Comprehensive housing summary for July 2014: prices peak, but lower interest rates are putting an end to the sale slowdown

Wtih yesterday's report on pending home sales, housing data from the first 7 months of 2014 is in the books.  The data clearly shows that earlier this year was the trough of the housing slowdown, and that lower mortgage rates - down over .5% from the beginning of this year - are beginning to have a positive impact. At the same time, it appears that housing prices hit an interim peak earlier this summer, and are stabilizing if not in a slight decline.

I've seen some very poor analysis of the housing market, that I won't link to, in the last month.  For example, I've seen an argument, unsupported by actual data, that prices or even inventory, rather than interest rates, lead sales. This is demonstrably false if you simply look at the data.

You really need to remember the following.  The housing market tends to cycle in a regular order:

• 1st, interest rates turn
• 2nd, permits, starts, and sales turn
• 3rd, prices turn
• 4th, inventory turns

Because of the time lag, prices and inventory may still be reacting to a move in interest rates that has since reversed - and that appears to be the case now.  July is when the turn in rates and prices became clear.

Interest rates

First, here is a graph, covering the last 30 years, of the YoY% mortgage rates (inverted so that higher rates give a lower value, blue) vs. housing permits, YoY change in 100,000's (red):

Here's a close-up of the last 5 years through July:

Interest rates on mortgages went up from 3.4% in early May 2013 to a high of 3.6% in August of last year.  On 16 of 19 occasions since the end of World War 2, that big a change led to a YoY decline of at least -100,000 in permits. In this case, housing permits drifted back lower, down to 4.1% at the end of June of this year, and in the last month have been on average about -0.3% lower than they were at this time last year.

The YoY decline in interest rates suggested that we would start to see some improvement in permits, sales, and starts, although probably muted since rates have not returned to 2013 lows.  In July, in two of the three series, we did.

Permits, starts, and sales

Here is a graph of the change, in thousands, YoY of starts (blue), permits (red), new home sales (green), and existing home sales (orange) (note that the St. Louis FRED does not track pending home sales):

Next, here is the YoY% change in the same four statistics:

Both of these graphs show the clear deceleration in the housing market through 2013 and into outright  declines in the early part of this year.  New and existing home sales have been consistently negative YoY, and permits ended up at midyear only +2% in the first half of 2014 compared with the first half of 2013.

But with July's data, we can see that the trough of the housing slowdown is in place, and that there has been a significant positive turn in the last several months.  Only pending sales were negative YoY by -2.1%, although they were up month over month for the fifth month in a row.

In summary, through July 2014:

• Permits are down -0.9% from their October 2013 high, but up +12.6% from their January 2014 low
• Starts are down -1.1% from their November 2013 high, but up +21.9% from their Januay 2014 low
• New home sales are down -9.8% from their January 2013 high, but up +2.2% from their March 2014 low
• Existing home sales are down -4.3% from their July 2013 high, but up +12.2% from their March 2014 low
• Pending home sales are down -2.1% from their June 2013 high, but up +12.4% from their February 2014 low

The impact of demographics on permits, starts, and sales

I suspect the situation this year is analogous to the late 1960's (one of the four exceptions to the rule that rising interest rates cause an actual decrease in sales), when Boomers first reached adulthood and the existing apartment stock was nowhere near adequate to the task.  Multi-unit starts skyrocketed, despite higher interest rates, while single family homes languished. It was an era of generally rising interest rates, and any temporary decline in interest rates was met with heightened housing activity.

Now it is Millennials. Now as then, it is only multi-unit (apartment) construction that is carrying the recovery in housing this year. Even with the overall July increase, single family home starts and sales have completely stalled.  Here is a graph of the YoY% change in single family house permits (blue) and multi-unit permits (red) since the beginning of 2011:

Since late 2013, multiunit construction has been entirely responsible for any increase in residential construction.

Prices

 The Case Shiller 20 city index for July showed an actual decline from May and June.  By this important measure, prices have actually already made an interim peak:

Median prices for new homes (red) and existing homes (blue) are not seasonally adjusted, so I am showing their YoY% change, which shows continued marked deceleration in price gains.  Note that YoY comparisons lag seasonally adjusted month over month comparisons:

It is likely that we have seen an interim, seasonally adjusted price peak in housing.  It should decline for awhile before bottoming, as sales have already bottomed.

Inventory

With housing prices still increasing YoY, even if they are near or at or slightly past their seasonally adjusted peak, we would expect to find more inventory entering the market, as potential sellers hope to take advantage of the improved pricing situation.  And that's exactly what we find. Below is the graph of combined new and existing home inventories:

The inventory of houses for sale is not just increasing, but it is increasing at an accelerating rate YoY.


In summary, through July 2014:

• 1. Lower interest rates have revived sales from their trough earlier this year. At the same time, because interest rates are still higher than they were several years ago, I am not expecting a renewed boom in sales.
• 2. As shown by the Case Shiller Index, prices hit an interim peak earlier this summer.  Because the lower interest rates are already feeding through the system, at this point I am expecting only a slight decline, or more generally a period of stable prices.

As I have noted a number of times in the last month, the biggest issue in the second half of this year is how much interest rates go down, and whether the decline is transitory or persists.  New housing sales are very important to the economy, and tend to feed through the entire economy over the course of a year or more.  For now, the trend is in the right direction.

