by Calculated Risk on 1/29/2016 01:01:00 PM

The graph below shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter trailing average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

In the graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue.

The dashed gray line is the contribution from the change in private inventories.

Note: This can't be used blindly.  Residential investment is so low as a percent of the economy that the small decline early last year was not  a concern.

Click on graph for larger image.

Residential investment (RI) increased at a 8.1% annual rate in Q4.  Equipment investment decreased at a 2.5% annual rate, and investment in non-residential structures decreased at a 5.3% annual rate.   On a 3 quarter trailing average basis, RI (red) and equipment (green) are both positive, and nonresidential structures (blue) is slightly negative.

Note: Nonresidential investment in structures typically lags the recovery, however investment in energy and power provided a boost early in this recovery - and is now causing a slight decline.  Other areas of nonresidential are now increasing significantly.  I'll post more on the components of non-residential investment once the supplemental data is released.

I expect investment to be solid going forward (except for energy and power), and for the economy to continue to grow at a steady pace.


The second graph shows residential investment as a percent of GDP.

Residential Investment as a percent of GDP has been increasing, but is only just above the bottom of the previous recessions - and I expect RI to continue to increase for the next few years.

I'll break down Residential Investment into components after the GDP details are released.

Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

The third graph shows non-residential investment in structures, equipment and "intellectual property products".  Investment in equipment - as a percent of GDP - has been moving sideways.  Other investment is generally trending up as a percent of GDP, except for nonresidential structures due to less investment in energy and power.

by Calculated Risk on 1/29/2016 10:04:00 AM

Chicago PMI: Jan Chicago Business Barometer Jumps 12.7 Points to 55.6

The Chicago Business Barometer bounced back sharply in January, increasing 12.7 points to 55.6 from 42.9 in December, the highest pace of growth in a year.
...
Chief Economist of MNI Indicators Philip Uglow said, “While the surge in activity in January marks a positive start to the year, it follows significant weakness in the previous two months, with the latest rise not sufficient to offset the previous falls in output and orders. Previously, surges of such magnitude have not been maintained so we would expect to see some easing in February. Still, even if activity does moderate somewhat next month, the latest increase supports the view that GDP will bounce back in Q1 following the expected slowdown in Q4.”
emphasis added

This was well above the consensus forecast of 45.5.


Click on graph for larger image.

The final University of Michigan consumer sentiment index for January was at 92.0, down from 92.6 in December:

"Consumer confidence has remained largely unchanged, as the January reading was just 0.6% below last month's level. The small downward revisions were due to stock market declines that were reflected in the erosion of household wealth, as well as weakened prospects for the national economy. The interviews conducted from last Friday until early this week provide no evidence that the East Coast blizzard influenced the data."
emphasis added

by Calculated Risk on 1/29/2016 08:37:00 AM

From the BEA: Gross Domestic Product: Fourth Quarter and Annual 2015 (Advance Estimate)

Real gross domestic product -- the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes -- increased at an annual rate of 0.7 percent in the fourth quarter of 2015, according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.0 percent.
...
The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), residential fixed investment, and federal government spending that were partly offset by negative contributions from private inventory investment, exports, and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the fourth quarter primarily reflected a deceleration in PCE and downturns in nonresidential fixed investment, in exports, and in state and local government spending that were partly offset by a smaller decrease in private inventory investment, a deceleration in imports, and an acceleration in federal government spending.
emphasis added

The advance Q4 GDP report, with 0.7% annualized growth, was below expectations of a 0.9% increase.

Personal consumption expenditures (PCE) increased at a 2.2% annualized ratein Q4, down from 3.0% in Q3.   Residential investment (RI) increased at a 8.1% pace. However equipment investment decreased at a 2.5% annualized rate, and investment in non-residential structures decreased at a 5.3% pace (due to the decline in oil prices).

The key negatives were investment in inventories (subtracted 0.45 percentage point), trade (subtracted 0.47 percentage point) and investment in nonresidential structures (subtracted 0.15 percentage points).

I'll have more later ...

by Calculated Risk on 1/28/2016 06:58:00 PM

From the Atlanta Fed GDPNow:

The final GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 is 1.0 percent on January 28, up from 0.7 percent on January 20. The forecast for fourth-quarter real residential investment growth, currently 3.4 percent, increased more than 4 percentage points after last Friday's existing home sales report from the National Association of Realtors. The advance estimate for fourth-quarter GDP growth will be released Friday, January 29 by the U.S. Bureau of Economic Analysis

The headline GDP number will not be great.

Friday:
• At 8:30 AM ET, Gross Domestic Product, 4th quarter 2015 (Advance estimate). The consensus is that real GDP increased 0.9% annualized in Q4.

• At 9:45 AM, Chicago Purchasing Managers Index for January. The consensus is for a reading of 45.5, up from 42.9 in December.

• At 10:00 AM, the University of Michigan's Consumer sentiment index (final for January). The consensus is for a reading of 93.0, down from the preliminary reading 93.3.

by Calculated Risk on 1/28/2016 03:56:00 PM

Freddie Mac reported that the Single-Family serious delinquency rate declined in December to 1.32%, down from 1.36% in November. Freddie's rate is down from 1.88% in December 2014, and the rate in December was the lowest level since September 2008.

Freddie's serious delinquency rate peaked in February 2010 at 4.20%.

These are mortgage loans that are "three monthly payments or more past due or in foreclosure". 

Note: Fannie Mae is expected to report early next week.

