by Calculated Risk on 4/26/2019 01:07:00 PM

At the end of last year, I posted Ten Economic Questions for 2019. I followed up with a brief post on each question. The goal was to provide an overview of what I expected in 2019 (I don't have a crystal ball, but I think it helps to outline what I think will happen - and understand - and change my mind, when the outlook is wrong).

By request, here is a quick Q1 review (it is very early in the year). I've linked to my posts from the beginning of the year, with a brief excerpt and a few comments:

10) Question #10 for 2019: Will housing inventory increase or decrease in 2019?

"I expect to see inventory up again year-over-year in December 2019.   My reasons for expecting more inventory are 1) inventory is still historically low (inventory in November 2018 was  the second lowest since 2000), 2) higher mortgage rates, and 3) further negative impact in certain areas from new tax law."

According to the March NAR report on existing home sales, inventory was up 2.4% year-over-year in March, and the months-of-supply was at 3.9 months. It is very early, and the inventory build has slowed recently as mortgage rates declined, but I still expect some increase in inventory this year.

9) Question #9 for 2019: What will happen with house prices in 2019?

"If inventory increases further year-over-year as I expect by December 2019, it seems likely that price appreciation will slow to the low single digits - maybe around 3%."

If is very early, but the CoreLogic data for February showed prices up 4.0% year-over-year. The January Case-Shiller data showed prices up 4.3% YoY - and slowing.  Currently it appears price gains will slow in 2019.

8) Question #8 for 2019: How much will Residential Investment increase?

"Most analysts are looking for starts and new home sales to increase to slightly in 2019. For example, the NAHB is forecasting a slight increase in starts (to 1.269 million), and no change in home sales in 2019. And Fannie Mae is forecasting a slight increase in starts (to 1.265 million), and for new home sales to increase to 619 thousand in 2019.

My sense is the weakness in late 2018 will continue into 2019, and starts will be down year-over-year, but not a huge decline.  My guess is starts will decrease slightly in 2019 and new home sales will be close to 600 thousand."

Through March, starts were down 9.7% year-over-year compared to the same period in 2018.  New home sales were also up 1.7% year-over-year.   It is early, but it appears starts will be down slightly this year, and new home sales will be up.

7) Question #7 for 2019: How much will wages increase in 2019?

"As the labor market continues to tighten, we should see more wage pressure as companies have to compete for employees. I expect to see some further increases in both the Average hourly earning from the CES, and in the Atlanta Fed Wage Tracker. Perhaps nominal wages will increase close to 3.5% in 2019 according to the CES."

Through March 2019, nominal hourly wages were up 3.2% year-over-year. It is early, but it appears wages will increase faster in 2019 than in 2018.

6) Question #6 for 2019: Will the Fed raise rates in 2019, and if so, by how much?

"My current guess is just one hike in the 2nd half of the year."

It now appears the Fed will be "patient" and not increase rates this year.

5) Question #5 for 2019: Will the core inflation rate rise in 2019? Will too much inflation be a concern in 2019?

The Fed is projecting core PCE inflation will increase to 2.0% to 2.1% by Q4 2019.  There are risks for higher inflation with the labor market near full employment, however I do think there are structural reasons for low inflation (demographics, few employment agreements that lead to wage-price-spiral, etc).

So, although I think core PCE inflation (year-over-year) will increase in 2019 and be around 2% by Q4 2019 (up from 1.9%), I think too much inflation will still not be a serious concern in 2019.

It is early, but inflation is currently close to the Fed's target. There is growing concern that inflation will soften in 2019, and that will be something to watch.

4) Question #4 for 2019: What will the unemployment rate be in December 2019?

Depending on the estimate for the participation rate and job growth (next question), it appears the unemployment rate will decline into the mid 3's by December 2019 from the current 3.7%. My guess is based on the participation rate being mostly unchanged in 2019, and for decent job growth in 2019, but less than in 2018 or 2017.

The unemployment rate was at 3.8% in March, and it appears the unemployment rate will decline further in 2019.

3) Question #3 for 2019: Will job creation in 2019 be as strong as in 2018?

So my forecast is for gains of around 133,000 to 167,000 payroll jobs per month in 2019 (about 1.6 million to 2.0 million year-over-year) .  This would be the fewest job gains since 2010, but another solid year for employment gains given current demographics.

Through March 2019, the economy has added 541,000 thousand jobs, or 180,000 per month. This is slightly above my forecast, and - so far - it appears job growth will slow this year compared to 2018.

2) Question #2 for 2019: How much will the economy grow in 2019?

