CR said: "...This graphs shows something very interesting: in general, residential investment leads nonresidential investment. There are periods when this observation doesn't hold - like '95 when residential investment fell and the growth of nonresidential investment remained strong..."
My view is (and always was) that this is a mid-cycle correction for the economy, just like 1995. Given the continuing lack of recession evidence I think there will be a "recovery."
CR also said: "...Another interesting period was 2001 when nonresidential investment fell significantly more than residential investment..."
Consumption is relatively stable throughout a business cycle, it's the business investment that really drives growth. Nonresidential investment fell and economic growth fell, that's the way it's supposed to work. If nonresidential investment doesn't run into trouble (and soon), there will be no recession.
Great analysis! Perhaps what is saving us so far is the extreme height of the residential peak that we are falling from. However, that also means that we could have a lot further to fall.
According to the GDP report, Federal spending is lower and state spending is higher. So, it does not look like Iraq will have a big stimulatory effect. We are spending a lot of money, but not nearly as much, as a percentage of GDP as during Vietnam.
Yes, the bond situation is very interesting (even though I am far from an expect on bonds). Perhaps the decline in the US dollar is supporting the bond yields. A combination of dropping dollar value and lower yields would make the bonds that much less attractive to our foreign debtors. If the dollar drops too far, even Fed cuts may have limited effect in bringing down long yields.
Please note that the grey bars are getting farther apart.
This "trend", if you will, started in 1982.
What happened in 1982? What has been different since then?
I expect to be drummed out of the comments for my answer to this question. I expect to be made a laughing stock and a by-word. Rotten tomatoes and heaping scorn will not be good enough for me.
But I sincerely, very sincerely believe I am right.
The envelope please...
Prozac and its congeners.
The US has been on a drug high since Prozac came out. Especially, the high pressure yuppies who run the equity markets.
If I am right, then the bust that is coming will make dot-com look like a day in the petting zoo.
Another way of looking at it is to say that what the US needs is more regulation. Well, the people in charge, as well as a great many of the people out of charge, will greet that notion with gunfire from their licensed weapons.
In response to my post: "If nonresidential investment doesn't run into trouble (and soon), there will be no recession."
Wally said: "Well, duh."
Nonresidential investment won't run into trouble and there will be no recession. What I meant by my original post is that it's critical for the "bear" argument that nonresidential investment fall apart, or their argument falls apart.
The markets are flat after what I would consider a dismal GDP report. The markets seem to go up no matter what the news. Probably due to money that was going into real estate now going into equities.
IF we see significant RE price declines, credit & the consumer will all but vanish. The accelerating increases in defaults sure leads me to believe it's on the way. This may be the last gasp for most HB stocks.
The markets are flat after what I would consider a dismal GDP report.
The markets are flat because despite the headline number coming in weaker than expected, it doesn't really change the growth outlook. The main reasons for the discrepancy between the consensus and the actual number aren't momentum pieces (government spending, for example). When the report was released there was a sharp drop in the futures and the market did open lower, but once everyone had a chance to digest the report they realized that whether 1.3% or 1.8%, the details don't change the outlook.
Consumer confidence also came in better than expected after the GDP report, which probably helped a bit.
CR - Steve suggests the consumer confidence report is keeping the market from sliding. I think we will see a delayed response to the report.
I have never been polled in a consumer confidence survey. I don't think that survey means a thing. The numbers seem to be all over the place. Do you have any charts that show whether the consumer confidence numbers correlate to anything or are predictive in any way - even to consumer spending?
As expected, the residential investment drag decreased from 1.2% in Q4 to 1% in Q1. If starts stay at current levels, look for that drag to decrease quite a bit. If we get another leg down in starts, the drag should still improve, but not by as much.
"Draft Fred Thompson for President"
It's not too late for Fred to enter the GOP bid. Here's a photo of Fred & the potential first Lady Jeri Kehn. 404 Not Found
Steve, seriously, do you see improvement in the housing market any time within the next 1-1/2 years?
The elephant is in center of the living room about to take a dump, with mtg rate resets accelerating into 2008. Does that not signal a worsening based on current trends where a reset is a trigger for default? Think of the eroding underlying values, debt levels (affordability) and credit tightening. A recipe for an enormous dump.
That depends on what we're talking about. If we're talking about the residential investment component of GDP, then, yes, I do expect to see improvement over the course of the year. Quite frankly I don't think you'll find an economist that doesn't expect to see an improvement.
CR expects RI to turn positive in the first half of 2008. Depending on if and how much starts fall much further, I think it could turn positive by the end of this year.
Either way, the drag on growth will likely be lifted over the next 3-5 quarters. We saw the start of that in this report.
We still have yet to see the full loss of MEW, lower disposable income due to coming wave of mortgage rate resets, and possible job losses from lower RE construction. All of which will take a whack at that PCE component of our economy (70% of our GDP). Which would also translate to more job loss for retailers, etc. We still have a ways to go in this cycle.
Steve wrote: "I wouldn't say consumer confidence is what's holding things up. I'm just saying it helps."
