Ceridian-UCLA Pulse of Commerce Leads Industrial Production in January

As a follow up to last week’s initial release of the Ceridian-UCLA Pulse of Commerce Index (PCI), I wanted to point out that it was successful in forecasting today’s industrial production (IP) results.

Although the underlying index suggested some weakness was encountered between December 2009 and January 2010, the less noisy 3 month moving average correctly predicted that the industrial production series would turn positive on a year-over-year basis in January.

This again suggests that the PCI is an accurate and timely predictor of the Feds industrial production series and likely a whole host of other aggregate macroeconomic data series.

The following chart (click for full-screen dynamic version) shows the PCI and the IP series plotted along with their year-over-year percent changes since 2004.

Production Pullback: Industrial Production January 2010

Today, the Federal Reserve released their monthly read of industrial production showing notable growth in total industrial production and the first year-over-year increases seen in some 21 months.

It's important to recognize that the recently launched Ceridian-UCLA Pulse of Commerce Index successfully predicted this months year-over-year total production index increase with exceptional accuracy.

While this report appears very positive and leans in favor of recovery, the significant inventory restocking, "cash-for-clunkers" and "cash-for-homedebtors" and associated dynamics have also played an important and likely temporary role in today's results.

“Final product” consumer durable goods increased 2.69% on a month-to-month basis jumping some 14.73% above 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 still remains weak with a decline 7.53% on a year-over-year basis.

Construction supply production, while still continuing to show a severe contraction over all, has just seen the first year-over-year increase to it's wood products component in some 41 months up 1.96% since January 2009.

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

Finally, HVAC (heating ventilation and air conditioning) while reflecting the substantial pullback and continued down trend of fixed commercial investment, managed to increase a notable 3.41% 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.

New Residential Construction Report: January 2010

Today’s New Residential Construction Report continued to indicate a weak recovery for the new home market showing the continued year-over-year increases to both permits and starts.

It’s clear now that the government’s housing stimulus tax credit and loose FHA lending policies have worked to prop both new and existing home sales.

The government’s efforts, which now include an extension of an even more broad housing tax credit, have sponsored demand and provided the new home market with a more fertile environment to clear.

Nonetheless, at 484K single family units (SAAR), the level of national housing starts still remains below levels seen in the fall of 2008.

With the substantial headwinds of rising unemployment, epic levels of foreclosure and delinquency, mounting bankruptcies, contracting consumer credit, and falling wages, an overhang of inventory and still falling home prices, the environment for “organic” home sales remains weak and likely very fragile.

Any substantial departure from the current perception of a strong “V”-shaped recovery (i.e. stock selloff, protracted high unemployment, etc.) would likely send both new and existing home sales down for another go at the lows seen last March.

Single family housing permits, the most leading of indicators, increased a whopping 48.25% nationally as compared to January 2009 but still remains an astonishing 69.98% below the peak in January 2005.

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.

Reading Rates: MBA Application Survey – February 17 2010

The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages, 1 year ARMs as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage remained unchanged since the last week at 4.94% while the purchase application volume declined 4.0% and the refinance application volume decreased 1.2% over the same period.

It’s important to recognize that despite the Federal Reserve’s “quantitative easing” measures and record low interest rates, the purchase application volume now sits near the lowest reading since 2000.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).


The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings February 2010

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

It's important to recognize that although each sentiment index has now shown notable 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.

Outstanding Contraction!: Commercial Paper Outstanding February 16 2010

The Commercial Paper (CP) market is essentially a private debt market used by corporations as a cheaper means of funding typical recurring operations than drawing on a line of bank credit.

Commercial paper, as financial instrument, is by no means a recent innovation and, in fact, you can read about how the CP market was affected by the many historic financial shocks experienced by the U.S. (read Panic on Wall Street: A History of America’s Financial Disasters)

Although the Federal Reserve was able to artificially bring CP rates down significantly since the shocking 615 basis point spread blowout (A2/P2 spread) of late 2008, they have apparently not been successful in preventing an overall contraction in the CP market.

The Federal Reserve calculates and published the total amount of CP outstanding every week and as of the latest published period, commercial paper outstanding is contracting at a fast pace, registering a whopping 27.04% decline year-over-year.

It's important to note that at $1.113 trillion, total commercial paper outstanding is 10.9% smaller that the level seen in the trough of the dot-com recession.

The Empire State Manufacturing Index: February 2010

The Empire State Manufacturing Survey, like the Philadelphia Federal Reserve’s Business Outlook Survey and the ISM’s Manufacturing Report on Business, consists of a series of diffusion indices distilled from a monthly survey of New York regional manufacturing executives and seeks to identify trends across 22 different current and future manufacturing related activities.