2Q deflated corporate profits, real residential spending add to caution about 2015

- by New Deal democrat

I have a new post up at XE.com, discussing several important datapoints from this monring's revisions to second quarter GDP.

The remainder of 2014 still looks good, but there is at least one additional reason to remain cautious about 2015.

No matter how you measure, wages have stagnated

- by New Deal democrat

We have a variety of economic data series to track wages, including measures of average wages, median wages, and wages per unit production hour. There are at least 7 such measures.

In addition to the monthly average hourly pay report (listed first below), there are 4 quartely series:

• The most  commonly known measure is that of average hourly pay for nonsupervisory workers, which is part of the monthly jobs report.
• The Bureau of Labor Statistics, which conducts the household employment survey, also reports "usual weekly earnings" for full time workers each quarter. 
• The BLS also measures the Employment Cost Index quarterly.  
• The BLS also measures "business sector real compensation per hour" quarterly. 
• Another quarterly measure is unit labor costs, which measure how much labor gets paid per unit of output.

There are also two annual series:

• The BLS reports occupational employment statistics which are reported annually.  
• Additionally, the Social Security Administration measures annual net compensation from actual W-9 tax withholding forms, but this has only been issued through 2012.  This method means that the result is subject to change based on the total hours worked (remember that in the recession we lost 6% of jobs, but almost 10% of aggregate hours).  

Let's take a look at all of them.

The first graph, below, tracks monthly average (mean, not median) hourly wages (green), median wages from the employment cost index (red), and unit labor production costs (blue). All are adjusted for inflation using the CPI.  Since the quarterly index of median wages only started in Q1 2000, I have normed the indexes to 100 at that time:

As you can see, real average wages have risen fitfully, mainly reacting to the price of gas). Median real wages have essentially been flat for 10 years. This is certainly not what I would call good, given all the productivity gains during that same period. You need consumers to have the money to buy, before real growth in selling picks up as well.

Speaking of productivity gains, here are unit labor costs (i.e., how much labor does it cost to produce one widget) through the second quarter of 2014:

But since the price producers have charged for widgets has changed over time (in other words, is it really a labor gain if labor costs 2% more per widget, but the producer charges consumers 4% more per widget?), here are real unit labor costs adjusted by inflation:

This tells quite a different story.  The share of payments to labor has not kept up with the real price of production -- which is the flip side of record corporate profits.

The remaining 4 measures do not come with graphic presentations either by the BLS or the St. Louis FRED.  So I will provide them in a table, below.

Two of the remaining series uses tax return data.  Once a year, the Social Security Administration reports on the median salary of those who pay into it via their withholding taxes.  Secondly, every year the BLS reports on mean and median hourly wage rates for a panoplay of "occupational employment," and also give the average and the median for the aggregate sample. The most recent report, from this April,  reported on the data as of May 2013. The below table gives the median wage, adjusted by the CPI.

A third measure in the table below is the quarterly measure of "usual weekly earnings" of wage and salary workers. That report only goes back to 2004.

To reiterate, all of these are adjusted for inflation:

Year	Social Security		Usual weekly earnings	Occupational Employment
1999	27,164		---	---
2000	27,374		---	---
2001	27,713		---	16.78
2002	27,784		---	16.95
2003	27,657		---	16.91
2004	27,903		332	16.80
2005	27,331		333	16.71
2006	27,832		335	16.80
2007	27,984		345	16.70
2008	27,468		342	17.22
2009	27,584		337	17.12
2010	27,382		335	17.13
2011	26,963		337	16.86
2012	27,413		335	16.71
2013	---		333	16.63

 While two of the above 3 measues are annual, "usual weekly earnings" is updated quarterly, so here is a more detailed look at that measure through the second quarter of this year:

2013 Q1  332
2013 Q2  334
2013 Q3  333
2013 Q4  334
2014 Q1  336
2014 Q2  330

If you are keeping score, among the median measures, that's a decline from peak to trough is -3.6% for Social Security, -4.3% for usual weekly wages, -3.4% for Occupational employment, and -2.6% for the Employment Cost Index.  Average hourly wages declined - 2.6% from 2009 to their trough in 2012.  The big, nearly 2% decline in second quarter 2014 of usual weekly earnings is certainly surprising. Since it goes against all of the other monthly and quarterly series, I am inclined to think it is just a case of an outlier panel.  We'll see when 3rd quarter results are posted in October.

The bottom line is that, since the turn of the Millenium, real median wages - no matter how measured -  have stagnated. Gas prices caused them to rise during the recession, and then decline thereafter as the effects of those gas prices filtered through the economy. 

The jury is out on whether that decline has ended. Some measures suggest that real wages bottomed in late 2012 or early 2013.  Others suggest that the decline may have continued at least slightly since then.

No matter which measure you use, the fact is that American labor is still not sharing in the fruits of its productivity.

Draghi's Austerity Defense Rings Hollow

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/draghis-austerity-defense-rings-hollow

This Week's Germany News Has Been Concerning

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/weeks-news-germany-not-encouraging

A thought for Sunday: it is time for Judge Griesa to cease and desist

 - by New Deal democrat

It's Sunday, so I get to stray from posting economic data, and editorialize....