This is a market committed to confidence. Since both UMI and Conference Board consumer confidence surveys were down again, it's difficult to take it any other way. The UMI study didn't change much, but the notable factor in yesterday's Conference Board was a pretty large drop in the current conditions reading:
"The Conference Board Consumer Confidence Index, which had decreased in March, retreated further in April. The Index now stands at 104.0, down from 108.2 in March. The Present Situation Index decreased to 131.3 from 138.5 in March. The Expectations Index declined to 85.8 from 87.9."
I like the Nattering Nabob's daily reviews and lately the role of the housing market on the stock market.
Taking the magnifying glass out...
Steve, are you saying that "GDP growth is decelerating." is a total distortion or merely a mis-"representation" of "GDP growth has decreased." (the Steve approved fact)? [physics and economics use the term 'accelerating' quite differently, yes?]
Is it merely rhetorical for you to agree to argue with others who use non-facts as long as these incompetents present them as non-facts...academic exercises, maybe?
I B charmed.
Steve, We have record new home inventories along with record existing home inventories at the same time as the credit markets are tightening. I hope you agree the surge in rate resets won't help that supply number come down over the course of the year and well into 08.
New home starts remain stubbornly high despite a weakening market, as builder desperately try to monetize their land holdings. They are sacrificing margins (losing money) to grab whatever cash they can the only way they know how.
I think both you and CR are not discounting the difference from previous cycles. RI will perhaps decline more slowly for a couple of quarters as HBs play a fools game.
Regarding military spending saving the economy from recession.
During the Korean and Vietnam wars, I believe, taxes were much higher. In the 80s, the ratio of debt to GDP was about half its current value. The size of the army was much larger than now.
So, how is a new military buildup to be financed? Raising taxes is probably politically unpalatable for the current administration. As for a massive new issue of debt: well I'm not a bond expert either, but how would that impact interest rates given the weakening currency and gradual withdrawal of foreign investors? And how would the interest rates impact the economy?
I don't think a surge in military spending looks possible at the moment unless an external shock of 9/11 magnitude occurs, but that shock would probably send the economy into a tailspin anyway.
The preliminary reading on the UMI report was 85.5, the final number was 87.1.
Consumer confidence is following the same pattern of last several years. Higher in the winter and lower in the summer as gas prices rise. There's nothing unique about the consumer confidence numbers this year relative to last year. On the whole, they still reflect a healthy consumer.
I agree with Lurker.
Charts lag reality; projecting a trend is always accurate mostly - it is correct day after day and you are always right and then one day the trend changes and you are wrong so you change the projection and then you are right again, day after day. Repeat.
Even if we are not currently in recession we are circling the drain. The distinction is minor. We are not in meaningful growth.
Talk about cotinuing to build into a record glut. Going to get increasingly difficult to rationalize the HBs attempts to monetize their land holdings...
"Of 127.3 million housing units in the United States, 17.6 million were vacant at the end of the quarter, including 2.2 million vacant units that were for sale, 4 million for rent and 4.2 million seasonal homes. The number of vacant homes for sale has increased by 599,000 in the past year, up 38%. "
I believe the non-residential investment shoe is just about to drop given that the CMBX index (tracking commercial mortgage swaps) is also tightening significantly. It does not look as bad as residential subprime but each vintage is also getting worse and worse. I don't remember this problem got any attention from the mainstream media.
"Of 127.3 million housing units in the United States, 17.6 million were vacant at the end of the quarter, including 2.2 million vacant units that were for sale, 4 million for rent and 4.2 million seasonal homes. The number of vacant homes for sale has increased by 599,000 in the past year, up 38%. "
And to think we have Homeless in the streets...bastards!!..this country is going to the shit...Island living is looking better and better each passing day.
Steve - expectations for UMI were higher, but the survey itself continues to decline. There's a minor difference.
Barely - it's hard for me to wrap my mind around home vacancies going from 2.1% to 2.8% in just a year with such good employment, etc. More than anything else, that vacancy rate is a wake-up call. We are a long, long way from a housing recovery:
"The homeowner vacancy rate increased the most in cities, rising to 4% from 2.5% a year ago. In suburbs, the vacancy rate rose to 2.4% from 1.8% a year ago. In rural areas, the vacancy rate remained at 2.2%."
Four percent vacancies in cities? I find it hard to believe that number.
Turnover of homes has been higher than average lately. Four percent is at least half of all expected sales this year. I find this number mouthdroppingly shocking.
Fundamentals in the office sector may be unraveling based on a recent loan delinquency index by Fitch Ratings. The latest version of Fitch's index shows that "CMBS office was the only major property type to end the first quarter with a higher delinquent dollar balance than at the end of the fourth-quarter," says Fitch Ratings Senior Director Patty Bach. "Office delinquencies were up 4% from year-end levels," says Bach.
Another potentially alarming sign: The first quarter U.S. office vacancy rate tracked by Torto Wheaton Research (TWR) ticked up 10 basis points to 12.6%, the first increase since the second quarter 2003.
"While a 10-basis-point movement is not cause for alarm, it may indicate [that] the recovery the office sector was enjoying is slowing, especially in suburban markets," says Bach.
theoxylander said: "Yes, the chart looks like Spring of 2001. Why are you so happy about it?..."
Because it also looks like 1995, when residential investment was well below non-residential and there was no recession.
Combine that with all the other non-recession data (solid employment, strong earnings, no extreme weakness in durable goods orders, low inflation...I could go on, but what's the point?) and there's just no reason to think recession is a real concern.
