Case-Shiller Index

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Signs Of Life?

I was asked yesterday, by a stranger who knew that I write about such things, what I think about the economy. I said it sucks. Which it does in many ways. Yet there are signs of life because the news this week has been good so far.

Take, for example, the monthly report from the Institute for Supply Management. This is one of our more eagerly awaited pieces of data because it gives us insight into conditions in our manufacturing industries. The latest report covers information gleaned about industry in November, and was much more ebullient than anyone expected. The index of activity rose to 57.3% in November, up from October’s 56.4%. This continues a recent run of continuing strength and brings the index back up to where it was back in April 2011. There is  no way to interpret this other than to say it is very positive – any number over 50% points to expansion, and a series of such numbers suggests a steady gain in momentum.

The problem is that other statistics, also seeking to measure strength in manufacturing, seem at odds with this rosy picture. For instance, the Commerce Department’s data on orders for manufactured goods, has been relatively flat all year and is now suggesting a rather sluggish immediate prospect far removed from that the ISM data seems to support.

Time, will of course, resolve this apparent discrepancy, but the ISM index has generally stood the test of time and is a fairly reliable barometer of what is likely to go on over the next few months. So I err on the side of optimism, albeit cautiously.

Supporting this, and in another sector of the economy, is today’s news about new home sales. They jumped much more than expected in October, the latest moth for which data is available. Indeed that annualized rate of 440,000 new home sales represents a remarkable 25.4% increase over September’s rate and is a heady 21.6% up from last October. The median sale price in October reached $245,800, and the mean rose to $321,700. Meanwhile the inventory of new homes available for sale shrank to 183,000 which is around 4.9 months of supply at current rates of sale. This news is simply another in quite a long string all suggesting that the recovery in real estate is now fairly complete. Another well known report in this sector is the Case-Shiller index that tracks prices of existing homes being re-sold. The latest data we have from Case-Shiller – for sales through September – has prices at around 11.2% higher than last year, with p[rice gains showing up right across the country.

Incidentally, anecdotal information suggests that the new regulatory requirements issued by the Consumer Federal Protection Bureau which come into effect in January, may slow the real estate market down a little because they some of the easy money style mortgages that fueled real estate activity during the bubble. These regulations may end up damping bank lending down a little and thus making financing a home more costly and difficult. If they appear to be too stringent they may be revised. Then again such damping down is exactly what they are intended to do. They will make the emergence of a new bubble less likely.

Lastly, in this good news fest, is today’s employment report from ADP the big private payroll processor. ADP measures employment gains across the private sector and publishes its data a couple of days ahead of the government’s more complete employment and unemployment report, the next of which is due out Friday. According to ADP the economy added 215,000 new jobs last month which is well above expectations. It is also the best monthly gain in a year, and suggests that all the confusion caused by the government shutdown which depressed October’s numbers is well in the past. It also suggests that those dire reports about the negative effects on employment of health care reform were false. But we knew they would be didn’t we?

So there you have it. Three good reports in the span of a few days. Three very different parts of the economy doing well – very well.

So, why do I think the economy sucks?

Because of the longer term problems we have notably the enormously unequal distribution of the way in which new wealth is distributed. Our divided society is getting ever more sharply divided, and I consider that a major impediment to our ability to return  to a path of both strong and steady growth.

But that’s old news. Most of the newer reports are good. So let’s absorb that for a while before we dive back into the arguments over inequality.

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The Fama Quasi-Nobel: Posthumous Award for EMH?

They’re kidding, right?

Nope. They mean it.

What’s really weird is that he splits the award with Robert Shiller and some guy called Hansen who is an econometrician and thus unintelligible and largely irrelevant to sensible discussion of the economy.

Back to Fama and Shiller: there are a few ways to deal with this.

Take One:

Fama was the guy who created the Efficient Markets Hypothesis (EMH). Looked at strictly this theory tells us that there is nothing an investor can do to outfox the market. This is because all the information that is out there is incorporated in prices. Thus all those ads telling us about past performance and about clever investment strategies are simple hoaxes. The market is what it is, and neither you nor I can outwit it unless by dumb luck.

This interpretation of EMH means it is a still solid, relevant and good piece of work. The problem is that it is built on much of the same quicksand as its companion theories that posit rational behavior. And because it can be reduced to that dictum that “the market is what it is” it has little value to anyone other than obscure finance theorists. It says that incoming news will produce a different result tomorrow, so today’s market price has no implication or meaning for tomorrow’s price.

In a nutshell EMH is another example of the hermetically sealed reality-resistant thinking that dominates modern economics: the only quirks or rotten stuff sit outside the pristine and pure wondrous working of the marketplace. Which is why theorists like Fama are so ideologically hell bent against anything that appears to intrude into their precious markets. Especially governments.