As most readers of this blog are probably aware, there is contentious litigation in the Southern District of New York Federal Court between several "vulture" funds, and the country of Argentina.  In a nutshell, when Argentina was forced to unwind its 1990s currency peg to the $US in 2001, it swapped old bonds for new bonds, but agreed to the jurisdiction of US courts in any litigation over the new bonds.  Over 90% of the old bondholders eventually went along, but some bondholders sold their rights to "vulture" funds which insisted on being paid in full.  In the ensuing US litigation, the US District Court in New York City agreed with the vulture funds.

The 83 year old senior judge handling the case, Judge Thomas Griesa, however, has gone well beyond making a legal ruling as to who owes whom how much.  He has issued injunctions ordering banks anywhere in the world  not to allow payments by Argentina on any debt unless it pays the vulture funds in full.

This egregious extra-territorial extension of claimed jurisdiction is bad enough, but if the following statement reported by Reuters  on Thursday is true, then in my opinion Griesa has finally stepped way over the line separating Judicial resolution of litigation, and the foreign policy of the United States:

"Griesa said proposed legislation announced on Tuesday by President Cristina Fernandez would violate orders he imposed favoring creditors who refused to accept restructured bonds following the country's 2002 default on $100 billion in debt.""It is illegal, and the court directs that it cannot be carried out," Griesa said at a hearing in New York."

I don't remember Judge Griesa being made the King of Argentina. Let's be clear here:  the new law passed by Argentina may violate the terms of its bond swap, and it may violate the orders of Judge Griesa in the US.  But for a US judge to be claim that a law passed by another country is illegal, and may not be obeyed, is a breathtaking usurpation of executive authority, and an imperial arrogation of Sovereignty over a foreign country.

To understand how outrageous this is, swap out Argentina for a country with more power.  Imagine a US judge Ordering that a law enacted by China, or Russia, or the EU, is "illegal" and may not be obeyed. To say that the blowback against the US would be significant would be an understatement.  The blunt truth is, the only reason Griesa can take this position is that Argentina doesn't have the military power to extract a price. Doesn't that sound like a decision that the Executive, not a low level judge, should be making?

I also don't buy that "Argentina" has made its bed, and now must sleep in it.  A corporation, faced with a similar issue, could simply wind up operations and its shareholder start a new corporation from scratch.  Countries can't do that.  And Argentina in 2015 is literally a different population from Argentina in the 1990s or 2001.  Demographically, its median age is 30, meaning an absolute majority of Argentinians were not of voting age in 2001, let along the 1990s, and about 15% of its population wasn't even born in 2001!  So the coercion being inflicted by Judge Griesa falls largely upon individuals who cannot bear any moral responsibility for the decisions made by former governments.

Judge Griesa has done quite enough damage already. He has now vastly overstepped the proper  authority of a US court, by effectively declaring himself the omnipotent Sovereign over another country.  It is time for him to cease and desist, or to be made to cease and desist by the Obama Administration.

International Round-Up

Over at XE.com

International Week in Review

International Preview for August 24-29

Weekly Indicators for August 18 - 22 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at XE.com.  Summer is nearing its close and the data allows us to put our feet up, sip a libation, and enjoy the view.

The consumer fades further: real retail sales per capita for July

 - by New Deal democrat

With the release of the CPI the other day, I can update on of my new favorite economic measures, real retail sales per capita.  This takes the real, inflation adjusted sales number and adjusts it further by the number of consumers doing the buying. In the past, when the average individual consumer is puling back, it is an early (as in a year or more) signal of a downturn in  the economy:

This measure is slightly below its high from two months ago. I won't really be concerned unless it stays below its May peak for at least two more months.


Now let's look at it a second way, which is the YoY% change:

As I wrote last week in a post at XE.com, there has been a "slow fade" of the consumer since 2010.  July's real number continues that fade, although again I won't really be concerned unless the YoY measure turns negative and stays there for several months.

To put this in context of a number of indicators I continually study, there is a lot of evidence that the expansion is significantly past its halfway point (which ain't too bad after a 5 year expansion), but there is no imminent sign of any actual downtrun. My big fear remains the failure of wages to make any real progress in the last 15 years.

Prices of existing houses have probably made an interim peak

 - by New Deal democrat

I have a new post up at XE.com on this morning's report on existing home sales for July.

We have probably hit an interim peak for prices in the last two months.  More details in the article.

EU Weakness in Two Charts

This is over at XE.xom

We Might As Well Describe the EU's Economy As One in Permanent Recession

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/we-might-well-describe-eus-economy-one-permanent-recession

Lower mortgage rates = bottom in housing slowdown has probably passed

 - by New Deal democrat

I have a new post up at XE.com, looking at today's housing permits report. It looks like the decrease in interest rates that started at the beginning of this year is taking hold in new housing construction.

Weekly Indicators for August 11 - 15 at XE.com

 - by New Deal democrat

My Weekly Indicators piece is up at XE.com.

With increased geopolitical and international economic concerns, the US is benefitting once again from a flight to safety.

Industrial production and nonfarm payrolls: As Good as It Gets, Millennium edition

 - by New Deal democrat

The index of industrial production has grown at nearly a 5% rate in the past year (blue in the graph below), which is as good as it has been since the turn of the Millennium with the brief exception of 2010 vs. the 2009 depths of the recession:

Similarly, nonfarm payroll growth (red), at about 1.9% YoY, is also as good as it has been since the turn of the Millennium.

In other words, where we have been over the last 12 months is what passes for the economy firing on all cylinders at any point in the last 15 years.

Just to put that in perspective, here is the same data going back to 1983:

You can see that the last 15 years have been pathetic compared to the 15 years before that (and the 1980s and 1990s weren't as good as the 1960s and 1970s).

