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Friday, March 02, 2018

Oil Rigs "A Small Rise in Rig Counts"

by Calculated Risk on 3/02/2018 03:45:00 PM

A few comments from Steven Kopits of Princeton Energy Advisors LLC on Mar 2, 2018:

• Total US oil rigs came in soft this week, +1 to 800

• Horizontal oil rigs were up, +2 to 699
...
• Rig additions should be accelerating through the coming weeks. If we do not see a substantial rise in the horizontal oil rig count in the next two weeks, we will once again be looking at an inflection point

• For the week as a whole, oil prices were not much changed over the previous week, holding around $61 / barrel WTI.
Oil Rig CountClick on graph for larger image.

CR note: This graph shows the US horizontal rig count by basin.

Graph and comments Courtesy of Steven Kopits of Princeton Energy Advisors LLC.

Merrill on Housing

by Calculated Risk on 3/02/2018 01:58:00 PM

A few brief excerpts on taxes from a note by Merrill Lynch economist Michelle Meyer: Housing: the top five questions (Overall Merrill is positive on housing).

How does the tax legislation impact the housing market?
On the one hand, tax reform is supportive of the housing market as it increases disposable income for households. The average household will see tax-home pay increase by $1,610 this year according to the Joint Committee of Taxation, which helps affordability and increases confidence.

On the other hand, it reduces the incentive for homeownership by doubling the standard deduction, reducing the cap for the mortgage interest deduction (MID) to 750k and limiting property tax deductions along with state and local income taxes to $10k. This results in fewer households who will itemize deductions, thereby making homeownership less attractive from a tax perspective. The biggest challenge is for markets where there is a double whammy of high home prices and property/income taxes....

In our view, the winners from tax reform are conventional buyers who are below the MID cap and likely to see a net windfall of cash from lower taxes. However, the high priced markets on the coast could struggle. The consequence: we expect to see strong new home sales growth, particularly for lower priced properties, but slower growth in high priced existing home sales.
CR Note: There are several headwinds for housing this year including: higher mortgage rates, impact of tax legislation, higher labor costs, higher material costs (Lumber prices are up sharply), and overall affordability. I think housing will be OK this year, but I'm watching for any slowing.

When the Story Changes, Be Alert

by Calculated Risk on 3/02/2018 11:48:00 AM

There is an axiom in investing that when the story changes, pay attention. As an example, if a company changes their focus, reconsider your investment.

Over the last several years, the economic story has been consistent: Strong employment growth, steady economic growth (solid given demographics), low inflation, and an accommodative monetary policy - with no fiscal stimulus. I noted several times that the future was bright, and in late 2016, I pointed out that the cupboard is full.

With minimal policy changes in 2017, and a stronger global economy, the US economic expansion continued, pretty much as expected.

But in 2018, the story is changing.  We are seeing some economic tailwinds and some headwinds.  Although the tax changes are poorly conceived, and mostly benefit high income earners, there should be some short term boost to economic growth.   That might lead the Federal Reserve to raise rates a little quicker than anticipated.

And, for housing, the tax changes could negatively impact a segment of the housing market, and rising mortgage rates are another headwind.  Note: I'm tracking housing inventory this year to see if there is an impact.

And now the Trump administration is proposing tariffs and talking openly talking of a trade war.   That is a downside risk to the economy.

As economists at Nomura noted this morning: "A sharp deterioration in financial conditions and aggressive trade policies by the Trump administration present notable risks."

I still think the economy will be fine in 2018, but the story is changing.

Zillow Case-Shiller Forecast: More Solid House Price Gains in January

by Calculated Risk on 3/02/2018 08:58:00 AM

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

From Aaron Terrazas at Zillow: December Case-Shiller Results and January Forecast: Why 2018 Looks A Lot Like 2017

The familiar patterns in the housing market that emerged in the second half of 2017 – lots of demand from home buyers, limited supply of homes available to buy, quickly rising prices and slow but steadily deteriorating affordability – are continuing to shape the start to 2018 as well.

Zillow predicts the S&P/Case-Shiller national index will show a 6.4 percent gain in national home prices in January, a slight increase from the 6.3 percent annual gain home prices posted for December. The December increase was greater than November’s 6.1 percent annual gain. Case-Shiller will release January data on Tuesday, March 27.

Case-Shiller’s 20-city composite index rose 6.3 percent year-over-year in December, a slight slowdown from November’s 6.4 percent annual growth. The 10-city composite index climbed 6 percent, the same rate as the prior month.

Among cities included in the 20-city index, Seattle, Las Vegas and San Francisco reported the highest year-over-year gains in December, at 12.7 percent, 11.1 percent and 9.2 percent, respectively.
The Zillow forecast is for the year-over-year change for the Case-Shiller National index to be slightly larger in January than in December.   Zillow is forecasting a smaller year-over-year increase for both the 10-city index, and the 20-city index in January.
Zillow forecast for Case-Shiller

Thursday, March 01, 2018

Market Update

by Calculated Risk on 3/01/2018 06:37:00 PM

Friday:
• At 10:00 AM, University of Michigan's Consumer sentiment index (preliminary for February). The consensus is for a reading of 99.5, down from 99.9 in January.

S&P 500
Click on graph for larger image.

By request - following the market sell off today - here is a stock market graph. This graph shows the S&P 500 since 1990 (this excludes dividends).

The dashed line is the closing price today.

The market is close to unchanged year-to-date, and off 6.8% from the all time high.

Not very scary - at least not yet.

U.S. Light Vehicle Sales mostly unchanged at 17.1 million annual rate in February

by Calculated Risk on 3/01/2018 03:40:00 PM

Based on a preliminary estimate from AutoData, light vehicle sales were at a 17.08 million SAAR in February.

