Leading economic indicators remain positive

In November of this year, the U.S. economy created 321,000 jobs, more than in any month in almost three years. It was the 50th consecutive month of job growth, an unparalleled streak since World War II. Compared with the rest of the world, where many economies grow barely grow at all, the U.S. economy looks like a well-tuned engine pulling other national economies forward. Are we out of the recession? Yes, but as a country and a region we are still not at prerecession numbers of home sales and starts nationally or regionally. And it should be a number of years before we get there.

Yes, the economy is much improved. But it hasn’t fully recovered from the catastrophic recession that began seven years ago. There are almost 2 million more non-farm jobs in the USA today than in 2007 – about 140 million in all. But the ranks of the unemployed are up by nearly 2 million — a total of 9.1 million last month — since November 2007.

For most of us, what we think about the state of the economy is defined by our daily experiences. Over the last decade, rents have increased over 60% in our Texas metros, real estate appreciation has been around the 35% range, but wages have increased only 10%. Income is not keeping up with housing and living costs. It may be a while before we see wages regain pace.

The majority of economists and analysts feel that the nation has turned the corner. The U.S. Leading Economic Index rose almost 1% as of November 2014, a sign that indicates a lasting rebound. This latest report suggests steady growth this last year, but some uncertainties remain. Businesses are expanding with caution and concern about the fragility of the recovery, including the latest oil fluctuations. This last week we again saw Federal budget battles until the last minute. But the better-than-expected holiday season might point to sustained stronger demand and could put the U.S on a faster growth track for 2014.

The positive economic news of 2013-14 and the rising index of U.S. leading indicators signals that the world’s largest economy will keep expanding in the 1st half of the 2015. The increase in the New York-based Conference Board’s gauge of the outlook for three to six months matched the median forecast of economists surveyed.

Even with the positive economic news, we must bear in mind that we are recovering, not recovered. The US and the Texas region are not back to prerecession numbers in housing. Employment and economic growth are good, but many industries such as construction are not at prerecession numbers.

Inflation slows

The Consumer Price Index (CPI) is a measure of the average change in prices over time of goods and services purchased by households. The CPIs are based on prices of food, clothing, shelter, fuels, transportation fares, and charges for doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 87 urban areas across the country from about 4,000 housing units and approximately 26,000 retail establishments like department stores, supermarkets, hospitals, filling stations, and other types of stores and service establishments.

Our cost of living has not gone up as rapidly as last year, possibly influencing consumer sentiment that the economy has slowed. This year national CPI decreased. Unlike last year where we saw inflation and consumer goods increasing in value, U.S. consumer prices recorded their biggest drop in nearly six years in November as gasoline prices fell.

The Labor Department said on Wednesday its Consumer Price Index fell 0.3 percent last month, the largest decline since December 2008, after being flat in October. In the 12 months through November, the CPI increased 1.3 percent, the smallest gain since February, after advancing 1.7 percent in October. Most analysts had forecast the CPI slipping only 0.1 percent from October and rising 1.4 percent from a year ago. Stripping out food and energy prices, the so-called core CPI edged up 0.1 percent after rising 0.2 percent in October. In the 12 months through November, the core CPI rose 1.7 percent after increasing 1.8 percent in October. The Fed targets 2 percent inflation and it tracks an index that is running even lower than the CPI. This is lower than the 2.4 percent average annual increase over the last ten years. This is the first time the CPI has gone up less than 2.0 percent for consecutive years since 1997-98.

Plunging crude oil prices, which hit a fresh five year low this week on increased shale production in the U.S. and slowing global demand are keeping overall inflation in check for now. Texans have some concern about falling oil prices. Prices below $70/barrel can’t support new production in shale oil fields, so those areas in our region tied to this economic boom should have some concern. But lower oil prices are good for the economy at large.

The economy is recovering, but not recovered. The number of long-term unemployment is at a record high, and we need to address those needs. Small businesses are cautiously expanding, but slower than in the past. Since they make up over 85% of our national GDP, small business expansion is key to the national and regional economic recovery.

