"Fiscal Cliff": 3PM ET "deadline" for Reid and McConnell

From the WaPo (updated): Senators trade proposals into night to avoid 'fiscal cliff' (ht black dog)

Reid and McConnell have set a deadline of about 3 p.m. on Sunday for cinching a deal. That's when they're planning to convene caucus meetings of their respective members in separate rooms just off the Senate floor. At that point, the leaders will brief their rank and file on whether there has been significant progress and will determine whether there is enough support to press ahead with a proposal.
...
If all goes according to plan, the leaders would roll out the legislation Sunday night and hold a vote by at least midday Monday, giving the House the rest of New Year's Eve to consider the measure.

According to the article, the sticking points are taxes for high income earners and "how to tax inherited estates".

Note: This type of "deadline" is just a target, and there probably won't be an update until later in the day.

Housing: 2.5% Year over Year change in Asking Prices

According to housingtracker, median asking prices were up 2.5% year-over-year in December. We can't read too much into this increase because these are just asking prices, and median prices can be distorted by the mix. As an example, the median asking price might have increased just because there are fewer low priced foreclosures listed for sale.

Note: The Trulia asking price index is adjusted for both mix and seasonality, but the housingtracker data is just the median, the 25th percentile and 75th percentile - and is impacted by both changes in the mix and seasonality.

But with those caveats, here is a graph of asking prices compared to the year-over-year change in the Case-Shiller composite 20 index.

Click on graph for larger image.

The Case-Shiller index is in red.  The Case-Shiller Composite 20 index was up 4.3% year-over-year in October, and will probably be up close to 6% in 2012.

The brief period in 2010 with a year-over-year increase in the repeat sales index was related to the housing tax credit.

Also note that the 25th percentile took the biggest hit (that was probably the flood of low end foreclosures on the market).

Now the year-over-year change in median asking prices has been positive for thirteen consecutive months. We have to be careful about the mix (fewer foreclosures on the market), but this suggests year-over-year selling prices will stay positive.

On seasonality, asking prices peaked in June and are down about 4% over the last six months.   I expect this measure of asking prices to start increasing seasonally in February, and to stay positive year-over-year.

Yesterday:
' Summary for Week Ending Dec 28th
' Schedule for Week of Dec 30th

Unofficial Problem Bank list declines to 838 Institutions

The FDIC released its enforcement action activity for November 2012 this week. As a result, seven banks were removed and four banks were added. The changes leave the Unofficial Problem Bank List with 838 institutions with assets of $313.1 billion. A year ago, the list held 970 institutions with assets of $391.2 billion. For the month, the list count declined by 18 and assets fell $13.3 billion. The count decline of 18 matches the highest amount recorded back in April 2012.

The FDIC terminated actions against County Bank, Rehoboth Beach, DE ($341 million); Citizens State Bank - Midwest, Cavalier, ND ($109 million); Prime Alliance Bank, Woods Cross, UT ($104 million); Holbrook Co-operative Bank, Holbrook, MA ($94 million); and Security State Bank of Lewiston, Lewiston, MN ($66 million). The other removals were Hastings State Bank, Hastings, NE, ($136 million) and Hull Federal Savings Bank, Baltimore, MD ($25 million) as they found merger partners.

The following four banks joined the list -- Lake Area Bank, Lindstrom, MN ($276 million); The Peoples Bank, Chestertown, MD ($247 million); WestSide Bank, Hiram, GA ($134 million); and First State Bank of Miami, Texas, Miami, TX ($50 million). The FDIC issued a Prompt Corrective Action order against Covenant Bank, Chicago, IL ($60 million).

After the passage of the fourth quarter, it is time for a refresh of the transition matrix. As seen in the table, there have been a total of 1,606 institutions with assets of $808.9 billion that have appeared on the list. Removals have totaled 768 institutions or nearly 48 percent of the total. Failures continue to be the leading removal cause as 347 institutions with assets of $290.4 billion have failed since appearing on the list. Removals from unassisted mergers and voluntary liquidations total 129 institutions. While there has been an acceleration in action terminations in 2012, the pace has slowed down some during the fourth quarter. In all, actions have been terminated against 292 institutions with assets of $129.6 billion, with 40 terminations occurring in this quarter.

Schedule for Week of Dec 30th

Earlier:
' Summary for Week Ending Dec 28th

The key report next week is the December employment report to be released on Friday. Other key reports include December auto sales on Wednesday, the December ISM manufacturing index, and the December ISM service index.

Reis might release their Q4 Office, Mall and Apartment vacancy rate reports this week.

Happy New Year to All!  As usual, the Calculated Risk blog will be open all week.

"Fiscal Cliff" Update

by Bill McBride on 12/29/2012 08:44:00 PM

Update on Fiscal Cliff

by Bill McBride on 12/28/2012 08:40:00 PM

The Bubble in "Cliffs"

Just an observation ... I think we are seeing a "bubble" in "cliffs" ...

From CNBC: Milk Futures Showing No Sign of 'Dairy Cliff'

From CNBC: 'Container Cliff' Avoided Until Early February

This reminds of the bubble in bubble reporting following the housing bubble.  Oh well ... it isn't as dumb as the "Risk on, risk off" meme.

Best to all!

Summary for Week ending Dec 28th

It was a light holiday week for economic data. Happy Holidays to all!

New home sales increased to 377,000 in November and are on pace to increase 18%+ in 2012. This was a solid annual increase, and yet sales are still very weak - 2012 will be the 3rd lowest year for New Home sales since the Census Bureau started tracking new home sales in 1963.  So there is still plenty of upside for new home sales over the next few years.

Case-Shiller house prices were up 4.3% year-over-year in October, and will probably be up around 6% for the year. And the 4-week average of initial weekly unemployment claims declined to the lowest level of the year - and the lowest since early 2008.

Consumer confidence was weak (future expectations), and there were some reports of retail sales being below expectations, but overall the data was decent.

Of course the economic headlines were about the "fiscal cliff" negotiations. There is no cliff (more of a slope), and there is no drop dead date - but policymakers do need to reach an agreement soon.

Here is a summary of last week in graphs:

' New Home Sales at 377,000 SAAR in November

Click on graph for larger image in graph gallery.

The Census Bureau reports New Home Sales in November were at a seasonally adjusted annual rate (SAAR) of 377 thousand. This was up from a revised 361 thousand SAAR in October (revised down from 368 thousand). Sales for August and September were revised up slightly.

The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.

On inventory, according to the Census Bureau:

"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."

Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.

This graph shows the three categories of inventory starting in 1973.

The inventory of completed homes for sale was just above the record low in November. The combined total of completed and under construction is also just above the record low since "under construction" is starting to increase.

New home sales have averaged 363 thousand SAAR through November 2012, up sharply from the 307 thousand sales in 2011. Also sales are finally at the lows for previous recessions too.

This was slightly above expectations of 375,000.

Sales Ratio: Existing to New Homes

Earlier I posted a graph that shows the "distressing gap" between new and existing home sales. I've argued that this gap has been mostly caused by distressed sales (foreclosures and short sales) and that eventually the gap would close.

Another way to look at this is a ratio of existing to new home sales.

This ratio was fairly stable from 1994 through 2006, and then the flood of distressed sales kept the number of existing home sales elevated and depressed new home sales. (Note: This ratio was fairly stable back to the early '70s, but I only have annual data for the earlier years).

Click on graph for larger image.

In general the ratio has been trending down, although it increased over the last few months with the recent pickup in existing home sales. I expect this ratio to trend down over the next several years as the number of distressed sales declines and new home sales increase.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

Earlier:
' New Home Sales at 377,000 SAAR in November
' New Home Sales graphs

Friday: Chicago PMI, Pending Home Sales

First from Neil Irwin at the WaPo: Three ways Washington could mess up the recovery in 2013. A few excerpts:

Going off the cliff. This is the most scrutinized possibility, the one that has been widely analyzed (and, as of Thursday morning, at least, seemed like a growing possibility).
...
If the nation goes fully off the fiscal cliff, and stays there, the Congressional Budget Office estimates it would amount to a drag on gross domestic product of 2.9 percentage points in 2013 ...
...
A deal with too much austerity, too fast. Going off the fiscal cliff is probably not even the likeliest risk (though the odds are changing all the time). Another risk is that while there is a deal to avert the entirety of the cliff, it is a deal that calls for enough austerity in 2013 to seriously undermine the nation's economic prospects.
...
Debt ceiling hijinks. If the nation goes over the fiscal cliff, the results would be bad, but not catastrophic; we've had recessions before, we'll have them again. But in late February or early March comes a deadline with even more at stake: The legally mandated cap on how much debt the Treasury can issue will become a binding constraint, setting the stage for the same messy negotiations that walloped financial markets and business confidence in the summer of 2011.

