by Calculated Risk on 5/24/2019 08:52:00 AM

A few brief excerpt from a Merrill Lynch research note on the auto sector: Autos: lot full

In our view, the peak in auto sales is clear and we will likely see some softening going forward, but we do not expect a sharp drop. The labor market is still solid with a healthy pace of job growth and the emergence of wage inflation. Consumers are feeling increasingly confident about job prospects, which could encourage the purchase of a big-ticket item such as a vehicle. Absent a recession, auto sales will avoid the painful drop.

The slowdown in sales leads to excess inventory ... the excess inventory is largely concentrated in light trucks and SUVs and the cost to carry such inventory is high. Producers have started to respond, with motor vehicle production down 2.5% mom sa in April, marking the second drop in three months. There is likely more to come.
…
A weakening in the auto cycle will serve as a drag to the economy. … Motor vehicle output added an average of 0.2pp / year to real GDP growth from 2010 to 2018 after slicing a half of a percentage point in each 2008 and 2009. Motor vehicle production is already on course to be a drag this year, slicing 0.14pp from 1Q GDP growth. We expect it to cut nearly 0.2pp to annual growth this year. Relative to last year, that is a reversal of 0.4pp. It doesn’t feel great but it is manageable. A decline in output naturally means there is also a decline in jobs.
emphasis added

CR Notes: this is close to my view. As I wrote earlier this month: A small decline in sales this year isn't a concern - I think sales will move mostly sideways at near record levels.

This means the economic boost from increasing auto sales is over.

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

Note: dashed line is April estimated sales rate of 16.43 million SAAR.

by Calculated Risk on 5/23/2019 06:13:00 PM

We could see a 3 handle for mortgage rates tomorrow.

From Matthew Graham at Mortgage News Daily: Lowest Mortgage Rates in More Than a Month

Mortgage rates dropped quickly today as global financial markets underwent a volatile shift. When money is flowing out of stocks and into bonds (as it was today) rates move lower. There are several underlying reasons for the move and it's impossible to assign a value to each of them with perfect precision.
…
The net effect for mortgage rates hasn't been fully realized yet. Mortgage lenders set rates at the beginning of the day and they don't tend to change their offerings unless markets make a very big move. Today's very big moves came in several phases and lenders only accounted for a little more than half of the underlying change in bond markets. Nonetheless, the average lender ended the day in line with the lowest rates in more than a year. If bond markets merely hold steady by tomorrow morning, mortgage rates will be even lower. [30YR FIXED - 4.0-4.125%]

CR Note: The decline in mortgage rates - from around 5% late last year, to 4% - is a key factor in the pickup in new home sales.

by Calculated Risk on 5/23/2019 01:01:00 PM

New home sales for April were reported at 673,000 on a seasonally adjusted annual rate basis (SAAR). Sales for March were revised up to 723,000, a new high for this cycle.   Sales in January and February were also revised up.

My view has been that we'd see further growth in New Home sales.  Last month I wrote: "My guess is we haven't seen the peak of this cycle yet."   Didn't take long!

Earlier: New Home Sales decreased to 673,000 Annual Rate in April, March Revised up to New Cycle High.

Click on graph for larger image.

This graph shows new home sales for 2018 and 2019 by month (Seasonally Adjusted Annual Rate).

Sales in April were up 7.0% year-over-year compared to April 2018.

Year-to-date (just through April), sales are up 6.7% compared to the same period in 2018.  This comparison was the most difficult in the first half of 2018, so this is a strong start for 2019.

And here is another update to the "distressing gap" graph that I first started posting a number of years ago to show the emerging gap caused by distressed sales.

The "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through April 2019. This graph starts in 1994, but the relationship had been fairly steady back to the '60s.

Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales.

Even though distressed sales are down significantly, following the bust, new home builders focused on more expensive homes - so the gap has only closed slowly.

I still expect this gap to close.   However, this assumes that the builders will offer some smaller, less expensive homes.

Another way to look at this is a ratio of existing to new home sales.

