by Calculated Risk on 10/30/2013 04:41:00 PM

With the release of the CPI report this morning, we now know the Cost of Living Adjustment (COLA), and the contribution base for 2014.

Currently CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). Here is a discussion from Social Security on the current calculation (1.5% increase) and a list of previous Cost-of-Living Adjustments. Note: this is not the headline CPI-U.

The contribution and benefit base will be $117,000 in 2014.

SPECIAL NOTE on CPI-chained: There has been some discussion of switching from CPI-W to CPI-chained for COLA. This will not happen this year, but could happen in the next year or two, and the switch would impact future Cost-of-living adjustments, see: Cost of Living and CPI-Chained.

If CPI-chained was used instead of CPI-W, the increase would be 1.45% (probably rounded up to 1.5%).  CPI-chained would have minimal impact on any one year, but would reduce benefits over time.

by Calculated Risk on 10/30/2013 02:00:00 PM

About as expected ...

FOMC Statement:

Information received since the Federal Open Market Committee met in September generally suggests that economic activity has continued to expand at a moderate pace. Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated. Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.

Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H. Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.
emphasis added

by Calculated Risk on 10/30/2013 11:19:00 AM

The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.1% annualized rate) in September. The 16% trimmed-mean Consumer Price Index also increased 0.2% (2.2% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.2% (2.2% annualized rate) in September. The CPI less food and energy increased 0.1% (1.5% annualized rate) on a seasonally adjusted basis.

Note: The Cleveland Fed has the median CPI details for September here.

Click on graph for larger image.

This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.0%, the trimmed-mean CPI rose 1.7%, the CPI rose 1.2%, and the CPI less food and energy rose 1.7%. Core PCE is for August and increased just 1.2% year-over-year.

On a monthly basis, median CPI was at 2.1% annualized, trimmed-mean CPI was at 2.2% annualized, and core CPI increased 1.5% annualized.

These measures indicate inflation remains below the Fed's target.

by Calculated Risk on 10/30/2013 08:15:00 AM

From ADP:

Private sector employment increased by 130,000 jobs from September to October, according to the October ADP National Employment Report®. ... The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. September’s job gain was revised down from 166,000 to 145,000.
...
Mark Zandi, chief economist of Moody’s Analytics, said, "The government shutdown and debt limit brinksmanship hurt the already softening job market in October. Average monthly growth has fallen below 150,000. Any further weakening would signal rising unemployment. The weaker job growth is evident across most industries and company sizes.”

This was a little below the consensus forecast for 138,000 private sector jobs added in the ADP report. 

Note: ADP hasn't been very useful in predicting the BLS report on a monthly basis. The BLS report for October will be delayed until next Friday, November 8th, due to the government shutdown.

by Calculated Risk on 10/30/2013 07:02:00 AM

From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey

Mortgage applications increased 6.4 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending October 25, 2013. ...

The Refinance Index increased 9 percent from the previous week. The seasonally adjusted Purchase Index increased 2 percent from one week earlier. ...
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.33 percent, the lowest rate since June 2013, from 4.39 percent, with points decreasing to 0.26 from 0.41 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.


The first graph shows the refinance index.

The refinance index is up over the last seven weeks as rates have declined from the August levels.

However the index is still down 57% from the levels in early May.


The second graph shows the MBA mortgage purchase index.  

The 4-week average of the purchase index has fallen since early May, and the 4-week average of the purchase index is now down about 4% from a year ago.

by Calculated Risk on 10/29/2013 08:11:00 PM

A little good news via MarketWatch: Retail gas prices hit lowest level of 2013: AAA

The average U.S. price for a gallon of regular unleaded gasoline stood at $3.28 on Monday, the lowest price of 2013, according to AAA. The motorist and leisure travel group also said it expects gas prices to fall even further, approaching the end of the year "as sufficient, flat demand, the shift to cheaper winter-blend gasoline and falling crude-oil prices likely mean cheaper prices at the pump."

Wednesday:
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the weekly mortgage purchase applications index.

• At 8:30 AM, the ADP Employment Report for October. This report is for private payrolls only (no government). The consensus is for 138,000 payroll jobs added in October, down from 166,000 in September.

• At 8:30 AM, the Consumer Price Index for September. The consensus is for a 0.2% increase in CPI in September and for core CPI to increase 0.2%.

