by Calculated Risk on 2/01/2011 10:00:00 AM

PMI at 60.8% in January, up from 58.5% in December. The consensus was for a reading of 57.9%.

From the Institute for Supply Management: January 2011 Manufacturing ISM Report On Business®

The report was issued today by Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The manufacturing sector grew at a faster rate in January as the PMI registered 60.8 percent, which is its highest level since May 2004 when the index registered 61.4 percent. The continuing strong performance is highlighted as January is also the sixth consecutive month of month-over-month growth in the sector. New orders and production continue to be strong, and employment rose above 60 percent for the first time since May 2004. Global demand is driving commodity prices higher, particularly for energy, metals and chemicals."
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ISM's New Orders Index registered 67.8 percent in January, which is an increase of 5.8 percentage points when compared to the seasonally adjusted 62 percent reported in December. This is the 19th consecutive month of growth in the New Orders Index.
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ISM's Employment Index registered 61.7 percent in January, which is 2.8 percentage points higher than the seasonally adjusted 58.9 percent reported in December. This is the 16th consecutive month of growth in manufacturing employment. An Employment Index above 50.1 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.

Click on graph for larger image in new window.

Here is a long term graph of the ISM manufacturing index.

This was a strong report and above expectations. The new orders and employment indexes were especially strong.

by Calculated Risk on 2/01/2011 08:30:00 AM

The advance Q4 GDP report released last Friday showed a small annualized real increase of 0.8% for investment in non-residential structures. This broke a streak of nine straight quarterly declines. Note: this gain might be revised away.

With the release of underlying detail data yesterday - we can see that the reported small gain for non-residential structure investment in Q4 was mostly for power and petroleum mining structures.

If we look at just office, mall and lodging investment, non-residential structure investment continued to decline in Q4.

Click on graph for larger image in new graph gallery.

This graph shows investment in offices, malls and lodging as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q1 2008 and has declined sharply to a new series low as a percent of GDP (data series starts in 1959).

Investment in multimerchandise shopping structures (malls) peaked in 2007 and has fallen by two-thirds (note that investment includes remodels, so this will not fall to zero). Mall investment is also at a series low (as a percent of GDP).

The bubble boom in lodging investment was stunning. Lodging investment peaked at 0.32% of GDP in Q2 2008 and has fallen by over 70% already.

Notice that investment for all three categories typically falls for a year or two after the end of a recession, and then usually recovers very slowly (flat as a percent of GDP for 2 or 3 years). Something similar will probably happen again, and there will not be a recovery in these categories until the vacancy rates fall significantly.

The second graph is for Residential investment (RI) components. According to the Bureau of Economic Analysis (BEA), includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories (dormitories, manufactured homes).

This graph shows the various components of RI as a percent of GDP for the last 50 years. Usually the most important components are investment in single family structures followed by home improvement.

Investment in home improvement was at a $151.6 billion Seasonally Adjusted Annual Rate (SAAR) in Q4 (about 1.0% of GDP), significantly above the level of investment in single family structures of $106.2 billion (SAAR) (or 0.7% of GDP).

Brokers' commissions increased slightly in Q4, but are near the lowest level (as a percent of GDP) since the early '80s. In dollar terms, brokers' commissions are back to the 1998 / 1999 levels.

And investment in multifamily structures has been bouncing along at a series low for the last few quarters, although this is expected to increase in 2011.

These graphs show there is currently very little investment in offices, malls and lodging - and also very little investment in most components of residential investment.

by Calculated Risk on 1/31/2011 11:54:00 PM

This is one of several industry specific indexes I track each month.

Click on graph for larger image in graph gallery.

Unfortunately the data for this index only goes back to 2002.

Note: Any reading above 100 shows expansion for this index.

From the National Restaurant Association (NRA): Restaurant Industry Entering 2011 on Positive Note, as Restaurant Performance Index Posted Strong Gain in December

Driven by expanding same-store sales and customer traffic levels as well as growing optimism among restaurant operators, the outlook for the restaurant industry improved in December. The National Restaurant Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 101.0 in December, up a strong 1.1 percent from its November level.
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For the third time in the last four months, restaurant operators reported a net increase in same-store sales. ... Restaurant operators also reported a net increase in customer traffic levels in December.

by Calculated Risk on 1/31/2011 09:13:00 PM

Light vehicle sales for January - to be announced tomorrow - are expected to increase to 12.6 million (Seasonally Adjusted Annual Rate), from 12.5 million in December.

There were a couple of articles out today suggesting sales slowed at the end of the month.

From Bloomberg (ht jb):

Ford Motor Co. said the U.S. industrywide auto sales rate may be lower in January than December ...

From Reuters: Auto sales seen losing momentum in January

U.S. auto sales lost momentum in the final weeks of January, auto executives and a leading analyst cautioned on Monday ... J.D. Power forecast a January sales rate of between 11.5 million and 12 million vehicles, down sharply from the outlook for 12.2 million it had given just 10 days before.

