Residential Investment – Easy Trends (Q4 2014 – Final Estimate)

Residential investment is one of the best leading indicators for the general economy, meaning that what happens to residential investment typically ends up happening to the general economy a few months later. I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for residential investment and discuss whether it is currently going up, down or neither. You can read the basics of my methodology on the FAQ page.

NOTE: You may be reading an outdated analysis.  Please visit my latest residential investment trends analysis for more info.

Quick ‘n Easy

Residential investment refers to money that people spend on buying homes (either to live in or to rent out), home improvements and money people make on the sale of homes. There is also some inclusion of equipment that come with many homes. We care about how much private residential investment is taking place because it is a great leading indicator for what will happen to the general economy several months down the line.

The Bureau of Economic Analysis (BEA), the same group that publishes the GDP for every quarter, defines “residential fixed investment” as the following:

Consists of purchases of private residential structures and residential equipment that is owned by landlords and rented to tenants. Investment in residential structures consists of new construction of permanent-site single-family and multi-family units, improvements (additions, alterations, and major structural replacements) to housing units, expenditures on manufactured homes, brokers’commissions on the sale of residential property, and net purchases of used structures from government agencies. Residential structures also include some types of equipment that are built into residential structures, such as heating and air-conditioning equipment.

In other words, residential investment refers to money that people spend on buying homes (either to live in or to rent out), home improvements and money people make on the sale of homes. There is also some inclusion of equipment that come with many homes.

Why do we care about residential investment? It just so happens to be a fantastic leading indicator, which means that whatever happens to this indicator generally happens to the general economy several months down the road. One more thing – we care most about private residential fixed investment, not so much what the government spends. That’s what shows us the real trend in the economy.

Here’s a historical chart of private residential fixed investment over the last five years provided by the Federal Reserve Bank of St. Louis:

Residential Investment - Real Private Residential Fixed Investment - Q4 2014 Final Estimate - FRED

Source: StLouisFed.org

Residential Investment Trends and Projections

Below, I will discuss whether residential investment is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released. I usually start my analysis from three years ago. continue reading…

Share

GDP (Real Gross Domestic Product) – Easy Trends (Final Estimate Q4 2014)

GDP (or Real Gross Domestic Product) is the accepted measure of overall economic activity, so we should care which way it’s trending. I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for real GDP and discuss whether it is currently going up, down or neither. You can read the basics of my methodology on the FAQ page.

NOTE: You may be reading an outdated analysis. Please visit my latest GDP trends analysis for more info.

Quick ‘n Easy

Real GDP is simply the broadest and most widely accepted measure of economic activity. Even though there are specific details of it that many dispute, you can typically be assured that if this number is increasing consistently, things are going well in the economy.

You can read my Easy Intro to GDP for more information on what the Gross Domestic Product represents. Suffice it to say, it’s a broad measure of economic activity. If this number is growing, it is generally a good sign. We probably want to see levels up in the 3 to 3.5 percent annual growth range for signs of an economy that’s growing at a healthy pace. When the unemployment rate is too high, however, you need to have even more growth than that to put a dent in the unemployment figure.

Here’s a historical chart of real GDP annualized growth rate for each quarter from Doug Short, including lines that show the historical average growth rate and the “best fit” line:

Real GDP Q4 2014 Final Estimate - Doug Short

Courtesy: AdvisorPerspectives.com/Dshort/

GDP Trends and Projections

Below, I will discuss whether real GDP (real gross domestic product) is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released. I typically start my analysis from three years ago. continue reading…

Share

Initial Weekly Unemployment Claims (4-Week Moving Average) thru Week Ending March 21, 2015 – Easy Trends

In this article, I’ll do an “Easy Trends” analysis of the initial weekly unemployment claims data.  “Easy Trends” is a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

NOTE: You may be reading an outdated analysis.  Please visit my latest unemployment claims trend analysis for more info.

Quick ‘n Easy

By tracking the number of people who are filing for unemployment benefits for the first time each week, we get a quick insight into the latest status of the economy’s health.  Fewer claims equals more jobs, which equals more income, which usually equals more consumer spending (70% of the economy!) that supports company profits, which in turn can lead to more hiring.

Quick Version of Easy Trends Analysis

For the Initial Weekly Unemployment Claims series, I will be doing only a brief update as long as the level of claims is super low (below 300,000) or just low (below 350,000) but without a confirmed upward trend (which is undesirable of course). I will only call out a few specific statistics that I like to track. I’ll be tracking the trends, but it takes a lot of time to do the post, so I won’t do a post with the full analysis unless there is any cause for concern. Bottom Line: If you’re seeing my “quick version” of this analysis – don’t be worried about weekly jobless claims!

NOTE: The last time I did a full update was for the week ending March 7, 2015

4-week moving average of weekly initial unemployment claims: 297,000   (Good – we want this number to be below 350,000)

4-week moving average of weekly initial unemployment claims as a percent of the total size of the nation’s workforce: 0.19 percent   (Good)

Current Trend: None. Recently saw a break of confirmed upward trend of about 11,500 more claims per week.   (TBD)

Share

Leading Indicators vs June 2015 – Easynomics Court

For an explanation on “Easynomics Court” and how it works, read this page on leading indicators vs six months into the future.