• At 2:00 PM, the FOMC Meeting Announcement. No change to interest rates or QE purchases is expected at this meeting.

by Calculated Risk on 10/29/2013 05:43:00 PM

The Federal Reserve released the Q2 2013 Household Debt Service and Financial Obligations Ratios today. I used to track this quarterly back in 2005 and 2006 to point out that households were taking on excessive financial obligations.

These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households.

The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.
...
The homeowner mortgage FOR includes payments on mortgage debt, homeowners' insurance, and property taxes, while the homeowner consumer FOR includes payments on consumer debt and automobile leases

This data has limited value in terms of absolute numbers, but is useful in looking at trends. Here is a discussion from the Fed:

The limitations of current sources of data make the calculation of the ratio especially difficult. The ideal data set for such a calculation would have the required payments on every loan held by every household in the United States. Such a data set is not available, and thus the calculated series is only a rough approximation of the current debt service ratio faced by households. Nonetheless, this rough approximation may be useful if, by using the same method and data series over time, it generates a time series that captures the important changes in household debt service payments.

Click on graph for larger image.

The graph shows the DSR for both renters and homeowners (red), and the homeowner financial obligations ratio for mortgages (blue) and consumer debt (yellow).

The overall Debt Service Ratio decreased in Q2, and is just above the record low set in Q4 2012 thanks to very low interest rates. The homeowner's financial obligation ratio for consumer debt increased slightly in Q2, and is back to levels last seen in early 1995.

Also the homeowner's financial obligation ratio for mortgages (blue) is at a new record low.  This ratio increased rapidly during the housing bubble, and continued to increase until 2008. With falling interest rates, and less mortgage debt (mostly due to foreclosures), the mortgage ratio has declined to an all time low.

by Calculated Risk on 10/29/2013 03:28:00 PM

The Federal Open Market Committee (FOMC) is meeting today and Wednesday, with the FOMC statement expected to be released at 2:00 PM ET on Wednesday.

Expectations are the FOMC will take no action at this meeting (the FOMC will probably not adjust the size of their purchases of agency mortgage-backed securities and Treasury securities).

A key question for the meeting this week is how the FOMC will address the lack of data (aka "flying blind").  The delayed data probably means the FOMC will be on hold until at least the December meeting.  However the shutdown will still be impacting data releases through the end of the year, so the FOMC might wait until 2014 to start the "taper".

As a reminder, here are the quarterly projections from the September meeting. Unfortunately the advance report for Q3 GDP has been delayed (now scheduled for November 7th), so the FOMC is flying blind on GDP.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2013	2014	2015	2016
Sept 2013 Meeting Projections	2.0 to 2.3	2.9 to 3.1	3.0 to 3.5	2.5 to 3.3

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.

The unemployment rate was at 7.2% in September, however the unemployment rate is expected to increase in October due to the shutdown (and then decline in November as people return to work).

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2013	2014	2015	2016
Sept 2013 Meeting Projections	7.1 to 7.3	6.4 to 6.8	5.9 to 6.2	5.4 to 5.9

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

For inflation, PCE inflation was up 1.2% year-over-year in August (close to projected rate, but far below target), however the September report was delayed until next week (November 8th). 

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2013	2014	2015	2016
Sept 2013 Meeting Projections	1.1. to 1.2	1.3 to 1.8	1.6 to 2.0	1.7 to 2.0

For core inflation, core PCE inflation was up 1.2% year-over-year in August. 

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2013	2014	2015	2016
Sept 2013 Meeting Projections	1.2 to 1.3	1.5 to 1.7	1.7 to 2.0	1.9 to 2.0

So a key for the FOMC statement is how the FOMC addresses the lack of data (and if they mention the shutdown and related economic slowdown).

by Calculated Risk on 10/29/2013 11:56:00 AM

It appears house price increases have slowed recently based on agent reports and asking prices (a combination of a little more inventory and higher mortgage rates), but this slowdown in price increases is not showing up yet in the Case-Shiller index because of the reporting lag and because of the three month average (the August report was an average of June, July and August prices). I expect to see smaller year-over-year price increases going forward and some significant deceleration towards the end of the year or in early 2014.

I also think it is important to look at prices in real terms (inflation adjusted).  Case-Shiller, CoreLogic and others report nominal house prices.  As an example, if a house price was $200,000 in January 2000, the price would be close to $276,000 today adjusted for inflation.  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

Zillow's chief economist Stan Humphries said today: "Home value appreciation is better when it’s boring", and I agree. I'd sure like to see nominal price increases closer to the level of inflation. But that is just wishcasting (as opposed to forecasting).

