As a result of softer same-store sales and customer traffic levels, the National Restaurant Association’s Restaurant Performance Index (RPI) declined in August. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 101.5 in August, down 1.2 percent from July and the lowest level in 11 months. Despite the decline, August represented the 30th consecutive month in which the RPI stood above 100, which signifies expansion in the index of key industry indicators.
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“The RPI's August decline was the result of broad-based declines in the current situation indicators,” said Hudson Riehle, Senior Vice President, Research and Knowledge Group, National Restaurant Association. “Same-store sales and customer traffic softened from July’s strong levels, while the labor and capital spending indicators also dipped.
“Despite the declines, each of the current situation indicators were in expansion territory above 100, which indicates the restaurant industry remains on a positive growth trajectory,” Riehle added.
emphasis added
Click on graph for larger image.
The July S&P/Case-Shiller (SPCS) data published today showed home prices dipping on a seasonally-adjusted monthly basis, with both the 10- and 20-city indices falling 0.2 percent from June to July.This suggests the year-over-year change for the August Case-Shiller National index will be about the same as in the July report.
On an annual basis, the 10-city index was up 4.5 percent from July 2014, while the 20-city index increased 5 percent over the past year. The U.S. National Index was up 4.7 percent year-over-year. We expect the August SPCS to show a second consecutive monthly decline in the 10-city index, down 0.1 percent from July to August, and the 20-city index to be flat over the same period (seasonally adjusted). The National Index is expected to grow 0.4 percent (seasonally adjusted) in August from July. We expect all three indices to show annual appreciation of less than 5 percent when August data is released next month.
All SPCS forecasts are shown in the table below. These forecasts are based on today’s July SPCS data release and the August 2015 Zillow Home Value Index (ZHVI), released September 21. The SPCS Composite Home Price Indices for July will not be officially released until Tuesday, October 27.
| Zillow Case-Shiller Forecast | ||||||
|---|---|---|---|---|---|---|
| Case-Shiller Composite 10 |
Case-Shiller Composite 20 |
Case-Shiller National |
||||
| NSA | SA | NSA | SA | NSA | SA | |
| July Actual YoY |
4.5% | 4.5% | 5.0% | 5.0% | 4.7% | 4.7% |
| August Forecast YoY |
4.5% | 4.5% | 4.9% | 4.9% | 4.8% | 4.8% |
| August Forecast MoM |
0.1% | -0.1% | 0.1% | 0.0% | 0.3% | 0.4% |
I am starting to see signs of imbalances emerge in the form of high asset prices, especially in real estate, and that trips the alert system. One lesson I have taken from past episodes is that, once the imbalances have grown large, the options to deal with them are limited. I think back to the mid-2000s, when we faced the question of whether the Fed should raise rates and risk pricking the bubble or let things run full steam ahead and deal with the consequences later. What stayed with me were not the relative merits of either case, but the fact that by then, with the housing boom in full swing, it was already too late to avoid bad outcomes. Stopping the fallout would’ve required acting much earlier, when the problems were still manageable. I’m not assigning blame by any means, and economic hindsight is always 20/20. But I am conscious that today, the house price-to-rent ratio is where it was in 2003, and house prices are rapidly rising. I don’t think we’re at a tipping point yet—but I am looking at the path we’re on and looking out for potential potholes.Williams is looking at something like the third graph below. This shows the price-to-rent ratio is elevated, but nothing like during the housing bubble (and there are few signs of speculations).
emphasis added
| Month | YoY Change |
|---|---|
| Jan-14 | 10.5% |
| Feb-14 | 10.2% |
| Mar-14 | 8.9% |
| Apr-14 | 7.9% |
| May-14 | 7.0% |
| Jun-14 | 6.3% |
| Jul-14 | 5.6% |
| Aug-14 | 5.1% |
| Sep-14 | 4.8% |
| Oct-14 | 4.6% |
| Nov-14 | 4.6% |
| Dec-14 | 4.6% |
| Jan-15 | 4.4% |
| Feb-15 | 4.3% |
| Mar-15 | 4.3% |
| Apr-15 | 4.4% |
| May-15 | 4.5% |
| Jun-15 | 4.5% |
| Jul-15 | 4.7% |
The first graph shows the monthly Case-Shiller National Index SA, the monthly Case-Shiller Composite 20 SA, and the CoreLogic House Price Indexes (through July) in nominal terms as reported.
The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.
Here is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.
