by Calculated Risk on 1/19/2015 10:14:00 AM

This is worth a mention - the drought in California is a "growing" concern ...

From the San Jose Mercury News: California drought: What happened to the rain?

An unusually wet December has given way to a hot, totally dry January. And it's creating angst among drought-weary residents ...

Weather experts, however, say not to panic. They emphasize that it's too soon to say that California is headed into its fourth straight year of drought. And they point out that a dry January is not out of the ordinary in a typical Northern California winter.

"A midwinter dry spell occurs almost every winter, and it averages 19 days," said meteorologist Jan Null, owner of Golden Gate Weather Services in Saratoga. "Now if it persists on to February and March, then we're getting out of the normal realm."

This is the fourth year in a row with little rain or snow in the mountains (the statewide snowpack is about 36% of normal for this date). California is the largest agricultural state, and an ongoing drought could have an impact on food prices - and on the economy.

by Calculated Risk on 1/18/2015 11:12:00 PM

Another excellent piece from Tim Duy: Will The Fed Take a Dovish Turn Next Week?

As it stands now, we are heading into the next FOMC meeting with the growing expectation that the Fed will take a dovish turn. Is it not obvious that global economic turmoil, collapsing oil prices, weak inflation, and a stronger dollar are clearly pointing to rapidly rising downside risks to the US economy? For financial market participants, they answer is a clear "yes." Expectations of the first rate hike have been pushed out to the end of this year, seemingly in complete defiance of Fed plans for policy normalization. The Fed may get there as well and abandon their carefully crafted mid-year plan, but I suspect they will not move quite as rapidly as financial market participants desire.

As a general rule, the Fed tends to act in a more deliberate fashion....

Bottom Line: I reiterate my view that despite the generally positive data flow, and the upward boost from oil, I don't see how they can justify raising rates without some reasonable acceleration in wage growth. ... my broader point is this: During normal times the Fed moves methodically if not ponderously. The current state of the economy gives them room to move as such. So I would not be surpised to see a fairly steady hand revealed in the next FOMC statement.

by Calculated Risk on 1/18/2015 09:37:00 AM

Recently there has been some discussion of a recession in 2015. That seems very unlikely to me - I'm not even on "recession watch".    I decided to repeat a post I wrote in January 2013. (two years ago).  This still seems correct - and I've added a few updates in italics.

A few thoughts on the "next recession" ... Forecasters generally have a terrible record at predicting recessions. There are many reasons for this poor performance. In 1987, economist Victor Zarnowitz wrote in "The Record and Improvability of Economic Forecasting" that there was too much reliance on trends, and he also noted that predictive failure was also due to forecasters' incentives. Zarnowitz wrote: "predicting a general downturn is always unpopular and predicting it prematurely—ahead of others—may prove quite costly to the forecaster and his customers".

Incentives motivate Wall Street economic forecasters to always be optimistic about the future (just like stock analysts). Of course, for the media and bloggers, there is an incentive to always be bearish, because bad news drives traffic (hence the prevalence of yellow journalism).

In addition to paying attention to incentives, we also have to be careful not to rely "heavily on the persistence of trends". One of the reasons I focus on residential investment (especially housing starts and new home sales) is residential investment is very cyclical and is frequently the best leading indicator for the economy. UCLA's Ed Leamer went so far as to argue that: "Housing IS the Business Cycle". Usually residential investment leads the economy both into and out of recessions. The most recent recovery was an exception, but it was fairly easy to predict a sluggish recovery without a contribution from housing.

Since I started this blog in January 2005, I've been pretty lucky on calling the business cycle.  I argued no recession in 2005 and 2006, then at the beginning of 2007 I predicted a recession would start that year (made it by one month with the Great Recession starting in December 2007).  And in 2009, I argued the economy had bottomed and we'd see sluggish growth.

Finally, over the last 18 months, a number of forecasters (mostly online) have argued a recession was imminent.  I responded that I wasn't even on "recession watch", primarily because I thought residential investment was bottoming.

[CR Update: this was written two years ago - I'm not sure if those calling for a recession then have acknowledged their incorrect forecasts and / or changed theirs views (like ECRI and various bloggers). Clearly they were wrong.]

Now one of my blogging goals is to see if I can get lucky again and call the next recession correctly.  Right now I'm pretty optimistic (see: The Future's so Bright ...) and I expect a pickup in growth over the next few years (2013 will be sluggish with all the austerity).

