by Calculated Risk on 3/03/2015 12:29:00 PM

CR Note: The following is a post I wrote in January 2007 that is hopefully worth repeating.  I warned about always being short term bearish, even though most of my posts were very bearish back then!  I was predicting a recession would start in 2007 (the Great Recession started in December 2007), however I was still optimistic about the future.

In the comments, and occasionally via email, people have expressed surprise at my positive long term outlook. This reaction is probably understandable since most of my posts have a bearish economic tone.

In my view, both history and logic suggest that the economic future will be brighter. Economic growth has been the norm, and in the long term, the markets almost always reward the bullish investor.

It's human nature to be concerned about specific events, but historically the economy has recovered quickly from trauma. Concerned about the bird flu? Look at the 1918 flu pandemic that was followed by the Roaring '20s. Concerned about an economic Depression? The Great Depression was the worst economic event in recent times, and the economy was fine after WWII.

These are serious, but relatively short term events for the general economy.

Logically this makes sense. Economic growth is dependent on innovation and population growth. And innovation will almost certainly continue. In fact, the only real threats to the long term economy are massively destructive events (like a major meteor strike) and impediments to innovation.

It's not worth worrying about very low probability events like super volcanoes or meteor strikes. However higher probability events, like the potential impact from global warming, is probably a concern. But once again, even with global warming, innovation will most likely (hopefully) save the day.

I'll discuss possible impediments to innovation in a future post.

So why are my posts generally bearish? Simple - because I am writing about the short term. And in the short term I'm concerned about the impact of the housing bust on the general economy. And a short term aberration (a recession) to the long term trend is interesting and worth discussing. Clearly I'm bearish in the short term, and I feel the "odds of a recession" in 2007 "are at least a coin flip".

But we have to guard against always being short term bearish and long term bullish. That doesn't work from an investment perspective, since we will always be cautious in each successive short term - and the sum of many short terms is the long term. Intelligent people can always make a strong short term bearish argument, so a pattern of always being short term bearish is a serious risk - just something to consider.

Luckily, as I've been noting for some time, we will probably know by mid-2007 if the housing bust is going to significantly impact the general economy. I believe it will, so the next few months should be interesting.

Best to all.

by Calculated Risk on 3/03/2015 10:05:00 AM

Notes: This CoreLogic House Price Index report is for January. The recent Case-Shiller index release was for December. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA).

From CoreLogic: Home Prices Up 5 Percent Year Over Year for December 2014

CoreLogic® ... today released its January 2015 CoreLogic Home Price Index (HPI®) which shows that home prices nationwide, including distressed sales, increased 5.7 percent in January 2015 compared to January 2014. This change represents 35 months of consecutive year-over-year increases in home prices nationally. On a month-over-month basis, home prices nationwide, including distressed sales, increased by 1.1 percent in January 2015 compared to December 2014.

Including distressed sales, 27 states and the District of Columbia are at or within 10 percent of their peak. Four states, New York (+5.6), Wyoming (+8.3 percent), Texas (+8.3 percent) and Colorado (+9.1 percent), reached new highs in the home price index since January 1976 when the index starts.

Excluding distressed sales, home prices increased 5.6 percent in January 2015 compared to January 2014 and increased 1.4 percent month over month compared to December 2014. ...

“We continue to see a strong and progressive uptick in home prices as we enter 2015. We project home prices will continue to rise throughout the year and into 2016,” said Anand Nallathambi, president and CEO of CoreLogic. “A dearth of supply in many parts of the country is a big factor driving up prices. Many homeowners have taken advantage of low rates to refinance their homes, and until we see sustained increases in income levels and employment they could be hunkered down so supplies may remain tight. Demand has picked up as low mortgage rates and the cut in the FHA annual insurance premium reduce monthly payments for prospective homebuyers.”
emphasis added

Click on graph for larger image.

This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.

The index was up 1.1% in January, and is up 5.7% over the last year.