Take Two:

But Shiller has devoted much of his professional career to pointing out that people are a bit less – perhaps a lot less – than rational. At least in the meaning Fama has for rational.

In particular Shiller achieved notoriety for his study of real estate prices and noting the rise of the bubble that so famously burst a few years back.

Bubbles would suggest that markets are somewhat less than rational and are inclined to significant overshooting, undershooting, and other total misinterpretations of information. This is hardly efficient. Indeed a quick look at Shiller’s work seems to imply that he has debunked EMH pretty well. Don’t forget that according to EMH a house priced $100 one day and $1,000,000 the next is entirely within the realm of rational experience. The difference simply reflects different information. Duh.

So the quasi-Nobel prize committee is backing both sides of a very important argument. One that has huge implications for, inter alia, bank regulation. Do we regulate banks because they are likely to get swept away by Shiller-like exuberance? Or do we leave well alone because they are embedded in the smooth rational workings of the financial market place a la Fama?

Take Three:

This is what I call the “Krugman cop-out”.

His argument is that, even though Shiller seems to have undone Fama, and even though the work of the two seems to be in contradiction, the award to Fama is still worthy. After all someone had to dig the hole Shiller’s work subsequently filled up. Krugman is taking the old academic high road and trying to focus on all that now discarded effort. Perhaps he’s mindful that his work could also be debunked one day, and so he has closed ranks.

Take Four:

My view is that the quasi-Nobel committee was on the brink of giving Fama the prize back in the mid 2000’s, but was stopped dead in its tracks by the crisis, the bursting of the bubble, and the disarray this meant for the Fama camp. The committee had to wait for the dust to settle and for Fama’s defenders to rally around. They also had to allow the public of anyone interested in the prize to lose sight of EMH amongst all the post-crisis confusion and exposure of economics generally. Then they had to get someone else to steal the headlines – Shiller is a terrific choice – so that few outsiders would notice.

In many ways the award is akin to posthumous recognition. It is a reward for hard work done in the service of a now debunked theory.

EMH still has its supporters or course. They are that hardy band of rationalists who still dominate much of the economics landscape and who strenuously fight to keep reality at bay. Most of them appear to live in Chicago, which rather calls into question their rationality. Doesn’t it?

Well I think so.

 

Addendum:

For those of you confused by my references to the “quasi-Nobel”, I should make myself clear. I refuse to recognize the economics prize as a Nobel prize. It isn’t. It is a prize funded, not the Nobel Foundation, but by the Swedish Central Bank who sub-contracts the entire bureaucratic side of the award to the Nobel committee. It is thus a “faux” or “quasi” Nobel prize.

Besides, does anyone really think economics deserves a Nobel prize? I mean really?

 

 

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House Price Fever?

Yesterday’s news that the Case-Shiller index continues to move upwards is not necessarily good. The index shows that home prices rose another 0.3% in February bringing the increase since that time in 2012 to 9.3%. That’s the fastest annual rate of price increases for six years.

The winding down of foreclosures, low interest rates, and limited inventories have combined to push prices up. All the cities included in the index saw prices rise, so this is not just some local phenomenon, and hopefully not the re-emergence of a bubble.

Perhaps.

The pace of price increases in some cities is now perilously close to levels that would qualify as a local bubble were they to continue for too long. Phoenix, for example, has seen prices rise 23% over the past year. Just to put this all in context, New York City saw prices rise only 1.9% over the last year. The Phoenix experience can be explained partly, at least, by the enormous plunge in prices there during the crisis. I have argued before that prices overshot downwards during the crisis and thus created the possibility of a rapid recovery once conditions settled back down. Hopefully this is what we are seeing and price increases will level off as the overshoot is properly compensated for. Remember, also, that the screeching halt in construction caused by the crisis left the nation with a shortfall of single family housing. That shortfall is also having a mild effect on prices as demand currently outstrips supply.

Two other cities – Atlanta and Dallas – also saw record year over year price increases during the past twelve months, although in the case of the latter the historic data is very thin so there may not be much meaning to such a record.

Nonetheless the recovery of housing, which by most measures is now well established, is something we need to keep a close eye on. Interest rates are not going to rise any time soon. The continuation of aggressive monetary policy – as reflected in those rates – will create the sort of conditions is which a renewed bubble might occur. And given the banking industry’s predilection for forgetting its prior stupidity we all should expect problems to re-apopear in real estate in the medium term.

The fever could return. Let’s hope not.

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A Mixed Week Ends Well

There was a flurry of economic news this week, most of which was encouraging. The economy is in decent shape. Not great, just decent.

