Wednesday, February 17, 2010

FOMC Minutes

Yesterday, the Fed released the minutes from the January 26th meeting. Let's take a look at their assessment of the economic situation:

Some indicators suggested that the deterioration in the labor market was abating. The pace of job losses continued to moderate: The three-month change in private nonfarm payrolls had become progressively less negative since early 2009; that pattern was widespread across industries. The unemployment rate was essentially unchanged from October through December. The labor force participation rate, however, had declined steeply since the spring, likely reflecting, at least in part, adverse labor market conditions. Moreover, hiring remained weak, the total number of individuals receiving unemployment insurance--including extended and emergency benefits--continued to climb, the average length of ongoing unemployment spells rose steeply, and joblessness became increasingly concentrated among the long-term unemployed.

Here are some charts of the relevant data.

The 4-week moving average of initial unemployment claims continues to drop. Note the pace of the decline is on par with rate of decline after the early 80's recession.

It appears the unemployment rate has topped out.

And, the total pace of job losses continues to moderate.

Total industrial production (IP) rose in December, the sixth consecutive increase since its trough. The gain in December primarily resulted from a jump in output at electric and natural gas utilities caused by unseasonably cold weather. Manufacturing IP edged down after large and widespread gains in November. For the fourth quarter as a whole, the solid increase in manufacturing IP reflected a recovery in motor vehicle output, rising export demand, and a slower pace of business inventory liquidation. Output of consumer goods, business equipment, and materials all rose in the fourth quarter, though the average monthly gains in these categories were a little smaller than in the third quarter. The available near-term indicators of production suggested that IP would increase further in coming months.

We looked at IP yesterday, as the Fed just released it's latest report. Suffice it to say the latest reading added another month of positive economic data.

Consumer spending continued to trend up late last year but remained well below its pre-recession level. After a strong increase in November, real personal consumption expenditures appeared to drop back some in December. Retail sales may have been held down by unusually bad weather, but purchases of new light motor vehicles continued to increase. The fundamental determinants of household spending--including real disposable income and wealth--strengthened modestly, on balance, near the end of the year but were still relatively weak. Despite the improvement from early last year, measures of consumer sentiment remained low relative to historical norms, and terms and standards on consumer loans, particularly credit card loans, stayed very tight.

While real (inflation-adjusted) retail sales have bottomed without a real increase

Real personal consumption expenditures (Real PCEs) are up since bottoming at the beginning of the year. Also note the upward pace continues.

The recovery in the housing market slowed in the second half of 2009, even though a number of factors supported housing demand. Interest rates for conforming 30-year fixed-rate mortgages remained historically low. In addition, the Reuters/University of Michigan Surveys of Consumers reported that the number of respondents who expected house prices to increase continued to exceed the number who expected prices to decrease. Sales of existing single-family homes rose strongly from July to November but fell in December, a pattern that suggested sales were pulled ahead in anticipation of the originally scheduled expiration of the first-time homebuyer credit on November 30. Still, existing home sales remained above their level in earlier quarters. Sales of new homes also turned down in November and December, retracing part of their recovery earlier in the year. Similarly, starts of single-family homes retreated a little from June to December after advancing briskly last spring. The pace of construction was slow enough that even the modest pace of new home sales was sufficient to further reduce the overhang of unsold new single-family houses.

Let's look at the data. All the charts below are from Calculated Risk -- who still has the best real estate charts on the web. We'll start with new homes:

The pace of new home sales is still at the bottom. It rebounded a bit, but in reality the best way to describe the current pace of new home sales is "bumping along the bottom."

The good news is the months of supply is now in line with the top part of the range for historical norms, and

the total amount of homes on the market is now at the low end of historical norms. In other words, the excess inventory of new homes inventory has been worked off.

Let's move to the existing home market:

Existing home sales took a big dive last month, which was largely attributed to the confusion about the new home buyer's tax credit status.

The total inventory of existing homes continues to move lower, but is still at high levels compared to the historical norm. In addition,

The number of months it would take to clear the existing inventory at the present sales pace is still above the historical norm as well.

So, we have a new home sales market that is healing and an existing home sales market that is in the process of healing but still has a ways to go.

Real spending on equipment and software apparently rose robustly in the fourth quarter following a slight increase in the previous quarter. Spending on high-tech equipment, in particular, appeared to increase at a considerably more rapid clip in the fourth quarter than in the third; both orders and shipments of high-tech equipment rose markedly, on net, in October and November. Business purchases of motor vehicles likely also climbed in the fourth quarter. Outside of the transportation and high-tech sectors, business outlays on equipment and software appeared to change little in the fourth quarter. Conditions in the nonresidential construction sector generally remained poor. Real spending on structures outside of the drilling and mining sector dropped in the third quarter; data on nominal expenditures through November pointed to an even faster rate of decline in the fourth quarter. The pace of real business inventory liquidation appeared to decrease considerably in the fourth quarter. After three quarters of sizable declines, real nonfarm inventories shrank at a more modest pace in October, and book-value data for this category suggested that inventories may have increased in real terms in November. Available data suggested that the change in inventory investment—including a sizable accumulation in wholesale stocks of farm products—made an appreciable contribution to the increase in real gross domestic product (GDP) in the fourth quarter.

Spending on equipment and software appears to have turned the corner, but

Non-residential fixed investment is still bouncing along the bottom. In addition,

Total inventories appear to have bottomed, but are still waiting for a big move higher. In addition,

The inventory to sales ratio is at low levels, indicating business has cut inventories to the bone. The question now is "can business continue cutting inventories, or will they be forced to start adding inventory?"

Consumer price inflation was modest in December after being boosted in the preceding two months by increases in energy prices. Core consumer price inflation remained subdued. Price increases for non-energy services slowed early last year and remained modest throughout 2009, reflecting declining prices for housing services and perhaps the deceleration in labor costs. Price increases for core goods were quite modest during the second half of 2009. According to survey results, households' expectations of near-term inflation increased in January; in addition, median longer-term inflation expectations edged up, though they remained near the lower end of the narrow range that has prevailed over the past few years.

Inflation isn't an issue. Consider these charts:

CPI is increasing again, but hardly at a rate that could be considered scary.

We see the same pattern with PPI. We want a little inflation as that indicates somewhere in the system we have either enough demand pull or cost push inflation to keep the economy moving forward.

The U.S. international trade deficit widened in November, as a sharp rise in nominal imports outpaced an increase in exports. The rise in exports was driven primarily by a large gain in agricultural exports, which was partially offset by a decline in exports of consumer goods that followed robust growth in October. Imports of oil accounted for roughly one-third of the increase in total imports, though most other categories of imports also recorded gains.

There's good news and bad news with the above number. The bad news is the US is still a net importer, which subtracts from overall GDP growth. Here is the chart:

The chart shows the overall trade balance is again moving in the wrong direction. However,

Net exports are increasing. This is good news as it will add some upward pressure to the jobs picture.