by Calculated Risk on 12/31/2015 05:31:00 PM

Here is an update on hotel occupancy from HotelNewsNow.com: STR: US results for week ending 26 December

The U.S. hotel industry reported negative results in the three key performance measurements during the week of 20-26 December 2015, according to data from STR, Inc.

In year-over-year measurements, the industry’s occupancy decreased 4.0% to 42.8%. Average daily rate for the week was down 1.7% to US$108.34. Revenue per available room fell 5.6% to US$46.37.
emphasis added

The following graph shows the seasonal pattern for the hotel occupancy rate using the four week average.  Hotels are currently in the weakest part of the year; December and January.

The red line is for 2015, dashed orange is 2014, blue is the median, and black is for 2009 - the worst year since the Great Depression for hotels.  Purple is for 2000.

2015 is the best year on record for hotels.

Average Weekly Occupancy Rate by Year:
1) 2015 65.9%
2) 2000 64.8%
3) 2014 64.8%

And the worst:
2009 55.0%

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 12/31/2015 02:51:00 PM

Here are a few excerpts from a piece by Goldman Sachs economists Jan Hatzius and Zach Pandl: "8 Questions for 2016"

On GDP Growth:

We forecast that growth will improve only slightly from its current pace, averaging 2.25% next year.

On Housing:

[W]e see a strong case for a continued recovery in housing starts from about 1.2 million currently to 1.4-1.5 million over the next few years—even without a major easing in lending standards or a rebound in the headship rate of young adults ... we expect that 2016 will mark the end of the post-crisis housing market in several respects. We forecast that the rebound in house prices will slow, that single-family construction will account for a rising share of new housing starts, and that the homeownership rate will finally stabilize.

On Fed hikes:

[A] standard policy rule coupled with the Fed's economic projections (or our own) calls for a roughly 125bp increase in the funds rate by end-2016. While the FOMC's preference for a "gradual" path of hikes suggests that four is most likely, the economic case for the full 100bp implied by the Summary of Economic Projections (SEP) is strong.

by Calculated Risk on 12/31/2015 12:05:00 PM

Over the weekend, I posted some questions for next year: Ten Economic Questions for 2016. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2015.

7) Oil Prices: The decline in oil prices was a huge story at the end of 2014, and prices have declined sharply again at the end of 2015.  Will oil prices stabilize here (WTI is at $38 per barrel)?  Or will prices decline further?  Or will prices increase in 2016?

First, Josh Zumbrun at the WSJ has a review of 2015 forecasts compared to what actually happened: What Economic Forecasters Got Right, and Wrong, in 2015

Crude Oil

Average forecast for December 2015: $63/barrel
Actual as of December 29: about $38/barrel

None of the forecasters in the survey saw the price of oil being below $40 this month. Throughout the year, economists have continued to forecast that oil prices would regain some of their lost ground and have been continually disappointed.

Forecasters did a poor job on oil prices (including me).  Oil prices are difficult to predict with all the supply and demand factors.

The reason prices have fallen sharply is supply and demand. It is important to remember that the short term supply and demand curves for oil are very steep. 

In the long run, supply and demand will adjust to price changes.  But if someone asks why prices have fallen so sharply recently, the answer is "supply and demand" and that the short term supply and demand curves are steep for oil.

As I noted last year, the keys on the short term demand side have been the ongoing weakness in Europe and the slowdown in China.   There has been an increase in demand in the US, but that has been more than offset by global weakness.  Will Europe recovery in 2016? Will China's growth increase? Right now it looks like more of the same, so I expect the demand side to stay weak again in 2016.

The supply side is even more difficult.  There are volatile regions that have increased supply, such as from Libya and Iraq.  And there will be more supply from Iran in 2016.  Will be there be a 2016 supply disruption in Libya, Iraq, Iran, Nigeria, or some other oil exporting country?  That is a key geopolitical question.

And what about tight oil production in 2016?   At the current price, it would seem fracking would be uneconomical for new wells (existing wells will continue to produce).  We've seen some decline in US oil production, but the decline in supply has been fairly small.  As an example, production in North Dakota peaked at 38.1 million barrels in December 2015, and is only down to 34.6 million barrels in September.

It is impossible to predict an international supply disruption, however if a significant disruption happens, then prices will move higher. Continued weakness in Europe and China seems likely, however sluggish demand will be somewhat offset by less tight oil production.  It seems like the key oil producers (Saudi, etc) will continue production at current levels.  This suggests in the short run (2016) that prices will stay low, but probably move up a little in 2016.  I'll guess WTI will be up from the current price by December 2016 (but still under $50 per barrel).