US consumers have been slowly tightening their pursestrings

 - by New Deal democrat

I have a new post up at XE.com, discussing the state of the American consumer in view of yesterday's flat retail sales report.  Time is running out on some fort of relief.

Weekly Indicators for August 4 - 8 at XE.com

 - by New Deal democrat

My Weekly Indicator column for this week is up at XE.com.  Here we are in the dog days of summer, and the numbers are like a lazily and happily snoozing pooch.

International Week in Review: The ECB Blows It Edition

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/international-week-review-ecb-blows-it-edition

A better measure of labor utilization

 - by New Deal democrat

Every month there seems to be a debate about the strength, or lack thereof, of the recovery in jobs since the depths of the Great Recession.  Professor Paul Krugman's back of the envelope measure has been the employment to population ratio in the 25 to 54 age group.  This takes care of the confounding issue of Boomer retirements, but on the other hand, it doesn't take into account changes in, for example, the trade off between work and child care costs in terms of employment decisions.

With that in mind, I've been working on a better, more detailed metric for labor utilization.

It seems to me that a better, more granular view of labor utilization can be obtained by measuring the hours of work available in the economy to those who are  working or want to work.  This can be obtained by dividing aggregate hours worked by the total of the civilian labor force plus those not in the labor force but want a job now. Here's what that looks like:

Even that can be improved slightly.  There are some people who only want to work part time (for example, older persons who no longer need a full time job for medical benefits, or to put aside money for their children's education).  This metric has changed slightly over time, and depending on economic conditions.  When we adjust by subtracting those people who only want to work part time, here's what our measure of hours available to those who want to work full time:

Even this measure isn't perfect, since we don't know how the average number of hours desired, or worked, by those who only want part time work, has changed over time. But as you can see, there is very little difference between the two graphs.

Both graphs show that, as compared with the tech boom in the late 1990s, even at its peak, the last economic expansion had a shortfall of 4% of hours available to work, and our current expansion is about 2% below that, or 6% less than the peak of a bona fide economic boom.  On the other hand, its current measure is equivalent to early 1996 or 2006, which weren't exactly awful.

In summary, not awful, but not a boom either.   We probably need to add at least 2% to the total hours available, i.e., exceed the 2007 peak, before we have a reasonably comfortable employment situation.

UPDATE:  Since series "Not in labor force, want a job now" only goes back to 1994, we can't trace the exact metrics back before that time.  But if we simply divide aggregate hours by the civilian labor force, we get a similar metric that takes us all the way back into the 1960s:

The net result is that we are probably about 2% shy of the aggregate hours that would be consistent with strong labor utilization.

Don't Expect a Rate Cut In Australia Anytime Soon

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/dont-expect-rate-reduction-reserve-bank-australia

DEATHMATCH! Hurricane vs. volcanoes

 - by New Deal democrat

As many of you probably recall, I frequently check the webcams at Kilauea volcano in Hawaii.  Usually the summit and the outlet cone quietly steam away, and the lava politely flows downhill towards the Pacific Ocean, but a few times a year, something of more interest like the opening of a new vent happens.

As to which, enter Hurricane Iselle.  Not only is this the first full fledged hurricane forecast to hit the Big Island since about forever, its currently forecast track takes it directly over Kilauea. Since Kilauea isn't having an explosive eruption, we won't see how a full fledged ash cloud interacts with hurricane wall clouds.  But, assuming the webcams stay in operation, we may see plenty of steam from the interaction with the lava flows and underground hot spots.

The bigger Deathmatch will probably be won by Mauna Kea and Mauna Loa, the two 15,000 foot high volcanoes that dominate the island. I imagine they will rip apart much of the upper architecture of the hurricane.

Anyway, tomorrow should be an interesting day to watch!

The apartment boom of 2014: more building, low vacancies, higher rents

 -by New Deal democrat

I have a new post up at XE.com taking a detailed look at the apartment boom, which is the only part of the housing market that has been growing in the last year.

My table didn't transfer correctly to XE, so read the story over there, and then come back and look at the table below:

Year	Median Asking Rent	Usual weekly earnings	Rent as % of earnings	Real median asking rent
1988	330	382	86	649
1992	401	437	92	677
1993	422	450	88	690
2000	478	568	84	658
2002	545	607	90	717
2004	620	629	99	777
2009	723	732	99	797
2012	721	765	94	740
2013   Q1	718	770	93	722
2013  Q2	735	776	95	741
2013  Q3	736	778	95	738
2013  Q4	746	782	95	746
2014  Q1	766	791	97	763
2014  Q2	756	782	97	746

The REAL "real unemployment rate" for July 2014

 - by New Deal democrat

This is a slow week for data.  That being said, there is some worthwhile updated information on labor utilization, the housing market, and wages.  There's actually a lot on wages, but I want to wait for Friday, when 2Q unit labor costs are reported, before writing up that grand tour.

Today, let's update the "real real unemployment rate" for July.  This is my corrective for those commentators who have put together metrics that either assume there is no retiring Baby Boom, or rely upon nearly decade-old estimates.  There's simply no need for doing so, when every month the Census Bureau publishes the seasonally adjusted number of people who have completely stopped looking for work, but would nevertheless like a job now.

