by Calculated Risk on 7/02/2014 02:01:00 PM

Thursday at 8:30 AM ET, the BLS will release the employment report for June. The consensus, according to Bloomberg, is for an increase of 211,000 non-farm payroll jobs in June (range of estimates between 199,000 and 290,000), and for the unemployment rate to be unchanged at 6.3%.

Note: The BLS reported 217,000 payroll jobs added in May with the unemployment rate at 6.3%.

Here is a summary of recent data:

• The ADP employment report showed an increase of 281,000 private sector payroll jobs in June. This was above expectations of 210,000 private sector payroll jobs added. The ADP report hasn't been very useful in predicting the BLS report for any one month, but in general, this suggests employment growth above expectations.

• The ISM manufacturing employment index was unchanged in June at 52.8%. A historical correlation between the ISM manufacturing employment index and the BLS employment report for manufacturing, suggests that private sector BLS manufacturing payroll jobs decreased about 5,000 in June. The ADP report indicated a 12,000 increase for manufacturing jobs in June.

The ISM non-manufacturing employment index for June will be released tomorrow (after the employment report is released).

• Initial weekly unemployment claims averaged close to 314,000 in June, up slightly from May. For the BLS reference week (includes the 12th of the month), initial claims were at 314,000; this was down from 327,000 during the reference week in May.

The lower reference week reading suggests some upside to the consensus forecast.

• The final June Reuters / University of Michigan consumer sentiment index increased slightly to 82.5 from the May reading of 81.9. This is frequently coincident with changes in the labor market, but there are other factors too.

• On small business hiring: The small business index from Intuit showed a 20,000 increase in small business employment in June.  From Intuit:

U.S. small business employment grew for the fourth consecutive month in June, adding 20,000 jobs. While the labor market continues to show signs of revival, small business employment remains 900,000 workers shy of the peak reached in March of 2007.
...
"This month's employment data makes for the fourth consecutive month of small business job growth after a flat job market early in 2014. While employment growth continued this month, changes for compensation and hours worked were mixed but very small. This indicates that while the employment picture has improved, there is little pressure on wages or hours," said Susan Woodward, the economist who works with Intuit to create the indexes.

"The revenue figures for small businesses are better than they have been in some years – they were up in April, and are up even more in May. The rise in revenues for all businesses is about three-fourths of one percent, which is a lot, and if it continued for a year, would give us an increase of 10 percent."

• A few comments from Goldman Sachs economist Kris Dawsey:

We forecast a 210k increase in June payroll employment, just a bit less than the consensus expectation of 215k. On the one hand, ADP, initial claims, the labor differential, and the employment components of service sector surveys argue for a stronger report. On the other hand, consensus tends to be a bit too optimistic on June payrolls, and the "weather bounce-back" in employment after this winter's slowdown could be losing some steam.
...
Labor differential heading north. The Conference Board's labor differential―the net percent of respondents in the consumer confidence survey describing jobs as plentiful vs. hard to get―improved by 0.9pt in June to -17.1.

• Conclusion: Most of the data was fairly positive in June with the exception of small business hiring. The ADP report was higher in June than in May, and well above forecasts, and weekly unemployment claims were lower during the reference period. However the Intuit small business index showed somewhat less hiring in June.

Last year the consensus was for 161,000 payroll jobs added in June, and the BLS reported 195,000 jobs added (since revised up to 201,000).  In  June 2012, the consensus was for 90,000 payroll jobs added, and the BLS reported 80,000 jobs added (revised up to 88,000).

There is always some randomness to the employment report, but the I'll take the over on the consensus forecast of 211,000 nonfarm payrolls jobs added in June.  Note: This might be "wishcasting" (as opposed to forecasting) because 222,000 would put the year-over-year increase at a nice round 2.4 million or 200,000 per month.

by Calculated Risk on 7/02/2014 11:13:00 AM

From Fed Chair Janet Yellen: Monetary Policy and Financial Stability. A few excerpts:

