So Cal home sales, Carter and the inflation of the 70’s

Up a bit vs March last year so no boom yet:

CoreLogic (formerly DataQuick data): SoCal sales up 5.0% Year-over-year

By Bill McBride

April 20 (Calculated Risk) — CoreLogic released the Southern California report today for March (CoreLogic acquired DataQuick).

The data shows 18,156 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in March.

That was up 35.6% from 13,650 sales in February, and up 5.0% from 17,638 sales in March last year.

A narrative about how Carter’s deregulation of natural gas in 1978 (not ‘monetary policy’)is what broke the ‘great inflation’ that was likewise caused by the prior rise in the price of oil. The report may be ‘over friendly’ to Carter, but it was the substitution of natural gas for oil in public utilities and other businesses that dislodged OPEC’s pricing power. Note the supply cuts as Saudia Arabia and Iran, shown here, attempted to set hold prices at over $30 as substitution reduced demand:
oil-production

Miller Center – Jimmy Carter

Energy Policy Success

Carter’s main achievement involved energy policy, though he would receive little credit for it during his term. Despite the lip service paid by American presidents to reducing energy dependence, U.S. oil imports had shot up 65 percent annually since 1973. In 1976 the nation was consuming one-quarter of all Organization of Petroleum Exporting Countries (OPEC) production. The U.S. remained wasteful in energy use, with consumption per capita 2.3 times the average for nations in the European Economic Community and 2.6 times Japan’s. Carter set out to reduce this dependence.

The president got Congress to pass the Emergency Natural Gas Act, which would authorize the national government to allocate interstate natural gas. He created a Department of Energy to regulate existing energy suppliers and fund research on new sources of energy, particularly sustainable (wind and solar power) and ecologically sound sources. His Energy Security Act created the U.S. Synthetic Fuels Corporation, which would provide $20 billion in joint ventures with private industry. Carter signed his first energy package into law on November 9, 1978. The deregulation of oil and natural gas prices that resulted would lead to a vast increase in the supply of energy in the 1980s, and consequently a lowering of prices.

During Carter’s term, however, the actions of the OPEC oil cartel (foreign oil producers) resulted in an increase in oil prices, from $13 a barrel to over $34. With America so dependent on oil, this huge price increase resulted in a run-up in inflation. Carter asked Congress to accelerate stockpiling 500 million barrels of crude oil in a national security reserve, setting target date by end of 1980 instead of 1982 (the deadline set by the Ford administration). The administration also developed new conservation measures that would sharply reduce industry’s use of fuels, as well as automobile mileage standards. Strip mining would now be regulated by the Surface Mining Control and Reclamation Act, a victory for environmentalists.

Carter had other successes in energy policy, particularly in nuclear energy policy, in which he was an expert. He got Congress to abolish the powerful Joint Committee on Atomic Energy, a step that would make it easier to block breeder reactors and move toward light-water reactors of the kind favored by the administration. Carter won his route for a soon to be constructed oil pipeline in Alaska. He killed funding for the Clinch River Breeder Reactor, because the plutonium reactor technology would increase the risk of nuclear proliferation if adopted elsewhere in the world. Instead, Congress authorized and funded a shutdown of the reactor.

By April 1980, he had gotten much of his second energy package through, including a Crude Oil Windfall Profits Tax (with revenues designated for the general Treasury but not for specific energy projects), which would expire in 1993 or before, if the full amount of $227 billion had been collected. But there were two major defeats: Congress overrode a presidential veto of a bill that Congress had passed repealing a $4.62 per barrel oil import fee—the first time in twenty-eight years that a Congress had overridden a veto by a president from the majority party. It also defeated the Energy Mobilization Board that Carter had proposed to cut through “red tape” in developing new sources of energy.

While Americans had to endure long gas lines during the summer of 1979 and higher prices at the pump—effects of the Iranian revolution of that same year— Carter’s program by and large worked. Consumption of foreign oil did go down, from 48 percent when Carter took office to 40 percent in 1980, with a reduction of 1.8 million barrels a day. When Carter left office there were high inventories of oil and a surplus of natural gas, delivered by a more rational distribution system. There was greater oil exploration than before, leading eventually to an oil glut and a drop in prices-which Carter’s Department of Energy had not predicted. Between 1980 and 1985, domestic production would increased by almost 1 million barrels a day, while imports of crude oil and petroleum products declined from 8.2 to 4.5 million barrels a day. His goal of reducing U.S. dependency on foreign sources succeeded, at least temporarily.

