by Calculated Risk on 8/27/2012 09:11:00 PM

First, tropical storm Isaac is forecast to reach hurricane strength soon, and is expected to make landfall near New Orleans on Tuesday night. Here is the NHC website with the forecast track and satellite images. It appears Isaac will be slow down as it makes landfall and will be over New Orleans for an extended period.

The big news tomorrow will be the release of the Case-Shiller house price index for June that I expect will to show a year-over-year increase for the first time since the housing bust started (except a brief increase in 2010 related to the housing tax credit).

On Tuesday:
• At 9:30 AM ET, the S&P/Case-Shiller House Price Index for June (and the national index for Q2) will be released. The consensus is for a no change year-over-year in the Composite 20 prices (NSA) for June. The Zillow forecast is for the Composite 20 to increase 0.3% year-over-year, and for prices to increase 0.9% month-to-month seasonally adjusted.

• At 10:00 AM, the Conference Board's consumer confidence index for August is scheduled for release. The consensus is for a decrease to 65.0 from 65.9 last month.

• Also at 10:00 AM, the Richmond Fed Survey of Manufacturing Activity for August will be released. The consensus is for an increase to -10 for this survey from -17 in July (above zero is expansion).


A question for the August economic prediction contest (Note: You can now use Facebook, Twitter, or OpenID to log in).

by Calculated Risk on 8/27/2012 04:49:00 PM

The Department of Transportation (DOT) reported today:

Travel on all roads and streets changed by 0.4% (1.1 billion vehicle miles) for June 2012 as compared with June 2011. Travel for the month is estimated to be 257.6 billion vehicle miles.

Cumulative Travel for 2012 changed by 1.1% (15.6 billion vehicle miles).

The following graph shows the rolling 12 month total vehicle miles driven.

The rolling 12 month total is still mostly moving sideways.

Click on graph for larger image.

In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.

Currently miles driven has been below the previous peak for 55 months - and still counting.

The second graph shows the year-over-year change from the same month in the previous year.

Gasoline prices peaked in April at close to $4.00 per gallon, and then started falling.

Gasoline prices were down in June to an average of $3.60 per gallon according to the EIA. Last year, prices in June averaged $3.74 per gallon, so it makes sense that miles driven are up year-over-year in June.

Just looking at gasoline prices suggest miles driven will be up in July too, but then decline year-over-year in August with the recent increase in prices.

However, as I've mentioned before, gasoline prices are just part of the story. The lack of growth in miles driven over the last 4+ years is probably also due to the lingering effects of the great recession (high unemployment rate and lack of wage growth), the aging of the overall population (over 50 drivers drive fewer miles) and changing driving habits of young drivers. With all these factors, it may be years before we see a new peak in miles driven.

by Calculated Risk on 8/27/2012 01:08:00 PM

From Cleveland Fed President Sandra Pianalto: The Federal Reserve and Monetary Policy

I am expecting the U.S. economy to continue to grow, but at a moderate pace. I expect economic growth of about 2 percent this year. And with this moderate GDP growth forecast, my outlook is for very slow improvement in the jobless rate. I expect the pace of GDP growth to pick up gradually through 2014, and for the unemployment rate to remain above 7 percent through 2014. Given my outlook for slow economic growth, I also expect slow wage growth, and I anticipate that core inflation will remain near the FOMC's 2 percent long-term objective over the next few years. While inflation remains close to our objective, unemployment is still well above the FOMC's estimate of the longer-term normal rate. The monetary policy debate is whether the FOMC should take further actions to stimulate today's slow-growth economy to bring down unemployment.

Monetary policy should do what it can to support the recovery, but there are limits to what monetary policy can accomplish. Monetary policy cannot directly control the unemployment rate. It can only foster conditions in financial markets that are conducive to growth and a lower unemployment rate. At times, significant obstacles can get in the way.
...
... large-scale asset purchases can be effective. But our experience with these programs is limited, and as a result, they justify more analysis. For example, as the structure of interest rates has moved lower over time, it is possible that future large-scale asset purchase programs will yield somewhat smaller interest-rate declines than past programs. A related issue to evaluate is whether further reductions in longer-term interest rates would stimulate economic activity to the same degree as they have in the past.

