by Calculated Risk on 8/15/2011 09:05:00 AM

The BuildFax Residential Remodeling Index was at 129.5 in June, up from 124.3 in May. This is based on the number of properties pulling residential construction permits in a given month.

From BuildFax:

The Residential BuildFax Remodeling Index rose 23% year-over-year--and for the twentieth straight month--in June to 129.5, the highest number in the index to date. Residential remodels in June were up month-over-month 5.2 points (4%) from the May value of 124.3, and up year-over-year 24.5 points from the June 2010 value of 105.0.
...
In June, the West (7.3 points; 6%), the Midwest (11.2 points; 13%), and the South (< .1 points; < 1%) all had month-over-month gains, while the Northeast saw a decline (3.7 points; 4%). ... “The first half of 2011 brought pain to many sectors of the economy including home sales and jobs, however Americans continue to invest in remodeling, sending the BuildFax Remodeling Index to a new all-time high,” said Joe Emison, Vice President of Research and Development at BuildFax. “With so many Americans unable to sell their current home, it is apparent that they are planning on staying in their current residences and are making renovations and upgrades.”

Click on graph for larger image in graph gallery.

This is the highest level for the index (started in 2004) - even above the levels from 2004 through 2006 during the home equity ("home ATM") withdrawal boom.

Note: Permits are not adjusted by value, so this doesn't mean there is more money being spent, just more permit activity. Also some smaller remodeling projects are done without permits and the index will miss that activity.

Since there is a strong seasonal pattern for remodeling, the second graph shows the year-over-year change from the same month of the previous year.

The remodeling index is up 23% from June 2010.

Even though new home construction is still moving sideways, it appears that two other components of residential investment will increase in 2011: multi-family construction and home improvement.

Data Source: BuildFax, Courtesy of Index.BuildFax.com

Weekend:
• Summary for Week Ending August 12th
• Schedule for Week of August 14th

by Calculated Risk on 8/15/2011 08:30:00 AM

From the NY Fed: Empire State Manufacturing Survey

The August Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to worsen. The general business conditions index fell four points to -7.7, its third consecutive negative reading. The new orders index also remained below zero, at -7.8, while the shipments index was positive at 3.0.

Price indexes continued to retreat, with the prices paid index falling fifteen points to 28.3 and the prices received index falling three points to 2.2. The index for number of employees was slightly positive, while the average workweek index was slightly negative.

The index decreased from -3.8 in July, and is well below expectations of a reading of 1.0. This is the first regional survey released for August and shows that manufacturing in the NY region is still contracting.

Weekend:
• Summary for Week Ending August 12th
• Schedule for Week of August 14th

by Calculated Risk on 8/15/2011 12:47:00 AM

There will be a meeting of German chancellor Angela Merkel and French president Nicholas Sarkozy on Tuesday. There were some more rumors of a Eurobond this weekend, but according to the Financial Times that has been ruled out for now: Germany and France rule out eurobonds. Another meeting is not a good sign ...

The NY Times discusses the slowing European economies: Setbacks May Push Europe Into a New Downturn

On Tuesday, economists expect a report on euro area economic activity to show that gross domestic product slowed to 0.3 percent in the second quarter, from 0.8 percent in the first three months of the year.

And the NY Times discusses the false rumor last week about funding problems at Société Générale: Source Sought for False Story on French Bank. Pretty amusing story - it seems the rumor might have started with a fictional story in Le Monde (that was clearly labeled fiction).

And from the WSJ: Japan's Economy Shrinks but Beats Expectations

... Japan's economy continues to rebound from the devastating March 11 earthquake and tsunami faster than anticipated. The government reported that real Gross Domestic Product shrank 1.3% in annualized, seasonally adjusted terms in the second quarter. The outcome beat a 2.7% contraction [forecast].

The Asian markets are green tonight with the Nikkei up over 1%. The Hang Seng is up over 2%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P 500 is up about 7 points, and Dow futures are up about 70 points.

Oil: WTI futures are up to $85 and Brent is up to $108.