From an economic perspective, the thing that makes debt ceiling negotiations so perilous is the threat that Congressional Republicans are making ' in effect, to allow the U.S. government to default on its debts if they don't get their way on major spending cuts.

I think a fiscal agreement will be reached in the next couple of weeks (points 1 & 2), but we will have to see the details before analyzing the drag on the US economy. I'm not worried about the "debt ceiling" (point 3) - as I noted in 2011, there have been threats to not pay the bills before (that is what the debt ceiling is about), and it would be political suicide to default - so a bill will be passed.

Friday economic releases:
' At 9:45 AM, the Chicago Purchasing Managers Index for December will be released. The consensus is for an increase to 51.0, up from 50.4 in November.

' At 10:00 AM, the Pending Home Sales Index for November. The consensus is for a 1.8% increase in the index.

Earlier on new home sales:
' New Home Sales at 377,000 SAAR in November
' New Home Sales graphs

Philly Fed: State Coincident Indexes increased in 45 States in November

From the Philly Fed:

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for November 2012. In the past month, the indexes increased in 45 states and decreased in five states, for a one-month diffusion index of 80. Over the past three months, the indexes increased in 45 states, decreased in three, and remained stable in two, for a three-month diffusion index of 84. For comparison purposes, the Philadelphia Fed has also developed a similar coincident index for the entire United States. The Philadelphia Fed's U.S. index rose 0.2 percent in November and 0.6 percent over the past three months.

Note: These are coincident indexes constructed from state employment data. From the Philly Fed:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state's index is set to the trend of its gross domestic product (GDP), so long-term growth in the state's index matches long-term growth in its GDP.

Click on graph for larger image.

This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged).

In November, 45 states had increasing activity, down slightly from 46 in October (including minor increases). This is the second consecutive year with a weak spot during the summer, and improvement towards the end of the year.

Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession.

The map was all green earlier this year, than started to turn red, and is mostly green again.

Lawler: An 'Update' to the 'Excess' Supply of Housing

CR: Housing economist Tom Lawler sent me the following long piece that suggests a large number of the excess vacant housing supply has been absorbed.

Housing economist Tom Lawler writes: An 'Update' to the 'Excess' Supply of Housing; How Much Has the Number of Vacant Homes Fallen Since April 1, 2010 (through December 1, 2012?)

It is over 2 1/2 years since the Decennial Census 2010's 'snapshot' of the US population and housing market on April 1, 2010. While private housing analysts are still awaiting the result of research by Census analysts on the reasons for the sharply different results of Census 2010 compared to other Census surveys (e.g., the ACS and the HVS), I thought it might be useful to review some numbers since the Census was taken.

On the housing production from, Census estimates suggest that from April 2010 to November 2012, housing completions plus manufactured housing units totaled about 1.817 million (an annualized pace of about 681 thousand).

There are no data on the net loss to the housing stock over this period. Prior to the release of Census 2010 results many folks thought that the net loss to the housing stock last decade was averaging around 200 ' 250 thousand units a year, but the decennial Census results suggested a much smaller number. But for fun, let's assume that the net loss in the housing stock since the decennial Census has been about 400,000, or an annualized rate of 150,000.

Such a number would imply that the housing stock at the end of November/beginning of December increased by about 1.417 million, or an annualized rate of about 531 thousand.

Now what about the number of households (or occupied housing units)? Sadly, here there are no good, reliable data to count on. For 2012, there are two sources of 'estimates' on US 'households,' both based on supplement surveys of the Current Population Survey. One source is the Housing Vacancy Survey, which assumes that (1) the Census' Population Division estimates of the US housing stock are correct; and (2) the HVS' estimates of the % of the housing stock are correct. Census 2010 results (and to a lesser extent ACS results) strongly indicated, of course, that the latter assumption is not correct: the HVS appears to overstate significantly the share of the housing stock that is vacant, with the overstatement growing over the past few decades.

With that caveat in mind, the HVS estimates are that the number of US households averaged 114.916 million in September 2012, compared to an average of 112.633 million in March-April of 2010. The official Census 2010 household estimate for April 2010 was 116.716 million. Assuming that the HVS estimates for the last 3 months of 2012 show similar YOY growth as the previous few months, and 'grossing up' the totals to be consistent with Census 2010 totals, the HVS estimates might suggest household growth from April 1, 2010 to December 1, 2012 of about 2.62 million, or an annualized rate of about 983 thousand. This is a 'low' estimate.

Another source of an 'estimate' of US households in 2012 is the Annual Social and Economic Supplement to the Current Population Survey. This annual survey, taken over February, March, and April with an 'expanded' sample size relative to the 'normal' monthly CPS and HVS surveys, purportedly produces 'estimates' of the number of US households in March of each year that are consistent with (1) civilian non-institutionalized population estimates, and (2) survey results. The CPS/ASEC, in essence, is 'controlled' to population estimates, as opposed to the CPS/HVS, which is 'controlled' to housing stock estimates.

In the latest CPS/ASEC for March, 2012, the estimate of the number of US households was 121.084 million, which is a staggering 4.368 million higher than the official Census 2010 estimate for April 1, 2010. The CPS/ASEC revised household estimate for March, 2011, based on Census 2010 population controls, was 119.927 million, up from the previous 118.682 million in the 2011 report based on Census 2000 population controls. Census did not provide updated March 2010 estimates based on Census 2010 population controls.

It should be noted, however, that the CPS/ASEC household 'estimates' are not 'controlled' to Census 2010 household estimates, but instead are 'controlled' to population estimates, and the CPS/ASEC survey results appear to significantly overstate US households (they also aren't consistent with decennial Census estimates of the household, as opposed to civilian non-institutionalized, population estimates). I 'guesstimate' that a CPS/ASEC household estimate consistent with Census 2010 household population estimates and recently-released 2012 household population estimates by age group for March, 2012 would be about 119.6 million, and that an estimate for December 1, 2012 using updated household population estimates would be about 120.5 million, about 3.8 million higher than the Census 2010 estimate for April 1, 2010, and an annualized increase of about 1.425 million. This is a 'high' to 'very high' estimate.

Another alternative would be to look at updated estimates of the household population (available through December 1, 2012¹), and then make certain assumptions either about household size (very crude) or make certain assumptions about 'headship' rates by age group. Below is a table with some data to start with.

A few things are worth noting: first, overall population growth is estimated to have grown at an annualized rate of about 0.74% since the decennial Census was taken, and the household population is estimated to have grown at an annualized rate of 0.76%. This growth rate is significantly lower than last decade's average, partly reflecting lower immigration levels and partly reflecting lower birth rates.

The population of adults ' which is more important in terms of household growth, is estimated to have grown at a more rapid annualized rate. E.g., the 25+ year household population is estimated to have grown at an annualized rate of about 1.09%.

[Note: the difference between the 'resident' population and the 'household' population is the number of people estimated to be living in 'group quarters,' usually broken out between 'institutionalized' (including correctional facilities for adults, juvenile facilities, and nursing/skilled nursing facilities) and 'non-institutionalized' (including college/university student housing, military quarters, and other group housing).]

There are two 'Q&D' ways one might 'gueestimate' the number of households on December 1, 2012: one ' very quick, extremely dirty ' would be to assume that the average household size had remained the same. That approach, which doesn't take into account shifts in the age distribution of the population, would lead to an estimate of 119.028 million, up 2.366 million from April 1, 2010.

A second approach would be to assume that the 'headship' rates for different age groups on December 1, 2012 was about the same as on April 1, 2012. Using that 'Q&D' approach, one would get an estimate of the number of households on December 1, 2012 of about 120.283 million, up 3.567 million from April 1, 2010.

So ' let's assume that a 'very low' case for household growth from April 1, 2010 is around 2.4 million (annual rate of 900 thousand); a 'high' case is 4.0 million (annual rate of 1.5 million), and a 'base' case is around 3.2 million (annual rate of around 1.2 million). What might these numbers mean for the number of vacant homes as of December 1, 2012 compared to April 1, 2010?   Here is a table showing (rounded) what the numbers might look like.

Under a 'very low end' estimate of household growth, the number of vacant units since April 1, 2010 would be down by about a million. Under a 'very high end' estimate of household growth, the number of vacant housing units would be 2.4 million lower. And a 'not too unrealistic' estimate of household growth would imply that the number of vacant housing units was down by about 1.7 million.

Now, does a 1.7 million decline in the number of vacant homes for sale since April 1, 2010 seem plausible? Well, if that were the case one would probably expect that the number of homes for sale, for rent, and held as REO would be down significantly. So, let's take a look at some available numbers.

