheet in 2013, and it is very doubtful they will raise the Fed Funds rate this year).

Last year I wrote for 2012:

• I expect the Fed will change their communication strategy and add a likely future path of the Fed Funds rate to the quarterly economic forecasts.

• I think QE3 is likely, but more towards mid-year - and [timing] is data dependent.

The Fed introduced the new communication strategy, and then changed it again based on "thresholds" near the end of 2012.  On QE3, they waited a little longer than I expected, and the FOMC announced QE3 in September.

This year I don't think we will see as many monetary changes.

I expect the FOMC will review their purchases at each meeting just like they used to review the Fed Funds rate.  We might see some adjustments during the year, but currently I expect the Fed to purchase securities at about the same level all year.

Here are the ten questions for 2013 and a few predictions:
• Question #1 for 2013: US Fiscal Policy
• Question #2 for 2013: Will the U.S. economy grow in 2013?
• Question #3 for 2013: How many payroll jobs will be added in 2013?
• Question #4 for 2013: What will the unemployment rate be in December 2013?
• Question #5 for 2013: Will the inflation rate rise or fall in 2013?
• Question #6 for 2013: What will happen with Monetary Policy and QE3?
• Question #7 for 2013: What will happen with house prices in 2013?
• Question #8 for 2013: Will Housing inventory bottom in 2013?
• Question #9 for 2013: How much will Residential Investment increase?
• Question #10 for 2013: Europe and the Euro

by Calculated Risk on 1/08/2013 10:55:00 AM

Earlier I posted some questions for this year: Ten Economic Questions for 2013. I'll try to add some thoughts, and maybe some predictions for each question.

Note: Here is a review of my 2012 Forecasts

7) House Prices: It now appears house prices, as measured by the national repeat sales indexes, bottomed in early 2012? What will happen with house prices in 2013?

Calling the bottom for house prices in 2012 now appears correct.

Click on graph for larger image.

This graph shows the year-over-year change in the Case-Shiller Composite 10 and Composite 20 indexes.

The Composite 10 SA was up 3.4% YoY in October, and the Composite 20 SA was up 4.3% year-over-year. Other house price indexes have indicated similar gains. Right now it looks like the Case-Shiller Composite 20 index will finish the year up about 6%.

Note: the year-over-year gain in 2010 was related to the homebuyer tax credit.  However, in 2010, prices were still too high based on fundamentals.   However, when prices started increasing in 2012, prices were more in line with fundamentals based on price-to-income, price-to-rent and real house prices.

Some of the key factors in 2012 were limited inventory, fewer foreclosures, investor buying in certain areas, and a change in psychology as buyers and sellers started believing house prices had bottomed. In some areas, like Phoenix, there appeared to be a bounce off the bottom.

In 2013, inventories will probably remain low - suggesting more house price increases - and there also tends to be significant momentum in house prices (also suggesting more increases in 2013).

However, even though I expect inventories to be low this year, I think we will see more inventory come on the market in 2013 than 2012, as sellers who were waiting for a better market list their homes, and as some "underwater" homeowner (those who owe more than their homes are worth) finally can sell without taking a loss.

Also I expect more foreclosure in some judicial states, and I think the price momentum in Phoenix and other "bounce back" areas will slow.

All of these factors suggest further prices increases in 2013, but at a slower rate than in 2012.   Here are some other house prices forecasts ranging from 1.4% to 4.8% increases in 2013.  It looks like I'm in the consensus this year (I was out of the consensus in 2012).

Here are the ten questions for 2013 and a few predictions:
• Question #1 for 2013: US Fiscal Policy
• Question #2 for 2013: Will the U.S. economy grow in 2013?
• Question #3 for 2013: How many payroll jobs will be added in 2013?
• Question #4 for 2013: What will the unemployment rate be in December 2013?
• Question #5 for 2013: Will the inflation rate rise or fall in 2013?
• Question #6 for 2013: What will happen with Monetary Policy and QE3?
• Question #7 for 2013: What will happen with house prices in 2013?
• Question #8 for 2013: Will Housing inventory bottom in 2013?
• Question #9 for 2013: How much will Residential Investment increase?
• Question #10 for 2013: Europe and the Euro

by Calculated Risk on 1/08/2013 08:25:00 AM

Reis reported that the apartment vacancy rate fell to 4.5% in Q4, down from 4.7% in Q3 2012. The vacancy rate was at 5.2% in Q4 2011 and peaked at 8.0% at the end of 2009.

Some data and comments from Reis Senior Economist Ryan Severino:

Vacancy declined by another 20 bps during the fourth quarter to 4.5%. This exceeded performance during the third quarter when vacancy declined by 10 bps. On a year-over-year basis, the vacancy rate declined by 70 bps.

There was a bit of a resurgence in demand for apartment units during the fourth quarter when 45,162 units were absorbed. This represents an increase versus the 24,951 units that were absorbed during the third quarter but a slight decrease versus the 47,396 units that were absorbed during the fourth quarter of 2011. Net absorption has been consistently positive since the second quarter of 2009. For the calendar year 2012, 138,155 units were absorbed. This is a decline from the 172,707 units that were absorbed during calendar year 2011.This decline is not surprising. The market has tightened considerably over the last few years and at this point in the cycle a slight slowing should be anticipated.