Steve - expectations for UMI were higher, but the survey itself continues to decline. There's a minor difference.
I'm not talking about expectations. I'm talking about the mid-month reading (the UMI report is released twice a month). The mid-month reading was 85.3.
"Compared with a year ago, the housing stock increased by 1.9 million, with vacant units rising by 1.5 million and occupied units increasing by 415,000."
Isn't it interesting? So the net demand was only 415,000. Does it mean that the current 1.5 mil starts is still way above the demand?
I remember someone on this forum claimed that the demand may turn even negative as the people start to "compress". It does indeed look like this may be happening.
The auto industry has been in recession because of inventory problems, which led to slowdowns in production. I haven't been following this too closely, but Yellen referenced it in her speech yesterday. Apparently the auto recession is coming to an end and production is picking up again.
How can autos contribute to GDP when sales were down? Because production was up.
Because it also looks like 1995, when residential investment was well below non-residential and there was no recession.
Combine that with all the other non-recession data (solid employment, strong earnings, no extreme weakness in durable goods orders, low inflation...I could go on, but what's the point?) and there's just no reason to think recession is a real concern.
It does not look like 1995 to me at all.
In 95 the yield curve was not inverted, now it is. In 95 the M1 money supply was not collapsing, now it is. 95 was only 4 years after recession, not it is 6.
Why should I compare with 95? It looks to me like 1991 and 2001.
How can autos contribute to GDP when sales were down? Because production was up.
If you look at my comment, vehicle production in the U.S. was down 9.6% in the 1st quarter of 2007 compared to the 1st quarter of 2006 according to Wards.
Steve, if you back out the St.Louis FED chart up to 1978 (as far as it goes), you'll notice that consumer sentiment is not a very reliable leading indicator.
theoxylander said: "...Why should I compare with 95? It looks to me like 1991 and 2001..."
You're assuming that non-residential fixed investment will continue to deteriorate instead of stabilizing or strengthening. I don't make that assumption, because there's nothing to confirm it. The economic conditions simply aren't the same as in 1991 or 2001. If it doesn't fit, you can't convict.
You're right in that it doesn't always lead recessions. Sometimes it's coincident with recessions (see the previous article I linked from 2003). I was mainly debating MaxedOutMama's view that we may be in a recession right now.
Thanks for the clarification. I can see a small wobble up in 2Q 2007 such as we had in 4Q 2006.
But the overall direction still seems down to me. The recent fall in the dollar makes our imports more expensive, and that seems to be a factor that will restrain GDP growth. Housing doesn't yet seem to be at a bottom, and oil prices are a problem.
Underlying all of this is the fundamental hollowing out of the U.S. economy which is a by-product of artificially fixed exchange rates and other anomalous features of our trade with south and east Asia.
I guess we all have a framework that we try to fit the latest data into...
And that framework should be increasing transnational, DD, as the trade deficit illustrates transnationals exploiting cheap labor markets that together with fx markets make a mockery of that Comparitive Advantage Schtic.
The productive capacity of the US is being exported to offshore branch plants and co-ventures... underestimated by the official record IMO who have a bias in keeping the momentum, (the consumption even in the face of negative savings) who will be the last to confirm bad news, who have a vested interest in not stampeding the herd even if it is to get out of the way of the flash flood...like a sinking dollar.
Amongst all the spin we hear about the stock market it seems to be forgotten that in a global market a stock market ideally represents valuations of buisinesses based on the value in the local currency. When the dollar falls in value by 2% if nothing else changed you would expect the stock market to rise by 2%.
Similarly if manufacturing in the US has been reduced and transplanted overseas then the income in dollar terms returning to the US will be 2% greater each time the currency declines 2%, but in fact remain exactly the same in purchasing power.
Not surprisingly the dow and earnings are soaring and probably will continue to do OK.
But the impact on this transplanted manufacturing is a bit ominous for those who dont directly benefit from the extra profits that occur by removing high paid american workers from the process.
It is true that the wealthy in the US who have investments from this transplanted manufacturing do spend money into their local economies.
In a dog eat dog world it would not really matter too much but there is that annoying plankton theory.
The wealth generated by mighty american companies remains, but the costs of greating that wealth and the pyramid of services and compsumption in the manufacturing process has now gone to some place else. This was once income to joe 6pack and was based on the mighty manufacturing process of the US
but now Joe 6pack is involved in a kind of death spiral. He cant produce anything that produces a profit for his community without borrowing to do so. Joe now represents about 70% of the economy.
What is more companies are already determined to remove as much cost from the US as they conceivably can.
I am a capitalist i think, before i am a red commie bastard but i cant see how this is sustainable
"Combine that with all the other non-recession data (solid employment, strong earnings, no extreme weakness in durable goods orders, low inflation...I could go on, but what's the point?) and there's just no reason to think recession is a real concern."
Sebastian, You managed to list nearly all lagging indicators. Employment, Earnings.
Second, low inflation has nothing to do with recessions in itself - there was low inflation also in 1920's. There was low inflation in 1950's and 1960's also, yet during those times there were recessions, even a depression (the first one).
Also 2001 was not an extreme inflation, such that existed in 1970's and 1980's. It's more about real interest rates, yet even they don't explain everything. But inflation in itself, nah.
