by Calculated Risk on 3/05/2014 08:04:00 PM

From Tim Duy Fed Watch: A Lackluster Start to the New Year

Incoming data has tended to disappoint. While weather impacts are taking part of the blame, I tend to think that part of the blame should fall on overly optimistic interpretations of data patterns at the end of 2013. ...

Bottom Line: Data disappointment in part is driven by excessive optimism. In any event, data are not sufficiently disappointing to derail the Fed's tapering plans. Unless activity lurches sharply downward, I think the tapering process is pretty much on autopilot. It is now all about interest rates.

CR Note: I think Duy is correct that tapering will continue "unless activity lurches sharply downward", but I remain fairly optimistic about 2014. We will see ...

Thursday:
• Early, Trulia Price Rent Monitors for February. This is the index from Trulia that uses asking house prices adjusted both for the mix of homes listed for sale and for seasonal factors.

• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 338 thousand from 348 thousand.

• At 10:00 AM, the Manufacturers' Shipments, Inventories and Orders (Factory Orders) for January. The consensus is for a 0.5% decrease in January orders.

• At 12:00 PM, the Q4 Flow of Funds Accounts of the United States from the Federal Reserve.

by Calculated Risk on 3/05/2014 03:41:00 PM

Friday at 8:30 AM ET, the BLS will release the employment report for February. The consensus is for an increase of 150,000 non-farm payroll jobs in February, and for the unemployment rate to be unchanged at 6.6%.

Note: This was an unusually harsh winter, and the weather apparently impacted hiring in December, January and in February too. The Fed's beige book today mentioned weather 119 times (including all the District reports). In the January beige book, weather was only mentioned 21 times. In the March 2013 beige book, weather was mentioned 18 times. So weather could be a significant factor in the February report.

Here is a summary of recent data:

• The ADP employment report showed an increase of 139,000 private sector payroll jobs in February. This was below expectations of 158,000 private sector payroll jobs added. The ADP report hasn't been very useful in predicting the BLS report for any one month. But in general, this suggests employment growth below expectations.

• The ISM manufacturing employment index was unchanged in February at 52.3%. A historical correlation between the ISM manufacturing employment index and the BLS employment report for manufacturing, suggests that private sector BLS manufacturing payroll jobs decreased about 7,000 in February. The ADP report indicated a 1,000 increase for manufacturing jobs in February.

The ISM non-manufacturing employment index decreased in February to 47.5% from 56.4% in January. A historical correlation between the ISM non-manufacturing index and the BLS employment report for non-manufacturing, suggests that private sector BLS reported payroll jobs for non-manufacturing were unchanged in February.

Taken together, these surveys suggest around 6,000 fewer jobs in February - far below the consensus forecast.

• Initial weekly unemployment claims averaged close to 338,000 in February. This was up from an average of 333,000 in January.   For the BLS reference week (includes the 12th of the month), initial claims were at 334,000; this was up slightly from 329,000 during the reference week in January.

This suggests mostly layoffs in line with the consensus forecast.

• The final February Reuters / University of Michigan consumer sentiment index increased to 81.6 from the January reading of 81.2. This is frequently coincident with changes in the labor market, but there are other factors too.

• The small business index from Intuit showed no change in small business employment in February.

• Conclusion: Usually the data is mixed, but the data this month was fairly weak across the board. The ADP report was lower in February compared to the initial January report (January was revised down in the report today), the Intuit small business index showed no hiring, and the ISM surveys suggest essentially no change in payrolls in February

There is always some randomness to the employment report - and the timing and survey methods are different than for some other reports - but my guess is the BLS report will be under the consensus forecast of 150,000 nonfarm payrolls jobs added in February.

by Calculated Risk on 3/05/2014 02:00:00 PM

Fed's Beige Book "Prepared at the Federal Reserve Bank of Atlanta and based on information collected before February 24, 2014."

Reports from most of the twelve Federal Reserve Districts indicated that economic conditions continued to expand from January to early February. Eight Districts reported improved levels of activity, but in most cases the increases were characterized as modest to moderate. New York and Philadelphia experienced a slight decline in activity, which was mostly attributed to the unusually severe weather experienced in those regions. Growth slowed in Chicago, and Kansas City reported that conditions remained stable during the reporting period. The outlook among most Districts remained optimistic.

And on real estate:

Reports on residential housing markets were somewhat mixed. Many Districts continued to report improving conditions but noted that growth had slowed. Most of the Districts indicating otherwise attributed the slowing pace of improvement to unusually severe winter weather conditions. Home sales increased in Richmond, Atlanta, Chicago, St. Louis, and Dallas, while sales were down in Philadelphia, Cleveland, Minneapolis, and Kansas City. Boston and New York reported that the trend in sales for their Districts was mixed. New home construction increased in Richmond, Atlanta, Chicago, St. Louis, and Minneapolis, and remained flat in Kansas City, and was down slightly from the previous period in Philadelphia. Most Districts reported low levels of home inventories and indicated that home prices continued to appreciate. The outlook for sales and residential construction was positive in Boston, Philadelphia, Cleveland, Atlanta, and San Francisco.

