Friday, November 20, 2015

Update of October 2015 Economic Indicators (Amended)

I've been more focused on the housing issue lately, so I haven't kept up with other economic updates.

Here are my inflation measures.  As we come up to an expected rise in the Fed Funds Rate, the pattern seems pretty stable.  Year-over-year "Core minus Shelter" inflation at about 1%, and Shelter inflation rising along with economic recovery, as production gets funneled to real estate owners.  We have decided that building more houses is out of the question, so we have to handicap national income as much as we are handicapping housing expansion in order to prevent that transfer.  The national debate is over whether to use monetary policy or fiscal policy to hold our heads underwater until the bubbles go away.  I guess the monetarists have won this round.

Since housing demand is inelastic when supply is constrained, especially in the short run, negative income shocks will probably drive non-shelter inflation down farther than shelter inflation, unless we decide to push it so far that we create another foreclosure crisis.  Last time, though, housing starts were strong on the national scale, so when the self flagellation began there was a shift in marginal housing supply downward and there were many middle income families with recently originated mortgages.  In 2006, households at first bid up the rents on the stagnating housing stock until the mortgage default wave hit and households couldn't even sustain payments for the housing stock we still had.  But, this time, there has been neither a housing expansion nor a mortgage expansion, so I don't see how we can trigger a foreclosure crisis this time.  Does that mean that at the point where monetary policy begins to shrink spending that "Core minus shelter" inflation will collapse while shelter inflation jumps?  Did shelter inflation finally fall in 2007 because of defaults or because households began to make long term budget adjustments?  Since tenant inflation remained high, I think defaults was the trigger.  Since rent expenditures are already high, signaling that households already have inelastic housing demand, it seems as though we might expect rent inflation to rise again.  If rent inflation ends up at 5% and "Core minus Shelter" inflation declines to 0%, how will the Fed react to that.  I would be going long on Eurodollar futures (betting on falling forward interest rates) like crazy if it looks like that will happen.  My only misgiving is that political positions are vulnerable to regime shifts, and if the Fed came to their senses and reversed course, long fixed income positions could take a quick, deep hit.  The risk of nominal contraction is probably already priced into forward rate contracts, which is why the yield curve is so much less steep than it usually is at this point in a recovery.

Here are some charts from the just released household credit report from the New York Fed.  Mortgages outstanding rose, which is encouraging.  I had hoped to see more momentum by now, though.  I'm not sure if this is enough to overcome any monetary headwinds.  This is annualized growth of about 7%, and appears to be coming largely from outside the commercial banks.

The other charts here highlight the severe repression of mortgage credit we have seen since 2007.  It is mindboggling that supposedly serious people are talking about credit bubbles and macroprudential risks in this context.

Other Agencies = GSE's
I would like to compare this originations graph to a graph of mortgages outstanding, by holder.  Note that there was a sharp decline in originations at the end of 2003, across FICO scores, but mainly at the top.  Notice how there was a sharp discontinuity at the end of 2003 among the GSE pools.  There was clearly a policy shift at the end of 2003 that sharply cut into access to conventional loans.  The discontinuity points to a policy shift, not a market trend.  This pushed potential borrowers into the private non-conventional mortgage market.  Note that there was a tremendous increase in mortgages held by private pools during this period, but there was no increase at all in originations for low FICO scores.  The rise in subprime loans after 2003 has absolutely nothing to do with an increase in mortgage originations among high risk borrowers.  As with all of these housing boom issues, this was a supply problem.  The GSE's pulled back on the supply of real estate credit.

I have half seriously suggested that the GSE's and the mortgage originators that feed them should be socialized.  If they basically just push papers based on bureaucratic rule sets and then securitize the loans, whose main risk is basically currency risk, of which the Federal government is the monopoly supplier, and if management of that currency will then involve lender-of-last-resort financing of those institutions, then the administration and the risk of the process might as well be public.  There is no value being added by the private sector.  But, here we can see how a fully privatized system would be better, because private markets don't usually lead to sharp, immediate, and arbitrary trend changes based on policy postures.  An ownership system based on nominal long term fixed mortgages probably isn't sustainable with a discretionary fiat currency, though.  Privatization would be more feasible in something like an NGDP targeting monetary regime, though.

One minor bright spot is that mortgage originations have been growing - but this growth is entirely among FICO scores above 780.  If your FICO score is less than that, you don't have to worry about predatory lenders tricking you into building a home.  You're welcome.

Note that this pattern does not apply to auto loans.  I occasionally hear of fears about the auto loan market, too.  Maybe we will eventually decide that transportation is as gluttonous as shelter and we will limit this to FICO scores above 780, too.  One asset class at a time, though, folks.

On the employment front, I also think there are early signs of slowing growth.  Flows into and out of unemployment continue to have good trends.  But, flows between employment and "not in the labor force" now have flattened for several months, and the net flow out of the labor force has widened.  This suggests that opportunistic marginal labor transitions have stopped expanding.  Similar trend shifts happened in early 2001 and early 2007.

Looking at unemployment durations, it looks like improvements at the long end of durations have also leveled off.

This looks to me like exactly the sort of place in an extended recovery where the difference between a stingy monetary policy and an accommodative policy can make a big difference.  If the yield curve flattens when the Fed Funds Rate rises, look out below.

On the positive side, unemployment insurance still has a good trend, even though it is already at low levels.

Added: Hm.  I am more optimistic after seeing the weekly H.8 report on bank assets.  I guess I missed this last week.  This is quite a pop in closed end real estate loans.  I have been watching for this to happen for several months.  With the recent strength in other measures of mortgage growth, if we see a continuation of a new higher trend here, this could be good.  I think this is the single most important factor to watch with regard to economic growth in the near term.


  1. Egads, 1% inflation on core minus shelter..and on the CPI, not the PCE which runs 35 basis points lower...

    I would add that even non-shelter core is influenced by shelter costs...the price of labor has to get pushed up...

    But the Fed is "hyper-accommodative"!

    The right-wing has lost its marbles and the left-wing is clueless....

    1. I'm usually an eternal optimist, but I kind of think in the Great Recession, this is our 1937 moment. Not so much because of explicit policies themselves, but because the country seems to be nearly unanimous in demanding policies that counter economic progress.

      I think the "WW II ended the Great Depression" story is greatly in error, in terms of the economics. But, maybe it did, in terms of national character. Once the wheels of dislocation start to turn, how do you keep the dislocation from feeding division and anger that feed bad policy demands? Maybe Krugman was right about that alien invasion.

  2. The WWII story is amazing, but remember we had wage/price controls, rationing, huge conscription etc. Maybe the Keynesian version "worked" under those conditions, plus the external threat. Debt rocketed.
    I prefer a minimalist state and lots of money printing, and plain simple charity for those who need it.
    Who will eliminate home mortgage interest tax deductions and single-family detached zoning?

  3. I mention you in my latest Historinhas post. On remembering Arthur Burns.