by Calculated Risk on 12/22/2010 04:20:00 PM

Over the weekend I posted some questions for next year: Ten Economic Questions for 2011. I'll try to add some predictions, or at least some thoughts for each question - working backwards - before the end of year.

Remember, I have no crystal ball and I'm sure many people will disagree, especially about inflation. There are some people who have been predicting an imminent sharp rise in inflation for almost 2 years (it is always just around the corner). And many people argue that the standard inflation measures don't capture what they are actually seeing. I understand - each household has their own inflation measure, but we need to use some sort of aggregate measure.

Here was the question ...

9) Inflation: With all the slack in the system, will the U.S. inflation rate stay below target? Will there be any spillover from rising inflation rates in China and elsewhere?

First lets look at the current situation. Over the last 12 months, several key measures of inflation have shown small increases: CPI (Consumer Price Index) rose 1.1%, the median CPI increased 0.5%, the trimmed-mean CPI increased 0.8%, core CPI (less food and energy) increased 0.8%, and core PCE prices increased 1.2% (Q3 2009 to Q3 2010).

Click on graph for larger image in graph gallery.

This graph shows core CPI, median CPI and trimmed-mean CPI on a year-over-year basis.

They all show that inflation has been falling, and that measured inflation is up less than 1% year-over-year.

This makes sense because of the slack in the system (unemployment rate, capacity utilization, residential vacancy rates and more). Also inflation expectation measures are not indicating a significant increase in inflation.

It does appear that residential vacancy rates are now falling (from high levels), and rents appear to have bottomed, but it doesn't appear that rents will be rising rapidly any time soon.

For more on inflation, and a discussion of inflation measures, see Dr. Dave Altig's post today: An inflation (or lack thereof) chart show. Altig concludes:

I believe this is basically the bottom line: whether we look at headline inflation (straight-up, component-by-component, or in terms of the long-run trend), core inflation measures (of virtually any sensible variety), or inflation expectations (survey or market based), there is little a hint of building inflationary pressure.

I agree with Dr. Altig. My view is:
• I think the inflation rate (by these measures) will stay below the Fed's 2% target throughout 2011 (I'll guess close to 1%).
• I think rising prices in China, and rising commodity prices (like oil at $90 per barrel), will cause little spillover into U.S. inflation in 2011.

Ten Questions:
• Question #1 for 2011: House Prices
• Question #2 for 2011: Residential Investment
• Question #3 for 2011: Delinquencies and Distressed house sales
• Question #4 for 2011: U.S. Economic Growth
• Question #5 for 2011: Employment
• Question #6 for 2011: Unemployment Rate
• Question #7 for 2011: State and Local Governments
• Question #8 for 2011: Europe and the Euro
• Question #9 for 2011: Inflation
• Question #10 for 2011: Monetary Policy

by Calculated Risk on 12/22/2010 02:19:00 PM

• From the WSJ: Oil Passes $90 as Supplies Tighten

And from Professor Hamilton, a discussion about the impact of oil prices on economic growth from a couple weeks ago: Worrying about oil prices

• Yields are rising again in Ireland and Greece. The Ireland 10-year bond yield is up to 8.97%, the highest level since the "bailout". And the Greece 10-year bond yield is over 12% for the first time since the crisis in May. Something to watch. It seems another blowup in Europe is just around the corner.

• Q3 real GDP growth was revised up slightly to 2.6% from 2.5% (annualized rate). The key changes were that Personal consumption expenditures (PCE) growth was revised down to 2.4% from 2.8%, and changes in private inventories were estimated to contribute 1.61 percentage points to GDP growth compared to 1.30 percentage points in the 2nd estimate. This means final demand was slightly weaker than originally reported, and the increase in inventory slightly higher.

by Calculated Risk on 12/22/2010 11:15:00 AM

Earlier the NAR released the existing home sales data for November; here are a couple more graphs ...

The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change.