We began, on Monday, with a strong showing from durable goods, which grew 4.6% in December. The problem with this is that the growth was skewed by aircraft orders which are notoriously volatile. Even without them, however, orders were – you guessed it decent. The other Monday report was also a bit misleading. Pending homes sales dropped 4.3% in December, but the problem appears to be a lack of inventory of houses for sale in key areas rather than a lack of demand. This weakness may continue until the spring when home owners usually start the selling process. This would ease the inventory blockage and allow demand to be met more closely.

Then Tuesday produced evidence to support that interpretation of the pending homes sales decline: the Case-Shiller index of home prices showed a solid year on year price gain of 5.5%. Nineteen of the twenty cities comprising the index showed a year on year gain, with only New York City showing a decline. So the real estate market continued its recovery throughout the year and enters 2013 in much better health. We ought to remember, though, that even after 2012’s recovery home prices are still about 30% below the absurdity of their bubble peaks and practically every index of activity in housing is well below those peak levels as well.

Tuesday also brought us a shocking consumer sentiment number. The Conference Board measure of sentiment dropped to 58.6 in January, its lowest level since November 2011. Not only was the decline sharp – the index had been 66.7 in December – but it was more than expected and through the market into some confusion. The thinking had been that the horror show in Washington had eroded consumer confidence a tad, but no one expected anything to this degree. It turns out that the decline was less to do with legislative lunacy and the ongoing farce that is our political system, but was driven largely by a reaction to the sudden loss of wages due to the hike in payroll taxes. Not only does that hike scrunch worker pay packets, but it reminds people that their wages haven’t been growing much anyway. Score another negative for the forces of austerity.

Next: Wednesday brought us the bad news that the economy actually shrank 0.1% in the fourth quarter. This turns out to be an illusion when we adjust for two major quirks. First, inventories dropped sharply. Second, there was a huge spike down in defense spending. Remove these two oddities and the economy was chugging along at its recent 2.0% pace. there is no reason to believe that either inventories or military spending will repeat that fourth quarter gyration. So we can safely ignore them when we try to project the trajectory of growth this year. That dull, but decent, 2.0% rate seems a safe bet.

On Thursday there were one or two more strange numbers to think about. Personal incomes rose in December at the fastest rate for eight years. Was this the end of wage stagnation? Unfortunately not. The 2.6% jump came almost entirely because of a 34.3% increase in divided income. A very large number of businesses shifted their dividend payout from early 2013 to late 2012 in order to avoid potential tax increases. So what appears top be a great number turns out to be a total dud. The increase will simply be offset by a decline in 2013 as things settle back to normal. And that flood of cash it unlikely to turn up as spending. Typically people who receive much of their income as dividends are more wealthy and tend to spend a smaller percentage of their overall income.

Thursday’s weekly new claims for unemployment assistance data was also a jolt. Claims shot up 38,000 in a single week. Under normal circumstances this kind of change would make us all worry about the labor market, but this week’s figures elicited a big yawn. The reason being that it seems to be simply an unwinding of a major seasonal shift. The prior few weeks had been unusually strong, so much so that no one really believed the figures, and so this week’s weakness has been interpreted as a return to normal.

That this is the case is supported by today’s employment data. The economy added 157,000 new jobs in January which belies any thoughts of weakness. The number of new jobs was less than many had predicted based upon the very healthy 192,000 new private sector jobs reported by ADP earlier in the week. One of the key differences between the government report and the ADP date is that the government includes public sector jobs as well. Since government at all levels has been shedding jobs steadily the relatively good data for the private sector is being masked by the layoffs by government. Don’t forget that the majority of government jobs fall into three categories: teachers, police, and fire personnel. So the attrition of government jobs means we have of those people. Indeed most of the loss is in teaching – the country is employing about 300,000 fewer teachers than before the onset of crisis.

The good news on the jobs front was that there were some major revisions to the data for the end of 2012 with the result that the economy added an average of close to 180,000 jobs a month last year. This is the best sustained rate of job creation we have seen for a decade, and speaks well to the underlying strength of the economy. It still isn’t good enough, though, to prevent the unemployment rate from ticking up slightly to 7.9%. The reason being that we are seeing a greater influx of workers into the workforce. With opportunities more abundant some of the discouraged workers who dropped out completely during the bad years are now starting to look for work again and this has the perverse effect of making the data look worse.

Lastly, also today, we had the monthly glimpse into manufacturing provided by the Institute for Supply Management’s index and we had a different look at consumer sentiment.

The ISM index rose to 53.1% from 50.2%, which was a slightly stronger improvement than expected. Any reading over the magic 50.0% mark means that the manufacturing sector is expanding rather than contracting so this months number is encouraging. It also reverses the slight reversal that had set in during late summer and early fall. At the same time it is a not a very strong statement about the economy. Clearly thing could be a lot better.

