by Calculated Risk on 1/03/2014 11:51:00 AM

Note: Near the beginning of each year, I find it useful to jot down a few thoughts on how I expect the economy to perform. This isn't to test my forecasting skills - sometimes I learn more when I miss a forecast (As an example, I've spent a significant amount of time looking at the participation rate and demographics since I've been overly pessimistic on the unemployment rate the last few years).

Earlier I posted some questions for this year: Ten Economic Questions for 2014.

Here is a review of the Ten Economic Questions for 2013.

1) Economic growth: Heading into 2014, it seems most analysts expect faster economic growth. So do I. Will 2014 be the best year of the recovery so far? Could 2014 be the best year since the '90s? Or will 2014 disappoint?

First, here is a table of the annual change in real GDP since 1999.  Since 2000, the fastest real GDP growth was 3.8% in 2004, and the fastest growth for the recovery was 2.8% in 2012.

It is likely that 2014 will be the best year of the recovery, and possibly (with some luck) the best year since Clinton was president.

Annual Real GDP Growth
Year	GDP
1999	4.8%
2000	4.1%
2001	1.0%
2002	1.8%
2003	2.8%
2004	3.8%
2005	3.4%
2006	2.7%
2007	1.8%
2008	-0.3%
2009	-2.8%
2010	2.5%
2011	1.8%
2012	2.8%
20131	2.0%
1 2013 estimate.

There are several positives for the economy at the beginning of 2014: the housing recovery is ongoing (usually the best leading indicator for the economy), state and local government austerity is over (in the aggregate), household balance sheets are in much better shape - and it appears that in the aggregate, household deleveraging is over, most of the obvious downside risks have diminished, and even commercial real estate (CRE) investment and public construction will both probably make small positive contributions in 2014.

There is still some austerity at the Federal level (and cutting off emergency unemployment benefits is bad economic policy).  Also, there are always downside risks from Europe and China, rising interest rates and more, but with all these positive trends I'd expect a pickup in US growth in 2014.

In 2012 (the best year of recovery for GDP growth so far), Personal consumption expenditures (PCE) only increased at a 2.5% real rate, compared to 3.8% in 2004 (best year since 2000).  I expect PCE to pick up again into the 3% to 4% range, and this will give a boost to GDP.   This increase in consumer spending should provide an incentive for business investment.  Add in the ongoing housing recovery, some increase in state and local government spending, and 2014 should be the best year of the recovery with GDP growth at or above 3% (4% is not impossible).

Here are the ten questions for 2014 and a few predictions:
• Question #1 for 2014: How much will the economy grow in 2014?
• Question #2 for 2014: How many payroll jobs will be added in 2014?
• Question #3 for 2014: What will the unemployment rate be in December 2014?
• Question #4 for 2014: Will too much inflation be a concern in 2014?
• Question #5 for 2014: Monetary Policy: Will the Fed end QE3 in 2014?
• Question #6 for 2014: How much will Residential Investment increase?
• Question #7 for 2014: What will happen with house prices in 2014?
• Question #8 for 2014: Housing Credit: Will we see easier mortgage lending in 2014?
• Question #9 for 2014: How much will housing inventory increase in 2014?
• Question #10 for 2014: Downside Risks

by Calculated Risk on 1/03/2014 09:59:00 AM

2013 finished strong ...

From Merrill Lynch:

As we enter 2014, most of the data releases continue to surprise to the upside. We are now tracking 3.0% for 4Q GDP growth, following a solid 4.1% pace in 3Q. This is a marked improvement from the first half average growth rate of 1.8%. We should not be too surprised, however. The economy was hit with significant fiscal tightening at the beginning of 2013: taxes were hiked in January and the sequester spending cuts went into effect early in the year. The economy was able to handle the drag and has proved resilient. This leaves us feeling optimistic about the prospects for stronger growth to persist in 2014.

The gain in the second half of 2013 has been driven by the consumer. For 4Q, real consumer spending is tracking a solid 4.0% pace. ... We believe a pickup in consumer spending should leave businesses feeling more confident and willing to invest.

by Calculated Risk on 1/02/2014 09:02:00 PM

From NDD at the Bonddad Blog: Calculated Risk and I have made a bet on housing's direction in 2014

Both of us thought that housing was in a bubble in 2005. Both of us thought in 2011 that housing prices would bottom in early 2012.

