by Calculated Risk on 1/04/2010 10:23:00 AM

Through November construction spending has followed the expected script for 2009: a likely bottom for residential construction spending, and a collapse in private non-residential construction.

Residential construction spending was off slightly in November, and is now only 5.8% above the bottom earlier in 2009. I expect some residential spending growth in 2010, but the increases in spending will probably be sluggish until the large overhang of existing inventory is reduced.

Non-residential appeared flat in November, but that was only because of a downward revision to October spending. The collapse in non-residential construction spending continues ...

Click on graph for larger image in new window.

The first graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted.

Residential construction spending decreased in November, and nonresidential spending continued to decline.

Private residential construction spending is now 62.9% below the peak of early 2006.

Private non-residential construction spending is 22.5% below the peak of October 2008.

The second graph shows the year-over-year change for private residential and nonresidential construction spending.

Nonresidential spending is off 22.5% on a year-over-year (YoY) basis.

Residential construction spending is still off 22.2% from a year ago, but the negative YoY change is getting smaller.

For the first time since the housing bust started, nonresidential spending is off more on a YoY basis than residential.

Here is the report from the Census Bureau: November 2009 Construction at $900.1 Billion Annual Rate

by Calculated Risk on 1/04/2010 10:00:00 AM

PMI at 55.9% in December, from 53.6 in November, and down from 55.7 in October.

From the Institute for Supply Management: December 2009 Manufacturing ISM Report On Business®

Economic activity in the manufacturing sector expanded in December for the fifth consecutive month, and the overall economy grew for the eighth consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The manufacturing sector grew for the fifth consecutive month in December as the PMI rose to 55.9 percent, its highest reading since April 2006 when it registered 56 percent. This month's report is quite strong as both the New Orders and Production Indexes are above 60 percent. The sector may be benefiting from an excessive destocking cycle as indicated by the recent performance of the Customers' Inventories Index. Customers' inventories have been 'too low' for nine consecutive months, and this month's index is the lowest reading since the inception of the index in January 1997. Overall, the recovery in manufacturing is continuing, but there are still some industries mired in the downturn as evidenced by the seven industries still in decline."
...
ISM's Employment Index registered 52 percent in December, which is 1.2 percentage points higher than the 50.8 percent reported in November. This is the third month of growth in manufacturing employment, following 14 consecutive months of decline. An Employment Index above 49.7 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.
emphasis added

As noted, any reading above 50 shows expansion.

by Calculated Risk on 1/04/2010 08:40:00 AM

From Wyatt Buchanan at the San Francisco Chronicle: California leaders seek budget help from D.C.

California's political leaders, who are facing the daunting challenge of closing an estimated $20.7 billion budget deficit this year, are looking to Washington for help. Just don't call it a bailout.
...
"No one is looking for a bailout. We're looking for an investment," [Senate President Pro Tem Darrell Steinberg] said ...

On Friday, Schwarzenegger will release his initial budget proposal for the next fiscal year, and the Legislative Analyst's Office already has called on state leaders to "aggressively seek new federal assistance" to help close the projected deficit.

As the article notes, California sends far more to Washington D.C. then they receive (they are 43rd on the list of states) - we will probably hear more of that argument. Hey - it is an investment, not a bailout!

by Calculated Risk on 1/04/2010 12:29:00 AM

From Paul Krugman at the NY Times: That 1937 Feeling

The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary ...

Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” ... Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

Which brings us to the still grim fundamentals of the economic situation.
...
There can’t be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers — who are $11 trillion poorer than they were before the housing bust — are in no position to return to the buy-now-save-never habits of yore.

... A boom in business investment would be really helpful right now. But it’s hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.

Can exports come to the rescue? ... But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust.

So the odds are that any good economic news you hear in the near future will be a blip, not an indication that we’re on our way to sustained recovery.

A couple months ago I suggested a few possible upside surprises and downside risks to the 2010 outlook, and I suppose the most likely upside surprise would come from consumer spending. As Dr. Yellen noted in November: "Consumers have surprised us in the past with their free-spending ways and it’s not out of the question that they will do so again."

Note: I wrote that post when we though Q3 GDP growth was 3.5%, and I expected Q4 to be about the same. Since Q3 was revised down substantially, I now expect more of a transitory boost to Q4 GDP growth.

And I still think a sluggish 2010 is the most likely scenario. Dr. Krugman's concern is that policy makers will buy into the bullish commentary after a solid Q4, and repeat the mistakes of 1937.

by Calculated Risk on 1/03/2010 09:41:00 PM

From PIMCO's Paul McCulley: PIMCO’s Cyclical 2010 Outlook

The first issue is the peg between the Chinese yuan and the U.S. dollar, which essentially gives us a one-size-fits-all monetary policy in a very differentiated world. Progress, or lack of progress, on this issue could lead to several outcomes. If China were to let its currency appreciate, it could regain a degree of monetary policy autonomy and a better ability to manage the risk of overheating and asset price inflation. Another outcome, however, is that China refuses to let the yuan appreciate, essentially maintaining too easy of a monetary policy for itself and the developing countries that shadow Chinese policies. This would create bubble risk, particularly for assets such as emerging market (EM) equities and commodities.

The second major uncertainty is what will happen when the Fed completes its mortgage-backed securities (MBS) buying programs. We know that it will have an unfriendly effect on the interest rate markets, but we don’t know the magnitude, because it’s too hard to isolate the supply and demand dynamics between fundamentals and the stimulus programs. ...

The third uncertainty is any change in the Fed’s pre-commitment language, which is currently committed to keeping the fed funds rate exceptionally low for an “extended period.” We don’t think the Fed is going to tighten any time in 2010, but long before the FOMC (Federal Open Market Committee) actually does the deed, it will have to change its language. That could very well happen in 2010, and there is genuine uncertainty over how quickly and strongly the market will anticipate a tightening process. Our gut feeling is that the moment the Fed changes any one of its words, it’s going to be a very unpleasant experience, because the marketplace has very little patience and a very big imagination. The most important book at the Fed right now is a thesaurus, and it’s probably sitting on top of Paul Samuelson’s Foundations of Economic Analysis.
emphasis added

Professor Krugman discussed the Chinese peg a few days ago: Chinese New Year

China has become a major financial and trade power. But it doesn’t act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory.
...
My back-of-the-envelope calculations suggest that for the next couple of years Chinese mercantilism may end up reducing U.S. employment by around 1.4 million jobs.

And the Fed MBS purchase program is just one of several government housing support programs that is scheduled to end in the next six months (the MBS program is scheduled to be complete by the end of Q1). My estimate is mortgage rates will rise by about 35 to 50 bps relative to the Ten Year treasury yield when the Fed stops buying MBS.

And on the Fed Funds rate, it is very unlikely that the Fed will raise rates in 2010. However McCulley thinks the Fed might change the wording of the statement - and he believes "it’s going to be a very unpleasant experience, because the marketplace has very little patience and a very big imagination".

I think jobs and the housing market (prices, supply and demand) are the two biggest economic issues in the U.S. this year.