The first important thing to note is that, since the US Congress cut off extended unemployment benefits at the end of last year, this number, which had been in significant decline in 2013, has completely stopped and in fact has started to rise again:

This means that the "real real unemployment rate" (red) has declined less than the official U3 unemployment rate (blue) as shown in the graph below:

Since last November, while U3 has declilned by -0.8% from 7.0% to 6.2%, the "real" unemployment rate has only declined -0.5% from 10.3% to 9.8%.  Here's the close-up of that:

 Aside from the thoroughly preventable human tragedy, this has negative multiplier effect on consumer spending, and so is a self-inflicted drag on the economy.  The U6 calculation of underemployed vs. the "real underemployment rate" follows the same trajectory.

Has the Russell 2000 ETF Formed a Double Top?

Weekly Indicators for July 28 - August 1 at XE.com

 - by New Deal democrat

This week's installment is up at XE.com.  The news remains positive, but less so in comparison with recent weeks.

July 2014 jobs report: excellent job creation, poor wage and participation omens

- by New Deal democrat

HEADLINES:

• 205,000 jobs added to the economy
• U3 unemployment rate rose from 6.1% to 6.2%

Wages and participation rates

• Not in Labor Force, but Want a Job Now: up 144,000 to 6.259 million
• Employment/population ratio ages 25-54: down from 76.7% to 76.6%
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up +0.2% or $.04 from $20.58 to $20.61, up 2.0% YoY

May was revised upward by 5,000 to 229,000. June was also revised upward by 10,000 to 298,000. 

Since the economic expansion is well established, in recent months my focus has shifted to wages and the chronic heightened unemployment.  The headline numbers for July show little progress being made on those two fronts.

Those who want a job now, but weren't even counted in the workforce were 4.3 million at the height of the tech boom, and were at 7.0 million a couple of years ago.  They have actually slightly risen this year. As noted above they were 6.3 million in July.  This is almost certainly due to the cutoff in extended unemployment benefits by Congress at the end of last year.

After inflation, real hourly wages for nonsupervisory employees were probably unchanged from June to July. The YoY change in average hourly earnings is +2.0%, essentially equal to the inflation rate, so workers are making no real progress at all.

Finally, while the unemployment rate rose, it rose for the "good" reason.  The civilian labor force rose measured by the household survey rose by 329,000, while the number of new jobs in the same survey rose by 131,000.

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were decidedly mixed.

• the average manufacturing workweek fell by -2 hours from 41.1 to 40.9.  This is one of the 10 components of the LEI, and will have a significant negative impact.


• construction jobs increased by 22,000. YoY construction jobs are up 211,000, or about 4%.  This is good news.


• manufacturing jobs  increased by 28,000, and are up about 144,000 YoY.


• temporary jobs - a leading indicator for jobs overall - increased by 8,500.


• the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - increased by 177,000 to 2,587,000 compared with December's 2,255,000 low.

Other important coincident indicators help us paint a more complete picture of the present:

• The average workweek for all nonsupervisory workers was unchanged at 33.7 hours.


• Overtime hours fell 0.1 hour to 3.4 hours.


• the index of aggregate hours worked in the economy rose by 0.2% from 108.5 to 108.7. 


• The broad U-6 unemployment rate, that includes discouraged workers increased from12.1% to 12.2.


• The workforce creased by 329,000.  Part time jobs for economic reasons decreased by -33,000.

Other news included:

• the alternate jobs number contained in the more volatile household survey increased by 131,000 jobs.  The household survey jobs numbers had been lagging the establishment survey numbers, but as expected this difference has now been almost entirely made up, with the household survey showing a 2,066,000 increase in jobs YoY. 


• Government jobs increased by 11,000.

• the overall employment to population ratio for all ages 16 and above rose 0.1% from 58.9 to 59.0%, and has risen by +0.3% YoY. The labor force participation rate rose from 62.8% to 62.9, and has fallen by -0.5% YoY (but remember, this includes droves of retiring Boomers).

In summary, the excellent news is that the headline employment number was good once again.  Jobs are increasing so far this year at the rate of 2.76 million, or nearly 2% of the workforce.  This is the 12th best rate in the last 40 years, and the best since 1999.

The bad news is that no progress at all is being made on the discouraged long term unemployed, or on wages.  Only the prime working age participation rate is increasing.  The likelihood of a return to decent wage growth and full employment before the next recession hits is fading.

Russell Index Down For the Month

Japanese Industrial Production Is Sending Concerning Signals

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/japanese-industrial-production-sending-concerning-signals

2nd quarter GDP: good report, more later UPDATED

 - by New Deal democrat

Obviously, at +4.0% annualized, this was a good report (but if you have been reading the Weekly Indicators, you already suspected as much).  Plus, I have reason to believe the adjustments in the next couple of months are more likely to push it higher rather than lower.

I'll have more in a few hours over at XE.com, and I'll update with a link below when that happens.

UPDATE: My extended comments are now up at XE.com.  I think there is a 50/50 chance Q2 GDP is revised upward to over 5.0%.  But there are reasons for concern about 2015.

Will Housing Market Weakness Keep the Fed on the Sidelines Longer?

This is up over at XE.com.

CLFD: When Bad Things Happen to Good Companies

To completely date myself, I have an old copy of Graham and Dodd's Securities Analysis in my bookshelf.  This is the Fifth edition which I purchased in the late 1980s and is heavily dog-eared   I also have the sixth edition on my Kindle.  What I love about these books is they really teach you to focus on the company as a whole, rather than just looking at the top line of the earnings statement. 

