by Calculated Risk on 1/12/2013 08:05:00 AM

There was little economic data released this week. The trade deficit was much higher than expected, however the data might have been impacted by the port strike on the west coast. The BLS reported job openings were up about 12% year-over-year and the 4-week average for initial weekly unemployment claims increased a little.   Not much data, but next week will be busy!

Some quarterly data was released for office, apartment and mall vacancy rates and rents. All vacancy rates declined, although both office and mall rates are still near the cycle high - and apartment vacancy rates are already low.

Here are some thoughts on the economy in 2013:
• Question #1 for 2013: US Fiscal Policy
• Question #2 for 2013: Will the U.S. economy grow in 2013?
• Question #3 for 2013: How many payroll jobs will be added in 2013?
• Question #4 for 2013: What will the unemployment rate be in December 2013?
• Question #5 for 2013: Will the inflation rate rise or fall in 2013?
• Question #6 for 2013: What will happen with Monetary Policy and QE3?
• Question #7 for 2013: What will happen with house prices in 2013?
• Question #8 for 2013: Will Housing inventory bottom in 2013?
• Question #9 for 2013: How much will Residential Investment increase?
• Question #10 for 2013: Europe and the Euro

And here is a summary of last week in graphs:

• Trade Deficit increased in November to $48.7 Billion

Click on graph for larger image.

From Commerce: "[T]otal November exports of $182.6 billion and imports of $231.3 billion resulted in a goods and services deficit of $48.7 billion, up from $42.1 billion in October, revised. November exports were $1.7 billion more than October exports of $180.8 billion. November imports were $8.4 billion more than October imports of $222.9 billion."

Exports are 10% above the pre-recession peak and up 3.3% compared to November 2011; imports are near the pre-recession peak, and up 2.5% compared to November 2011.

The increase in the trade deficit in November was due to non-petroleum products.  The trade deficit with the euro area was $10.6 billion in November, up from $8.2 billion in November 2011. It appears the eurozone recession is still impacting trade.

Note: The trade deficit might have been skewed by the port strike that started in late November.

• BLS: Job Openings "unchanged" in November

This graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of turnover.  When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

Jobs openings increased slightly in November to 3.676 million, up from 3.665 million in October. The number of job openings (yellow) has generally been trending up, and openings are up about 12% year-over-year compared to November 2011.  Quits increased slightly in November, and quits are up 8% year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").

Not much changes month-to-month in this report, but the trend suggests a gradually improving labor market.

All current employment graphs
• Weekly Initial Unemployment Claims at 371,000

From the Department of Labor (DOL): "In the week ending January 5, the advance figure for seasonally adjusted initial claims was 371,000, an increase of 4,000 from the previous week's revised figure of 367,000. The 4-week moving average was 365,750, an increase of 6,750 from the previous week's revised average of 359,000.

Weekly claims were above the 362,000 consensus forecast.

Note: There are large seasonal factors in December and January, and that can make for fairly large swings for weekly claims.

All current Employment Graphs
• Reis: Office Vacancy Rate declines slightly in Q4 to 17.1%

Reis reported that the office vacancy rate declined slightly to 17.1% from 17.2% in Q3.

This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual).

The vacancy rate peaked in this cycle at 17.6% in Q3 and Q4 2010, and Q1 2011.

As Reis noted, net absorption was still positive, even though demand for office space was low - because there is so little new construction.  This remains a sluggish recovery for office space, and new construction will stay low until the vacancy rate falls much further.

• Reis: Apartment Vacancy Rate declined to 4.5% in Q4

Reis reported that the apartment vacancy rate fell to 4.5% in Q4, down from 4.7% in Q3 2012. The vacancy rate was at 5.2% in Q4 2011 and peaked at 8.0% at the end of 2009.

This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999). Note: Reis is just for large cities.

This was another strong quarter for apartments with the vacancy rate falling and rents rising. With more supply coming online in 2013, the decline in the vacancy rate should slow - but the market is still tight, and Reis expects rents to continue to increase.

• Reis: Mall Vacancy Rate declines in Q4

Reis reported that the vacancy rate for regional malls declined to 8.6% in Q4 from 8.7% in Q3. This is down from a cycle peak of 9.4% in Q3 2011.

For Neighborhood and Community malls (strip malls), the vacancy rate declined to 10.7% in Q4, down from 10.8% in Q3. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011.

This graph shows the strip mall vacancy rate starting in 1980 (prior to 2000 the data is annual). The regional mall data starts in 2000. Back in the '80s, there was overbuilding in the mall sector even as the vacancy rate was rising. This was due to the very loose commercial lending that led to the S&L crisis.

