by Calculated Risk on 12/31/2014 07:22:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'm adding some thoughts, and a few predictions for each question. Here is a review of the Ten Economic Questions for 2014.

1) Economic growth: Heading into 2015, most analysts are pretty sanguine. Even with contraction in the first quarter, 2014 was a decent year (GDP will grow around 2.4% in 2014). Will 2015 be the best year of the recovery so far? Could 2015 be the best year since the '90s? Or will 2015 disappoint again?

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 2.5% in 2010.

Economic activity clearly picked up in 2014 after the first quarter, however - due to severe weather - the economy contracted in Q1 and the economy only grew around 2.4% for the year (estimated).

Perhaps 2015 will be the year with 3%+ growth!

Annual Real GDP Growth
Year	GDP
1999	4.7%
2000	4.1%
2001	1.0%
2002	1.8%
2003	2.8%
2004	3.8%
2005	3.3%
2006	2.7%
2007	1.8%
2008	-0.3%
2009	-2.8%
2010	2.5%
2011	1.6%
2012	2.3%
2013	2.2%
20141	2.4%
1 2014 estimate.

All of the positives that led to the pickup in activity in 2014 are still present - the housing recovery is ongoing, state and local government austerity is over, household balance sheets are in much better shape and household deleveraging is over, and commercial real estate (CRE) investment (ex-energy) and public construction will both probably make positive contributions in 2015.

In addition, the sharp decline in oil prices should be a net positive for the US economy in 2015.  Plus the Federal government austerity is now ending (although there is the risk of more cuts).

A possible negative would be less exports due to the strong dollar.

Lower gasoline prices suggest an increase in personal consumption expenditures (PCE) excluding gasoline. And it seems likely PCE growth will be above 3% in 2015.  Add in some more business investment, the ongoing housing recovery, some further increase in state and local government spending, and 2015 should be the best year of the recovery with GDP growth at or above 3%.

Here are the ten questions for 2015 and a few predictions:
• Question #2 for 2015: How many payroll jobs will be added in 2015?
• Question #3 for 2015: What will the unemployment rate be in December 2015?
• Question #4 for 2015: Will too much inflation be a concern in 2015?
• Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
• Question #6 for 2015: Will real wages increase in 2015?
• Question #7 for 2015: What about oil prices in 2015?
• Question #8 for 2015: How much will Residential Investment increase?
• Question #9 for 2015: What will happen with house prices in 2015?
• Question #10 for 2015: How much will housing inventory increase in 2015?

by Calculated Risk on 12/31/2014 05:22:00 PM

Fannie Mae reported today that the Single-Family Serious Delinquency rate declined slightly in November to 1.91% from 1.92% in October. The serious delinquency rate is down from 2.44% in November 2013, and this is the lowest level since October 2008.

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

Earlier this week, Freddie Mac reported that the Single-Family serious delinquency rate was unchanged in November at 1.91%. Freddie's rate is down from 2.43% in November 2013, and is at the lowest level since December 2008. 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 0.53 percentage points over the last year, and at that pace the serious delinquency rate will be under 1% in late 2016 - although the rate of decline has slowed recently.

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

Maybe serious delinquencies will be close to normal in late 2016.

by Calculated Risk on 12/31/2014 11:28:00 AM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'm adding some thoughts, and a few predictions for each question. Here is a review of the Ten Economic Questions for 2014.

2) Employment:  With one month to go, 2014 is already the best year for employment growth since the '90s.   Will 2015 be as strong?  Or will job creation slow in 2015?

There are some positives for employment heading into 2015. Economic activity has clearly picked up in the US, and there is solid momentum heading into the new year. The decline in oil prices will give a boost to many sectors, construction activity (non-energy related) should increase, and the pace of public hiring will probably increase in 2015.

There are also some negatives. The decline in oil prices will lead to layoffs in the energy sector and have a ripple effect in some communities. The strong dollar will probably impact exporters, and the lower unemployment rate will mean some companies will have difficulty finding qualified candidates.