The S&P/Case-Shiller U.S. National Home Price Index, covering all nine U.S. census divisions, recorded a slightly higher year-over-year gain with a 4.7% annual increase in July 2015 versus a 4.5% increase in June 2015. The 10-City Composite was virtually unchanged from last month, rising 4.5% year-over-year. The 20-City Composite had higher year-over-year gains, with an increase of 5.0%.
...
Before seasonal adjustment, the National Index posted a gain of 0.7% month-over-month in July. The 10-City Composite and 20-City Composite both reported gains of 0.6% month-over-month. After seasonal adjustment, the National index posted a gain of 0.4%, while the 10-City and 20-City Composites were both down 0.2% month-over-month. All 20 cities reported increases in July before seasonal adjustment; after seasonal adjustment, 10 were down, nine were up, and one was unchanged.
...
“The S&P/Case Shiller National Home Price Index has risen at a 4% or higher annual rate since September 2012, well ahead of inflation. Most of the strength is focused on states west of the Mississippi. The three cities with the largest cumulative price increases since January 2000 are all in California: Los Angeles (138%), San Francisco (116%) and San Diego (115%). The two smallest gains since January 2000 are Detroit (3%) and Cleveland (10%). The Sunbelt cities – Miami, Tampa, Phoenix and Las Vegas – which were the poster children of the housing boom have yet to make new all-time highs. [says David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices.]
emphasis added
Click on graph for larger image.
The second graph shows the Year over year change in all three indices.
The last graph shows the bubble peak, the post bubble minimum, and current nominal prices relative to January 2000 prices for all the Case-Shiller cities in nominal terms.
“If the economy continues on the same trajectory it’s on…and everything else suggests that’s likely to continue…then there is a pretty strong case for lifting off” before 2015 ends, he said in a Wall Street Journal interview.From SF Fed President John Williams: The Economic Outlook: Live Long and Prosper
emphasis added
Looking forward, I expect that we’ll reach our maximum employment mandate in the near future and inflation will gradually move back to our 2 percent goal. In that context, it will make sense to gradually move away from the extraordinary stimulus that got us here. We already took a step in that direction when we ended QE3. And given the progress we’ve made and continue to make on our goals, I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year. Of course, that view is not immutable and will respond to economic developments over time.From Chicago Fed President Charles Evans: Thoughts on Leadership and Monetary Policy
Before raising rates, I would like to have more confidence than I do today that inflation is indeed beginning to head higher. Given the current low level of core inflation, some evidence of true upward momentum in actual inflation is critical to this assessment. I believe that it could well be the middle of next year before the headwinds from lower energy prices and the stronger dollar dissipate enough so that we begin to see some sustained upward movement in core inflation. After liftoff, I think it would be appropriate to raise the target interest rate very gradually. This would give us sufficient time to assess how the economy is adjusting to higher rates and the progress we are making toward our policy goals
If you didn’t have the opportunity to join the recent IACCM Ask The Expert Webinar, when Kelly Barner and I talked about our new book Procurement At The Crossroads: Career-impacting Insights into a Rapidly Changing Industry, it is now available on-demand.
You can, at your convenience, tune in via my radio show on Blog Talk Radio through the following link: Ask the Expert – Nine questions critical to the future of procurement WEBINAR
It was a fast-paced, at times thought-provoking session, that I am sure you will enjoy.
30
Personal income increased $52.5 billion, or 0.3 percent ... according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $54.9 billion, or 0.4 percent.The following graph shows real Personal Consumption Expenditures (PCE) through August 2015 (2009 dollars). Note that the y-axis doesn't start at zero to better show the change.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.4 percent in August, compared with an increase of 0.3 percent in July. ... The price index for PCE increased 0.3 percent in May, compared with an increase of less than 0.1 percent in April. The PCE price index, excluding food and energy, increased 0.1 percent in May, the same increase as in April.
The August price index for PCE increased 0.3 percent from August a year ago. The August PCE price index, excluding food and energy, increased 1.3 percent from August a year ago.
Click on graph for larger image.
Speaker John A. Boehner said Sunday that he expects the House of Representatives to pass the Senate’s government funding measure with Democratic support this week, averting a shutdown that has looked increasingly less likely since he announced on Friday that he would resign.Who votes for these crazies? I hope Boehner is correct about no shutdown, but I'd like to see a backlash at the voting booth.
...
Mr. Boehner delivered a clear message to conservative colleagues credited with forcing his hand: Holding the government hostage to achieve untenable policy goals was reckless and harmful to the institution itself.