Yesterday:
• Summary for Week Ending August 12th
• Schedule for Week of August 14th

by Calculated Risk on 8/14/2011 05:32:00 PM

On Friday, Reuters and the University of Michigan released the preliminary consumer sentiment index for August. This showed a sharp decline in sentiment to 54.9, the lowest level in 30 years (see graph below).
My reaction was the decline in sentiment was related to the heavy coverage of the debt ceiling debate, and not due to the usual suspects: gasoline prices or a weakening labor market. Of course consumer sentiment was already low because of high gasoline prices and a weak labor market, but gasoline prices are now falling and initial weekly unemployment claims have declined recently (the key for sentiment is that neither appears to be getting worse rapidly).

I looked at some of the previous spikes down in sentiment due to fairly short term events: 1) the 1987 market crash, 2) the Gulf War, 3) 9/11, 4) the Iraq Invasion, and 5) Hurricane Katrina. These events are apparent on the following graph (along with plenty of noise):

Click on graph for larger image in graphic gallery.

There are other reasons for declines in sentiment, but I was looking for event driven declines. Note: It is more unusual to see sentiment spike up due to an event - perhaps the capture of Saddam Hussein in Dec 2003 led to an increase in sentiment in the January 2004 report.

Looking at these five events (table below), some of the declines were related to other factors (like an increase in oil prices) - and some lasted longer and had a direct impact on consumption.

My feeling is the debt ceiling decline - assuming the decline was due to the insanity in D.C. - is most similar to the 1987 stock market crash (that scared everyone, but had little impact on the economy) and to Hurricane Katrina (although Katrina led to higher oil prices and a direct impact on consumption in several gulf states).

If I'm correct, then sentiment should bounce back fairly quickly - but only to an already low level. And the impact on consumption should be minimal. Of course sentiment could have declined because of other factors (weak labor market, European financial crisis, etc), and then sentiment will probably not bounce back quickly.

Event Driven Declines in Consumer Sentiment
Event	Date	Bounce Back	Impact on Consumption	Other Factors
1987 Market Crash	Oct-87	2 Months	None	None
Gulf War	Aug-90	6 Months	PCE declined	Recession, Oil Prices Doubled
9/11	Sep-01	4 months	PCE declined 3 out of 4 months	Recession
Iraq Invasion	Mar-03	2 Months	None	Oil Prices increased 10%+
Hurricane Katrina	Aug-05	3 Months	PCE declined 2 months	Oil Prices increased 10%+
Debt Ceiling	Aug-11	---	---	European Crisis, Weak Recovery

Yesterday:
• Summary for Week Ending August 12th
• Schedule for Week of August 14th

by Calculated Risk on 8/14/2011 02:11:00 PM

From Professor Hamilton at Econbrowser: Economic consequences of recent oil price changes

Earlier this year, disruptions in Libya and the resurgence of demand from the emerging economies sent oil prices up sharply, a development that many economists believe contributed to the slow growth for 2011:H1. The chaotic markets of the last few weeks saw oil prices drop back down to where they had been in December. Will that be enough to revive the struggling U.S. economy? There is some evidence suggesting that it may be too late.

I recently completed a survey of a large number of academic studies that found a nonlinear economic response to oil price changes. One very well-established observation is that although oil price increases were often associated with economic recessions, oil price decreases did not bring about corresponding economic booms. ... An oil price increase that just reverses a recent price decrease does not seem to have the same economic effects as a price move that establishes new highs.
emphasis added

In his post, Hamilton notes that there is usually a lagged response to oil price increases, and the worst impact from the sharp increase earlier this year would usually be expected at the end of this year - even though prices have since declined.

However, Hamilton continues:

My reading of developments during 2011 has been that, because of the very high gasoline prices we saw in 2008, U.S. car-buying habits never went back to the earlier patterns, and we did not see the same shock to U.S. automakers as accompanied some of the other, more disruptive oil shocks.

So maybe the impact will be less than for previous price shocks. Lower oil and gasoline prices has to help a little, however as Hamilton concludes, the reasons for the recent oil price decline are not good news for the U.S. economy.