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2018-01-16T15:06:31.658Z
0
{"feed":"calculated-risk","feedTitle":"Calculated Risk","feedLink":"/feed/calculated-risk","catTitle":"Business","catLink":"/cat/bussiness"}
A few excerpts from a note by Goldman Sachs economists:
• We expect strong global growth this year, given firm current momentum, easing financial conditions, and supportive fiscal policy. But high asset valuations and the prospect of labor market overheating suggest that the recent strength might be “too much of a good thing” further down the road.
...
• Our model suggests that near-term recession risk is low. The probability of a downturn is also below normal over the next 2-3 years, but has been rising steadily in economies that are seeing unusually easy financial conditions and tightening labor markets. These include the US, Germany, the UK and a number of smaller G10 economies ...

• Although our model is subject to a number of caveats, it confirms that we need to worry little about recession risk this year. But our analysis suggests that we should pay attention to measures of imbalances that signal rising recession risk further down the road.
CR Note: My view is recession risk is low this year, and I expect further growth in the US in 2018.
Weekend:
Schedule for Week of Jan 14, 2018

Tuesday:
• At 8:30 AM ET: The New York Fed Empire State manufacturing survey for January. The consensus is for a reading of 18.6, up from 18.0.

From CNBC: Pre-Market Data and Bloomberg futures: S&P 500 are up 7, and DOW futures are up 160 (fair value).

Oil prices were up over the last week with WTI futures at $64.73 per barrel and Brent at $70.26 per barrel.  A year ago, WTI was at $52, and Brent was at $54 - so oil prices are up solidly year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.54 per gallon. A year ago prices were at $2.34 per gallon - so gasoline prices are up 20 cents per gallon year-over-year.
In 2017, eight FDIC insured banks failed. This was up from 5 in 2016.

The great recession / housing bust / financial crisis related failures are behind us.

The first graph shows the number of bank failures per year since the FDIC was founded in 1933.

Click on graph for larger image.

Typically about 7 banks fail per year, so the 8 failures in 2017 was close to normal.

Note: There were a large number of failures in the '80s and early '90s. Many of these failures were related to loose lending, especially for commercial real estate.  Also, a large number of the failures in the '80s and '90s were in Texas with loose regulation.

Even though there were more failures in the '80s and early '90s then during the recent crisis, the recent financial crisis was much worse (larger banks failed and were bailed out).

The second graph includes pre-FDIC failures. In a typical year - before the Depression - 500 banks would fail and the depositors would lose a large portion of their savings.

Then, during the Depression, thousands of banks failed. Note that the S&L crisis...
The key economic report this week is December Housing Starts.

For manufacturing, December industrial production, and the January New York, and Philly Fed manufacturing surveys, will be released this week.

----- Monday, Jan 15th -----

All US markets will be closed in observance of Martin Luther King Jr. Day

----- Tuesday, Jan 16th-----

8:30 AM ET: The New York Fed Empire State manufacturing survey for January. The consensus is for a reading of 18.6, up from 18.0.

----- Wednesday, Jan 17th -----

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

9:15 AM: The Fed will release Industrial Production and Capacity Utilization for December.

This graph shows industrial production since 1967.

The consensus is for a 0.4% increase in Industrial Production, and for Capacity Utilization to increase to 77.3%.

10:00 AM: The January NAHB homebuilder survey. The consensus is for a reading of  73, down from 74 in December. Any number above 50 indicates that more builders view sales conditions as good than poor.

2:00 PM: the Federal Reserve Beige Book, an informal review by the Federal Reserve Banks of current economic conditions in their Districts.

----- Thursday, Jan 18th -----

8:30 AM ET: The initial weekly unemployment claims report will be released.  The consensus is for 250...
A few comments from Steven Kopits of Princeton Energy Advisors LLC on Jan 12, 2017:
• Total US oil rigs were up 10 to 752 this week

• Horizontal oil rigs were up 4 to 654

• We have expected rig counts to rise sharply in recent weeks, and we saw some – but still insufficient – vindication this week.
...
• Incredible price action again this week, with WTI breaching the $64 threshold, but with the Brent spread falling below $6.00.
Click on graph for larger image.

