Archive for June, 2015

May 2015 New Home Sales

Tuesday, June 30th, 2015

Sales of new homes rose in May 2015 to the highest level in seven years according to the Census Bureau.  There were 546,000 units sold on a seasonally adjusted annualized rate.  This is 2.2 percent higher than April’s upwardly revised count of 534,000 (originally 517,000).  An upward revision of 10,000 to March’s figure added to the enthusiasm.

Supply is getting tighter and prices are rising.  At the end of May, the Census Bureau estimates there were 206,000 new homes on the market, unchanged from April.  At the current pace of sales, the entire stock of new homes could be gone in just 4.5 months if no other houses were built.  The median price of a new home in America stands at $282,000 which is $8,300 less than a month earlier.  However, the average price improved $3,100 to $337,000 in the period.  This suggests a few really expensive homes were sold in the period, thus causing the average to rise while the median price fell.

Residential investment is making a comeback in America.  The levels are nowhere near the number of transactions prior to the peak, but the year-over-year improvement was 19.5 percent, a strong number considering the economy grew much slower over the same period.  New home construction adds to our nation’s output tally, so we should see this indicator make a positive contribution to second quarter GDP when it is released at the end of July.  Consumption should also benefit from this strengthening housing market as homes are furnished and fitted with the latest appliances.  In addition, faster construction is good for employment, adding even more to America’s virtuous cycle.  (by C. Cox)

May Chicago Fed National Activity Index

Monday, June 29th, 2015

National output appears to have slowed in May 2015 according to the Federal Reserve Bank of Chicago’s National Activity Index.  This comprehensive indicator, which is comprised of 85 components, shows the rate of change in May was below trend.  While the reading remained below zero (the trend line) for the fifth consecutive month, it actually improved versus April’s revised tally of -0.19 (originally -0.15) and currently sits at -0.17.  It has not deteriorated enough to think the economy is contracting; output is just moving forward at a slower pace than has been the recent norm.

Labor market data kept the CFNAI indicator from being worse in May; this segment of the economy was the only positive contributor to the indicator.  Production remained negative in the period but was less so than in April.  Data on consumption and housing suggest some slowing in these portions of output.  Sales, orders, and inventories made a neutral contribution after being slightly negative a month earlier.

Changes in the various components were mixed.  Of the indicator’s 85 parts, 35 made positive contributions to the total, and 50 subtracted from the count.  However, some comfort can be taken since 43 components improved and only 41 deteriorated; one was unchanged.

Atlas pays most attention to the three-month moving average of this indicator because it tends to give clues about recessions or increasing pressures on inflation.  The three-month average of the headline tally improved a bit to -0.16 versus an upwardly revised count in April of -0.20 (originally -0.23), and while it remained negative, this trend is not low enough to cause concerns about a contraction.  Instead, this measure simply reveals that the economy is moving slower than its recent trend.  In part, this indicator helps inform an argument for why the Federal Reserve will wait until next year before increasing overnight interest rates; the economy is running below trend and signs of dangerous inflation levels are absent.       (by C. Cox)

Is That Going to Scar?

Friday, June 26th, 2015

The Great Recession still echoes throughout America; some folks are not convinced the recession has ended.  Scars may have formed in a couple of segments within the economy, leaving long lasting impressions of the last contraction.  Real evidence is being examined by economists at the Federal Reserve Bank of San Francisco (FRSB) in order to make some sense of the slow pace of healing.  They noticed that the rate of improvement within the labor market was uneven and published a paper on the imbalance.  Additionally, housing professionals over at Zillow.com noted that the percent of homes underwater (houses worth less than the owner owes to a lender), while dropping, remains elevated relative to pre-crisis levels.  Marks on these segments of our economy could leave long lasting blemishes.

Based on the headlines alone, the employment market has made tremendous progress toward  being completely healed.  The unemployment rate is currently 5.5 percent according to the Bureau of Labor Statistics, and the Federal Reserve feels 5.2 percent unemployment is appropriate.  After reaching 10.0 percent in October 2009, there has been lots of healing.  However, there is a subset of workers who are involuntarily employed part-time, and the rate of improvement for this cohort has been much slower than headlines suggest.  As of May 2015, 4.2 percent of the labor force was working part-time even though they would prefer to have full-time jobs.  According to the economists in San Francisco, this is a little over 31 percent more than is normal when the headline unemployment rate is at its current level.

