The Chicago Fed National Activity Index: October 2012

The latest release of the Chicago Federal Reserve National Activity Index (CFNAI) indicated pronounced weakness for the national economy with the index falling notably from the prior month to stand at a near-recessionary level of -0.56 while the three month moving average also slumped to -0.56.

The CFNAI is a weighted average of 85 indicators of national economic activity collected into four overall categories of “production and income”, “employment, unemployment and income”, “personal consumption and housing” and “sales, orders and inventories”.

The Chicago Fed regards a value of zero for the total index as indicating that the national economy is expanding at its historical trend rate while a negative value indicates below average growth.

A value at or below -0.70 for the three month moving average of the national activity index (CFNAI-MA3) indicates that the national economy has either just entered or continues in recession.

Philadelphia Feeling: Federal Reserve Bank of Philadelphia Business Outlook Survey November 2009

Today, the Federal Reserve Bank of Philadelphia released the results of their Business Outlook Survey for November showing a slight increase in manufacturing activity with the current activity index still indicating expansion with a reading of 16.7.


Also, today’s results show that any recent parallel to the stagflationary eras of the 70s and early 80 which had given way to a stronger stag-deflationary force, and then mildly inflationary inline with the government stimulus now appears to be, at least temporarily, looking marginally double-dipish as latest release shows predictions on future employment flattening.

The following chart shows the latest results of the “current new orders” “current prices paid” and “future employment” components (click for larger versions).

The following chart (click for larger) shows these measures during the last stagflationary era seen between 1976 – 1980. Notice the clear divergence of rising prices and falling growth.

Follow The Leader: Index of Leading Economic Indicators October 2009

Today’s results of the Conference Board’s Leading Economic Indicators showed another monthly increase climbing .3% compared to September bringing the annual increase to 4.22% and leaving the index at a level of 103.8.

On the face of it this is clearly a Bullish “Green Shoots” development as this series (an aggregate of 10 component leading indices) is signaling a clear shift from leading contraction to expansion though the leading index is strongly influenced by stocks (i.e. the inclusion of the S&P 500 as one of the leading indicators) and the pronounced “V”-shaped bounce coming directly on the back of such a dramatic period of decline appears suspicious.

Could we be headed into a second dip (… similar to mid-1981) as the government’s Keynesian chicanery shows itself to have only propped demand but failed to encourage real “organic” demand?

Only time will tell…

New Residential Construction Report: October 2009

Subtitle: Government Sponsored Bounce Be Gone!

Today’s New Residential Construction Report was another blow to the “Green Shoots” crowd with both single family permits and starts declining significantly on a month-to-month and year-over-year basis in most regions.

This continues to indicate that the bounce seen in new construction activity that occurred between March and July was NOT the start of an “organic” V-shaped housing recovery but rather an induced bounce brought on by the government homeborrower tax handout which worked to fuel unusually strong seasonal activity (… thus thwarting seasonal adjustment) from pent-up demand sidelined by the epic financial panic at the end of 2008.

It’s important to consider that at 476K single family units (SAAR), the level of national housing starts still remains substantially below that seen in October 2008.

Another important factor in today’s results was the significant declines to multi-unit structures with permits for structures with at least 5 units dropping 18.3% month-to-month and 62.4% year-over-year while starts dropped 33.3% month-to-month and 78.1% year-over-year.

Permits for multi-unit structures with less than 5 units declined 15.8% month-to-month and 51.5% year-over-year while start appears to have dropped so substantially that the Census Bureau held back the seasonally adjusted results citing that “[the data] Does not meet publication standards because tests for identifiable and stable seasonality do not meet reliability standards.”… though seasonally unadjusted there was a 50% month-to-month and 60% year-over-year decline.

Single family housing permits, the most leading of indicators, again suggests declining future construction activity dropping 4.0% nationally as compared to October 2008 and an astonishing 74.11% since the peak in January 2005.

The one slight “green shoot” in today’s data, however, was that although most regions showed declines to permits with the Northeast declining 4.1%, the Midwest declining 12.2%, the South declining 3.7%,... the West actually registering the first year-over-year gain in permits in 46 consecutive months, a slight move up of 2.13%.

Keep in mind that these declines are coming on the back of the last three years of record declines.