IMPORTANT: On a seasonal basis, inventory usually bottoms in December and January, and then will start increasing again in February and March. Since the NAR "months-of-supply" metric uses Seasonally Adjusted (SA) sales, but Not Seasonally Adjusted (NSA) inventory, this seasonal decline in inventory will lead to a lower "months-of-supply" in December and January. I expect inventory in December to decline to around 3.4 million units, and the months-of-supply to fall to the mid-to-high 8s.

The key is to recognize the seasonal pattern, and watch the YoY change in inventory.

Click on graph for larger image in graph gallery.

Although inventory decreased from October to November, inventory increased 5.4% YoY in November.

The year-over-year increase in inventory is especially bad news because the reported inventory is very high (3.71 million), and the 9.5 months of supply in November is well above normal.

By request - the second graph shows existing home sales Not Seasonally Adjusted (NSA).

The red columns are for 2010.

Sales NSA were slightly above the level in 2008, but well below the level in other years.

The bottom line: Sales were weak in November - below consensus and close to Tom Lawler's forecast - and existing home sales will continue to be weak for some time.

Inventory is very high, and the year-over-year increase in inventory is very concerning. The high level of inventory will continue to put downward pressure on house prices.

by Calculated Risk on 12/22/2010 10:00:00 AM

The NAR reports: Existing-Home Sales Resume Uptrend with Stable Prices

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, rose 5.6 percent to a seasonally adjusted annual rate of 4.68 million in November from 4.43 million in October, but are 27.9 percent below the cyclical peak of 6.49 million in November 2009, which was the initial deadline for the first-time buyer tax credit.
...
Total housing inventory at the end of November fell 4.0 percent to 3.71 million existing homes available for sale, which represents a 9.5-month supply at the current sales pace, down from a 10.5-month supply in October.

Click on graph for larger image in new window.

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in November 2010 (4.68 million SAAR) were 5.6% higher than last month, and were 27.9% lower than November 2009.

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory decreased to 3.71 million in November from 3.86 million in October. The all time record high was 4.58 million homes for sale in July 2008.

Inventory is not seasonally adjusted and there is a clear seasonal pattern with inventory peaking in the summer and declining in the fall. I'll have more on inventory later ...

The last graph shows the 'months of supply' metric.

Months of supply decreased to 9.5 months in November from 10.5 months in October. This is very high and suggests prices, as measured by the repeat sales indexes like Case-Shiller and CoreLogic, will continue to decline.

These weak numbers are below the consensus of 4.85 million SAAR, are are close to what I expected (Lawler's forecast was 4.61 million). I'll have more later.

by Calculated Risk on 12/22/2010 07:54:00 AM

The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey

The Refinance Index decreased 24.6 percent from the previous week. The Refinance Index has declined six straight weeks and is at its lowest level since the week ending April 30, 2010. The seasonally adjusted Purchase Index decreased 2.5 percent from one week earlier.
...
The average contract interest rate for 30-year fixed-rate mortgages increased to 4.85 percent from 4.84 percent, with points decreasing to 0.96 from 1.33 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 1990.

The four-week moving average of the purchase index is at about the levels of 1997 - and about 17% below the levels of April this year - suggesting weak existing home sales through January 2011.

by Calculated Risk on 12/21/2010 10:14:00 PM

Two stories: Lehman's accounting was fishy. The other is a real fish story ...

• From the NY Times DealBook: Cuomo Sues Ernst & Young Over Lehman

The New York attorney general on Tuesday sued Ernst & Young, accusing the accounting firm of helping Lehman Brothers, its client, “engage in a massive accounting fraud” by misleading investors about the investment bank’s financial health.

• From Andrew Martin at the NY Times: In a Sign of Foreclosure Flaws, Suits Claim Break-Ins by Banks

In Texas, for example, Bank of America had the locks changed and the electricity shut off last year at Alan Schroit’s second home in Galveston, according to court papers. Mr. Schroit, who had paid off the house, had stored 75 pounds of salmon and halibut in his refrigerator and freezer, caught during a recent Alaskan fishing vacation.

“Lacking power, the freezer’s contents melted, spoiled and reeking melt water spread through the property and leaked through the flooring into joists and lower areas,” the lawsuit says. The case was settled for an undisclosed amount.

Not sure how you get that smell out.