Not sure what I should think of "no extreme weakness in durable goods orders" whether that's good or bad, but anyway. I'm not here to say there is a recession coming, only that leading indicators (at least some of them, stock markets won't agree at this point) do point to a slower growth many of them. But don't try to predict future growth with well-known lagging indicators. It makes no sense. Unemployment is typically at it's lowest point between two recessions just prior to the next one.
Not all economists considered today's report bad news. A gain in business investment and a smaller increase in inventories improve the outlook for this quarter.
The composition of GDP bodes well for a mild rebound,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts, and the only analyst to accurately forecast last quarter's growth rate.</b>The gain in capital spending is very good news and inventories are a smaller drag. It does look like we are bottoming out. It's fair to say that the first quarter was probably the low point.''
So the only guy to nail the 1.3% GDP recognizes that the report itself actually bodes well for future growth. My guess is that the market recognizes this, too.
The Global Insight team has a pretty good track record. I guess it's possible that their record still falls within the bounds of random chance, but that's probably unlikely.
ECRI also has a very good track record. Although I think their WLI is more of a marketing tool for their good stuff that they don't tell you the "recipe" of.
I also thought it was worth pointing out that Global Insight was the only one to predict the 1.3% because it was far below the consensus 1.8%. So their forecast for a second quarter pickup isn't because they're consistently optimistic.
Thanks Steve. My impression is that the forecast for this being a bottom is based upon some minor times...The gain in capital spending is very good news and inventories are a smaller drag.
The macro trend is a declining U.S. consumer, and Worried makes a very good logical case that eventually the offshoring chickens will come home to roost. I appreciate your attention to the data, though. We'll see...
So do we get to take you to task if the preliminary moves from this advance stat, Steve? What about the final? What about the revision on the final?
All we can say at the moment was that his guess lines up with the advance, no?
Hardly a prize.
The gain in capital spending....is it all that it's cracked up to be (overcoming the previous quarters' performance?) [or like the autos?] or on the same scale as stock buy-backs? It looks like a small gesture to me.
Again, think about it, we need the war in Iraq to keep us from tumbling into recession.
CR, can you please do your favorite trick and plot res and non-res investments together, but shift residential 6 months into the future?
That would be a very powerful and visual chart, like your start-stop-employment chart.
Japan and US slowing. Will we lead the globe into a sychronized recession? If we slow purchases of Chinese products, what will keep China growing?
Why didn't bond yields plunge? Pricing in Stagflation?
CR said: "...This graphs shows something very interesting: in general, residential investment leads nonresidential investment. There are periods when this observation doesn't hold - like '95 when residential investment fell and the growth of nonresidential investment remained strong..."
My view is (and always was) that this is a mid-cycle correction for the economy, just like 1995. Given the continuing lack of recession evidence I think there will be a "recovery."
CR also said: "...Another interesting period was 2001 when nonresidential investment fell significantly more than residential investment..."
Consumption is relatively stable throughout a business cycle, it's the business investment that really drives growth. Nonresidential investment fell and economic growth fell, that's the way it's supposed to work. If nonresidential investment doesn't run into trouble (and soon), there will be no recession.
Sebastia
Great analysis! Perhaps what is saving us so far is the extreme height of the residential peak that we are falling from. However, that also means that we could have a lot further to fall.
According to the GDP report, Federal spending is lower and state spending is higher. So, it does not look like Iraq will have a big stimulatory effect. We are spending a lot of money, but not nearly as much, as a percentage of GDP as during Vietnam.
Again, think about it, we need the war in Iraq to keep us from tumbling into recession.
We may have burned that bridge with the US public though by implementing poor strategery in the past.
Yes, the bond situation is very interesting (even though I am far from an expect on bonds). Perhaps the decline in the US dollar is supporting the bond yields. A combination of dropping dollar value and lower yields would make the bonds that much less attractive to our foreign debtors. If the dollar drops too far, even Fed cuts may have limited effect in bringing down long yields.
"If nonresidential investment doesn't run into trouble (and soon), there will be no recession."
Well, duh.
Please note that the grey bars are getting farther apart.
This "trend", if you will, started in 1982.
What happened in 1982? What has been different since then?
I expect to be drummed out of the comments for my answer to this question. I expect to be made a laughing stock and a by-word. Rotten tomatoes and heaping scorn will not be good enough for me.
But I sincerely, very sincerely believe I am right.
The envelope please...
Prozac and its congeners.
The US has been on a drug high since Prozac came out. Especially, the high pressure yuppies who run the equity markets.
If I am right, then the bust that is coming will make dot-com look like a day in the petting zoo.
Another way of looking at it is to say that what the US needs is more regulation. Well, the people in charge, as well as a great many of the people out of charge, will greet that notion with gunfire from their licensed weapons.
So, there won't be any more regulation.
Empires come and go. Ours is going.
In response to my post: "If nonresidential investment doesn't run into trouble (and soon), there will be no recession."
Wally said: "Well, duh."
Nonresidential investment won't run into trouble and there will be no recession. What I meant by my original post is that it's critical for the "bear" argument that nonresidential investment fall apart, or their argument falls apart.
S.
