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Sunday, September 18, 2022

FOMC Preview: 75bp Hike

by Calculated Risk on 9/18/2022 09:37:00 AM

Expectations are the FOMC will announce a 75bp rate increase in the federal funds rate at the meeting this week, although some analysts think a 100bp rate increase is possible.

From Merrill Lynch:
"We think the Fed will read the incoming data as justifying another large 75bp rate hike, bringing the target range for the federal funds rate to 3.0-3.25%. We think the Fed will signal a terminal funds rate of 4.0-4.25% early next year, 37.5bp higher than in June. We expect the FOMC statement to say that monetary policy will be moving into restrictive territory and the committee expects it to remain there “for some time”, similar to the tone of Chair Powell’s remarks at Jackson Hole. In the press conference, Powell is likely to emphasize that the “overarching goal” of monetary policy is the restoration of price stability, even if doing so requires a hard landing. Updated projections are likely to send a similar message, with less growth, higher unemployment, and a more restrictive policy stance suggesting the window to a soft landing has narrowed further."
From Goldman Sachs:
"We have raised our fed funds rate forecast by 75bp over the last two weeks, and now expect that the FOMC will hike by 75bp in September, 50bp in November, and 50bp in December to reach our terminal rate forecast of 4-4.25% by the end of 2022."
Analysts will be looking for comments on the size of future rate hikes.

Projections will be released at this meeting. For review, here are the June projections

In June, most participants expected thirteen 25bp rate hikes in 2022. The FOMC raised rates 25 bp in March, 50 bp in May, 75 bp in June and 75 bp in July.  It now appears there will be sixteen 25bp rate hikes this year.

Wall Street forecasts have been revised down further since June due to the ongoing negative impacts from the pandemic. the war in Ukraine and financial tightening, and the FOMC will likely revise down their GDP projections.   For example, from Goldman Sachs:
"We still forecast GDP growth of +1.1%/+1.0% in 2022Q3/Q4 and 0% GDP growth in 2022 on a Q4/Q4 basis, but now expect GDP growth of ... +1.1% in 2023 on a Q4/Q4 basis"
GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date202220232024
June 20221.5 to 1.91.3 to 2.01.5 to 2.0
1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 3.7% in August. So far, the economic slowdown has barely pushed up the unemployment rate.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date202220232024
June 20223.6 to 3.83.8 to 4.13.9 to 4.1
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of July 2022, PCE inflation was up 6.3% from July 2021. This was below the cycle high of 6.8% YoY in May. Analysts are expecting inflation to decline slowly, but the Q4 2022 year-over-year change will likely be revised up.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1
Projection Date202220232024
June 20225.0 to 5.32.4 to 3.02.0 to 2.5

PCE core inflation was up 4.6% in July year-over-year. This was below the cycle high of 5.3% YoY in February.  

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1
Projection Date202220232024
June 20224.2 to 4.52.5 to 3.22.1 to 2.5

Saturday, September 17, 2022

Real Estate Newsletter Articles this Week

by Calculated Risk on 9/17/2022 02:11:00 PM

At the Calculated Risk Real Estate Newsletter this week:

Current State of the Housing Market

2nd Look at Local Housing Markets in August

Mortgage Equity Withdrawal Still Strong in Q2

Q2 Update: Delinquencies, Foreclosures and REO

California Home Sales off 24% YoY in August, Prices Up Only 1.4% YoY; August Existing Home Sales Forecast

This is usually published 4 to 6 times a week and provides more in-depth analysis of the housing market.

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Schedule for Week of September 18, 2022

by Calculated Risk on 9/17/2022 08:11:00 AM

The key reports this week are August Housing Starts and Existing Home sales.

The FOMC meets this week and is expected to raise rates 75 bp.

----- Monday, Sept 19th -----

10:00 AM: The September NAHB homebuilder survey. The consensus is for a reading of 47, down from 49 in August. Any number below 50 indicates that more builders view sales conditions as poor than good.

----- Tuesday, Sept 20th -----

Total Housing Starts and Single Family Housing Starts8:30 AM: Housing Starts for August.

This graph shows single and total housing starts since 1968.