Strong multifamily construction was cited in New York, Cleveland, Richmond, Atlanta, and Dallas, while Boston indicated that its pipeline of multifamily construction was declining. Dallas experienced rent growth above its historical average, while New York reported mixed trends in rent growth. Cleveland noted that it expects healthy growth in rents this year.

Many Districts, including New York, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, and San Francisco, indicated that commercial real estate activity had increased and that conditions continued to improve since the previous report. Philadelphia noted that there was very little activity to report in construction or leasing due to severe winter weather. The outlook for nonresidential construction was fairly optimistic in Boston, Philadelphia, Cleveland, Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco.
emphasis added

Some pretty positive comments on commercial real estate.  This is a downgrade to the previous beige book, but might be weather related.

by Calculated Risk on 3/05/2014 11:02:00 AM

From housing economist Tom Lawler:

Hovnanian Enterprises, the nation’s sixth largest home builder in 2012, reported that net home orders (including unconsolidated joint ventures) in the quarter ended January 31, 2014 totaled 1,202, down 10.6% from the comparable quarter of 2013. The company’s sales cancellation rate, expressed as a % of gross orders, was 18% last quarter, up from 17% a year ago. Home deliveries last quarter totaled 1,138, down 4.2% from the comparable quarter of 2013, at an average sales price of $351,279, up 6.1% from a year ago. The company’s order backlog at the end of January was 2,438, up 6.0% from last January, at an average order price of $368,243, up 4.3% from a year ago.

Hovnanian’s net orders in California plunged by 43.4% compared to a year ago. Hovnanian’s average net order price in California last quarter was $653,366, up 46.8% from a year ago and up 83.2% from two years ago. Net orders in the Southwest were down 10.0% YOY.

Here is an excerpt from the company’s press release.

"While our first quarter is always the slowest seasonal period for net contracts, the strong recovery trajectory from the spring selling season of 2013 has softened on a year-over-year basis. Net contracts in the months of December, January and February have not met our expectations. In addition to the lull in sales momentum, both sales and deliveries were impacted by poor weather conditions and deliveries were further impacted by shortages in labor and certain materials in some markets that have extended cycle times," stated Ara K. Hovnanian, Chairman of the Board, President and Chief Executive Officer.

"We are encouraged by the fact that we have a higher contract backlog, gross margin and community count than we did at the same point in time last year. Furthermore, we have taken steps to spur additional sales in the spring selling season, including the launch of Big Deal Days, a national sales campaign during the month of March. Our first quarter has always been the slowest seasonal period and we expect to report stronger results as the year progresses. We believe this is a temporary pause in the industry's recovery, and based on the level of housing starts across the country, we continue to believe the homebuilding industry is still in the early stages of recovery," concluded Mr. Hovnanian.
emphasis added

The company reported that it owned or controlled 34,763 lots at the end of January, up 17.0% from last January.

by Calculated Risk on 3/05/2014 10:05:00 AM

The February ISM Non-manufacturing index was at 51.6%, down from 54.0% in January. The employment index decreased sharply in February to 47.5%, down from 56.4% in January. Note: Above 50 indicates expansion, below 50 contraction.

From the Institute for Supply Management: February 2014 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in February for the 49th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The report was issued today by Anthony Nieves, CPSM, C.P.M., CFPM, chair of the Institute for Supply Management® (ISM®) Non-Manufacturing Business Survey Committee. "The NMI® registered 51.6 percent in February, 2.4 percentage points lower than January's reading of 54 percent. The Non-Manufacturing Business Activity Index decreased to 54.6 percent, which is 1.7 percentage points lower than the reading of 56.3 percent reported in January, reflecting growth for the 55th consecutive month and at a slower rate. The New Orders Index registered 51.3 percent, 0.4 percentage point higher than the reading of 50.9 percent registered in January. The Employment Index decreased 8.9 percentage points to 47.5 percent from the January reading of 56.4 percent and indicates contraction in employment for the first time after 25 consecutive months of growth. The Prices Index decreased 3.4 percentage points from the January reading of 57.1 percent to 53.7 percent, indicating prices increased at a slower rate in February when compared to January. According to the NMI®, ten non-manufacturing industries reported growth in February. The majority of respondents' comments indicate a slowing in the rate of growth month over month of business activity. Some of the respondents attribute this to weather conditions. Overall respondents' comments reflect cautiousness regarding business conditions and the economy."
emphasis added

Click on graph for larger image.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

This was well below the consensus forecast of 53.6% and indicates slower expansion in February than in January.