by Calculated Risk on 12/27/2012 08:22:00 PM

First from Neil Irwin at the WaPo: Three ways Washington could mess up the recovery in 2013. A few excerpts:

Going off the cliff. This is the most scrutinized possibility, the one that has been widely analyzed (and, as of Thursday morning, at least, seemed like a growing possibility).
...
If the nation goes fully off the fiscal cliff, and stays there, the Congressional Budget Office estimates it would amount to a drag on gross domestic product of 2.9 percentage points in 2013 ...
...
A deal with too much austerity, too fast. Going off the fiscal cliff is probably not even the likeliest risk (though the odds are changing all the time). Another risk is that while there is a deal to avert the entirety of the cliff, it is a deal that calls for enough austerity in 2013 to seriously undermine the nation’s economic prospects.
...
Debt ceiling hijinks. If the nation goes over the fiscal cliff, the results would be bad, but not catastrophic; we’ve had recessions before, we’ll have them again. But in late February or early March comes a deadline with even more at stake: The legally mandated cap on how much debt the Treasury can issue will become a binding constraint, setting the stage for the same messy negotiations that walloped financial markets and business confidence in the summer of 2011.

From an economic perspective, the thing that makes debt ceiling negotiations so perilous is the threat that Congressional Republicans are making — in effect, to allow the U.S. government to default on its debts if they don’t get their way on major spending cuts.

I think a fiscal agreement will be reached in the next couple of weeks (points 1 & 2), but we will have to see the details before analyzing the drag on the US economy. I'm not worried about the "debt ceiling" (point 3) - as I noted in 2011, there have been threats to not pay the bills before (that is what the debt ceiling is about), and it would be political suicide to default - so a bill will be passed.

Friday economic releases:
• At 9:45 AM, the Chicago Purchasing Managers Index for December will be released. The consensus is for an increase to 51.0, up from 50.4 in November.

• At 10:00 AM, the Pending Home Sales Index for November. The consensus is for a 1.8% increase in the index.

Earlier on new home sales:
• New Home Sales at 377,000 SAAR in November
• New Home Sales graphs

by Calculated Risk on 12/27/2012 06:46:00 PM

Earlier I posted a graph that shows the "distressing gap" between new and existing home sales. I've argued that this gap has been mostly caused by distressed sales (foreclosures and short sales) and that eventually the gap would close.

Another way to look at this is a ratio of existing to new home sales.

This ratio was fairly stable from 1994 through 2006, and then the flood of distressed sales kept the number of existing home sales elevated and depressed new home sales. (Note: This ratio was fairly stable back to the early '70s, but I only have annual data for the earlier years).

Click on graph for larger image.

In general the ratio has been trending down, although it increased over the last few months with the recent pickup in existing home sales. I expect this ratio to trend down over the next several years as the number of distressed sales declines and new home sales increase.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

Earlier:
• New Home Sales at 377,000 SAAR in November
• New Home Sales graphs

by Calculated Risk on 12/27/2012 03:28:00 PM

From the Philly Fed:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for November 2012. In the past month, the indexes increased in 45 states and decreased in five states, for a one-month diffusion index of 80. Over the past three months, the indexes increased in 45 states, decreased in three, and remained stable in two, for a three-month diffusion index of 84. For comparison purposes, the Philadelphia Fed has also developed a similar coincident index for the entire United States. The Philadelphia Fed’s U.S. index rose 0.2 percent in November and 0.6 percent over the past three months.

Note: These are coincident indexes constructed from state employment data. From the Philly Fed:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

Click on graph for larger image.

This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged).

In November, 45 states had increasing activity, down slightly from 46 in October (including minor increases). This is the second consecutive year with a weak spot during the summer, and improvement towards the end of the year.


Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession.

The map was all green earlier this year, than started to turn red, and is mostly green again.

by Calculated Risk on 12/27/2012 01:50:00 PM

Two months ago I pointed out that there was no drop dead date for the "fiscal cliff" (more a slope than a cliff).

A few things to remember:

• There is no drop dead date. Online sites and TV channels with "fiscal cliff" countdown timers are an embarrassment and are just trying to scare viewers.

• The "fiscal cliff" is about too much austerity too quickly (cutting the deficit too quickly). The "cliff" is a combination of expiring tax cuts (income taxes, payroll taxes, and more will increase), and forced spending cuts (mostly for defense). This has NOTHING to do with other long term fiscal issues, primarily related to medicare.

• All along I've assumed an agreement would be reached in January. That timing is based on a two assumptions: 1) the tax cuts for high income earners would be allowed to expire, and 2) some politicians will not vote for any package that included a tax rate increase. After January 1st the politicians can vote for a tax cut for most Americans. That is obviously dumb, and makes extra work for many involved with payrolls and taxes, but that is politics.  It is possible an agreement could be reached in the next few days - but I still think January is more likely.  If it slips to February, I'll be concerned.

• We need the details of the fiscal agreement before we can estimate the drag on the US economy from all the austerity.

by Calculated Risk on 12/27/2012 11:49:00 AM

New home sales have averaged 363,000 on an annual rate basis through November. That means sales are on pace to increase 18%+ from last year. Most sectors would be pretty happy with an 18% increase in sales.

But even with the significant increase this year, 2012 will be the 3rd lowest year for New Home sales since the Census Bureau started tracking new home sales in 1963. This year will be above 2010 and 2011, but below the 375,000 sales in 2009. I expect new home sales to double from here within the next several years as distressed sales continue to decline.

I started posting the following graph four years ago when the "distressing gap" first appeared.

The "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through October. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

Click on graph for larger image.

Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales kept existing home sales elevated, and depressed new home sales since builders weren't able to compete with the low prices of all the foreclosed properties.

I don't expect much of an increase in existing home sales (distressed sales will slowly decline and be offset by more conventional sales). But I do expect this gap to close - mostly from an increase in new home sales.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

Earlier:
• New Home Sales at 377,000 SAAR in November
• New Home Sales graphs