Archive for November 2011
Philadelphia FED Survey
My “touchstone” for economic forecasting is the quarterly Philadelphipa FED Survey of Professional Forecasters. They survey about 50 or so forecasters each quarter representing the top forecasting “shops” in the country. (The number isn’t exact, because many of the forecasters wish to remain anonymous.) Included in the mix are the usual suspects — Mark Zandi from Moody’s, Ethan Harris from BofA, Dean Maki from Barclays, Ardavan Mobasheri from AIG, Sean Snaith of U. Central Florida, and so forth. I mention these names as examples to demonstrate these are folks who span the broad array of economic perspectives, and who usually represent firms that are actually putting their “money where their mouth is.”
An additional strength of this survey is methodological — the Phily-FED reports not only the mean of the responses, but also the distribution of those responses. Thus, it’s very helpful to see when individual forecasts are highly coalesced around a central tendency, or if there is a great degree of dispersion in the estimates.
Bottom line — the current projections for 2012 and 2013 are now weaker than they were three months ago (in the previous survey). While a double-dip recession doesn’t appear to be in the offing, the panelists expect real GDP growth to end up at 1.8% for 2011, 2.4% in 2012, and 2.7% in 2013. While 2011 will end slightly rosier than previously forecast, the numbers for out-years are about 0.2% lower than previously expected. The outlook for 2014 is also less than previously expected.
Courtesy Philadelphia FED Quarterly Survey of Professional Forecasters
These downward revisions in GDP growth come primarily from “…upward revisions to unemployment and downward revisions to job growth.” Specifically, unemployment is expected to end this year right at 9.0%, and is expected to fall to 8.8% next year, 8.5% ini 2013, and 7.8% in 2014. The prior survey had a fair amount dispersion in estimates for end-of-year 2011 unemployment, with over 30% of respondents optimistically thinking that unemployment could end the year between 8.5% and 8.9%. That number has now dropped to about 20%, and about 75% of respondents now believe that unemployment will end this year between 9.0% and 9.4%.
Courtesy Philadelphia FED Quarterly Survey of Professional Forecasters
Intriguingly, the central tendency of next year’s forecast didn’t change much from the last survey to this one, with between 30% – 40% of respondents thinking that unemployment would hover between 8.5% and 8.9% next year. The real change in the forecast came in the next-lower and next-higher brackets of estimates, which nearly reversed themselves from last survey to this survey. A quarter ago, about 25% of respondents thought that unemployment would end up around 8.6% in 2012, and only about 20% projected 9.2%. Today, only about 15% forecast the lower range, and about 32% are opting for the higher range.
Finally, while forecasts of inflation over the next ten years is still nearly flat-lined around 2.5%, there have been slight up-tics in forecasts ever since mid-2010. The following chart shows the general sentiment among forecasters, as well as the “track” of their forecasts over the past 20 years, which as you can see is pretty neatly distributed in a tight range. In general, inflation has not been a major issue in over a decade, but it is still worth tracking.
Courtesy Philadelphia FED Quarterly Survey of Professional Forecasters
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Now for a little good news….
Globe Street has a great piece about the self storage market, which is doing very nicely lately. Top firms in the fiele had revenue growth of 4% to 5.8% in the 3rd quarter, with net operating income growing 7.3% to 8.6%. ranged as high as 91.7% at Public Storage. The article properly notes that this sector is now joining apartments in strong, positive territory. Overall REIT share performance, as noted in the chart below, certainly underscores this (YTD as of October 2011, data courtesy NAREIT).
While the article correctly notes the strength in this market segment, it doesn’t connect the dots vis-a-vis why. Some of this is obvious, but it bears noting due to the very signficant long-range implications. The more-or-less simultaneous strength of the apartment sector and the self storage sector isn’t coincidental — the popularity of apartments for households which WOULD HAVE been in the owner-occupied housing market is driving the need for self storage. Anecdotal evidence of late suggests that the trend is toward smaller apartments — studios, efficiencies, and one-bedrooms seem to be in higher demand lately, although I haven’t seen this formally quantified as of yet. Given that, not only is there a need for self-storage, there will also be an increased need for SMALLER self-storage units as opposed to larger ones, urban infill units (or at least units near apartment communities) and even self-storage as an adjunct to apartment communities themselves.