"Looking to 2019, fiscal policy will still be a positive for growth - although the boost will fade over the course of the year, and become a drag in 2020.   And oil prices declined sharply in late 2018, and this will be a drag on economic growth in 2019.   Auto sales are mostly moving sideways, and housing has been under pressure due to higher mortgage rates and the new tax plan.

These factors suggest growth will slow in 2019, probably to the low 2s -and maybe even a 1 handle."

GDP growth was solid in Q1 at 3.2%, although the underlying details were weaker than the headline number.  Last year I was forecasting a pickup in growth - and that happened - and this year I expect growth to slow over the course of the year.

1) Question #1 for 2019: Will Mr. Trump negatively impact the economy in 2019?

My forecasts are based on a limited negative impact from Mr. Trump - and I hope that remains the case.   But he is a key downside risk for the economy.

So far so good, but Mr. Trump's words and actions remain key risks for the economy.

The Fed will probably not raise rates this year, and it appears new home sales might be higher than I originally expected, but overall - and it is very early - it looks like 2019 is unfolding mostly as expected.

by Calculated Risk on 4/26/2019 08:54:00 AM

Investment was weak in Q1 (although private inventories increased).   Also personal consumption expenditures (PCE) was weak (only increased at a 1.2% annual rate).

The first 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.

Click on graph for larger image.

Residential investment (RI) decreased in Q1 (-2.8% annual rate in Q1).  Equipment investment increased slightly at a 0.2% annual rate, and investment in non-residential structures decreased at a 0.8% annual rate.

On a 3 quarter trailing average basis, RI (red) is down slightly, equipment (green) is slightly positive, and nonresidential structures (blue) is down slightly.

Recently RI has been soft, but the decrease is fairly small.

I'll post more on the components of non-residential investment once the supplemental data is released.

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

Residential Investment as a percent of GDP decreased in Q1, however RI has generally been increasing.  RI as a percent of GDP is only just above the bottom of the previous recessions - and I expect RI to continue to increase further in this cycle.

The increase is now primarily coming from single family investment and home remodeling.

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 and  non-residential structures - as a percent of GDP - declined slightly.

by Calculated Risk on 4/26/2019 08:34:00 AM

From the BEA: Gross Domestic Product, First Quarter 2019 (Advance Estimate)

Real gross domestic product (GDP) increased at an annual rate of 3.2 percent in the first quarter of 2019, according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2018, real GDP increased 2.2 percent....

The increase in real GDP in the first quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, state and local government spending, and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased. These contributions were partly offset by a decrease in residential investment.

The acceleration in real GDP growth in the first quarter reflected an upturn in state and local government spending, accelerations in private inventory investment and in exports, and a smaller decrease in residential investment. These movements were partly offset by decelerations in PCE and nonresidential fixed investment, and a downturn in federal government spending. Imports, which are a subtraction in the calculation of GDP, turned down.
emphasis added

The advance Q1 GDP report, with 2.6% annualized growth, was above expectations.

Personal consumption expenditures (PCE) increased at 1.2% annualized rate in Q1, down from 3.2% in Q4.   Residential investment (RI) decreased 2.8% in Q1. Equipment investment increased at a 0.2% annualized rate, and investment in non-residential structures decreased at a 0.8% pace.

I'll have more later ...

by Calculated Risk on 4/25/2019 08:25:00 PM

From Goldman Sachs today on Q1 GDP:

We boosted our Q1 GDP forecast by two tenths to +2.6% (qoq ar) ahead of tomorrow’s advance release, reflecting the firm pace of durable inventory growth and the surprising rebound in commercial aircraft shipments in March.
emphasis added

Friday:
• At 8:30 AM ET, Gross Domestic Product, 1st quarter 2019 (Advance estimate). The consensus is that real GDP increased 2.0% annualized in Q1, down from 2.2% in Q4.

• At 10:00 AM, University of Michigan's Consumer sentiment index (Final for April). The consensus is for a reading of 97.1.

by Calculated Risk on 4/25/2019 04:20:00 PM

A few brief excerpts from a Merrill Lynch research note:

We look for nonfarm payroll employment growth of 250k in the April Bureau of Labor Statistics (BLS) employment report, to be released on May 3rd. …

we think the strong job growth should put further downward pressure on the unemployment rate and look for it to decline to 3.7% from 3.8%. …

we look for wage growth to return back to the recent trend and forecast that average hourly earnings growth of 0.3% mom

by Calculated Risk on 4/25/2019 11:00:00 AM

From the Kansas City Fed: Tenth District Manufacturing Activity Grew More Modestly

The Federal Reserve Bank of Kansas City released the April 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 grew more modestly, but expectations for future activity remained generally solid.