But we have totally different opinions about the direction of housing in 2014.
...
So here are the terms of our bet: If starts or sales are up at least 20% YoY in any month in 2014, I will make a $100 donation to the charity of Bill's choice, which he has designated as the Memorial Fund in honor of his late co-blogger, Tanta. If housing permits or starts are down 100,000 YoY at least once in 2014, he make a $100 donation to the charity of my choice, which is the Alzheimer's Association.

Note that since our forecasts are not mirror images of one another, it is possible that both or us will win this bet. Or neither!

It is possible that we both will win (and two charities will receive donations). I'll update everyone in 2014.

Friday:
• All day: Light vehicle sales for November. The consensus is for light vehicle sales to decrease to 16.0 million SAAR in December (Seasonally Adjusted Annual Rate) from 16.3 million SAAR in November. I'll post a graph - probably around 3 PM ET.

• 2:30 PM, Fed Chairman Ben S. Bernanke speaks, The Changing Federal Reserve: Past, Present, Future, At the American Economic Association Meeting, Philadelphia, Pennsylvania

by Calculated Risk on 1/02/2014 01:45:00 PM

Note: Near the beginning of each year, I find it useful to jot down a few thoughts on how I expect the economy to perform. This isn't to test my forecasting skills - sometimes I learn more when I miss a forecast (As an example, I've spent a significant amount of time looking at the participation rate and demographics since I've been overly pessimistic on the unemployment rate the last few years).

Earlier I posted some questions for this year: Ten Economic Questions for 2014.

Here is a review of the Ten Economic Questions for 2013.

2) Employment: How many payroll jobs will be added in 2014? Will we finally see some pickup over the approximately 2.1 to 2.3 million job creation rate of 2011, 2012, and 2013?

First, here is a table of the annual change in total nonfarm and private sector payrolls jobs since 1999.  The last three years have been near the best since 1999 (2005 was the best year for total nonfarm, and 2011 the best for private jobs).

It is possible that 2014 will be the best year since 1999 for both total nonfarm and private sector employment.

Change in Payroll Jobs per Year (000s)
	Total, Nonfarm	Private
1999	3,170	2,709
2000	1,944	1,680
2001	-1,757	-2,308
2002	-532	-765
2003	62	104
2004	2,019	1,872
2005	2,484	2,298
2006	2,071	1,862
2007	1,115	827
2008	-3,617	-3,797
2009	-5,052	-4,976
2010	1,022	1,235
2011	2,103	2,420
2012	2,193	2,269
20131	2,293	2,315
1 2013 is 12 month change ended in November.

For the last couple of years, I've been hammering on two key positive themes: 1) the pickup in residential investment (RI), and 2) the end of state and local government layoffs. Both of these will be positive for employment again in 2014 (there seems to be a lag between increases in RI and employment, and I expect a larger increase in residential construction employment in 2014).

The following table shows the annual change in State and Local government since 2008. The four years of declining employment ended in 2008.  Note: The Federal government layoffs are ongoing, and total government employment declined again in 2013. 

To put these declines in perspective, during the G.W. Bush years (2001 through 2008), state and local governments added about 215 thousand jobs each year.

State and Local Government, Annual Change in Payroll (000s)
Year	State Government	Local Government	Total
2008	52	109	161
2009	-40	-88	-128
2010	-15	-243	-258
2011	-94	-192	-286
2012	-2	-32	-34
20131	12	58	70
1 2013 is 12 month change ended in November.

The second table shows the change in construction payrolls starting in 2006.

	Construction Jobs (000s)
2006	152
2007	-195
2008	-789
2009	-1,051
2010	-182
2011	144
2012	99
20131	178

It is important to note that construction includes residential, commercial and public. In 2013, residential spending was up solidly, but public construction commercial spending mostly moved sideways.  I expect all three categories to make positive contributions in 2014.