Here are the Ten Economic Questions for 2016 and a few predictions:

• Question #1 for 2016: How much will the economy grow in 2016?
• Question #2 for 2016: How many payroll jobs will be added in 2016?
• Question #3 for 2016: What will the unemployment rate be in December 2016?
• Question #4 for 2016: Will the core inflation rate rise in 2016? Will too much inflation be a concern in 2016?
• Question #5 for 2016: Will the Fed raise rates in 2016, and if so, by how much?
• Question #6 for 2016: Will real wages increase in 2016?
• Question #7 for 2016: What about oil prices in 2016?
• Question #8 for 2016: How much will Residential Investment increase?
• Question #9 for 2016: What will happen with house prices in 2016?
• Question #10 for 2016: How much will housing inventory increase in 2016?

by Calculated Risk on 12/31/2015 09:50:00 AM

Chicago PMI: Dec Chicago Business Barometer Down 5.8 points to 42.9

The Chicago Business Barometer contracted at the fastest pace since July 2009, falling 5.8 points to 42.9 in December from 48.7 in November
...
There was also ongoing weakness in New Orders, which contracted at a faster pace, to the lowest level since May 2009. The fall in Production was more moderate but still put it back into contraction for the sixth time this year. The Employment component, which had recovered in recent months, dropped back below the 50 neutral mark in December, leaving it at the lowest since July.

The only positive this month came from a special question with 55.1% of the panel expecting demand to be stronger in 2016 compared with 14.3% who thought it would be lower. 30.6% of respondents thought demand would be unchanged.
...
Chief Economist of MNI Indicators Philip Uglow said, “The steepness of the decline in the Barometer in recent months ends a particularly volatile year, which has seen orders and output move in and out of contraction. It lends weight to the Fed’s gradual approach to tightening, with the flexibility to change direction if needed.”
emphasis added

This was well below the consensus forecast of 50.0.

by Calculated Risk on 12/31/2015 08:36:00 AM

The DOL reported:

In the week ending December 26, the advance figure for seasonally adjusted initial claims was 287,000, an increase of 20,000 from the previous week's unrevised level of 267,000. The 4-week moving average was 277,000, an increase of 4,500 from the previous week's unrevised average of 272,500.

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

The previous week was unrevised at 267,000.

The following graph shows the 4-week moving average of weekly claims since 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 increased to 277,000.

This was above the consensus forecast of 270,000, and the low level of the 4-week average suggests few layoffs.

Average weekly unemployment claims in 2015 were the lowest in over 40 years (when the workforce was much smaller).

by Calculated Risk on 12/30/2015 08:10:00 PM

Thursday:
• At 8:30 AM ET, initial weekly unemployment claims report will be released. The consensus is for 270 thousand initial claims, up from 267 thousand the previous week.

• At 9:45 AM, Chicago Purchasing Managers Index for December. The consensus is for a reading of 50.0, up from 48.7 in November.

The automakers will report December vehicle sales on Tuesday, January 5th. Sales in November were at 18.1 million on a seasonally adjusted annual rate basis (SAAR), and it possible sales in December will be over 18 million SAAR again.

From WardsAuto: North America Production Will Hit 18 Million Next Year

Forecast 2016 production totals 18.2 million vehicles, including 17.7 million light vehicles and 490,000 medium- and heavy-duty trucks. The LV total is 1.2% above the estimated 17.44 million in 2015, while the big-truck volume is 4.9% under 2015’s estimated total of 515,000.

Total estimated vehicle output in 2015 of 17.96 million units is 1.1% above 2014’s 17.42 million and will topple the previous high of 17.66 million in 2000. LV volume this year will be a new record – beating 2000’s 17.16 million – while big-truck output will be a 9-year high.

2015 was a record year for light vehicle production in the US, and it looks like 2016 will be even better.

by Calculated Risk on 12/30/2015 04:31:00 PM

The Case-Shiller house price indexes for October were released yesterday. Zillow forecasts Case-Shiller a month early, and I like to check the Zillow forecasts since they have been pretty close.

From Zillow: November Case-Shiller Forecast Shows Continued Growth

Similar to last month’s Zillow’s Home Value Index data, October S&P Case-Shiller data shows home prices continuing to climb. The 10- and 20-City Indices as well as the National Case-Shiller Index grew by nearly 1 percent between September and October. Similarly all three of the indices showed annual growth rates north of 5 percent. This marks the first time in over a year the national index has grown at 5 percent annually.

When November Case-Shiller data is released a month from now, we expect the data will show continuing growth month-over-month, though not at quite the same sizzling pace. We predict that the 10- and 20- City Indices will end November 0.5 percent above their October values (seasonally adjusted). We expect the national index to grow slightly faster than the other two, at a rate of 0.7 percent month-over-month.

Inline with continued monthly growth we also expect all rates still above 5 percent when November data is released. The table below shows the current changes in Case-Shiller data along with our forecasts for next month’s data.

This suggests the year-over-year change for the November Case-Shiller National index will be slightly higher than in the October report.

by Calculated Risk on 12/30/2015 12:38:00 PM

Over the weekend, I posted some questions for next year: Ten Economic Questions for 2016. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2015.

8) Residential Investment: Residential investment (RI) was up solidly in 2015. Note: RI is mostly investment in new single family structures, multifamily structures, home improvement and commissions on existing home sales. How much will RI increase in 2016? How about housing starts and new home sales in 2016?

First a graph of RI as a percent of Gross Domestic Product (GDP) through Q3 2015.

Click on graph for larger image.

