New Residential Construction Report: December 2010

Today’s New Residential Construction Report showed a notable gain for single family permits and a notable decline for single family starts which, considering the truly depressed level of new home construction activity, appears to suggest that housing is continuing to remain historically weak.

Single family housing permits, the most leading of indicators, increased 5.5% on a month-to-month basis to 440K single family units (SAAR) but declined a notable 14.9% below the level seen in December 2009 and an astonishing 75.53% below the peak in September 2005.

Single family housing starts declined 9.0% to 417K (SAAR) units dropping 14.2% below the level seen in December 2009 and a whopping 77.13% below the peak set in early 2006.

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

Reading Rates: MBA Application Survey – January 19 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, 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 declined 1 basis point to 4.77% since last week while the purchase application volume declined 1.9% and the refinance application volume increased 7.7% over the same period.

It's important to note that rates have been, more or less, trending up for about twelve weeks now and coincidentally somewhat in-line with the Fed making QE2 official.

While early scuttlebutt about QE2 measures worked to depress mortgage rates earlier this year, it appears that the actual implementation of the measures is not currently working to force them down any lower resulting in continued poor trends for purchase and refinance activity.

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

Could the Fed have reached a limit on the long end of the rate curve? We will have to wait to find out.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages as well as one year ARMs since 2006 (click for larger dynamic full-screen version).

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

The New “Household” Misery Index: November 2010

Back in the 1970s and 80s the “Misery Index” was popularized as a measure that accurately captured the misery and malaise of the time.

The original Misery Index was a bit too simplistic as it only captured the severity of the two main vexing issues of the time, unemployment and inflation.

Today, inflation, as measured by the annual rate of change of the CPI-U, is not a significant source of financial misery.

Of course, households on fixed income may dispute that fact and many have argued that CPI itself does not accurately capture “real” inflation as it has never accounted for the ridiculous increasing costs of housing and other essentials so for the sake of formulating a new misery index, inflation will factored out.

Another key to formulating a new misery index is to specifically target “household” misery as opposed to including data that might target the miserable state of affairs of the federal government or corporate misery.

The Household Misery Index captures the following trends and weights them equally:

1. The U-3 unemployment rate
2. YOY percent change of the 10-Year moving average of total nonfarm payrolls
3. YOY percent change of the 10-Year moving average of “real” personal income
4. YOY percent change of the 10-year moving average of “real” S&P 500

The unemployment rate captures the misery associated to the threat and severity of a potential bout of unemployment while the annual change of the 10 year moving average of non-farm payrolls captures a more fundamental sense of the overall job market.

The annual change to the 10 year moving average of “real” (adjusted with CPI-U) personal income captures a household’s long term sense of income prospects.

The annual change to the 10 year moving average of “real” (adjusted with CPI-U) S&P 500 captures a household’s long term sense of typical investment prospects.

Unfortunately, all home price series are simply not long enough to include in the formulation but there may be alternative measures that can be included in the future.

The level of misery increased 0.01% in November and remained near the peak for this cycle and nearly the highest level seen in 30 years while on a year-over-year basis, misery climbed 0.06%.

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings January 2011

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing a flattening for most measures with the "buyer traffic" index improving slightly to 12 as home builders continue to plod through the weakest activity seen in generations.

It's important to recognize that currently the HMI index is showing a slight year-over-year increase but still remains very near the lowest levels seen in over 20 years, a testament to the significance of the latest pullback.

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

The Empire State Manufacturing Index: January 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 indicated expansion for current activity and future activity with the current business conditions index climbing to 11.92 while the future conditions index increased to 58.95.

Current new orders increased to 12.39 while future new orders edged up slightly to 53.68.

University of Michigan Survey of Consumers January 2011 (Preliminary)

Today's release of the Reuters/University of Michigan Survey of Consumers for January indicated an decline in consumer sentiment with a reading of 72.7 declining 2.28% below the level seen last year.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) increased to 68.2, and the Current Economic Conditions Index declined to 79.8.