[CR Update: 2013 was a little better than I expected, but still sluggish. And 2014 had a weak start, but the last three quarters were solid.]

The next recession will probably be caused by one of the following (from least likely to most likely):

3) An exogenous event such as a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons. All of these events are possible, but they are unpredictable, and the probabilities are low that they will happen in the next few years or even decades.

2) Significant policy error. This might involve premature or too rapid fiscal or monetary tightening (like the US in 1937 or eurozone in 2012).  Two examples: not reaching a fiscal agreement and going off the "fiscal cliff" probably would have led to a recession, and Congress refusing to "pay the bills" would have been a policy error that would have taken the economy into recession.  Both are off the table now, but there remains some risk of future policy errors. 

Note: Usually the optimal path for reducing the deficit means avoiding a recession since a recession pushes up the deficit as revenues decline and automatic spending (unemployment insurance, etc) increases.  So usually one of the goals for fiscal policymakers is to avoid taking the economy into recession. Too much austerity too quickly is self defeating.

[CR Update: Most of the poor policy choices in the U.S. are behind us. Austerity hurt the recovery, but austerity appears over at the state and local level and diminished at the Federal level.]

1) Most of the post-WWII recessions were caused by the Fed tightening monetary policy to slow inflation. I think this is the most likely cause of the next recession. Usually, when inflation starts to become a concern, the Fed tries to engineer a "soft landing", and frequently the result is a recession. Since inflation is not an immediate concern, the Fed will probably stay accommodative for a few more years.

So right now I expect further growth for the next few years (all the austerity in 2013 concerns me, especially over the next couple of quarters as people adjust to higher payroll taxes, but I think we will avoid contraction). [CR Update: We avoided contraction in 2013!] I think the most likely cause of the next recession will be Fed tightening to combat inflation sometime in the future - and residential investment (housing starts, new home sales) will probably turn down well in advance of the recession. In other words, I expect the next recession to be a more normal economic downturn - and I don't expect a recession for a few years.

[CR Update: This still seems correct - no recession this year.]

by Calculated Risk on 1/17/2015 06:38:00 PM

On Friday I posted an article from housing economist Tom Lawler: Lawler: “Surprise” Warnings on Margins/Effective Prices Whacks Home Builder Stocks

A few people took this as Lawler being "surprised". Nothing could be further from reality!

First, from the piece from Lawler:

"While most competent housing analysts had expected diminished price increases and increased sales incentives at most home builders in 2014 and 2015 following the surprising sharp price increases in 2013, the majority of housing analysts and investors had no such expectation."

That was Lawler making fun of the people who got it wrong!

Lawler started 2014 warning about incentives and reduced margins - and he warned about them all year.  As an example, Lawler wrote in May:

"it seems highly likely that the “pricing power” builders had in 2013 will not be evident in 2014, and in fact “effective” home prices may ease a bit as builders significantly increase their use of sales incentives from 2013’s unusually low level."

Many people were "surprised" by the builder announcements, but not Lawler!

by Calculated Risk on 1/17/2015 12:15:00 PM

The key economic reports this week are December housing starts on Wednesday, and existing home sales on Friday.

----- Monday, January 19th -----
All US markets will be closed in observance of Martin Luther King, Jr. Day

----- Tuesday, January 20th -----
10:00 AM: The January NAHB homebuilder survey. The consensus is for a reading of 58, up from 57 in December.  Any number above 50 indicates that more builders view sales conditions as good than poor.

----- Wednesday, January 21st -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

8:30 AM: Housing Starts for December.

Total housing starts were at 1.028 million (SAAR) in November. Single family starts were at 677 thousand SAAR in November.

The consensus is for total housing starts to increase to 1.040 million (SAAR) in December.

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

----- Thursday, January 22nd -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 300 thousand from 316 thousand.

9:00 AM: FHFA House Price Index for November 2014. This was originally a GSE only repeat sales, however there is also an expanded index. The consensus is for a 0.3% increase.

11:00 AM: the Kansas City Fed manufacturing survey for January.

----- Friday, January 23rd -----
10:00 AM: Existing Home Sales for December from the National Association of Realtors (NAR).

The consensus is for sales of 5.05 million on seasonally adjusted annual rate (SAAR) basis. Sales in November were at a 4.93 million SAAR. Economist Tom Lawler estimates the NAR will report sales of 5.15 million SAAR.

A key will be the reported year-over-year increase in inventory of homes for sale.