In their research, the economists in San Francisco found three structural (i.e. long-term) factors that determine whether or not a person is working part-time involuntarily: demographics, industry, and wage levels.   For example, employers in the retail or leisure/hospitality industries are tend to hire part-time workers, and this segment of our economy now represents a larger share of total employment than before the Great Recession.  Behavioral differences between generations are also causing the involuntary part-time percentage to rise.  Typically, workers under 25 years old are a primary source of willingly part-time employees, but their share of the labor force has been falling for decades, forcing firms to hire part-time workers within segments of the labor force that do not generally want to work less than full-time.  Finally, compensation continues to be a reason for firms to hire part-time workers (e.g. tax rules generally allow employers to exclude part-time workers from company benefit plans), and while this may not be a new development, the FRSB noted it as a cause for higher involuntary part-time work in their research.

Housing has developed a bit of a keloid as well.  According to the real estate website Zillow.com, the share of homes  underwater in America has been cut in half since the peak in the first quarter of 2012 (31.4 percent) but is still well above the pre-crisis norm.  As of the first quarter 2015, 15.4 percent of home owners remain underwater.  When the housing market is healthy, Zillow estimates the level should be somewhere around one or two percent.

Both labor and housing markets should heal eventually.  A nation with so many resources such as ours will survive and recover.  Developed economies tend to last for centuries.  However, those currently working, nearing retirement, or just entering the workforce are likely to feel the effects of the last contraction for the rest of their lives.  It may take a subsequent generation, those after the Millennials, before we find a cohort not scarred for life by the Great Recession.  (by C. Cox)

Existing Home Sales May 2015

Wednesday, June 24th, 2015

Sale of existing homes jumped in May according to the National Association of Realtors.  After selling 5.09 million units in April (upwardly revised from 5.04 million), the pace increased 5.1 percent to 5.35 million sales at a seasonally adjusted annualized rate.  Year-over-year, the pace of sales increased for the ninth consecutive month and were 9.2 percent higher than in May 2014.

Sales improved in all four sections of the nation.  In the Northeast, transactions jumped 11.3 percent in the period; the year-over-year tally happens to be the same in this section of the country.  Midwest sales rose 4.1 percent and are up 12.4 percent from a year earlier.  Sales in the South, the largest section of the nation, were 4.3 percent and represented 41percent of all sales in the period.  Finally, transactions in the West also improved 4.3 percent in the period and have grown 6.9 percent since May of last year.

The composition of buyers has changed dramatically in the past year.  First-time buyers represented a larger number of transactions versus a year earlier.  The same cannot be said about homes purchased for cash or sales to investors.  Also, distressed sales represented a smaller percentage of overall transaction versus May of 2014.

Price measures are inching ever closer to peak levels reached before the financial crisis.  Excluding seasonal adjustments, the average price for a new home was $272,800 in May versus the peak of $276,200 in June 2007.  The median price now sits at $228,700 and has been higher on a year-over-year basis for 39 consecutive months; it is now just $1,700 away from the July 2006 peak for this central tendency measure.

Rising interest rates did not keep this segment of the economy from improving.  According to Freddie Mac, the average commitment rate for a 30-year fixed-rate mortgage climbed to 3.84 percent from just 3.67 percent in April.   While the cost of money was higher, it remained below 4.0 percent for the sixth consecutive month.

Inventory measures were mixed.  On an absolute basis, there are more homes on the market than in April.  An increase of 3.2 percent puts the number of homes on the market at 2.29 million; this is 1.8 percent higher than a year ago.  However, on a relative basis, the inventory fell.  If sales continued at the most recent pace and no other homes were put on the market, the entire stock of homes would be gone in just 5.1 months, down from 5.2 months in April.  This is substantially lower than the levels seen during and immediately after the financial crisis, but is roughly in line with pre-crisis levels.

Housing continues its road to recovery.  On its own, existing home sales do not add to our nation’s output because they are a used product.  However, many forms of ancillary output are associated with this market place, so its continued improvement suggests to Atlas that the current expansion is on a firm foundation and is likely to continue.     (by C. Cox)

Eggs and Gas

Tuesday, June 23rd, 2015

Prices paid by consumers increased 0.4 percent in May 2015 according to the Consumer Price Index from the Bureau of Labor Statistics.  This is the largest monthly increase since February 2013.  On a year-over-year basis the CPI was unchanged, thus not negative for the first time since December 2014.  After an extended period of low inflation and even bouts of deflation in this measure of prices, something smells foul.