NAR estimates that the number of existing homes for sales declined from 3.09 million at the end of March 2010 to 2.03 million at the end of November 2012, a decline of about 1.06 million. Realtor.com's listings numbers fell by a similar amount. Obviously not all homes listed for sale are vacant, but a significant % are vacant.

Census estimates that the number of completed new SF homes for sales declined from 92 thousand at the end of March 2010 to 40 thousand at the end of October 2012, a decline of 52 thousand.

The REO inventory of Fannie, Freddie, FHA, and private-label ABS, combined with an estimate of the REO inventory of FDIC-insured institutions (based on $ carrying amounts and estimates of the average carrying balance) declined from about 531 thousand from the end of March 2010 to about 367 thousand at the end of September 2012, a decline of about 164 thousand. Some, but probably less than 40%, of these REO properties were listed for sale.

There aren't good, aggregate data on the number of homes for rent: HVS has estimates, but comparisons with decennial Census data indicate that HVS rental vacancy rates not only are overstated, but also that the overstatement has grown over time. Given that caveat, the HVS estimates show that the number of homes for rent declined from a first-half 2010 average (to come close to an April 1 estimate) of about 4.458 million to a third-quarter 2012 average of 3.809 million, a decline of about 649 thousand. The actual decline is probably larger.

Hmmmm'..gosh, a decline in the number of vacant homes of about 1.7 million since April 1, 2010 sure SEEMS plausible!

But wait: if the number of vacant homes since Census 2010 has been that large, then that would imply a sizable reduction in the 'excess' supply of housing ' enough so that, if true, one should have expected to see stability in, or even in many areas even increases in, home prices in 2012! Could that really be true? (CR note: see previous posts!)

Looking ahead to the next few years, the likely growth in population by age groups suggests that household formations should average about 1.3 million a year, with some upside if headship rates rebound in any meaningful fashion.

¹ Actually, 'estimates' are available through July 1, 2012, and data from August 1, 2012 through December 1, 2012, are short-term 'projections.'

CR Note: This was from housing economist Tom Lawler.

Weekly Initial Unemployment Claims decline to 350,000, 4-Week average at low for 2012

The DOL reports:

In the week ending December 22, the advance figure for seasonally adjusted initial claims was 350,000, a decrease of 12,000 from the previous week's revised figure of 362,000. The 4-week moving average was 356,750, a decrease of 11,250 from the previous week's revised average of 368,000.

The previous week was revised up slightly from 361,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims declined to 356,750.

The 4-week average is now at the low for the year. The previous low for the 4-week average was 363,000.

The recent spike in the 4-week average was due to Hurricane Sandy.

Weekly claims were lower than the 365,000 consensus forecast.

And here is a long term graph of weekly claims:

Note: There are large seasonal factors in December and January, and that can make for large swings for weekly claims. Still - it is nice finishing year at the lowest level for the 4-week average.

Thursday: New Home Sales, Initial Unemployment Claims

First, a reminder that rents can't outpace incomes for long ... from Conor Dougherty at the WSJ: Tenants Feel Pinch of Rising Rents

The rising cost of renting is putting pressure on tenants at a time when many are still grappling with slow or falling income growth. In the third quarter, renters spent 24.12% of their disposable income on financial obligations'things such as rent, debts and auto leases. That was the highest level since early 2010, according to the Federal Reserve.

And on house prices from Nick Timiraos at the WSJ: Home Prices Hit a Milestone

Home prices are on track to notch their first yearly gain since 2006, the strongest performance since the housing bust and a development that could accelerate the real-estate rebound even as the broader economy stutters.
...
"The tide has changed," said Ivy Zelman, chief executive of research firm Zelman & Associates. "People feel it's OK to go back into residential real estate'it's no longer taboo'and that change in sentiment could have a very powerful effect."

Thursday economic releases:
' At 8:30 AM, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 365 thousand from 361 thousand last week. If correct, this would put the 4-week average near the low for the year.

' At 10:00 AM, New Home Sales for November from the Census Bureau. The consensus is for an increase in sales to 375 thousand Seasonally Adjusted Annual Rate (SAAR) in November from 368 thousand in October.

' Also at 10:00 AM, the Conference Board's consumer confidence index for December will be released. The consensus is for an decrease to 70.0 from 73.7 last month.

Earlier on house prices:
' Case-Shiller: House Prices increased 4.3% year-over-year in October
' Comment on House Prices, Real House Prices, and Price-to-Rent Ratio
' All Current House Price Graphs

Another question for the December economic prediction contest (Note: You can now use Facebook, Twitter, or OpenID to log in).

Wednesday: Case-Shiller House Prices, Richmond Fed Manufacturing Survey

First a great story about Jack Klugman from Joshua Green at the WaPo: Jack Klugman's secret, lifesaving legacy

And for those seeing Les Mis this week, here are couple of incredible performances of "I Dreamed a Dream", first by Ruthie Henshall at the 10th Anniversary and another by Lea Salonga at the 25th Anniversary Concert.

Wednesday economic releases:
' At 9:00 AM, the S&P/Case-Shiller House Price Index for October will be released. Although this is the October report, it is really a 3 month average of August, September and October. The consensus is for a 4.1% year-over-year increase in the Composite 20 index (NSA) for September. The Zillow forecast is for the Composite 20 to increase 4.1% year-over-year, and for prices to increase 0.3% month-to-month seasonally adjusted.

' At 10:00 AM, the Richmond Fed Survey of Manufacturing Activity for December will be released. The consensus is for a decrease to 6 for this survey from 9 in November (Above zero is expansion).

A couple of posts yesterday:
' Review of My 2012 Forecasts
' Ten Economic Questions for 2013

Two more questions this week for the December economic prediction contest (Note: You can now use Facebook, Twitter, or OpenID to log in).

Private Investment and the Business Cycle

A little holiday cheer ...

Discussions of the business cycle frequently focus on consumer spending (PCE: Personal consumption expenditures), but the key is to watch private domestic investment, especially residential investment. Even though private investment usually only accounts for around 15% of GDP, the swings for private investment are significantly larger than for PCE during the business cycle, so private investment has an outsized impact on GDP at transitions in the business cycle.

The first graph shows the real annualized change in GDP and private investment since 1960 (this is a 3 quarter centered average to smooth the graph).

GDP has fairly small annualized changes compared to the huge swings in investment, especially during and just following a recession. This is why investment is one of the keys to the business cycle.

Click on graph for larger image.

Note that during the recent recession, the largest decline for GDP was in Q4 2008 (a 8.9% annualized rate of decline).  On a three quarter center averaged basis (as presented on graph), the largest decline was 5.9% annualized.

However the largest decline for private investment was a 43% annualized rate!  On a three quarter average basis (on graph), private investment declined at a 35% annualized rate.

The second graph shows the contribution to GDP from the four categories of private investment: residential investment, equipment and software, nonresidential structures, and "Change in private inventories". Note: this is a 3 quarter centered average of the contribution to GDP.

This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment lags the business cycle. Red is residential, green is equipment and software, and blue is investment in non-residential structures. The usual pattern - both into and out of recessions is - red, green, and blue.

The dashed purple line is the "Change in private inventories". This category has significant ups and downs, but is always negative during a recession, and provides a boost to GDP just after a recession. 

The key leading sector - residential investment - has lagged this recovery because of the huge overhang of existing inventory. Usually residential investment is a strong contributor to GDP growth and employment in the early stages of a recovery, but not this time - and that weakness was a key reason why the recovery was sluggish so far.

Residential investment finally turned positive during 2011 and made a positive contribution to GDP in 2012.

What does this mean for the business cycle? Usually residential investment would turn down before a recession, and that isn't happening right now. Instead residential investment is starting to increase.

The third graph shows residential investment as a percent of GDP. Residential investment as a percent of GDP is just above the record low, and it seems likely that residential investment as a percent of GDP will increase further in 2013.

The key downside risk for the US economy in 2013 is too much austerity, too quickly.   However, barring a policy mistake (I expect a fiscal agreement), it seems unlikely there will be a sharp decline in private investment in 2013.   This is because residential investment is already near record lows as a percent of GDP and will probably increase further in 2013, and  that suggests the US will avoid a new recession in 2013.

LPS: House Price Index increased 0.3% in October, Up 4.3% year-over-year

Notes: I follow several house price indexes (Case-Shiller, CoreLogic, LPS, Zillow, FNC and more). The timing of different house prices indexes can be a little confusing. LPS uses October closings only (not a three month average like Case-Shiller or a weighted average like CoreLogic), excludes short sales and REOs, and is not seasonally adjusted.

From LPS: U.S. Home Prices Up 0.3 Percent for the Month; Up 4.3 Percent Year-Over-Year

Lender Processing Services ... today released its latest LPS Home Price Index (HPI) report, based on October 2012 residential real estate transactions. The LPS HPI combines the company's extensive property and loan-level databases to produce a repeat sales analysis of home prices as of their transaction dates every month for each of more than 15,500 U.S. ZIP codes. The LPS HPI represents the price of non-distressed sales by taking into account price discounts for REO and short sales.

