by Calculated Risk on 12/29/2014 01:49:00 PM

A few related articles on oil  ...

From Bloomberg: Oil Falls to 5-Year Low as Supply Glut Seen Lingering

Oil fell to the lowest level in more than five years amid speculation that a global supply glut that’s driven crude into a bear market will continue through the first half of 2015.
...
WTI for February delivery fell 96 cents, or 1.8 percent, to $53.77 a barrel at 12:25 p.m. on the New York Mercantile Exchange.

Currently WTI is at $53.21, and Brent futures are at $57.79.

From Bloomberg: Oil Rigs in U.S. Drop by 37 to Lowest Level Since April

Rigs targeting oil declined by 37 to 1,499 in the week ended Dec. 26, Baker Hughes Inc. (BHI) said on its website today. The number of oil rigs has slipped by 76 in three weeks. ... The number of rigs targeting U.S. oil is down from a record 1,609 following a $55-a-barrel drop in global prices since June, threatening to slow the shale-drilling boom that’s propelled domestic production to the highest in three decades.
...
While the U.S. rig count has dropped, domestic production continues to surge, with the yield from new wells in shale formations including North Dakota’s Bakken and Texas’s Eagle Ford projected to reach records next month, Energy Information Administration data show.

Although new exploration will slow sharply, I expect domestic producers to continue to produce at most existing wells at current prices.

And less exploration will lead to layoffs.  From the WSJ: Oil Jobs Squeezed as Prices Plummet

Tom Runiewicz, a U.S. industry economist at IHS Global Insight, forecasts companies providing support services to oil and gas companies could lose 40,000 jobs by the end of 2015, about 9% of the category’s total, if oil stays around $56 a barrel through the second quarter of next year. Equipment manufacturers could shed 5,000 to 6,000 jobs, or about 6% of total employment for such companies.

There will be winners and losers with the decline in oil prices, however, since the US is a large net importer of oil (despite the myth reported by some in the media), overall the decline in oil prices should be a positive for the economy.

by Calculated Risk on 12/29/2014 10:35:00 AM

From the Dallas Fed: Texas Manufacturing Activity Picks Up Pace

Texas factory activity increased again in December, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose strongly from 6 to 15.8, indicating output grew at a faster pace in December.

Other measures of current manufacturing activity reflected continued growth during the month. The capacity utilization index rose from 9.8 to 12.4, due to a higher share of respondents noting an increase in December than in November. The shipments index climbed to 19.6, its highest reading in five months. The new orders index moved down from 5.6 to 1.3, suggesting moderating demand growth, but more than a quarter of firms noted increases in new orders over November levels.

Perceptions of broader economic conditions remained positive this month. The general business activity index fell from 10.5 to 4.1. The company outlook index was almost unchanged at 8.4, with 21 percent of respondents noting an improved outlook.

Labor market indicators reflected unchanged workweeks but continued employment increases. The December employment index held steady at a solid reading of 9.2
emphasis added

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Click on graph for larger image.

The New York and Philly Fed surveys are averaged together (dashed green, through December), and five Fed surveys are averaged (blue, through December) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through November (right axis).

It seems likely the ISM index will be solid, but show slower expansion in December. The ISM Manufacturing Index for December will be released on Friday, January 2nd, and the consensus is for a decrease to 57.5 from 58.7 in November.

by Calculated Risk on 12/29/2014 08:33:00 AM

Note: I follow several house price indexes (Case-Shiller, CoreLogic, Black Knight, Zillow, FHFA, FNC and more). The timing of different house prices indexes; Black Knight uses the current month closings only (not a three month average like Case-Shiller or a weighted average like CoreLogic), excludes short sales and REOs, and is not seasonally adjusted.

From Black Knight: U.S. Home Prices Up 0.1 for the Month; Up 4.5 Percent Year-Over-Year

Today, the Data and Analytics division of Black Knight Financial Services​ released its latest Home Price Index (HPI) report, based on October 2014 residential real estate transactions. The Black Knight HPI combines the Company’s extensive property and loan-level databases to produce a repeat sales analysis of home prices as of their transaction dates every month for each of more than 18,500 U.S. ZIP codes. The Black Knight HPI represents the price of non-distressed sales by taking into account price discounts for REO and short sales.

The Black Knight HPI increased 0.1% percent in October, and is off 10.2% from the peak in June 2006 (not adjusted for inflation).

The year-over-year increases have been getting steadily smaller for the last year - as shown in the table below:

Month	YoY House Price Increase
Jan-13	6.7%
Feb-13	7.3%
Mar-13	7.6%
Apr-13	8.1%
May-13	7.9%
Jun-13	8.4%
Jul-13	8.7%
Aug-13	9.0%
Sep-13	9.0%
Oct-13	8.8%
Nov-13	8.5%
Dec-13	8.4%
Jan-14	8.0%
Feb-14	7.6%
Mar-14	7.0%
Apr-14	6.4%
May-14	5.9%
June-14	5.5%
July-14	5.1%
Aug-14	4.9%
Sep-14	4.6%
Oct-14	4.5%

The press release has data for the 20 largest states, and 40 MSAs.