“We have got groups here in town, members of the House and Senate here in town, who whip people into a frenzy believing they can accomplish things that they know, they know are never going to happen,” Mr. Boehner said in a live interview broadcast on CBS’s “Face the Nation.”
The speaker described these conservative members of his party as “false prophets,” who promise policy victories they cannot deliver. “The Bible says, beware of false prophets,” he said. “And there are people out there spreading noise about how much can get done.”
9:00 AM: S&P/Case-Shiller House Price Index for July. Although this is the July report, it is really a 3 month average of May, June and July prices.
10:00 AM: ISM Manufacturing Index for September. The consensus is for the ISM to be at 50.5, down from 51.1 in August.
All day: Light vehicle sales for September. The consensus is for light vehicle sales to decrease to 17.5 million SAAR in September from 17.7 million in August (Seasonally Adjusted Annual Rate).
This graph shows the year-over-year change in total non-farm employment since 1968.
Travel on all roads and streets changed by 4.2% (11.4 billion vehicle miles) for July 2015 as compared with July 2014.The following graph shows the rolling 12 month total vehicle miles driven to remove the seasonal factors.
Travel for the month is estimated to be 283.7 billion vehicle miles.
The seasonally adjusted vehicle miles traveled for July 2015 is 264.4 billion miles, a 3.9% (9.9 billion vehicle miles) increase over July 2014. It also represents a 0.8% change (2.1 billion vehicle miles) compared with June 2015.
Click on graph for larger image.
In July 2015, gasoline averaged of $2.88 per gallon according to the EIA. That was down significantly from July 2014 when prices averaged $3.69 per gallon.
Real gross domestic product -- the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes -- increased at an annual rate of 3.9 percent in the second quarter of 2015, according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.6 percent.Here is a Comparison of Third and Second Estimates. PCE growth was revised up from 3.1% to 3.6%. Residential investment was revised up from 7.8% to 9.3%.
The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was 3.7 percent. With the third estimate for the second quarter, the general picture of economic growth remains the same; personal consumption expenditures (PCE) and nonresidential fixed investment increased more than previously estimated ...
emphasis added
"Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter."Barring a significant economic change, it seems likely there will be a rate hike in October, or more likely, December.
emphasis added
Federal Reserve Chairwoman Janet Yellen laid out her most detailed case yet for the central bank to begin raising short-term interest rates later this year ...Friday:
Ms. Yellen made her case like a prosecutor making a courtroom closing argument. She presented it in a 40-page speech at the University of Massachusetts in Amherst, including 40 academic citations, 35 footnotes, nine graphs and an appendix.
Central to her argument was a belief that slack in the economy has diminished to a point where inflation pressures should start to gradually build in the coming years.
Those pressures aren’t asserting themselves yet, she argued, because a strong dollar and falling oil and import prices are placing temporary downward pressure on consumer prices. As those headwinds diminish, she predicted, inflation will gradually rise.
Assuming that my reading of the data is correct and long-run inflation expectations are in fact anchored near their pre-recession levels, what implications does the preceding description of inflation dynamics have for the inflation outlook and for monetary policy?
This framework suggests, first, that much of the recent shortfall of inflation from our 2 percent objective is attributable to special factors whose effects are likely to prove transitory. As the solid black line in figure 8 indicates, PCE inflation has run noticeably below our 2 percent objective on average since 2008, with the shortfall approaching about 1 percentage point in both 2013 and 2014 and more than 1-1/2 percentage points this year. The stacked bars in the figure give the contributions of various factors to these deviations from 2 percent, computed using an estimated version of the simple inflation model I just discussed. As the solid blue portion of the bars shows, falling consumer energy prices explain about half of this year's shortfall and a sizable portion of the 2013 and 2014 shortfalls as well. Another important source of downward pressure this year has been a decline in import prices, the portion with orange checkerboard pattern, which is largely attributable to the 15 percent appreciation in the dollar's exchange value over the past year. In contrast, the restraint imposed by economic slack, the green dotted portion, has diminished steadily over time as the economy has recovered and is now estimated to be relatively modest.31 Finally, a similarly small portion of the current shortfall of inflation from 2 percent is explained by other factors (which include changes in food prices); importantly, the effects of these other factors are transitory and often switch sign from year to year.
Although an accounting exercise like this one is always imprecise and will depend on the specific model that is used, I think its basic message--that the current near-zero rate of inflation can mostly be attributed to the temporary effects of falling prices for energy and non-energy imports--is quite plausible. If so, the 12-month change in total PCE prices is likely to rebound to 1-1/2 percent or higher in 2016, barring a further substantial drop in crude oil prices and provided that the dollar does not appreciate noticeably further.
