by Calculated Risk on 11/16/2017 08:33:00 AM

The DOL reported:

In the week ending November 11, the advance figure for seasonally adjusted initial claims was 249,000, an increase of 10,000 from the previous week's unrevised level of 239,000. The 4-week moving average was 237,750, an increase of 6,500 from the previous week's unrevised average of 231,250.

Claims taking procedures continue to be severely disrupted in the Virgin Islands. The ability to take claims has improved in Puerto Rico and they are now processing backlogged claims
emphasis added

The previous week was unrevised.

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 increased to 237,750.

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

by Calculated Risk on 11/15/2017 08:20:00 PM

Earlier from the NY Fed: Empire State Manufacturing Survey: General Business Conditions Index Fell Eleven Points

Business activity continued to grow strongly in New York State, according to firms responding to the November 2017 Empire State Manufacturing Survey. Though the headline general business conditions index fell eleven points from the multiyear high it reached last month, it remained firmly in positive territory at 19.4. The new orders index climbed to 20.7 and the shipments index came in at 18.4—readings that pointed to ongoing solid gains in orders and shipments. Delivery times were slightly shorter than last month, and inventory levels edged higher. Labor market indicators reflected moderate employment gains and little change in hours worked. Both input prices and selling prices rose at a pace that was little changed from last month. Indexes assessing the six-month outlook suggested that firms were very optimistic about future business conditions.
emphasis added

Thursday:
• At 8:30 AM, The initial weekly unemployment claims report will be released. The consensus is for 235 thousand initial claims, down from 239 thousand the previous week.

• Also at 8:30 AM, the Philly Fed manufacturing survey for November. The consensus is for a reading of 25.0, down from 27.9.

• At 9:15 AM, The Fed will release Industrial Production and Capacity Utilization for October. The consensus is for a 0.5% increase in Industrial Production, and for Capacity Utilization to increase to 76.2%.

• At 10:00 AM, The November NAHB homebuilder survey. The consensus is for a reading of 67, down from 68 in October. Any number above 50 indicates that more builders view sales conditions as good than poor.

by Calculated Risk on 11/15/2017 04:06:00 PM

Update: Here are five questions that people ask me all the time.
1. Are house prices in a bubble?
2. Is a recession imminent (within the next 12 months)?
3. Is the stock market a bubble?
4. Can investors use macro analysis?
5. Will Mr. Trump have a negative impact on the economy?

Two weeks ago I posted five economic questions I'm frequently asked. 

Since then I've discussed:
1) Are house prices in a new bubble?

2) Is a recession imminent (within the next 12 months)?

3) Is the stock market a bubble?

Today I will discuss: Can investors use macro analysis?

Macro is the analysis of the economy as a whole (GDP, Unemployment, inflation, demographics), as opposed to the analysis of individual companies (or individuals). Sometimes we can use macro trends to help with sector analysis.

An example of the later would the apartment sector. It was in 2010 that I started discussing the turnaround for apartments. Then, in January 2011, I attended the NMHC Apartment Strategies Conference in Palm Springs, and the atmosphere was very positive. My analysis was based on three factors: low volume of new supply, a large cohort moving into their 20s (the prime renting age), and people moving from owning to renting (the foreclosure crisis).   2010 and 2011 was a great time to invest in apartments.

Another example of macro sector analysis was in January 2009, when I wrote about the auto sector: Vehicle Sales. It was pretty easy to predict sales were near a bottom, and that auto sales would "increase significantly" going forward.

We can also use macro analysis to follow the business cycle.  However analysts have a poor track record in calling turns in the business cycle. As an example, ECRI called a recession in September 2011, and finally threw in the towel in May 2015.  If investors sold when ECRI first made their recession call in Sept 2011, they would have missed close to a 75% increase in the market!

Note: This is partially from a previous post and is NOT intended as investment advice.

