by Calculated Risk on 7/31/2014 09:06:00 PM

From Goldman Sachs economist Sven Jari Stehn: July Payroll Preview

We expect a 235,000 increase in nonfarm payrolls and a one tenth drop in the unemployment rate to 6.0%. As far as payrolls are concerned, our forecast would be a solid gain but at a pace slightly below that seen over the past few months. While a number of labor market indicators improved slightly in July (including jobless claims, the business survey employment components and household job market perceptions), other considerations point to a deceleration in the pace of employment creation (including a slowdown in ADP employment growth, softer online job advertising, higher layoffs and the composition of the June payroll gain).

Friday:
• At 8:30 AM ET, the Employment Report for July. The consensus is for an increase of 228,000 non-farm payroll jobs added in July, down from the 288,000 non-farm payroll jobs added in June. The consensus is for the unemployment rate to be unchanged at 6.1% in July.

• At 8:30 AM, Personal Income and Outlays for June including revised estimates 2011 through May 2014. The consensus is for a 0.4% increase in personal income, and for a 0.4% increase in personal spending. And for the Core PCE price index to increase 0.2%.

• At 9:55 AM, Reuter's/University of Michigan's Consumer sentiment index (final for July). The consensus is for a reading of 81.5, up from the preliminary reading of 81.3, and down from the June reading of 82.5.

• All day, Light vehicle sales for July. The consensus is for light vehicle sales to decrease to 16.7 million SAAR in July from 16.9 million in June (Seasonally Adjusted Annual Rate).

• At 10:00 AM, Construction Spending for June. The consensus is for a 0.5% increase in construction spending.

• At 10:00 AM, ISM Manufacturing Index for July. The consensus is for an increase to 55.9 from 55.3 in June. The ISM manufacturing index indicated expansion in June at 55.3%. The employment index was at 52.8%, and the new orders index was at 58.9%.

by Calculated Risk on 7/31/2014 03:59:00 PM

Fannie Mae reported today that the Single-Family Serious Delinquency rate declined in June to 2.05% from 2.08% in May. The serious delinquency rate is down from 2.77% in June 2013, and this is the lowest level since October 2008.

The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.

Last week, Freddie Mac reported that the Single-Family serious delinquency rate declined in June to 2.07% from 2.10% in May. Freddie's rate is down from 2.79% in June 2013, and is at the lowest level since January 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.

Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure".

Click on graph for larger image

The Fannie Mae serious delinquency rate has fallen 0.72 percentage points over the last year, and at that pace the serious delinquency rate will be under 1% in late 2015 or early 2016.

Note: The "normal" serious delinquency rate is under 1%.

Maybe serious delinquencies will be back to normal in 2016.

by Calculated Risk on 7/31/2014 02:31:00 PM

Friday at 8:30 AM ET, the BLS will release the employment report for July. The consensus, according to Bloomberg, is for an increase of 233,000 non-farm payroll jobs in July (range of estimates between 200,000 and 280,000), and for the unemployment rate to be unchanged at 6.1%.

Note: The BLS reported 288,000 payroll jobs added in June with the unemployment rate at 6.1%.

Here is a summary of recent data:

• The ADP employment report showed an increase of 218,000 private sector payroll jobs in July. This was below expectations of 235,000 private sector payroll jobs added. The ADP report hasn't been very useful in predicting the BLS report for any one month, but in general, this suggests employment growth slightly below expectations.

• The ISM manufacturing and non-manufacturing employment indexes for July will be released after the employment report this month. The ADP report indicated a 3,000 increase for manufacturing jobs in July.

Although the ISM reports are not available, the regional manufacturing surveys were all positive on employment for July (even the disappointing Chicago PMI improved on employment).

• Initial weekly unemployment claims averaged close to 302,000 in July, down from 316,000 in June. For the BLS reference week (includes the 12th of the month), initial claims were at 303,000; this was down from 314,000 during the reference week in June.

The lower reference week reading suggests some upside to the consensus forecast.

• The preliminary July Reuters / University of Michigan consumer sentiment index decreased to 81.3 from the June reading of 82.5. This is frequently coincident with changes in the labor market, but there are other factors too.

