by Calculated Risk on 3/29/2013 10:12:00 AM

Click on graph for larger image.

The final Reuters / University of Michigan consumer sentiment index for March increased to 78.6 from the preliminary reading of 71.8, and up from the February reading of 77.6.

This was well above the consensus forecast of 72.5, but still fairly low. There are a number of factors that impact sentiment including unemployment, gasoline prices and, for 2013, the payroll tax increase and even politics (sequestration, default threats, etc).  

The preliminary decline was probably related to both high gasoline prices and policy concerns. According to Reuters, concerns about policy have abated, and consumers expect "employment will accelerate through the rest of 2013".

by Calculated Risk on 3/29/2013 08:46:00 AM

The BEA released the Personal Income and Outlays report for February:

Personal income increased $143.2 billion, or 1.1 percent ... in February, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $77.2 billion, or 0.7 percent.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in February, the same increase as in January. ... PCE price index -- The price index for PCE increased 0.4 percent in February, compare with an increase of less than 0.1 percent in January. The PCE price index, excluding food and energy, increased 0.1 percent, compared with an increase of 0.2 percent.
...
Personal saving -- DPI less personal outlays -- was $310.9 billion in February, compared with $262.5 billion in January. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 2.6 percent in February, compared with 2.2 percent in January.

The following graph shows real Personal Consumption Expenditures (PCE) through February (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

Click on graph for larger image.

The dashed red lines are the quarterly levels for real PCE. Both income and spending were above expectations in February, although some of the increase in spending was related to higher gasoline prices.

Using the two-month method to estimate Q1 PCE growth (first two months of the quarter), PCE was increasing at a 3.5% annual rate in Q1 2013 (using mid-month method, PCE was increasing at 3.2% rate). This suggests upward revisions to Q1 GDP forecasts.

by Calculated Risk on 3/28/2013 09:54:00 PM

Note: Markets Closed will be closed Friday in observance of the Good Friday Holiday.

Earlier the Chicago ISM reported:

The Chicago Purchasing Managers reported the Chicago Business Barometer veered downward, falling 4.4 points to 52.4 in March. After a strong start to the year, the Business Barometer was knocked back by steep declines in New Orders, Production, and another disappointing dip in Order Backlogs. All other Business Activity measures also declined in March, the exception being supplier lead times, which lengthened considerably. 

The employment index declined slightly to 55.1 from 55.7, and new orders were down sharply to 53.0 from 60.2 in February (above 50 is expansion).

Also, Catherine Rampell at the NY Times Economix brings us another reminder that the middle class is struggling: Median Household Income Down 7.3% Since Start of Recession

Median annual household income in February 2013 was $51,404, about 1.1 percent (or $590) lower than the January 2013 level of $51,994. The numbers are all pretax, and are adjusted for both inflation and seasonal changes.

February’s median annual household income was 5.6 percent lower than it was in June 2009, the month the recovery technically began; 7.3 percent lower than in December 2007, when the most recent recession officially started; and 8.4 percent lower than in January 2000, the earliest date that this statistical series became available.

Friday economic releases:
• At 8:30 AM ET, Personal Income and Outlays for February. The consensus is for a 0.9% increase in personal income in February (following the sharp increase in December due to some people taking income early to avoid higher taxes, and then the subsequent sharp decline in January), and for 0.6% increase in personal spending. And for the Core PCE price index to increase 0.2%.

• At 9:55 AM, Reuter's/University of Michigan's Consumer sentiment index (final for March). The consensus is for a reading of 72.5.

• At 10:00 AM, the Regional and State Employment and Unemployment (Monthly) for February 2013 will be released.

by Calculated Risk on 3/28/2013 05:01:00 PM

The third estimate of Q4 GDP report was released this morning, and although GDP was revised up, growth was still very weak at a 0.4% annualized real rate in Q4.  Personal consumption expenditures (PCE) were at a 1.8% annualized real growth rate; the third consecutive quarter with a sub 2% growth rate.

There were two significant drags on GDP in Q4, the changes in private inventories subtracted 1.52 percentage points, and government spending subtracted 1.41 percentage points. Inventories will probably rebound in Q1, but government spending (especially at the Federal level) will remain under pressure all year.

Overall this was a weak report, but with some underlying positives especially related to investment (a leading indicator).   The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter centered average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue.

The dashed gray line is the contribution from the change in private inventories.

Click on graph for larger image.

Residential Investment (RI) made a positive contribution to GDP in Q4 for the seventh consecutive quarter. Usually residential investment leads the economy, but that didn't happen this time because of the huge overhang of existing inventory, but now RI is contributing. The good news: Residential investment has clearly bottomed.

The ongoing positive contribution from RI to GDP is a significant story. 

Equipment and software investment increased solidly in Q4, after decreasing in Q3. This followed twelve consecutive quarters with a positive contribution.

The contribution from nonresidential investment in structures was revised to a positive in Q4. Nonresidential investment in structures typically lags the recovery, however investment in energy and power has masked the ongoing weakness in office, mall and hotel investment (the underlying details will be released next week).

The increase in investment is a key positive looking forward.

The second graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.

The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has added to GDP growth for the last 7 quarters (through Q4 2012).

However the drag from state and local governments is ongoing.   Although not as large a negative as the worst of the housing bust (and much smaller spillover effects), this decline in state and local government spending has been relentless and unprecedented.    I expect the drag from state and local governments to end, but the drag from Federal spending will be ongoing.

The key story is that residential investment is continuing to increase, and I expect this to continue.   The change in private inventories will rebound in Q1, and I expect GDP to be closer to 3% this quarter.   Since RI is the best leading indicator for the economy, this suggests no recession this year or in 2014 (with the usual caveats about Europe and policy errors in the US).

by Calculated Risk on 3/28/2013 02:40:00 PM

Just a few thoughts based on some recent conversations: The key driver for new residential construction, both single family and rental properties, is household formation. And household formation is mostly driven by jobs.  So jobs are the key driver for new residential construction.

But wait ... there are about 3 million fewer payroll jobs now than at the start of the recession. So why do we need any new housing units?

Two frequently mentioned reasons are more foreign buying (so jobs are not a driver), and that housing is not transportable, so some areas will need more housing.    However many areas are seeing a pickup in construction (not just areas with better job growth).    There probably is more foreign buying, especially in the gateway cities like New York, Miami (for South American buyers), and in California for Asian buyers, but that doesn't explain all of the apparent disconnect between total jobs and households.

I think the real reason for the changing ratio between total jobs and households is demographics.

In the decade from 1994 through 2003 (data started in 1994), the BLS reported the number of people "55 and over" and "not in the labor force" increased by 4.3 million.  But in the last 9+ years,  from January 2004 until February 2013, the BLS reports the number of people over 55 and not in the labor force increased by 8.1 million. So more older people are leaving the labor force.

And older people tend to live in smaller households (see from the Census Bureau: America’s Families and Living Arrangements: 2012), and this has pushed down the overall household size - even with some people doubling up. The overall mean household size in America is 2.55, but that falls to 2.29 for householders in the 55 to 59 age group, and 2.07 in the 60 to 64 age group, 1.91 in the 65 to 74 age group, and to 1.60 for those 75 and older.

This increase in the number of retired Americans with smaller household sizes means the relationship between jobs and households has changed over time.   Models of the relationship of number of households to jobs have to be modified to include changing demographics - and this is one reason why the US needs more housing.