Today’s report indicated a continued improvement with the current business conditions index continuing to rise to 24.9 and the future conditions index declining only slightly to an optimistic 52.78 indicating that an expansion in manufacturing activity is underway.

Current and future new orders also continued to indicate expansion though the future outlook has deteriorated a bit with a reading of just 8.78 while current conditions remained well within expansion territory at 55.56.

The current and future outlook for inventories continued to improve with the current index surging to 0.0 while the future index showed a 12.5.



The ISM’s PMI Composite index correlates well with the Empire State Manufacturing Survey’s Current General Conditions index again confirming that improvement is underway.

Conspicuous Correlation: Retail Sales January 2010

Today, the U.S. Census Bureau released its latest nominal read of retail sales showing an increase of 0.5% from December 2009 and an 4.7% increase from January 2009 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 declined 4.16% compared to January 2009.

Further, adjusted for inflation (now deflation), “real” discretionary retail sales declined 6.52% since Januray 2009.

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 chart 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.

Looking at the chart below (click for full-screen dynamic 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.

Extended Unemployment: Initial, Continued and Extended Unemployment Claims February 11 2010

While today’s jobless claims report continued to show a, more or less, steady trend down to both initial and continued unemployment claims with a nearly textbook peak shaping up, considering the federal extended claims data offers a more dire view of the state of the job market and of the economy as a whole.

Seasonally adjusted “initial” unemployment claims declined by 43,000 to 440,000 claims from last week’s revised 483,000 claims while “continued” claims declined 79,000 resulting in an “insured” unemployment rate of 3.5%.

Since the middle of 2008 though, two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.

Currently there are some 5.68 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 5.6 million people that are currently counted as receiving traditional continued unemployment benefits, there are well over 11 million people on state and federal unemployment rolls.

The following chart shows the recent trend in initial non-seasonally adjusted initial jobless claims with the year-over-year percent change acting as a rough equivalent of a seasonally adjustment.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

The following chart shows “population adjusted” continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967.

Also, acceleration and deceleration of unemployment claims has generally preceded comparable movements to the unemployment rate by 3 – 8 months (click for larger version).

On The Pulse: Ceridian-UCLA Pulse of Commerce Index January 2010

Yesterday, an exciting new index was launched as a joint effort between Ceridian Corporation, a business solutions firm that, among other things, provides payment services to the trucking industry, the UCLA Anderson School of Management and Charles River Associates.

Termed the “Ceridian-UCLA Pulse of Commerce Index™” (PCI), this series is compiled from vast numbers of real time diesel fuel payment transactions that are executed daily by truckers through Ceridian’s electronic card payment services.

Ceridian suggests that this index will serve as a timely indicator of the state of the U.S. economy that, while closely matching the trend seen in the Federal Reserve’s Industrial Production series, will be released as much as a week in advanced.

The latest release of the PCI suggests that the economy may have slowed a bit in January with the seasonally adjusted index declining 3.78% as compared to December 2009 yet, on an year-over-year basis, the index rose 3.57%.

Further, the three month moving average, while also slowing since December registered its first year-over-year increase in 21 months indicating that January’s Industrial Production data (released next week) could show a similar annual gain.

As cited in the release, the PCI is closely correlated to the industrial production series but given the broad nature of the series it’s not surprising to see that it correlates well with other macro data.

Looking at the chart below (click for full-screen dynamic version) you can see that while a pretty reasonable correlation exists between the PCI and the S&P/Case-Shiller Composite-10 Home Price Index (CSI), the CSI reached its peak roughly a year before the PCI.

Could the latest easing of home prices foretell a general slowing trend in the economy?

Total Real Estate Lending Contracts!

As a further indication that we are currently experiencing reasonably unprecedented economic trends, the total of all real estate loans for all commercial banks has just registered its first nominal annual decline on record.

This is particularly notable given that the series stretches all the way back to 1947 and thus captures a host of trying economic times including eleven separate recessions.

October 2009 registered a 1.70% annual decline followed by a tepid 0.06% increase in November and then a 0.38% decline in December bringing the total real estate loans held by commercial banks to just over $3.80 trillion.

The following chart (click for full-screen dynamic version) plots real estate loans at all commercial banks since 1947 along with the annual percent change of real estate loans. The light yellow bands indicate U.S. recessions.

Aside from reduced demand, if you want to know what might be keeping banks on the sidelines tightfisted and unwilling to lend take a look at the following chart (click for full-screen dynamic version) that plots nonperforming total loans for all commercial banks.

Notice that as of Q3 2009 the nonperforming loan ratio reached 5.03%, the highest percentage of delinquent or nonaccrual loans to total loans seen in at least twenty years.