NOTE: In case you are accessing this post long after it was originally posted, you may also be interested in the most recent Easynomics Court case.

As of today, the official Easynomics Court conviction record for categorizing the growth level six months into the future is:

  • 19 – Guilty (Win)
  • 13 – Not Guilty (Loss)
  • Conviction Rate = 59 percent

NOTE: A random guess would yield the correct result only 33 percent of the time, so the leading indicators are definitely worth noting.


Leading Indicators from December 2014

Charges Filed: “The Leading Indicators hereby charge that June 2015 shall be a POSITIVE month, as indicated by a positive annualized growth rate at or faster than the historical average of 3.3 percent.”

Exhibit A – Industrial Production | POSITIVE

In the six months leading up to December 2014, Industrial Production rose at an annualized rate of about 3.8 percent. This is consistent with growth that is at or faster than historically average rates over the next six months or so.

Easy Description: Industrial production (manufacturing, mining and utilities) is an excellent leading indicator for the broader economy.

Easynomics Rating Methodology: I will calculate the change in the Industrial Production Index over the six months leading up to the month the “charges” are being filed. I will convert that change into an annualized rate. If the annualized rate is less than zero, I will issue a “negative” rating – 3.3 percent or higher will be “positive” – anything in between will be “neutral.”

continue reading…

Share

New Residential Homes Sales and Inventory Months of Supply – Easy Trends (thru February 2015)

Sales of new residential homes contributes to the GDP, and the level of supply can indicate something about prices. I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for an indicator (in this one, it is new residential homes sales and inventory) and discuss whether it is currently going up, down or neither. You can read the basics of my methodology on the FAQ page.

NOTE: You may be reading an outdated analysis. Please visit my latest new residential homes inventory months of supply trend analysis for more info.

Quick ‘n Easy

For new residential homes reports, there are two key things to look at: 1) number of homes sold and 2) inventory of homes for sale. When there are too many new residential homes still left unsold (inventory) on the market, it usually means that prices will be dropping because supply is greater than demand. A good way of measuring the inventory is to calculate how long it would take that inventory to sell at the current pace of sales. The normal level of supply for new residential homes is a little less than 6 months.

For new residential homes reports, there are two key things to look at: 1) number of homes sold and 2) inventory of homes for sale. We care about the number sold because each one contributes to the overall economy (builders get paid, brokers get paid, companies that made the raw materials get paid, etc). We care about inventory because when there are too many new residential homes still left unsold (inventory) on the market, it usually means that prices will be dropping because supply is greater than demand. The opposite is true if there is very low inventory. A good way of measuring whether current levels of new residential homes are too high or too low is to calculate how long it would take the current inventory to sell at the current annual pace of sales. For example, if there are 150,000 unsold new residential homes with the most recent report saying the annual pace of sales was 225,000, here’s what the calculation would look like:

Example:
225,000 new residential homes sold per year
divide by 12 to get 18,750 new residential homes sold per month
150,000 unsold homes divided by 18,750 sold per month = 8 months supply

Here’s a graph of the New Residential Homes Sales followed by Inventory Months of Supply from Calculated Risk:

New Residential Homes Sales February 2015 - Calculated Risk

Courtesy: CalculatedRiskBlog.com

New Residential Homes Inventory Months of Supply February 2015 - Calculated Risk

Courtesy: CalculatedRiskBlog.com

New Residential Homes Trends and Projections

Below, I will discuss whether the indicators are currently in a trend, when the last confirmed trend was and what that says about projecting the next data points to be released. I usually start my trend analysis from about three years ago.

continue reading…

Share

Existing Homes Sales and Inventory Months of Supply (thru February 2015)

Most of homes sold are existing homes sales, so it is an important area of the housing sector to follow. I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither. You can read the basics of my methodology on the FAQ page.

NOTE: You may be reading an outdated analysis. Please visit my latest existing homes sales and inventory months of supply trend analysis for more info.

Quick ‘n Easy

Typically, if it would take longer than 6 months for the unsold inventory of existing homes (not newly built) to be sold at the latest pace of sales, we can expect prices for existing homes to go down. If it’s less than 6 months, we can expect prices to go up.

You can get a sense for whether there are too many existing homes still on sale (inventory) by taking the total inventory and dividing it by the pace of sales. The result is “months of supply,” which basically means that if existing homes were to continue selling at the same rate as the most recent month of data, the current inventory of homes would be sold by that many months. A normal reading is around 6 months – higher number means too much inventory, and if supply is greater than demand, that usually means prices will drop.

Here’s a chart of the Existing Homes Inventory Months of Supply from Calculated Risk: (focus on the red line)

Existing Homes Months of Supply February 2015 - Calculated Risk

Courtesy: CalculatedRiskBlog.com

Existing Homes Sales Trends and Projections

Below, I will discuss whether the indicator is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released. I typically start my analysis from three years ago. continue reading…

Share