I've seen estimates of around 50,000 layoffs in the energy sector related to lower oil prices.  There will be a ripple effect too that will probably double that number of job losses (businesses in oil producing areas will also lose employees).

Note: Those expecting 300+ thousand jobs per month in 2015 will probably be disappointed.  Too many people compare to the '80s and '90s, without thinking about changing demographics. The prime working age population (25 to 54 years old) was growing 2.2% per year in the '80s, and 1.3% per year in the '90s.  The prime working age population has actually declined slightly this decade.  Note: The prime working age population is now growing slowly again, and growth will pick up the '20s.

For review, here is a table of the annual change in total nonfarm, private and public sector payrolls jobs since 1997.  For private employment, 2014 was probably the best year since 1997.

Change in Payroll Jobs per Year (000s)
	Total, Nonfarm	Private	Public
1997	3,408	3,213	195
1998	3,003	2,734	313
1999	3,177	2,716	461
2000	1,946	1,682	264
2001	-1,735	-2,286	551
2002	-508	-741	233
2003	105	147	-42
2004	2,033	1,886	147
2005	2,506	2,320	186
2006	2,085	1,876	209
2007	1,140	852	288
2008	-3,576	-3,756	180
2009	-5,087	-5,013	-74
2010	1,058	1,277	-219
2011	2,083	2,400	-317
2012	2,236	2,294	-58
2013	2,331	2,365	-34
20141	2,900	2,810	90
1 2014 is estimated.

In 2014, public employment added to total employment, but at a fairly low level. Public hiring will probably pick up to 150,000+ in 2015.

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

	Construction Jobs (000s)
2006	152
2007	-195
2008	-789
2009	-1,047
2010	-192
2011	144
2012	114
2013	156
20141	215

Energy related construction hiring will decline in 2015, but I expect other areas of construction to be solid.

As I mentioned above, in addition to layoffs in the energy sector, exporters will have a difficult year - and more companies will have difficulty finding qualified candidates.  Even with the overall boost from lower oil prices - and some additional public hiring, I expect total jobs added to be lower in 2015 than in 2014.

So my forecast is for gains of about 200,000 to 225,000 payroll jobs per month in 2015.  Lower than 2014, but another solid year for employment gains given current demographics.

Here are the ten questions for 2015 and a few predictions:
• Question #2 for 2015: How many payroll jobs will be added in 2015?
• Question #3 for 2015: What will the unemployment rate be in December 2015?
• Question #4 for 2015: Will too much inflation be a concern in 2015?
• Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
• Question #6 for 2015: Will real wages increase in 2015?
• Question #7 for 2015: What about oil prices in 2015?
• Question #8 for 2015: How much will Residential Investment increase?
• Question #9 for 2015: What will happen with house prices in 2015?
• Question #10 for 2015: How much will housing inventory increase in 2015?

by Calculated Risk on 12/31/2014 10:02:00 AM

From the NAR: Pending Home Sales Show Modest Gain in November

The Pending Home Sales Index, a forward-looking indicator based on contract signings, increased 0.8 percent to 104.8 in November from a slightly downwardly revised 104.0 in October and is now 4.1 percent above November 2013 (100.7) – the highest year-over-year gain since August 2013 (5.6 percent).
...
The PHSI in the Northeast rose 1.4 percent to 89.1 in November, and is now 7.0 percent above a year ago. In the Midwest the index decreased 0.4 percent to 100.0 in November, and is now 0.5 percent below November 2013.

Pending home sales in the South rose 1.3 percent to an index of 119.7 in November, and are 5.1 percent above last November. The index in the West increased 0.4 percent in November to 98.5, and is now 4.9 percent above a year ago.

Note: Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in December and January.

by Calculated Risk on 12/31/2014 08:34:00 AM

The DOL reported:

In the week ending December 27, the advance figure for seasonally adjusted initial claims was 298,000, an increase of 17,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 280,000 to 281,000. The 4-week moving average was 290,750, an increase of 250 from the previous week's revised average. The previous week's average was revised up by 250 from 290,250 to 290,500.