The markets are flat after what I would consider a dismal GDP report. The markets seem to go up no matter what the news. Probably due to money that was going into real estate now going into equities.
IF we see significant RE price declines, credit & the consumer will all but vanish. The accelerating increases in defaults sure leads me to believe it's on the way. This may be the last gasp for most HB stocks.
The markets are flat after what I would consider a dismal GDP report.
The markets are flat because despite the headline number coming in weaker than expected, it doesn't really change the growth outlook. The main reasons for the discrepancy between the consensus and the actual number aren't momentum pieces (government spending, for example). When the report was released there was a sharp drop in the futures and the market did open lower, but once everyone had a chance to digest the report they realized that whether 1.3% or 1.8%, the details don't change the outlook.
Consumer confidence also came in better than expected after the GDP report, which probably helped a bit.
CR too late in the economic cycle for a 'mid term correction'
Savings rate to low, negative demographics- totally disagree
Sebastian, the non-residential real estate is in trouble:
Commercial Real Estate securitization – light is yellow « The Theroxylandr in Flame
Give me at least one argument why "Nonresidential investment won't run into trouble".
At least one link to support your words, please.
CR - Steve suggests the consumer confidence report is keeping the market from sliding. I think we will see a delayed response to the report.
I have never been polled in a consumer confidence survey. I don't think that survey means a thing. The numbers seem to be all over the place. Do you have any charts that show whether the consumer confidence numbers correlate to anything or are predictive in any way - even to consumer spending?
what is "non-residential investment" ? is this corprate cap-ex ?
Steve,
We all know the rate of growth is decreasing. Any reason to believe this trend will change any time soon? If not, why the enthusiasm for equities?
Let's face it, the market is out of touch with fundamentals, and this will not end well for long term investors...
barely,
I wouldn't say consumer confidence is what's holding things up. I'm just saying it helps. You can see a spike when it was released at 10:00 AM.
Consumer confidence isn't a major market mover, but it does matter a little bit.
theroxylander said: "...
At least one link to support your words, please..."
Sorry to embarrass you, but you could look at CR's chart.
S.
As expected, the residential investment drag decreased from 1.2% in Q4 to 1% in Q1. If starts stay at current levels, look for that drag to decrease quite a bit. If we get another leg down in starts, the drag should still improve, but not by as much.
all those comopnies (FirstFED is next) borowing money to buyback shares ignore this:
By the time they will start being in loses this will INCREASE the loss per share......
I think stocks are doing well simply because earnings and projected earnings are strong.
I meant to say:
If starts stay at current levels, look for that drag to improve quite a bit in Q2.
Consumer spending contributed 2.6% to the 1.2% reported GDP.
"Blowout Increase in Consumer Debt Averts Recession"
"Draft Fred Thompson for President"
It's not too late for Fred to enter the GOP bid. Here's a photo of Fred & the potential first Lady Jeri Kehn.
404 Not Found
I like Fred and Jeri!
They would look very appropriate standing next to Donald Trump. But is that enough to make him presidential?
We all know the rate of growth is decreasing.
We know that growth has decreased. If you want to argue that growth is still decelerating, you can do that, but don't present that as fact.
lama said: "I think stocks are doing well simply because earnings and projected earnings are strong."
I agree.
Sebastia
why such high vacancy rate:
http://bubbletracking.blogspot.com/2007/04/17-million-romanian-straw-man.html?ref=patrick.net
Steve, seriously, do you see improvement in the housing market any time within the next 1-1/2 years?
The elephant is in center of the living room about to take a dump, with mtg rate resets accelerating into 2008. Does that not signal a worsening based on current trends where a reset is a trigger for default? Think of the eroding underlying values, debt levels (affordability) and credit tightening. A recipe for an enormous dump.
barely,
That depends on what we're talking about. If we're talking about the residential investment component of GDP, then, yes, I do expect to see improvement over the course of the year. Quite frankly I don't think you'll find an economist that doesn't expect to see an improvement.
CR expects RI to turn positive in the first half of 2008. Depending on if and how much starts fall much further, I think it could turn positive by the end of this year.
Either way, the drag on growth will likely be lifted over the next 3-5 quarters. We saw the start of that in this report.
We still have yet to see the full loss of MEW, lower disposable income due to coming wave of mortgage rate resets, and possible job losses from lower RE construction. All of which will take a whack at that PCE component of our economy (70% of our GDP). Which would also translate to more job loss for retailers, etc. We still have a ways to go in this cycle.
Based on the trend and known by now facts we may well already in recession.
Yal,
Non-residential fixed investment is basically commercial construction equipment and software.
Steve wrote: "I wouldn't say consumer confidence is what's holding things up. I'm just saying it helps."
This is a market committed to confidence. Since both UMI and Conference Board consumer confidence surveys were down again, it's difficult to take it any other way. The UMI study didn't change much, but the notable factor in yesterday's Conference Board was a pretty large drop in the current conditions reading:
"The Conference Board Consumer Confidence Index, which had decreased in March, retreated further in April. The Index now stands at 104.0, down from 108.2 in March. The Present Situation Index decreased to 131.3 from 138.5 in March. The Expectations Index declined to 85.8 from 87.9."
I like the Nattering Nabob's daily reviews and lately the role of the housing market on the stock market.