The LPS HPI is off 22.6% from the peak in June 2006. Note: The press release has data for the 20 largest states, and 40 MSAs. LPS shows prices off 53.6% from the peak in Las Vegas, 45.5% off from the peak in Riverside-San Bernardino, CA (Inland Empire), and barely off in Austin and Houston.

Looking at the year-over-year price change throughout the year - in May, the LPS HPI was up 0.4% year-over-year, in June the index was up 0.9% year-over-year, 1.8% in July, 2.6% in August, 3.6% in September, and now 4.3% in October. This is steady improvement on a year-over-year basis. Note: Case-Shiller for October will be this morning.

Review of My 2012 Forecasts

Near the end of each year I try to post a few general forecasts for the coming year. The purpose is to try to provide an overview of how I think the economy will perform.

Some years there are BIG calls, like in late 2006 when I predicted a recession would start in 2007 (made it by one month!). Another 'BIG' call example was in early 2009 when I started writing about a second half economic recovery.

Most of my forecasts are more mundane, as an example for 2012 GDP, I wrote:

'my guess is growth will be sluggish relative to the slack in the system, but above the 2011 growth rate. '

Right now 'sluggish' looks correct, and if Q4 2012 GDP is at or above 1.6% (annualized), then 2012 will actually be better than 2011 (Q4 over Q4 of previous year). But even if I had been wrong, I find it useful to write down some forecasts and then to understand why I was right or wrong. (I'd say my guess on growth was about right).

Of course my BIG call for 2012 was that house prices would finally find a bottom as measured by the national repeat sales indexes (see: The Housing Bottom is Here). In early 2012, I wrote:

'My guess is that nominal house prices, using the national repeat sales indexes and not seasonally adjusted, will bottom in March 2012.'

As of right now ' with prices up almost 5% seasonally adjusted since early this year ' the house price bottom call looks correct.

Note: When I wrote that post, the consensus was house prices would decline throughout 2012. Since then the consensus has changed and most analysts now think prices bottomed early this year.

I did get a couple of forecasts wrong in 2012. For the unemployment rate, I wrote:

A couple of predictions.

' The participation rate will rise slightly in 2012 and probably end the year in the 64.0% to 64.5% range.

' The unemployment rate will still be in the 8% to 9% range in December 2012.

Even though I've been arguing that most of the decline in the participation rate over the last few years was due to changing demographics (as opposed to cyclical due to the recession), I still thought we'd see some slight increase in participation in 2012 ' and that didn't happen.

Click on graph for larger image.

The participation rate fell to 63.6% in November, and the unemployment rate declined to 7.7%. (Participation rate is the blue line. This is the percentage of the working age population in the labor force).

Since I was wrong on the participation rate, my forecast for the unemployment rate was too pessimistic.

I was also too pessimistic on foreclosures. I wrote:

Will foreclosure activity increase in 2012?

This is a difficult question. There are several significant policy changes in the works: 1) a possible Mortgage Settlement, 2) HARP refinance (the automated program starts in March), and 3) a REO to rental program. It appears the overall goal of these policy changes is to reduce the large backlog of seriously delinquent loans while, at the same time, not flood the housing market with distressed homes.

My guess is the policy changes will all be announced in the next few months, and that foreclosure activity will increase significantly.

The policy changes were announced, but the lenders focused more on modifications and short sales than foreclosures, and foreclosure activity has only picked up recently in some judicial foreclosure states.

On employment I was close. I wrote:

My guess is private employment will increase around 150 to 200 thousand per month on average in 2012; about the same rate as in 2011.

With over 13 million unemployed workers - and 5.6 million unemployed for more than 26 weeks - adding 2 million private sector jobs will not seem like much of job recovery for many Americans. Hopefully I'm too pessimistic.

That was about right. The economy has added 1.7 million private sector jobs through November (over 1.8 million including the preliminary benchmark revision).

A key forecast ' that appears correct ' was that the drag from state and local governments would end around mid-year. I wrote:

It is looking like there will be less drag from state and local governments in 2012, and that most of the drag will be over by the end of Q2 (end of FY 2012). This doesn't mean state and local government will add to GDP in the 2nd half of 2012, just that the drag on GDP and employment will probably end. Just getting rid of the drag will help.

This graph shows total state and government payroll employment since January 2007. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, and 230,000 in 2011. So far in 2012, state and local governments have actually added a few jobs, and state and local government employment increased by 4,000 in November.

Note: The dashed line shows an estimate including the benchmark revision.

It appears most of the state and local government layoffs are over, however the Federal government layoffs are ongoing. 

This graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.

The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has added to GDP growth for the last 6 quarters (through Q3 2012).

The red bars are for state and local governments. Although not as large a negative as the worst of the housing bust (and much smaller spillover effects), this decline has been relentless and unprecedented. The good news is the drag appears to be ending, and state and local governments actually added to GDP growth in Q3 2012 - for the first time since Q3 2009.

A few more forecasts - On monetary policy I wrote:

' I expect the Fed will change their communication strategy and add a likely future path of the Fed Funds rate to the quarterly economic forecasts.

' I think QE3 is likely, but more towards mid-year - and [timing] is data dependent.

The Fed introduced the new communication strategy, and then changed it again near the end of 2012. They waited a little longer than I expected, and the FOMC announced QE3 in September.

And on inflation:

The bottom line is the inflation rate will probably stay low in 2012 with high unemployment and low resource utilization. I expect QE3 to be announced before mid-year, and that will probably keep the inflation rate near the Fed's target (as opposed to falling further). But I don't see inflation as a significant threat in 2012.

The inflation outlook was correct. It is stunning how many analysts and policymakers have consistently been wrong on inflation for the last several years - and they still haven't changed their views or models!

And on Europe and the Euro:

So once again my guess is the euro will survive another year without losing any countries (Assuming a Greek debt deal). There will be plenty of blowups along the way, but I think the impact on the US economy will be fairly minimal.

I was pessimistic on Europe, but less pessimistic than many others. And once again Europe made it through another year.

All and all the economy evolved about as I expected in 2012. I'll try to post some forecasts for 2013 soon, but I'll wait until we see the details of the fiscal agreement. Policy matters ' and the key downside risk for the US economy in 2013 is rapid austerity.

"Fiscal Cliff": Weary eyes turn toward the Senate

by Bill McBride on 12/24/2012 09:23:00 AM

Ten Economic Questions for 2013

Here are some questions I'm thinking about ...

1) US Policy: This is probably the biggest downside risk for the US economy in 2013. I assume some sort of fiscal agreement will be reached soon, but how much austerity will be included? What will happen with the Alternative Minimum Tax (AMT)? What about emergency unemployment benefits? What about extending the mortgage relief for debt forgiveness (important for short sales)?

And what about other policy in 2013 such as the "default ceiling" (aka debt ceiling)? In 2011, the threat of a US government default slowed the economy to almost a standstill for a month. Right now the White House is taking the Ronald Reagan approach (when the Democrats pulled a similar reckless stunt) and they are saying President Obama will only sign a clean debt ceiling bill. Good.  Hopefully default is off the table, but you never know.

2) Economic growth: Heading into 2013 there are still significant downside risks from the European financial crisis and from U.S. fiscal policy. Will the U.S. economy grow in 2013? Or will there be another recession?

3) Employment: How many payroll jobs will be added in 2013? Will we finally see some pickup over the approximately 2 million private sector job creation rate of 2011 and 2012?

4) Unemployment Rate: The unemployment rate is still elevated at 7.7% in November. For the last two years I've been too pessimistic on the unemployment rate because I was expecting some minor bounce back in the participation rate. Instead the participation rate continued to decline. Maybe 2013 will be the year the participation rate increases a little, or at least stabilizes. Economists at the SF Fed wrote about this last week: Will the Jobless Rate Drop Take a Break?

The recent recession was unusual in its depth and its duration. Labor market conditions have remained difficult for a long time. As a result, large numbers of discouraged workers have stopped looking for jobs. A big unknown is whether these workers will stay out of the labor force permanently or enter as the economy recovers. If these workers join the labor force, increasing participation could have a major impact on the unemployment rate in the coming years.

What will the unemployment rate be in December 2013?

5) Inflation: The Fed has made it clear they will tolerate a little more inflation, but currently the inflation rate is running below the Fed's 2% target. Will the inflation rate rise or fall in 2012?

6) Monetary Policy: Currently the Fed is planning to buy $85 billion in Treasury and agency mortgage-backed securities per month as part of the open-ended QE3. Will the Fed continue all year at this pace? Or will the Fed increase their purchase rate? Or will the Fed decrease their purchase rate, stop these purchases, or even sell some securities?