Both state and local government and construction hiring should improve further in 2014.  Federal layoffs will be a negative, but most sectors should be solid.  So my forecast is somewhat above the previous three years, and I expect gains of about 200,000 to 225,000 payroll jobs per month in 2014.

It is possible that 2014 will be the best year since 1999 (264 thousand total per month, 225 thousand private sector).  Maybe we will even party like it is 1999 (for employment growth).

Here are the ten questions for 2014 and a few predictions:
• Question #1 for 2014: How much will the economy grow in 2014?
• Question #2 for 2014: How many payroll jobs will be added in 2014?
• Question #3 for 2014: What will the unemployment rate be in December 2014?
• Question #4 for 2014: Will too much inflation be a concern in 2014?
• Question #5 for 2014: Monetary Policy: Will the Fed end QE3 in 2014?
• Question #6 for 2014: How much will Residential Investment increase?
• Question #7 for 2014: What will happen with house prices in 2014?
• Question #8 for 2014: Housing Credit: Will we see easier mortgage lending in 2014?
• Question #9 for 2014: How much will housing inventory increase in 2014?
• Question #10 for 2014: Downside Risks

by Calculated Risk on 1/02/2014 10:52:00 AM

The Census Bureau reported that overall construction spending increased in November:

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during November 2013 was estimated at a seasonally adjusted annual rate of $934.4 billion, 1.0 percent above the revised October estimate of $925.1 billion. The November figure is 5.9 percent (±2.0%) above the November 2012 estimate of $882.7 billion.
...
Spending on private construction was at a seasonally adjusted annual rate of $659.4 billion, 2.2 percent above the revised October estimate of $644.9 billion. Residential construction was at a seasonally adjusted annual rate of $345.5 billion in November, 1.9 percent above the revised October estimate of $339.2 billion. Nonresidential construction was at a seasonally adjusted annual rate of $313.9 billion in November, 2.7 percent above the revised October estimate of $305.7 billion. ...

November, the estimated seasonally adjusted annual rate of public construction spending was $275.0 billion, 1.8 percent below the revised October estimate of $280.2 billion.

Click on graph for larger image.

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

Private residential spending is 49% below the peak in early 2006, and up 51% from the post-bubble low.

Non-residential spending is 24% below the peak in January 2008, and up about 39% from the recent low.

Public construction spending is now 16% below the peak in March 2009 and up about 4% from the recent low.

The second graph shows the year-over-year change in construction spending.

On a year-over-year basis, private residential construction spending is now up 24%. Non-residential spending is up 1% year-over-year. Public spending is down slightly year-over-year.

To repeat a few key themes:
1) Private residential construction is usually the largest category for construction spending, and is now the largest category once again.  Usually private residential construction leads the economy, so this is a good sign going forward.

2) Private non-residential construction spending usually lags the economy.  There was some increase this time for a couple of years - mostly related to energy and power - but the key sectors of office, retail and hotels are still at very low levels.  Based on the architecture billings index, I expect private non-residential to increase in 2014

3) Public construction spending was down in November and is now only 4% above the low in April.  However it appears that the drag from public construction spending is over.  Public spending has declined to 2006 levels (not adjusted for inflation) and was a drag on the economy for 4 years. In real terms, public construction spending has declined to 2001 levels.

Looking forward, all categories of construction spending should continue to increase. Residential spending is still very low, non-residential should start to pickup, and public spending appears to have bottomed.

by Calculated Risk on 1/02/2014 10:00:00 AM

The ISM manufacturing index indicated slightly slower expansion in December than in November. The PMI was at 57.0% in December, down from 57.3% in November. The employment index was at 56.9%, up from 56.5%, and the new orders index was at 64.2%, up from 63.6% in November.

From the Institute for Supply Management: December 2013 Manufacturing ISM Report On Business®

Economic activity in the manufacturing sector expanded in December for the seventh consecutive month, and the overall economy grew for the 55th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The PMI™ registered 57 percent, the second highest reading for the year, just 0.3 percentage point below November's reading of 57.3 percent. The New Orders Index increased in December by 0.6 percentage point to 64.2 percent, which is its highest reading since April 2010 when it registered 65.1 percent. The Employment Index registered 56.9 percent, an increase of 0.4 percentage point compared to November's reading of 56.5 percent. December's employment reading is the highest since June 2011 when the Employment Index registered 59 percent. Comments from the panel generally reflect a solid final month of the year, capping off the second half of 2013, which was characterized by continuous growth and momentum in manufacturing."
emphasis added

Click on graph for larger image.

