Tuesday, August 14, 2018

Can the Fed successfully steer between Scylla and Charybdis? An update


  - by New Deal democrat

As I type this, the spread between 2 year and 10 year Treasuries is back to 0.25%, the level below which I switch my rating on the yield curve from positive to neutral. Already the spread is tight enough that, even if it never inverts, it suggests a slowdown in the next 6-12 months, as happened in 1984 and 1995 in the graph below of real YoY GDP growth and the Fed funds rate:



One aspect of what is happening in the bond market is that the 2 to 10 year spread is reaching equivalent levels at higher and higher absolute yields.  Here's a graph I generated last week, where I normed both the 2 and 10 year Treasury yields to zero at a point where the spread between them was 0.30%:



Note that the two lines intersect (meaning the spread between them is 0.30% three times in the past 45 days: first when the 10 year bond was yielding about 2.83%, then when it was yielding 2.87%, and last week when it was yielding 2.98%.

In other words, the dynamic is that the yield on the 10 year bond has to be at higher and higher levels in order not to be too tight.  And the higher those 10 year bond yields, the higher mortgage rates go as well, gradually strangling the housing market.

Can the Fed successfully steer between the Scylla of an inverted yield curve and the charybdis of  a housing market downturn?

Possibly. The San Francisco Fed's staff just published a paper in which they suggested that the "neutral Fed funds rate" was 2.5%, as shown in this graph which they generated:



If the Fed stops after two more hikes, it's at least possible that there could be a tight but not inverted yield curve with 10 year bonds yielding roughly 3%.

But the Fed's own "dot plot" from their meetings suggest that they intend to hike the Fed funds rate to at least 3%. If that happens, I see no way the economy doesn't wind up on the rocks.

Monday, August 13, 2018

Gimme Shelter: the rental affordability crisis has worsened


 - by New Deal democrat

Four years ago HUD warned of "the worst rental affordability crisis ever," citing statistics that
About half of renters spend more than 30 percent of their income on rent, up from 18 percent a decade ago, according to newly released research by Harvard’s Joint Center for Housing Studies. Twenty-seven  percent of renters are paying more than half of their income on rent. 
This is a serious real-world issue. I have been tracking rental vacancies, construction, and rents ever since.  The Q2 2018 report on vacancies and rents was released a few weeks ago, so let's take an updated look. In this post I will look at four measures:

  • real median asking rent, as calculated quarterly using the Census Bureau's American Community Survey
  • two rental measures from the monthly CPI reports
  • HUD's quarterly rental affordability index
  • Rent Cafe's monthly rental index

As we will see, regardless of which measure used, rent increases continue to outpace worker's wage growth, meaning the situation is getting worse. Most likely this is a result of increased unaffordability in the housing market, driving potential home buyers to become or remain renters instead.

Real median asking rent

In the second quarter of last year, median asking rents zoomed up over 5% from $864 to $910. In the two quarters since, they have remained at that level: 




Here is an updated look at real, inflation adjusted median asking rents. The entires prior to 2009 show the interim high and low values from the previous 20 years. Since 2009, real rents have almost continuously soared -- and reached yet another record high in the quarter just ended:

Year Median
Asking Rent
Usual weekly
earnings 
Rent as %
of earnings

198833038286
199240143792
199342245088
200047856884
200254560790
2004 59962995
200968073992
201271776893
2013 73477894
2014  76279196
2015813809100
2016859832103
2017 8968860104
2018 Q1954881108
2018 Q2 951876109

The big increase in unaffordability is unfortunately of a piece with the rental vacancy rate which, after appearing to have bottomed in 2016, tightened again in this report: 


CPI rent

The monhtly CPI report also includes two measures of inflation in rents. The CPI for actual rent (blue) continued an apparent slow deceleration, while owner's equivalent rent (red), the major component of inflation, remains near the highest levels in a decade, at over 3% YoY: 



HUD's Rental Affordability Index

Yet another metric is HUD's  Rental Affordability Index which, similarly to my chart above, compares median renter income with median asking rent. In its  most recent (Q1) uupdate, it, like the median household income data, shows both rents and renters' income bottoming out in 2011-12, but with rents outpacing income ever since:
  

As a result, the trend in "rental affordability index," according to HUD, which had been easing since 2011, has declined in the past year to matchits worst levels:
.


Note that HUD's measure of housing affordability also generally deteriorated in 2017, making home-buying the least affordable since 2008, although better than  during the bubble years. 

But the strong suggestion is that, as housing has become less and less affordable, more households are forced into renting, which has responded by *also* becoming less affordable. 

[Paranthetically, I'm not sold on HUD's method, mainly because it relies upon annual data released with a lag. In other words, the entire last year plus is calculated via extrapolation.]