7) House Prices: It now appears house prices, as measured by the national repeat sales indexes, bottomed in early 2012? What will happen with house prices in 2013?

8) Housing Inventory: Over the last few years, we've seen a dramatic plunge in existing home inventory. Will inventory bottom in 2013?

9) Residential Investment: Residential investment (RI) picked up in 2012, with new home sales and housing starts increasing 20% or so.  Note: RI is mostly investment in new single family structures, multifamily structures, home improvement and commissions on existing home sales. This still leaves RI at a historical low level. How much will RI increase in 2012?

10) Europe and the Euro: What will happen in Europe in 2013? Will a country leave the euro this coming year, will the euro-zone implode, or will 2013 be the bottom for the euro-zone economies?

I'm sure there are other key questions, but these are the ones I'm thinking about now.

Gasoline Prices near Low for Year, Expected to Increase

Another update on gasoline prices. It looks like prices will finish the year near the low, but probably increase soon.

From CNN: Gas prices slide, but the decline won't last, survey says

The average cost of a gallon of regular gasoline is $3.26, down 58 cents over the past 11 weeks, the Lundberg Survey found.

But that good news at the pump is unlikely to continue, says publisher Tribly Lundberg.

'Higher crude oil prices are translating into higher wholesale gasoline prices,' and retailers will need to pass them through, she says. Expect prices to jump 5 or 10 cents per gallon soon.

Yesterday:
' Summary for Week Ending Dec 21st
' Schedule for Week of Dec 23rd

Here is a graph from Gasbuddy.com showing the roller coaster ride for gasoline prices. If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent; gasoline prices in most of the U.S. are impacted more by Brent prices.

DOT: Vehicle Miles Driven increased 0.3% in October

The Department of Transportation (DOT) reported Friday:

Travel on all roads and streets changed by +0.3% (0.9 billion vehicle miles) for October 2012 as compared with October 2011. Travel for the month is estimated to be 251.5 billion vehicle miles.

Cumulative Travel for 2012 changed by +0.6% (14.9 billion vehicle miles). The Cumulative estimate for the year is 2,464.5 billion vehicle miles of travel.

Vehicle miles driven decreased in the Northeast (probably impacted by Hurricane Sandy) and increased in all other regions. The following graph shows the rolling 12 month total vehicle miles driven.

The rolling 12 month total is still moving sideways.

Click on graph for larger image.

In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.

Currently miles driven has been below the previous peak for 59 months - and still counting.

The second graph shows the year-over-year change from the same month in the previous year.

Gasoline prices were up in October compared to October 2011. In October 2012, gasoline averaged of $3.81 per gallon according to the EIA. Last year, prices in October averaged $3.51 per gallon. 

However, as I've mentioned before, gasoline prices are just part of the story. The lack of growth in miles driven over the last 5 years is probably also due to the lingering effects of the great recession (high unemployment rate and lack of wage growth), the aging of the overall population (over 55 drivers drive fewer miles) and changing driving habits of young drivers.

With all these factors, it may be years before we see a new peak in miles driven.

Schedule for Week of Dec 23rd

Earlier:
' Summary for Week Ending Dec 21st

This will be a light week for economic data with the markets closing early on Monday, and closed on Tuesday, in observance of the Christmas Day holiday.

The key economic reports this week are the Case-Shiller house price indexes on Wednesday, and New Home sales on Thursday. 

Happy Holidays to All.  As usual, the Calculated Risk blog will be open.

Unofficial Problem Bank list declines to 841 Institutions

As expected, the OCC released its enforcement actions through mid-November this week. For the week, there were eight removals and four additions to the Unofficial Problem Bank List. After the changes, the list holds 841 institutions with assets of $313.3 billion. A year ago, the list held 973 institutions with assets of $397.6 billion.

The OCC terminated actions against National Bank of Kansas City, Overland Park, KS ($640 million); First Community Bank, National Association, Sugar Land, TX ($610 million); RiverWood Bank, Bemidji, MN ($156 million); The Midland National Bank of Newton, Newton, KS ($132 million); and Texas Republic Bank, National Association, Frisco, TX ($76 million).

The following three banks solved their problems by finding a healthier merger partner: The Community Bank, A Massachusetts Cooperative Bank, Brockton, MA ($317 million); Premier Bank, Tallahassee, FL ($272 million); and Stone County National Bank, Crane, MO ($81 million).

The OCC issued new actions against Los Alamos National Bank, Los Alamos, NM ($1.6 billion); Westbury Bank, West Bend, WI ($525 million); GCF Bank, Sewell, NJ ($314 million); and Home Loan Investment Bank, F.S.B., Warwick, RI ($196 million). Keen readers will know that Los Alamos National Bank is making its second appearance on the list after being removed in April 2012 when the OCC terminated an action issued in January 2010.

Next week, we look for the FDIC to release its actions through November but to shut it down as far as closings go. Wishing all a Merry Christmas and may you find a safe & sound bank under your tree.

Earlier: Chicago Fed National Activity Index improves, Kansas City Fed Mfg Survey shows contraction

A couple of reports from earlier this morning:

' The Chicago Fed released the national activity index (a composite index of other indicators): Economic Activity Increased in November

Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to +0.10 in November from '0.64 in October. Two of the four broad categories of indicators that make up the index increased from October, but only the production and income category made a positive contribution to the index in November.

The index's three-month moving average, CFNAI-MA3, increased from '0.59 in October to '0.20 in November'its ninth consecutive reading below zero. November's CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.

This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.

Click on graph for larger image.

This suggests economic activity increased, but growth was still below trend in November.

According to the Chicago Fed:

What is the National Activity Index? The index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

' From the Kansas City Fed: Tenth District Manufacturing Activity Declined Further

Tenth District manufacturing activity declined further in December, though by a smaller amount than in October or November. Factories' production expectations were somewhat more optimistic than last month, but a higher share of firms plan to decrease employment in coming months. Approximately half of all contacts cited fiscal policy uncertainty as having impacted their hiring decisions. Price indexes mostly increased, particularly for future raw materials, with the increase driven heavily by food prices.

The month-over-month composite index was -2 in December, up slightly from -6 in November and -4 in October ... The employment index decreased from 22 to 13 after rebounding solidly last month.
...
'We saw factory activity decline for the third straight month, which many firms blamed on the uncertainty created by the fiscal cliff talks", said [Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City]. "Contacts still plan modest output expansion in the first half of 2012, but they now expect their employment to fall, before recovering later in the year.'

This showed contraction, but the index was slightly better than expected.

ATA Trucking Index rebounds in November

This is a minor indicator that I follow. Truck tonnage was negatively impacted by Hurricane Sandy in October, and bounced back in November.

From ATA: ATA Truck Tonnage Index Rebounds 3.7% in November

The American Trucking Associations' advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index jumped 3.7% in November erasing October's 3.7% drop. (The 3.7% decrease in October was revised from a 3.8% contraction ATA reported on November 20, 2012.) November's gain was the first since July of this year. As a result, the SA index equaled 118.0 (2000=100) in November versus 113.8 in October. Compared with November 2011, the SA index was up 1%, after contracting 2.1% on a year-over-year basis in October. Year-to-date, compared with the same period last year, tonnage was up 2.8%.
...
'Sandy impacted both October's and November's tonnage readings,' ATA Chief Economist Bob Costello said. 'But it was still good to see tonnage snap back in November.' Costello said he expects a boost to flatbed tonnage from the rebuilding in the areas impacted by Sandy, but most of that won't happen until the spring when the money starts flowing and the weather is conducive to building.

'Outside of Sandy, if the fiscal cliff isn't fixed in time, expect a slowdown in tonnage early next year as paychecks shrink for all households,' Costello said. 'Since trucks account for the vast majority of deliveries in the retail supply, any reduction in consumer spending will hurt.' Costello added that even if we don't go off the fiscal cliff, he expects slower tonnage growth in 2013 than 2012 as better housing starts and auto sales will be offset by slower factory output and consumer spending.
emphasis added

Note from ATA:

Trucking serves as a barometer of the U.S. economy, representing 67% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9.2 billion tons of freight in 2011. Motor carriers collected $603.9 billion, or 80.9% of total revenue earned by all transport modes.

Click on graph for larger image.

Here is a long term graph that shows ATA's For-Hire Truck Tonnage index.

The dashed line is the current level of the index.

Overall the index has been mostly moving sideways this year due to the slowdown in manufacturing.

Summary for Week ending Dec 21st

The economic data released this week was encouraging.  The November Personal Income and Outlays report suggests PCE might increase over 2% in Q4 - not great, but higher than most forecasts.