Taking the magnifying glass out...
Steve, are you saying that "GDP growth is decelerating." is a total distortion or merely a mis-"representation" of "GDP growth has decreased." (the Steve approved fact)? [physics and economics use the term 'accelerating' quite differently, yes?]
Is it merely rhetorical for you to agree to argue with others who use non-facts as long as these incompetents present them as non-facts...academic exercises, maybe?
I B charmed.
Steve, We have record new home inventories along with record existing home inventories at the same time as the credit markets are tightening. I hope you agree the surge in rate resets won't help that supply number come down over the course of the year and well into 08.
New home starts remain stubbornly high despite a weakening market, as builder desperately try to monetize their land holdings. They are sacrificing margins (losing money) to grab whatever cash they can the only way they know how.
I think both you and CR are not discounting the difference from previous cycles. RI will perhaps decline more slowly for a couple of quarters as HBs play a fools game.
Regarding military spending saving the economy from recession.
During the Korean and Vietnam wars, I believe, taxes were much higher. In the 80s, the ratio of debt to GDP was about half its current value. The size of the army was much larger than now.
So, how is a new military buildup to be financed? Raising taxes is probably politically unpalatable for the current administration. As for a massive new issue of debt: well I'm not a bond expert either, but how would that impact interest rates given the weakening currency and gradual withdrawal of foreign investors? And how would the interest rates impact the economy?
I don't think a surge in military spending looks possible at the moment unless an external shock of 9/11 magnitude occurs, but that shock would probably send the economy into a tailspin anyway.
Yes, the chart looks like Spring of 2001. Why are you so happy about it?
MaxedOutMama,
The preliminary reading on the UMI report was 85.5, the final number was 87.1.
Consumer confidence is following the same pattern of last several years. Higher in the winter and lower in the summer as gas prices rise. There's nothing unique about the consumer confidence numbers this year relative to last year. On the whole, they still reflect a healthy consumer.
Consumer confidence usually plunges prior to recessions. That's not what's happening here.
I agree with Lurker.
Charts lag reality; projecting a trend is always accurate mostly - it is correct day after day and you are always right and then one day the trend changes and you are wrong so you change the projection and then you are right again, day after day. Repeat.
Even if we are not currently in recession we are circling the drain. The distinction is minor. We are not in meaningful growth.
Steve,
Have you considered that this time it is different?
This is not a usual biz-cycle in which unemployment cause R/E to stall.
This is a long term credit bubble deflating.
Corporate profits, asset prices are all inflated from years of pumping money into the economy.
Investment in places like China, India is beyond the ability of any economy to absorb and expend.. Residential R/E is the equivalent in the US.
The money is still running around in the system and so it makes sense that everyone still feels OK but even you can surly see the contractionÂ…..
I can answer this whole topic without even speaking a word other than what i have just said in this sentence.:
http://www.safehaven.com/images/nystrom/7437_b.jpg
Talk about cotinuing to build into a record glut. Going to get increasingly difficult to rationalize the HBs attempts to monetize their land holdings...
Home vacancy rate rises to record 2.8% in first quarter - MarketWatch
Banker: Tnx.
such a waste:
"Of 127.3 million housing units in the United States, 17.6 million were vacant at the end of the quarter, including 2.2 million vacant units that were for sale, 4 million for rent and 4.2 million seasonal homes. The number of vacant homes for sale has increased by 599,000 in the past year, up 38%. "
I believe the non-residential investment shoe is just about to drop given that the CMBX
index (tracking commercial mortgage swaps) is also tightening significantly. It does not look as bad as residential subprime but each vintage is also getting worse and worse. I don't remember this problem got any attention from the mainstream media.
such a waste:
"Of 127.3 million housing units in the United States, 17.6 million were vacant at the end of the quarter, including 2.2 million vacant units that were for sale, 4 million for rent and 4.2 million seasonal homes. The number of vacant homes for sale has increased by 599,000 in the past year, up 38%. "
And to think we have Homeless in the streets...bastards!!..this country is going to the shit...Island living is looking better and better each passing day.
WRONG.
Michigan consumer sentiment was around 92 in March 2001. Now it is 87. We are below last recession levels already.
Yal,
There's certainly credit problems in the mortgage market, but outside of that there still seems to be ample liquidity.
Steve - expectations for UMI were higher, but the survey itself continues to decline. There's a minor difference.
Barely - it's hard for me to wrap my mind around home vacancies going from 2.1% to 2.8% in just a year with such good employment, etc. More than anything else, that vacancy rate is a wake-up call. We are a long, long way from a housing recovery:
"The homeowner vacancy rate increased the most in cities, rising to 4% from 2.5% a year ago. In suburbs, the vacancy rate rose to 2.4% from 1.8% a year ago. In rural areas, the vacancy rate remained at 2.2%."
Four percent vacancies in cities? I find it hard to believe that number.
Turnover of homes has been higher than average lately. Four percent is at least half of all expected sales this year. I find this number mouthdroppingly shocking.
This was emailed to me and I thought fitting...
...........................
Office CMBS Showing Strain
Staff Report
Fundamentals in the office sector may be unraveling based on a recent loan delinquency index by Fitch Ratings. The latest version of Fitch's index shows that "CMBS office was the only major property type to end the first quarter with a higher delinquent dollar balance than at the end of the fourth-quarter," says Fitch Ratings Senior Director Patty Bach. "Office delinquencies were up 4% from year-end levels," says Bach.