It's important to recognize that while consumer sentiment is still higher than the panic laden trough level seen in late 2008, the current sentiment level is far lower than any level seen during the 2001 tech recession and roughly equivalent to the worst seen during the early 1990s and second dip 1982 recessions.

Constructing Economic Anemia: December 2010

The following are some interesting tidbits related to the state of construction supplies and housing from the today's industrial production report.

It appears that construction production from plywood to carpeting to paving and roofing and glass supplies are all experiencing anemic trends.

The plywood, carpeting and furniture series appear to mirror exactly the trends seen in the housing market with the temporary tick up occurring in the face of the government's housing tax scam now giving way to a clear resumption of the preceding decline.

Production Pullback: Industrial Production December 2010

Today, the Federal Reserve released their monthly read of industrial production showing a notable improvement with total industrial production climbing 0.84% from November and 5.91% above the level seen in December 2009.

This report appears to indicate there December brought another notable improvement bucking the recent weakening trend and likely indicating that the expansion will continue.

Conspicuous Correlation: Retail Sales December 2010

Today, the U.S. Census Bureau released its latest nominal read of retail sales showing an increase of 0.6% since November bringing the total increase since last year to 7.9% 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 increased 0.38% from November and climbed 5.69% above the level seen in December 2009 while, adjusting for inflation, “real” discretionary retail sales increased 4.24% 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.

The Fall of Greece: November 2010

Looking at the most recent OECD economic indicators, Greece makes by far the weakest showing in all the Eurozone appearing to have clearly collapsed into recession.

Industrial production remains in severe contraction territory, consumer has fallen off a cliff, business confidence though trending up is clearly depressed and the leading index is turning down fast dropping 0.08% since October and 6.75% below the level seen in November 2009.

For December (more timely data), consumer confidence declined 0.61% since November dropping 6.29% below the level seen in December 2009 while business confidence increased from November and remained 0.54% above the level seen in December 2009.

Industrial production remains weak but jumped a whopping 5.25% since September (much less timely data) remaining near the lowest levels seen since the late 1990s.

China's Engine: November 2010

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 now appears back on the rise.

China’s leading economic indicator has now increased for three consecutive months with the latest November period showing a notable month-to-month increase of 0.15% bringing the latest level just 1.09% below the level seen in November 2009.

OECD Composite Leading Indicators: November 2010

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 (bookmark the live dashboard).

The latest monthly results indicate that the global economy has taken a notable turn for the better with the total leading index increasing 0.10% since October and climbing 1.10% above the level seen in November 2009.

Total Business confidence also improved notably climbing 0.33% since November (more timely data) and climbing 3.33% above the level seen in December 2009.

Total Consumer confidence for December (more timely data) also jumped notably with the total index increasing 0.23% since November and 0.85% above the level seen in December 2009.

Extended Unemployment: Initial, Continued and Extended Unemployment Claims January 13 2011

Today’s jobless claims report showed a notable increase to initial unemployment claims and a notable decrease to continued unemployment claims as a declining trend continued to shape up for both initial and traditional continued claims.

Seasonally adjusted “initial” unemployment increased by a whopping 35,000 to 445,000 claims from last week’s revised 410,000 claims while seasonally adjusted “continued” claims declined by 248,000 resulting in an “insured” unemployment rate of 3.1%.

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 4.63 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 4.41 million people that are currently counted as receiving traditional continued unemployment benefits, there are 9.05 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 Stamp: Food Stamp Participation October 2010

As a logical consequence of the prolonged economic downturn it appears that participation in the federal food stamp program is continuing to rise.

In fact, household participation has been climbing so steadily that it has far surpassed the last peak set as a result of the immediate fallout following hurricane Katrina.

The latest data released by the Department of Agriculture shows that in October, an additional 289,737 new recipients were added to the food stamps program, an increase of 14.67% on a year-over-year basis, while household participation increased 16.98%.

Individual participation as a ratio of the overall civilian non-institutional population has increased 13.72% over the same period.

These results confirm that participation is continuing it's explosive climb, likely as a result of the jump in total unemployment, driving the nominal benefit costs up an lofty 13.95% on a year-over-year basis to $5,778,387,682 for the month.