.comment-link {margin-left:.6em;}
Visit Freedom's Zone Donate To Project Valour

Wednesday, July 20, 2011

Well That Was Gross And Disgusting

Yesterday's Census report on new construction kind of supported not an uptick forecast, but the idea that next year there would be an uptick in home building activity overall. For years I have had 2012 pegged as the real year when residential construction activity would rebound! By "uptick" I mean a growth in the real value of construction, which has not yet happened and will not happen meaningfully this year. Note that this report is NOMINAL, rather than real, spending. And still it stinketh to the high heavens.

The only thing that could accurately convey the true suckiness of these figures would be if Sarah Palin picked up a CNBC announcer's position, and reported the figures each month dressed in a Princess Leia outfit. For May's report she would say something like "I thought I recognized the foul stench of another declining Value of Construction report this morning, and we've just received the figures and I was right!" Then she would pull out a light saber and whack an arm or a leg off whichever poor dolt the administration had sent out to spin it, and we would all cheer.

By which I mean to tactfully hint that most analysts are misreading the new construction report. We'll know it's really crossing over when the "under construction" figures stop falling YoY (-6.3% in this report) and when quarterly SA completions stop plummeting (completions were down 39.3% YoY in yesterday's report). Because of financing difficulties, the pace of construction on a lot of "started" multi-family projects may be quite minimal right now. You often move some dirt to preserve your authorization/permit, but you may not be building very fast. Toward the end of the project you are building fast and they always advance the funding, because they are close to turnover and delay does not serve the creditors' interests (absent a total collapse). Thus right now completions mean more than starts on multi-family.

Against that hopeful 2012 outlook, the issue of the Oct 1st cut in conforming loan limits is a counterbalance. It's much more serious than most think because it will deliver high loan portfolio losses for several years after, and because it is concentrated in certain areas and in a certain price segment of loans. Because of the concentrated nature of the effect, it will greatly tighten underwriting standards for new home loans at certain price levels, so it is bound to negatively influence new single-family construction. For the next few months, the pending conforming loan limit changes will skew the total sales mix toward high-end, and so will produce apparent price increases in the NAR reports. Look at the skew between single-family and condo/co-op sales in the Existing Home breakdown to see what I mean. Those price increases aren't real and are going to reverse themselves in an epic implosion by February of next year.

So today's Existing Home Sales report is an important third leg of the residential construction piece. And it is disturbing. First, on a YoY NSA basis national home sales are down by 8.5%. On a month over month seasonally adjusted basis, home sales dropped slightly, gaining only in the southern region. But more more serious, months of supply ramped up to 9.5 months from 9.1 last month. In June of last year it was at 8.9 months.

Now, taking all this together, my long-held forecast (since 2007) that residential construction would start being a reliable growth edge beginning in 2012 is in deep jeopardy. In fact, I think I just dumped it.

This is a crushing blow, and if I had not spent three hours last night scrubbing and bleaching I would probably be wandering in circles calling upon the Almighty for strength.

Why is this a crushing blow?

Under the circumstances it is quite dire, because even the most optimistic economic forecasters with any credibility realize that falling real wages and rising real unemployment do not auger well for final demand next year. In particular, they are extremely adverse for MV output, which always moves the economy.

The wondrous thing about residential construction and its huge relative contribution to recovery cycles is that it is countercyclical. First, it is never a mass-market, average effect. You only need a very small net percentage of the population willing to build new or buy new to produce a large relative growth vector to the economy, including moving a lot of material and generating a lot of jobs. And yes, we currently have high unemployment, but there is always ten percent of the population which is doing quite well (there were even in the GD), and they tend to take advantage of their opportunities for cheaper financing and higher buying/building ops to build or buy. In fact, the entire success or failure of the Bernank's "blow an asset bubble" plans depend on whether those with a lot of assets use the money to invest in residential construction. OOOOOOOOOOPPPPPS!

Now, rising unemployment is very bad for new car sales, which are a mass-market deal. And I have already acknowledged that we are in a cyclical downturn, so the hope of having a short cycle do now depend on next year's residential construction outlook. I mean, let's face it, we aren't going to be building strip malls and car dealerships, are we?

