by Calculated Risk on 11/19/2014 02:00:00 PM

From the Fed: Minutes of the Federal Open Market Committee, October 28-29, 2014. Excerpts:

In their discussion of the economic situation and the outlook, most meeting participants viewed the information received over the intermeeting period as suggesting that economic activity continued to expand at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate; on balance, participants judged that the underutilization of labor resources was gradually diminishing. Participants generally expected that, over the medium term, real economic activity would increase at a pace sufficient to lead to a further gradual decline in the unemployment rate toward levels consistent with the Committee's objective of maximum employment. Inflation was continuing to run below the Committee's longer-run objective. Market-based measures of inflation compensation declined somewhat, while survey-based measures of longer-term inflation expectations remained stable. Participants anticipated that inflation would be held down over the near term by the decline in energy prices and other factors, but would move toward the Committee's 2 percent goal in coming years, although a few expressed concern that inflation might persist below the Committee's objective for quite some time. Most viewed the risks to the outlook for economic activity and the labor market as nearly balanced. However, a number of participants noted that economic growth over the medium term might be slower than they currently expected if the foreign economic or financial situation deteriorated significantly.
...
In their discussion of communications regarding the path of the federal funds rate over the medium term, meeting participants agreed that the timing of the first increase in the federal funds rate and the appropriate path of the policy rate thereafter would depend on incoming economic data and their implications for the outlook. Most participants judged that it would be helpful to include new language in the Committee's forward guidance to clarify how the Committee's decision about when to begin the policy normalization process will depend on incoming information about the economy. Some participants preferred to eliminate language in the statement indicating that the current target range for the federal funds rate would likely be maintained for a "considerable time" after the end of the asset purchase program. These participants were concerned that such a characterization could be misinterpreted as suggesting that the Committee's decisions would not depend on the incoming data. However, other participants thought that the "considerable time" phrase was useful in communicating the Committee's policy intentions or that additional wording could be used to emphasize the data-dependence of the Committee's decision process. A couple of them noted that the removal of the "considerable time" phrase might be seen as signaling a significant shift in the stance of policy, potentially resulting in an unintended tightening of financial conditions. A couple of others thought that the current forward guidance might be read as suggesting an earlier date of liftoff than was likely to prove appropriate, given the outlook for inflation and the downside risks to the economy associated with the effective lower bound on interest rates. With regard to the pace of interest rate increases after the start of policy normalization, a number of participants thought that it could soon be helpful to clarify the Committee's likely approach. It was noted that communication about post-liftoff policy would pose challenges given the inherent uncertainty of the economic and financial outlook and the Committee's desire to retain flexibility to adjust policy in response to the incoming data. Most participants supported retaining the language in the statement indicating that the Committee anticipates that economic conditions may warrant keeping the target range for the federal funds rate below longer-run normal levels even after employment and inflation are near mandate-consistent levels. However, a couple of participants thought that the language should be amended in light of the prescriptions suggested by many monetary policy rules and the risks associated with keeping interest rates below their longer-run values for an extended period of time.
emphasis added

by Calculated Risk on 11/19/2014 11:10:00 AM

Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.

From AIA: Pace of Demand Slows Slightly, but Positive Outlook for Architecture Billings Index Continues

Headed by the continued strength in the multi-family residential market and the emerging growth for institutional projects, demand for design services continues to be healthy as exhibited in the latest Architecture Billings Index (ABI). As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the October ABI score was 53.7, down from a mark of 55.2 in September. This score reflects an increase in design activity (any score above 50 indicates an increase in billings). The new projects inquiry index was 62.7, following a mark of 64.8 the previous month.

The AIA has added a new indicator measuring the trends in new design contracts at architecture firms that can provide a strong signal of the direction of future architecture billings. The score for design contracts in October was 56.4.

“Though it has been slow in emerging, we’re finally seeing some momentum develop in design activity for nonprofits and municipal governments, and as such we’re seeing a new round of activity in the institutional sector,” said AIA Chief Economist Kermit Baker, Hon. AIA, PhD. “It will be interesting to see if and how the results of the mid-term Congressional and gubernatorial elections impact this developing momentum.”

