by Calculated Risk on 3/02/2013 08:38:00 AM

It was interesting week. In testimony to Congress, Fed Chairman Ben Bernanke made it clear he will keep the "pedal to the metal" with monetary policy. Meanwhile, Congress keeps tapping on the fiscal policy brakes, this time with "sequestration" budget cuts.

However, even with conflicting policy, the economy is doing OK - at least so far in 2013.

New Home sales in January were at the highest level since July 2008, auto sales were up again in February, the ISM manufacturing index for February was at the highest level since June 2011, weekly initial unemployment claims declined, and consumer sentiment increased. All were better than expected, and it appears the economy was improving before the sequestration budget cuts on March 1st - even with the payroll tax increase this year (although personal consumption expenditures were only up slightly in January).

Also Case-Shiller reported that house prices were up 6.8% in 2012 and finished the year strong. This year-over-year increase strongly suggests house prices bottomed in early 2012.

The ongoing housing recovery and solid auto sales (both leading indicators) suggest the economy will continue to grow for next few years. 

Here is a summary of last week in graphs:

• New Home Sales at 437,000 SAAR in January

Click on graph for larger image in graph gallery.

The Census Bureau reports New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 437 thousand. This was up from a revised 378 thousand SAAR in December (revised up from 369 thousand). 

January is seasonally the weakest month of the year for new home sales, so January has the largest positive seasonal adjustment. Also this was just one month with a sales rate over 400 thousand - and we shouldn't read too much into one month of data. But this was the highest level since July 2008 and it is clear the housing recovery is ongoing.

On inventory, according to the Census Bureau:

"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."

Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.

This graph shows the three categories of inventory starting in 1973.

The inventory of completed homes for sale was just above the record low. The combined total of completed and under construction is also just above the record low.

This was above expectations of 381,000 sales in January. This is the strongest sales rate since 2008. This was another solid report.

New Home Sales graphs
• U.S. Light Vehicle Sales increase to 15.4 million annual rate in February

Based on an estimate from AutoData Corp, light vehicle sales were at a 15.38 million SAAR in February. That is up 7% from February 2012, and up about 1% from the sales rate last month.

This was above the consensus forecast of 15.2 million SAAR (seasonally adjusted annual rate).

Note: dashed line is current estimated sales rate.

This is another positive sign for the economy going forward.

• ISM Manufacturing index increases in February to 54.2

The ISM manufacturing index indicated expansion in February. PMI was at 54.2% in February, up from 53.1% in January. The employment index was at 52.6%, down from 54.0%, and the new orders index was at 57.8%, up from 53.3% in January.

Here is a long term graph of the ISM manufacturing index.

This was above expectations of 52.8% and suggests manufacturing expanded at a faster pace in February.

• Personal Income declined 3.6% in January, Spending increased 0.2%

The BEA reported: "Personal income decreased $505.5 billion, or 3.6 percent ... in January, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $18.2 billion, or 0.2 percent."

The dashed red lines are the quarterly levels for real PCE. Personal spending increased about as expected in January.

Ignore the sharp decline in income and decline in the saving rate - that decline was because some people took income in December to avoid higher taxes in 2013.

• Construction Spending declined in January

The Census Bureau reported that overall construction spending decreased in January:

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during January 2013 was estimated at a seasonally adjusted annual rate of $883.3 billion, 2.1 percent below the revised December estimate of $902.6 billion. The January figure is 7.1 percent above the January 2012 estimate of $824.7 billion.

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

Private residential spending is 55% below the peak in early 2006, and up 37% from the post-bubble low. Non-residential spending is 25% below the peak in January 2008, and up about 37% from the recent low.

Public construction spending is now 17% below the peak in March 2009 and at the lowest level since 2006 (not inflation adjusted).

The second graph shows the year-over-year change in construction spending.

On a year-over-year basis, private residential construction spending is now up 22%. Non-residential spending is up 4% year-over-year mostly due to energy spending (power and electric). Public spending is down 3% year-over-year.

• Case-Shiller: Comp 20 House Prices increased 6.8% year-over-year in December

From S&P: Home Prices Closed Out a Strong 2012 According to the S&P/Case-Shiller Home Price Indices

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 30.0% from the peak, and up 0.9% in December (SA). The Composite 10 is up 6.2% from the post bubble low set in March (SA).