“Regional factory growth in April was a bit weaker than in March, but similar to previous months,” said Wilkerson. “About a third of firms noted that flooding and extreme weather had negatively affected their activity in recent months.”
...
The month-over-month composite index was 5 in April, down slightly from 10 in March but higher than 1 in February. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. Growth eased slightly in factory production of both durable and nondurable goods, particularly food, machinery, electronic, and chemical products. Most month-over-month indexes slowed in April but remained positive, with production, shipments, order backlog, and employment all decreasing. In contrast, the new orders index edged higher from 4 to 10. Most year-over-year factory indexes fell in April, and the composite index eased from 27 to 22. The future composite index also moved lower from 22 to 11, as most future factory activity indexes eased somewhat.
emphasis added

Most of the regional surveys have shown slower growth in April than in March.

by Calculated Risk on 4/25/2019 10:10:00 AM

The Census Bureau released the Residential Vacancies and Homeownership report for Q1 2019.

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.

"National vacancy rates in the first quarter 2019 were 7.0 percent for rental housing and 1.4 percent for homeowner housing. The rental vacancy rate of 7.0 percent was virtually unchanged from the rate in the first quarter 2018, but 0.4 percentage points higher than the rate in the fourth quarter 2018 (6.6 percent). The homeowner vacancy rate of 1.4 percent was 0.1 percentage point lower than the rate in the first quarter 2018 (1.5 percent), but not statistically different from the rate in the fourth quarter 2018.

The homeownership rate of 64.2 percent was virtually unchanged from the rate in the first quarter 2018, but 0.6 percentage points lower than the rate in the fourth quarter 2018 (64.8 percent)."

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 decreased to 64.2% in Q1, from 64.8% in Q4.

I'd put more weight on the decennial Census numbers - given changing demographics, the homeownership rate has bottomed.

The HVS homeowner vacancy decreased to 1.4% in Q1.

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

The rental vacancy rate increased to 7.0% in Q1.

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

Overall this suggests that vacancies have declined significantly, and my guess is the homeownership rate has bottomed - and that the rental vacancy rate is close to the bottom for this cycle.

by Calculated Risk on 4/25/2019 08:34:00 AM

The DOL reported:

In the week ending April 20, the advance figure for seasonally adjusted initial claims was 230,000, an increase of 37,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 192,000 to 193,000. The 4-week moving average was 206,000, an increase of 4,500 from the previous week's revised average. The previous week's average was revised up by 250 from 201,250 to 201,500.
emphasis added

The previous week was revised up.

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 206,000.

This was well above the consensus forecast.

by Calculated Risk on 4/24/2019 07:26:00 PM

Thursday:
• At 8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for 200 thousand initial claims, up from 192 thousand the previous week.

• At 8:30 AM: Durable Goods Orders for March from the Census Bureau. The consensus is for a 0.8% increase in durable goods orders.

• At 10:00 AM: the Q1 2019 Housing Vacancies and Homeownership from the Census Bureau.

by Calculated Risk on 4/24/2019 03:28:00 PM

Note: This appears to be a leading indicator for industrial production.

From the American Chemistry Council: Chemical Activity Barometer Shows Second Monthly Gain in April

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), rose 0.5 percent in April on a three-month moving average (3MMA) basis, the second monthly gain after several weak months.
...
“The latest CAB signals gains in U.S. commercial and industrial activity through mid-2019, but at a slow pace,” said Kevin Swift, chief economist at ACC. “As a result, the recovery and expansion underway is likely to surpass the record of 120 months set during the 1990s. The CAB reading suggests that there are glimmers of hope for improving activity in the closing months of the year.”
...
Applying the CAB back to 1912, it has been shown to provide a lead of two to fourteen months, with an average lead of eight months at cycle peaks as determined by the National Bureau of Economic Research. The median lead was also eight months. At business cycle troughs, the CAB leads by one to seven months, with an average lead of four months. The median lead was three months. The CAB is rebased to the average lead (in months) of an average 100 in the base year (the year 2012 was used) of a reference time series. The latter is the Federal Reserve’s Industrial Production Index.
emphasis added

Click on graph for larger image.

This graph shows the year-over-year change in the 3-month moving average for the Chemical Activity Barometer compared to Industrial Production.  It does appear that CAB (red) generally leads Industrial Production (blue).

The year-over-year increase in the CAB suggests further gains in industrial production into 2019, but at a slow pace.