That is down 1.4% year-over-year from February 2017, and down slightly from last month.

Vehicle Sales
Click on graph for larger image.

This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for February (red, light vehicle sales of 17.08 million SAAR  from AutoData).

This was at the consensus forecast for February.

Note that the increase in sales at the end of 2017 was due to buying following the hurricanes.

Sales will probably decline again in 2018 after setting a new sales records in both 2015 and 2016.

Vehicle Sales The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Note: dashed line is current estimated sales rate.

Construction Spending mostly unchanged in January

by Calculated Risk on 3/01/2018 11:52:00 AM

Earlier today, the Census Bureau reported that overall construction spending was mostly unchanged in January:

Construction spending during January 2018 was estimated at a seasonally adjusted annual rate of $1,262.8 billion, nearly the same as the revised December estimate of $1,262.7 billion. The January figure is 3.2 percent above the January 2017 estimate of $1,223.5 billion.
Private spending decreased and public spending increased in January:
Spending on private construction was at a seasonally adjusted annual rate of $962.7 billion, 0.5 percent below the revised December estimate of $967.9 billion. ...

n January, the estimated seasonally adjusted annual rate of public construction spending was $300.1 billion, 1.8 percent above the revised December estimate of $294.8 billion.
emphasis added
Construction Spending 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 has been increasing, but is still 23% below the bubble peak.

Non-residential spending is 6% above the previous peak in January 2008 (nominal dollars).

Public construction spending is now 8% below the peak in March 2009, and 14% above the austerity low in February 2014.

Year-over-year Construction SpendingThe second graph shows the year-over-year change in construction spending.

On a year-over-year basis, private residential construction spending is up 4%. Non-residential spending is down 1% year-over-year. Public spending is up 8% year-over-year.

This was below the consensus forecast of a 0.3% increase for January, however spending for the previous two months was revised up slightly.

ISM Manufacturing index increased to 60.8 in February

by Calculated Risk on 3/01/2018 10:05:00 AM

The ISM manufacturing index indicated expansion in February. The PMI was at 60.8% in February, up from 59.1% in January. The employment index was at 59.7%, up from 54.2% last month, and the new orders index was at 64.2%, down from 65.4%.

From the Institute for Supply Management: February 2018 Manufacturing ISM® Report On Business®

Economic activity in the manufacturing sector expanded in February, and the overall economy grew for the 106th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.

The report was issued today by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee: “The February PMI® registered 60.8 percent, an increase of 1.7 percentage points from the January reading of 59.1 percent. The New Orders Index registered 64.2 percent, a decrease of 1.2 percentage points from the January reading of 65.4 percent. The Production Index registered 62 percent, a 2.5 percentage point decrease compared to the January reading of 64.5 percent. The Employment Index registered 59.7 percent, an increase of 5.5 percentage points from the January reading of 54.2 percent. The Supplier Deliveries Index registered 61.1 percent, a 2 percentage point increase from the January reading of 59.1 percent. The Inventories Index registered 56.7 percent, an increase of 4.4 percentage points from the January reading of 52.3 percent. The Prices Index registered 74.2 percent in February, a 1.5 percentage point increase from the January reading of 72.7 percent, indicating higher raw materials prices for the 24th consecutive month. Comments from the panel reflect expanding business conditions, with new orders and production maintaining high levels of expansion; employment expanding at a faster rate to support production; order backlogs expanding at a faster rate; and export orders and imports continuing to grow faster in February. Supplier deliveries continued to slow (improving) at a faster rate. Price increases occurred across most industry sectors. The Customers’ Inventories Index indicates levels remain too low. Capital expenditure lead times improved by five days while production material supplier lead times extended four days during the month of February.”
emphasis added
ISM PMIClick on graph for larger image.

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

This was above expectations of 58.6%, and suggests manufacturing expanded at a faster pace in February than in January.

A solid report.

Personal Income increased 0.4% in January, Spending increased 0.2%

by Calculated Risk on 3/01/2018 08:42:00 AM

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

Personal income increased $64.7 billion (0.4 percent) in January according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $134.8 billion (0.9 percent) and personal consumption expenditures (PCE) increased $31.2 billion (0.2 percent).

Real DPI increased 0.6 percent in January and Real PCE decreased 0.1 percent. The PCE price index increased 0.4 percent. Excluding food and energy, the PCE price index increased 0.3 percent.
The January PCE price index increased 1.7 percent year-over-year and the October PCE price index, excluding food and energy, increased 1.5 percent year-over-year.

The following graph shows real Personal Consumption Expenditures (PCE) through January 2018 (2009 dollars). Note that the y-axis doesn't start at zero to better show the change.

Personal Consumption Expenditures Click on graph for larger image.

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

The increase in personal income was slightly above expectations,  and the increase in PCE was at expectations.

Weekly Initial Unemployment Claims decrease to 210,000, 4-Week Average lowest since 1969

by Calculated Risk on 3/01/2018 08:34:00 AM

The DOL reported:

In the week ending February 24, the advance figure for seasonally adjusted initial claims was 210,000, a decrease of 10,000 from the previous week's revised level. This is the lowest level for initial claims since December 6, 1969 when it was 202,000. The previous week's level was revised down by 2,000 from 222,000 to 220,000. The 4-week moving average was 220,500, a decrease of 5,000 from the previous week's revised average. This is the lowest level for this average since December 27, 1969 when it was 219,750. The previous week's average was revised down by 500 from 226,000 to 225,500.

Claims taking procedures in Puerto Rico and in the Virgin Islands have still not returned to normal.
emphasis added
The previous week was revised down.

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 decreased to 220,500.

This was lower than the consensus forecast. The low level of claims suggest relatively few layoffs.