Why are investors so focused on the business cycle? Obviously earnings decline in a recession, and stock prices fall too. The following graph shows the year-over-year (YoY) change in the S&P 500 (using average monthly prices) since 1970. Notice that the market usually declines YoY in a recession.

Note: Because this is “year-over-year” there is a lag to the S&P 500 data.

Click on graph for larger image.

So calling a recession isn’t just an academic exercise, there is some opportunity to preserve capital.

Not all downturns in the stock market are associated with recessions. As an example, the 1987 market crash was during an economic expansion. And the stock bubble collapse lasted from March 2000 through early 2003 – and the only official economic recession during that period was 7 months in 2001.

Although I don’t give investment advice, I think investors should measure their performance with some index. Warren Buffett likes to use the S&P 500 index, so I also used the S&P 500 for this exercise.

Imagine if we could call recessions in real time, and if we could predict recoveries in advance. The following table shows the performance of a buy-and-hold strategy (with dividend reinvestment), compared to a strategy of market timing based on 1) selling when a recession starts, and 2) buying 6 months before a recession ends.

For the buy and sell prices, I averaged the S&P 500 closing price for the entire month (no cherry picking price – just cherry picking the timing with 20/20 hindsight).

I assumed an investor started at five different times, in January of 1970, 1980, 1990, 2000 and 2010.

S&P 500 Annualized Return, including dividends
Annual Return from Start Date			Recession Timing Sensitivity
Start Investing	Buy and Hold	Recession Timing	Two Months Early	One Month Early	One Month Late	Two Months Late
Jan-70	9.3%	13.3%	12.4%	13.0%	13.2%	12.7%
Jan-80	10.3%	13.8%	13.7%	13.7%	14.0%	13.3%
Jan-90	8.6%	12.9%	12.6%	12.8%	12.9%	12.4%
Jan-00	3.3%	9.2%	9.7%	9.5%	9.3%	9.4%
Jan-10	14.2%	14.2%	---	---	---	---

The “recession timing” column gives the annualized return for each of the starting dates. Timing the recession correctly always outperforms buy-and-hold. The last four columns show the performance if the investor is two months early (both in and out), one month early, one month late, and two months late. The investor doesn’t have to be perfect!

Note: This includes dividends, but not taxes. Also I assumed no interest earned when the investor is out of the market (money in the mattress).

The second table provides the same information, but this time in dollars (assuming a $10,000 initial investment)..

S&P 500: Value of $10,000 Investment, including dividends
Value based on Start Date			Recession Timing Sensitivity
Start Investing	Buy and Hold	Recession Timing	Two Months Early	One Month Early	One Month Late	Two Months Late
Jan-70	$528,040	$2,711,990	$1,920,410	$2,443,700	$2,632,340	$2,152,660
Jan-80	$307,240	$907,270	$869,690	$870,620	$955,130	$779,090
Jan-90	$77,240	$204,690	$190,090	$200,650	$201,980	$180,780
Jan-00	$16,260	$36,960	$39,370	$38,270	$37,490	$38,080
Jan-10	$18,970	$18,970	---	---	---	---

Unfortunately forecasters have a terrible record of predicting downturns. The running joke is that forecasters have predicted 9 of the last 5 recessions! Although a forecaster doesn’t have to be perfect, they still have to be right. And that is very rare.

As economist Victor Zarnowitz said way back in 1960: “The record of predicting turning points — changes in the direction of economic activity — is on the whole poor." Forecasting hasn't improved much since then.

As an example, here are some comments from then Fed Chairman Alan Greenspan in 1990 (a recession began in July 1990):

“In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].”
Chairman Greenspan, July 1990

“...those who argue that we are already in a recession I think are reasonably certain to be wrong.”
Greenspan, August 1990

“... the economy has not yet slipped into recession.”
Greenspan, October 1990

I'd say he missed that downturn. Of course Wall Street and Fed Chairmen are notoriously bad at calling downturns.