This ratio was fairly stable from 1994 through 2006, and then the flood of distressed sales kept the number of existing home sales elevated and depressed new home sales. (Note: This ratio was fairly stable back to the early '70s, but I only have annual data for the earlier years).

In general the ratio has been trending down since the housing bust, and this ratio will probably continue to trend down a little more.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

by Calculated Risk on 5/23/2019 11:00:00 AM

From the Kansas City Fed: Growth in Tenth District Manufacturing Activity Continued at a Modest Pace

The Federal Reserve Bank of Kansas City released the May Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that growth in Tenth District manufacturing activity continued at a modest pace, and expectations for future activity remained generally solid.

“Regional factory growth was sluggish again in May,” said Wilkerson. “Several firms noted that new tariffs were disrupting activity.”
...
The month-over-month composite index was 4 in May, similar to a reading of 5 in April but down from 10 in March. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. Growth continued to grow modestly at most durable and nondurable production plants, with stronger growth for food, plastics, and metals products. Most month-over-month indexes slowed slightly in May but remained positive, with production, shipments, and new orders indexes all decreasing. In contrast, the employment index rebounded from 2 to 5, and both inventory indexes also increased. Most year-over-year factory indexes showed little change, with the composite index inching higher from 22 to 23. The future composite index also edged up, moving from 11 to 12, and most future factory activity indexes remained stable or moved slightly higher.
emphasis added

A couple of industry comments:

“The increased costs of steel and plastic are crippling us.”

“April was a down month but May will be worse. Tariffs will force us to reduce our workforce and increase costs to the consumer.”

by Calculated Risk on 5/23/2019 10:19:00 AM

The Census Bureau reports New Home Sales in April were at a seasonally adjusted annual rate (SAAR) of 692 thousand.

The previous three months were revised up.

"Sales of new single‐family houses in April 2019 were at a seasonally adjusted annual rate of 673,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 6.9 percent below the revised March rate of 723,000, but is 7.0 percent above the April 2018 estimate of 629,000."
emphasis added

Click on graph for larger image.

The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.

Even with the increase in sales over the last several years, new home sales are still somewhat low historically.

The second graph shows New Home Months of Supply.

The months of supply increased in April to 5.9 months from 5.6 months in March.

The all time record was 12.1 months of supply in January 2009.

This is near the top of the normal range (less than 6 months supply is normal).

"The seasonally‐adjusted estimate of new houses for sale at the end of April was 332,000. This represents a supply of 5.9 months at the current sales rate."

On inventory, according to the Census Bureau:

"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."

Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.

The third graph shows the three categories of inventory starting in 1973.

The inventory of completed homes for sale is still somewhat low, and the combined total of completed and under construction is a little low.

The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate).

In April 2019 (red column), 66 thousand new homes were sold (NSA). Last year, 61 thousand homes were sold in April.

The all time high for April was 116 thousand in 2005, and the all time low for April was 30 thousand in 2011.

This was close to expectations of 678 thousand sales SAAR, and sales in the three previous months were revised up significantly.  And sales in March were revised up to a new cycle high. I'll have more later today.

by Calculated Risk on 5/23/2019 08:32:00 AM

The DOL reported:

In the week ending May 18, the advance figure for seasonally adjusted initial claims was 211,000, a decrease of 1,000 from the previous week's unrevised level of 212,000. The 4-week moving average was 220,250, a decrease of 4,750 from the previous week's unrevised average of 225,000.
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 decreased to 220,250.

This was below the consensus forecast.

by Calculated Risk on 5/22/2019 07:04:00 PM

Thursday:
• At 8:30 AM ET, The initial weekly unemployment claims report will be released.  The consensus is for 217 thousand initial claims, up from 212 thousand last week.

• At 10:00 AM, New Home Sales for April from the Census Bureau. The consensus is for 678 thousand SAAR, down from 692 thousand in March.