Home price index

One of the most watched residential real estate indexes is the Case-Shiller index. The Case-Shiller Index estimates that the 10-City Composite gained 4.8% year-over-year, down from 5.5% in August. The 20-City Composite gained 4.9% year-over-year, compared to 5.6% in August. The National and Composite Indices were both slightly negative in September. Both the 10 and 20-City Composites reported a slight downturn while the National Index posted a -0.1% change for the month. Home prices nationwide were 22% above the trough reached in the fourth quarter of 2011, but remained 28% percent below the peak reached in the first quarter of 2006. The analysis projects that price appreciation is expected to slow to 5.7% nationally through the fourth quarter of 2014 across all U.S. markets, close to its long-term annual average of 4.5% recorded since 1975.


The supply of homes for sale in 2014 in each Texas metro is still near a record low. Houston has a 3.7 month supply, 10% less than this time last year, which was down 30% from the previous year. Houston continues to be one of the healthiest markets in the nation.

Dallas / Fort Worth has 2.5 month supply, with the number of houses for sale in North Texas at the lowest level in more than a decade. Prices jumped in November as demand for properties surpassed supply. Median home prices in the area rose 12 percent last month from November 2013, according to the latest report on local home sales. It was the second-largest annual price increase this year.

San Antonio has a 3.9 month supply, a 3% decrease, and Austin a 2.9 month supply, a 7% increase from a year ago. That said, most markets had their best year in sales since the start of the recession. And demand for housing in all Texas metro markets is the best it’s been in a decade. All four major Texas metros have seen an increase not only in residential starts, but also an increase in office, commercial, and industrial construction. This increase in business regionally continues pushing material and labor costs up.

All this leads to another challenging year for homebuyers. Buyers who came back to the market after sitting things out during the recession still have to scramble to land a home. Real estate agents and economists expected that with the significant rise in home prices in Texas in 2013-14, more properties would go on the market to take advantage of the strong buyer demand. That hasn’t happened, for many reasons. People like the idea of their equity increasing, but realize that should they sell, they are also going to be in the same crowded group of buyers if they are looking to re-buy in the same market. If they are planning to stay in the neighborhood they are going to be in for sticker shock. So, 2015 will continue to have the challenges of low inventory of last year.

Housing starts and new home sales

In 2014, new home starts are doing better, but are still at about 50 to 60% of prerecession numbers. There were 4,669 multi-family building permits issued in October 2014, 39 percent less than in October 2013. During the 12 months ending in October 2014, a total of 61,526 permits were issued, 14.2 percent more than in the previous year.

After a multi-year bottom of sorts, indicators are up, but the long-term trend is clearly down from previous highs. The good news is that homebuilders, developers, and lenders are much more confident about their prospects with the demand currently outstripping inventory in most of Texas.


The unemployment rate in the U.S. (5.9%) and Texas (5.1%) are all well over 3 points better than at the bottom of the recession. One of the frightening statistics is that 40% of the unemployed have been without a job for more than 6 months, more than any other time since 1946. As this trend has been watched over the last few years it means, essentially, should you lose your job, there is a nearly 50% chance that you will be without a job for at least half a year. For those that have been unemployed for a long term, it is a challenge to say the least.

The continued positive trends in pricing, foreclosures, and inventory continue to support the case for continued improvement in housing and most real estate, as does the long-term trend in housing starts. The economy is improving, just not at the rate of a year ago. Next time you get in a conversation about the economy, understand that it continues to improve. All the fundamentals are in place. The economy and the continued optimism, even with oil fluctuating over the last few weeks, shows that 2015 will be another good year.

Economic indicators to watch

Every week there are a variety of indicators released to gauge the health and direction of the economy. With so many numbers and so much information, it is sometimes difficult to know what to watch and why. The media has a habit of reporting figures without much context, so I thought it would be a useful exercise to discuss the most important indicators and what exactly they mean.

So what should you watch? Generally, economic indicators fall into three categories – leading indicators, coincident indicators, and lagging indicators. This week, we’ll focus on leading indicators, and cover the others in the coming weeks.

Leading indicators indicate which way the economy is headed. Some prime examples are unemployment claims, the Consumer Confidence Index, the Federal Open Market Committee Statement, and housing starts.

Weekly claims for unemployment

Weekly claims for unemployment is the number of workers filing for unemployment benefits after losing a job. I check both the US BLS (Bureau of Labor Statistics) U3 number which is typically the ‘headline rate’ we see quoted in the media, and more importantly the BLS U6 number.