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

The previous week was revised up slightly.

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 slightly to 290,750.

This was higher than the consensus forecast of 286,000, and the level suggests few layoffs.

by Calculated Risk on 12/30/2014 09:02:00 PM

Wednesday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 286 thousand from 280 thousand.

• At 9:45 AM ET, Chicago Purchasing Managers Index for December. The consensus is for a reading of 59.0, down from 60.8 in November.

• At 10:00 AM ET, Pending Home Sales Index for November. The consensus is for a 0.5% increase in the index.

The Case-Shiller house price indexes for October were released earlier today. Zillow has started forecasting Case-Shiller a month early - now including the National Index - and I like to check the Zillow forecasts since they have been pretty close.

From Zillow: Nov. 2014 Case-Shiller Forecast: Home Price Changes Slowing, But Still Growing

The October S&P/Case-Shiller (SPCS) data released this morning showed more slowing in the housing market, with annual growth in national home prices falling to 4.6 percent. Annual appreciation in home values has been below 5 percent for the past two months, and we anticipate this trend to continue into the future. The 10- and 20-City Indices also saw annual growth rates decline in October; the 10-City index rose 4.4 percent, while the 20-City Index rose 4.5 percent – down from rates of 4.5 percent and 4.7 percent, respectively, in September.

Our forecast for November SPCS indicates that the slowing in home price gains will continue into November. Zillow predicts the national SPCS to rise 4.5 percent on an annual basis.

The non-seasonally adjusted (NSA) 20-City index fell 0.1 percent from September to October, and we expect it to decrease 0.2 percent in November. We also expect a monthly decline in the 10-City Composite Index next month, falling 0.2 percent from October to November (NSA).

All forecasts are shown in the table below. These forecasts are based on the October SPCS data release and the November 2014 Zillow Home Value Index (ZHVI), released Dec. 19. Officially, the SPCS Composite Home Price Indices for November will not be released until Tuesday, Jan. 27.

So the Case-Shiller index will probably show a lower year-over-year gain in November than in October.

Zillow November 2014 Case-Shiller Forecast
	Case-Shiller Composite 10		Case-Shiller Composite 20		Case-Shiller National
	NSA	SA	NSA	SA	NSA	SA
YoY	4.2%	4.2%	4.4%	4.4%	4.5%	4.5%
MoM	-0.2%	0.5%	-0.2%	0.5%	-0.2%	0.6%

by Calculated Risk on 12/30/2014 04:51:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2014.

3) Unemployment Rate: The unemployment rate was at 5.8% in November, down 0.9 percentage points year-over-year.  Currently the FOMC is forecasting the unemployment rate will be in the 5.2% to 5.3% range next December.  What will the unemployment rate be in December 2015?

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.

On participation: We can be pretty certain that the participation rate will decline over the next couple of decades based on demographic trends.  In 2014, I expected the participation rate to stabilize or decline slightly as the labor market improved - the long term down trend was offset by some people returning to the labor force.  It is possible that the participation rate could even increase a little in 2015 before resuming the downtrend.  If the participation rate increases a little (say to 63%) then the unemployment rate will be a little higher next December.

Here is a table of the participation rate and unemployment rate since 2008.

Unemployment and Participation Rate for December each Year
December of	Participation Rate	Change in Participation Rate (percentage points)	Unemployment Rate
2008	65.8%		7.3%
2009	64.6%	-1.2	9.9%
2010	64.3%	-0.3	9.4%
2011	64.0%	-0.3	8.5%
2012	63.6%	-0.4	7.9%
2013	62.8%	-0.8	6.7%
20141	62.8%	0.0	5.8%
1This is the November 2014 participation and unemployment rate.