I am also mindful of the potential for low interest rates to heighten the incentives of financial market participants to reach for yield and take on risk, and of the limits of macroprudential measures to address these and other financial stability concerns. Accordingly, there may be times when an adjustment in monetary policy may be appropriate to ameliorate emerging risks to financial stability.
...
[M]onetary policy has powerful effects on risk taking. Indeed, the accommodative policy stance of recent years has supported the recovery, in part, by providing increased incentives for households and businesses to take on the risk of potentially productive investments. But such risk-taking can go too far, thereby contributing to fragility in the financial system. This possibility does not obviate the need for monetary policy to focus primarily on price stability and full employment--the costs to society in terms of deviations from price stability and full employment that would arise would likely be significant.
...
In recent years, accommodative monetary policy has contributed to low interest rates, a flat yield curve, improved financial conditions more broadly, and a stronger labor market. These effects have contributed to balance sheet repair among households, improved financial conditions among businesses, and hence a strengthening in the health of the financial sector. Moreover, the improvements in household and business balance sheets have been accompanied by the increased safety of the financial sector associated with the macroprudential efforts I have outlined. Overall, nonfinancial credit growth remains moderate, while leverage in the financial system, on balance, is much reduced. Reliance on short-term wholesale funding is also significantly lower than immediately before the crisis, although important structural vulnerabilities remain in short-term funding markets.

Taking all of these factors into consideration, I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns. That said, I do see pockets of increased risk-taking across the financial system, and an acceleration or broadening of these concerns could necessitate a more robust macroprudential approach. For example, corporate bond spreads, as well as indicators of expected volatility in some asset markets, have fallen to low levels, suggesting that some investors may underappreciate the potential for losses and volatility going forward. In addition, terms and conditions in the leveraged-loan market, which provides credit to lower-rated companies, have eased significantly, reportedly as a result of a "reach for yield" in the face of persistently low interest rates. The Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued guidance regarding leveraged lending practices in early 2013 and followed up on this guidance late last year. To date, we do not see a systemic threat from leveraged lending, since broad measures of credit outstanding do not suggest that nonfinancial borrowers, in the aggregate, are taking on excessive debt and the improved capital and liquidity positions at lending institutions should ensure resilience against potential losses due to their exposures. But we are mindful of the possibility that credit provision could accelerate, borrower losses could rise unexpectedly sharply, and that leverage and liquidity in the financial system could deteriorate. It is therefore important that we monitor the degree to which the macroprudential steps we have taken have built sufficient resilience, and that we consider the deployment of other tools, including adjustments to the stance of monetary policy, as conditions change in potentially unexpected ways.
emphasis added

by Calculated Risk on 7/02/2014 09:51:00 AM

Reis reported that the apartment vacancy rate was unchanged in Q2 at 4.1%. In Q2 2013 (a year ago) the vacancy rate was at 4.3%, and the rate peaked at 8.0% at the end of 2009.

Some interesting comments from Reis Senior Economist Ryan Severino:

Vacancy was unchanged during the second quarter at 4.1%, a slight worsening versus last quarter. Over the last twelve months the national vacancy rate has declined by 20 basis points, slightly below the pace of the last few quarters. We have been anticipating this slowdown in vacancy compression as demand moderates while supply growth accelerates. The national vacancy rate now stands 390 basis points below the cyclical peak of 8.0% observed right after the recession concluded in late 2009. However, at 4.1%, the national vacancy rate remains low by historical standards. The only time vacancy in the US was lower was during the dot.com boom‐and‐bust days of 1999 and 2000.

Demand remained relatively strong during the second quarter, as the sector absorbed 35,102 units. This is down slightly versus last quarter's 40,853 units absorbed but was the largest figure for a second quarter since 2011. Year to date, net absorption is tracking ahead of last year's pace, indicating that demand remains resilient even after more than four years of an apartment market recovery.

Completions during the second quarter totaled 33,210 units. This is a rebound from the first quarter, when construction activity was likely muted by severe winter weather. The overall trend in construction is clearly upward. Despite first quarter's severe winter weather, new construction is already ahead of last year's pace. The market remains on track to deliver the highest level of new completions since 1999 when the economy was growing at a far faster pace than it is today.
...
Asking and effective rents both grew by 0.8% during the second quarter. This is an increase from growth during the first quarter which now appears to be just a temporary slow down, likely due to seasonal factors. Rent growth, though weak by historical standards given such a low vacancy rate, continues to accelerate.
emphasis added

Click on graph for larger image.

This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999). Note: Reis is just for large cities.