In fact, the book places far more emphasis on the balance sheet than most other analysis books out there.  This makes a tremendous amount of sense to me, as it really focuses on how management is going about the business of growing the company. 

This explains why I love companies that have strong balance sheets, which brings me to Clearfield Communications.   This company has a very strong balance sheet, with a current ratio of 5.4 and a cash ration of 2.5.  These numbers are indicative of their performance over the last five years.  And their defensive interval ratio has increased from 147 in 2009 to 187 in their latest annual report.  Return on assets is just as impressive averaging 15% over the last five years.

And earnings have been strong.  In their first quarter they reported strong year over year growth:

Revenues for the three months ended December 31, 2013 were $16,148,000, an increase of approximately 57% or $5,883,000 from revenue of $10,265,000 for the first three months of fiscal 2013.  Revenues to broadband service providers and commercial data networks customers were $15,077,000 in the fiscal 2014 first quarter, versus $8,912,000 in the same period of fiscal 2013.  Revenues to build-to-print and OEM customers were $1,071,000 in the fiscal 2014 first quarter versus $1,353,000 in the same period of fiscal 2013.  General softness in the U.S. telco market was more than offset by a large, ongoing build of a U.S. based existing customer.  Also, international sales increased over 160% compared to the first quarter of fiscal 2013 to more than a million dollars.  In addition, increases were driven in part by new product offerings in the access network that drives fiber closer to the home, business and cell tower (FTTx). Operating results for the first quarter of fiscal year 2014 are not necessarily indicative of results to be expected for future quarters or the entire year, due to variability in customer purchasing patterns, seasonality of the business, and operating and other factors.

And the results from their latest report were just as impressive:

Net sales for the second quarter of fiscal 2014 ended March 31, 2014 were $13,214,000, an increase of approximately 26% or $2,700,000 from net sales of $10,514,000 for the second quarter of fiscal 2013.  Net sales to broadband service providers and commercial data networks customers were $12,170,000 in the second quarter of fiscal 2014, versus $9,563,000 in the same period of fiscal 2013.  Among this group, the Company recorded $2,197,000 in international sales, versus $623,000 in the same period of fiscal 2013.  Net sales to build-to-print and OEM customers were $1,044,000 in the second quarter of fiscal 2014 versus $951,000 in the same period of fiscal 2013.  The Company allocates sales from external customers to geographic areas based on the location to which the product is transported.  Accordingly, international sales represented 17% and 6% of total net sales for the second quarters of fiscal 2014 and 2013, respectively.

So, we have a company with a rock solid balance sheet and strong earnings.  I bet the stock has been rallying, right?

Not really:

Since posting a high of 26.59, the stock has moved lower, closing yesterday at 13.08. 

Let's take a longer look at the chart to get an idea for what's happening.

At the end of 2012, Clearfield was trading between 4 and 5 per share.  For most of 2013, Clearfield rallied very strongly, increasing a whopping 564% from their low of 4 to their absolute high of 26.59.  While I seriously doubt most investors made that much money, there were probably a fair amount that did very well. 

While the earnings reports were very strong, they did miss estimates, although the second miss was by a mere 2 cents.

What's really happening is this: traders and investors who made money in 2013 are unloading their shares, handing them over to the next round of Clearfield bulls.  Let's take a look at some basic, back-of-the-envelope calculations using some of the basic methodology presented by Gann in his book Truth of the Stock Tape and Wall Street Stock Selector to determine when this process might be done.

The company has 13.42 million shares outstanding.  According to NASDAQ, they have a roughly 27% institutional ownership and a 50 day average volume of 190,000.  Let's assume that institutions are buy and hold, meaning the actual effective float is about 9.796 million.  At a 190,000 average volume the complete available float will turn over in 51.55 days which is 2.5 months in trading time (the trading week is only 5 days).  Obviously, it will take a bit longer for the shares to change hands from the investors who purchased during the 2013 rally, so we're probably looking at around 5-6 months for this handoff. 

However, this time calculation is only an estimate.  And, of course, you should keep your eyes on the chart for other potential entry points.  But, assuming that Gann was right, we have a few more months at least of this process.

The information contained herein has been obtained from sources or data that we believe to be reliable, but we do not offer any guarantees as to its accuracy or completeness. Market information is subject to change without notice and past performance is no guarantee of future results. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security or other instrument.



 

The housing market halfway through 2014: a comprehensive report

 - by New Deal democrat

Wtih this morning's report on pending home sales, housing data from the first half of 2014 is in the books. At the end of last year, I politely disagreed with Bill McBride a/k/a Calculated Risk, about the direction of the market this year.  Bill thought average starts and sales would be up 20%.  Based on increased interest rates, I believed they would be down by about -100,000 at some point this year.  Except for one outlier in housing starts in April, neither has panned out so far, with data coming somewhere in the middle.  With that summary, let's take a detailed look at housing through midyear.

As I wrote last month, the housing market tends to cycle in a regular order:

• 1st, interest rates turn
• 2nd, permits, starts, and sales turn
• 3rd, prices turn
• 4th, inventory turns

Because of the time lag, prices and inventory may still be reacting to a move in interest rates that has since reversed - and that appears to be the case now.  Let's look at where each of those points in the cycle stands.