But the track record for calling recoveries isn’t much better. ...  I was very lucky with the recent recession, but the key wasn’t calling the end in June 2009 (I thought it ended in July), but looking for the bottom in early 2009 (that is why I posted several times in early 2009 that I was looking for the sun).

This is NOT intended as investment advice. I am NOT an investment advisor. Just some (hopefully) fun musing ...

by Calculated Risk on 11/15/2017 01:53:00 PM

According to the BLS employment report, retailers hired seasonal workers in October at a lower pace than the last few years.

Typically retail companies start hiring for the holiday season in October, and really increase hiring in November. Here is a graph that shows the historical net retail jobs added for October, November and December by year.

This graph really shows the collapse in retail hiring in 2008. Since then seasonal hiring has increased back close to more normal levels. Note: I expect the long term trend will be down with more and more internet holiday shopping.

Click on graph for larger image.

Retailers hired 137 thousand workers (NSA) net in October.   Note: this is NSA (Not Seasonally Adjusted).

This suggests retailers are a little cautious about the holiday season - or are having difficulty finding seasonal workers.  Note: There is a decent correlation between October seasonal retail hiring and holiday retail sales.

by Calculated Risk on 11/15/2017 11:29:00 AM

The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.3% (3.3% annualized rate) in October. The 16% trimmed-mean Consumer Price Index rose 0.2% (2.3% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.1% (1.3% annualized rate) in October. The CPI less food and energy rose 0.2% (2.7% annualized rate) on a seasonally adjusted basis.

Note: The Cleveland Fed released the median CPI details for October here. Motor fuel decreased 20% in October, annualized, following a sharp increase in September due to Hurricane Harvey.

Click on graph for larger image.

This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.3%, the trimmed-mean CPI rose 1.8%, and the CPI less food and energy rose 1.8%. Core PCE is for September and increased 1.3% year-over-year.

On a monthly basis, median CPI was at 3.3% annualized, trimmed-mean CPI was at 2.3% annualized, and core CPI was at 2.7% annualized.

Using these measures, inflation picked up year-over-year in October.  However, overall, these measures are mostly below the Fed's 2% target  (Median CPI is slightly above).

by Calculated Risk on 11/15/2017 10:27:00 AM

Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.

From the AIA: Architecture Billings Bounce Back

After a stand-alone month of contracting demand for design services, there was a modest uptick in the Architecture Billings Index (ABI) for October. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the October ABI score was 51.7, up from a score of 49.1 in the previous month. This score reflects an increase in design services provided by U.S. architecture firms (any score above 50 indicates an increase in billings). The new projects inquiry index was 60.2, up from a reading of 59.0 the previous month, while the new design contracts index eased slightly from 52.9 to 52.8.

“As we enter the fourth quarter, there is enough design activity occurring that construction conditions should remain healthy moving through 2018,” said AIA Chief Economist, Kermit Baker, Hon. AIA, PhD. “Extended strength in inquiries and new design contracts, along with balanced growth across the major building sectors signals further gains throughout the construction industry.”
...
• Regional averages: Northeast (54.0), South (50.8), West (49.8), Midwest (49.0)

• Sector index breakdown: commercial / industrial (51.2), mixed practice (50.7), multi-family residential (50.7), institutional (50.7)
emphasis added

Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 52.7 in October, up from 49.1 in September. Anything above 50 indicates expansion in demand for architects' services.

Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction.  This index was positive in 10 of the last 12 months, suggesting a further increase in CRE investment into 2018.

by Calculated Risk on 11/15/2017 08:41:00 AM

On a monthly basis, retail sales increased 0.2 percent from September to October (seasonally adjusted), and sales were up 4.6 percent from October 2016.

From the Census Bureau report:

Advance estimates of U.S. retail and food services sales for October 2017, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $486.6 billion, an increase of 0.2 percent from the previous month, and 4.6 percent above October 2016. ... The August 2017 to September 2017 percent change was revised from up 1.6 percent to up 1.9 percent.

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 0.4% in October.