CR note: This graph shows the US horizontal rig count by basin.

Graph and comments Courtesy of Steven Kopits of Princeton Energy Advisors LLC.
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% (3.5% annualized rate) in December. The 16% trimmed-mean Consumer Price Index rose 0.2% (2.8% 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% (1.8% annualized rate) in December. The CPI less food and energy rose 0.3% (3.4% annualized rate) on a seasonally adjusted basis.
Note: The Cleveland Fed released the median CPI details for December here.

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 2.4%, the trimmed-mean CPI rose 1.9%, and the CPI less food and energy rose 1.8%. Core PCE is for November and increased 1.5% year-over-year.

On a monthly basis, median CPI was at 3.5% annualized, trimmed-mean CPI was at 2.8% annualized, and core CPI was at 3.4% annualized.

Using these measures, inflation picked up a little year-over-year in December. ...
On a monthly basis, retail sales increased 0.8 percent from November to December (seasonally adjusted), and sales were up 5.4 percent from December 2016.

From the Census Bureau report:
Advance estimates of U.S. retail and food services sales for December 2017, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $495.4 billion, an increase of 0.4 percent from the previous month, and 5.4 percent above December 2016. ... The October 2017 to November 2017 percent change was revised from up 0.8 percent to up 0.9 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 December.

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 4.9% on a YoY basis.

The increase in December was slightly below expectations, however sales in October and November were revised up. A solid report.
Friday:
• At 8:30 AM ET: Retail sales for December will be released.  The consensus is for a 0.5% increase in retail sales.

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

• At 10:00 AM: Manufacturing and Trade: Inventories and Sales (business inventories) report for November.  The consensus is for a 0.3% increase in inventories.
From Bloomberg: Crude Oil Prices Are Up 49%, and It’s Not All Thanks to OPEC
The bottom line: A 49 percent surge in benchmark North American crude futures since late June, putting prices at a three-year high.
...
"We expect inventories are going to build this year -- slightly,” said Michael Cohen, Barclays Head of Oil Markets Research, in an interview on Bloomberg TV. "You’re going to see a bunch of new crude supply coming on to the market this year from the U.S. So all in all, on a balanced basis, we don’t see the kind of shortage to bring us to $80 for a sustainable basis."
Click on graph for larger image

The first graph shows WTI and Brent spot oil prices from the EIA. (Prices today added).

According to Bloomberg, WTI is at $64.29 per barrel today, and Brent is at $69.66.

Prices really collapsed at the end of 2014 - and then rebounded a little - and then collapsed again at the end of 2015 and in early 2016.

Now, with the global economy stronger and less domestic production, oil prices are rising.

The second graph shows the year-over-year change in WTI based on data from the...
Note: I'm going to retire the graph below.  The purpose was to see when the market shifted from distressed sales to more conventional sales.  For several years, not much changed. But in 2012 and 2013, we saw some significant changes with a dramatic shift from distressed sales to more normal equity sales.  Now almost all of the sales are conventional equity sales.

Note: The Sacramento Association of REALTORS® started breaking out REOs in May 2008, and short sales in June 2009.

In December, total sales were down 8.0% from December 2016, and conventional equity sales were down 3.8% compared to the same month last year.

In December, 2.9% of all resales were distressed sales. This was up from 2.3% last month, and down from 4.8% in December 2016.

Sacramento Realtor Press Release: 2017 closes with less sales, less inventory, higher sales price
December recorded 1,408 closed escrows, a .9% increase from November(1,396 sales) and an 8% decrease from last year (1,530 sales).
...
Active Listing Inventory decreased, dropping 28.9% from 2,216 to 1,575. The Months of Inventory also decreased, dropping 31.3% from 1.6 Months to 1.1. A year ago the Months of inventory was 1 and Active Listing Inventory stood at 1,458 listings (7.4% below the current figure).
emphasis added
Here are the statistics.

The DOL reported:
In the week ending January 6, the advance figure for seasonally adjusted initial claims was 261,000, an increase of 11,000 from the previous week's unrevised level of 250,000. The 4-week moving average was 250,750, an increase of 9,000 from the previous week's unrevised average of 241,750.