Saudi output

Saudis set price and let their clients buy all they want at the price settings, so their output continually adjusts to equal global demand net of all others producers.

What’s clear is that said net global demand has fluctuated very little, obviating the notion that the price collapse was somehow a function of a collapse of demand.

saudi-output-march

Chicago Fed, Existing home sales

More bad new, and, again consumption down even with lower gas prices:

Chicago Fed National Activity Index
chicago-fed-feb-table-2
Highlights
The economy has indeed gotten off to a slow start this year, confirmed by the national activity index which came in at minus 0.11 in February vs minus 0.10 in January. The 3-month average is now in negative ground, at minus 0.08 in February vs plus 0.26 in January.

The weakest component in February is for personal consumption & housing, at minus 0.17. The component for production-related indicators, at minus 0.07, is the second weakest. These readings offer tangible confirmation that both housing and manufacturing are pulling down economic growth.

But employment, importantly, continues to be the bright spot for the economy, at plus 0.11 with sales/orders/inventories fractionally positive at plus 0.02.

Also less than expected and depressed:

Existing Home Sales
existing-home-sales-feb
Highlights
Existing home sales bounced 1.2 percent higher in February to a 4.88 million annual pace which is above January’s 4.82 million but still isn’t that strong. The year, in fact, opens with the two weakest months for existing home sales since April last year. The year-on-year rate, however, is showing strength, at plus 4.7 percent in February for the strongest reading since October 2013.

The data are split between single-family homes and condos with the single-family component in front which is encouraging, up 1.4 percent to a 4.10 million pace and a year-on-year gain of 5.9 percent. The condo component was unchanged in February at 0.540 million for a year-on-year minus 3.6 percent.

The South is by far the largest region for total sales and rose 1.9 percent in February for a year-on-year plus 6.0 percent. The West and Midwest are the next largest regions with the Midwest unchanged in the month and up 4.9 percent year-on-year with the West up 1.9 percent in February for a year-on-year gain of 2.8 percent. February sales fell 6.5 percent in the Northeast, which lags in the distance in size. The year-on-year rate for the Northeast is plus 3.6 percent.

Existing homes on the market are still on the scarce side, at 4.6 months of supply and unchanged from January. A year ago, the rate was 4.9 months. Prices firmed in the latest report, up 2.5 percent to a median $202,600 and a respectable 7.5 percent ahead of a year ago. Note, however, that price data in this report are subject to volatility. Still the year-on-year reading is the best since February last year.

The housing market is soft though there are some signs of life in this report including the month’s gain for single-family sales. New home sales, like sales of existing homes, have also been soft and a decline is expected in tomorrow’s data.
existing-home-sales-feb-graph

Oil Price Drop Hurts Spending on Business Investments

By Nick Timiraos

March 22 (WSJ) — Business capital spending rose 6% last year due to gains from a broad base of U.S. industries. The drag from energy this year could cut that growth rate in half in 2015, according to Goldman Sachs. Moreover, equity analysts at the bank estimate capital spending globally by energy companies in the S&P 500 will fall 25%. Already, energy companies in the S&P 500 have announced about $8.3 billion in spending cuts. Excluding energy, capital spending will grow 4% for S&P 500 companies this year, says Citi.

Think of it this way- portfolios and speculators sold euro for dollars last year to people who sold dollars to buy euro to then make purchases from the EU, as the EU ran a trade surplus and the US ran a trade deficit.

So those euro that were sold were ‘reabsorbed’ by euro exporters who used them to pay expenses domestically, etc. as tight fiscal policy in the EU continued to keep euro in short supply.

That means the euro ‘aren’t there’ to be repurchased should the portfolios and speculators attempt to rebalance until they drive the euro high enough to reverse the trade flows.