New construction also increased during the quarter. 24,614 units were delivered during the fourth quarter, versus 17,378 units during the third quarter. This is also an increase compared to the 10,145 units that were delivered during the fourth quarter of 2011. This is the third consecutive quarter of construction increases and the highest level of quarterly completions since the second quarter of 2010. For calendar year 2012, 66,846 units were completed. This is an increase versus the 42,290 that were completed during 2011.

Asking and effective rents both grew by 0.6% during the fourth quarter. This was below the third quarter performance when asking and effective rents grew by 0.8% and 0.9%, respectively. Both asking and effective rents have consistently increased since the first quarter of 2010. However, this was the weakest performance since the fourth quarter of 2011. Nonetheless, taking a longer‐term view, on a year‐over‐year basis rent growth continues to accelerate. Nationally, asking and effective rents hit another all‐time high during the fourth quarter, propelled by strong demand, limited new supply growth, and a still weak for‐sale housing market.
...
The outlook for 2013 remains stout. Although new completions are expected to accelerate substantially during 2013, demand should remain tight. With demand outpacing new completions, vacancy is expected to continue to decrease, but the rate of decline will slow as the market digests all of the new units coming online. However, given that tightness in the market will persist, rent growth will continue to accelerate – having shorn concessions landlords now feel empowered to raise face‐level asking rents in a more pronounced fashion. The majority of the market will continue to perform well in 2013 as their tenants will have no choice but to continue paying record‐level rents. The greatest risk likely resides in the highest‐quality properties with the most expensive rents, typically class A and above properties. Rents in these high‐quality properties are prohibitively expensive and tenants have already countenanced large annual rent increases. With housing prices remaining relatively low and mortgage rates hovering near record‐low levels, an increasing number of these class A/A+ tenants, who boast high incomes, ample savings, and good credit ratings, will do the math and decide that it is finally time to purchase a home.

Click on graph for larger image.

This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999). Note: Reis is just for large cities.

This was another strong quarter for apartments with the vacancy rate falling and rents rising. With more supply coming online in 2013, the decline in the vacancy rate should slow - but the market is still tight, and Reis expects rents to continue to increase.

by Calculated Risk on 1/07/2013 09:06:00 PM

From Alan Zibel and Nick Timiraos at the WSJ: Watchdog to Set Loan Rules

This week, the Consumer Financial Protection Bureau will define standards that all mortgage lenders are likely to follow when originating home loans. ...

The rules don't specify a minimum down payment and instead focus on ensuring that banks document borrowers' ability to make their monthly loan payments. Loans in which borrowers make only interest payments for a set period and those in which the principal balance can increase are excluded by law from being "qualified" mortgages. ...

CFPB is likely to offer two ways in which lenders can meet the regulator's standard ... Under the first approach, the regulator will consider as qualified mortgages all loans that receive an approval after being run through the automated underwriting engines maintained by [Fannie, Freddie, FHA], even if they aren't ultimately sold to or insured by those institutions.

Under the second approach, loans would be deemed qualified mortgages if borrowers are spending no more than 43% of their pretax income on monthly debt payments.

In the long run this is an important step. This will insure that most loans are made to a somewhat reasonable standard (43% of pretax income is pretty high) - and no stated income or Alt-A loans will meet these standards (Great news!).

Tuesday economic release:
• Early: Reis Q4 2012 Apartment survey of rents and vacancy rates. In Q3 Reis reported the apartment vacancy rate declined to 4.6%, from 4.7% in Q2. The vacancy rate peaked at 8.0% in Q4 2008 and Q1 2009. With a combination of more supply coming online, and the probable bottom for house prices (motivating some renters to buy), most of the decline in the vacancy rate is probably behind us.

• At 7:30 AM ET, the NFIB Small Business Optimism Index for December will be released. The consensus is for an increase to 87.9 from 87.5 in November.

• At 3:00 PM, Consumer Credit for November from the Federal Reserve. The consensus is for credit to increase $13.2 billion in November.

by Calculated Risk on 1/07/2013 06:57:00 PM

Inventory declines every year in December and January as potential sellers take their homes off the market for the holidays. That is why it helps to look at the year-over-year change in inventory.

According to the deptofnumbers.com for (54 metro areas), overall inventory is down 23.9% year-over-year in early January, and probably at the lowest level since the early '00s.

This graph shows the NAR estimate of existing home inventory through November (left axis) and the HousingTracker data for the 54 metro areas through early January.


Click on graph for larger image.

Since the NAR released their revisions for sales and inventory in 2011, the NAR and HousingTracker inventory numbers have tracked pretty well.

On a seasonal basis, housing inventory usually bottoms during the holidays and then starts increasing in February - and peaks in mid-summer.  So inventory is probably near the seasonal bottom right now and should start increasing again soon.

The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker.

HousingTracker reported that the early January listings, for the 54 metro areas, declined 23.9% from the same period last year.

The year-over-year declines will probably start to get smaller since inventory is already very low. It seems very unlikely we will see 20%+ year-over-year declines this summer, and I think overall inventory might be bottoming right now.