The consensus is for 1.445 million SAAR, down from 1.446 million SAAR.

During the day: The AIA's Architecture Billings Index for August (a leading indicator for commercial real estate).

----- Wednesday, Sept 21st -----

7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

Existing Home Sales10:00 AM: Existing Home Sales for August from the National Association of Realtors (NAR). The consensus is for 4.70 million SAAR, down from 4.81 million in July.

The graph shows existing home sales from 1994 through the report last month.

Housing economist Tom Lawler expects the NAR to report 4.84 million SAAR.

2:00 PM: FOMC Meeting Announcement. The FOMC is expected to raise the Fed Funds rate by 75bp at this meeting.

2:00 PM: FOMC Forecasts This will include the Federal Open Market Committee (FOMC) participants' projections of the appropriate target federal funds rate along with the quarterly economic projections.

2:30 PM: Fed Chair Jerome Powell holds a press briefing following the FOMC announcement.

----- Thursday, Sept 22nd -----

8:30 AM: The initial weekly unemployment claims report will be released.  The consensus is for an increase to 218 thousand from 213 thousand last week.

11:00 AM: the Kansas City Fed manufacturing survey for September.

----- Friday, Sept 23rd -----

No major economic releases scheduled.

Friday, September 16, 2022

COVID Sept 16, 2022, Update on Cases, Hospitalizations and Deaths

by Calculated Risk on 9/16/2022 09:34:00 PM

On COVID (focus on hospitalizations and deaths):

COVID Metrics
New Cases per Day260,83168,949≤5,0001
Deaths per Day2🚩391342≤501
1my goals to stop daily posts,
27-day average for Cases, Currently Hospitalized, and Deaths
🚩 Increasing 7-day average week-over-week for Cases, Hospitalized, and Deaths
✅ Goal met.

COVID-19 Deaths per DayClick on graph for larger image.

This graph shows the daily (columns) and 7-day average (line) of deaths reported.

Average daily deaths bottomed in July 2021 at 214 per day.

California Home Sales off 24% YoY in August, Prices Up Only 1.4% YoY; August Existing Home Sales Forecast

by Calculated Risk on 9/16/2022 03:24:00 PM

Today, in the Calucalated Risk Newsletter: California Home Sales off 24% YoY in August, Prices Up Only 1.4% YoY; August Existing Home Sales Forecast

On California:
August’s sales pace was up 6.1 percent on a monthly basis from 295,460 in July and down 24.4 percent from a year ago, when 414,860 homes were sold on an annualized basis. ... The statewide median price edged up 0.7 percent in August to $839,460 from the $833,910 recorded in July and was up 1.4 percent from the $827,940 recorded last August. The year-over-year price gain was the smallest in more than two years.
From housing economist Tom Lawler:
I project that existing home sales as estimated by the National Association of Realtors ran at a seasonally adjusted annual rate of 4.84 million in August, up 0.6% from July’s preliminary pace and down 19.2% from last August’s seasonally adjusted pace.

Q3 GDP Tracking: Close to 1%

by Calculated Risk on 9/16/2022 01:31:00 PM

From BofA:

On net, the data on retail trade and IP helped push our 3Q US GDP tracking estimate lower by 0.3pp to 0.8% qoq saar. Activity appears to be rebounding in the second half of the year off its first-half decline, but not by much. [September 16th estimate]
emphasis added
From Goldman:
We left our Q3 GDP tracking estimate unchanged at +1.1% (qoq ar). [September 15th estimate]
And from the Altanta Fed: GDPNow
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2022 is 0.5 percent on September 15, down from 1.3 percent on September 9. After this week's releases from the US Department of the Treasury's Bureau of the Fiscal Service, the US Bureau of Labor Statistics, the US Census Bureau, and the Federal Reserve Board of Governors, decreases in the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth from 1.7 percent and -6.1 percent, respectively, to 0.4 percent and -6.4 percent, respectively, was slightly offset by an increase in the nowcast of third-quarter real government spending growth from 1.3 percent to 2.0 percent.[September 15th estimate]

Predicting the Next Recession

by Calculated Risk on 9/16/2022 09:29:00 AM

The recession callers were back in the first half of 2022, and some like ARK's Cathie Wood and Home Depot's Ken Langone claimed the US was already in a recession.   I disagreed and noted I wasn't even on recession watch!