Let me now turn to some of the potential costs. It is conceivable that, at some point, policies designed to promote further declines in rates could interfere with financial stability. Some financial institutions find themselves challenged today by the low-interest-rate environment, and they might take actions to remain profitable that could affect risk in the financial system. ...

Finally, it is also conceivable that, at some point, the Federal Reserve's presence in certain securities markets would become so large that it would distort market functioning. It is important to have good estimates of how large the Federal Reserve's participation would have to be to cause a meaningful deterioration in securities market functioning, and to better understand the potential costs of such deterioration for the economy as a whole.

The bottom line is this: I am supportive of actions that provide economic benefits with manageable risks. The FOMC's policy actions to date have been important economic stabilizers and have acted to support the expansion. Yet today, we still find ourselves in a challenging economic environment – one in which we continue to rely on nontraditional policy tools. These new tools come with benefits and with risks ... and we must constantly weigh both in our efforts to meet our dual mandate of maximum employment and stable prices.

Pianalto is a voting member of the FOMC and her views are considered to be in the middle. Her concern about "a meaningful deterioration in securities market functioning" was addressed in the last meeting in a staff report, from the FOMC minutes:

In reviewing the costs that such a program might entail, some participants expressed concerns about the effects of additional asset purchases on trading conditions in markets related to Treasury securities and agency MBS, but others agreed with the staff's analysis showing substantial capacity for additional purchases without disrupting market functioning.

Some reports will probably focus on Pianalto's comment that "there are limits to what monetary policy can accomplish", but she clearly outlined the dual mandate, noted that unemployment was forecast to be very high for years, while inflation is forecast to be "close" to the FOMC objective - and there has already been a staff report addressing her concern about market functioning.  My guess is she is leaning towards additional accommodation.

by Calculated Risk on 8/27/2012 10:30:00 AM

From the Dallas Fed: Texas Manufacturing Growth Slows but Six-Month Expectations Improve

Texas factory activity increased but at a slower pace in August, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, fell from 12 to 6.4, suggesting softer output growth.

The general business activity index remained negative but climbed nearly 12 points from -13.2 to -1.6.
...
Labor market indicators reflected stronger labor demand but unchanged workweeks. Employment growth picked up in August, with the index rising to 14.2, its highest reading in five months. Twenty-four percent of firms reported hiring new workers, while 10 percent reported layoffs. The hours worked index was near zero, suggesting little change in workweek length.

This was above expectations of a -6.0 reading for the general business activity index.

So far all of regional manufacturing surveys have been weak in August.

by Calculated Risk on 8/27/2012 08:50:00 AM

From Chicago Fed President Charles Evans: Some Thoughts on Global Risks and Monetary Policy

Evans concludes with an impassioned plea to do more to help reduce unemployment:

Finding a way to deliver more accommodation — whether it is monetary or fiscal — is particularly important now because delays in reducing unemployment are costly. An unusually large percentage of the unemployed have been without work for quite an extended period of time; their skills can become less current or even deteriorate, leaving affected workers with permanent scars on their lifetime earnings. And any resulting lower aggregate productivity also weighs on potential output, wages and profits for the economy as a whole. The damage intensifies the longer that unemployment remains high. Failure to act aggressively now could lower the capacity of the economy for many years to come.
...
I have outlined some policy actions that I think can take us in the direction of a more vibrant and resilient economy. Given the risks we face, I think it is vital that we make such moves today. I don’t think we should be in a mode where we are waiting to see what the next few data releases bring. We are well past the threshold for additional action; we should take that action now.

Evans once again proposes keeping the Fed funds rate low until unemployment falls below some target (he suggests 7%), unless inflation rises above 3%.

Evans also supports open-ended QE until the economic conditions clearly improve:

I support further use of our balance sheet to provide even more monetary accommodation. ... I believe it is time to take even stronger steps, such as the purchase of more mortgage-backed securities, to increase the degree of monetary support for the recovery. As suggested recently by my colleagues Eric Rosengren and John Williams, these could be open-ended purchases, meaning that they would continue at a certain rate until there was clear evidence of improvement in economic conditions.

This is not a new position for Evans, but this is an especially strong speech.