by Calculated Risk on 10/13/2015 02:34:00 PM

Fed Governor Daniel Tarullo was on CNBC today: Fed's Tarullo: Not appropriate to hike rates based on current environment

The U.S. economy likely would not support an interest rate hike this year without signs inflation and wages are increasing, a top Federal Reserve official told CNBC on Tuesday.

"I wouldn't expect it would be appropriate to raise rates," Fed Governor Daniel Tarullo said.

Another quote via Neil Irwin: "Probably wise to not be counting too much on past correlations, things like the Phillips Curve"

This is the second Fed Governor in two days to argue it is appropriate to wait until next year, see Tim Duy's Brainard Drops A Policy Bomb

The Fed governors almost always vote with the Fed Chair, so this either suggests a sharp disagreement, or Fed Chair Janet Yellen is changing her mind.  Either is a significant story.

by Calculated Risk on 10/13/2015 10:29:00 AM

In addition to Case-Shiller, and CoreLogic, I'm also watching the FNC, Zillow and several other house price indexes.

FNC released their August 2015 index data today.  FNC reported that their Residential Price Index™ (RPI) indicates that U.S. residential property values increased 0.2% from July to August (Composite 100 index, not seasonally adjusted). 

The 10 city MSA increased 0.2% (NSA), the 20-MSA RPI increased 0.2%, and the 30-MSA RPI also increased 0.2% in August. These indexes are not seasonally adjusted (NSA), and are for non-distressed home sales (excluding foreclosure auction sales, REO sales, and short sales).

Notes: In addition to the composite indexes, FNC presents price indexes for 30 MSAs. FNC also provides seasonally adjusted data.

The year-over-year (YoY) change was smaller in August than in July, with the 100-MSA composite up 5.5% compared to August 2014.

The index is still down 14.5% from the peak in 2006 (not inflation adjusted).

Click on graph for larger image.

This graph shows the year-over-year change based on the FNC index (four composites) through August 2015. The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals.

Most of the other indexes are also showing the year-over-year change in the 5% range. For example, Case-Shiller was up 4.7% in July, CoreLogic was up 6.9% in August.

Note: The August Case-Shiller index will be released on Tuesday, October 27th.

by Calculated Risk on 10/13/2015 09:00:00 AM

From the National Federation of Independent Business (NFIB): NFIB Small Business Optimism Index increased only 0.2 points last month

The Index of Small Business Optimism was basically unchanged in September, rising only 0.2 points, this after an August gain of only 0.5 points. ...

Overall, a solid improvement in hiring activity. There was no evidence in the NFIB data that job creation slacked off sharply from June and July, each with 245,000 jobs. Reported job creation returned to its best level of the year, with owners adding a net 0.18 workers per firm in recent months, up 0.05 from August.
emphasis added

Click on graph for larger image.

This graph shows the small business optimism index since 1986.

The index increased to 96.1 in September from 95.9 in August.

by Calculated Risk on 10/12/2015 08:38:00 PM

A couple of excellent articles ...

From Binyamin Appelbaum at the NY Times: Nobel in Economics Given to Angus Deaton for Studies of Consumption

The economist Angus Deaton has devoted his career to improving the data that shape public policy, including measures of wealth and poverty, savings and consumption, health and happiness.
...
“To design economic policy that promotes welfare and reduces poverty, we must first understand individual consumption choices,” the Royal Swedish Academy of Sciences said in announcing the economics prize, the last of this year’s Nobels. “More than anyone else, Angus Deaton has enhanced this understanding.”

From economist Justin Wolfers in the NY Times: Why Angus Deaton Deserved the Economics Nobel Prize

The central contribution of Angus Deaton, the latest winner of the Nobel Memorial Prize in economics, has been to shift the gaze of his fellow economists beyond measures of income, to broader measures of well-being.

Much of his research has focused on consumption — measures of the food people eat, the condition of their housing, and the services they consume. And he has been a trailblazer in shifting the attention of economists away from the behavior of economywide aggregates such as gross domestic product, and toward the analysis of individual households.

by Calculated Risk on 10/12/2015 04:33:00 PM

Note: Fiscal 2015 ended on September 30, 2015.