U3 measures the unemployment rate, which is defined as people who are without jobs and have actively looked for work within the past four weeks. U3 does not count ‘discouraged workers’, or those who are unemployed but no longer seeking employment.

U6 gives a fuller picture of unemployment. It includes the unemployed from U3, in addition to ‘discouraged workers’, ‘marginally attached workers (those who would like to work but have not looked recently), and part-time workers who would like to work full-time but cannot due to economic conditions.

Market sensitivity: High (monetary policy, stock and lending is affected by this number)
Release time: 8:30 AM ET every Thursday, covers the week ending the previous Saturday.
Frequency: Weekly
Source: Bureau of Labor Statistics

Why it is important: The initial unemployment claims report has proven to be a good indicator of when the national economy is approaching a turning point. Experts pay close attention to this indicator due to the accuracy and timeliness. It accurately reflects what is presently going on in the economy. For example, if a large number of people are losing their jobs every week and applying for unemployment compensation, this will eventually dampen consumer spirits, slow their spending, and cause businesses to pare back investments. On a regional and local level it shows the economic health of the area. As we all know by now, Texas and its metros have had a phenomenal run during the recession and presently. When the local unemployment is doing well it has a tremendous impact on restaurants, retail, office, commercial, etc. A healthy unemployment number is somewhere between 5 and 6%.

Consumer Confidence Index

The Consumer Confidence Index examines consumer expectations about the economy (how they feel about jobs, the economy, and spending), as reflected by a survey of 5,000 U.S. households conducted by the Conference Board.

Market sensitivity: Medium, but can be high at turning points in the economy.

Release time: 10 AM ET, announced the last Tuesday of the month being surveyed.

Frequency: Monthly

Source: The Conference Board – The Conference Board is an objective, independent source of economic and business knowledge for its clients

Why it is important?: Happy consumers are good for business. When consumers have confidence in the economy they are more inclined to spend. When they are confident about their job and their company, they are more likely to shop, travel, go out to restaurants, invest, buy homes, and keep the economy on a roll. The opposite obviously is lousy for business, and if the number of malcontents in large enough it can derail an economy.

It is a highly subjective survey, and the results should be interpreted as such. People can grab onto a small situation that garners a lot of mainstream press, such as gas prices, and use that as their basis for overall economic conditions, fair or not. There are no real data sets here, and people are not economists, so they cannot be counted on to realize that, for example, because gas prices may only represent 5% of their expenses, they should not sour their entire economic outlook.

Analysts and economists look for the index to be somewhere between 85 and 110 to be a healthy outlook for the consumer.

The Federal Open Market Committee Statement

Market sensitivity: Very high
Release time: 2:15 PM ER on the day the FOMC concludes its meeting. A schedule of its meetings can be found at www.federalreserve.gov/fomc/.
Frequency: The FOMC formally gathers eight times a year and issues a statement on the results of its deliberations at the conclusion of every meeting. Only in the most extraordinary circumstances might the FOMC choose to act between scheduled meetings.
Source: Federal Reserve Board

Why it is important: Understand that this statement is issued from the US central bank, the Federal Reserve, an institution that is structured to be above the political manipulations of Congress, meaning that it statements are taken with a sense of gravity about the seriousness of report. The brevity of this report belies the enormous impact it has around the world. This is a report that barely fills a single page, contains virtually no numbers, and comes out just eight times a year. The FOMC statement is studied word by word by economists, analysts, investors, and the business press. Words or phrases that showed up in previous releases but are omitted in the current statement are studied to capture all the possible nuances on how the Fed currently view the economy.

How do you read the FOMC statement? Slowly and carefully.

First, there is a short introduction sentence that tells the outcome of the FOMC vote on interest rates, which currently are at their lowest in over 60 years. The delay of QE2 had a tremendous positive impact for the markets last week.

Next, there is a brief section describes the economy’s current state based on the latest economic indicators. After that, there is the part that reviews and highlights the Fed’s assessment of current inflation and growth. This is the part where economists, analysts and investors get a sense of what the FED will be inclined to do when it meets next. This paragraph is more forward looking and offers some insight into what the FOMC will monitor most closely between now and the next meeting.