The housing numbers were solid.  Housing starts are on pace to increase about 25% this year, and, for existing homes, inventory is down sharply and conventional sales up. 

Other positives include Q3 GDP being revised up, the highest Architecture Billings Index since 2007, a rebound in the trucking index, a decline in the 4-week average of initial weekly unemployment claims, and another increase in builder confidence.

Manufacturing was still weak, but two of the three regional surveys were slightly better than expected.  A negative was consumer sentiment, and that is probably related to the "fiscal cliff" debate in Washington that is still showing no signs of progress. I expect an agreement, but not until early January (although it could happen sooner). Next week will be a light week for economic data, but there are two key housing reports - new home sales and Case-Shiller house prices.

Here is a summary of last week in graphs:

' Housing Starts at 861 thousand SAAR in November

Total housing starts were at 861 thousand (SAAR) in November, down 3.0% from the revised October rate of 888 thousand (SAAR).

A few key points:

' Housing starts are on pace to increase about 25% in 2012. This is a solid year-over-year increase, and residential investment is now making a positive contribution to GDP growth.

' Even after increasing 25% in 2012, the approximately 770 thousand housing starts this year will still be the 4th lowest on an annual basis since the Census Bureau started tracking starts in 1959 (the three lowest years were 2009 through 2011). Starts averaged 1.5 million per year from 1959 through 2000, and demographics and household formation suggests starts will return to close to that level over the next few years. That means starts will come close to doubling from the 2012 level.

' Residential investment and housing starts are usually the best leading indicator for economy. Nothing is foolproof, but this suggests the economy will continue to grow over the next couple of years.

This was slightly below expectations of 865 thousand starts in November.

Friday: November Personal Income and Outlays, Durable Goods, Consumer Sentiment

On household formation from Cardiff Garcia at FT Alphaville: Another look at US household formation, and why it matters

James Sweeney of Credit Suisse has written one of the more optimistic (and convincing) notes we've come across about the near-term trajectory for US housing.

Its optimism is based mainly on its analysis of expected household formation growth, which Sweeney finds has been underestimated by most observers. The note includes a good discussion of the ways in which healthy household formation growth can have powerful multiplicative effects throughout the rest of the economy. ...

But the two really interesting points in the Sweeney note are that 1) household formation growth can grow meaningfully even under relatively pessimistic assumptions for the US economy, and 2) even modest assumptions of household formation growth can have an have an unexpectedly big impact on the rest of the economy.

And from the Credit Suisse research note:

So how many households will form? A reasonable estimate, in our view, is somewhere between the strong and base case views, meaning 6-8 million over the next five years. Demographics alone should create 5.7 million, with the rest driven by a labor market recovery that falls short of our strong scenario.

We need not assume such high numbers to demonstrate the powerful forces formation can unleash. Even the base case scenario of 5.7 million will drive a substantial pick-up in residential investment. The extremely low levels of housing starts and permits over the past few years means a large number of new housing units will likely need to be built.

I'll revisit household formation soon, but I think we will see even higher household formation than the Credit Suisse estimate. But even with 1.1 million households per year (plus 2nd home buying and demolitions), means housing starts will have to increase to 1.4 to 1.5 million in a few years (once the excess is absorbed).  That is almost double from the 770 or so thousand this year.

And here is Business Insider's list of the most important charts for 2012. They include two of my charts - the first showing the beginning of the recovery for housing, and the second that the drag from state and local governments is near the end.

Friday economic releases:
' At 8:30 AM ET, Durable Goods Orders for November from the Census Bureau. The consensus is for a 0.5% increase in durable goods orders.

' Also at 8:30 AM, Personal Income and Outlays for November. The consensus is for a 0.3% increase in personal income in November, and for 0.4% increase in personal spending. And for the Core PCE price index to increase 0.1%. This will give us a preliminary estimate for Q4 PCE.

' Also at 8:30 AM, the Chicago Fed National Activity Index for November. This is a composite index of other data.

' At 9:55 AM, the final Reuter's/University of Michigan's Consumer sentiment index for December. The consensus is for a reading of 75.0.

' At 10:00 AM, Regional and State Employment and Unemployment (Monthly) for October 2012.

' At 11:00 AM, Kansas City Fed regional Manufacturing Survey for December. The consensus is for a reading of -3, up from -6 in November (below zero is contraction).

Personal Income increased 0.6% in November, Spending increased 0.4%

The BEA released the Personal Income and Outlays report for November:

Personal income increased $85.8 billion, or 0.6 percent ... in November, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $41.3 billion, or 0.4 percent..
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.6 percent in November, in contrast to a decrease of 0.2 percent in October. ... The price index for PCE decreased 0.2 percent in November, in contrast to an increase of 0.1 percent in October. The PCE price index, excluding food and energy, increased less than 0.1 percent, compared with an increase of 0.1 percent.
...
Personal saving -- DPI less personal outlays -- was $436.7 billion in November, compared with $404.6 billion in October. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 3.6 percent in November, compared with 3.4 percent in October.

The following graph shows real Personal Consumption Expenditures (PCE) through November (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

Click on graph for larger image.

This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE. Personal income increased more than expected in November and PCE for October was revised up.

The "two month method" for estimating Q4 PCE suggests PCE will increase close to 2.2% in Q4 - more growth than most expect - although this estimate is probably a little high because PCE was strong in September. Still better than expected ...

Weekly Initial Unemployment Claims at 361,000

The DOL reports:

In the week ending December 15, the advance figure for seasonally adjusted initial claims was 361,000, an increase of 17,000 from the previous week's revised figure of 344,000. The 4-week moving average was 367,750, a decrease of 13,750 from the previous week's unrevised average of 381,500.

The previous week was revised up from 343,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims declined to 367,750.

The recent spike in the 4 week average was due to Hurricane Sandy as claims increased significantly in NY, NJ and other impacted areas. Now, as expected, the 4-week average is back to the pre-storm level.

Weekly claims were slightly higher than the 359,000 consensus forecast.

And here is a long term graph of weekly claims:

Note: We use the 4-week average to smooth out noise, but following an event like Hurricane Sandy,  the 4-week average lags the event. It looks like the average should decline again next week, perhaps to a new low for the year. The low for the year is 363,000.

2013 Housing Forecasts

Towards the end of each year I collect some housing forecasts for the following year.

Here was a summary of forecasts for 2012. Right now it looks like new home sales will be around 370 thousand this year, and total starts around 770 thousand or so.  Tom Lawler, John Burns and David Crowe (NAHB) were all very close on New Home sales for 2012.  Lawler was the closest on housing starts.

The table below shows several forecasts for 2013. (several analysts were kind enough to share their forecasts - thanks!)

From Fannie Mae: Housing Forecast: November 2012

From NAHB: Housing and Interest Rate Forecast, 11/29/2012 (excel)

I haven't worked up a forecast yet for 2013. I've heard there are some lot issues for some of the builders (not improved until 2014), and that might limit supply. In general I expect prices to increase around the rate of inflation, and to see another solid increase in 2013 for new home sales and housing starts.

Thursday: Existing Home Sales, Q3 GDP, Unemployment Claims, Philly Fed Mfg Survey

First, Stan Collender reviews his budget predictions for 2012 and offers five predictions for 2013: Beyond The Fiscal Cliff: My Budget Crystal Ball For 2013. One of his 2012 predictions is still open:

The one prediction whose fate is still unknown is that I told readers not to be shocked if the only thing that happens in a lame-duck session is a deal that both extends the tax cuts and delays the sequester spending cuts until June 30, 2013, or beyond. We should know in a few weeks whether that happens.

My guess is some sort of deal will be worked out in early January, but Collender might be correct and everything could get extended for six months.

Wednesday economic releases:
' At 8:30 AM ET, The initial weekly unemployment claims report will be released. The consensus is for claims to increase to 359 thousand from 343 thousand last week. If correct, this would put the 4-week just above the low for the year.

' Also at 8:30 AM, the third estimate of Q3 GDP from the BEA. The consensus is that real GDP increased 2.8% annualized in Q3, up slightly from the 2.7% second estimate.

' At 10:00 AM, Existing Home Sales for November from the National Association of Realtors (NAR). The consensus is for sales of 4.90 million on seasonally adjusted annual rate (SAAR) basis. Sales in October 2012 were 4.79 million SAAR. Economist Tom Lawler estimates the NAR will report sales at 5.10 million SAAR.

' Also at 10:00 AM, the Philly Fed Manufacturing Survey for December. The consensus is for a reading of minus 2.0, up from minus 10.7 last month (above zero indicates expansion).

' Also at 10:00 AM, the Conference Board Leading Indicators for November. The consensus is for a 0.2% decrease in this index.

' Also at 10:00 AM, FHFA House Price Index for October 2012. This was originally a GSE only repeat sales, however there is also an expanded index that deserves more attention. The consensus is for a 0.3% increase in house prices.