So, gross and disgusting it is. Further, the markets are going to get a kick in the collective confidence butt when the long-awaited NAR revisions to their methodology are released next month. See CR,

As for Crude Inventories. Ain't nothing there. Four week distillate demand has rebounded to -2.5% YoY. This is a relative improvement, but it is almost surely due to heating oil buys rather than higher trucking activity. Gasoline four week demand just fell hard to -2.2%. This is the lowest level so far this year by a stretch, but I'm wondering if it isn't due to Carmaggedon in LA. I expected that to produce a noticeable shift in demand, so I expect it to reverse to near previous levels. I could be wrong, but not only do they have plenty of cars out there, they drive them. A lot. For long distances. In traffic. Wasting gas.

Crude stocks fell by 3.7 million barrels, but it turns out that total commercial petroleum + product inventory increased by 3.8 million barrels. Also, we reached a landmark; four week net imports of crude and petroleum products is down by 10% YoY versus -8.9% YTD YoY. Four week domestic production is up 3.7% versus YTD of 2%. The rest is in lower consumption. If we opened up Alaska AT ALL we would be up by over 10%.


May I nitpick if my intentions are pure? You use English so well, and it's such a joy to read your posts, but (here it comes)- I've seen the verb "auger" a couple of times and my mind immediately flashes to the word "augury" with a "u" after the "g". So I went and looked it up:


The "-er" version is (noun) a tool or (verb) the use of that tool; the "-ur" version is (n) a prophet or (v) to prophesy.

Don't you just love English???
PS- That wasn't sarcasm. I really am sincere about the "love English" thing. As a kid I used to look up a word in the dictionary, then hop to another and another; after an hour or so I'd realize I had no idea what I had been trying to find in the first place, but I sure enjoyed the experience anyway.
Thanks, A_Nonny. I appreciate it.
Just another bit of info to finish the puzzle:


These guys are pro global warming...but whatever...I think the article's main point is valid.

Does the amount of job losses mentioned line up with the figures you have been keeping track of?

People talk about MMT (Warren Mosler etc.) This is what I always bring up. I agreewith them that we have unlimited "cash" but the military's cash "burn rate" is too great for our system. It will lead to the mathematical "end" sooner. We could have directed spending to useful things (by lowering taxes to near zilch?)and had a flourishing society (and a much better reputation internationally).

I'm no pacifist, we need mega weapons sitting off our coasts ready to use against any aggressors. But the amount we spend is insane..and leads to a crumbling society. Just like North Korea.

Here's another explanation for no new jobs.

Job creation seems to have stalled out when Obamacare was passed. Kinda lines up with cf's comment on an earlier thread.
The fact the healthcare is obtained by most
Americans through their work place is crazy.
Why we make labor more expensive and then
Tax labor rather than tax imports makes no

There are a lot of reasons, I got intrigued when the mentions of job losses in that article seemed to line up with stuff I've been reading.

Myself, I don't even keep up with job loss numbers because I know where the US has been heading for a while. Like, a *long* time ago.

I just wanted to see if the numbers actually correlated since Bush ramped it all up. I believe they will correlate.

Forget Obama, it's loot the ship's safe and steal a lifeboat with his crew. Women and children be damned.

So, all this "war" is sucking the US totally dry of manpower and materials. It's the opposite of the crap propaganda that "war is good for the economy". You hear that old chestnut all the time.

It completely goes against history and common sense. Endless war is terminal for empires. All of them.
Anon 9:40PM - the Afghanistan and Iraq wars have cost about $1.23 trillion to date. The current administration runs bigger deficits than that each year. The wars are a much smaller fraction of the fiscal problem than some would have you believe - largely because those people don't want you to look at other, bigger drivers of the fiscal problems.

What is a bigger loser?
Fed Reserve playing around with 16 trillion:


Right on time eh?
Post a Comment

Links to this post:

Create a Link

<< Home

This page is powered by Blogger. Isn't yours?