Another potentially alarming sign: The first quarter U.S. office vacancy rate tracked by Torto Wheaton Research (TWR) ticked up 10 basis points to 12.6%, the first increase since the second quarter 2003.
"While a 10-basis-point movement is not cause for alarm, it may indicate [that] the recovery the office sector was enjoying is slowing, especially in suburban markets," says Bach.
Office CMBS Showing Strain
theroxylandr,
What I said was consumer confidence plunges prior to recessions.
Take a look at this chart and tell me I'm wrong.
The markets are flat because despite the headline number coming in weaker than expected, it doesn't really change the growth outlook.
Steve, come on you're smarter than that.
Looking at Table 3, Motor vehicles and parts, 2006 Q1 was $445.1 billion and 2007 Q1 was $460.1 billion, up 3.4%:
News Release: Gross Domestic Product
If you look at Wards Auto statistics:
Key Automotive Data | Wards Auto
Light vehicle sales in the U.S. were down 1.3% 07Q1 vs 06Q1 and vehicle production in the United States was down 9.6% over the same period.
Somebody want to figure out how this happens?
theoxylander said: "Yes, the chart looks like Spring of 2001. Why are you so happy about it?..."
Because it also looks like 1995, when residential investment was well below non-residential and there was no recession.
Combine that with all the other non-recession data (solid employment, strong earnings, no extreme weakness in durable goods orders, low inflation...I could go on, but what's the point?) and there's just no reason to think recession is a real concern.
Sebastia
Steve - expectations for UMI were higher, but the survey itself continues to decline. There's a minor difference.
I'm not talking about expectations. I'm talking about the mid-month reading (the UMI report is released twice a month). The mid-month reading was 85.3.
From the article about vacancies.
"Compared with a year ago, the housing stock increased by 1.9 million, with vacant units rising by 1.5 million and occupied units increasing by 415,000."
Isn't it interesting? So the net demand was only 415,000. Does it mean that the current 1.5 mil starts is still way above the demand?
I remember someone on this forum claimed that the demand may turn even negative as the people start to "compress". It does indeed look like this may be happening.
Steve, your chart has bad resolution to see clearly. I was looking at:
St. Louis Fed: FRED Graph
As you see consumer sentiment started to plunge in September of 2001. It was about 6 months AFTER recession started.
People actually didn't notice the recession initially.
If vacancies are at such a high rate..can someone please explain to me where these people are going????...Have we Inhabited mars?
mb,
The auto industry has been in recession because of inventory problems, which led to slowdowns in production. I haven't been following this too closely, but Yellen referenced it in her speech yesterday. Apparently the auto recession is coming to an end and production is picking up again.
How can autos contribute to GDP when sales were down? Because production was up.
theroxylandr,
Why did you start the timeline at 2001? Back it up a year.
Steve,
So you think the rate of economic growth has stopped decreasing? And that the rate of GDP growth will go up beginning in Q2 2007?
It does not look like 1995 to me at all.
In 95 the yield curve was not inverted, now it is. In 95 the M1 money supply was not collapsing, now it is. 95 was only 4 years after recession, not it is 6.
Why should I compare with 95? It looks to me like 1991 and 2001.
MaxedOutMama,
Here is the mid-month reading.
How can autos contribute to GDP when sales were down? Because production was up.
If you look at my comment, vehicle production in the U.S. was down 9.6% in the 1st quarter of 2007 compared to the 1st quarter of 2006 according to Wards.
Sorry, mb. I missed that part of your comment.
I predict new home no-reserve auctions in Q4, as the carrying costs of the ridiculous stubbornly high starts eat builders alive.
Detroit Dan,
Yes, I'd be surprised if GDP isn't higher in Q2 than in Q1.
That's assuming Q1 growth stays at 1.3%.
Sorry, mb. I missed that part of your comment.
no problem
Steve, if you back out the St.Louis FED chart up to 1978 (as far as it goes), you'll notice that consumer sentiment is not a very reliable leading indicator.
theoxylander said: "...Why should I compare with 95? It looks to me like 1991 and 2001..."
You're assuming that non-residential fixed investment will continue to deteriorate instead of stabilizing or strengthening. I don't make that assumption, because there's nothing to confirm it. The economic conditions simply aren't the same as in 1991 or 2001. If it doesn't fit, you can't convict.
Sebastia
Incognitus,
You're right in that it doesn't always lead recessions. Sometimes it's coincident with recessions (see the previous article I linked from 2003). I was mainly debating MaxedOutMama's view that we may be in a recession right now.
Steve,
Thanks for the clarification. I can see a small wobble up in 2Q 2007 such as we had in 4Q 2006.
But the overall direction still seems down to me. The recent fall in the dollar makes our imports more expensive, and that seems to be a factor that will restrain GDP growth. Housing doesn't yet seem to be at a bottom, and oil prices are a problem.
Underlying all of this is the fundamental hollowing out of the U.S. economy which is a by-product of artificially fixed exchange rates and other anomalous features of our trade with south and east Asia.
I guess we all have a framework that we try to fit the latest data into...