To illustrate the extent to which permits and starts have declined, I have created the following charts (click for larger versions) that show the percentage changes of the current values on a year-over-year basis as well as compared to the peak year of 2004.




Here are the seasonally adjusted statistics outlined in today’s report:

Housing Permits

Nationally

• Single family housing permits down 4.0% as compared to October 2008.

Regionally

• For the Northeast, single family housing down 4.1% as compared to October 2008.
• For the Midwest, single family housing permits down 12.2% as compared to October 2008.
• For the South, single family housing permits down 3.7% compared to October 2008.
• For the West, single family housing permits up 2.13% as compared to October 2008.

Housing Starts

Nationally

• Single family housing starts down 10.9% as compared to October 2008.

Regionally

• For the Northeast, single family housing starts down 17.5% as compared to October 2008.
• For the Midwest, single family housing starts down 16.8% as compared to October 2008.
• For the South, single family housing starts down 4.9% as compared to October 2008.
• For the West, single family housing starts down 16.5% as compared to October 2008.

Housing Completions

Nationally

• Single family housing completions down 30.2% as compared to October 2008.

Regionally

• For the Northeast, single family housing completions up 1.7% as compared to October 2008.
• For the Midwest, single family housing completions down 41.0% as compared to October 2008.
• For the South, single family housing completions down 32.9% as compared to October 2008.
• For the West, single family housing completions down 26.6% as compared to October 2008.

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings November 2009

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing generally flat results.

It's important to recognize that although each sentiment index has now shown year-over-year increases, their levels still remain near the worst levels seen in over 20 years.

The new home market will likely not resume any significant form of healthy function until the considerable overhang of inventory is cleared.

Bounce, Crackle and Pop!

The extra-seasonal, “cash for first time homedebtors” fueled housing price bounce having reached its peak in most markets in mid-summer now appears to be completely reverting for some.

The Radar Logic home price data now indicates that there are seven regional markets that have now dropped below their March lows.

This presents an unequivocal bump in the road of the supposed “V” shaped economic recovery as a significant “housing recovery” disappointment shapes up over the next few months.

The following rollup (click for larger) shows the regions that have now completely reverted from the summer peak to break the prior lows seen in March… some even dropping to series lows, resting at levels not seen since the late 1990s.

Note that I added “value” loss for homes purchased at the summer peak and costing either $200K, $300K, $400K and $500K… all losses are well in excess of the senseless $8000 government carrot tax “credit”.

The following are Blytic charts for each of the seven popped markets.

Production Pullback: Industrial Production October 2009

Today, the Federal Reserve released their monthly read of industrial production showing a tepid continuation of the production bounce that occurred primarily as a result of the “cash-for-clunkers” policy while also indicating that many key components have now come back under pressure now that the government stimulus effects have ended.

“Final product” consumer durable goods slumped 1.36% on a month-to-month basis while remaining 8.05% below the level seen just one year ago.

It’s important to note that although the Federal Government's “cash-for-clunkers” policy breathed life into the vehicle components of the durable goods category, home appliances, furniture and carpeting continued its decline dropping 15.53% on a year-over-year basis and now resting at the lowest level seen in nearly 30 years.

Construction supply production has been showing the most severe contraction seen in at least the nearly 30 years with wood products falling 15.02% on a year-over-year basis.

The motor vehicle and business vehicle components are clearly indicating that the government sponsored bounce and any residual effects provided by the "cash for clunkers" policy has now likely peaked out.

Finally, HVAC (heating ventilation and air conditioning) appears to be firmly reflecting the substantial pullback in fixed commercial investment falling 15.46% on a year-over-year basis.

The following charts (click for larger) show the overall consumer durable component along with the Home Appliances, Furniture and Carpeting sub-component on both a time series and year-over-year basis, construction supply production with the wood products sub-component, and general and business related vehicle production all overlaid with the last two recessions for comparisons purposes.

Conspicuous Correlation: Retail Sales October 2009

Today, the U.S. Census Bureau released its latest nominal read of retail sales showing an increase of 1.4% from September 2009 and 1.7% decline from October 2008 on an aggregate of all items including food, fuel and healthcare services.

Discretionary retail sales including home furnishings, home garden and building materials, consumer electronics and department store sales decline 8.19% compared to October 2008.

Further, adjusted for inflation (now deflation), “real” discretionary retail sales declined 7.73% since October 2008.