Interest rates

First, here is a graph, covering the last 30 years, of the YoY% mortgage rates (inverted so that higher rates give a lower value, blue) vs. housing permits, YoY change in 100,000's (red):

Here's a close-up of the last 5 years:

Interest rates on mortgages went up from 3.4% in early May 2013 to a high of 3.6% in August of last year.  On 16 of 19 occasions since the end of World War 2, that big a change led to a YoY decline of at least -100,000 in permits. In this case, housing permits have since drifted back lower, down to 4.1% at the end of June of this year, and in the last month have been on average about -0.3% lower than they were at this time last year.

The YoY decline in interest rates indicates that we should shortly start to see some improvement in permits, sales, and starts, although probably muted since rates have not returned to 2013 lows.

Permits, starts, and sales

Here is a graph of the change, in thousands, YoY of starts (blue), permits (red), new home sales (green), and existing home sales (orange) (note that the St. Louis FRED does not track pending home sales):

Next, here is the YoY% change in the same four statistics:

Both of these graphs show the clear deceleration in the housing market through 2013 and into 2014.  With the sole exception of housing starts in April (a more noisy series than permits), which may have been a bounce-back from an unexpectedly dismal winter, all of the major series have been dead in the water this year. New and existing home sales have been consistently negative, and permits up only +2% in the first half of 2014 compared with the first half of 2013.

This morning, pending home sales were reported as down -1.1%  from May to June, and down -7.3% from June of last year, which was also the index's post-housing bust high.  It further appears that February of this year was the subsequent low in reaction to higher interest rates. The index is up +9% on a seasonally adjusted basis since that time.

In summary, through June 2014:

• Permits are down -10% from their October 2013 high
• Starts are down -19% from their November 2013 high
• New home sales are down -10% from their January 2013 high
• Existing home sales are down -6% from their July 2013 high
• Pending home sales are down -7% from their June 2013 high

As I noted a month ago, May new home sales were as big an outlier to the upside as March was originally reported to the downside, so a significant revision was very possible.  March was subsequently revised about 10% higher, and May has now been revised over 10% lower than as originally reported.

The impact of demographics on permits, starts, and sales

I suspect the situation this year is analogous to the late 1960's (one of the four exceptions to the rule that rising interest rates cause an actual decrease in sales), when Boomers first reached adulthood and the existing apartment stock was nowhere near adequate to the task.  Multi-unit starts skyrocketed, despite higher interest rates, while single family homes languished. It was an era of generally rising interest rates, and any temporary decline in interest rates was met with heightened housing activity.

Now it is Millennials. Now as then, it is only multi-unit (apartment) construction that is carrying the recovery in housing this year. Single family home starts and sales have completely stalled.  Here is a graph of the YoY% change in single family house permits (blue) and multi-unit permits (red) since the beginning of 2011:

Since late 2013, multiunit construction has been entirely responsible for any increase in residential construction. Single family home construction has completely stalled.

Prices

Prices continue to increase, but YoY the price gains are decelerating at various rates depending on the index.  Let's start by showing the YoY% change in median prices in the Case Shiller 20 city index:

The YoY% change in median prices for new homes (red) and existing homes (blue): shows even further deceleration:

Finally, it is worth noting that the same deceleration is also showing up in the data at Depatment of Numbers Housing Tracker. I used this database of asking prices, which is updated weekly, to call in real time both the top of the housing boom in 2006, and the bottom of the housing bust in 2012.  What is particularly noteworthy is that in 2006, it was the asking prices for houses in the 75th percentile (more expensive homes) which turned first.  Now prices for those same more expensive houses are showing the most deceleration of all, as shown in this table, which shows the YoY% change for each percentile of houses for sale nationwide:

Month	25th percentile	50th percentile	75th percentile
Jun 2013	6.3	7.4	7.5
Sep 2013	12.0	10.9	7.9
Dec 2013	13.3	11.2	7.8
Mar 2014	13.8	10.7	6.3
Jun 2014	14.3	10.9	5.9
Jul 2014	12.0	9.1	4.7

Inventory

With housing prices still increasing, albeit at a reduced rate, we would expect to find more inventory entering the market, as potential sellers hope to take advantage of the improved pricing situation.  And that's exactly what we find. Below is the graph of combined new and existing home inventories:

The inventory of houses for sale is not just increasing, but it is increasing at an accelerating rate YoY.


In summary, through midyear 2014:

• Higher interest rates since May 2013 have brought growth in single family home building and sales to a complete halt. Only demographics-driven building of apartments and condos is supporting growth.  With interest rates turning slightly lower YoY as of June, there will probably be renewed vigor in housing permits, starts, and sales by the end of this year.  We have either already seen the interim bottom in permits, starts, and sales, or will shortly.
• Decelerating and/or YoY declining sales have existed long enough for prices gains to decelerate, although they haven't turned negative on a YoY basis.  Since prices are seasonal, it is difficult to tell, but the peak may already have occurred. 
• Although prices are decelerating, they are still higher YoY and thus inventory is continuing to pour onto the market.  This will probably continue, but will begin to decelerate between now and the end of this year.

In short, as of midyear 2014, the trends in the housing market are reacting in their normal order. Interest rates have turned positive, sales are bottoming, prices are increasing at a quickly decelerating rate YoY and may actually have peaked, while inventory is still increasing smartly and is likely to continue to pour onto the market for a while longer.