Black Knight shows prices off 41.0% from the peak in Las Vegas, off 34.0% in Orlando, and 31.7% off from the peak in Riverside-San Bernardino, CA (Inland Empire). Prices are at new highs in Colorado and Texas (Denver, Austin, Dallas, Houston and San Antonio metros). Prices are also at new highs in Honolulu, HI, and Nashville, TN.

Note: Case-Shiller for October will be released tomorrow.

by Calculated Risk on 12/28/2014 08:25:00 PM

From the WSJ: Need a Raise in 2015? Try Changing Jobs

In an economic recovery weighed down by subdued income growth for most Americans, a Kansas City Fed paper suggests those who are moving on to new jobs are better able to negotiate pay increases.

By focusing on job “switchers,” Kansas City Fed economist José Mustre-del-Río says he is able to get a better sense of present wage conditions.

“Unlike wages of stayers, wages of switchers are much more cyclically sensitive, as contracts signed with new employers are more likely to reflect current economic conditions,” he writes in a research note. “We find that switchers’ wage growth has been quite strong the past several quarters as the labor market continues to tighten.”

For instance, job switchers’ average wage growth rose from around 4.3% per quarter in the first quarter of 2013 to 5.6% in the third quarter of 2014, the study found. Those changing jobs in leisure and hospitality experienced average wage growth of 7.7%, well above a the 2% experience by the average worker last year and that has kept consumers barely keeping pace with inflation.

Monday:
• At 10:30 AM ET, the Dallas Fed Manufacturing Survey for December. This is the last of the regional Fed surveys for December.

Weekend:
• Schedule for Week of December 28th

• Question #7 for 2015: What about oil prices in 2015?

• Question #8 for 2015: How much will Residential Investment increase?

• Question #9 for 2015: What will happen with house prices in 2015?

• Question #10 for 2015: How much will housing inventory increase in 2015?

From CNBC: Pre-Market Data and Bloomberg futures: currently the S&P futures are up 3 and DOW futures are up 30 (fair value).

Oil prices were down over the last week with WTI futures at $55.48 per barrel and Brent at $60.01 per barrel.  A year ago, WTI was at $99, and Brent was at $112 - so prices are down 44% and 46% year-over-year respectively.

Below is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are around $2.29 per gallon (down about $1.00 per gallon from a year ago).  If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent; gasoline prices in most of the U.S. are impacted more by Brent prices.

Orange County Historical Gas Price Charts Provided by GasBuddy.com

by Calculated Risk on 12/28/2014 06:29:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2014.

7) Oil Prices: Declining oil prices and falling bond yields were two of the biggest stories of 2014. Will oil prices continue to decline in 2015?

The reason prices have fallen sharply is supply and demand. It is important to remember that the short term supply and demand curves for oil are very steep. 

In the long run, supply and demand will adjust to price changes.  But if someone asks why prices have fallen so sharply recently, the answer is "supply and demand" and that the short term supply and demand curves are steep for oil.

The keys on the short term demand side have been the ongoing weakness in Europe and the slowdown in China.   Professor Hamilton estimates that about 45% of the recent decline in oil prices was due to weakness in the global economy. Will Europe recovery in 2015? Will China's growth increase? Right now it looks like more of the same, so I expect the demand side to stay weak in 2015.

For supply, some of the increase has been due to increased shipments from Libya, but most of the supply increase has been due to increased tight oil production.  The questions on the supply side are: 1) will be there be a 2015 supply disruption in Libya, Iraq, Nigeria, or some other oil exporting country, and 2) what price will lead to less fracking production?

Professor Hamilton posted some thoughts today: Supply, demand and the price of oil

At what price would supply and demand be back in balance? I won’t even make an attempt to predict short-run developments for the wild cards like Libya, Iraq, and China. But in principle, the U.S. supply situation should be simpler. At current prices, some of the higher-cost producers will be forced out. It should be a textbook problem of finding the point on the marginal cost curve at which there’s an incentive for the marginal producer to meet desired demand; given a quantity Q demanded on the horizontal axis, find the price P associated with that Q from the height of the vertical axis on the marginal cost curve. The problem is, nobody knows for sure exactly what that marginal cost curve looks like, and sunk costs for existing wells make it hard (and painful for the oil producers) to find out.

It is impossible to predict an international supply disruption - if a significant disruption happens, then prices will obviously move higher. Continued weakness in Europe and China does seem likely - and I expect the frackers to slow down with exploration and drilling, but to continue to produce at most existing wells at current prices (WTI at $55 per barrel). This suggests in the short run (2015) that prices will stay well below $100 per barrel (perhaps in the $50 to $75 range) - and that is a positive for the US economy (Note: the US is a large importer of oil - see: Katie Couric and the Net Petroleum Exporter Myth

Here are the ten questions for 2015 and a few predictions:
• Question #2 for 2015: How many payroll jobs will be added in 2015?
• Question #3 for 2015: What will the unemployment rate be in December 2015?
• Question #4 for 2015: Will too much inflation be a concern in 2015?
• Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
• Question #6 for 2015: Will real wages increase in 2015?
• Question #7 for 2015: What about oil prices in 2015?
• Question #8 for 2015: How much will Residential Investment increase?
• Question #9 for 2015: What will happen with house prices in 2015?
• Question #10 for 2015: How much will housing inventory increase in 2015?