In the mid-'00s, mall investment picked up as mall builders followed the "roof tops" of the residential boom (more loose lending). This led to the vacancy rate moving higher even before the recession started. Then there was a sharp increase in the vacancy rate during the recession and financial crisis.

The yellow line shows mall investment as a percent of GDP through Q3. This has increased from the bottom because this includes renovations and improvements. New mall investment has essentially stopped.

The good news is, as Reis noted, new square footage is near a record low, and with very little new supply, the vacancy rate will probably continue to decline slowly.

Vacancy data courtesy of Reis.

by Calculated Risk on 1/11/2013 08:59:00 PM

Some short excerpts from a research note by Goldman Sachs chief economist Jan Hatzius:

1.Will the 2013 tax hike tip the economy back into recession?

No. To be sure, it will likely deal a heavy blow to household finances, and we therefore expect consumer spending to be weak this year. ...

2.Will growth pick up in the second half?

Yes. This forecast is based on the assumption that the drag from fiscal retrenchment—i.e., the ex ante reduction in the government deficit—diminishes in the second half of 2013 but the boost from the ex ante reduction in the private sector financial balance remains large. In our forecast, this causes a pickup in real GDP growth to a 2½% annualized rate in 2013H2, and further to around 3% in 2014.
...
3.Will capital spending growth accelerate?

Yes. We expect a pickup from around zero in the second half of 2012 to about 6% in 2013 on a Q4/Q4 basis. This would contribute 0.6 percentage points to real GDP growth and offset most of the likely slowdown in consumer spending growth.
...
4.Will the housing market continue to recover?

Yes. The fundamentals for housing activity point to further large gains in the next couple of years.
...
6.Are profit margins bound to shrink in 2013?

No.
...
7.Will core inflation accelerate significantly?

No. We expect inflation as measured by the PCE price index excluding food and energy to stay around 1½%, moderately below the Fed’s 2% target.
...
8.Will there be a bond market scare over the budget deficit?

No. ... the large government deficits of the past five years are closely related to the dramatic balance sheet adjustment in the private sector. ... As the private sector balance sheet adjustment comes closer to completion, we expect the government deficit to diminish gradually ... By 2015, we expect the federal deficit to be down to $500bn, or just under 3% of GDP. If this forecast is correct, concerns about the federal deficit are likely to diminish over the next few years.
...
9.Will the Federal Reserve stop buying assets?

No. Admittedly, the minutes of the December 11-12 FOMC meeting suggest that most Fed officials currently expect QE3 to end by late 2013. But we would not make too much of this. For one thing, it is important to remember that the outlook for monetary policy depends on the outlook for the economy.
...
10.Will interest rates rise?

Not much. ... At the longer end of the curve, we do expect a small increase in 10-year Treasury yields to 2.2% by the end of 2013.

by Calculated Risk on 1/11/2013 07:55:00 PM

From the NY Times: ‘Any Lawful Steps’ Urged to Avert Default

“In the event that Republicans make good on their threat by failing to act, or by moving unilaterally to pass a debt-limit extension only as part of unbalanced or unreasonable legislation, we believe you must be willing to take any lawful steps to ensure that America does not break its promises and trigger a global economic crisis — without Congressional approval, if necessary,” wrote Senators Harry Reid of Nevada, Richard J. Durbin of Illinois, Charles E. Schumer of New York and Patty Murray of Washington.
...
Democratic leadership aides said the Senate would probably take up legislation in early February that would allow the president to raise the debt ceiling on his own in set increments, perhaps of $1 trillion. Congress would have the ability to reject the increase, but that would take a two-thirds majority.

That plan was first used at the suggestion of Senator McConnell in 2011 to solve the last debt-ceiling impasse.

I remain confident that the debt ceiling will be raised, and that the US Government will pay the bills.

However "fear" will start slowing the economy soon - just like in 2011 - and the House will receive (and deserves) all of the blame for any damage done to the economy.

I assume the House is looking for a way out, and maybe another McConnell bill is the solution.

by Calculated Risk on 1/11/2013 04:21:00 PM

From Wendy Chen at Nomura:

After slowing for seven straight quarters, we expect China's GDP growth to rebound to 8% in Q4 2012.

We expect real GDP growth to rebound to 8.0% y-o-y in Q4 from a low of 7.4% in Q3, underpinned by accommodative monetary and fiscal policies, inventory destocking coming to an end and a modest improvement in exports. Industrial production growth is likely to rise to 10.6% y-o-y in December from 10.1%, as a return to more normal inventories lifts production. We expect fixed asset investment to rise slightly to 20.8% y-o-y (ytd) in December from 20.7% in November, driven by infrastructure investment and possibly real estate investment. We expect retail sales to grow by 15.6% y-o-y in December from 14.9%, aided by easier financing conditions and rising asset prices.

