Calculated Risk

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From: Calculated Risk
Sent: ‎Wednesday‎, ‎December‎ ‎31‎, ‎2014 ‎9‎:‎38‎ ‎AM
To: Commercial and Forensic Appraiser, and CRE Consultant

Calculated Risk

Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?Question #4 for 2015: Will too much inflation be a concern in 2015?Question #3 for 2015: What will the
unemployment rate be in December 2015?Zillow: Case-Shiller House Price Index year-over-year change expected to slow further in NovemberWeekly Initial Unemployment Claims increased to 298,000NAR: Pending Home Sales Index increased
0.8% in November, up 4.1% year-over-yearQuestion #2 for 2015: How many payroll jobs will be added in 2015?

Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?

Posted: 12/30/2014 7:47:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'll try to
add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2014.

5) Monetary Policy: The Fed completed QE3 in 2014, and
now the question is will the Fed raise rates in 2015? If so, when? And by how much? The Fed Funds rate has been at 0 to 0.25% since December 2008.

For years I've made fun of those predicting an imminent Fed Funds rate increase. Based on high unemployment and low inflation, I
argued it would be a "long time" before the first rate hike. Well, time flies!

As far as the first rate increase and timing, Tim Duy wrote a week ago Looking Backward to See the Future
My baseline scenario is that the Fed drops "considerable" entirely in January, retains "patient" in March, drops "patient" in April, and raise rates in June.Of course the Fed will be data dependent. If the unemployment rate declines to 5.5% or so in the May report, and
core inflation continues to move upwards towards 2%, then a June rate hike seems likely.
 
Note: It seems very likely the FOMC will drop "patient" from the FOMC statement the meeting before hiking rates (if "patient" is in the April statement, a rate hike in June is much less
likely).

If the data is less convincing, then the FOMC will probably wait until the July or September meetings (I've seen a few analysts arguing the FOMC will wait until 2016, but my feeling is the Fed will hike rates in 2015).

The FOMC will not want to immediately reverse
course, so the might wait a little longer than expected. Right now my guess is the first rate hike will happen at either the June, July or September meetings. I expect subsequent rate hikes to be gradual, and depending on the timing of the first rate hike, I expect rates to be close to
1% at the end of 2015.

The old saying on Wall Street with regards to rate hikes is "3 steps and a stumble". I don't think there is an validity to the saying, but I expect to hear it on CNBC in 2015!

Here are the ten questions for 2015 and a few predictions:
• Question #2 for 2015: How many payroll jobs will be added in
2015?
• Question #3 for 2015: What will the unemployment rate be in December 2015?
• Question #4 for 2015:
Will too much inflation be a concern in 2015?
• Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
• Question #6 for 2015: Will real wages increase in 2015?
• Question #7 for 2015: What about oil prices in 2015?
• Question #8 for 2015: How much will Residential Investment increase?
• Question #9 for 2015: What will happen
with house prices in 2015?
• Question #10 for 2015: How much will housing inventory increase in 2015?






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Question #4 for 2015: Will too much inflation be a concern in 2015?

Posted: 12/30/2014 9:09:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'll try to
add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2014.

4) Inflation: The inflation rate is still running well
below the Fed's 2% target. Will the core inflation rate rise in 2015? Will too much inflation be a concern in 2015?

Every year some analysts (and clueless politicians) forecast runaway inflation. And every year they have been wrong. Someday inflation will be a concern - but
not yet!

Although there are different measure for inflation (including some private measures) they all show that inflation is at or below the Fed's 2% inflation target. I follow several
measures of inflation, median CPI and trimmed-mean CPI from the Cleveland Fed. Core PCE prices (monthly from the BEA) and core CPI (from the BLS).

Click on graph for
larger image.

On a year-over-year basis, the median CPI rose 2.3%, the trimmed-mean CPI rose 1.8%, and the CPI less food and energy rose 1.7%. Core PCE is for October and increased 1.6% year-over-year

On a monthly basis, median CPI was at 1.8% annualized,
trimmed-mean CPI was at 1.0% annualized, and core CPI increased 0.9% annualized.

Due to the slack in the labor market (elevated unemployment rate, part time workers for economic reasons), and even with some real wage growth in 2015, I expect these measures of inflation will stay
mostly at or below the Fed's target in 2015. If the unemployment rate continues to decline - and wage growth picks up - maybe inflation will be an issue in 2016.

So currently I think core inflation (year-over-year) will increase in 2015, but too much inflation will not be a serious
concern this year.

Here are the ten questions for 2015 and a few predictions:
• Question #2 for 2015: How
many payroll jobs will be added in 2015?
• Question #3 for 2015: What will the unemployment rate be in December 2015?
• Question #4 for 2015: Will too much inflation be a concern in 2015?
• Question #5 for 2015: Will the Fed raise rates in
2015? If so, when?
• Question #6 for 2015: Will real wages increase in 2015?
• Question #7 for 2015: What
about oil prices in 2015?
• Question #8 for 2015: How much will Residential Investment increase?
• Question
#9 for 2015: What will happen with house prices in 2015?
• Question #10 for 2015: How much will housing inventory increase in 2015?