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

by Calculated Risk on 5/22/2019 02:08:00 PM

From the Fed: Minutes of the Federal Open Market Committee, April 30, 2019, and continued on Wednesday, May 1, 2019. A few excerpts:

Participants discussed the potential policy implications of continued low inflation readings. Many participants viewed the recent dip in PCE inflation as likely to be transitory, and participants generally anticipated that a patient approach to policy adjustments was likely to be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective. Several participants also judged that patience in adjusting policy was consistent with the Committee's balanced approach to achieving its objectives in current circumstances in which resource utilization appeared to be high while inflation continued to run below the Committee's symmetric 2 percent objective. However, a few participants noted that if the economy evolved as they expected, the Committee would likely need to firm the stance of monetary policy to sustain the economic expansion and keep inflation at levels consistent with the Committee's objective, or that the Committee would need to be attentive to the possibility that inflation pressures could build quickly in an environment of tight resource utilization. In contrast, a few other participants observed that subdued inflation coupled with real wage gains roughly in line with productivity growth might indicate that resource utilization was not as high as the recent low readings of the unemployment rate by themselves would suggest. Several participants commented that if inflation did not show signs of moving up over coming quarters, there was a risk that inflation expectations could become anchored at levels below those consistent with the Committee's symmetric 2 percent objective—a development that could make it more difficult to achieve the 2 percent inflation objective on a sustainable basis over the longer run. Participants emphasized that their monetary policy decisions would continue to depend on their assessments of the economic outlook and risks to the outlook, as informed by a wide range of data.

In their consideration of the economic outlook, members noted that financial conditions had improved since the turn of the year, and many uncertainties affecting the U.S. and global economic outlooks had receded, though some risks remained. Despite solid economic growth and a strong labor market, inflation pressures remained muted. Members continued to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes for the U.S. economy. In light of global economic and financial developments and muted inflation pressures, members concurred that the Committee could be patient as it determined what future adjustments to the target range for the federal funds rate may be appropriate to support those outcomes.

After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. Members agreed that in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee would assess realized and expected economic conditions relative to the Committee's maximum-employment and symmetric 2 percent inflation objectives. They reiterated that this assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. More generally, members noted that decisions regarding near-term adjustments of the stance of monetary policy would appropriately remain dependent on the evolution of the outlook as informed by incoming data.

Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some time, especially in an environment of moderate economic growth and muted inflation pressures, even if global economic and financial conditions continued to improve.
emphasis added

by Calculated Risk on 5/22/2019 12:11:00 PM

From the Philly Fed:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for April 2019. Over the past three months, the indexes increased in 46 states and decreased in four, for a three-month diffusion index of 84. In the past month, the indexes increased in 44 states, decreased in four states, and remained stable in two, for a one-month diffusion index of 80.
emphasis added

Note: These are coincident indexes constructed from state employment data. An explanation from the Philly Fed:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing by production workers, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

Click on map for larger image.

Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession, and all or mostly green during most of the recent expansion.

The map is mostly green on a three month basis, but there are some red states.

Source: Philly Fed.

Note: For complaints about red / green issues, please contact the Philly Fed.

And here is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged).

In April, 44 states had increasing activity (including minor increases).

by Calculated Risk on 5/22/2019 10:16:00 AM

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

From the AIA: Slight rebound for architecture billings in April

Following a sizable decrease in demand for design services in March, the April Architecture Billings Index (ABI) climbed back into positive territory according to a new report today from The American Institute of Architects (AIA).

AIA’s ABI score for April showed a small increase in design services at 50.5 in April, which is up from 47.8 in March. Any score above 50 indicates an increase in billings. Additionally, business conditions remained strong at firms located in the South. Despite this and the positive overall billings score, most regional and sector indictors continue to display decreasing demand for design services.

“In contrast to 2018, conditions throughout the construction sector recently have become more unsettled,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “Though we may not be at a critical inflection point, the next several months of billing data will be indicative of the health of the industry going into 2020.”
...
• Regional averages: South (51.6); Midwest (49.3); West (49.0); Northeast (45.1)

• Sector index breakdown: mixed practice (53.2); institutional (49.2); multi-family residential (47.4); commercial/industrial (46.6)
emphasis added

Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 50.5 in April, up from 47.8 in March. 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 has been positive for 11 of the previous 12 months, suggesting a further increase in CRE investment in 2019.