Rent Cafe's monthly rental index

Finally, there is a monthly rental index calculated by Rent Cafe.  This has the benefit of being much more timely.  Since it is not seasonally adjusted, the index must be compared YoY. While Zumper only includes 12 months of data in their monthly releases, at the beginning of this year they did publish the historical YoY record of their index (blue in the graph below). Rent Cafe's measure of rent shows that a surge to over 5% increases YoY occurred in 2015 and early 2016, and has abated to less than 4% YoY since, in contrast to the CPI measures and also to HUD's and the Census Bureau's data:


Through 2017, their measure of rents was continuing to grow at about 3% YoY. Below are the last 12 months through July:  




Here's the bottom line, from all 4 sources: regardless of which measure we use, rents are growing faster than nominal wages for nonmangerial workers,which have onl increased at 2.7% YoY through last month. 

In particular, this quarter's Census report not only indicates no relief from the "rental affordability crisis," it, like all the other metrics, shows that it is becoming worse, as -- most likely -- more and more households are being shut out of the home-buying market due to 5%+ YoY increases in house prices and increased interest rates, and are forced to compete for apartments instead.

Saturday, August 11, 2018

Weekly Indicators for August 6 - 10 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Two long leading indicators are within 1% of turning negative. And two short leading indicators are also weakening considerably.

A friendly reminder that not only is the post informative, but I get compensated the more people read it, so by all means please read it!

Friday, August 10, 2018

Real wages decline YoY, while real aggregate payrolls grow


 - by New Deal democrat

With the consumer price report this morning, let's conclude this weeklong focus on jobs and wages by updating real average and aggregate wages.

Through July 2018, consumer prices are up 2.9% YoY, while wages for non-managerial workers are up 2.7%. Thus real wages have actually declined YoY:



In the longer view, real wages have actually been flat for nearly 2 1/2 years:



Because employment and hours have increased, however, real *aggregate* wage growth has continued to increase:



Real aggregate wages -- the total earned by the American working and middle class -- are now up 25.8% from their October 2009 bottom.

Finally, because consumer spending tends to slightly lead employment, let's compare YoY growth in real retail sales, measured quarterly (red), with that in real aggregate payrolls (blue):



Here's the monthly close-up on the last 10 years:



Since late last year real retail sales growth has accelerated YoY, so we should expect the recent string of good employment reports to continue for at least a few more months.

Thursday, August 9, 2018

Four measures of wages all show renewed stagnation


 - by New Deal democrat

This is something I haven't looked at in awhile. Since 2013, I have documented the stagnation vs. growth in average and median wages, for example here and here. I last did this in 2017. So let's take an updated look.

We have a variety of economic data series to track both average and median wages:
Let's start with nominal wages.  The first graph below shows the YoY% growth in each of the four measures:



While each is noisy, the overall trends are clear:
  • First, in this cycle as in the last, wage growth declined coming out of recessions, then rose as the expansion continued.  
  • Second, by most measures nominal growth has picked up somewhat in the last year. 
  • Third, secularly there has been an undeniable slowdown in wage growth, which (while not shown) was 4-6% in the late 1990s peak and 3-4% at the 2000s peak. So far in this expansion it is no better than 2.5%-3%.  I believe this is in part due to how weak the employment situation was for so long into this expansion, but also secularly due to shifts in bargaining power, as employers learn over time that employees can be retained with lower and lower annual increases in compensation.

Now let's turn to the real, inflation-adjusted measures. Our first graph starts out normed to 100 for each measure in the fourth quarter of 2007.  



After a spike during the Great Recession due entirely to the collapse of gas prices at that time, real wage growth declined through 2013 time frame, then rose significantly from late 2014 through early 2016 mainly due to the decline in gas prices. Since that time, 3 of the 4 measures (all except the ECI) have turned flat if not worse.  Further, note the divergence between the mean measure of the average hourly earnings (blue) and median measures in usual weekly earnings (red) and the employment cost index (green), strongly suggesting that gains have been skewed towards the upper end of the income distribution.

Finally, let's look at the YoY% real growth in the four measures:



Here the picture continues to be not good at all.  After growing 2-3% in real terms during 2014-15, in 2016 real wage growth decelerated to only 0.5%-1.5% across the spectrum of measures, and as of the most recent readings is between -0.5% to +0.5% . 

In my last look at this data over a year ago, I concluded that the prospects for further meaningful wage growth for the broad mass of American workers during this cycle was dim. Nothing that has happened since that time has changed this poor result. What little nominal acceleration in gains there has been in any of the four series has been entirely negated by inflation. What gains in income have been made at the household level appear to be due exclusively to declines in the unemployment and underemployment rates.