... on Monday Chrysler Chief Executive Sergio Marchionne said that industry-wide sales had fallen off in the final weeks of the month, which typically account for the bulk of sales.

"We've seen a softening of the U.S. market in the last couple of weeks," Marchionne told reporters ...

We will know tomorrow. Blame it on the snow?

by Calculated Risk on 1/31/2011 04:40:00 PM

Some random thoughts ...

• QE2 Changes: I'm hearing speculation that the Fed might taper off the QE2 purchases of treasury securities to "promote a smooth transition in markets". Currently the plan is to purchase $600 billion in Treasury securities by the end of Q2 or about $75 billion per month. The speculation is that the size will remain the same ($600 billion), but that the Fed will taper off the purchases through the end of Q3 or so.

That is what the Fed did with previous purchase programs. In August 2009 for Treasury securities:

To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.

And the same decision in September 2009 for MBS:

Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.

• Egypt. I continue to read the Al Jazeera Egypt live blog (the link changes for each day Egypt time). Hopefully there will be a positive and peaceful outcome for the Egyptian people.

A common email question is about the impact on the U.S. economy. My view is this could impact the U.S. by pushing up oil prices, especially if 1) protests spreads to larger oil producers in the Middle East, or 2) the Suez canal is closed. Both seem unlikely in the short term, although my view could change with events. Oil prices have already risen, also from the WSJ: Brent Crude Tops $100. Here is some analysis from Professor Hamilton at Econbrowser: Geopolitical unrest and world oil markets

• Q4 2010: Homeownership Rate Falls to 1998 Levels

This is based on the Housing Vacancies and Homeownership survey. What is important about this survey is the trends for the homeownership rate, and homeowner and rental vacancy rates. This shows a sharp drop in the rental vacancy rate as many households move from owning to renting and also suggests the excess housing inventory is being absorbed.

In the Graph Gallery: Homeownership rate, Homeowner vacancy rate, Rental vacancy rate.

• The Chicago PMI was Strong, the Dallas Fed Index was Weak. The Chicago PMI is far more useful as an indicator for the economy the the Dallas Fed index, and the Chicago PMI was very strong (including for employment). I expect the ISM manufacturing index tomorrow to show strong expansion in January (similar to December).

• Personal Income and Outlays Report for December. Includes graph for Real PCE, Personal Saving and Real Personal Income less Transfer Payments. Personal consumption has been increasing faster than personal income - that probably isn't sustainable.

• From the Federal Reserve The January 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices. In general banks have stopped tightening standards (they are already very tight), and demand has stopped falling (there is little demand for loans) - and a special question showed banks are more "upbeat" on delinquencies and charge-offs in 2011 ...

• Some research from the San Francisco Fed: Estimating the Macroeconomic Effects of the Fed's Asset Purchases

• Some research from the Cleveland Fed: High Unemployment after the Recession: Mostly Cyclical, but Adjusting Slowly

And from the weekend:
• Summary for Week ending January 29th
• Schedule for Week of January 30th
• BLS Employment Revisions on Feb 4th

by Calculated Risk on 1/31/2011 02:00:00 PM

In general banks have stopped tightening standards (they are already very tight), and demand has stopped falling (there is little demand for loans) - and a special question showed banks are more "upbeat" on delinquencies and charge-offs ...

From the Federal Reserve The January 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices

Overall, the January survey indicated that a modest net fraction of banks continued to ease standards and terms for commercial and industrial (C&I) loans over the fourth quarter while banks reported small mixed changes in their lending policies for other types of loans to businesses and households. Similarly, the respondents reported a moderate increase in demand for C&I loans but little change, on balance, in demand for other types of loans.

And here is a special question "on banks' outlook for asset quality in 2011":

The January survey included a set of special questions that asked banks about their outlook for delinquencies and charge-offs across major loan categories in the current year, assuming that economic activity progresses in line with consensus forecasts. This special question has been asked once each year during the past five years. In the January survey, expectations were significantly more upbeat than in past years. Moderate to large net fractions of banks reported that they expected improvements in delinquency and charge-off rates during 2011 in every major loan category.

The responses indicated that banks were least likely to expect improvement in the quality of residential real estate loans this year. About 20 percent of banks, on net, reportedly expect improvement in nontraditional closed-end loans, and about 35 percent of banks indicated they expect improvement in HELOCs. Almost 40 percent of respondents expected improvement for prime closed-end loans. Large banks were somewhat more likely than small banks to report expectations of improvement in the quality of residential real estate loans.

The survey also found that about 50 percent of banks, on net, expected improvement this year in the quality of consumer loans, including both credit card loans and other consumer loans. Similarly, about 55 percent of banks, particularly large banks, expected improvement in the quality of CRE loans.

Here is the full report.