by Calculated Risk on 1/02/2014 10:00:00 AM

The ISM manufacturing index indicated slightly slower expansion in December than in November. The PMI was at 57.0% in December, down from 57.3% in November. The employment index was at 56.9%, up from 56.5%, and the new orders index was at 64.2%, up from 63.6% in November.

From the Institute for Supply Management: December 2013 Manufacturing ISM Report On Business®

Economic activity in the manufacturing sector expanded in December for the seventh consecutive month, and the overall economy grew for the 55th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The PMI™ registered 57 percent, the second highest reading for the year, just 0.3 percentage point below November's reading of 57.3 percent. The New Orders Index increased in December by 0.6 percentage point to 64.2 percent, which is its highest reading since April 2010 when it registered 65.1 percent. The Employment Index registered 56.9 percent, an increase of 0.4 percentage point compared to November's reading of 56.5 percent. December's employment reading is the highest since June 2011 when the Employment Index registered 59 percent. Comments from the panel generally reflect a solid final month of the year, capping off the second half of 2013, which was characterized by continuous growth and momentum in manufacturing."
emphasis added

Click on graph for larger image.

Here is a long term graph of the ISM manufacturing index.

This was at expectations of 57.0%, and was the 2nd highest reading of 2012. The new orders index was at the highest level since April 2010, and the employment index was at the highest since June 2011. A very solid report.

by Calculated Risk on 1/02/2014 08:41:00 AM

The DOL reports:

In the week ending December 28, the advance figure for seasonally adjusted initial claims was 339,000, a decrease of 2,000 from the previous week's revised figure of 341,000. The 4-week moving average was 357,250, an increase of 8,500 from the previous week's revised average of 348,750.

The previous week was revised up from 338,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

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 357,250.

Weekly claims are frequently volatile during the holidays because of the seasonal adjustment. This is the highest level for the 4-week average since October.

by Calculated Risk on 1/01/2014 08:42:00 PM

Happy New Year!

Here are eight of the ten questions for 2014 with a few predictions (two more to come):
• Question #3 for 2014: What will the unemployment rate be in December 2014?
• Question #4 for 2014: Will too much inflation be a concern in 2014?
• Question #5 for 2014: Monetary Policy: Will the Fed end QE3 in 2014?
• Question #6 for 2014: How much will Residential Investment increase?
• Question #7 for 2014: What will happen with house prices in 2014?
• Question #8 for 2014: Housing Credit: Will we see easier mortgage lending in 2014?
• Question #9 for 2014: How much will housing inventory increase in 2014?
• Question #10 for 2014: Downside Risks

Thursday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to be unchanged at 338 thousand.

• At 9:00 AM, the Markit US PMI Manufacturing Index for December. The consensus is for an decrease to 54.5 from 54.7 in November.

• At 10:00 AM, the ISM Manufacturing Index for December. The consensus is for a decrease to 57.0 from 57.3 in November. The ISM manufacturing index indicated expansion in November at 57.3%. The employment index was at 56.5%, and the new orders index was at 63.6%.

• Also at 10:00 AM, Construction Spending for November. The consensus is for a 1.0% increase in November construction spending.

by Calculated Risk on 1/01/2014 04:35:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2014.

Here is a review of the Ten Economic Questions for 2013.

3) Unemployment Rate: The unemployment rate is still elevated at 7.0% in November. For the last three years I've been too pessimistic on the unemployment rate because I was expecting some minor bounce back in the participation rate. Instead the participation rate continued to decline. Maybe 2014 will be the year the participation rate increases a little, or at least stabilizes. What will the unemployment rate be in December 2014?

Forecasting the unemployment rate includes forecasts for economic and payroll growth, and also for changes in the participation rate. Note: The participation rate is the percent of the working age population (16 and over) that is in the labor force.

Policy matters in 2014 too.  The Emergency Unemployment Compensation (EUC) benefits expired on December 28, 2013. With the very high level of long term unemployed, not extending EUC is unprecedented, bad economics and ... well, cruel. So maybe Congress will pass an extension. This matters for the unemployment rate - if there is no extension, the unemployment rate will probably decline 0.2 to 0.3 percentage points in the first quarter just due to people dropping out of the labor force (or taking minimum wage jobs to survive).   I'd guess Congress will be shamed into taking action, but you never know.

And on participation: We can be pretty certain that the participation rate will decline over the next couple of decades based on demographic trends, but it is uncertain what will happen in 2014.   The participation rate could bounce back or at least stabilize. Or the participation rate could decline further as has happened over the last few years.