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

This was at expectations of 57.0%, and was the 2nd highest reading of 2012. The new orders index was at the highest level since April 2010, and the employment index was at the highest since June 2011. A very solid report.

by Calculated Risk on 1/02/2014 08:41:00 AM

The DOL reports:

In the week ending December 28, the advance figure for seasonally adjusted initial claims was 339,000, a decrease of 2,000 from the previous week's revised figure of 341,000. The 4-week moving average was 357,250, an increase of 8,500 from the previous week's revised average of 348,750.

The previous week was revised up from 338,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.


The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 357,250.

Weekly claims are frequently volatile during the holidays because of the seasonal adjustment. This is the highest level for the 4-week average since October.

by Calculated Risk on 1/01/2014 08:42:00 PM

Happy New Year!

Here are eight of the ten questions for 2014 with a few predictions (two more to come):
• Question #3 for 2014: What will the unemployment rate be in December 2014?
• Question #4 for 2014: Will too much inflation be a concern in 2014?
• Question #5 for 2014: Monetary Policy: Will the Fed end QE3 in 2014?
• Question #6 for 2014: How much will Residential Investment increase?
• Question #7 for 2014: What will happen with house prices in 2014?
• Question #8 for 2014: Housing Credit: Will we see easier mortgage lending in 2014?
• Question #9 for 2014: How much will housing inventory increase in 2014?
• Question #10 for 2014: Downside Risks

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to be unchanged at 338 thousand.

• At 9:00 AM, the Markit US PMI Manufacturing Index for December. The consensus is for an decrease to 54.5 from 54.7 in November.

• At 10:00 AM, the ISM Manufacturing Index for December. The consensus is for a decrease to 57.0 from 57.3 in November. The ISM manufacturing index indicated expansion in November at 57.3%. The employment index was at 56.5%, and the new orders index was at 63.6%.

• Also at 10:00 AM, Construction Spending for November. The consensus is for a 1.0% increase in November construction spending.

by Calculated Risk on 1/01/2014 04:35:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2014.

Here is a review of the Ten Economic Questions for 2013.

3) Unemployment Rate: The unemployment rate is still elevated at 7.0% in November. For the last three years I've been too pessimistic on the unemployment rate because I was expecting some minor bounce back in the participation rate. Instead the participation rate continued to decline. Maybe 2014 will be the year the participation rate increases a little, or at least stabilizes. What will the unemployment rate be in December 2014?

Forecasting the unemployment rate includes forecasts for economic and payroll growth, and also for changes in the participation rate. Note: The participation rate is the percent of the working age population (16 and over) that is in the labor force.

Policy matters in 2014 too.  The Emergency Unemployment Compensation (EUC) benefits expired on December 28, 2013. With the very high level of long term unemployed, not extending EUC is unprecedented, bad economics and ... well, cruel. So maybe Congress will pass an extension. This matters for the unemployment rate - if there is no extension, the unemployment rate will probably decline 0.2 to 0.3 percentage points in the first quarter just due to people dropping out of the labor force (or taking minimum wage jobs to survive).   I'd guess Congress will be shamed into taking action, but you never know.

And on participation: We can be pretty certain that the participation rate will decline over the next couple of decades based on demographic trends, but it is uncertain what will happen in 2014.   The participation rate could bounce back or at least stabilize. Or the participation rate could decline further as has happened over the last few years.

Unemployment and Participation Rate for December each Year
December of	Participation Rate	Decline in Participation Rate (percentage points)	Unemployment Rate
2008	65.8%		7.3%
2009	64.6%	1.2	9.9%
2010	64.3%	0.3	9.3%
2011	64.0%	0.3	8.5%
2012	63.6%	0.4	7.8%
20131	63.0%	0.6	7.0%
1This is the November 2013 participation and unemployment rate.

