The Conference Board LEI for the U.S. increased for the fourth consecutive month in May. Positive contributions from all the financial and labor components of the leading economic index more than offset the large negative contribution from building permits. In the six-month period ending May 2014, the LEI increased 2.3 percent (about a 4.7 percent annual rate), slower than the growth of 3.5 percent (about a 7.2 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators remained widespread.
Recent data suggest the economy is finally moving up from a 2 percent growth trend to a more robust expansion,” said Ken Goldstein, Economist at The Conference Board. “The CEI shows the pace of economic activity continued to gain traction in May, while the trend in the LEI remains positive. Going forward, the biggest challenge is to sustain the rise in income growth which will drive consumption.
The no-recession indicator, courtesy of Doug Short:
Philly Fed report for the month of June came in better than expected (17.8 vs 14.0), hitting its highest level since last September. It was also the fourth straight month of improvement in the index and the fourth straight month it came in better than expected. Recent improvement in this indicator certainly supports the notion that harsh winter weather was behind the sluggish data earlier this year.
The table to the right provides a breakdown of each of the components in the Philly Fed report. Of those nine components, just two declined this month while seven increased. Unfortunately, one of the largest increases in this month’s report was in Prices Paid which spiked to 35.0 from last month’s reading of 23.0. This is the highest monthly reading since July 2011, and the first time the Prices Paid index has seen double digit increases for two straight months since June 2009. In fact, it is only the third time in the history of the index going back to 1980 that we have seen two straight double-digit increases in the Prices Paid component. This is probably not the type of news the Fed wanted to hear after this week’s CPI data.
The Mortgage Bankers Association yesterday lowered its new and existing home sales forecast for 2014 to 5.28 million — a decrease of 4.1 percent that would be the first annual drop in four years. The industry group also cut its prediction on mortgage lending volume for purchases to $751 billion, an 8.7 percent decline and the first retreat in three years.
Bullish forecasts in early 2014 from MBA,Fannie Mae and Freddie Mac have been sideswiped by rising home prices and an economy that isn’t producing higher paying jobs. The share of Americans who said they planned to buy a home in the next six months plunged to 4.9 percent last month from 7.4 percent at the end of 2013, the highest in records going back to 1964, according to the Conference Board, a research firm in New York. (…)
The pullback by the largest investors, who raised about $20 billion to purchase as many as 200,000 properties in the past two years, has also cooled the market.
With home prices up 31 percent since a post-bubble low in January 2012 and bargains harder to find, Blackstone Group LP has reduced its pace of buying by 70 percent since last year. The firm is focusing its acquisitions for rentals on five markets — Seattle, Atlanta and the Florida cities of Tampa, Orlando and Miami, Jonathan Gray, the firm’s global head of real estate, said in March. (…)
The Federal Housing Finance Agency, which oversees Freddie Mac and Fannie Mae, in May announced new rules to encourage lenders to relax credit standards. The rules are designed to reduce the risk that lenders will have to buy back soured mortgages due to underwriting errors — an issue that has kept standards tight.
The average credit score for borrowers in May who bought homes was 755 on a scale of 300 to 850, according to a report this week from Ellie Mae, a loan processor in Pleasanton, California. That compared with 756 in December, the last time it was higher.
St. Louis Fed Financial Stress Gauge Hits a Record Low Fear is not a factor for financial markets right now. According to a weekly index produced by the Federal Reserve Bank of St. Louis, market stress hit a record low reading in the week ending on June 13.
According to a weekly index produced by the Federal Reserve Bank of St. Louis, market stress hit a record low reading in the week ending on June 13. The bank said its Financial Stress Index came in at -1.303 for the week, after standing at -1.264 the prior week.
The latest decline was driven by a broad array of forces, led by very low bond market volatility and a decline in inflation expectations over the next decade. During the height of the financial crisis over 2008 and 2009, the bank’s index surged and was above a 6 reading for a time. The St. Louis Fed says a zero reading indicates “normal” financial conditions: negative numbers denote below-average stress, and positive numbers indicate more stress than normal.
For the same price, here’s the Cleveland Fed Financial Stress Index:
So, no need to stress on equity valuations:
Janet Yellen says share valuations remain within “historical norms”.
Two words: “irrational exuberance”.
This chart shows the level of the forward price/earnings ratio on the S&P 500, with the current level marked by the blue line, and Alan Greenspan’s famous comment in 1996 highlighted.
(BTW, interesting post on CAPE, returns etc.:Andrew Smithers Valuing non-US markets)
But there are reasons to stress in credit markets:
Reflecting above-average confidence, the high yield bond spread recently narrowed to 322 bp for its thinnest band since mid-July 2007. Nevertheless, history clearly doubts the durability of such very thin spreads. For example, the high yield bond spread’s month-long average has been greater than 322 bp nearly 91% of the time since January 1983. Thus, it’s hardly surprising that the high yield spread tends to widen by more than 100 bp in the 12 months following a 322 bp gap.
Furthermore, in view of how June’s composite speculative grade bond yield is on track to set a record low month-long average, the credit market’s confidence in the benign outlook for high yield seems all the more excessive. Not only have high yield spreads been wider 90.7% of the time, but the average speculative grade bond yield has been greater than June’s likely average for 99.7% of the sample’s 378 monthly observations. The latter underscores how important the avoidance of substantially higher Treasury bond yields is to the corporate bond market.
The record shows that credit cycle downturns tend to be preceded by extraordinarily narrow high yield bond spreads. Just several months prior to August 2007’s start to the latest credit cycle downturn, the high yield bond spread averaged merely 281 bp during 2007’s second quarter. Back then, few, if any, dared to predict that the spread would swell to 513 by 2007’s final quarter.
Similarly, a credit cycle downturn emerged in August 1998 notwithstanding how the high yield bond spread’s three-month average had dropped to a speciously upbeat 330 bp during as of April 1998. (Figure 1.) (…)
Careful out there! You now know the odds are against you.
The Asset-Rich, Income-Poor Economy
Kevin Warsh and Stanley Druckenmiller in the WSJ:
(…) The aggregate wealth of U.S. households, including stocks and real-estate holdings, just hit a new high of $81.8 trillion. That’s more than $26 trillion in wealth added since 2009. No wonder most on Wall Street applaud the Fed’s unrelenting balance-sheet recovery strategy. It’s great news for those households and businesses with large asset holdings, high risk tolerances and easy access to credit.
Yet it provides little solace for families and small businesses that must rely on their income statements to pay the bills. About half of American households do not own any stocks and more than one-third don’t own a residence. Never mind the retirees who are straining to make the most of their golden years on bond returns.
The Fed’s extraordinary tools are far more potent in goosing balance-sheet wealth than spurring real income growth. The most recent employment report reveals the troubling story for Main Street. While 217,000 jobs were created in May, incomes for most Americans remain under stress, with only modest improvements in hours worked and average hourly earnings. (…)
Balance-sheet wealth is sustainable only when it comes from earned success, not government fiat. Wealth creation comes from strong, sustainable growth that turns a proper mix of labor, capital and know-how into productivity, productivity into labor income, income into savings, savings into capital, capital into investment, and investment into asset appreciation.
The country needs an exit from the 2% growth trap. There are no short-cuts through Fed-engineered balance-sheet wealth creation. The sooner and more predictably the Fed exits its extraordinary monetary accommodation, the sooner businesses can get back to business and labor can get back to work.
What is the difference between 2% growth and 3% growth in the U.S. economy? As the late economist Herb Stein recounted, the answer is 50%. And the real difference is one between a balance-sheet recovery that helps the well-to-do and an income-statement recovery that advances the interests of all Americans.