From CBO: Monthly Budget Review for September 2015

The federal government ran a budget deficit of $435 billion fiscal year 2015, the Congressional Budget Office estimates—$48 billion less than the shortfall recorded in fiscal year 2014, and the smallest deficit recorded since 2007. Relative to the size of the economy, that deficit—at an estimated 2.4 percent of gross domestic product (GDP)—was slightly below the average experienced over the past 50 years, and 2015 was the sixth consecutive year in which the deficit declined as a percentage of GDP since peaking at 9.8 percent in 2009. By CBO’s estimate, revenues were about 8 percent higher and outlays were about 5 percent higher in 2015 than they were in the previous fiscal year.
emphasis added

And on September:

The federal government realized a surplus of $95 billion in September 2015, CBO estimates—$11 billion smaller than the surplus in September 2014. Because September 1, 2014, was the Labor Day holiday, certain payments that ordinarily would have been made in September were instead made in August. Without those shifts in the timing of payments, the surplus for September 2015 would have been $8 billion larger than last September’s.

As former Fed Chairman Ben Bernanke noted in February 2013, the deficit as a percent of GDP would actually be smaller now without the "sequester":

The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise.

A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO's estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant.

Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.

The "know-nothings" in Congress didn't listen then, and they are not listening now.

The Treasury will report the actual figures tomorrow.

by Calculated Risk on 10/12/2015 01:38:00 PM

Here is an article today from economist Josh Lehner: Is 2015 Peak Renter?

There have been at least three primary drivers of the massive shift toward renting in the past decade: finances, demographics, and taste and preferences. Much of the discussion surrounding this overall shift has focuses on the finance issues — foreclosures, credit availability, ability to afford, lack of down payment, etc — and with good reason as this is the most visible aspect of the housing bust and impact of the Great Recession. However given the ongoing strength in multifamily housing today, key questions are being asked. Among them: how long can it last and how much, if at all, will ownership rebound in the future? In other words, when will the housing market hit peak renter? To answer, let’s examine those three underlying drivers.
...
All that said, our office remains skeptical that all of the shift into rental is permanent, even from a taste or preference stand point. When the Millennials do settle down, get married, have a couple of kids — at a later age than previous generations — we know single family with good schools looks a lot more attractive. Even so, it does look like most of the increase in rentals is likely to be permanent, particularly in light of the fact that no economist or housing expect I know is predicting a return to the pattern of development and growth seen during much of the past few decades. Even within the renter/owner calculus, as Bill talked about on TV, condos are likely to grow, which are, obviously, both owner and multifamily. Combine this with the possibility that retiring Boomers will actually want to downsize and live in the urban core (I think this is still an open question, not a done deal) and the outlook for multifamily remains strong.

Overall, the biggest takeaway I have from this work, is that in growing, popular areas like Portland, even if the market shifts back toward ownership somewhat, overall demand will increase for both. This is simply due to overall population growth. There will be more of all ages, and preferences a decade from now, look back at those first two graphs.

Thanks for the nice mention! There is much much more in the article.

by Calculated Risk on 10/12/2015 11:28:00 AM

Here is another graph on framing lumber prices. Early in 2013 lumber prices came close to the housing bubble highs.

The price increases in early 2013 were due to a surge in demand (more housing starts) and supply constraints (framing lumber suppliers were working to bring more capacity online).

Prices didn't increase as much early in 2014 (more supply, smaller "surge" in demand).

In 2015, even with the pickup in U.S. housing starts, prices are down year-over-year.  Note: Multifamily starts do not use as much lumber as single family starts, and there was a surge in multi-family starts.

Overall the decline in prices is probably due to more supply, and less demand from China.

Click on graph for larger image in graph gallery.

This graph shows two measures of lumber prices: 1) Framing Lumber from Random Lengths through early October 2015 (via NAHB), and 2) CME framing futures.