;)

mtg purchase apps, architect billings index, oil debt comments, Atlanta Fed GDP forecast

Still no sign of life here:

MBA Mortgage Applications
mba-3-13-table
Highlights
Despite low mortgage rates, demand for mortgage purchase applications continues to be weak, down 2.0 percent in the March 13 week for a year-on-year rate of only plus 1.0 percent. Refinance applications fell 5.0 percent in the week. Rates moved lower in the week with the average 30-year mortgage for conforming loans ($417,000 or less) down 2 basis points to 3.99 percent.
purch-app-index-10yr

Not looking good here either:

Washington, D.C. – March 18, 2015 – After its first negative score in ten months, the Architecture Billings Index (ABI) showed a nominal increase in design activity in February, and has been positive ten out of the past twelve months. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the February ABI score was 50.4, up slightly from a mark of 49.9 in January. This score reflects a minor increase in design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 56.6, down from a reading of 58.7 the previous month.
abi-feb

More evidence this was the source of credit expansion, now gone, that picked up the slack when taxes were raised and spending cut in 2013. BIS chart on left shows growth of energy sector debt that offset the 2013 tax hikes and spending cuts.

The subsequent cutbacks explains the sudden collapse of US GDP:

Atlanta Fed GDPnow:

atl-qdp-now-3-18

Unless some other agents steps up to spend more than its income GDP growth will not recover, and, as in prior cycles, the ‘automatic fiscal stabilizers’ will do their thing to reduce tax collections and increase transfer payments, thereby increasing the federal deficit in the ensuing slowdown until the deficit gets large enough reverse the downturn and support the next growth cycle.

labor market index, consumer credit, China trade, BIS on oil and debt

This is the Fed’s new indicator:

Labor Market Conditions Index
lm-conditions
Definition
The U.S. labor market is large and multifaceted. Often-cited indicators such as the unemployment rate or payroll employment, measure a particular dimension of labor market activity. It is not uncommon for different indicators to send conflicting signals about labor market conditions. The Fed’s research department has created a labor market conditions index (LMCI) based on 19 labor market indicators. It is not an official report. However, the monthly publication is carefully noted by Fed Chair Janet Yellen and has gained market attention.

Misleading at best as the two month average was just that, average:

Consumers swipe way to largest increase in revolving credit since March (WSJ) Total outstanding consumer credit expanded at a 5.37% seasonally adjusted annual rate to $3.31 trillion in December. That was a slight acceleration from November’s 4.92% gain. Revolving credit grew at a 7.85% pace in December, a turnaround from November’s 1.28% decline. December’s expansion in revolving credit was the largest since March. Nonrevolving credit, such as auto and student loans, grew at a 4.46% pace during the month, the smallest monthly increase since October 2011. November’s nonrevolving balances grew 7.21%. Revolving credit tends to be volatile, but nonrevolving credit has consistently expanded since August 2011.

No acceleration in growth whatsoever:
cc-2-9-1
The revolving is volatile but doesn’t look to be going anywhere:
cc-2-9-2

cc-2-9-3

January data always suspect but sometimes indicative:

China’s imports slump, capping dismal January trade performance (Reuters) China exports fell 3.3 percent in January from year-ago levels while imports tumbled 19.9 percent. Last year the new year holiday idled factories and financial markets for a week in January, but this year the holiday comes in late February and January was a full month of business as usual. Coal imports dropped nearly 40 percent to 16.78 million tonnes, down from December’s 27.22 million tones. Crude oil imports slid by 7.9 percent in volume terms. While exports to the United States rose by 4.8 percent year-on-year to $35 billion, exports to the European Union slid 4.6 percent to $33 billion in the same period. Exports to Hong Kong, South Korea and Japan were also down, with exports to Japan slumping over 20 percent.

China’s Exports Post Surprise Drop in January (WSJ) Exports fell 3.3% in January from a year earlier, a sharp deterioration from December’s 9.7% rise. In January, exports to Southeast Asia and the U.S. were stronger, while shipments to the European Union, Japan and Hong Kong were all weaker in dollar terms. In a statement accompanying the trade data, China’s customs authorities said that a survey showed weaker confidence among exporters for the fourth consecutive month. “This shows that exports will be facing downward pressure in the first quarter as well as the beginning of the second quarter,” the statement said. Year-ago data for January may have been inflated by over-invoicing by exporters. Exports climbed nearly 11% year over year in January last year.