Depending on the estimate for the participation rate and job growth (next question), it appears the unemployment rate will decline to close to 5% by December 2015.   My guess is based on the participation rate staying relatively steady in 2015 - before declining again over the next decade. If the participation rate increases a little, then I'd expect unemployment in the low-to-mid 5% range.

Here are the ten questions for 2015 and a few predictions:
• Question #2 for 2015: How many payroll jobs will be added in 2015?
• Question #3 for 2015: What will the unemployment rate be in December 2015?
• Question #4 for 2015: Will too much inflation be a concern in 2015?
• Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
• Question #6 for 2015: Will real wages increase in 2015?
• Question #7 for 2015: What about oil prices in 2015?
• Question #8 for 2015: How much will Residential Investment increase?
• Question #9 for 2015: What will happen with house prices in 2015?
• Question #10 for 2015: How much will housing inventory increase in 2015?

by Calculated Risk on 12/30/2014 04:09:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2014.

4) Inflation: The inflation rate is still running well below the Fed's 2% target. Will the core inflation rate rise in 2015? Will too much inflation be a concern in 2015?

Every year some analysts (and clueless politicians) forecast runaway inflation.  And every year they have been wrong.  Someday inflation will be a concern - but not yet!

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.  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.

On a year-over-year basis, the median CPI rose 2.3%, the trimmed-mean CPI rose 1.8%, and the CPI less food and energy rose 1.7%. Core PCE is for October and increased 1.6% year-over-year

On a monthly basis, median CPI was at 1.8% annualized, trimmed-mean CPI was at 1.0% annualized, and core CPI increased 0.9% annualized.

Due to the slack in the labor market (elevated unemployment rate, part time workers for economic reasons),  and even with some real wage growth in 2015, I expect these measures of inflation will stay mostly at or below the Fed's target in 2015.  If the unemployment rate continues to decline - and wage growth picks up - maybe inflation will be an issue in 2016.

So currently I think core inflation (year-over-year) will increase in 2015, but too much inflation will not be a serious concern this year.

Here are the ten questions for 2015 and a few predictions:
• Question #2 for 2015: How many payroll jobs will be added in 2015?
• Question #3 for 2015: What will the unemployment rate be in December 2015?
• Question #4 for 2015: Will too much inflation be a concern in 2015?
• Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
• Question #6 for 2015: Will real wages increase in 2015?
• Question #7 for 2015: What about oil prices in 2015?
• Question #8 for 2015: How much will Residential Investment increase?
• Question #9 for 2015: What will happen with house prices in 2015?
• Question #10 for 2015: How much will housing inventory increase in 2015?

by Calculated Risk on 12/30/2014 02:47:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2014.

5) Monetary Policy: The Fed completed QE3 in 2014, and now the question is will the Fed raise rates in 2015? If so, when? And by how much? The Fed Funds rate has been at 0 to 0.25% since December 2008.

For years I've made fun of those predicting an imminent Fed Funds rate increase.  Based on high unemployment and low inflation, I argued it would be a "long time" before the first rate hike.   Well, time flies!

As far as the first rate increase and timing, Tim Duy wrote a week ago Looking Backward to See the Future

My baseline scenario is that the Fed drops "considerable" entirely in January, retains "patient" in March, drops "patient" in April, and raise rates in June.

Of course the Fed will be data dependent. If the unemployment rate declines to 5.5% or so in the May report, and core inflation continues to move upwards towards 2%, then a June rate hike seems likely.
 
Note: It seems very likely the FOMC will drop "patient" from the FOMC statement the meeting before hiking rates (if "patient" is in the April statement, a rate hike in June is much less likely).

If the data is less convincing, then the FOMC will probably wait until the July or September meetings (I've seen a few analysts arguing the FOMC will wait until 2016, but my feeling is the Fed will hike rates in 2015).

The FOMC will not want to immediately reverse course, so the might wait a little longer than expected.  Right now my guess is the first rate hike will happen at either the June, July or September meetings.  I expect subsequent rate hikes to be gradual, and depending on the timing of the first rate hike, I expect rates to be close to 1% at the end of 2015.