The China data releases are scheduled for next Friday.

It appears China's growth is picking up in the short term, but growth will probably slow again. Michael Pettis wrote last month: Three cheers for the new data?

I expected that politics would require a jump in growth over the rest of this year and the beginning of the next, this “good growth” tells us nothing about the health of the underlying economy. It only tells us how difficult politically the transition is likely to be.
...
Growth rates in China will continue to slow dramatically in the next few years, and if there are temporary lulls, as there must be, these do not represent any sort of “bottoming out” at all. They simply represent the fact that Beijing cannot afford politically to allow the adjustment to taker place too quickly, and from time to time Beijing is are going to step on the investment accelerator to speed things up temporarily.

by Calculated Risk on 1/11/2013 10:46:00 AM

Last year I posted Ten Economic Questions for 2013. Here are my thoughts on the #1 question - and what I consider the #1 downside risk to the US economy in 2013.

Note: Here is a review of my 2012 Forecasts

1) US Policy: This is probably the biggest downside risk for the US economy in 2013. I assume some sort of fiscal agreement will be reached soon, but how much austerity will be included? What will happen with the Alternative Minimum Tax (AMT)? What about emergency unemployment benefits? What about extending the mortgage relief for debt forgiveness (important for short sales)?

And what about other policy in 2013 such as the "default ceiling" (aka debt ceiling)? In 2011, the threat of a US government default slowed the economy to almost a standstill for a month. Right now the White House is taking the Ronald Reagan approach (when the Democrats pulled a similar reckless stunt) and they are saying President Obama will only sign a clean debt ceiling bill. Good. Hopefully default is off the table, but you never know.

Comments: Since I posted this question, a fiscal agreement was reached to avert the "fiscal cliff". Although I would have structured the agreement differently, the key goal of reducing the amount of austerity in 2013 was achieved - unfortunately the media did a generally poor job of explaining the "fiscal cliff", and I suspect most people thought it was about reducing the deficit, when the main concern was reducing the deficit too quickly in 2013 and taking the economy back into recession.

As far as specifics that I mentioned in the question, the AMT was fixed long term, emergency unemployment benefits were extended, and the relief for mortgage debt forgiveness was extended for another year (important for short sales). These are all positives for the US economy.

Unfortunately there are still several fiscal issues remaining for this year. The "sequester" (automatic spending cuts) still needs to be resolved, the "debt ceiling" needs to be raised, and a “continuing resolution” needs to be passed or the government will be shut down.

The so-called "debt ceiling" is really just about paying the bills. Here are a few things to know:
1) The House will raise the debt ceiling before the deadline, and the US will pay the bills.

2) The House majority has no leverage on the "debt ceiling"; as I've noted before, the House majority holds a losing hand and everyone knows it. The sooner they fold (and raise the debt ceiling) the better for everyone. As we saw in 2011, there are real world consequences for waiting until the last minute.

3) Those thinking there are no consequences for missing the deadline, I suggest reading the new (January 7th) Debt Limit Analysis by analysts at the Bipartisan Policy Center. From a political perspective, missing the deadline will, in the words of Republican Senator Mitch McConnell, make the "Republican brand toxic".  It would be political suicide, so it will not happen.

Hopefully the House will fold their losing hand soon. If they are planning on taking the country to the brink, and betting voters will forget like after 2011, I think that is another losing bet.

Although the negotiations on the "sequester" will be tough, I suspect something will be worked out (remember the goal is to limit the amount of austerity in 2013).  The issue that might blow up is the “continuing resolution", and that might mean a partial shut down of the government.  This wouldn't be catastrophic (like the "debt ceiling"), but it would still cause problems for the economy and is a key downside risk.

And a final prediction: If we just stay on the current path - and the "debt ceiling" is raised, and a reasonable agreement is reached on the "sequester", and the “continuing resolution" is passed - I think the deficit will decline faster than most people expect over the next few years.  Eventually the deficit will start to increase again due to rising health care costs (this needs further attention), but that isn't a short term emergency.

Here are the ten questions for 2013 and a few predictions:
• Question #1 for 2013: US Fiscal Policy
• Question #2 for 2013: Will the U.S. economy grow in 2013?
• Question #3 for 2013: How many payroll jobs will be added in 2013?
• Question #4 for 2013: What will the unemployment rate be in December 2013?
• Question #5 for 2013: Will the inflation rate rise or fall in 2013?
• Question #6 for 2013: What will happen with Monetary Policy and QE3?
• Question #7 for 2013: What will happen with house prices in 2013?
• Question #8 for 2013: Will Housing inventory bottom in 2013?
• Question #9 for 2013: How much will Residential Investment increase?
• Question #10 for 2013: Europe and the Euro