Mish's Global Economic Trend Analysis |
| Empire State Manufacturing Activity Flattens; Huge Divergences Appear - What Does It Mean? Posted: 15 Sep 2010 02:32 PM PDT Inquiring minds are digging into details of the September Federal Reserve Empire State Manufacturing Survey for clues on the economy. The Empire State Manufacturing Survey indicates that conditions held relatively steady in New York's manufacturing sector in September. The general business conditions index remained positive, although it slipped 3 points to 4.1. The new orders and shipments indexes were both up moderately for the month, at levels signaling stable activity. The prices paid index was positive and little changed from last month, while the prices received index edged up to just above zero. Employment indexes were positive, suggesting that employment levels and the average workweek continued to expand over the month. The degree of optimism about the six-month outlook continued to deteriorate, with the future general business conditions index hitting its lowest level since early 2009.Selected Empire State Charts  Current Business Conditions  Expectations Six Months Ahead  Divergences Current conditions have stabilized while future expectations continue to deteriorate, five consecutive months. Did we just see a "last gasp" in new orders and shipments? Stabilization? More interesting yet is the way in which the current conditions index has "stabilized". A tip of the hat to reader "Ronald" who writes... In the ten years of data they have on their website, this is the first time I have seen the percentage of businesses showing increases and the number of businesses showing decreases in general activity both increased 2 months running. Moreover, this is the 3rd lowest level of businesses conditions staying at the same level. Finally, when businesses showing deteriorating conditions reached 30 percent, it has typically been during recession and the index has historically been between 0 and -10.A quick check shows the following. July: This month, 27 percent of respondents said that conditions had improved, while 22 percent said that conditions had worsened. August: Roughly 30 percent of respondents reported that conditions had improved, while 22 percent reported that conditions had worsened. September: Almost 35 percent of respondents said that conditions had improved over the month—up from the 30 percent who had said so last month, but the percentage that reported worsening conditions increased from 22 percent in August to 31 percent." The reports actually show consecutive rises in improved conditions with a one month huge rise in deteriorating conditions. Nonetheless, how long can a third of businesses report better conditions with nearly a third of businesses reporting worsening conditions? In conjunction with future expectations falling 5 consecutive months to the lowest level since March 2009, I suggest "not long". Look for these divergences to break to the downside, most likely in a strong way that will surprise the vast majority of economists who never bother to look at the details in these reports. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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| Posted: 15 Sep 2010 10:53 AM PDT The small upward correction in home prices from multiple tax credit offerings died in July. Worse yet, inventory of homes for sale as well as shadow inventory both soared. 8 million foreclosure-bound homes have yet to hit the market according to Morgan Stanley. Home Prices Drop in 36 States CoreLogic reports Growing Number of Declining Markets Underscore Weakness in the Housing Market without Tax-Credit Support CoreLogic Home Price Index Remained Flat in JulyCoreLogic HPI Including Distressed Sales  See the above article for additional charts Beazer Homes Warns on Orders The Wall Street Journal reports Beazer Homes Warns of Order Miss Beazer Homes USA Inc. said Wednesday it might miss order expectations for its fiscal-fourth quarter, as it also cut estimates for the year's land and development spending, reflecting the sector's weakness following the expiration of home-buyer tax credits.Inventory Soars Bloomberg reports U.S. Home Prices Face Three-Year Drop as Supply Gains The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market.I disagree with Herb Blecher. I see little advantage stretching this mess out for a decade, and that is what the government seems hell-bent on doing. Everyone wants the government to "do something". Unfortunately tax credits stimulated the production of new homes, ultimately adding to inventory. Prices need to fall to levels where there is genuine demand. The short-term rise in the Case-Shiller home price index and the CoreLogic HPI was a mirage that will soon vanish in the reality of an inventory of 8 million homes that must eventually hit the market. Lost Decade About 2 million houses will be seized by lenders by the end of next year, according to Mark Zandi, chief economist of Moody's Analytics in West Chester, Pennsylvania. He estimates prices will drop 5 percent by 2013.Home Price Pressures
Last Bubble Not Reblown After the bottom is found, remember the axiom: the last bubble is not reblown for decades. Look at the Nasdaq, still off more than 50% from a decade ago. The odds home prices return to their peak in 10 years is close to zero. Houses in bubble areas may never return to peak levels in existing owner's lifetimes. Zandi is way overoptimistic in his assessment of 3% annual appreciation after the bottom is found. Price Stagnation I expect small nominal increases after housing bottoms, but negative appreciation in real terms as inflation picks up in the second half of the decade. Yes, deflation will eventually end. Alternatively the US goes in and out of deflation for a decade (depending on how much the Fed and Congress acts to prevent a much needed bottom). Either way, look for price stagnation in one form or another. Thus, if you have come to the conclusion there is no good reason to hold on to a deeply underwater home, nor any reason to rush into a home purchase at this time, you have reached the right conclusions. Hyperinflation? Please be serious. When Will Housing Bottom? Flashback October 25, 2007: When Will Housing Bottom? On the basis of mortgage rate resets and a consumer led recession I mentioned a possible bottom in the 2011-2012 timeframe. See Housing - The Worst Is Yet To Come for more details.When I wrote that in 2007, most thought I was off my rocker. Now, based on inventory, I may have been far too optimistic. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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