Unemployment and Participation Rate for December each Year
December of	Participation Rate	Decline in Participation Rate (percentage points)	Unemployment Rate
2008	65.8%		7.3%
2009	64.6%	1.2	9.9%
2010	64.3%	0.3	9.3%
2011	64.0%	0.3	8.5%
2012	63.6%	0.4	7.8%
20131	63.0%	0.6	7.0%
1This is the November 2013 participation and unemployment rate.

My guess is the participation rate will stabilize or only decline slightly in 2014 (less than in 2012 and 2013), unless the EUC isn't extended.  Without an extension of the EUC, we might see a 0.3 to 0.5 percentage decline in the participation rate in 2014.

Even if the participation rate stabilizes, the unemployment rate will probably decline for the right reason in 2014; a pickup in job growth.

Depending on the estimate for job growth (next question), it appears the unemployment rate will decline to the low-to-mid 6% range by December 2014.

Here are the ten questions for 2014 and a few predictions:
• Question #1 for 2014: How much will the economy grow in 2014?
• Question #2 for 2014: How many payroll jobs will be added in 2014?
• Question #3 for 2014: What will the unemployment rate be in December 2014?
• Question #4 for 2014: Will too much inflation be a concern in 2014?
• Question #5 for 2014: Monetary Policy: Will the Fed end QE3 in 2014?
• Question #6 for 2014: How much will Residential Investment increase?
• Question #7 for 2014: What will happen with house prices in 2014?
• Question #8 for 2014: Housing Credit: Will we see easier mortgage lending in 2014?
• Question #9 for 2014: How much will housing inventory increase in 2014?
• Question #10 for 2014: Downside Risks

by Calculated Risk on 1/01/2014 01:49:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2014. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2013.

4) Inflation: The Fed has made it clear they will tolerate a little more inflation, but currently the inflation rate is running well below the Fed's 2% target. Will the inflation rate rise in 2014? Will too much inflation be a concern in 2014?

Although there are different measure for inflation (including some private measures) they all show that inflation is at or below the Fed's 2% inflation target.

Note: I agree with the FOMC view, that "inflation persistently below its 2 percent objective could pose risks to economic performance".   Some people think there should be zero inflation, I think this is incorrect and there are clear reasons that a little inflation is good for the economy.

I follow several measures of inflation, median CPI and trimmed-mean CPI from the Cleveland Fed.  Core PCE prices (monthly from the BEA) and core CPI (from the BLS).

Click on graph for larger image.

This graph shows the year-over-year change for these four key measures of inflation through November. On a year-over-year basis, the median CPI rose 2.0%, the trimmed-mean CPI rose 1.6%, the CPI rose 1.2%, and the CPI less food and energy rose 1.7%. Core PCE is for October and increased just 1.1% year-over-year.

On a monthly basis, median CPI was at 2.2% annualized, trimmed-mean CPI was at 1.2% annualized, and core CPI increased 1.9% annualized.

For some technical reasons, core PCE has been lower than the other measures.  Goldman Sachs chief economist Jan Hatzius addressed this recently:

"almost half of the slowdown in core PCE inflation in 2013 was due to the slowdown in healthcare cost growth. Although a significant part of this slowdown is likely to persist, some of it—specifically the Medicare reimbursement cut related to the federal sequester—is likely to reverse in 2014 and this will likely add 0.1-0.2 percentage points to core PCE inflation."

So core PCE will probably move up a little year-over-year, but with all the slack still in the system (and little wage growth), I expect the other measures of inflation to stay at or below the Fed's target in 2014.  If the unemployment rate continues to decline - and wage growth picks up - maybe inflation will be an issue in 2015 or 2016.

So currently I think inflation (year-over-year) will increase a little in 2014 as growth picks up, but too much inflation will not be a concern in 2014.

Here are the ten questions for 2014 and a few predictions:
• Question #1 for 2014: How much will the economy grow in 2014?
• Question #2 for 2014: How many payroll jobs will be added in 2014?
• Question #3 for 2014: What will the unemployment rate be in December 2014?
• Question #4 for 2014: Will too much inflation be a concern in 2014?
• Question #5 for 2014: Monetary Policy: Will the Fed end QE3 in 2014?
• Question #6 for 2014: How much will Residential Investment increase?
• Question #7 for 2014: What will happen with house prices in 2014?
• Question #8 for 2014: Housing Credit: Will we see easier mortgage lending in 2014?
• Question #9 for 2014: How much will housing inventory increase in 2014?
• Question #10 for 2014: Downside Risks