Question #3 for 2015: What will the unemployment rate be in December 2015?

Posted: 12/30/2014 9:51:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'll try to
add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2014.

3) Unemployment Rate: The unemployment rate was at 5.8% in
November, down 0.9 percentage points year-over-year. Currently the FOMC is forecasting the unemployment rate will be in the 5.2% to 5.3% range next December. What will the unemployment rate be in December 2015?

Forecasting the unemployment rate includes forecasts for economic
and payroll growth, and also for changes in the participation rate. Note: The participation rate is the percent of the working age population (16 and over) that is in the labor force.

On participation: We can be pretty certain that the participation rate will decline over the next couple of decades based on demographic trends. In 2014, I expected the participation rate to stabilize or decline slightly as the labor market improved - the
long term down trend was offset by some people returning to the labor force. It is possible that the participation rate could even increase a little in 2015 before resuming the downtrend. If the participation rate increases a little (say to 63%) then the unemployment rate will be a
little higher next December.

Here is a table of the participation rate and unemployment rate since 2008.

Unemployment and Participation Rate for December each
YearDecember ofParticipation RateChange in Participation Rate (percentage points)Unemployment Rate200865.8%7.3%200964.6% -1.29.9%201064.3% -0.39.4%201164.0%
-0.38.5%201263.6% -0.47.9%201362.8%-0.86.7%2014162.8%0.05.8%1This is the November 2014 participation and unemployment rate.
Depending
on the estimate for the participation rate and job growth (next question), it appears the unemployment rate will decline to close to 5% by December 2015. My guess is based on the participation rate staying relatively steady in 2015 - before declining again over the next decade. If
the participation rate increases a little, then I'd expect unemployment in the low-to-mid 5% range.

Here are the ten questions for 2015 and a few predictions:
• Question #2 for 2015: How many payroll jobs will be added in 2015?
• Question #3 for 2015: What will the unemployment
rate be in December 2015?
• Question #4 for 2015: Will too much inflation be a concern in 2015?
• Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
• Question #6 for 2015: Will real wages increase
in 2015?
• Question #7 for 2015: What about oil prices in 2015?
• Question #8 for 2015: How much will
Residential Investment increase?
• Question #9 for 2015: What will happen with house prices in 2015?
• Question #10 for 2015: How much will housing inventory increase in 2015?

Zillow: Case-Shiller House Price Index year-over-year change expected to slow further in November

Posted: 12/31/2014 2:02:00 AM

Wednesday:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 286 thousand from 280 thousand.

• At 9:45 AM ET, Chicago Purchasing Managers Index for December. The consensus is for a reading of 59.0, down from 60.8 in November.

• At 10:00 AM ET, Pending Home Sales Index for November. The consensus is for a 0.5% increase in the index.

The
Case-Shiller house price indexes for October were released earlier today. Zillow has started forecasting Case-Shiller a month early - now including the National Index - and I like to check the Zillow forecasts since they have been pretty close.

From Zillow: Nov. 2014 Case-Shiller Forecast: Home Price Changes Slowing, But Still Growing
The October S&P/Case-Shiller (SPCS) data released this morning showed more slowing in the housing market, with
annual growth in national home prices falling to 4.6 percent. Annual appreciation in home values has been below 5 percent for the past two months, and we anticipate this trend to continue into the future. The 10- and 20-City Indices also saw annual growth rates decline in October; the 10-City index
rose 4.4 percent, while the 20-City Index rose 4.5 percent – down from rates of 4.5 percent and 4.7 percent, respectively, in September.

Our forecast for November SPCS indicates that the slowing in home price gains will continue into November. Zillow predicts the national SPCS to rise
4.5 percent on an annual basis.

The non-seasonally adjusted (NSA) 20-City index fell 0.1 percent from September to October, and we expect it to decrease 0.2 percent in November. We also expect a monthly decline in the 10-City Composite Index next month, falling 0.2 percent from October
to November (NSA).

All forecasts are shown in the table below. These forecasts are based on the October SPCS data release and the November 2014 Zillow Home Value Index (ZHVI), released Dec. 19.
Officially, the SPCS Composite Home Price Indices for November will not be released until Tuesday, Jan. 27. So the Case-Shiller index will probably show a lower year-over-year gain in November than in October.

Zillow November 2014 Case-Shiller Forecast Case-Shiller
Composite 10Case-Shiller
Composite 20Case-Shiller
NationalNSASANSASANSASAYoY4.2%4.2%4.4%4.4%4.5%4.5%MoM-0.2%0.5%-0.2%0.5%-0.2%0.6%

Weekly Initial Unemployment Claims increased to 298,000

Posted: 12/31/2014 1:34:00 PM

The DOL reported:
In the week ending December 27, the advance figure for
seasonally adjusted initial claims was 298,000, an increase of 17,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 280,000 to 281,000. The 4-week moving average was 290,750, an increase of 250 from the previous week's revised average. The previous
week's average was revised up by 250 from 290,250 to 290,500.