Dollar Tree Buying Family Dollar

On June 12th, I explained the reasoning behind Icahn's buying a 9.4% stake in Family Dollar.  Today, Dollar Tree has agreed to by Family dollar at a solid premium. 

Nice trade, Carl.

A note on existing home sales

 - by New Deal democrat

I put a post about last week's report of existing home sales up at XE.com.

Steven Hayward of Powerline Fails Econ 101 (Again)

I know, I know  -- saying that one of the "experts" over at Powerline fails in econ is a foregone conclusion.  But sometimes it's amazing just how inept they are.

In his latest salvo, Hayward writes:

Anyway, most economists will tell you that your attitude about the minimum wage is a test as to whether you paid attention to the first day of Econ 101 (and even the NY Times editorial page said as recently as 1987 that the right minimum wage should be zero).  But Common Core liberalism requires a higher minimum wage now as an article of faith.

Well, actually, no there's a lot more to this than drawing simple lines on a supply and demand graph.  As noted by the CEA:

Finally, as one recent review of minimum wage research published since 2000 concluded, “The weight of that evidence points to little or no employment response to modest increases in the minimum wage.” Many economists now believe that a substantial portion of the cost to employers of minimum wage increases is offset by savings from reduced employee turnover and higher worker productivity. Moreover, in the short-run in an economy that is still demand-constrained, raising the minimum wage will increase the purchasing power of a vital segment of workers and contribute to stronger overall economic activity.

Mr. Hayward might want to actually click on the link listed above -- unless Hayward's Nobel Prize in econ informs him differently.

But more importantly, he might want to look at the actual evidence that's occurred since 13 states raised their respective minimum wage:

Beginning in January of this year, 13 states individually increased their own minimum wages, creating a sort of natural experiment in which the remaining states could serve as a control group. All that was left was for someone to do the math, and the Center for Economic and Policy Research, building on research conducted earlier in the year by Goldman Sachs, delivered that in a report last week.

Of the 13 states that raised their minimum wages, all but one saw job growth in the first five months of 2014. To be sure, that’s a small achievement in an environment where the national economy is adding something on the order of 250,000 jobs per month.

The really interesting finding is that the states that raised the minimum wage saw job growth that was, on average, higher than states that did not. The 37 states that did not raise the minimum wage at the beginning of this year saw employment increase by .68 percent. Those that did raise the wage saw employment increase by .99 percent.

In other words, states that have raised their minimum wage have seen an increase in their employment -- which runs counter to Hayward's argument.  Not that reality means much to him, however.

All Hayward had to do was search "minimum wage" in the news over the last month to find that article.  In fact, practically everyone who reads economic news on a regular basis saw that piece of news over that time period. 

Two thoughts for Sunday on increasing inequality of wealth

 - by New Deal democrat

A new study by the Russell Sage Foundation on changes in wealth is yet another piece of confirmation that "the American dream" has only been working for a select few at least since the turn of the Millennium.  Two pieces of data in that study are of particular note.

First of all, the graph of median wealth per percentile since 1984 reveals that an important change happened shortly after 2000, but before the onset of the Great Recession:

Note that between 1984 and 2003, the increase in inequality did not involve the poor getting poorer (although studies of wages as opposed to wealth indicate wages for the lower percentiles were declining during that time).  Rather, the more affluent pulled away.

After 2003, however, but before the onset of the Great Recession, the bottom 25% of households, whose wealth had previously at least kept even over the previous 20 years,  experienced a real 30% decline in wealth.

This is the group most likely to live in apartments and who therefore did not benefit on paper from the housing bubble.  Almost certainly this was due to the offshoring of blue collar  labor that grew geometrically once China was granted "most favored nation" trading status in 1999.   That this large decline for a large swathe of ordinary American households occurred during a time of overall economic growth was a calamity, and an indictment of the accompanying economic policy.

Secondly, a few words of caution in interpreting this table that accompanies the report:

While the table is certainly very powerful evidence of the precarious state of the median household, I would prefer to see a table that does not include housing wealth.  This particular table mainly shows the impact of the housing bubble and bust on wealth.  While "trading down" and cashing in the difference at retirement does occur, appreciation in housing value is most usually traded in for a larger house, or simply retained over the occupant's life.

Perhaps more importantly, this table does not adjust for age, and so must be treated with caution.  For example, the household at the 75th percentile is found to be worth $260,000.  I would regard a 25 year old who is worth $260,000 as upper middle class, if not borderline wealthy.  They can already own the median house outright, have a nice car, and devote all of their wages or salary to long term saving for, e.g., retirement, and to discretionary spending.  Pretty sweet.

On the other hand, a 65 year old worth $260,000, particularly when that includes wealth tied up in a house, is faring no better than lower middle class.  Where pensions are a thing of the past, this household is going to live a very precarious old age.

Put another way, most 20-somethings are probably in the bottom 20% of households in terms of wealth (especially with student loans).  At the other end of the spectrum, not infrequently the household with a net worth at the 90th percentile is also known as "mom and dad."  They've lived beneath their means, and put away $10,000 a year or more throughout their working lives, and due to appreciation of those savings and probably some investments like mutual funds, seen the nest egg grow.

The last time I saw a study that spelled out wealth difference by percentile by age was over half a decade ago.

The Russell Sage Foundation data is powerful.  As with all data, just sift carefully.

Near 14 year low in initial jobless claims

 by New Deal democrat

I put a post up about the nearly 14 year low in initial jobless claims up at XE.com.