Another question for the December economic prediction contest (Note: You can use Facebook, Twitter, or OpenID to log in).

MBA: Mortgage Applications decline sharply

From the MBA: Refinance Applications Fall to Lowest Level in Over a Month in Latest MBA Weekly Survey

The Refinance Index decreased 14 percent from the previous week to the lowest level since week ending November 2, 2012. The seasonally adjusted Purchase Index decreased 5 percent from one week earlier. ...

'Despite the Federal Reserve's announcement last week that it would purchase an additional $45 billion in Treasury securities per month as part of its continuing quantitative easing effort, rates increased in the second half of the week,' said Mike Fratantoni, MBA's Vice President of Research and Economics. 'As a result, refinance applications dropped sharply to the lowest level in over a month.'
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.50 percent from 3.47 percent, with points increasing to 0.44 from 0.36 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Click on graph for larger image.

This graph shows the MBA mortgage purchase index.

Although the purchase index declined 5% this week, the 4-week average is up about 25% from the post-bubble low.

Housing Starts at 861 thousand SAAR in November

From the Census Bureau: Permits, Starts and Completions

Housing Starts:
Privately-owned housing starts in November were at a seasonally adjusted annual rate of 861,000. This is 3.0 percent below the revised October estimate of 888,000, but is 21.6 percent (±12.5%) above the November 2011 rate of 708,000.

Single-family housing starts in November were at a rate of 565,000; this is 4.1 percent below the revised October figure of 589,000. The November rate for units in buildings with five units or more was 285,000.

Building Permits:
Privately-owned housing units authorized by building permits in November were at a seasonally adjusted annual rate of 899,000. This is 3.6 percent above the revised October rate of 868,000 and is 26.8 percent above the November 2011 estimate of 709,000.

Single-family authorizations in November were at a rate of 565,000; this is 0.2 percent below the revised October figure of 566,000. Authorizations of units in buildings with five units or more were at a rate of 307,000 in November.

Click on graph for larger image.

The first graph shows single and multi-family housing starts for the last several years.

Multi-family starts (red, 2+ units) decreased slightly from October.

Single-family starts (blue) decreased to 565,000 thousand in November.

The second graph shows total and single unit starts since 1968.

This shows the huge collapse following the housing bubble, and that total housing starts have been increasing lately after moving sideways for about two years and a half years.

Total housing starts were at 861 thousand (SAAR) in November, down 3.0% from the revised October rate of 888 thousand (SAAR).

Total starts are up about 80% from the bottom start rate, and single family starts are up about 60% from the low.

This was slightly below expectations of 865 thousand starts in November. Starts in November were up 21.6% from November 2011, and right now starts are on pace to be up about 25% from 2011. I'll have more soon ...

Tuesday: NAHB Home Builder Confidence

Two more articles on the possible "fiscal cliff" deal:

From the NY Times: President Delivers a New Offer on the Fiscal Crisis to Boehner

The White House plan would permanently extend Bush-era tax cuts on incomes below $400,000, essentially meaning that only the top tax bracket, 35 percent, would rise to 39.6 percent.

The president's plan would cut spending by $1.22 trillion over 10 years, an official said, $800 billion of it in programmatic cuts, and $122 billion by adopting a new measure of inflation that slows the growth of government benefits, especially Social Security.

From the WSJ: White House Revises Offer on Tax Rates in Deficit Talks

In President Barack Obama's latest budget proposal, the White House said it now would seek to raise tax rates on income above $400,000, a person familiar with the talks said. ...

In total, the plan would include $1.22 trillion in spending reductions, with $400 billion coming from changes to health-care programs, $200 billion from cuts to other mandatory spending programs, $100 billion in cuts coming from defense spending and another $100 billion coming from nondefense discretionary spending.

Tuesday economic releases:
' At 10:00 AM ET, The December NAHB Housing Market Index (HMI) survey will be released. The consensus is for a reading of 47, up from 46 in November. Although this index has been increasing sharply, any number below 50 still indicates that more builders view sales conditions as poor than good.

Fiscal Cliff: Chained CPI

Ezra Klein at the WaPo WonkBlog wrote earlier today: A 'fiscal cliff' deal is near: Here are the details

Boehner offered to let tax rates rise for income over $1 million. The White House wanted to let tax rates rise for income over $250,000. The compromise will likely be somewhere in between. More revenue will come from limiting deductions, likely using some variant of the White House's oft-proposed, oft-rejected idea for limiting itemized deductions to 28 percent. The total revenue raised by the two policies will likely be a bit north of $1 trillion. ...

On the spending side, the Democrats' headline concession will be accepting chained-CPI, which is to say, accepting a cut to Social Security benefits.

Chained CPI is a relatively new series (started in 2002), and measures inflation at a slightly lower rate than CPI or CPI-W - and over time this would add up both for Social Security payments and also for revenue (tax brackets would increase slower using chained CPI than using currently).

From the BLS: Frequently Asked Questions about the Chained Consumer Price Index for All Urban Consumers (C-CPI-U)

Click on graph for larger image in graph gallery.

The graph shows the year-over-year change in headline CPI, CPI-W, and chained CPI.

There isn't much difference on a year-over-year basis, but notice the blue line is mostly below the other two all the time. Those small differences add up over time as the following table shows.

This table shows the 10 year change in each measure (from Nov 2002 to Nov 2012) and the annualized change over that period. If we were using chained CPI instead of CPI-W over the last 10 years, Social Security benefits would be about 3.6% lower than they are now.

Housing: Inventory down 24% year-over-year in mid-December

Inventory declines every year in December and January as potential sellers take their homes off the market for the holidays. That is why it helps to look at the year-over-year change in inventory.

According to the deptofnumbers.com for (54 metro areas), overall inventory is down 23.9% year-over-year and probably at the lowest level since the early '00s.

This graph shows the NAR estimate of existing home inventory through October (left axis) and the HousingTracker data for the 54 metro areas through mid-December.

Click on graph for larger image.

Since the NAR released their revisions for sales and inventory last year, the NAR and HousingTracker inventory numbers have tracked pretty well.

On a seasonal basis, housing inventory usually bottoms in December and January and then increases through the summer. So inventory will probably decline a little further over the next month before increasing again next year.

The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker.

HousingTracker reported that the mid-December listings, for the 54 metro areas, declined 23.9% from the same period last year.

My guess is inventory will bottom in January (both seasonally and for the current cycle). I think the recent increase in prices will entice a few more people to list their homes (some people will no longer have negative equity too and can finally sell). Also there may be a few more foreclosure listings in some judicial states.

Nick Timiraos at the WSJ writes: 2013: How Rising Prices Could Boost Housing Demand

Rising prices could eventually encourage more sellers to put their homes on the market, which would help boost demand even further. Glenn Kelman, chief executive of Redfin, says he is looking to increase the company's workforce of 400 agents nationally by 50% by the end of January. 'I'm going across the country meeting with managers, and the only topic we're talking about is hiring,' he said.

At the least the year-over-year declines should still start to get smaller since inventory is already very low. It seems very unlikely we will see 20%+ year-over-year declines next summer!

NY Times: Sunnier Forecast, D.C. Shadow

From Catherine Rampell at the NY Times: Economic Forecast Is Sunnier, but Washington Casts a Big Shadow

Economists see a number of sources of underlying strength in the economy, but for the growth to gain traction, they say, political leaders need to avoid the broad tax increases and spending cuts now being debated.

The nascent housing rebound, the natural gas boom, record profit margins, a friendlier credit market for small businesses, along with pent-up demand for autos and other big purchases, could in combination unleash growth and hiring that the economy needs.

'Underneath all the shenanigans in Washington, there's a lot of strengthening,' said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
...
Estimates for the last quarter of 2012 are hovering around an unusually weak 1 percent annualized rate.

That dismal pace is driven partly by drags from Europe's recession and China's slowdown; partly by companies readjusting after potentially overstocking their back-room shelves in the third quarter; and largely by worries about the so-called fiscal cliff of spending cuts and tax increases set for early 2013.

There are some clear positives for 2013, especially from housing and less drag from state and local governments (Rampell didn't mention this, but I did on Friday). I expect the rate of growth to pickup next year, but I wouldn't get too excited.

Obviously there is going to be some more austerity in the US at the Federal level next year, and we need some reasonable resolution to the "fiscal cliff". My expectation is that relief from the Alternative Minimum Tax (AMT) will be extended, the tax cuts for low to middle income families will be extended, and that most, but not all, of the defense spending cuts will be reversed (aka "sequestration"). However I think the payroll tax cut will probably not be extended, and tax rates on high income earners will increase a few percentage points to the Clinton era levels. There are also many more details that will need to be worked out - like Mortgage Debt Relief Act for short sellers, extending emergency unemployment benefits, and the Medicare "Doc Fix".