Usually residential investment is a strong contributor to GDP growth and employment in the early stages of a recovery, but not this time - and that weakness was a key reason why the recovery was sluggish. Residential investment finally turned positive during 2011 and made a solid positive contribution to GDP every year since then.

But even with the recent increases, RI as a percent of GDP is still very low - close to the lows of previous recessions - and it seems likely that residential investment as a percent of GDP will increase further in 2016.

The second graph shows total and single family housing starts through November 2015.

Housing starts are on pace to increase over 10% in 2015. And even after the significant increase over the last four years, the approximately 1.1 million housing starts in 2015 will still be the 11th lowest on an annual basis since the Census Bureau started tracking starts in 1959 (the seven lowest years were 2008 through 2014).  The other lower years were the bottoms of previous recessions.

The third graph shows New Home Sales since 1963 through November 2015. The dashed line is the current sales rate.

New home sales in 2015 were up close to 14% compared to 2014 at close to 500 thousand.

Here is a table showing housing starts and new home sales over the last decade. No one should expect an increase to 2005 levels, however demographics and household formation suggest starts will return to close to the 1.5 million per year average from 1959 through 2000. That means starts will come close to increasing 40% over the next few years from the 2015 level.

Housing Starts and New Home Sales (000s)
	Housing Starts	Change	New Home Sales	Change
2005	2068	---	1,283	---
2006	1801	-12.9%	1,051	-18.1%
2007	1355	-24.8%	776	-26.2%
2008	906	-33.2%	485	-37.5%
2009	554	-38.8%	375	-22.7%
2010	587	5.9%	323	-13.9%
2011	609	3.7%	306	-5.3%
2012	781	28.2%	368	20.3%
2013	925	18.5%	429	16.6%
2014	1003	8.5%	437	1.9%
20151	1110	10.6%	498	14.0%
12015 estimated

Most analysts are looking for starts to increase to around 1.25 million in 2016, and for new home sales around 560 thousand. This would be an increase of around 12% for both starts and new home sales.

I think there will be further growth in 2016, but I'm a little more pessimistic than some analysts. Some key areas - like Houston - will be hit hard by the decline oil prices. And I think growth will slow for multi-family starts. Also, to achieve double digit growth for new home sales in 2016, the builders would have to offer more lower priced homes (the builders have focused on higher priced homes in recent years).  There has been a shift to offering more affordable new homes, but it takes time.

My guess is growth of around 4% to 8% in 2016 for new home sales, and about the same percentage growth for housing starts.  Also I think the mix between multi-family and single family starts will shift a little more towards single family in 2016.

Here are the Ten Economic Questions for 2016 and a few predictions:

• Question #1 for 2016: How much will the economy grow in 2016?
• Question #2 for 2016: How many payroll jobs will be added in 2016?
• Question #3 for 2016: What will the unemployment rate be in December 2016?
• Question #4 for 2016: Will the core inflation rate rise in 2016? Will too much inflation be a concern in 2016?
• Question #5 for 2016: Will the Fed raise rates in 2016, and if so, by how much?
• Question #6 for 2016: Will real wages increase in 2016?
• Question #7 for 2016: What about oil prices in 2016?
• Question #8 for 2016: How much will Residential Investment increase?
• Question #9 for 2016: What will happen with house prices in 2016?
• Question #10 for 2016: How much will housing inventory increase in 2016?

by Calculated Risk on 12/30/2015 10:02:00 AM

From the NAR: Pending Home Sales Decline Modestly in November

The Pending Home Sales Index, a forward-looking indicator based on contract signings, decreased 0.9 percent to 106.9 in November from an upwardly revised 107.9 in October but is still 2.7 percent above November 2014 (104.1). Although the index has increased year-over-year for 15 consecutive months, last month's annual gain was the smallest since October 2014 (2.6 percent).
...
The PHSI in the Northeast decreased 3.0 percent to 91.8 in November, but is still 4.3 percent above a year ago. In the Midwest the index rose 1.0 percent to 104.9 in November, and is now 4.1 percent above November 2014.

Pending home sales in the South increased 1.3 percent to an index of 119.9 in November and are 0.5 percent higher than last November. The index in the West declined 5.5 percent in November to 100.4, but remains 4.5 percent above a year ago.
emphasis added

This was below expectations of a 0.5% increase for this index.  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 12/29/2015 08:54:00 PM

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

Note: Long time reader and mortgage broker "Soylent Green Is People" sent me a note yesterday: "the unthinkable is occurring: seems like Irvine home prices have hit an air pocket, falling in some cases."

Irvine is expensive, but not a "luxury home" market. But this has me thinking that we might be seeing a slowdown in prices increases (or flat prices) in some areas.

From Denise Garcia at CNBC: Luxury home prices finally getting too high?

The tables have turned in the real estate industry as luxury listing prices fell for the first time since 2012, according to a Redfin report. The brokerage firm suggests that the drop in prices stems from wealthy buyers and foreign investors refusing to buy at the top of the market.

Prices for luxury homes fell by 2.2 percent in the third quarter, compared to a year ago, according to the report.

These are listing prices, not sale prices - and it has seemed like many homes were listed at absurd asking prices. I doubt we will see a significant price decline in these areas, but prices might flatten out.