• Regional averages: South (58.4), West (56.1), Midwest (54.4), Northeast (47.0) [three month average]
emphasis added

Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 53.7 in October, down from 55.2 in September. Anything above 50 indicates expansion in demand for architects' services.

Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction.  So the positive readings over the last six months suggest an increase in CRE investment in 2015.

by Calculated Risk on 11/19/2014 08:30:00 AM

From the Census Bureau: Permits, Starts and Completions

Housing Starts:
Privately-owned housing starts in October were at a seasonally adjusted annual rate of 1,009,000. This is 2.8 percent below the revised September estimate of 1,038,000, but is 7.8 percent above the October 2013 rate of 936,000.

Single-family housing starts in October were at a rate of 696,000; this is 4.2 percent above the revised September figure of 668,000. The October rate for units in buildings with five units or more was 300,000.
emphasis added

Building Permits:
Privately-owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 1,080,000. This is 4.8 percent above the revised September rate of 1,031,000 and is 1.2 percent above the October 2013 estimate of 1,067,000.

Single-family authorizations in October were at a rate of 640,000; this is 1.4 percent above the revised September figure of 631,000. Authorizations of units in buildings with five units or more were at a rate of 406,000 in October.

Click on graph for larger image.

The first graph shows single and multi-family housing starts for the last several years.

Multi-family starts (red, 2+ units) decreased in October (Multi-family is volatile month-to-month).  Note that permits were strong for multi-family, so multi-family starts will probably increase in November.

Single-family starts (blue) increased solidly in October.

The second graph shows total and single unit starts since 1968.

 The second graph shows the huge collapse following the housing bubble, and that housing starts have been increasing after moving sideways for about two years and a half years.

This was below expectations of 1.025 million starts in October, but this was due to the volatile multi-family sector.

Overall this was a solid report, with a solid increase in single family starts, upward revisions to the previous two months, and a solid increase in permits.  I'll have more later ...

by Calculated Risk on 11/19/2014 07:01:00 AM

From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey

Mortgage applications increased 4.9 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending November 14, 2014. This week’s results included an adjustment for the Veterans Day holiday. ...

The Refinance Index increased 1 percent from the previous week. The seasonally adjusted Purchase Index increased 12 percent from one week earlier to the highest level since July 2014.
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.18 percent from 4.19 percent, with points decreasing to 0.24 from 0.26 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.


The first graph shows the refinance index.

The refinance index is down 70% from the levels in May 2013.

Even with the recent slight small increase in activity - as people who purchased in the last year or so refinance - refinance activity is very low this year and 2014 will be the lowest since year 2000.


The second graph shows the MBA mortgage purchase index.  

According to the MBA, the unadjusted purchase index is down about 6% from a year ago.

by Calculated Risk on 11/18/2014 09:02:00 PM

An excerpt from a research piece by Goldman Sachs economist Alec Phillips: Fiscal Effects on Growth Should Be Neutral over the Coming Year

• As 2015 approaches, we take a look at our fiscal policy assumptions for the coming year. Overall, we estimate the effect of federal fiscal policy on growth to be very slightly positive in 2014, at about +0.1pp, and roughly neutral in 2015.

• Tax policy looks fairly stable. We do not expect any significant changes in tax policy, assuming Congress extends a number of tax benefits that expired at the start of 2014.

• On the spending side, we see modest downside risk to our projection of federal spending, offset to some extent by the possibility that federal funding, particularly for defense, could be increased by Congress in 2015. Spending on subsidies under the Affordable Care Act (ACA) poses modest downside risk: enrollment estimates for 2015 have been reduced, and an upcoming Supreme Court decision could reduce them further.

Less fiscal drag in 2015 will be a positive for the economy!

Wednesday:
• At 7:00 AM, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 8:30 AM ET, Housing Starts for October. The consensus is for total housing starts to increase to 1.025 million (SAAR) in October.

• During the day: The AIA's Architecture Billings Index for October (a leading indicator for commercial real estate).

• At 2:00 PM, the the FOMC Minutes for the Meeting of October 28-29, 2014