Earlier: Case-Shiller: Case-Shiller: Comp 20 House Prices increased 12.8% year-over-year in August

Nominal House Prices

The first graph shows the quarterly Case-Shiller National Index SA (through Q2 2013), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through August) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to Q4 2003 levels (and also back up to Q4 2008), and the Case-Shiller Composite 20 Index (SA) is back to April 2004 levels, and the CoreLogic index (NSA) is back to October 2004.

Real House Prices

The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to Q4 2000 levels, the Composite 20 index is back to December 2001, and the CoreLogic index back to June 2002.

In real terms, house prices are back to early '00s levels.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to Q4 2000 levels, the Composite 20 index is back to May 2002 levels, and the CoreLogic index is back to February 2003.

In real terms - and as a price-to-rent ratio - prices are mostly back to early 2000 levels.

Nominal Prices: Cities relative to Jan 2000


The last graph shows the bubble peak, the post bubble minimum, and current nominal prices relative to January 2000 prices for all the Case-Shiller cities in nominal terms.

As an example, at the peak, prices in Phoenix were 127% above the January 2000 level. Then prices in Phoenix fell slightly below the January 2000 level, and are now up 39% above January 2000. 

These are nominal prices, and as I noted above real prices (adjusted for inflation) are up about 38% since January 2000 - so the increase in Phoenix from January 2000 until now is about the change in inflation.

Two cities - Denver (up 43% since Jan 2000) and Dallas (up 28% since Jan 2000) - are at new highs (no other Case-Shiller Comp 20 city is very close).    Denver is up slightly more than inflation over that period, and Dallas slightly less.  Detroit prices are still below the January 2000 level.

by Calculated Risk on 10/29/2013 09:00:00 AM

S&P/Case-Shiller released the monthly Home Price Indices for August ("August" is a 3 month average of June, July and August prices).

This release includes prices for 20 individual cities, and two composite indices (for 10 cities and 20 cities).

Note: Case-Shiller reports Not Seasonally Adjusted (NSA), I use the SA data for the graphs.

From S&P: Home Prices Rise Further in August 2013 According to the S&P/Case-Shiller Home Price Indices

Data through August 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices ... showed that the 10-City and 20-City Composites increased 12.8% year-over-year. Compared to July 2013, the annual growth rates accelerated for both Composites and 14 cities.

On a monthly basis, the 10-City and 20-City Composites gained 1.3% in August. Las Vegas led the cities with an increase of 2.9%, its highest since August 2004. Detroit and Los Angeles followed with gains of 2.0%. ... In August 2013, the 10- and 20-City Composites posted annual increases of 12.8%.

“The 10-City and 20-City Composites posted a 12.8% annual growth rate,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “Both Composites showed their highest annual increases since February 2006. All 20 cities reported positive year-over-year returns. Thirteen cities posted double-digit annual gains. Las Vegas and California continue to impress with year-over-year increases of over 20%. Denver and Phoenix posted 20 consecutive annual increases; Miami and Minneapolis 19. Despite showing 26 consecutive annual gains, Detroit remains the only city below its January 2000 index level.
...
“Denver and Dallas again set new highs. All the other cities remain below their peaks. Boston and Charlotte are the two MSAs closest to their peaks with only 8-9% left to go. Las Vegas is still down 47.1% from its peak level.”

Click on graph for larger image.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 23.1% from the peak, and up 0.9% in August (SA). The Composite 10 is up 16.7% from the post bubble low set in Jan 2012 (SA).

The Composite 20 index is off 22.3% from the peak, and up 0.9% (SA) in August. The Composite 20 is up 17.3% from the post-bubble low set in Jan 2012 (SA).

The second graph shows the Year over year change in both indices.

The Composite 10 SA is up 12.2% compared to August 2012.

The Composite 20 SA is up 12.8% compared to August 2012. This was the fifteenth consecutive month with a year-over-year gain.

Prices increased (SA) in 20 of the 20 Case-Shiller cities in August seasonally adjusted.  Prices in Las Vegas are off 47.7% from the peak, and prices in Denver and Dallas are at new highs.

This was above the consensus forecast for a 12.4% YoY increase. I'll have more on prices later.