This index is not seasonally adjusted, and this was a solid month-to-month increase.


The second graph is from CoreLogic. The year-over-year comparison has been positive for thirty five consecutive months suggesting house prices bottomed early in 2012 on a national basis (the bump in 2010 was related to the tax credit).

The YoY increase has mostly moved sideways over the last six months.

by Calculated Risk on 3/02/2015 07:58:00 PM

On mortgage rates from Matthew Graham at Mortgage News Daily: Mortgage Rates Back up to 3.875 Percent

What had been 3.75% on Friday is now 3.875% in terms of the most prevalent conventional 30yr fixed rates for top tier scenarios.

CR Note: The Ten Year yield increased to 2.08% today from 2.00% on Friday.

Tuesday:
• All day, Light vehicle sales for February. The consensus is for light vehicle sales to increase to 16.7 million SAAR in February from 16.6 million in January (Seasonally Adjusted Annual Rate).

• At 8:15 PM, Speech, Fed Chair Janet L. Yellen, Bank Regulation and Supervision, At the Citizens Budget Commission's Annual Awards Dinner, New York, New York

by Calculated Risk on 3/02/2015 03:13:00 PM

Fannie Mae reported today that the Single-Family Serious Delinquency rate declined slightly in January to 1.86% from 1.89% in December. The serious delinquency rate is down from 2.33% in January 2014, and this is the lowest level since September 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 was declined in January to 1.86%. Freddie's rate is down from 2.34% in January 2014, 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 0.47 percentage points over the last year - the pace of improvement has slowed - and at that pace the serious delinquency rate will be under 1% in late 2016.

The "normal" serious delinquency rate is under 1%, so maybe serious delinquencies will be close to normal at the end of 2016.  This elevated delinquency rate is mostly related to older loans - the lenders are still working through the backlog, especially in judicial foreclosure states like Florida.

by Calculated Risk on 3/02/2015 02:18:00 PM

The Case-Shiller house price indexes for December were released last Tuesday. Zillow forecasts 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: 10- & 20-City Case-Shiller Composites Expected to Show Declines In Jan. From Dec

The December S&P/Case-Shiller (SPCS) data released [last] week showed healthy home price appreciation largely at pace with prior months, with annual growth in the U.S. National Index at 4.6 percent in December.

Annual appreciation in home values as measured by SPCS has been less than 5 percent for the past four months. We anticipate this trend to continue as annual growth in home prices slows to more normal levels between 3 percent and 5 percent. Zillow predicts the U.S. National Index to rise 4.5 percent on an annual basis in January.

The 10- and 20-City Composite Indices both experienced modest bumps in annual growth rates in December; the 10-City index rose to 4.3 percent and the 20-City Index rose to 4.5 percent – up from rates of 4.2 percent and 4.3 percent, respectively, in November. The non-seasonally adjusted (NSA) 10- and 20-City indices both rose 0.1 percent from November to December. We expect both to turn negative in January, with each predicted to fall 0.1 percent month-over-month (NSA).

All forecasts are shown in the table below. These forecasts are based on the December SPCS data release and the January 2014 Zillow Home Value Index (ZHVI), released Feb. 19. Officially, the SPCS Composite Home Price Indices for January will not be released until Tuesday, March 31.

So the year-over-year change in for January Case-Shiller index will probably be about the same, or a little lower, than in the December report.

Zillow Case-Shiller Forecast
	Case-Shiller Composite 10		Case-Shiller Composite 20		Case-Shiller National
	NSA	SA	NSA	SA	NSA	SA
December Actual YoY	4.3%	4.3%	4.5%	4.5%	4.6%	4.6%
January Forecast YoY	4.3%	4.3%	4.5%	4.5%	4.5%	4.5%
January Forecast MoM	-0.1%	0.6%	-0.1%	0.6%	0.0%	0.5%

by Calculated Risk on 3/02/2015 11:01:00 AM

The Census Bureau reported that overall construction spending decreased in January:

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during January 2015 was estimated at a seasonally adjusted annual rate of $971.4 billion, 1.1 percent below the revised December estimate of $982.0 billion. The January figure is 1.8 percent above the January 2014 estimate of $954.6 billion.