There were no special factors impacting this week's initial claims The previous week was revised up slightly.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased slightly
to 290,750.

This was higher than the consensus forecast of 286,000, and the level suggests few layoffs.

NAR: Pending Home Sales Index increased 0.8% in November, up 4.1% year-over-year

Posted: 12/31/2014 3:02:00 PM

From the NAR: Pending Home Sales Show Modest Gain in November
The Pending
Home Sales Index, a forward-looking indicator based on contract signings, increased 0.8 percent to 104.8 in November from a slightly downwardly revised 104.0 in October and is now 4.1 percent above November 2013 (100.7) – the highest year-over-year gain since August 2013 (5.6 percent).
...
The PHSI in the Northeast rose 1.4 percent to 89.1 in November, and is now 7.0 percent above a year ago. In the Midwest the index decreased 0.4 percent to 100.0 in November, and is now 0.5 percent below November 2013.

Pending home sales in the South rose 1.3 percent to an
index of 119.7 in November, and are 5.1 percent above last November. The index in the West increased 0.4 percent in November to 98.5, and is now 4.9 percent above a year ago.Note: Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in
December and January.

Question #2 for 2015: How many payroll jobs will be added in 2015?

Posted: 12/31/2014 4:28:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'm adding some
thoughts, and a few predictions for each question. Here is a review of the Ten Economic Questions for 2014.

2) Employment: With one month to go, 2014 is already the best year for
employment growth since the '90s. Will 2015 be as strong? Or will job creation slow in 2015?

There are some positives for employment heading into 2015. Economic activity has clearly picked up in the US, and there is solid momentum heading into the new year. The decline in
oil prices will give a boost to many sectors, construction activity (non-energy related) should increase, and the pace of public hiring will probably increase in 2015.

There are also some negatives. The decline in oil prices will lead to layoffs in the energy sector and have a ripple
effect in some communities. The strong dollar will probably impact exporters, and the lower unemployment rate will mean some companies will have difficulty finding qualified candidates.

I've seen estimates of around 50,000 layoffs in the energy sector related to lower oil prices.
 There will be a ripple effect too that will probably double that number of job losses (businesses in oil producing areas will also lose employees).

Note: Those expecting 300+ thousand jobs per month in 2015 will probably be disappointed. Too many people compare to the '80s
and '90s, without thinking about changing demographics. The prime working age population (25 to 54 years old) was growing 2.2% per year in the '80s, and 1.3% per year in the '90s. The prime working age population has actually declined slightly this decade. Note: The prime working age
population is now growing slowly again, and growth will pick up the '20s.

For review, here is a table of the annual change in total nonfarm, private and public sector payrolls jobs since 1997. For private employment, 2014 was probably the best year since 1997.

Change in Payroll Jobs per Year (000s)Total, NonfarmPrivatePublic19973,4083,21319519983,0032,73431319993,1772,71646120001,9461,6822642001-1,735-2,2865512002-508-7412332003105147-4220042,0331,88614720052,5062,32018620062,0851,87620920071,1408522882008-3,576-3,7561802009-5,087-5,013-7420101,0581,277-21920112,0832,400-31720122,2362,294-5820132,3312,365-34201412,9002,810901 2014 is estimated.
In 2014, public employment added to total employment, but at a fairly
low level. Public hiring will probably pick up to 150,000+ in 2015.

The second table shows the change in construction payrolls starting in 2006.

Construction Jobs
(000s)20061522007-1952008-7892009-1,0472010-19220111442012114201315620141215
Energy related construction hiring will decline in 2015, but I expect other areas of construction to be solid.

As I mentioned above, in addition to layoffs in the energy sector, exporters will have a difficult year - and more companies
will have difficulty finding qualified candidates. Even with the overall boost from lower oil prices - and some additional public hiring, I expect total jobs added to be lower in 2015 than in 2014.

So my forecast is for gains of about 200,000 to 225,000 payroll
jobs per month in 2015. Lower than 2014, but another solid year for employment gains given current demographics.

Here are the ten questions for 2015 and a few predictions:
• Question #2 for 2015: How many payroll jobs will be added in 2015?
• Question #3 for 2015: What will the unemployment
rate be in December 2015?
• Question #4 for 2015: Will too much inflation be a concern in 2015?
• Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
• Question #6 for 2015: Will real wages increase
in 2015?
• Question #7 for 2015: What about oil prices in 2015?
• Question #8 for 2015: How much will
Residential Investment increase?
• Question #9 for 2015: What will happen with house prices in 2015?
• Question #10 for 2015: How much will housing inventory increase in 2015?

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