by Calculated Risk on 11/01/2005 12:05:00 PM

The AP reports: Construction spending hit all-time high in September

Construction spending set another record in September as the building industry continued to enjoy boom times.

The Commerce Department said construction activity rose 0.5 percent to an all-time high of $1.12 trillion at a seasonally adjusted annual rate in September...
...
Private construction rose by 0.6 percent to a seasonally adjusted annual rate of $871.5 billion with private residential building up an even stronger 1 percent, to $624.3 billion. Both the overall private construction figure and the residential activity were at all-time highs.

Both office construction and commercial buildings, a category that includes shopping centers, showed big gains in September.

Total government construction was unchanged in September at an annual rate of $248.5 billion after posting a 0.4 percent increase in August. Activity at the state and local level rose by 0.3 percent to a record high of $231.9 billion while federal building projects dipped by 4.5 percent to an annual rate of $16.7 billion.

New Home inventories are already at record levels, sales appear to be slowing, and residential construction activity is at record levels. Hmmm ...

by Calculated Risk on 10/31/2005 08:11:00 PM

Dr. Duy prepares us for another "measured pace" rate hike tomorrow: Fed Watch: Another Meeting, Another 25 Basis Points

"The above title makes the Fed sound just a little too predictable. But the hawkish rhetoric from Fed officials has been quite clear, and last week’s data adds to the case for additional tightening at what we have come to know as the measured pace.
...
...incoming data suggests the economy remains on cruise control despite the series of speed bumps the Fed keeps laying down. Does this mean the Fed just keeps laying down more bumps? For the rest of this year, the answer appears to be yes. I think the Fed is comfortable chasing the 10 year bond. Indeed, the bond market has recently cleared the way for additional hikes, with the 10 year yield rising above 4.5%."

But after the next couple of hikes, Dr. Duy expects the FED to become more data dependent:

"While policymakers might see the need for additional rate hikes, they realize a lot is also in the pipeline as well. With a considerable amount of accommodation removed, the Fed, I suspect, will soon start paying more attention to data that comes in on the weak side.

So what will the Fed be looking for in that respect? The Fed will be watching for additional evidence of a slowing housing market. Again, the point is not housing itself, but the expected negative impact of a housing slowdown on consumer spending. I doubt the early data and anecdotal evidence is enough to convince them that the housing ATM is closed, but if the housing bears are correct, we could see evidence in that direction pile up over the next couple of months.

Another red flag for the Fed would be sputtering investment spending. Greenspan’s speeches and the minutes suggest that policymakers expected investment spending to hold strong, and they were a little disappointed by what they were seeing..."

Hey, hey, hey ... I think those housing bears are correct! Read Dr. Duy's entire post - it is excellent as always.

And a couple of comments on the "data". Dr. Kash is concerned about personal income growth and the negative savings rate: Slowing Growth?

And to add to Kash's concerns, I've noticed that the data on personal savings has been steadily revised downward.

Click on graph for larger image.

The graph shows the monthly personal savings (Billions $ annual rate) from the BEA's monthly Personal Income and Outlays report.

The purple bar is the initial reported value, the red bar the most recent revision.

With the exception of March (minor upwards revision), all of the revisions have been negative. This might indicate a change in trend. I wonder if this concerns the FED?

by Calculated Risk on 10/31/2005 10:15:00 AM

The Census Bureau released the 3rd quarter Housing Vacancies and Homeownership (PDF) report today.

National vacancy rates in the third quarter 2005 were 9.9 percent for rental housing and 1.9 percent for homeowner housing ...

The Home Ownership rates was 68.8%.

The housing survey is subject to large errors and readers must be careful evaluating quarter to quarter changes. But the report does show these trends:

1) Vacancy rates might have peaked for rental housing at the historically high rate of around 10%, and

2) The vacancy rate for homeowner housing is at a record level and might still be increasing.

This level of vacancies indicates significant excess housing capacity.

Here is the Census Bureau site for Housing Vacancies and Homeownership with definitions and historical tables.

by Calculated Risk on 10/31/2005 01:40:00 AM

My Angry Bear post is up: GDP and Housing.