Both private and public spending decreased in January:

Spending on private construction was at a seasonally adjusted annual rate of $697.6 billion, 0.5 percent below the revised December estimate of $700.9 billion. ...

In January, the estimated seasonally adjusted annual rate of public construction spending was $273.8 billion, 2.6 percent below the revised December estimate of $281.1 billion.
emphasis added

Note: Non-residential for offices and hotels is generally increasing, but spending for oil and gas is generally declining. Early in the recovery, there was a surge in non-residential spending for oil and gas (because prices increased), but now, with falling prices, oil and gas is a drag on overall construction spending.

As an example, construction spending for lodging is up 18% year-over-year, whereas spending for power (includes oil and gas) construction peaked in mid-2014 and is down 14% year-over-year (and will fall further in the coming months).

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 dipped a little last year, but is increasing again.

Non-residential spending is 17% below the peak in January 2008.

Public construction spending is now 16% below the peak in March 2009 and about 5% above the post-recession low.

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

On a year-over-year basis, private residential construction spending is down 3%. Non-residential spending is up 5% year-over-year. Public spending is up 5% year-over-year.

Looking forward, all categories of construction spending should increase in 2015. Residential spending is still very low, non-residential is starting to pickup (except oil and gas), and public spending has probably hit bottom after several years of austerity.

This was well below the consensus forecast of a 0.3% increase, with weakness in Public and non-residential spending.

by Calculated Risk on 3/02/2015 10:00:00 AM

The ISM manufacturing index suggests slower expansion in February than in January. The PMI was at 52.9% in February, down from 53.5% in January. The employment index was at 51.4%, down from 54.1% in January, and the new orders index was at 52.5%, down from 52.9%.

From the Institute for Supply Management: February 2015 Manufacturing ISM® Report On Business®

Economic activity in the manufacturing sector expanded in February for the 26th consecutive month, and the overall economy grew for the 69th 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® (ISM®) Manufacturing Business Survey Committee. "The February PMI® registered 52.9 percent, a decrease of 0.6 percentage point from January’s reading of 53.5 percent. The New Orders Index registered 52.5 percent, a decrease of 0.4 percentage point from the reading of 52.9 percent in January. The Production Index registered 53.7 percent, 2.8 percentage points below the January reading of 56.5 percent. The Employment Index registered 51.4 percent, 2.7 percentage points below the January reading of 54.1 percent. Inventories of raw materials registered 52.5 percent, an increase of 1.5 percentage points above the January reading of 51 percent. The Prices Index registered 35 percent, the same percentage as in January, indicating lower raw materials prices for the fourth consecutive month. Comments from the panel express a growing level of concern over the West Coast dock slowdown, negatively impacting exports and imports and requiring workarounds and added costs."
emphasis added

On that last sentence - the good news is the West Cost port slowdown has been resolved, although it will take a few months to catch up.

Click on graph for larger image.

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

This was slightly below expectations of 53.0%, but still indicates expansion in February.

by Calculated Risk on 3/02/2015 08:41:00 AM

The BEA released the Personal Income and Outlays report for January:

Personal income increased $50.8 billion, or 0.3 percent ... in January, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $18.9 billion, or 0.2 percent.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in January, in contrast to a decrease of 0.1 percent in December. ... The price index for PCE decreased 0.5 percent in January, compared with a decrease of 0.2 percent in December. The PCE price index, excluding food and energy, increased 0.1 percent, compared with an increase of less than 0.1 percent.

The following graph shows real Personal Consumption Expenditures (PCE) through January 2015 (2009 dollars). Note that the y-axis doesn't start at zero to better show the change.