My guess is the participation rate will stabilize or only decline slightly in 2014 (less than in 2012 and 2013), unless the EUC isn't extended.  Without an extension of the EUC, we might see a 0.3 to 0.5 percentage decline in the participation rate in 2014.

Even if the participation rate stabilizes, the unemployment rate will probably decline for the right reason in 2014; a pickup in job growth.

Depending on the estimate for job growth (next question), it appears the unemployment rate will decline to the low-to-mid 6% range by December 2014.

Here are the ten questions for 2014 and a few predictions:
• Question #1 for 2014: How much will the economy grow in 2014?
• Question #2 for 2014: How many payroll jobs will be added in 2014?
• Question #3 for 2014: What will the unemployment rate be in December 2014?
• Question #4 for 2014: Will too much inflation be a concern in 2014?
• Question #5 for 2014: Monetary Policy: Will the Fed end QE3 in 2014?
• Question #6 for 2014: How much will Residential Investment increase?
• Question #7 for 2014: What will happen with house prices in 2014?
• Question #8 for 2014: Housing Credit: Will we see easier mortgage lending in 2014?
• Question #9 for 2014: How much will housing inventory increase in 2014?
• Question #10 for 2014: Downside Risks

by Calculated Risk on 1/01/2014 01:49:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2014. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2013.

4) Inflation: The Fed has made it clear they will tolerate a little more inflation, but currently the inflation rate is running well below the Fed's 2% target. Will the inflation rate rise in 2014? Will too much inflation be a concern in 2014?

Although there are different measure for inflation (including some private measures) they all show that inflation is at or below the Fed's 2% inflation target.

Note: I agree with the FOMC view, that "inflation persistently below its 2 percent objective could pose risks to economic performance".   Some people think there should be zero inflation, I think this is incorrect and there are clear reasons that a little inflation is good for the economy.

I follow several measures of inflation, median CPI and trimmed-mean CPI from the Cleveland Fed.  Core PCE prices (monthly from the BEA) and core CPI (from the BLS).

Click on graph for larger image.

This graph shows the year-over-year change for these four key measures of inflation through November. On a year-over-year basis, the median CPI rose 2.0%, the trimmed-mean CPI rose 1.6%, the CPI rose 1.2%, and the CPI less food and energy rose 1.7%. Core PCE is for October and increased just 1.1% year-over-year.

On a monthly basis, median CPI was at 2.2% annualized, trimmed-mean CPI was at 1.2% annualized, and core CPI increased 1.9% annualized.

For some technical reasons, core PCE has been lower than the other measures.  Goldman Sachs chief economist Jan Hatzius addressed this recently:

"almost half of the slowdown in core PCE inflation in 2013 was due to the slowdown in healthcare cost growth. Although a significant part of this slowdown is likely to persist, some of it—specifically the Medicare reimbursement cut related to the federal sequester—is likely to reverse in 2014 and this will likely add 0.1-0.2 percentage points to core PCE inflation."

So core PCE will probably move up a little year-over-year, but with all the slack still in the system (and little wage growth), I expect the other measures of inflation to stay at or below the Fed's target in 2014.  If the unemployment rate continues to decline - and wage growth picks up - maybe inflation will be an issue in 2015 or 2016.

So currently I think inflation (year-over-year) will increase a little in 2014 as growth picks up, but too much inflation will not be a concern in 2014.

Here are the ten questions for 2014 and a few predictions:
• Question #1 for 2014: How much will the economy grow in 2014?
• Question #2 for 2014: How many payroll jobs will be added in 2014?
• Question #3 for 2014: What will the unemployment rate be in December 2014?
• Question #4 for 2014: Will too much inflation be a concern in 2014?
• Question #5 for 2014: Monetary Policy: Will the Fed end QE3 in 2014?
• Question #6 for 2014: How much will Residential Investment increase?
• Question #7 for 2014: What will happen with house prices in 2014?
• Question #8 for 2014: Housing Credit: Will we see easier mortgage lending in 2014?
• Question #9 for 2014: How much will housing inventory increase in 2014?
• Question #10 for 2014: Downside Risks