by Calculated Risk on 1/03/2011 12:42:00 PM

This is the last in a series of "Ten Economic Questions for 2011". These posts included some thoughts and few predictions on these questions.

Of course no one has a crystal ball, but my general view is economic and employment growth will improve in 2011 as compared to 2010, but growth will still be sluggish relative to the slack in the system. By "sluggish" I mean I don't expect anything like the 7.2% real GDP growth we saw in 1984 coming out of the early '80s severe recession. This recession was different - caused by the bursting of the housing and credit bubbles - and recoveries from financial crisis tend to be slow.

And there are downside risks from falling house prices, Europe, and state and local government budget cuts. And unfortunately I think the unemployment rate will still be around 9% at the end of 2011.

The good news is residential investment will probably make a positive contribution to GDP growth for the first time since 2005. And residential construction employment will probably increase in 2011.

This graph shows the annual change in real residential investment, and the change in residential construction employment since 2004. The economy has lost about 1.3 million residential construction jobs over the last 5 years, and only a small portion of those jobs will return in 2011.

We still need to work down the excess inventory of housing units. It is good news that completions in 2011 will be at or near a record low. And with improved employment growth, we should see a pickup in household formation. The combination of a low number of new units added to the housing stock, and more household formation, should lead to a meaningful decline in the number of excess housing units this year.

That brings up the question: if there are still excess vacant housing units, why will residential investment increase in 2011? There are a few reasons: for multi-family units it takes over a year on a average to complete, and apartment owners are seeing falling vacancy rates - and some have started to plan for 2012 and will be breaking ground in 2011. We can this in reports from architects.

And for single family homes, not all areas are the same (and most housing can't be moved). Also, as the economy improves, I expect some increase in homes built for owners (not built for sale). This will probably mean something like a 15% increase in residential investment in 2011.

As I've noted before, one of the key reasons for the sluggish recovery has been the ongoing problems in housing. Usually residential investment is a major contributor to GDP growth in the early stages of a recovery, but not this time because of the huge overhang of existing vacant homes.

Click on graph for larger image in graphics gallery.

This graph shows RI and investment in single family structures as a percent of GDP. Usually RI rebounds strongly at the beginning of a recovery, but this time RI has continued to decline.

RI as a percent of GDP is at a post WWII low of 2.22%, and investment in single family structures is near the all-time low.

Even though I expect a pickup this year, I think residential investment as a percent of GDP will still be very low.

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 1/03/2011 10:59:00 AM

The Census Bureau reported overall construction spending increased in November compared to October.

[C]onstruction spending during November 2010 was estimated at a seasonally adjusted annual rate of $810.2 billion, 0.4 percent (±1.6%)* above the revised October estimate of $806.7 billion.

Private construction spending also increased in November:

Spending on private construction was at a seasonally adjusted annual rate of $491.8 billion, 0.3 percent (±1.1%)* above the revised October estimate of $490.5 billion.

Click on graph for larger image in new window.

This graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted.

Private residential spending increased in November; private non-residential construction spending is still declining.

Residential spending is 65% below the peak early 2006, and non-residential spending is 38% below the peak in January 2008.

Sometime this year (in 2011), residential construction spending will probably pass non-residential spending. Although I expect the recovery in residential spending to be sluggish, Residential investment will probably make a positive contribution to GDP growth in 2011 for the first time since 2005.

by Calculated Risk on 1/03/2011 10:00:00 AM

PMI at 57.0% in December, up slightly from 56.6% in November. The consensus was for an increase to 57.2%.

From the Institute for Supply Management: December 2010 Manufacturing ISM Report On Business®

Manufacturing continued to grow in December as the PMI registered 57 percent, an increase of 0.4 percentage point when compared to November's reading of 56.6 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
...
ISM's New Orders Index registered 60.9 percent in December, which is an increase of 4.3 percentage points when compared to the 56.6 percent reported in November. This is the 18th consecutive month of growth in the New Orders Index. A New Orders Index above 50.2 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders
...
ISM's Employment Index registered 55.7 percent in December, which is 1.8 percentage points lower than the 57.5 percent reported in November. This is the 13th consecutive month of growth in manufacturing employment.

Click on graph for larger image in new window.

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

This was slightly below expectations and in line with the regional Fed manufacturing surveys.

by Calculated Risk on 1/03/2011 08:54:00 AM

This will be a common story this year ...

From the NY Times: Cuomo Plans One-Year Freeze on State Workers’ Pay

Gov. Andrew M. Cuomo will seek a one-year salary freeze for state workers as part of an emergency financial plan he will lay out in his State of the State address on Wednesday, senior administration officials said.

... the immediate budget savings from the freeze would be relatively modest — between $200 million and $400 million against a projected deficit in excess of $9 billion

This weekend:
• Summary for Week ending January 1st
• Schedule for Week of January 2, 2011

by Calculated Risk on 1/02/2011 11:59:00 PM

From Paul Krugman in the NY Times: Deep Hole Economics

If there’s one piece of economic wisdom I hope people will grasp this year, it’s this: Even though we may finally have stopped digging, we’re still near the bottom of a very deep hole.

Why do I need to point this out? Because I’ve noticed many people overreacting to recent good economic news. ...

Jobs, not G.D.P. numbers, are what matter to American families. ... Growth at a rate above 2.5 percent will bring unemployment down over time.

Suppose that the U.S. economy were to grow at 4 percent a year, starting now and continuing for the next several years. Most people would regard this as excellent performance, even as an economic boom; it’s certainly higher than almost all the forecasts I’ve seen.

Yet the math says that even with that kind of growth the unemployment rate would be close to 9 percent at the end of this year, and still above 8 percent at the end of 2012.

Even though I'm more optimistic about 2011 than 2010, I still think that growth will be sluggish relative to the slack in the system - and that the unemployment rate will stay elevated for some time. There is definitely a danger of becoming too optimistic.

by Calculated Risk on 1/02/2011 06:46:00 PM

From Nick Timiraos and Anton Troinovski at the WSJ: Key to Real-Estate Rebound: Solid Economic Growth

"The No. 1 biggest risk is that, for whatever reason, the overall economy does not grow sufficiently to produce any meaningful rebound in jobs," said Thomas Lawler, a housing economist in Leesburg, Va.
...
New housing construction is stuck at its lowest levels in more than 40 years. "That will help absorb supply in ways that a lot of people underestimate," Mr. Lawler said.

The key to recovery in real estate is absorbing the excess supply. Lawler makes two key points: 1) We need job growth (and that would mean household formation absorbing the excess supply) and, 2) Housing completions are at record lows (not adding to the excess supply).

Earlier:
• Summary for Week ending January 1st
• Schedule for Week of January 2, 2011