Production Pullback: Industrial Production May 2011

Today, the Federal Reserve released their monthly read of industrial production and capacity utilization showing slight flattening of sorts with total industrial production increasing just 0.10% from April but rising 3.42% above the level seen in May 2010.

Capacity utilization declined 0.01% from April but climbed 3.25% above the level seen in May of 2010 to stand at 76.73%

It's important to recognize that though the "recovery" is well over two years old, both industrial production and capacity utilization are notably below the peaks set in late 2007.

The Empire State Manufacturing Survey: June 2011

The Empire State Manufacturing Survey 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 showed notable overall weakness and indicated contraction for current manufacturing activity with the current activity index declining to -7.79 while assessments of future activity declined as well with the future activity index declining to 22.45.

Current prices paid registered the first decline in seven months falling to 56.12 while current new orders declined to -3.61 and assessments of future new orders plunging to 15.31.

Reading Rates: MBA Application Survey – June 15 2011

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 as well as the volume of 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 declined 3 basis points to 4.51% since last week while the purchase application volume increased 4.5% and the refinance application volume jumped 16.5% over the same period.

Rates now appear to be trending down having, more of less, declined continually for the last few months.

Given that we are nearing the end of the Feds QE2 intervention, it will be interesting to see how long rates trend in the next few months.

In any event, the purchase application volume remains near the lowest level seen in well over a decade while refinance activity continues to bounce around a bit.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages since 2006 as well as the purchase, refinance and composite loan volumes (click for larger dynamic full-screen version).

The Fall of Greece: April 2011

Looking at the most recent OECD economic indicators, Greece makes by far the weakest showing in all the Eurozone as it continues to plod through tremendously difficult economic times.

Industrial production remains in severe contraction territory, consumer confidence has fallen off a cliff, business confidence is clearly depressed and the leading index is turning down fast dropping 0.66% since March and 6.36% below the level seen in April 2010.

For May (more timely data), consumer confidence declined 0.04% from April and dropped 0.69% below the level seen in May 2010 while business confidence declined notably from April dropping 0.47% but remaining 0.86% above the level seen in May 2010.

Industrial production remains epically weak plunging 1.21% between February and March 2011 (less timely data) remaining near the lowest levels seen since the late 1990s.

China's Engine: April 2011

Looking at the latest release of the OECD economic indicators for China, it appears that the massive jump in economic activity seen since the panicky period of late 2008 took a notable pause throughout most of 2010 and after having shown some growth into early 2010, is now back on the decline (note... this is a highly revised series that has been swinging between expansion to contraction with each monthly release).

China’s leading economic indicator suggests that economic activity declined in April showing a month-to-month decline of 0.33% bringing the latest level just 0.84% below the level seen in April 2010.

OECD Composite Leading Indicators: April 2011

Note... be sure to bookmark the OECD Dashboard for a real-time view of all the OECD composite indices.

The Organization for Economic Co-Operation and Development (OECD) publishes a wealth of data tracking the fundamental economic dynamics of the world’s largest economies.

The OECD leading indicator, industrial production, business confidence and consumer confidence series all disclose important and timely clues to the state of each respective economy or group of economies.

The latest monthly results indicate that economic conditions in the global economy generally weakened with the total leading index declining 0.02% since March but climbing 0.44% above the level seen in April 2010 while a more timely indicator of business confidence weakened notably.

Total Business confidence plunged 0.89% since April (more timely data) but still remaining 0.71% above the level seen in May 2010.

Total Consumer confidence increased with the total index climbing 0.26% since April (more timely data) dropping 0.08% below the level seen in May 2010.

Conspicuous Correlation: Retail Sales May 2011

Today, the U.S. Census Bureau released its latest nominal read of retail sales showing an decline of 0.2% since April bringing the total increase since last year to 7.7% on an aggregate of all items including food, fuel and healthcare services.

Nominal discretionary retail sales including home furnishings, home garden and building materials, consumer electronics and department store sales increased 0.01% from April increasing 3.13% above the level seen in May 2010 while, adjusting for inflation, “real” discretionary retail sales actually declined 0.43% over the same period.

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 shows the year-over-year change to nominal discretionary retail sales and the year-over-year change to nominal the S&P/Case-Shiller Composite home price index since 1993 and since 2000.

As you can see there is, 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.

Hong Kong Bubble?: Hong Kong Residential Property Prices April 2011

Today, the University of Hong Kong released their Hong Kong Residential Real Estate Series (HKU-REIS) indicating that, in April, the price of residential properties increased 1.52% since March climbing 25.55% above the level seen in April 2010.

The “Hong Kong Island” index, “Kowloon” and “New Territories” sub-components also showed notabl monthly and annual increases with the "Hong Kong Island" series indicated that prices have now far outpaced the prior 1997 peak.

The HKU-REIS is a set of property price indices constructed monthly using a “modified” repeat-sale methodology similar to that of the S&P/Case-Shiller indices yet suited to the Hong Kong property market.

Beantown Bust: Boston Home Sales and Prices April 2011

Looking at the latest data from the Massachusetts Association of Realtors and S&P/Case-Shiller, it is easy to see that the Bay State is now fully entrenched in the infamous housing "double-dip".

Prices and sales are falling, inventory is up and the monthly supply is over 10 months... now with no government tax scam muddying the view, the market is showing it's true "organic" trends while it continues slumping through the worst decline in generations.

The Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for April showing that single family homes sales increased 13% from March but fell a whopping 20% below the level seen in April 2010 with detached single family median home prices plunging 8.5% below the level seen last year.

Condo sales increased 12.1% from March but dropped 26.1% below the level seen in April 2010 while median selling prices increased 6.7% above the level seen a year earlier.

The S&P/Case-Shiller (CSI) Boston index indicated that area single family home prices declined 1.66% between February and March and registering a year-over-year decline of 2.66%, the eighth consecutive annual decline.

As for condos, the Boston condo CSI indicated area unit values declined 1.86% between February and March with values showing a year-over-year decline of 3.08%.

Single family homes stayed on the market for an average of 151 days while condos stayed an average of 135 days, both values significantly higher than the level seen last year indicating that the sales pace is continuing to slide while the monthly supply of both single family homes and condos remains at or above 10 months.

As in months past, be on the lookout for the inflation adjusted charts produced by BostonBubble.com for an even more accurate "real" view of the current home price movement.

Index of Stress: May 2011

The Federal Reserve Bank of St. Louis recently began publishing a new weekly index that seeks to track the general level of financial stress.

As periods of financial stress come and go a whole host of fundamental economic indicators immediately adjust to meet the near and long term expectations of market participants

Interest rates, yields spreads, popular market volatility indices all move in real time giving observers unequivocal evidence of changes general sentiment.

The St. Louis Fed has devised a method of crunching eighteen of these sensitive indices down into one convenient index it calls the St. Louis Fed Financial Stress Index (STLFSI).

The latest results of the STLFSI indicate that the level of financial stress continues to trend down in the last few weeks with the latest figure hovering at a level of -.06.

Recession Redux?: May 2011

With much of the econ-finance talk these days still centered around the possibility of a looming “double-dip” let’s take a closer look at two particularly sensitive and accurate leading indicators of our economic health to see if we can tease out the future trends.

First, the Federal Reserve Bank of New York is known to use the yield curve (or more specifically the spread between the 10 year and the 3 month treasury yields) to calculate a probability of recession.

This method appears to have been spearheaded by Professor Arturo Estrella of the Rensselaer Polytechnic Institute and Professor Frederic Mishkin of the Columbia Business School as outlined in the June 1996 issue of Current Issues in Economic and Finance, a journal published by the Federal Reserve Bank of New York.

The yield curve probability method is said to have a nearly perfect track record at predicting recessions some two to six quarters ahead with only one false positive, a period in 1967 that many economists, most notably the late Milton Friedman, considered to have been a credit crunch/mini-recession even though the NBER does not officially recognize it as such.

Another important leading indicator with a solid track record is the Economic Cycle Research Institutes (ECRI) weekly leading indicator (WLI).

When the growth component of the WLI turns strongly negative less then -6 it generally means a notable slowdown or recession is in the offing.

So what are these two important indicators saying about our current economic situation?

The yield curve spread indicator is indicating that the probability of recession is nearly zero while the ECRI leading index is showing some weakening signs with the growth component declining to a tepid level of 4.1.

Extended Unemployment: Initial, Continued and Extended Unemployment Claims June 09 2011

Today’s jobless claims report showed an slight increase to both initial unemployment claims and decline to continued unemployment claims as a rising trend continued to materialize for initial claims.

Seasonally adjusted “initial” unemployment increased by 1,000 to 427,000 claims from last week’s revised 426,000 claims while seasonally adjusted “continued” claims declined by 71,000 resulting in an “insured” unemployment rate of 2.9%.

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 3.99 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 3.51 million people that are currently counted as receiving traditional continued unemployment benefits, there are 7.50 million people on state and federal unemployment rolls.

Economic Jolt: Job Openings and Labor Turnover April 2011

Yesterday, the Bureau of Labor Statistics released their latest monthly read of job availability and labor turnover (JOLT) showing that private non-farm job “openings” declined 4.87% since March but climbed 10.89% above the level seen in April 2010 while private non-farm job “hires” declined 2.55% from March but 2.68% above the level seen in April 2010

Job “layoffs and discharges” declined 5.66% from March while dropping 3.28% below the level seen last year while quitting activity continues to declined 4.01% from March but remaining 6.85% above the level seen in April 2010.

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).

Outstanding Contraction!: Commercial Paper Outstanding May 2011

The Commercial Paper (CP) market is essentially a private debt market used by corporations as a generally 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 for May commercial paper outstanding continued to rise climbing from a series low (data tracked back as far as 2001) set back January while expanding 12.61% on a year-over-year basis to $1196.80 billion, a level that is still notably lower than even the worst periods of the last two recessions.

Reading Rates: MBA Application Survey – June 08 2011

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 as well as the volume of 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 declined 4 basis points to 4.54% since last week while the purchase application volume declined 4.4% and the refinance application volume increased 1.3% over the same period.

Rates now appear to be trending down having, more of less, declined continually for the last four months.

Given that we are nearing the end of the Feds QE2 intervention, it will be interesting to see how long rates trend in the next few months.

In any event, the purchase application volume remains near the lowest level seen in well over a decade while refinance activity continues to slow.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages since 2006 as well as the purchase, refinance and composite loan volumes (click for larger dynamic full-screen version).