A few obvious points on the "fiscal cliff": 1) It is about the deficit shrinking too quickly next year, 2) there is no "drop dead" date (the sites with countdown times are embarrassing themselves), and 3) entitlements are not part of the "cliff" (although some changes might be part of an agreement).

Empire State Manufacturing index indicates further contraction

by Bill McBride on 12/17/2012 08:40:00 AM

Unofficial Problem Bank list declines to 845 Institutions

Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The number of unofficial problem banks grew steadily and peaked at 1,002 institutions on June 10, 2011. The list has been declining since then.

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for Dec 14, 2012.

Changes and comments from surferdude808:

Similar to last week, the only changes this week to the Unofficial Problem Bank list were removals. In all, there were four removals, which leaves the list at 845 institutions with assets of $312.9 billion. A year ago, the list held 974 institutions with assets of $398.3 billion.

Oasis Bank, SSB, Houston, TX ($77 million) left the list through an unassisted merger and actions were terminated against WaterStone Bank, SSB, Wauwatosa, WI ($1.7 billion Ticker: WSBF); Essex Bank, Tappahannock, VA ($1.1 billion Ticker: BTC); and Northwestern Bank, Chippewa Falls, WI ($366 million). The failure tonight -- Community Bank of the Ozarks, Sunrise Beach, MO -- was not on the Unofficial Problem Bank List as an enforcement action could not be located on the FDIC website.

Next week, several changes should occur as the OCC will release its actions through mid-November 2012.

Earlier:
' Summary for Week Ending Dec 14th
' Schedule for Week of Dec 16th

Schedule for Week of Dec 16th

Earlier:
' Summary for Week Ending Dec 14th

This will be a very busy week for economic data. There are three key housing reports to be released this week: December homebuilder confidence on Tuesday, November housing starts on Wednesday, and November existing home sales on Thursday.

For manufacturing, the December NY Fed (Empire state), Philly Fed, and the Kansas City Fed surveys will be released this week.

The third estimate of Q3 GDP will be released on Thursday, and the November Personal Income and Outlays report will be released on Friday.

FNC: Residential Property Values increased 3.7% year-over-year in October

In addition to Case-Shiller, CoreLogic, FHFA and LPS, I'm also watching the FNC, Zillow and several other house price indexes.

FNC released their October index data last night. FNC reported that their Residential Price Index' (RPI) indicates that U.S. residential property values increased 0.4% from September to October.

From FNC: Home Prices Up 0.4% in October; Year-Over-Year Growth Acceleration Continues

Based on recorded sales of non-distressed properties (existing and new homes) in the 100 largest metropolitan areas, the FNC 100-MSA composite index shows that home prices nationally were up 0.4% in October. This was the eighth consecutive month that prices moved higher, leading to a total appreciation rate of 5.1% year to date. The year-over-year growth has accelerated rapidly since first turning positive four months ago. Foreclosures as a percentage of total home sales were 17.6% in October, down from 26.7% at the beginning of the year or 23.5% a year ago.

The year-over-year trends continued to show improvement in October, with the 100-MSA composite up 3.7% compared to October 2011. The FNC index turned positive on a year-over-year basis in July - that was the first year-over-year increase in the FNC index since year-over-year prices started declining in early 2007 (over five years ago).

Click on graph for larger image.

This graph is based on the FNC index (four composites) through October 2012. The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals.

The key is the indexes are now showing a year-over-year increase indicating prices probably bottomed early this year.

The October Case-Shiller index will be released on Wednesday, Dec 26th.

Earlier:
' Summary for Week Ending Dec 14th
' Schedule for Week of Dec 16th

Bank Failure #51: Community Bank of the Ozarks, Sunrise Beach, Missouri

From the FDIC: Bank of Sullivan, Sullivan, Missouri, Assumes All of the Deposits of Community Bank of the Ozarks, Sunrise Beach, Missouri

As of September 30, 2012, Community Bank of the Ozarks had approximately $42.8 million in total assets and $41.9 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $10.4 million. ... Community Bank of the Ozarks is the 51st FDIC-insured institution to fail in the nation this year, and the fourth in Missouri.

Another one bites the dust.

Some Bullish 2013 House Price Forecasts

From the WSJ: Home Prices Could Jump 9.7% in 2013, J.P. Morgan Says

J.P. Morgan Chase & Co. expects U.S. home prices to rise 3.4% in its base-case estimate and up to 9.7% in its most bullish scenario of economic growth. Standard & Poor's, which rates private-issue mortgage bonds, on Friday said it expects a 5% rise in 2013.

The J.P. Morgan analysts boosted their base-case estimate from 1.5% ...

I think house prices will increase further in 2013 based on supply and demand (there is little supply, however I think it is possible that inventory will bottom in 2013), but I doubt we will see a 9.7% price increase next year on the repeat sales indexes.

The WSJ's Nick Timiraos makes an amusing comment on Twitter: "All these analysts forecasting monster home price gains were forecasting moderate declines a few months ago."

At the beginning of the year, the consensus was that house prices would decline for at least another year. When I posted The Housing Bottom is Here in early February, many people were surprised. How views change!

Summary for Week ending Dec 14th

The key US economic story of the week was the FOMC announcement of thresholds for raising the Fed Funds rate based on the unemployment rate and inflation.  Also the FOMC expanded QE3 by an additional $45 billion per month starting in January (some people are calling it QE4, but that isn't consistent - the FOMC expanded an earlier QE).  This was a significant change in Fed communication, and the change allows the FOMC to drop the date language from the FOMC statement.  If the economy improves quicker than the forecast, then investors will adjust their estimate of timing (or the opposite). The Fed also made it very clear they will tolerate a little more inflation in the near term.

The economic data showed some bounce back following Hurricane Sandy.  The retail report increased 0.3% (less than forecast though), and industrial production increase 1.1% (more than forecast).  And initial weekly unemployment claims continued to decline following the Sandy spike. 

This bounce back shows the declines in October were storm related.

The austerity debate (aka "Fiscal cliff) still showing no signs of progress.  But I don't expect agreement until early January (although it could happen sooner).  Next week will be very busy with several key housing reports.

Here is a summary of last week in graphs:

' Retail Sales increased 0.3% in November

Click on graph for larger image.

On a monthly basis, retail sales increased 0.3% from October to November (seasonally adjusted), and sales were up 3.7% from November 2011. The change in sales for October was unrevised at a 0.3% decline.

This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).

Retail sales are up 24.5% from the bottom, and now 8.8% above the pre-recession peak (not inflation adjusted)

The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993.

Retail sales ex-gasoline increased by 4.0% on a YoY basis (3.7% for all retail sales).

This was at the consensus forecast of no change ex-autos, but below the consensus forecast for total retail sales of a 0.6% increase in November. Retail sales are still sluggish, but generally trending up.

' Trade Deficit increased in October to $42.2 Billion

The Dept of Commerce reported: "[T]otal October exports of $180.5 billion and imports of $222.8 billion resulted in a goods and services deficit of $42.2 billion, up from $40.3 billion in September, revised. October exports were $6.8 billion less than September exports of $187.3 billion. October imports were $4.9 billion less than September imports of $227.6 billion."

Both exports and imports decreased in October. US trade has slowed recently.

Exports are 9% above the pre-recession peak and up 1.0% compared to October 2011; imports are 4% below the pre-recession peak, and down 0.8% compared to October 2011.

The second graph shows the U.S. trade deficit, with and without petroleum, through October.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Oil averaged $99.75 in October, up from $98.88 per barrel in September. The trade deficit with China increased to $29.5 billion in October, up from $28.1 billion in October 2011. Most of the trade deficit is still due to oil and China.

The trade deficit with the euro area was $8.9 billion in October, up from $7.1 billion in October 2011. It appears the eurozone recession is impacting trade.

' Industrial Production increased 1.1% in November, Bounces back following Hurricane Sandy

From the Fed: "Industrial production increased 1.1 percent in November after having fallen 0.7 percent in October. The gain in November is estimated to have largely resulted from a recovery in production for industries that had been negatively affected by Hurricane Sandy, which hit the Northeast region in late October."

This graph shows Capacity Utilization. This series is up 11.6 percentage points from the record low set in June 2009 (the series starts in 1967).

Capacity utilization at 78.4% is still 1.9 percentage points below its average from 1972 to 2010 and below the pre-recession level of 80.6% in December 2007.

The second graph shows industrial production since 1967.

Industrial production increased in November to 97.5. This is 17% above the recession low, but still 3.2% below the pre-recession peak.

IP was above expectations due to the bounce back following Hurricane Sandy. Overall IP has only up 2.5% year-over-year.