Apartment vacancy data courtesy of Reis.

by Calculated Risk on 7/02/2014 08:27:00 AM

From ADP:

Private sector employment increased by 281,000 jobs from May to June according to the June ADP National Employment Report®. ... The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis.
...
Mark Zandi, chief economist of Moody’s Analytics, said, "The job market is steadily improving. Job gains are broad based across all industries and company sizes. Judging from the job market, the economic recovery remains fully intact and is gaining momentum.”

This was above the consensus forecast for 210,000 private sector jobs added in the ADP report. 

Note: ADP hasn't been very useful in directly predicting the BLS report on a monthly basis, but it might provide a hint. The BLS report for June will be released on Thursday (since Friday is a holiday).

by Calculated Risk on 7/02/2014 07:01:00 AM

From the MBA: Mortgage Applications Decrease Slightly in Latest MBA Weekly Survey

Mortgage applications decreased 0.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending June 27, 2014. ...

The Refinance Index increased 0.1 percent from the previous week. The seasonally adjusted Purchase Index decreased 1 percent from one week earlier. ...
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.28 percent from 4.33 percent, with points decreasing to 0.14 from 0.18 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.


The first graph shows the refinance index.

The refinance index is down 75% from the levels in May 2013.

As expected, refinance activity is very low this year.


The second graph shows the MBA mortgage purchase index.  

According to the MBA, the unadjusted purchase index is down about 16% from a year ago.

by Calculated Risk on 7/01/2014 07:40:00 PM

The BLS released the Metropolitan Area Employment and Unemployment report for May today.

Unemployment rates were lower in May than a year earlier in 357 of the 372 metropolitan areas, higher in 11 areas, and unchanged in 4 areas, the U.S. Bureau of Labor Statistics reported today. Twelve areas had jobless rates of at least 10.0 percent and 93 areas had rates of less than 5.0 percent. ...

Yuma, Ariz., and El Centro, Calif., had the highest unemployment rates in May, 26.5 percent and 21.1 percent, respectively. Bismarck, N.D., had the lowest unemployment rate, 2.2 percent.

It is interesting to look at a few areas I've been tracking. As an example, the unemployment rate in Sacramento has fallen from a high of 12.9% to 6.7% in May. No wonder housing has improved!

And another area I've been tracking is the Inland Empire in California.  Way back in 2006 I disagreed with some analysts on the outlook for the Inland Empire in California. I wrote:

As the housing bubble unwinds, housing related employment will fall; and fall dramatically in areas like the Inland Empire. The more an area is dependent on housing, the larger the negative impact on the local economy will be.

So I think some pundits have it backwards: Instead of a strong local economy keeping housing afloat, I think the bursting housing bubble will significantly impact housing dependent local economies.

And sure enough, the economies of housing dependent areas like the Inland Empire were devastated during the housing bust. The good news is the Inland Empire is now recovering.

Click on graph for larger image.

This graph shows the unemployment rate for the Inland Empire (using MSA: Riverside, San Bernardino, Ontario), and also the number of construction jobs as a percent of total employment.

The unemployment rate is falling, but still high at 8.0% (down from 15.0% in 2010). And construction employment is still low, but starting to increase.

Obviously the outlook for the Inland Empire is much better today.

Wednesday:
• Early, Reis Q2 2014 Apartment Survey of rents and vacancy rates.

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

• At 8:15 AM, the ADP Employment Report for June. This report is for private payrolls only (no government). The consensus is for 210,000 payroll jobs added in June, up from 180,000 in May.

• At 10:00 AM, Manufacturers' Shipments, Inventories and Orders (Factory Orders) for May. The consensus is for a 0.3% decrease in May orders.

• At 11:00 AM, Speech by Fed Chair Janet Yellen, Financial Stability, At the Inaugural Michel Camdessus Central Banking Lecture at the International Monetary Fund, Washington, D.C.

by Calculated Risk on 7/01/2014 02:55:00 PM

Based on an WardsAuto estimate, light vehicle sales were at a 16.9 million SAAR in June. That is up 7% from June 2013, and up 1% from the 16.7 million annual sales rate last month.

This was above the consensus forecast of 16.4 million SAAR (seasonally adjusted annual rate).

Click on graph for larger image.

This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for June (red, light vehicle sales of 16.9 million SAAR from WardsAuto).

Severe weather clearly impacted sales in January and February.  Since then vehicle sales have been very strong.

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

Note: dashed line is current estimated sales rate.