We did see negative real GDP growth in Q1 and in Q2 - but that didn't mean the US economy was in a recession (and this has never been the definition of a US recession).  For a discussion of recessions, see NBER's What is a recession?  

Also, there are two measures of economic growth - Gross Domestic Product (GDP), and Gross Domestic Income (GDI).  See: Better Measure of Output: GDP or GDI?
The Bureau of Economic Analysis (BEA) produces two measures of national output which, in theory, should be equivalent. In practice, however, there are often substantive differences.
And when there are differences, GDP is usually revised towards GDI.  And guess what? GDI was positive in both Q1 and Q2.  And other measures of the economy were also positive, especially employment.  So, it is extremely unlikely there was a recession.

Way back in 2013, I wrote a post "Predicting the Next Recession. This post was in response to several recession forecasts (that were also incorrect).

In that 2013 post, I wrote:
The next recession will probably be caused by one of the following (from least likely to most likely):

3) An exogenous event such as a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons. All of these events are possible, but they are unpredictable, and the probabilities are low that they will happen in the next few years or even decades.
emphasis added
Unfortunately, in 2020, one of those low probability events happened (pandemic), and that led to a recession in 2020.
2) Significant policy error. Two examples: not reaching a fiscal agreement and going off the "fiscal cliff" probably would have led to a recession, and Congress refusing to "pay the bills" would have been a policy error that would have taken the economy into recession. 
We've seen several policy errors, mostly related to immigration and trade during the previous administration, but none that would lead the economy into a recession.
1) Most of the post-WWII recessions were caused by the Fed tightening monetary policy to slow inflation. I think this is the most likely cause of the next recession. Usually, when inflation starts to become a concern, the Fed tries to engineer a "soft landing", and frequently the result is a recession.
And this most common cause of a recession is the current concern.  Since inflation picked up, mostly due to the pandemic (stimulus spending, supply constraints) and due to the invasion of Ukraine, the Fed has embarked on a tightening cycle to slow inflation.   

The Fed cannot ease pandemic related supply constraints (except by curbing demand), and the Fed cannot stop the war.  So, there is a possibility that the Fed will tighten too much and that will lead to a "hard landing" (aka recession).

The key will be to watch housing.  Housing is the main transmission mechanism for Fed policy.   One of my favorite models for business cycle forecasting uses new home sales (also housing starts and residential investment).   I also look at the yield curve, but I've found new home sales is generally more useful.  (See my post in 2019: Don't Freak Out about the Yield Curve)

For the economy, what I focus on is single family starts and new home sales.   For the bottoms and tops of key housing activity, here is a graph of Single-family housing starts, New Home Sales, and Residential Investment (RI) as a percent of GDP.

Note: The pandemic has distorted the economic data, and as I've noted many times, we can't be a slave to any model.

Starts, new home sales, residential Investment Click on graph for larger image.

The arrows point to some of the earlier peaks and troughs for these three measures - and the most recent peak.

The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.

New home sales and single-family starts turned down last year, but that was partly due to the huge surge in sales during the pandemic - and then rebounded somewhat.   Now both new home sales and single-family starts have turned down in response to higher mortgage rates.   Residential investment has also peaked.

YoY Change New Home SalesThe second graph shows the YoY change in New Home Sales from the Census Bureau.  Currently new home sales (based on 3-month average) are down 10% year-over-year.

Note: the New Home Sales data is smoothed using a three month centered average before calculating the YoY change. The Census Bureau data starts in 1963.

Some observations:

1) When the YoY change in New Home Sales falls about 20%, usually a recession will follow. An exception for this data series was the mid '60s when the Vietnam buildup kept the economy out of recession.   Another exception was in late 2021 - we saw a significant YoY decline in new home sales related to the pandemic and the surge in new home sales in the second half of 2020.  I ignored that pandemic distortion.