The old saying on Wall Street with regards to rate hikes is "3 steps and a stumble".  I don't think there is an validity to the saying, but I expect to hear it on CNBC in 2015!

Here are the ten questions for 2015 and a few predictions:
• Question #2 for 2015: How many payroll jobs will be added in 2015?
• Question #3 for 2015: What will the unemployment rate be in December 2015?
• Question #4 for 2015: Will too much inflation be a concern in 2015?
• Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
• Question #6 for 2015: Will real wages increase in 2015?
• Question #7 for 2015: What about oil prices in 2015?
• Question #8 for 2015: How much will Residential Investment increase?
• Question #9 for 2015: What will happen with house prices in 2015?
• Question #10 for 2015: How much will housing inventory increase in 2015?

by Calculated Risk on 12/30/2014 11:23:00 AM

This morning, S&P reported that the National index increased 0.7% in October seasonally adjusted. However, it appears the seasonal adjustment has been distorted by the high level of distressed sales in recent years. Trulia's Jed Kolko wrote in August: "Let’s Improve, Not Ignore, Seasonal Adjustment of Housing Data"

The housing crisis substantially changed the seasonal pattern of housing activity: relative to conventional home sales, which peak in summer, distressed home sales are more evenly spread throughout the year and sell at a discount. As a result, in years when distressed sales constitute a larger share of overall sales, the seasonal swings in home prices get bigger while the seasonal swings in sales volumes get smaller.

Sharply changing seasonal patterns create problems for seasonal adjustment methods, which typically estimate seasonal adjustment factors by averaging several years’ worth of observed seasonal patterns. A sharp but ultimately temporary change in the seasonal pattern for housing activity affects seasonal adjustment factors more gradually and for more years than it should. Despite the recent normalizing of the housing market, seasonal adjustment factors are still based, in part, on patterns observed at the height of the foreclosure crisis, causing home price indices to be over-adjusted in some months and under-adjusted in others.

Kolko proposed a better seasonal adjustment:

This graph from Kolko shows the weighted seasonal adjustment (see Kolko's article for a description of his method). Kolko calculates that prices increased 0.2% on a weighted seasonal adjustment basis in October - as opposed to the 0.7% SA increase and 0.2% NSA decrease reported by Case-Shiller.

The "better" SA (green) shows prices are still increasing, but more slowly.

The expected slowdown in year-over-year price increases is ongoing. In November 2013, the Comp 20 index was up 13.8% year-over-year (YoY). Now the index is only up 4.5% YoY. This is the smallest YoY increase since October 2012 (the National index was up 10.9% YoY in October 2013, is now up 4.6% - also the slowest YoY increase since October 2012.

Looking forward, I expect the indexes to slow a little further on a YoY basis, however: 1) I don't expect the indexes to turn negative YoY (in 2015) , and 2) I think most of the slowdown on a YoY basis is now behind us. This slowdown in price increases was expected by several key analysts, and I think it is good news for housing and the economy.

In the earlier post, I graphed nominal house prices, but it is also 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 $278,000 today adjusted for inflation (39%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

Another point on real prices: In the Case-Shiller release this morning, the National Index was reported as being 9.8% below the bubble peak.   However, in real terms, the National index is still about 24% below the bubble peak.

Nominal House Prices

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

In nominal terms, the Case-Shiller National index (SA) is back to March 2005 levels, and the Case-Shiller Composite 20 Index (SA) is back to October 2004 levels, and the CoreLogic index (NSA) is back to February 2005.

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 November 2002 levels, the Composite 20 index is back to July 2002, and the CoreLogic index back to March 2003.

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 March 2003 levels, the Composite 20 index is back to October 2002 levels, and the CoreLogic index is back to May 2003.

In real terms, and as a price-to-rent ratio, prices are mostly back to early 2000 levels - and maybe moving a little sideways now.