Unlike residential investment, auto sales bounced back fairly quickly following the recession and were a key driver of the recovery.   

by Calculated Risk on 7/01/2014 02:10:00 PM

We are finally seeing the slowdown in the year-over-year (YoY) housing price indexes that many of us have been expecting based on supply and demand.  With inventory increasing steadily - and by one measure now above 2012 levels for the same week - the price slowdown will probably continue (and we may see price index declines in some areas).

Note: on inventory, the NAR data for May indicated inventory was up 6.0% YoY, but still down 7.6% compared to May 2012.  Comparing to 2012 is interesting because prices started to increase in early 2012 (my bottom call in February 2012: The Housing Bottom is Here).

As an example, the CoreLogic index released this morning showed an 8.8% YoY increase in May; a fairly large increase, but the smallest year-over-year increase since late 2012 - and down from a 11.8% YoY increase a few months ago.

This slowdown in the house price indexes (even though expected) is a key story for 2014.  The next question is how much prices will slow.  Zillow is forecasting their index will increase 2.9% over the next 12 months. This will be a key story for the rest of the year and in 2015.

Here is a table of several indexes through April and May.

Year-over-year change for selected House Price Indexes
	Case Shiller1	CoreLogic	FHFA2	Zillow	Black Knight3	FNC
Jan-14	13.2%	11.4%	7.3%	6.3%	8.0%	9.1%
Feb-14	12.9%	11.8%	6.9%	5.6%	7.6%	9.2%
Mar-14	12.3%	11.0%	6.4%	5.7%	7.0%	9.1%
Apr-14	10.8%	10.0%	5.9%	5.3%	6.4%	8.4%
May-14	---	8.8%	---	5.3%	---	---
1Case-Shiller Composite 20 2FHFA Purchase Only Index SA 3Black Knight formerly LPS

by Calculated Risk on 7/01/2014 11:43:00 AM

The Census Bureau reported that overall construction spending increased in May:

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during May 2014 was estimated at a seasonally adjusted annual rate of $956.1 billion, 0.1 percent above the revised April estimate of $955.1 billion. The May figure is 6.6 percent above the May 2013 estimate of $896.6 billion.

Private spending declined and public spending increased in May:

Spending on private construction was at a seasonally adjusted annual rate of $682.8 billion, 0.3 percent below the revised April estimate of $684.6 billion. Residential construction was at a seasonally adjusted annual rate of $354.8 billion in May, 1.5 percent below the revised April estimate of $360.1 billion. Nonresidential construction was at a seasonally adjusted annual rate of $328.0 billion in May, 1.1 percent above the revised April estimate of $324.5 billion. ...

In May, the estimated seasonally adjusted annual rate of public construction spending was $273.3 billion, 1.0 percent above the revised April estimate of $270.5 billion.
emphasis added

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 is 48% below the peak in early 2006, and up 55% from the post-bubble low.

Non-residential spending is 21% below the peak in January 2008, and up about 45% from the recent low.

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 now up 7%. Non-residential spending is up 11% year-over-year. Public spending is up 1% year-over-year.


Looking forward, all categories of construction spending should increase in 2014. Residential spending is still very low, non-residential is starting to pickup, and public spending has probably hit bottom.

by Calculated Risk on 7/01/2014 10:00:00 AM

The ISM manufacturing index suggests slightly slower expansion in June than in May. The PMI was at 55.3% in June, down from 55.4% in May. The employment index was at 52.8%, unchanged from 52.8% in May, and the new orders index was at 58.9%, up from 56.9% in May.

From the Institute for Supply Management: June 2014 Manufacturing ISM® Report On Business®

Economic activity in the manufacturing sector expanded in June for the 13th consecutive month, and the overall economy grew for the 61st 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 June PMI® registered 55.3 percent, a decrease of 0.1 percentage point from May's reading of 55.4 percent, indicating expansion in manufacturing for the 13th consecutive month. The New Orders Index registered 58.9 percent, an increase of 2 percentage points from the 56.9 percent reading in May, indicating growth in new orders for the 13th consecutive month. The Production Index registered 60 percent, 1 percentage point below the May reading of 61 percent. Employment grew for the 12th consecutive month, registering 52.8 percent, the same level of growth as reported in May. Inventories of raw materials remained at 53 percent, the same reading as reported in both May and April. The price of raw materials grew at a slower rate in June, registering 58 percent, down 2 percentage points from May."
emphasis added

Click on graph for larger image.

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

This was just below expectations of 55.6%.