Then there was the University of Michigan’s monthly look at consumer confidence which showed an increase from 72.9 in December to 73.8 in January. Yes, I know. This contrasts rather starkly with the other index – from the Conference Board  – I mentioned earlier. One fell, the other rose. The common features are these: the ending of the payroll tax ‘holiday’ hit consumers hard; neither index is very strong by historic standards; and both were depressed  by what people see as dampened current conditions. Those aspects of sentiment dealing with the future were more buoyant. Whether consumers are right about the future we will have to wait and see.

Right now we have navigated a very full week of information only to end up pretty much where we started. The economy is decent,not great. It could be a whole lot better, but won’t be until we get policies aimed at getting demand moving. Since the entire focus is on austerity, which is a policy disaster, we cannot expect an improvement.

Nothing this week changes my mind: look for growth to hover between 1.5% and 2.0% this year. Better than nothing. Not good at all.

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Latest News

Yes it’s hard to focus at this time of year under the best of circumstances. This year is even worse. The background noise provided by the lack of active negotiation over the so-called fiscal cliff, and the Treasury Department’s sudden discovery that we will hit the debt ceiling at year’s end, drown out any day to day news. So in the spirit of giving here’s a look at that humdrum stuff:

House Prices

We learned yesterday, from the Case-Shiller index,  that home prices fell in October. Since the index is not seasonally adjusted most people seem to think that this simply reflects the early fall slow down in activity rather than the onset of a prolonged decline. The biggest declines were registered in Chicago – down 1.5% for the month and 1.3% for the last twelve months, and in Boston – down 1.4% for the month, but up 1.4% over the past year. That twelve month decline in Chicago was only one of two city declines: New York was the other where prices dropped 1.3% over the last year.

In general the numbers support the notion of a slow recovery in real estate from a very low level. I doubt prices will accelerate much in 2013, with a lot riding on how income tax rates and deductions are sorted out as part of the current sort-of negotiations in Washington.

Consumer Confidence

Today’s news is not good. Consumers report that the fiscal cliff shenanigans is getting them down. The Conference Board measure of consumer confidence, as of early December, sank to 65.1 from 71.5 in early November. This is the lowest confidence has been for four months. Within the overall index there were some interesting data in the sub-indices. For instance, the index of expectations plummeted from 80.9 in NOvember to 66.5 in December. Obviously consumers are deeply affected by the nonsense in Washington. We went through an almost identical shift back during the 2011 debt limit debacle, and we should expect to follow a similar trajectory this time. This implies confidence will perk up almost the minute a deal is cut and will, most likely, return to its slow and steady improvement. Of course there are a whole string of ifs in that forecast, beginning with the existence of a deal at all.

New Home Sales

New home sales jumped up by 4.4% in November, bringing levels to 15.3% higher than a year ago. The rate of sales, 377,000 annually, is still very low compared with the fantasy levels of the bubble years, but represents a very solid recovery from the depths of a year or two ago. The strongest region was the South, where sales leapt 21.1% in the month, followed by the Northeast where sales rose 12.5%. Other regions fared less well: sales out West dropped 17.8%, and the Midwest saw a decline of 12.5%.

Persistently low mortgage rates appear to be the key factor driving sales. Any boost provided by rising incomes is very modest due to the lack of much increase in wages. The broader availability of jobs is adding some demand, although I doubt it is a key driver. Another possible source of growth in demand is simply the backlog of households who postponed buying during the early crisis years and who are now more comfortable going ahead. Once this backlog is worked off, and in the absence of better incomes growth, I expect sales to suffer a slight stagnation in 2013 – not necessarily an outright decline, but a period of less dynamic growth.

Meanwhile the median price of a new home rose to $246,200 in November, up 3.7% from October, and about 15% higher than a year ago.

Jobless Claims

New claims for unemployment assistance dropped 12,000 to 350,000 last week. This number may be skewed by the closure this week of key data gathering offices around the country and so is potentially unreliable. The key information in that data is that claims appear to have fallen back below their pre-hurricane Sandy levels. Also, the four week moving average of claims dropped by 11,250 to 356,750, its lowest level in four years. Setting aside the caveats due to the odd seasonality of the numbers, I think we can draw a general conclusion that the jobs market is lumbering along slowly at a pace that is neither good nor bad.

So what does this slew of data mean?

Not a heck of a lot. The economy is almost exactly where we left it before the holidays. Growth is clearly slower than it was in the summer, but is hasn’t stalled.

And, unfortunately, the outcome of the fiscal cliff discussions will have more bearing on 2013 than anything else.

Given both the content of the negotiations and the players involved that is not a happy thought.

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