• On small business hiring: The small business index from Intuit showed a 15,000 increase in small business employment in July.  From Intuit:

U.S. small businesses added 15,000 jobs in July, bringing the number of new jobs added over the last six months to more than 90,000. While 610,000 jobs have been added since the small business recovery began in March 2010, small business employment remains 870,000 jobs below its peak in March 2007.
...
"This month's employment increase shows additional progress." said Susan Woodward, the economist who works with Intuit to create the indexes. "Things continue to get better, but slowly. The jobs added by small business over the most recent six months, including July, are more than double what we saw over the prior six months."

• A few comments from Merrill Lynch economists:

We look for nonfarm payrolls to increase 250,000 in July, a slight slowdown from the three-month average of 272,000. The unemployment rate will likely hold at 6.1% while average hourly earnings edge up a trend-like 0.2% mom. This will translate to a 2.2% yoy pace for wage growth. The wage data will be in focus – despite the continued notable drop in the unemployment rate, wage growth has remained lackluster. This suggests that there is indeed spare capacity in the labor market, which can be seen by the large number of discouraged and marginally attached workers. We should therefore continue to look at these broader measures of unemployment, which have improved but remain historically elevated.

The early indicators of the labor market look healthy: initial jobless claims continued to slide lower while the regional manufacturing surveys showed a pickup in hiring. Furthermore, the labor differential has been improving, falling to -17.1 in June — the best since the summer of 2008, when the recession was just getting underway. In particular, we look for private payrolls to be up 235,000 while government jobs expand by 15,000, driven by state and local hiring. Special focus will be construction and retail jobs — we think the risk is that construction hiring looks sluggish, in part due to seasonal adjustment issues. Retail job growth should improve, but may look soft relative to the recent trend.

Within the household survey, we look for some slowdown in household job growth after the strong 407,000 gain in June. However, we think job creation will still look strong in this more volatile survey. The labor force participation rate was little changed last month and we think the risk is that it inches up slightly; however, we have been surprised by the continued weak trend in participation. Hence, we wouldn’t be surprised if the unemployment rate fell by another tenth.

• Conclusion: The ADP report was lower in July than in June - and below forecasts - but still fairly solid.  Weekly unemployment claims were at the lowest level during the reference period in a number of years. However the Intuit small business index showed somewhat less hiring in July.

There is always some randomness to the employment report, but the I'll take the under on the consensus forecast of 233,000 nonfarm payrolls jobs added in July. 

by Calculated Risk on 7/31/2014 11:36:00 AM

From the National Restaurant Association: Restaurant Performance Index Declined in June Amid Softer Customer Traffic

Due in large part to softer customer traffic levels, the National Restaurant Association’s Restaurant Performance Index (RPI) registered a moderate decline in June. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 101.3 in June, down from a level of 102.1 in May and the first decline in four months. Despite the drop, the RPI remained above 100 for the 16th consecutive month, which signifies expansion in the index of key industry indicators.
emphasis added

Click on graph for larger image.

The index decreased to 101.3 in June, down from 102.1 in May. (above 100 indicates expansion).

Restaurant spending is discretionary, so even though this is "D-list" data, I like to check it every month - and even with the monthly decline this is a solid reading.

by Calculated Risk on 7/31/2014 09:52:00 AM

From the Chicago ISM: Chicago Business Barometer Down 10.0 points to 52.6 in July

The Chicago Business Barometer dropped 10.0 points to 52.6 in July, significantly down from May’s seven month high of 65.5, led by a collapse in Production and the ordering components, all of which have been strong since last fall.

A monthly fall of this magnitude has not been seen since October 2008 and left the Barometer at its lowest level since June 2013.

In spite of the sharp decline this month, feedback from purchasing managers was that they saw the downturn as a lull rather than the start of a new downward trend. This was especially so given the recent strong performance and the fact that Employment managed to increase further in July.
emphasis added

This was well below the consensus estimate of 63.0.

by Calculated Risk on 7/31/2014 08:36:00 AM

The DOL reports:

In the week ending July 26, the advance figure for seasonally adjusted initial claims was 302,000, an increase of 23,000 from the previous week's revised level. The previous week's level was revised down by 5,000 from 284,000 to 279,000. The 4-week moving average was 297,250, a decrease of 3,500 from the previous week's revised average. This is the lowest level for this average since April 15, 2006 when it was 296,000. The previous week's average was revised down by 1,250 from 302,000 to 300,750.