Click on graph for larger image.

The dashed red lines are the quarterly levels for real PCE.

The increase in personal income was lower than expected,  Also the increase in PCE was below the 0.1% decrease consensus.  The sharp decline in oil and gasoline prices pulled down PCE (and the PCE price index).  Even though PCE decreased, real PCE increased in January (as shown in the graph).

On inflation: The PCE price index increased 0.2 percent year-over-year due to the sharp decline in oil prices. The core PCE price index (excluding food and energy) increased 1.3 percent year-over-year in January.

by Calculated Risk on 3/01/2015 08:48:00 PM

An excellent piece about the Fed from Tim Duy: Game On

Bottom Line: The Fed's confidence in the US economy is driving them closer to policy normalization. The labor market improvements are key - as long as unemployment is falling, confidence in the inflation outlook is rising. The more important message, however, is as the timing of the first rate hike draws closer, the level of uncertainty is rising. And it is not just about the timing of that rate hike. The Fed is sending a clear message that the subsequent path of rates is also very uncertain, and they don't think that uncertainty is being taken seriously by market participants. In their view, financial markets are too complacent about the likely path of interest rates.

Monday:
• At 8:30 AM ET, Personal Income and Outlays for January. The consensus is for a 0.4% increase in personal income, and for a 0.1% decrease in personal spending. And for the Core PCE price index to increase 0.1%.

• At 10:00 AM, the ISM Manufacturing Index for February. The consensus is for a decrease to 53.0 from 53.5 in January. The ISM manufacturing index indicated expansion in January at 53.5%. The employment index was at 54.1%, and the new orders index was at 52.9%.

• Also at 10:00 AM, Construction Spending for January. The consensus is for a 0.3% increase in construction spending.

Weekend:
• Schedule for Week of March 1, 2015

From CNBC: Pre-Market Data and Bloomberg futures: currently S&P futures are up slightly and DOW futures are up 30 (fair value).

Oil prices were mixed over the last week with WTI futures at $49.40 per barrel and Brent at $62.19 per barrel.  A year ago, WTI was at $103, and Brent was at $110 - so prices are down 52% and 43% respectively year-over-year.

Below is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are up to $2.42 per gallon (down about $1.00 per gallon from a year ago).  If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent; gasoline prices in most of the U.S. are impacted more by Brent prices.

Orange County Historical Gas Price Charts Provided by GasBuddy.com

by Calculated Risk on 3/01/2015 09:30:00 AM

Note: In a related story, the WSJ reported yesterday Wages Rise at Restaurants as Labor Market Tightens

Restaurant wages zoomed up to an annualized pace of more than 3% in the second half of last year from below a 1.5% pace in the first half of 2013, according to the Labor Department. ... Many restaurant owners are now scrambling to hire and retain workers, a potential precursor to widespread wage gains if it signals diminished slack in the labor market.

Here is a minor indicator I follow from the National Restaurant Association: Restaurant Performance Index Remained Elevated in January

Buoyed by higher same-store sales and traffic and a positive outlook among operators, the National Restaurant Association’s Restaurant Performance Index (RPI) remained elevated in January. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 102.7 in January, which represented the fourth consecutive month above the level of 102. In addition, January marked the 23rd consecutive month in which the RPI stood above 100, which signifies expansion in the index of key industry indicators.

“A solid majority of restaurant operators reported higher same-store sales and customer traffic in January, which helped keep the RPI well into positive territory,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the Association. “In addition, nearly six in 10 operators expect their business to improve in the next six months, with plans for capital expenditures also continuing at a high level.” br />
emphasis added

Click on graph for larger image.

The index decreased to 102.7 in January, down from 102.9 in December. (above 100 indicates expansion).

Restaurant spending is discretionary, so even though this is "D-list" data, I like to check it every month. This is another very solid reading - and it is likely restaurants are benefiting from lower gasoline prices and are having to raise wages - a little - to attract and retain workers.