Claims taking procedures continue to be disrupted in the Virgin Islands. The claims taking process in Puerto Rico has still not returned to normal.
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 250,750.

This was higher than the consensus forecast. The low level of claims suggest relatively few layoffs.
Thursday:
• At 8:30 AM ET, The initial weekly unemployment claims report will be released. The consensus is for 245 thousand initial claims, down from 250 thousand the previous week.

• Also at 8:30 AM, The Producer Price Index for December from the BLS. The consensus is a 0.2% increase in PPI, and a 0.2% increase in core PPI.
From Jordan Rappaport, Senior Economist at the Kansas City Fed: Pent-Up Demand and Continuing Price Increases: The Outlook for Housing in 2018 An excerpt on inventory:
The low rate of residential construction has been contributing to the tight supply of existing homes listed for sale. New construction provides liquidity to local housing markets, where households are often both buyers and sellers. With fewer new homes from which to choose, many homeowners considering upgrading have instead chosen to remain in their current homes and so have not listed them for sale. As a result, the number of existing homes for sale has decreased as well, dissuading other homeowners from upgrading and further dampening sales listings. This “vicious circle” has limited the efficacy of rising sales prices in eliciting more listings. Since early 2015, the number of single-family homes listed for sale has steadily declined (Chart 2, blue line). Correspondingly, the ratio of listed homes to monthly sales, also known as “months supply,” fell to 3.8 in November, its lowest value since 1982, the earliest date for which data are available (green line).

Click on graph for larger image.
Limited new construction and sales listings of low-end single-family homes have similarly dissuaded many younger households from leaving their apartments to purchase homes, thereby depressing the number of vacant apartments available...
Heavy truck sales increased 3% in 2017 compared to 2016, and heavy truck sales were up 18% year-over-year in December.

First, here is a table of heavy truck sales since 2000 (source: BEA).

Note that sales peaked during the housing bubble, and really collapsed during the great recession. The decline in 2016 was probably related to oil prices.

Heavy Truck Sales (000s)YearSales 2000461.92001350.12002322.42003328.42004431.62005496.52006544.42007371.12008298.52009199.82010217.62011306.62012346.32013352.62014407.72015449.32016401.02017412.5

Click on graph for larger image.

This graph shows heavy truck sales since 1967 using data from the BEA. The dashed line is the December 2017 seasonally adjusted annual sales rate (SAAR).

Heavy truck sales really collapsed during the great recession, falling to a low of 181 thousand in April and May 2009, on a seasonally adjusted annual rate basis (SAAR).

Truck sales softened with the decline in oil prices, however with the increase in oil prices over the last year, heavy truck sales increased too.

Heavy truck sales were at 447 thousand SAAR in December 2017, down slightly from 451 thousand in November, and up from 379 thousand in December 2016.  With solid construction and rising oil prices, heavy truck sales will probably increase in 2018.
Way back in 2006 I disagreed with some analysts on the outlook for the Inland Empire in California. I wrote:
As the housing bubble unwinds, housing related employment will fall; and fall dramatically in areas like the Inland Empire. The more an area is dependent on housing, the larger the negative impact on the local economy will be.

So I think some pundits have it backwards: Instead of a strong local economy keeping housing afloat, I think the bursting housing bubble will significantly impact housing dependent local economies.
And sure enough, the economies of housing dependent areas like the Inland Empire were devastated during the housing bust. The good news is the Inland Empire is expanding solidly now.

Click on graph for larger image.

This graph shows the unemployment rate for the Inland Empire (using MSA: Riverside, San Bernardino, Ontario), and also the number of construction jobs as a percent of total employment.

The unemployment rate is falling, and is down to 4.1% (down from 14.4% in 2010). And construction employment is up from the lows (as a percent of total employment), but still well below the bubble years.

So the unemployment rate has fallen to a record low, but the economy isn't as heavily depending on construction. Overall the Inland Empire economy is in...
From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey
Mortgage applications increased 8.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 5, 2018. This week’s results included an adjustment for the New Year’s holiday. Results for the previous week ending 12/29/17 were revised.

... The Refinance Index increased 11 percent from the previous week. The seasonally adjusted Purchase Index increased 5 percent from one week earlier. The unadjusted Purchase Index increased 44 percent compared with the previous week and was 1 percent lower than the same week one year ago. ...