To be reasonably confident that inflation will return to 2 percent over the next few years, we need, in turn, to be reasonably confident that we will see continued solid economic growth and further gains in resource utilization, with longer-term inflation expectations remaining near their pre-recession level. Fortunately, prospects for the U.S. economy generally appear solid. Monthly payroll gains have averaged close to 210,000 since the start of the year and the overall economy has been expanding modestly faster than its productive potential. My colleagues and I, based on our most recent forecasts, anticipate that this pattern will continue and that labor market conditions will improve further as we head into 2016.
The labor market has achieved considerable progress over the past several years. Even so, further improvement in labor market conditions would be welcome because we are probably not yet all the way back to full employment. Although the unemployment rate may now be close to its longer-run normal level--which most FOMC participants now estimate is around 4.9 percent--this traditional metric of resource utilization almost certainly understates the actual amount of slack that currently exists: On a cyclically adjusted basis, the labor force participation rate remains low relative to its underlying trend, and an unusually large number of people are working part time but would prefer full-time employment. Consistent with this assessment is the slow pace at which hourly wages and compensation have been rising, which suggests that most firms still find it relatively easy to hire and retain employees.
Reducing slack along these other dimensions may involve a temporary decline in the unemployment rate somewhat below the level that is estimated to be consistent, in the longer run, with inflation stabilizing at 2 percent. For example, attracting discouraged workers back into the labor force may require a period of especially plentiful employment opportunities and strong hiring. Similarly, firms may be unwilling to restructure their operations to use more full-time workers until they encounter greater difficulty filling part-time positions. Beyond these considerations, a modest decline in the unemployment rate below its long-run level for a time would, by increasing resource utilization, also have the benefit of speeding the return to 2 percent inflation. Finally, albeit more speculatively, such an environment might help reverse some of the significant supply-side damage that appears to have occurred in recent years, thereby improving Americans' standard of living.
Consistent with the inflation framework I have outlined, the medians of the projections provided by FOMC participants at our recent meeting show inflation gradually moving back to 2 percent, accompanied by a temporary decline in unemployment slightly below the median estimate of the rate expected to prevail in the longer run. These projections embody two key judgments regarding the projected relationship between real activity and interest rates. First, the real federal funds rate is currently somewhat below the level that would be consistent with real GDP expanding in line with potential, which implies that the unemployment rate is likely to continue to fall in the absence of some tightening. Second, participants implicitly expect that the various headwinds to economic growth that I mentioned earlier will continue to fade, thereby boosting the economy's underlying strength. Combined, these two judgments imply that the real interest rate consistent with achieving and then maintaining full employment in the medium run should rise gradually over time. This expectation, coupled with inherent lags in the response of real activity and inflation to changes in monetary policy, are the key reasons that most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective.
By itself, the precise timing of the first increase in our target for the federal funds rate should have only minor implications for financial conditions and the general economy. What matters for overall financial conditions is the entire trajectory of short-term interest rates that is anticipated by markets and the public. As I noted, most of my colleagues and I anticipate that economic conditions are likely to warrant raising short-term interest rates at a quite gradual pace over the next few years. It's important to emphasize, however, that both the timing of the first rate increase and any subsequent adjustments to our federal funds rate target will depend on how developments in the economy influence the Committee's outlook for progress toward maximum employment and 2 percent inflation.
The economic outlook, of course, is highly uncertain and it is conceivable, for example, that inflation could remain appreciably below our 2 percent target despite the apparent anchoring of inflation expectations. Here, Japan's recent history may be instructive: As shown in figure 9, survey measures of longer-term expected inflation in that country remained positive and stable even as that country experienced many years of persistent, mild deflation.34 The explanation for the persistent divergence between actual and expected inflation in Japan is not clear, but I believe that it illustrates a problem faced by all central banks: Economists' understanding of the dynamics of inflation is far from perfect. Reflecting that limited understanding, the predictions of our models often err, sometimes significantly so. Accordingly, inflation may rise more slowly or rapidly than the Committee currently anticipates; should such a development occur, we would need to adjust the stance of policy in response.