The Composite 20 index is off 29.2% from the peak, and up 0.9% (SA) in December. The Composite 20 is up 7.0% from the post-bubble low set in March (SA).

The second graph shows the Year over year change in both indices.

The Composite 10 SA is up 5.9% compared to December 2011.

The Composite 20 SA is up 6.8% compared to December 2011. This was the seventh consecutive month with a year-over-year gain since 2010 (when the tax credit boosted prices temporarily).  This was the largest year-over-year gain for the Composite 20 index since 2006.

This was at the consensus forecast for a 6.8% YoY increase.

• Weekly Initial Unemployment Claims decrease to 344,000

The following graph shows the 4-week moving average of weekly claims since January 2000.

The DOL reports:

In the week ending February 23, the advance figure for seasonally adjusted initial claims was 344,000, a decrease of 22,000 from the previous week's revised figure of 366,000. The 4-week moving average was 355,000, a decrease of 6,750 from the previous week's revised average of 361,750.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 355,000 - just above the lowest 4-week average since the recession.

Weekly claims were below the 360,000 consensus forecast.

• Consumer Sentiment improves

The final Reuters / University of Michigan consumer sentiment index for February increased to 77.6. The preliminary reading was 76.3, and the January reading was 73.8.

This was above the consensus forecast of 76.0, but still low. There are a number of factors that impact sentiment including unemployment, gasoline prices and, for 2013, the payroll tax increase, the default threat from Congress and the "sequester" spending cuts. People will slowly adjust to the payroll tax increase, and the threat of default is now behind us ... and sentiment has improved a little ... but the sequester cuts might hurt sentiment in March.

by Calculated Risk on 3/01/2013 10:00:00 PM

From Fed Chairman Ben Bernanke: Long-Term Interest Rates. Excerpts:

[W]hy are long-term interest rates currently so low? To help answer this question, it is useful to decompose longer-term yields into three components: one reflecting expected inflation over the term of the security; another capturing the expected path of short-term real, or inflation-adjusted, interest rates; and a residual component known as the term premium. Of course, none of these three components is observed directly, but there are standard ways of estimating them. ...

[H]ow are long-term rates likely to evolve over coming years? It is worth pausing to note that, not that long ago, central bankers would have carefully avoided this topic. However, it is now a bedrock principle of central banking that transparency about the likely path of policy, in general, and interest rates, in particular, can increase the effectiveness of policy. In the present context, I would add that transparency may mitigate risks emanating from unexpected rate movements. Thus, let me turn to prospects for long-term rates, starting with the expected path of rates and then turning to deviations from the expected path that may arise.

If, as the FOMC anticipates, the economic recovery continues at a moderate pace, with unemployment slowly declining and inflation expectations remaining near 2 percent, then long-term interest rates would be expected to rise gradually toward more normal levels over the next several years.

by Calculated Risk on 3/01/2013 07:22:00 PM

I think these excerpts from a research piece by Goldman Sachs economist Alec Phillips are helpful in understanding the issues:

In 2011, Congress passed and the President signed the Budget Control Act, which raised the debt limit by $2.1 trillion and cut $2.1 trillion from projected spending over the following ten years. Caps on discretionary spending levels were estimated to reduce spending by $900bn compared with baseline projections that assumed spending would growth with inflation. The remainder of the savings was to be achieved by the congressional “super committee.” To motivate the super committee, and to ensure deficit reduction even if it failed, the legislation established $1.2 trillion in automatic cuts through 2021 by means of sequestration if the super committee could not agree on at least that much in deficit reduction. The super committee failed to agree on a deficit reduction package, leaving sequestration to take effect.
...
The cuts are not that large in the context of the $3.5 trillion federal budget, but sequestration will nevertheless cause real disruptions because the law to implement the cuts is very prescriptive and because they must be phased in relatively quickly once triggered ...

We estimate that sequestration will reduce annualized growth in 2013 by 0.6 percentage point (on a Q4/Q4 basis), with the greatest effects in Q2 and Q3. We expect the effect on growth to wane somewhat starting in Q42013, as the rate of reduction in federal spending becomes more gradual. Although sequestration will reduce the level of spending further in 2014, the rate of change will be much more gradual by that point so the effect on growth should be much smaller. ...