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 4.1% on a YoY basis.

The increase in October was slightly above expectations, and sales in August and September were revised up.

by Calculated Risk on 11/15/2017 07:00:00 AM

From the MBA: Mortgage Applications Increase in Latest MBA Weekly Surve

Mortgage applications increased 3.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending November 10, 2017. This week’s results do not include an adjustment for the Veterans’ Day holiday.

... The Refinance Index increased 6 percent from the previous week to its highest level since October 2017. The seasonally adjusted Purchase Index increased 0.4 percent from one week earlier. The unadjusted Purchase Index decreased 3 percent compared with the previous week and was 17 percent higher than the same week one year ago. ...

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($424,100 or less) remained unchanged at 4.18 percent, with points increasing to 0.40 from 0.38 (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 since 1990.

Refinance activity will not pick up significantly unless mortgage rates fall well below 4%.


The second graph shows the MBA mortgage purchase index.

According to the MBA, purchase activity is up 17% year-over-year.

by Calculated Risk on 11/14/2017 07:18:00 PM

From the NY Fed: Total Household Debt Increases, Delinquency Rates of Several Debt Types Continue Rising

The Federal Reserve Bank of New York’s Center for Microeconomic Data today issued its Quarterly Report on Household Debt and Credit, which reported that total household debt increased by $116 billion (0.9%) to $12.96 trillion in the third quarter of 2017. There were increases in mortgage, student, auto and credit card debt (increasing by 0.6%, 1.0%, 1.9% and 3.1% respectively) and a modest decline in home equity lines of credit (HELOC) balances (decreasing by 0.9%).
...
Credit card and auto loan flows into delinquency increased. Specifically, credit card flows into delinquency have increased over the past year, while auto loan flows into delinquency have been steadily increasing for several years.
emphasis added

Click on graph for larger image.

Here are two graphs from the report:

The first graph shows aggregate consumer debt increased in Q3.  Household debt previously peaked in 2008, and bottomed in Q2 2013.

From the NY Fed:

Mortgage balances, the largest component of household debt, increased again during the third quarter. Mortgage balances shown on consumer credit reports on September 30 stood at $8.74 trillion, an increase of $52 billion from the second quarter of 2017. Balances on home equity lines of credit (HELOC) have been slowly declining; they dropped by $4 billion and now stand at $448 billion. Non-housing balances, which have been increasing steadily for nearly 6 years overall, saw a $68 billion increase in the third quarter. Auto loans grew by $23 billion and credit card balances increased by $24 billion, while student loans saw a $13 billion increase.

The second graph shows the percent of debt in delinquency. There is still a larger than normal percent of debt 90+ days delinquent (Yellow, orange and red).

The overall delinquency rate increased in Q3.  From the NY Fed:

Aggregate delinquency rates ticked up slightly in the third quarter of 2017. As of September 30, 4.9% of outstanding debt was in some stage of delinquency. Of the $630 billion of debt that is delinquent, $408 billion is seriously delinquent (at least 90 days late or “severely derogatory”). Flows into delinquency deteriorated for some types of debt. The flow into 90+ delinquent for credit card balances has been increasing notably for one year, and that measure for auto loans has increased, and the flow into 90+ delinquency for auto loan balances has been slowly increasing since 2012.

There is much more in the report.

by Calculated Risk on 11/14/2017 06:18:00 PM

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

• At 8:30 AM, Retail sales for October be released.  The consensus is for a 0.1% increase in retail sales.

• Also at 8:30 AM, The Consumer Price Index for October from the BLS. The consensus is for a 0.1% increase in CPI, and a 0.2% increase in core CPI.

• Also at 8:30 AM, The New York Fed Empire State manufacturing survey for November. The consensus is for a reading of 26.0, down from 30.2.

• At 10:00 AM, Manufacturing and Trade: Inventories and Sales (business inventories) report for September.  The consensus is for a 0.1% increase in inventories.

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