by Calculated Risk on 4/28/2011 12:18:00 PM

From the Kansas City Fed: Survey of Tenth District Manufacturing

Growth in Tenth District manufacturing activity moderated somewhat in April, but remained solid. Most producers continued to report healthy
expectations. Raw materials prices continued to rise, and more producers raised selling prices.

The month-over-month composite index was 14 in April, down from 27 in March and 19 in February. The employment index dropped from 25 to 17 ...

Note: both the composite index and employment index were at record highs last month. Any reading above zero indicates expansion.

This is the last of the regional Fed surveys for April. The regional surveys provide a hint about the ISM manufacturing index, as the following graph shows.

Click on graph for larger image in graph gallery.

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

The regional surveys suggest the ISM manufacturing index will in the mid-to-high 50s range (fairly strong expansion). The ISM index for April will be released on Monday, May 2nd.

Earlier:
• Advance Report: Real Annualized GDP Grew at 1.8% in Q1
• Residential Investment and Non-Residential investment in Structures at Record Lows as Percent of GDP

by Calculated Risk on 4/28/2011 10:08:00 AM

First from the NAR: Pending Home Sales Rise Again in March

The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 5.1 percent to 94.1 in March from a downwardly revised 89.5 in February [revised down from 90.8]. The index is 11.4 percent below 106.2 in March 2010 ...

This suggests a slight increase in sales in April and May.

And a couple more graphs from the GDP report ...

Click on graph for larger image in graph gallery.

Residential Investment (RI) decreased in Q1, and as a percent of GDP, RI is at a post-war record low at 2.21%.

Some people have asked how a sector that only accounts for 2.2% of GDP could be so important? The answer is that usually RI accounts for a large percentage of the employment and GDP growth in the first year or so of a recovery (and increases in RI have a positive impact on other areas like furniture, etc). Not this time because of the huge overhang of existing vacant units.

I'll break down Residential Investment (RI) into components after the GDP details are released this coming week. Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

I expect RI to increase in 2011 and add to both GDP and employment growth - for the first time since 2005 (even with the weak start in Q1).

The second graph shows non-residential investment in structures and equipment and software.

Equipment and software investment has been increasing sharply, and investment growth increased in Q1 at a 11.6% annualized rate.

Non-residential investment in structures is at a record low of 2.48% of GDP, and will probably stayed depressed for some time. I expect non-residential investment in structures to bottom later this year, but the recovery will be very sluggish for some time with the high vacancy rates for offices and malls. I'll also post the investment in offices, malls and hotels after the GDP details are released.

Earlier:
• Advance Report: Real Annualized GDP Grew at 1.8% in Q1

by Calculated Risk on 4/28/2011 08:55:00 AM

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.8 percent in the first quarter of 2011 (that is, from the fourth quarter to the first quarter) according to the "advance" estimate released by the Bureau of Economic Analysis

Click on graph for larger image in graph gallery.

This graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The dashed line is the current growth rate. Growth in Q1 at 1.8% annualized was below trend growth (around 3.1%) - and very weak for a recovery, especially with all the slack in the system.

A few key numbers:
• Real personal consumption expenditures increased 2.7 percent (annual rate) in the fourth quarter, compared with an increase of 4.0 percent in Q4 2010. This is higher than the pace in January and February, and indicates a pickup in March.

• Investment: Nonresidential structures decreased 21.7 percent, equipment and software increased 11.6 percent and real residential fixed investment decreased 4.1 percent.

• Government spending subtracted 1.09 percentage points in Q1 (unusual), and change in private inventories added 0.93 percentage points.

The following graph shows the rolling 4 quarter contribution to GDP from residential investment, equipment and software, and nonresidential structures. This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. The usual pattern - both into and out of recessions is - red, green, blue.

Residential Investment (RI) made a negative contribution to GDP in Q1 2011, and the four quarter rolling average is negative again following the slight boost from the tax credit early in 2010.

Equipment and software investment has made a significant positive contribution to GDP for seven straight quarters (it is coincident).

The contribution from nonresidential investment in structures was negative in Q1. Nonresidential investment in structures typically lags the recovery.

The key leading sector - residential investment - has lagged this recovery because of the huge overhang of existing inventory. Usually RI is a strong contributor to GDP growth and employment in the early stages of a recovery, but not this time - and this is a key reason why the recovery has been sluggish so far. However I expect residential investment will turn positive this year mostly from investment in multi-family structures and home improvement.

by Calculated Risk on 4/28/2011 08:30:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending April 23, the advance figure for seasonally adjusted initial claims was 429,000, an increase of 25,000 from the previous week's revised figure of 404,000. The 4-week moving average was 408,500, an increase of 9,250 from the previous week's revised average of 399,250.