We expect slightly less of an effect on employment compared to the effect on GDP growth. The Congressional Budget Office estimates that the cuts will reduce employment at the end of 2013 by 750,000, or roughly a 0.5% reduction in employment, similar to the 0.6pp reduction in growth it assumes will result from sequestration in 2013.

But it is possible that the direct effect on federal employment may be somewhat smaller than the proportional GDP effect would imply. ... several federal agencies have announced that, at least for FY2013, compensation expenses are likely to be reduced by furloughing federal employees. This means that rather than reducing the number of employees proportionally to the cut, the number of days worked would be reduced instead.

Sequestration has happened before, but not quite on this scale. Meaningful cuts under sequestration were scheduled to take effect in 1986, 1988, and 1990. ... Cuts took effect in each of those years but after allowing the first cut to take effect as planned in FY1986, Congress intervened to reduce the subsequent cuts in FY1988 and FY1990. ...

The key timeframe for action will be late March and April. By late March, Congress will need to pass a new “continuing resolution” (CR) to temporarily extend spending authority, which was last extended before the 2012 election and expires March 27.

Of course the sequestration cuts could be changed at any time by an agreement between the President and Congress. It seems unlikely that the House will shut down the government in late March (but you never know), and maybe we will see an agreement to reduce or change the sequestration as part of a "continuing resolution".  This isn't as obvious as the debt ceiling debate ...

by Calculated Risk on 3/01/2013 03:58:00 PM

Based on an estimate from AutoData Corp, light vehicle sales were at a 15.38 million SAAR in February. That is up 7% from February 2012, and up about 1% from the sales rate last month.

This was above the consensus forecast of 15.2 million SAAR (seasonally adjusted annual rate).

This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for February (red, light vehicle sales of 15.38 million SAAR from AutoData).

Click on graph for larger image.

This is a solid start to the new year.    After three consecutive years of double digit auto sales growth, the growth rate will probably slow in 2013 - but this will still be another positive year for the auto industry.

Even if sales average the January / February rate all year, Total sales would be up about 6% from 2012.

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Note: dashed line is current estimated sales rate.

This shows the huge collapse in sales in the 2007 recession, and that sales have increased significantly from the bottom.

This is another positive sign for the economy going forward.

by Calculated Risk on 3/01/2013 12:35:00 PM

Catching up ...

A few key themes:
1) Private residential construction is usually the largest category for construction spending, but there was a huge collapse in spending following the housing bubble (as expected).  Private residential is now about even with private non-residential, and residential will probably be the largest category of construction spending in 2013.  Usually private residential construction leads the economy, so this is a good sign going forward.

2) Private non-residential construction spending usually lags the economy.  There was some increase this time, mostly related to energy and power - but the key sectors of office, retail and hotels are still at very low levels.

3) Public construction spending has declined to 2006 levels (not adjusted for inflation).  This has been a drag on the economy for almost 4 years.

The Census Bureau reported that overall construction spending decreased in January:

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during January 2013 was estimated at a seasonally adjusted annual rate of $883.3 billion, 2.1 percent below the revised December estimate of $902.6 billion. The January figure is 7.1 percent above the January 2012 estimate of $824.7 billion.

Private construction spending decreased due to less spending on power and electric, and public construction spending declined too:

Spending on private construction was at a seasonally adjusted annual rate of $614.2 billion, 2.6 percent below the revised December estimate of $630.9 billion. Residential construction was at a seasonally adjusted annual rate of $304.6 billion in January, nearly the same as the revised December estimate of $304.7 billion. ...

In January, the estimated seasonally adjusted annual rate of public construction spending was $269.0 billion, 1.0 percent below the revised December estimate of $271.7 billion.

Click on graph for larger image.

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

Private residential spending is 55% below the peak in early 2006, and up 37% from the post-bubble low. Non-residential spending is 25% below the peak in January 2008, and up about 37% from the recent low.

Public construction spending is now 17% below the peak in March 2009 and at the lowest level since 2006 (not inflation adjusted).

The second graph shows the year-over-year change in construction spending.

On a year-over-year basis, private residential construction spending is now up 22%. Non-residential spending is up 4% year-over-year mostly due to energy spending (power and electric). Public spending is down 3% year-over-year.