Saturday, August 18, 2018

Weekly Indicators for August 13 - 17 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

There were 4 long leading indicators that were on the cusp of changing. To see what happened, please  put a penny or two in my pocket by heading on over and reading!

Friday, August 17, 2018

Why don't I see any more Doomish commentary on how commercial and industrial loans are turning negative and ensuring a recession?

 - by New Deal democrat

Oh, that's probably why.

I told you soin July 2017, when I published a graph showing that commercial and industrial loans tend to lag the Senior Loan Officer Survey by about 6 quarters, and concluded:

"in the last three quarters, the Senior Loan Officers have reported a slight loosening of standards, which suggests that commercial and industrial loans will continue to flatline through about the end of the year, and improve in 2018."

Which is, of course, exactly what they did.

My extended take on housing permits and starts at Seeking Alpha

 - by New Deal democrat

My long-form take on housing sales, updated with yesterday morning's housing permits and starts report, is up at Seeking Alpha.

Like my Weekly Indicators posts, I make a penny or two when you decide to read.  So decide to read!

Also worth mentioning: my overall view of housing differs somewhat from that of Bill McBride a/k/a Calculated Risk.  Like Bill, I don't think housing has already peaked.  But unlike Bill, I see inventory as the tail, rather than the (a?) head. "Months' inventory" typically turns up precisely because sales turn down, so doesn't give me any new information. Also, Bill is really focused on the demographic tailwind, and on "pent-up demand."  I'm not sure about the latter, since the bubble years where 2+ million units were added a year, coincided with the demographic *nadir,* i.e., there was a lot of excess housing to be absorbed. As to the former, high enough interest rates and prices will be enough to overcome it. I don't think we're quite there - yet.

Thursday, August 16, 2018

Housing starts turn negative, while permits remain positive

 - by New Deal democrat

NOTE: I'll have a more comprehensive report up at Seeking Alpha later, and will link to it once it is posted.

This morning's report on housing permits and starts was a mixed bag.

Permits, while below their single family peak in February and their overall peak in March, were higher than last month. Their shorter term trend is neutral while the 12 month trend remains positive.

Starts, on the other hand, were lower YoY for the second month in a row. Single family starts had their lowest month since last December.

The data isn't up on FRED yet, so here is the Census Bureau's graph:

Because of their volatility, the best way to view starts is as a 3 month average. But even so viewing, starts made a 7 month low. The last two months are equivalent to the low readings of last summer, and no better than average compared with 2016.

Still, because permits tend to slightly lead starts, and single family permits are the least volatile measure of all, the trend in housing must continue to be counted as a weak positive.

This, by the way, contrasts with the weekly data on purchase mortgage applications, which is now down YoY even as measured over a 4 week average; and is among the lowest readings of the last 18 months.

Wednesday, August 15, 2018

Industrial production cools a bit; retail sales continue strong

 - by New Deal democrat

Both industrial production and retail sales for July were reported this morning. Let's take a look at both.

First, industrial production increased m/m to another all time high (gray in the graph below), as did manufacturing (red):

At the same time, if you zoom in on the inset, you can see that manufacturing growth has slowed down somewhat this year.  It is only up +0.8% in the last 5 months, after having risen 2% in the 6 previous months.

There has been some evidence in both the regional Fed reports and the ISM manufacturing index of a little cooling -- from white hot to red hot -- in manufacturing activity in the past few months. This report is of a piece with that cooling. Tomorrow both the Empire State and Philadelphia Fed regional manufacturing reports will be released, and may (or may not!) give evidence of further cooling this month.

Second, retail sales increased a strong +0.5% in July, but only after a -0.3% downward revision to June. Adjusting for inflation, real retail sales continue to grow on trend:

Real retail sales per capita also continued to grow on trend:

I expect per capita real retail sales to turn about a year before any downturn in the economy as a whole.

Since real retail sales are also a good short leading indicator for employment (red in the graph below), here is growth in both measured YoY:

This suggests continued strong employment growth in the next few months. One thing to watch for is what happens when last September's outsized +1.3% monthly increase drops out of the YoY calculations two months from now.

But the nowcast as indicated by the two reports is continued good growth in both production and consumption.

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
Rent as %
of earnings

2004 59962995
2013 73477894
2014  76279196
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.