On a “nominal” basis, there had appeared to be “rough correlation” between strong home value appreciation and strong retail spending preceding the housing bust and an even stronger correlation when home values started to decline.

The following charts show my initial analysis plotting the year-over-year change to an aggregate series consisting of the primary discretionary retail sales categories that I termed the “discretionary” retail sales series and the year-over-year change to the S&P/Case-Shiller Composite home price index since 1993 and since 2000.


As you can see there was, at the very least, a coincidental change to home values and consumer spending during the boom and then the bust, but as home values have continued to decline, retail spending has remained low but has not continued to consistently contract.


As you can see from the above charts (click for larger version), adjusted for inflation (CPI for retail sales, CPI “less shelter” for S&P/Case-Shiller Composite) the “rough correlation” between the year-over-year change to the “discretionary” retail sales series and the year-over-year S&P/Case-Shiller Composite series seems now even more significant.

Economic Jolt: Job Openings and Labor Turnover September 2009

Today, the Bureau of Labor Statistics released their latest monthly read of job availability and turnover (JOLT) showing that, on a year-over-year basis, private non-farm job “openings” declined 23.38%, job “hires” declined 11.85%, job “layoffs and discharges” increased 10.73% and job quits declined substantially dropping 26.30%.

Job “openings” (click chart below for larger version), the reports most leading “demand side” indicator, has now declined on a year-over-year basis for 25 consecutive months strongly suggesting that the private sector will curtail future hiring activity.

Sliding down that slope of the Beveridge curve, the decline in the job vacancy rate is clearly corresponding with an equal but inverse movement up in the general unemployment rate as can be plainly seen in the following chart (click chart for larger version).

Job “hiring” activity (click chart for larger version) has also been declining significantly with the latest results posting the 26th consecutive decline on a year-over-year basis further confirming the tremendous weakness seen in the job market.

With the latest revisions by the BLS, job “separations”, whereby workers and their employers go their separate ways by one means or another (layoffs, retirement, termination, quitting, etc.), appear to be flattening as a result of nearly equivalent but opposing movements in quitting and layoff activity.

It’s important to understand that job “quits” are included as a component of the “separations” data series as “quitting” is a valid means of workers “separating” from employers but their inclusion tends to create an overall procyclical trend in what would otherwise be logically thought of as a countercyclical process (i.e. downturn leads to increase in separations not decrease).

As the economy slides further into recession and the employment situation worsens workers tend to reduce quitting activity presumably for fear that they could risk a long bout of unemployment and the latest results (click chart for larger version) confirm this with the some of the sharpest year-over-year declines on record.

Layoff activity, now separated into its own series and as you can see from the chart below is showing a dramatic surge that is roughly equivalent but opposite to the decline seen in quitting activity.

Bubble’s Bounce Then Bust Again!

Against the backdrop of historically low interest rates and government stimulation, participants in property markets in both the United States and the United Kingdom responded with nothing short of jubilance.

Whereas pessimism was the leading dynamic for the majority of 2008, it seems that the Spring of 2009 brought a renewal of housing euphoria, though in a more limited and fragile sense.

In the U.S., the first time “homebuyer” tax credit, the “cash for clunkers” of housing, provided significant stimulation on the lower end, driving sales and a noteworthy bounce in prices.

In the U.K., the lowest interest rates in most peoples' lifetimes taken together with significantly corrected prices provided the impetus for a notable price bounce as well.

But how long can this stimulation last and what will happen if it doesn’t?

Now is where the rubber meets the road.

The most recent data is showing signs that the euphoric bounce is drawing to a close.

The Radar Logic home price indices clearly show that the U.S. home price bounce has topped out and is now fully in decline even in some of the worst hit markets where prices have already dropped back to levels not seen in at least a decade.

While the “Nationwide” series, one of the leading U.K. housing market indices, showed the first year-over-year increase in 18 months, on a month-to-month basis prices hardly moved from September while the “Halifax” series followed suit.

The S&P/Case-Shiller Composite 10 series, a comparable series to both of the U.K. series, is also showing that the rate of house price inflation is slowing on a month-to-month basis while remaining strongly negative on a year-over-year basis.

What does it mean for all of these series to be moving together and leaning toward a posture of deflation?

It means the bounce is likely drawing to a close leaving intervening governments with a serious dilemma.