Long term? This market risks getting over-build whenever the housing market stabilizes. However, that seems to be several years out. In the intermediate term, one would suspect a strong demand for more units paralleling the demand for apartments.
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And yet another post about housing
With all the negative news about housing, the market may have a tendency to grasp at any straw that floats along. In today’s news, that straw is a report from the census bureau that home ownership rates — which have been declining steadily for two years, and are now at a 13-year low — seemed to reverse trend in the 3rd quarter and rise by 0.4% to 66.3%.
courtesy U.S. Census Bureau, 11/9/11
Of course, a quick read of the footnotes belies the problem with this pronouncement. First, as you can see, there’s a fair amount of cycling around long-term trends, and that’s probably what this is. Second, on a seasonally adjusted basis (which is really where the truth can be found), the increase was only 0.2%, which is statistically insignificant. Further, on a year-to-year basis, we’re still lower than where we were a year ago, which really underscores the long-term trend. I continue to believe that ownership rates will stabilize somewhere above 64%, but probably pretty close to it. At the current trend, that may take 3 – 5 years.
More importantly, though, an increase in housing demand (and prices) led us out of prior recessions, but housing is continuing to be a drag on the market following this most recent one. Unless and until the housing market doldrums stabilize, solid economic growth will elude us.
courtesy U.S. Census Bureau, 11/9/11
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Housing redux
While I’m on the subject, the Royal Instition of Chartered Surveyors (RICS), of which I’m a Fellow, publishes a great . Last week’s edition had a piece on the U.S. housing market doldrums, with a particular emphasis on the dearth of mortgage purchases (the secondary market which is vital to the liquidity of the mortgage business).
As you might guess, this important segment of the market peaked in 2005/6, and with a brief attempt at pick-up in early 2008, has been on a downward slide ever since. The index currently stands more than 60% down from the peaks of just 5 years ago. The trend continues downward, and fell 3.5% in the third quarter of this year.
Mortgage Purchase Index
They note that residential investment as a percentage of GDP currently stands at 2.2%, down from pre-recession levels of 6.6%. What’s more, the excess supply overhang will take years to absorb, according to their analysis.
The health — or lack thereof — us currently a front-burner issue for the Federal Reserve, which is now looking at the mortgage bond market as a means of helping to stimulate this anemic sector. Both FRB member Daniel Turillo and Vice Chair Janet Yellen have made public pronouncements in that direction recently.
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The housing market — Damning with faint praise
Sorry we’ve been absent for so long — it’s been a terrifically busy summer and early fall here at Greenfield. Hopefully, we’ll be back in the saddle more frequently for the rest of this year.
From an economist’s perspective, there’s plenty to talk about — Euro-zone debt crisis, job growth (or lack thereof), Federal and state debt, etc., etc., etc. My own focus is the mixed-message on the housing market, which continues in the doldrums. If you listen to the reports from the National Association of Realtors, you get some positive headlines followed by fairly depressing details. Existing home sales are better than forecasted, mainly due to great borrowing rates and the influx of “investor-buyers”. Lots of single family homes and condos are being turned into rental property or held “dark” for the economic lights to come back on. A surprisingly large number of homes are purchased for all-cash, since if you believe that housing prices are near their bottom, then residential real estate may be more stable — and potentially have better returns — than equities.
On the other hand, new home sales continue to languish at their lowest levels since we started keeping score in 1963.
Intriguingly, if you ignore the post-2003 “bubble” period, and trendline the data (which grows over time, to account for the increasing population), you end up with about 900,000 new home sales in 2011. As it happens, we’re actually around 300,000, reflective of a significant decline in home ownership rates — now down to about 66%.
The real question is whether or not this change in home ownership rates is temporary or permanent. We happen to think it’s permanent. That’s not all bad news, but it means that when new home sales come back on-line (eventually getting back to somewhere short of 900,000, but certainly higher than 300,000), we won’t see a return to bubble-statistics.
From a small northwestern observatory... 