This is a lot more threatening than I had been led to believe:

Box: Oil and debt

Note the rate of energy debt growth over the last few years, and that these charts don’t include all energy related debt. Looks to have been about 1% of GDP and added about that much plus ‘multipliers’, filling in for the tax hikes and sequesters of 2013.

And now it’s over.

Two things as price fell in half from $100/barrel.

1. Credit expansion slows and maybe reverses.

2. The value of the collateral behind the loans has been halved, which is highly problematic for the lenders.
cc-2-9-4
cc-2-9-5
These are just initial BIS findings. The full report comes out in March.

And not to forget there’s now a new King of Saudia Arabia who decides what the price will be.

Saudi discounts altered

Remember when they reduced some of their discounts I suggested they may be stabilizing prices?

Now they are increasing a discount, indicating they are trying to soften prices?

Saudis Deepen Asia Light-Oil Discount to Low in Market Fight

By Anthony DiPaola and Mark Shenk

Feb 6 — State-owned Saudi Arabian Oil Co. lowered its official selling price for Arab Light crude by 90 cents to $2.30 a barrel less than Middle East benchmarks, the company said in an e- mailed statement Thursday. That’s the lowest in at least the 14 years since Bloomberg began gathering data.

“This is further evidence that they are hellbent on protecting their market share in China,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $2.4 billion, said by phone Thursday. “They are trying to stay competitive in what is the biggest area of growth.”

Middle Eastern producers are increasingly competing with cargoes from Latin America, Africa and Russia for buyers in Asia. China was the world’s second-biggest crude consumer after the U.S. in 2014, according to International Energy Agency data.

Oil prices have collapsed since the Organization of Petroleum Exporting Countries decided to maintain its output target on Nov. 27, fanning speculation that Saudi Arabia and other members were determined to let North American shale drillers and other producers share the burden of reducing an oversupply.

Raised Premium

Brent crude, the benchmark for more than half of the world’s oil, rose as much as $2.31 a barrel, or 4.1 percent, to $58.88 on the London-based ICE Futures Europe exchange and traded at $58.47 at 10:53 a.m. local time. West Texas Intermediate, the U.S. benchmark, rose $1.78 to $52.26 a barrel on the New York Mercantile Exchange.

Saudi Aramco, as the producer is known, cut differentials on each of the four other grades it sells to Asia, its largest market, and raised them to the U.S., northwest Europe and the Mediterranean region, according to Thursday’s statement. The discount on Extra Light crude to Asia also dropped to a low of at least 14 years and Arab Medium was cut to within 10 cents of its record discount for buyers in Asia.

“Asia is still the market that they want to keep, so they are pricing to keep the crude attractive,” Olivier Jakob, managing director of Zug, Switzerland-based researcher Petromatrix GmbH, said by phone Friday. Saudi Aramco increased pricing to the Mediterranean region where “demand has been good because refining margins are good,” he said.

Refiners and traders in Asia had expected Saudi Aramco to cut Arab Light crude by $1 a barrel, according to the median estimate of eight buyers in a Bloomberg survey this week.

Persian Gulf oil producers sell most of their crude under long-term contracts to refiners. Most of the region’s state oil companies price their oil at a premium or discount, also known as the differential, to a benchmark. For Asia the benchmark is the average of Oman and Dubai oil grades.

China Market

Saudi Arabia’s share among the top three suppliers to China fell to 37 percent in December, from 44 percent in October, as the country lost ground to Angola and Russia, according to Julian Lee, an oil strategist for Bloomberg First Word. In the U.S., Saudi Aramco is in contention with Mexico to be the second-largest supplier behind Canada, Lee said.

The kingdom’s state oil producer raised the differentials on all crude it will ship to the U.S. next month by 15 cents a barrel, pushing the premium for Arab Light to 45 cents more than the U.S. Gulf Coast benchmark.

Saudi Aramco took the oil market by surprise when it trimmed its November crude pricing to five-year lows for Asia, signaling the biggest producer in OPEC would defend its market share rather than seek to prop up prices.