And that framework should be increasing transnational, DD, as the trade deficit illustrates transnationals exploiting cheap labor markets that together with fx markets make a mockery of that Comparitive Advantage Schtic.
The productive capacity of the US is being exported to offshore branch plants and co-ventures... underestimated by the official record IMO who have a bias in keeping the momentum, (the consumption even in the face of negative savings) who will be the last to confirm bad news, who have a vested interest in not stampeding the herd even if it is to get out of the way of the flash flood...like a sinking dollar.
The US economy:
Amongst all the spin we hear about the stock market it seems to be forgotten that in a global market a stock market ideally represents valuations of buisinesses based on the value in the local currency. When the dollar falls in value by 2% if nothing else changed you would expect the stock market to rise by 2%.
Similarly if manufacturing in the US has been reduced and transplanted overseas then the income in dollar terms returning to the US will be 2% greater each time the currency declines 2%, but in fact remain exactly the same in purchasing power.
Not surprisingly the dow and earnings are soaring and probably will continue to do OK.
But the impact on this transplanted manufacturing is a bit ominous for those who dont directly benefit from the extra profits that occur by removing high paid american workers from the process.
It is true that the wealthy in the US who have investments from this transplanted manufacturing do spend money into their local economies.
In a dog eat dog world it would not really matter too much but there is that annoying plankton theory.
The wealth generated by mighty american companies remains, but the costs of greating that wealth and the pyramid of services and compsumption in the manufacturing process has now gone to some place else. This was once income to joe 6pack and was based on the mighty manufacturing process of the US
but now Joe 6pack is involved in a kind of death spiral. He cant produce anything that produces a profit for his community without borrowing to do so. Joe now represents about 70% of the economy.
What is more companies are already determined to remove as much cost from the US as they conceivably can.
I am a capitalist i think, before i am a red commie bastard but i cant see how this is sustainable
but now Joe 6pack is involved in a kind of death spiral. He cant produce anything that produces a profit for his community without borrowing to do so.
These back-to-fundamentals it-just-doesn't-make-sense ideas are too often overlooked. I agree, and see the loss of manufacturing as a huge problem.
How long or what effect RI has on GDP should correlate with months of Vacancy??????????????? Couldn't it?
"Combine that with all the other non-recession data (solid employment, strong earnings, no extreme weakness in durable goods orders, low inflation...I could go on, but what's the point?) and there's just no reason to think recession is a real concern."
Sebastian, You managed to list nearly all lagging indicators. Employment, Earnings.
Second, low inflation has nothing to do with recessions in itself - there was low inflation also in 1920's. There was low inflation in 1950's and 1960's also, yet during those times there were recessions, even a depression (the first one).
Also 2001 was not an extreme inflation, such that existed in 1970's and 1980's. It's more about real interest rates, yet even they don't explain everything. But inflation in itself, nah.
Not sure what I should think of "no extreme weakness in durable goods orders" whether that's good or bad, but anyway. I'm not here to say there is a recession coming, only that leading indicators (at least some of them, stock markets won't agree at this point) do point to a slower growth many of them. But don't try to predict future growth with well-known lagging indicators. It makes no sense. Unemployment is typically at it's lowest point between two recessions just prior to the next one.
Detroit Dan,
If you're still around, you might be interested in this. This is in regards to why I expect Q2 to be better than Q1.
From this article:
Not all economists considered today's report bad news. A gain in business investment and a smaller increase in inventories improve the outlook for this quarter.
The composition of GDP bodes well for a mild rebound,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts, and the only analyst to accurately forecast last quarter's growth rate.</b>The gain in capital spending is very good news and inventories are a smaller drag. It does look like we are bottoming out. It's fair to say that the first quarter was probably the low point.''
So the only guy to nail the 1.3% GDP recognizes that the report itself actually bodes well for future growth. My guess is that the market recognizes this, too.
Let's say that forecasting is largely random even among the experts. So, if one guy gets it right, would you celebrate him forever?
FWIW though, ECRI WLI is back at January peaks.
BR,
The Global Insight team has a pretty good track record. I guess it's possible that their record still falls within the bounds of random chance, but that's probably unlikely.
ECRI also has a very good track record. Although I think their WLI is more of a marketing tool for their good stuff that they don't tell you the "recipe" of.
I also thought it was worth pointing out that Global Insight was the only one to predict the 1.3% because it was far below the consensus 1.8%. So their forecast for a second quarter pickup isn't because they're consistently optimistic.
Thanks Steve. My impression is that the forecast for this being a bottom is based upon some minor times...The gain in capital spending is very good news and inventories are a smaller drag.
The macro trend is a declining U.S. consumer, and Worried makes a very good logical case that eventually the offshoring chickens will come home to roost. I appreciate your attention to the data, though. We'll see...
So do we get to take you to task if the preliminary moves from this advance stat, Steve? What about the final? What about the revision on the final?
All we can say at the moment was that his guess lines up with the advance, no?
Hardly a prize.
The gain in capital spending....is it all that it's cracked up to be (overcoming the previous quarters' performance?) [or like the autos?] or on the same scale as stock buy-backs? It looks like a small gesture to me.
What can be said though is that the uptrend in the WLI is still intact.
Imageshack - wlijc5