Click on graph for larger image in graph gallery.

This graph shows the 4-week moving average of weekly claims for the last 40 years. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased this week to 408,250.

Weekly claims have increased over the last few weeks, and this is the first time the four-week average was above 400,000 in two months.

by Calculated Risk on 4/27/2011 10:14:00 PM

From Professor Tim Duy: Very High Bar for QE3

...
Apparently the threat of headline deflation off the table, Bernanke is not inclined to pursue sustained easing despite low core inflation and high unemployment. Again, I am not entirely surprised, except that Bernanke appear to suggest we are much closer to an inflation tipping point than I would expect. He could have tempered these comments with a more forceful discussion of labor costs, but did not. It seems clear these comments were intended to calm the non-existent bond market vigilantes, but is it consistent with the outlook? Arguably, no. For what it’s worth, I think Bernanke appeared most uncomfortable during this portion of the conference.

Bottom Line: When I look at the revisions to the Fed’s outlook and listen to Bernanke, I get the sense that the basic Fed policy is summarized as follows: “The economic situation continues to fall short of that consistent with the dual mandate, we have the tools to address that deviation, but will take no additional action because some people in the Middle East are seeking democracy.”

The Fed's forecasts for inflation and the unemployment rate would seem to suggest more QE, but I think Tim Duy's assessment is correct: Bernanke has set the bar very high for QE3. And the odds of more fiscal policy aimed at the unemployed are zero.

Earlier:
• A few takeaways from Bernanke Press Briefing
• Q1 2011: Homeownership Rate at 1998 Levels

by Calculated Risk on 4/27/2011 06:04:00 PM

First, there were no surprises.

• Here is the video of the press conference (about 57 minutes).

• Bernanke commented that "extended period" probably implies that the Fed would not raise rates for a "couple of meetings" after the "extended period" language is removed from the FOMC statement. Back in 2003/2004, the Fed raised rates in June 2004, about six months after the last appearance of the "considerable period" language in December 2003.

• Bernanke discussed the "stock" versus "flow" view of the QE2 purchases, and he said the Fed does not expect any significant impact on markets when QE2 ends in June (we already knew this was the Fed's view). Bernanke also said the program would not be tapered off, but would just end.

• When asked if the Fed could do more about unemployment, Bernanke responded: "Going forward we'll have to continue to make judgments about whether additional steps are warranted. But as we do so, we have to keep in mind that we do have a dual mandate, that we do have to worry about both the rate of growth but also the inflation rate. And, as I was indicating earlier, I think that even purely from an employment perspective that if inflation were to become unmoored - inflation expectations were to rise significantly - that the cost of that in terms of employment loss in the future if we had to respond to that would be quite significant." This sounds like QE3 is unlikely unless the economy slows sharply (or inflation falls).

• Bernanke noted that an early exit step would be to stop reinvesting maturing securities. This suggests that the Fed will continue to reinvest maturing securities after QE2 ends in June. This is exactly what I've been expecting (from FOMC preview):

This suggests a timeline for the earliest Fed funds rate increase:
• End of QE2 in June.
• End of reinvestment 2+ months later.
• Drop extended period language a couple months later
• Raise rates in early to mid-2012.

That is probably the earliest the Fed would raise rates - and it could be much later.

• And here are the updated forecasts. The GDP forecast is lower, inflation is higher and the unemployment rate lower:

April 2011 Economic projections of Federal Reserve Governors and Reserve Bank presidents
	2011	2012	2013
Change in Real GDP	3.1 to 3.3	3.5 to 4.2	3.5 to 4.3
Previous Projection (Jan 2011)	3.4 to 3.9	3.5 to 4.4	3.7 to 4.6
Unemployment Rate	8.4 to 8.7	7.6 to 7.9	6.8 to 7.2
Previous Projection (Jan 2011)	8.8 to 9.0	7.6 to 8.1	6.8 to 7.2
PCE Inflaton	2.1 to 2.8	1.2 to 2.0	1.4 to 2.0
Previous Projection (Jan 2011)	1.3 to 1.7	1.0 to 1.9	1.2 to 2.0
Core PCE Inflation	1.3 to 1.6	1.3 to 1.8	1.4 to 2.0
Previous Projection (Jan 2011)	1.0 to 1.3	1.0 to 1.5	1.2 to 2.0

FOMC definitions:
¹ Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.
² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

Earlier:
• Q1 2011: Homeownership Rate at 1998 Levels