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) increased to 4.23 percent from 4.22 percent, with points decreasing to 0.35 from 0.37 (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...
Wednesday:
• At 7:00 AM ET, The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

Earlier from the National Federation of Independent Business (NFIB): Average Monthly Optimism Sets All-Time Record in 2017
The Index of Small Business Optimism lost 2.6 points in December, falling to 104.9, still one of the strongest readings in the 45-year history of the NFIB surveys. The highest reading of 108.0 was reached in July 1983, only slightly above November’s 107.5. The lowest reading of 79.7 occurred in April 1980. Two of the 10 Index components posted a gain, five declined, and three were unchanged. The decline left the Index historically strong and maintained a string of exceptional readings that started the day after the 2016 election results were announced. Following the election announcement, the Index rose from 95.0 (a below average reading) for October and pre-election November, to 102.0 in the November weeks after the election, and then to 105.0 in January. This surge in optimism has led to 2017 achieving the highest yearly average Index reading in the survey’s history. The average monthly Index for 2017 was 104.8. The previous record was 104.6, set in 2004.

Job creation was slow in the small-business sector as owners reported a seasonally adjusted average employment change per firm of 0.01 workers. Clearly, a lack of “qualified” workers is impeding the growth in employment. ... Nineteen percent of owners cited the difficulty of...
Note: This index is possibly a leading indicator for new non-residential Commercial Real Estate (CRE) investment, except manufacturing.

From Dodge Data Analytics: Dodge Momentum Index Ends Year on High Note
The Dodge Momentum Index grew 3.6% in December to 153.9 (2000=100) from the revised November reading of 148.6. The Momentum Index is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year. December’s increase was due to an 8.6% jump in the institutional component of the Momentum Index, while the commercial component eked out a 0.7% gain. For the full year 2017, the Momentum Index averaged 132.3, up 10.7% from the full year average for 2016, with similar improvement for the commercial sector (up 11.4%) and the institutional sector (up 9.7%). After retreating during the third quarter of 2017, the Momentum Index regained its upward track in the fourth quarter, which enabled December’s reading for the Momentum Index to be up 20.9% compared to the same month a year ago. The continued strengthening by the Momentum Index in 2017 suggests that nonresidential building construction activity will advance further during 2018.
emphasis added
Click on graph for larger image.

This graph shows the Dodge Momentum Index since 2002. The index...
From the BLS: Job Openings and Labor Turnover Summary
The number of job openings was little changed at 5.9 million on the last business day of November, the U.S. Bureau of Labor Statistics reported today. Over the month, hires and separations were little changed at 5.5 million and 5.2 million, respectively. Within separations, the quits rate was unchanged at 2.2 percent and the layoffs and discharges rate was little changed 1.1 percent. ...

The number of quits was little changed at 3.2 million in November. The quits rate was 2.2 percent. The number of quits was little changed for total private and increased for government.
emphasis added
The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

This series started in December 2000.

Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for November, the most recent employment report was for December.

Click on graph for larger image.


Note that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of labor market turnover.  When the blue...
The Fed's Household Debt Service ratio through Q3 2017 was released on today: Household Debt Service and Financial Obligations Ratios. I used to track this quarterly back in 2005 and 2006 to point out that households were taking on excessive financial obligations.

These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households. Note: The Fed changed the release in Q3 2013.
The household Debt Service Ratio (DSR) is the ratio of total required household debt payments to total disposable income.

The DSR is divided into two parts. The Mortgage DSR is total quarterly required mortgage payments divided by total quarterly disposable personal income. The Consumer DSR is total quarterly scheduled consumer debt payments divided by total quarterly disposable personal income. The Mortgage DSR and the Consumer DSR sum to the DSR.
This data has limited value in terms of absolute numbers, but is useful in looking at trends. Here is a discussion from the Fed:
The limitations of current sources of data make the calculation of the ratio especially difficult. The ideal data set for such a calculation would have the required payments on every loan held by every household in the United States. Such a data set is not available, and thus the calculated series is only an approximation of the debt service ratio faced by households. Nonetheless, this approximation is useful to the extent that, by using the same method...