Dr. Thoma excerpts Krugman's Ending the Fraudulence. I would like to echo Dr. Thoma's comments on the media.

Journalists need to ... ask themselves how to do a better job of presenting objective analysis on economic matters rather than the opinions of pundits from both sides. That’s a lot harder than grabbing the usual talking heads who say the usual things, it will require digging in and doing research, seeking out and talking to the real experts in the field, and understanding the issues before reporting on them.

Of course the media tries to be "fair" and report both sides. When one side is spouting nonsense, reporting both sides equally is absurd. Dr. Krugman once joked that if President Bush said that the Earth was flat, the headlines of news articles would read, "Opinions Differ on Shape of the Earth."

And finally, I have suggested that the UK's current economic problems might be an example of what will happen in the US, after the housing market slows, since the BoE started raising rates sooner than the FED. Australia is another country to watch: Home sales stall on slowdown

SALES of new homes and units plummeted 16 per cent in September with no sight of a recovery in the housing market, figures released today show.

The sale of new houses fell by 20 per cent while the sale of multi-units rose 9.4 per cent over the month, the Housing Industry Association (HIA) said.

New home sales are less than half their level two years ago before the property market had started to cool with higher interest rates.

Australia's peak building industry body said there was no sight of recovery in housing demand.

Dilbert (Scott Adams) has started blogging: Enjoy!

by Calculated Risk on 10/28/2005 08:48:00 PM

The Economic Alliance for Business (EDAB) just released their October 2005 East Bay Quarterly Forecast, authored by Christopher Thornberg, Senior Economist for UCLA Anderson Forecast (thanks to Robert Sakai). The report is fairly positive on the economy over the next few quarters, but is cautionary on real estate. Dr. Thornberg writes:

The good news is likely to continue for the next few quarters. Katrina and Rita may have monopolized the newspapers, but they will have little impact positive or negative on the California economy. Gas prices are already on their way back down. Demand is softening as the year moves into the winter season and refining capacity is coming back online. With pockets flush again, expect a solid holiday season for retailers in the area.

But there are storm clouds on the horizon that are being generated by yet another low-pressure system building up -- our housing markets. Prices have continued their truly meteoric rise, as has the pace of building. But there are signs the market is starting to lose its oomph. Market activity in the Bay Area has started to slow sharply, and inventories are on the rise.

From the section on Real Estate: Is the party coming to an end?

As has been discussed in this and past reports, the primary driver of the California economy, including the Bay Area and the East Bay, has been the residential real estate boom. ... All this new construction has been creating many of the new jobs in the state including those in finance companies working to extend credit. And while we lack direct evidence, it appears that consumer spending is being fueled largely by the wealth being generated within the economy by the massive rate of appreciation.

After a discussion of housing fundamentals, Thornberg states:

... housing prices should have basically gone flat as of Q4 2002, and instead they have grown at an unprecedented pace. While there is some room for debate on this issue, I put the starting date of the downturn in ‘per worker income’ at Q4 2002. On this basis, we can guesstimate that property in California is now overvalued by something close to 35 or 40%.(emphasis added)

Thornberg concludes:

The market is still red hot of course. Price appreciation and market activity continue at a record pace. Nevertheless, right now the bubble is clearly starting to lose steam.
...
The best indicator that the party is starting to end will be a decline in overall market activity—slowing of total unit sales and build up of inventories. When inventories rise and sales start to fall this will spill over into price appreciation and construction within three to six quarters, and this is when the overall economy will begin to feel the pinch. Right now the market appears to be at a crossroads. According to the latest numbers available, market inventories in the state have almost doubled over the past six months and overall market activity has been flat albeit at a very high pace.
...
... things are clearly at a tipping point. And remember, while it is unlikely that nominal home prices will fall rapidly, that does not mean a cooling market will do little damage to the economy. A cooling market is characterized by a large drop in new building units, market activity, and refinancing activity, not to mention heightened foreclosure activity. A lot of the new jobs in those areas will suddenly start to disappear. And don’t forget those wealth effects. When consumers realize they can no longer expect that appreciation bonus to subsidize their consumption habits, they will very likely pull back on spending. Keep an eye out.