Also note that the sharp decline in 2010 was related to the housing tax credit policy in 2009 - and was just a continuation of the housing bust.

2) It is also interesting to look at the '86/'87 and the mid '90s periods. New Home sales fell in both of these periods, although not quite 20%. As I noted in earlier posts, the mid '80s saw a surge in defense spending and MEW that more than offset the decline in New Home sales. In the mid '90s, nonresidential investment remained strong.

If the Fed tightening cycle will lead to a recession, we should see housing turn down first (new home sales, single family starts, residential investment).  This is now happening, but this usually leads the economy by a year or more.  So, we might be looking at a recession in 2023.

There are other indicators too - such as the yield curve and heavy truck sales - but mostly I'll be watching housing.

Note: I will look at comparing to 2019 to remove the pandemic distortions.

Thursday, September 15, 2022

Q2 Update: Delinquencies, Foreclosures and REO

by Calculated Risk on 9/15/2022 09:30:00 AM

Today, in the Calculated Risk Real Estate Newsletter: Q2 Update: Delinquencies, Foreclosures and REO

A brief excerpt:

Last year, I pointed out that the foreclosure moratorium, combined with the expiration of a large number of forbearance plans, would NOT lead to a surge in foreclosures and impact house prices (as happened following the housing bubble).
Here is some data on REOs through Q2 2022 …
Case-Shiller House Prices IndicesWe will probably see an increase in REOs in late 2022 and into 2023 following the end of the moratoriums.

This graph shows the nominal dollar value of Residential REO for FDIC insured institutions. Note: The FDIC reports the dollar value and not the total number of REOs.

The dollar value of 1-4 family residential Real Estate Owned (REOs, foreclosure houses) decreased slightly from $788 million in Q1 2022 to $784 million in Q2 2022. (Probably declined in 2020 and 2021 due to foreclosure moratoriums, forbearance programs and house price increases).
The bottom line is there will be an increase in foreclosures late this year and next (from record low levels), but it will not be a huge wave of foreclosures as happened following the housing bubble. The distressed sales during the housing bust led to cascading price declines, and that will not happen this time.
There is much more in the article. You can subscribe at

Industrial Production Decreased 0.2 Percent in August

by Calculated Risk on 9/15/2022 09:21:00 AM

From the Fed: Industrial Production and Capacity Utilization

Industrial production decreased 0.2 percent in August. Manufacturing output edged up 0.1 percent after increasing 0.6 percent in July. The index for mining was unchanged, and the index for utilities decreased 2.3 percent. At 104.5 percent of its 2017 average, total industrial production in August was 3.7 percent above its year-earlier level. Capacity utilization declined 0.2 percentage point in August to 80.0 percent, a rate that is 0.4 percentage point above its long-run (1972–2021) average.
emphasis added
Capacity Utilization Click on graph for larger image.

This graph shows Capacity Utilization. This series is up from the record low set in April 2020, and above the level in February 2020 (pre-pandemic).

Capacity utilization at 80.0% is 0.4% above the average from 1972 to 2021.  This was below consensus expectations.

Note: y-axis doesn't start at zero to better show the change.

Industrial ProductionThe second graph shows industrial production since 1967.

Industrial production decreased in August to 104.5. This is above the pre-pandemic level.

The change in industrial production was below consensus expectations.

Retail Sales Increase 0.3% in August

by Calculated Risk on 9/15/2022 08:43:00 AM

On a monthly basis, retail sales were up 0.3% from July to August (seasonally adjusted), and sales were up 9.1 percent from July 2021.

From the Census Bureau report:

Advance estimates of U.S. retail and food services sales for August 2022, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $683.3 billion, an increase of 0.3 percent from the previous month, and 9.1 percent above August 2021. ... The June 2022 to July 2022 percent change was revised from virtually unchanged to down 0.4 percent.
emphasis added
Retail Sales Click on graph for larger image.

This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).

Retail sales ex-gasoline were up 0.8% in August.

The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993.

Retail and Food service sales, ex-gasoline, increased by 7.6% on a YoY basis.

Year-over-year change in Retail Sales Sales in August were slightly above expectations, and sales in May, June and July were revised up, combined.