Right now Random Lengths prices are down about 22% from a year ago, and CME futures are down around 35% year-over-year.

by Calculated Risk on 10/12/2015 09:27:00 AM

Columbus Day 2008 was a crazy time ... A few headlines on my blog from Monday, October 13, 2008:

• Paulson to Meet with Bank CEOs Today

The 3 p.m. meeting is being called while most of the banking chiefs are in Washington for meetings of the World Bank and the International Monetary Fund. Invited to attend were banking executives including Ken Lewis, CEO of Bank of America, Jamie Dimon, CEO of J.P. Morgan Chase, Lloyd Blankfein, CEO of Goldman Sachs Group; John Mack, CEO of Morgan Stanley; and Vikram Pandit, CEO of Citigroup.

... one person familiar with the matter said Secretary Paulson is expected to discuss details of his new plan to take equity stakes in financial firms ...

• Federal Reserve and other central banks announce unlimited liquidity

In order to provide broad access to liquidity and funding to financial institutions, the Bank of England (BoE), the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank (SNB) are jointly announcing further measures to improve liquidity in short-term U.S. dollar funding markets.

• Foreclosures in Orange County

MDA DataQuick, in a special report prepared for the Orange County Register, found that as of early September there were more than 3,300 unsold foreclosures in the county. DataQuick looked at all foreclosures for the year ended in June, and checked to see how many had resold. It found 40 percent were unsold.

• Paul Krugman Wins Nobel Economics Prize

by Calculated Risk on 10/11/2015 07:29:00 PM

The Bond Market and Banks will be closed Monday in observance of the Columbus Day Holiday. The stock market will be open.

An excerpt from an article by Tim Duy: Fed Struggles With The High Water Mark

So where does all of this leave Fed policy? Confused, I think, like September when economists saw the outcome of that meeting as a coin toss. Don't expect communications to become much clearer. October is off the table (despite what Lacker might believe). They first need to decide if the last two months of jobs data were aberrations or signals of slowing job growth. They can't do that before October. And I am not confident they can do so by December. If we get two more reports hovering around 200k a month between now and December, matched with generally consistent data across other indicators, then December is on the table. That would indicate the economy is not coming off its high water mark without some help from the Fed. If jobs growth slows to 100k a month, again with a broad swath of generally consistent data, then we are looking at deep into 2016 before any hike. Around 150k is the gray area. They won't know if the economy is poised to head lower on its own, or if that is sufficient to contain inflationary pressures. They don't know if they should be tapping on the breaks or not. Risk management under the assumption of constrained inflation suggests they push off action until January or March. But they would not send such a clear message. Indeed, I suspect that more numbers like the last two will make the December meeting much like September's. That I fear is my current baseline - another close call in which the Fed concludes to take a pass.

Weekend:
• Schedule for Week of October 11, 2015

From CNBC: Pre-Market Data and Bloomberg futures: currently S&P futures are flat and DOW futures are down 10 (fair value).

Oil prices were up over the last week with WTI futures at $49.84 per barrel and Brent at $52.65 per barrel.  A year ago, WTI was at $86, and Brent was at $89 - so prices are down more than 40% year-over-year (a year ago that prices were falling).

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.31 per gallon (down about $0.90 per gallon from a year ago).

by Calculated Risk on 10/11/2015 11:36:00 AM

A few excerpts from a research piece by Goldman Sachs economist David Mericle: What We Have Here Is a Failure to Participate

[W] now expect the participation rate to fall by about 0.2-0.25pp per year. The main reasons for the forecast change are that we have flattened the slope of the upward trend in participation rates for older workers and will see a smaller boost from declines in the now-lower stock of discouraged workers in the future. This implies that a given amount of GDP growth will put more downward pressure on the unemployment rate than we previously estimated, and we now expect the rate to fall below 4½% in coming years even as growth slows toward a trend rate. Exhibit 10 shows our new forecast paths.

Click on graph for larger image.

This graph from Goldman Sachs shows their projection for the labor force participation rate on the left. Goldman expects the participation rate to decline from the current 62.4% to around 61.8% in 2018.  Most of the expected decline over the next few years will be from retirement.

Note: Economist at the BLS expect the participation rate to continue to decline for the next couple of decades due to demographics.

The right side of the graph shows Goldman's forecast for the unemployment rate (previous forecast and revision).

Goldman expects the unemployment rate to decline to around 4.6% at the end of 2016, and to see further decline in 2017 and 2018.