Two components pushed the index higher in the period.  After nearly no change in April, gasoline prices rose 10.5 percent in May.  Despite the monthly jump, prices at the pump are lower for the 10th consecutive month on a year-over-year basis, down 25.0 percent.  Eggs also jumped in the period.  Bird flu has hit chicken and turkey farms in the West and Midwest.  Millions of egg-laying birds were destroyed which put constraints on the supply of eggs.  The price of these single cells increased 2.6 percent in May.

Beneath the headline, inflation was much tamer.  Excluding food and energy, prices were just 0.1 percent more expensive than in April.  This happens to be the smallest uptick in 2015.  Compared to a year earlier, this core measure of prices is just 1.7 percent higher.

Inflation continues to be subdued according to the Consumer Price Index.  The subtle monthly uptick and relatively mild year-over-year statistic may provide our central bank another reason to delay changing monetary policy.  Output is growing but doing so slowly, and the Federal Reserve probably feels it should err on the side of too much inflation and a boiling economy versus being partially blamed for extinguishing the flame that is keeping output and price increases lukewarm.    (by C. Cox)

Industrial Production May 2015

Monday, June 22nd, 2015

Output for physically made goods fell in May 2015 according to the Federal Reserve’s survey of Industrial Production.  The headline figure fell 0.2 percent as two of the three major industry groups declined.  In addition, April’s tally was downwardly revised from -0.3 percent to -0.5 percent after more complete data became available.  Year to date, this indicator has yet to register a reading above zero and has been negative three out of the last six months.

May’s industrial production report makes the economy look rather weak.  The one positive industry, utilities, “bounced back” from a decline of 3.2 percent in April with a positive 0.2 percent uptick.  It only gets worse from here.  Mining fell 0.3 and continued its string of lower monthly tallies, down for the fifth month in a row; it is also down on a year-over-year basis.  Manufacturing, the largest component of the indicator, gave back all of its April gain and then some, falling 0.2 percent after a slight uptick of 0.1 percent a month earlier.  If there is a silver lining in this report, it is that the production of business equipment moved up 0.2 percent, an indication that businesses are investing in capital.

Capacity utilization continued to weaken.   The proportion of potential output dropped for the sixth month in a row, falling to 78.1 percent from 78.3 percent a month earlier.  Some of this drop can be attributed to companies adding to their capacity; it has grown 2.8 percent since May 2014. A declining trend in capacity use tends to be disinflationary, so this development will likely be talked about by our central bankers while they convene over interest rate/monetary policy.

May’s industrial production report disappointed.  This indicator is not paralleling the survey information from the Institute for Supply Management (ISM).  In its latest manufacturing release, firms told the ISM that output is slowing but not contracting.  Industrial production represent a relatively small segment of our economy, but manufacturing tends to be sensitive to the business cycle, so its production should be watched in the months ahead to see if some sort of contraction is developing.       (by C. Cox)

How much will $0.08 get you?

Friday, June 19th, 2015

Yogi Berra once commented that the value of “a nickel ain’t worth a dime anymore,” but what about a nickel and three pennies?  After some serious number crunching here at Atlas, we’ve come to the conclusion that $0.08 is worth a lot, especially when you multiply it enough times.  Our economy is dominated by consumption, and if enough people have an extra $0.08 in their hourly pay, many more goods and services can be afforded.

The mathematical product of $0.08 and the number of workers in America is large.  As of April, our economy employed 141,059,000 nonfarm workers according to the Bureau of Labor Statistics (BLS).  Multiply this figure by the $0.08 per hour wage increase the average worker received in May, and the hourly income for those already employed grew by $11,284,720 every sixty minutes.  Of course, this does not include the additional 280,000 net new workers that found jobs in May.  On average, this group now also earns $24.96 an hour or $6,988,000 each time the big hand passes 12 during their working day.   So in aggregate, $18,273,520 more is earned each hour because of the labor markets May 2015 improvements.  Further, since the average work week remained even at 34.5 hours, so $630,408,840 make its way into Americans’ income each week.  Over year, that is over $32.7 billion dollars!

After taxes are paid on the income, consumers can do two things with that money.  It can be spent or it can be saved, and Americans will do both.  In the weeks ahead, data on consumption will find its way into the press in the form of retail sales and the report on income and outlays.  Based on the earlier mentioned figures from the BLS, Atlas expects both to improve.
(by C. Cox)