Finally, there is a list of FOMC members who participated in the meeting that morning and how they voted. Generally (particularly with interest rates) the preference is to have unanimity among the members in line with the Fed Chairman. There are occasions when certain participants disagree so strongly with the Fed chairman’s recommendation they will formally register their disapproval.

Housing starts
Housing starts refers to the number of new homes being built and permits for the future construction. In a healthy market for every two new jobs there should be one housing start. If housing starts start to outpace job creation, I begin to worry about speculative building.

Release time: Normally released 2 to 3 weeks after the month covered.

Frequency: Monthly

Source: Census Bureau, Dept of Commerce

Revisions: Modest revisions normally occur for the proceeding two months on housing starts and one month on permits. Seasonal adjustments are made every April.

Why it is important: There isn’t a single indicator that can foresee the future direction of the economy. However, of all the indices this one comes surprisingly close. Excluding one brief instance, there has never been a recession in the US at a time when the housing sector stood strong. Only once since WWII did the economy contract despite a robust housing market, and that was in 2001. Even then, the recession was short-lived and not very deep. This impressive track record is why may economists and experts view homebuilding as one of the most reliable leading indicators of economic activity. Residential real estate is among the first sectors to shut down when the economy nears recession, and it is the first to show growth when the economy begins to turn up.

What makes housing so far ahead of the rest of the economy? Sensitivity to interest rates and credit and confidence in the future economy. A strong economy drives interest rates higher. As mortgage rates climb, demand for new homes slows. Builders are less likely to seek loans when rates are high.

Another critical aspect of the homebuilding industry is how powerful an influence it has on the rest of the economy through what are known as “multiplier effects” (how much one dollar moves through the economic chain). New construction has major ramifications for many industries. A jump in residential construction drives up demand for steel, wood, electricity, glass, plastic, wiring, piping, oil, concrete, etc. Locally there is the need for skilled labor, slab and flatwork, carpenters, electricians, truck drivers, forklift operators, etc. In turn, laborers spend their wages in the local economy, bolstering retail, hospitality, and services. An estimate is that for every 1,000 single family homes under construction, some 2,500 full time jobs and nearly $100 million in wages are generated.

How are housing starts counted? Housing starts is the number of privately owned new houses (technically housing units) on which construction has been started in a given period. This data is divided into three types: single-family houses, townhouses or small condos, and apartment buildings with five or more units. Each apartment unit is considered a single start. The construction of a 30-unit apartment building is counted as 30 housing starts.

Why housing permits? 95%+ of all localities in the US require construction firms to obtain authorization before the first shovel touches the soil. By tracking the issuance of permits, one can get a sense of how much and where future construction activity will take place. Because housing permits are such an excellent marker of future homebuilding and economic strength, they are one of the ten components that make up the Conference Board’s Index of Leading Economic Indicators.

How is it computed? The Census Bureau conducts telephone interviews and sends out mailers to builders in 19,000 municipalities across the country during the first two weeks of each month to inquire about the number of construction starts and permits filed in their regions.

This indicator has broad effects on financial markets – bonds, stocks, and the value of the dollar can be impacted by this stat.

Bonds: Good news in housing is often perceived as bad news for the players in the fixed income markets. A healthy increase in housing starts depicts an economy that is robust and where inflation pressures are likely to accelerate. That has an effect that knocks down bond prices and causes yields to rise, leading to losses on bond portfolios. Most bond traders prefer weak or falling housing starts because they show a slowing economy with less inflation.

Stocks: Prolonged weakness in housing starts can alarm stock investors since historically it has been a precursor to a broader downturn in the economy. If the market is vibrant and inflation remains contained, shareholders will view it as a positive sign. As explained earlier, a rebound in new home sales has a beneficial impact on other businesses as well. This is bullish for corporate profits and stock prices. The caution comes when housing starts surge at a time when the rest of the economy is already operating at full speed. Investors historically withdraw from stocks as worries mount that the Federal Reserve will raise short term interest rates to slow the economic activity to prevent hyper inflation.

Dollar: Investors are attracted to the US if they can earn a higher return here relative to what they can receive in other countries. A strong housing report is considered bullish for the dollar because it historically supports higher corporate profits and a firming of US interest rates.

This may be way more than you wanted to know. But as you look to buy, sell or invest in real estate this economic primer hopefully will help you make a better decision.