Considerable uncertainties also surround the outlook for economic activity. For example, we cannot be certain about the pace at which the headwinds still restraining the domestic economy will continue to fade. Moreover, net exports have served as a significant drag on growth over the past year and recent global economic and financial developments highlight the risk that a slowdown in foreign growth might restrain U.S. economic activity somewhat further. The Committee is monitoring developments abroad, but we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy. That said, in response to surprises affecting the outlook for economic activity, as with those affecting inflation, the FOMC would need to adjust the stance of policy so that our actions remain consistent with inflation returning to our 2 percent objective over the medium term in the context of maximum employment.
Given the highly uncertain nature of the outlook, one might ask: Why not hold off raising the federal funds rate until the economy has reached full employment and inflation is actually back at 2 percent? The difficulty with this strategy is that monetary policy affects real activity and inflation with a substantial lag. If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. In addition, continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability. For these reasons, the more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data.
Conclusion
To conclude, let me emphasize that, following the dual mandate established by the Congress, the Federal Reserve is committed to the achievement of maximum employment and price stability. To this end, we have maintained a highly accommodative monetary policy since the financial crisis; that policy has fostered a marked improvement in labor market conditions and helped check undesirable disinflationary pressures. However, we have not yet fully attained our objectives under the dual mandate: Some slack remains in labor markets, and the effects of this slack and the influence of lower energy prices and past dollar appreciation have been significant factors keeping inflation below our goal. But I expect that inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return to maximum employment and long-run inflation expectations remain well anchored. Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change.
emphasis added
The Federal Reserve Bank of Kansas City released the September Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity declined at a similar pace as in previous months, while expectations for future activity dropped considerably.The recent decline in the Kansas City region manufacturing has probably been mostly due to lower oil prices, although respondents also blame the strong dollar.
“Survey respondents continued to blame a strong dollar and weak energy activity for declining factory activity”, said Wilkerson. “This month their future outlook also weakened after holding steady in recent months.”
...
Tenth District manufacturing activity declined at a similar pace as in previous months, while expectations for future activity dropped considerably. Producers continued to cite weak oil and gas activity along with a strong dollar as key reasons for the sluggish activity. Most price indexes fell from the previous survey.
The month-over-month composite index was -8 in September, largely unchanged from -9 in August and -7 in July ... employment index inched up from -10 to -7, and the new orders for exports index also moved slightly higher.
emphasis added
The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for August 2015. In the past month, the indexes increased in 41 states, decreased in five, and remained stable in four, for a one-month diffusion index of 72. Over the past three months, the indexes increased in 44 states, decreased in five, and remained stable in one, for a three-month diffusion index of 78.Note: These are coincident indexes constructed from state employment data. An explanation from the Philly Fed:
The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.
Click on graph for larger image.
Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession, and is mostly green now.
The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), dropped 0.4 percent in September, following a revised 0.2 percent decline in August. The pattern shows a marked deceleration, even reversal, over second quarter activity. Data is measured on a three-month moving average (3MMA). Accounting for adjustments, the CAB remains up 1.2 percent over this time last year, also a deceleration of annual growth. In September 2014, the CAB logged a 4.1 percent annual gain over September 2013. It is unlikely that growth will pick up through early 2016. ...
Applying the CAB back to 1919, it has been shown to provide a lead of two to 14 months, with an average lead of eight months at cycle peaks as determined by the National Bureau of Economic Research. ...
“Business activity cooled off in September,” said ACC Chief Economist Kevin Swift. “Chemical, other equity, and product prices all continued to suffer, signaling a likely slowdown in broader economic activity,” he added. “One bright spot continues to be plastic resins, particularly those used in light vehicles. Sales of light vehicles are on track to record a banner year, the best since 2000,” he said. Light vehicles are a key end use market for chemistry, containing nearly $3,500 of chemistry per vehicle.
Also at play is the ongoing decline in U.S. exports. According to Swift, global trade is lagging behind both global industrial production and broader economic activity with deflationary forces at play. With this month’s data, the CAB is signaling slower gains in U.S. business activity into early 2016.
emphasis added
Click on graph for larger image.
U.S. house prices rose in July, up 0.6 percent on a seasonally adjusted basis from the previous month, according to the Federal Housing Finance Agency (FHFA) monthly House Price Index (HPI). The previously reported 0.2 percent change in June remains unchanged.
The FHFA HPI is calculated using home sales price information from mortgages sold to, or guaranteed by, Fannie Mae and Freddie Mac. From July 2014 to July 2015, house prices were up 5.8 percent. The U.S. index is 1.1 percent below its March 2007 peak and is roughly the same as the November 2006 index level.
Click on graph for larger image.