Click on graph for larger image

Although the rate is declining, the "normal" serious delinquency rate is under 1%. 

The serious delinquency rate has fallen 0.56 percentage points over the last year, and at that rate of improvement, the serious delinquency rate will not be below 1% until the second half of 2016.

So even though delinquencies and distressed sales are declining, I expect an above normal level of Fannie and Freddie distressed sales through 2016 (mostly in judicial foreclosure states).

by Calculated Risk on 1/28/2016 01:40:00 PM

The Census Bureau released the Residential Vacancies and Homeownership report for Q4 2015.

This report is frequently mentioned by analysts and the media to track household formation, the homeownership rate, and the homeowner and rental vacancy rates.  However, there are serious questions about the accuracy of this survey.

This survey might show the trend, but I wouldn't rely on the absolute numbers.  The Census Bureau is investigating the differences between the HVS, ACS and decennial Census, and analysts probably shouldn't use the HVS to estimate the excess vacant supply or household formation, or rely on the homeownership rate, except as a guide to the trend.

Click on graph for larger image.

The Red dots are the decennial Census homeownership rates for April 1st 1990, 2000 and 2010. The HVS homeownership rate increased to 63.8% in Q4, from 63.7% in Q3.

I'd put more weight on the decennial Census numbers - and given changing demographics, the homeownership rate is probably close to a bottom.

The HVS homeowner vacancy was unchanged at 1.9% in Q4. 

This has been mostly moving sideways for the last 2+ years.

Once again - this probably shows the general trend, but I wouldn't rely on the absolute numbers.

The rental vacancy rate decreased in Q4 to 7.0% from 7.3% in Q3.

I think the Reis quarterly survey (large apartment owners only in selected cities) is a much better measure of the rental vacancy rate, but this does suggest the rental vacancy rate might have bottomed.

The quarterly HVS is the most timely survey on households, but there are many questions about the accuracy of this survey.

by Calculated Risk on 1/28/2016 11:00:00 AM

From the Kansas City Fed: Tenth District Manufacturing Activity Fell Again

The Federal Reserve Bank of Kansas City released the January Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity fell again in January.

“We saw another moderate drop in regional factory activity in January, marking the eleventh straight month of slight to moderate declines,” said Wilkerson. “However, firms remained optimistic that conditions would improve slightly in coming months.”
...
The month-over-month composite index was -9 in January, unchanged from -9 in December but down from -1 in November.
...
The employment index was largely unchanged at -15. ...

Most future factory indexes were somewhat lower, but on net positive overall. The future composite index was basically unchanged at 5, while the shipments, employment, and new orders for exports indexes increased somewhat.
emphasis added

This was the last of the regional Fed surveys for January. Four our of five of the regional surveys indicated contraction in January, especially in the Dallas region (oil prices).

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Click on graph for larger image.

The New York and Philly Fed surveys are averaged together (yellow, through January), and five Fed surveys are averaged (blue, through January) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through December (right axis).

It seems likely the ISM index will be weak in January, and will probably show contraction again.  The early consensus is the ISM index will decline to 47.9% from 48.2% in December (below 50 is contraction).

by Calculated Risk on 1/28/2016 10:02:00 AM

From the NAR: Pending Home Sales Tick Up in December

The Pending Home Sales Index, a forward-looking indicator based on contract signings, crawled 0.1 percent to 106.8 in December from a downwardly revised 106.7 in November and is now 4.2 percent above December 2014 (102.5). The index has increased year-over-year for 16 consecutive months.
...
The PHSI in the Northeast increased 6.1 percent to 97.8 in December, and is now 15.3 percent above a year ago. In the Midwest the index decreased 1.1 percent to 103.6 in December, but is still 3.6 percent above December 2014.

Pending home sales in the South declined 0.5 percent to an index of 119.3 in December but are 1.0 percent higher than last December. The index in the West decreased 2.1 percent in December to 97.5, but remains 3.4 percent above a year ago.
emphasis added

This was below expectations of a 0.8% 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 January and February.

by Calculated Risk on 1/28/2016 08:38:00 AM

The DOL reported:

In the week ending January 23, the advance figure for seasonally adjusted initial claims was 278,000, a decrease of 16,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 293,000 to 294,000. The 4-week moving average was 283,000, a decrease of 2,250 from the previous week's revised average. The previous week's average was revised up by 250 from 285,000 to 285,250.

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

The previous week was revised up to 293,000.

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 decreased to 283,000.

This was close to the consensus forecast of 275,000. Although initial claims have increased recently, this is still a very low level and the 4-week average suggests few layoffs.

by Calculated Risk on 1/27/2016 06:21:00 PM

From former Minneapolis Fed President Narayana Kocherlakota: Monetary Policy is Not About Interest Rates

Both the inflation situation and (perhaps more arguably) the employment situation seem to call for more monetary stimulus, not less. But the FOMC is set on gradual normalization of interest rates. This framework seems grounded in a troubling aversion to both low interest rates and interest rate volatility.

If Kocherlakota was on the FOMC, he would have dissented.

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released.  The consensus is for 285 thousand initial claims, down from 293 thousand the previous week.

• Also at 8:30 AM, Durable Goods Orders for December from the Census Bureau. The consensus is for a 0.2% increase in durable goods orders.

• At 10:00 AM, Pending Home Sales Index for December. The consensus is for a 0.8% increase in the index.

• Also at 10:00 AM, the Q4 Housing Vacancies and Homeownership from the Census Bureau.

• At 11:00 AM, the Kansas City Fed manufacturing survey for January.