“The U.S. used to be the market the Saudis were most concerned about preserving market share in, but that’s no longer the case,” O’Grady said. “China is where they see growth coming from in the decades ahead and the U.S. is also producing a greater share of the oil it needs.”

personal income/spending, labor charts and comments, ISM, construction spending, earnings chart

The mainstream assert that the drop in oil prices is an unambiguous positive for the US economy, as it’s like maybe a $200 billion tax cut for consumers. The idea is that the $ saved on oil products get spent elsewhere, increasing real spending. On the negative side they see the fall in capital expenditures as under $100 billion and hurting only a few consumers but not nearly as many as get helped.

So far the data isn’t showing this happening, at least not in a meaningful way.

What they’ve left out is that falling oil prices only shift income from sellers of oil to buyers of oil, and even nominal spending due to that shift increases only to the extent that buyers of oil spend more of they savings than sellers of oil cut back due to loss of income. Additionally, capex reductions are from lack of potential profits, and not from shifting incomes. Putting all this together there is the reasonable possibility that the drop in oil prices turns out to be an unambiguous negative.

Personal Income and Outlays
eco-release-2-2-1
Highlights
The consumer sector has been volatile on a monthly basis for spending while income growth has been steadier. Meanwhile, inflation has been weak. Personal income grew 0.3 percent in December after advancing 0.3 percent in November. Market expectations were for a 0.3 percent rise. December matched expectations. The wages & salaries component increased a modest 0.1 percent, but followed a jump of 0.6 percent the prior month.

Personal spending decreased 0.3 percent, following a boost of 0.5 percent in November. Analysts projected a dip of 0.2 percent for December.

Durables fell 1.2 percent on a swing in auto sales, following a rise of 1.8 percent in November. Nondurables, tugged down by gasoline prices, decreased 1.3 percent after decreasing 0.3 percent the prior month. Services edged up 0.1 percent, following a 0.5 percent spike in November.

PCE inflation remained weak-largely due to lower energy costs. Headline inflation decreased 0.2 percent on a monthly basis, following a drop of 0.2 percent in November. Forecasts were for a 0.3 percent drop. Core PCE inflation was flat in both December and November. December matched expectations.

On a year-ago basis, headline PCE inflation decelerated to 0.7 percent in December from 1.2 percent the prior month. Year-ago core inflation posted at 1.3 percent in December compared to 1.4 percent in November. Both series remain below the Fed goal of 2 percent year-ago inflation.
eco-release-2-2-2

Note how after tax real income has had two shifts lower and isn’t growing fast enough to ‘catch up.’
eco-release-2-2-3
And nominal after tax income growth has actually slowed recently:
eco-release-2-2-4
Interesting that this slowed!
eco-release-2-2-5

eco-release-2-2-6
eco-release-2-2-7
This may also show business has been ‘over hiring’?
eco-release-2-2-8
New export orders collapse- who would have thought???
;)

And import orders rose bit, also as expected from the shift in oil income.

ISM Mfg Index
eco-release-2-2-9
Highlights
ISM growth had been running hot compared to other manufacturing reports but has slowed down noticeably the last two readings. January’s composite score of 53.5 compares with a revised 55.1 in December and 57.6 in November. October was the fourth quarter’s peak at 57.9.

New orders slowed substantially in January, to 52.9 from 57.8. In contrast, November and October growth in orders was in the low 60s. Weakness in foreign demand is a key factor here as new export orders fell 2.5 points to a sub-50 49.5. This is the lowest export reading since November 2012. Total backlog orders also moved into contraction, to 46.0 for a 6.5 point loss.

Production remained strong in part because of the working down of backlogs. A big headline is prices paid which fell 3.5 points to 35.0 which is very low, the lowest reading since April 2009.

This report is a concern, reflecting weak foreign markets and also troubles in the oil patch. The ISM wasn’t the first to signal slowing but it now heavily underscore prior indications.
eco-release-2-2-10

The chart says it all:

Construction Spending
eco-release-2-2-11
Highlights
Construction outlays rebounded 0.4 percent in December after dipping 0.2 percent the month before. December was below market expectations were for a 0.6 percent gain.

December’s increase was led by public outlays which rebounded 1.1 percent after dropping 1.8 percent jump in November. Private residential spending rose 0.3 percent after edging up 0.1 percent in November. Private nonresidential construction spending eased 0.2 percent in December after a 0.8 percent rise the month before.

On a year-ago basis, total outlays were up 2.2 percent in December compared to 2.7 percent in November.

eco-release-2-2-12

eco-release-2-2-13