There were no special factors impacting this week's initial claims.

The previous week was revised down to 279,000.

The following graph shows the 4-week moving average of weekly claims since January 1971.

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 decreased to 297,250.

This was lower than the consensus forecast of 305,000.  The 4-week average is now at normal levels for an expansion.

by Calculated Risk on 7/30/2014 07:47:00 PM

From Tim Duy on the FOMC Statement at Economist's View

At the conclusion of this week's FOMC meeting, policymakers released yet another statement that only a FedWatcher could love. It is definitely an exercise in reading between the lines. The Fed cut another $10 billion from the asset purchase program, as expected. The statement acknowledged that unemployment is no longer elevated and inflation has stabilized. But it is hard to see this as anything more that describing an evolution of activity that is fundamentally consistent with their existing outlook. Continue to expect the first rate hike around the middle of next year; my expectation leans toward the second quarter over the third.
...
Rather than something to worry over, I sense that the majority of the FOMC is feeling relief over the recent inflation data. It is often forgotten that the Fed WANTS inflation to move closer to 2%. The reality is finally starting to look like their forecast, which clears the way to begin normalizing policy next year. Given the current outlook, expect only gradual normalization. ...

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 305 thousand from 284 thousand.

• At 9:45 AM, the Chicago Purchasing Managers Index for July. The consensus is for a increase to 63.0, up from 62.6 in June.

by Calculated Risk on 7/30/2014 04:00:00 PM

Private investment rebounded in Q2.   Residential investment increased at a 7.5% annual rate in Q2, equipment investment increased at a 7.0% annual rate, and investment in non-residential structures increased at a 5.3% annual rate. 

The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter trailing average). 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. So the usual pattern - both into and out of recessions is - red, green, blue.

The dashed gray line is the contribution from the change in private inventories.

Click on graph for larger image.

Residential Investment (RI) increased in Q2, but the three quarter average was negative (red).

Residential investment is so low - as a percent of the economy - that this small decline is not  a concern.  However, for the rate of economic growth to increase, RI will probably have to continue to make positive contributions.
  
Equipment and software added 0.4 percentage points to growth in Q2 and the three quarter average moved higher (green).

The contribution from nonresidential investment in structures was also positive in Q2.  Nonresidential investment in structures typically lags the recovery, however investment in energy and power provided a boost early in this recovery. 

I expect to see all areas of private investment increase over the next few quarters - and that is key for stronger GDP growth.

by Calculated Risk on 7/30/2014 02:00:00 PM

Another $10 billion reduction in asset purchases. Two key statement changes: "a range of labor market indicators suggests that there remains significant underutilization of labor resources" and "Inflation has moved somewhat closer to the Committee's longer-run objective".

FOMC Statement:

Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter. Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has moved somewhat closer to the Committee's longer-run objective. 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 activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat.

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in August, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month rather than $15 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month rather than $20 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. The Committee's sizable and still-increasing holdings of longer-term securities 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. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation 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 remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

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. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Narayana Kocherlakota; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo. Voting against was Charles I. Plosser who objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for "a considerable time after the asset purchase program ends," because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals.
emphasis added

by Calculated Risk on 7/30/2014 09:48:00 AM

A few graphs based on the GDP report (including revisions).

The first graph shows the contribution to percent change in GDP for residential investment (RI) and state and local governments since 2005. 

This shows the huge slump in RI during the housing bust (blue), followed by the unprecedented period of state and local austerity (red) not seen since the Depression.

Click on graph for larger image.

State and local government spending bounced back in Q2, and I expect state and local governments to continue to make a positive contribution to GDP in 2014.

RI (blue) added to GDP growth for a few years, before subtracting in Q4 2013 and Q1 2014.    RI bounced back in Q2, and since RI is still very low, I expect RI to make a positive contribution to GDP for some time.

The second graph shows residential investment as a percent of GDP.

Residential Investment as a percent of GDP has bottomed, but it still below the levels of previous recessions - and I expect RI to continue to increase for the next few years.

I'll break down Residential Investment 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.

The third graph shows non-residential investment in structures, equipment and "intellectual property products".

I'll add details for investment in offices, malls and hotels next week.

Overall this was a solid report.  Private investment rebounded in Q2, and that is the key to more growth going forward.