Diesel usage diverging from overall economy

While the economy has been recovering nicely from the Great Recession there are some interesting divergences which are popping up with this recovery.  One of them which has been discussed elsewhere in the blogosphere (sorry no links) is the apparent divergence between fuel usage and economic activity.

Diesel fuel usage

The Ceridian Index reports monthly on diesel fuel used by the trucking industry.   Unlike retail sales which continues upwards the Ceridian fuel index is now declining on a year over year basis. From their most recent report you can see the decline.

One can see in the next chart the apparent divergence between retail sales and diesel usage.

The researchers at Ceridian note the divergence as well and have a possible solution  Unlike the rest of the economy which is improving on a year over year basis, the housing market remains stuck in the duldroms and is still sputtering along the bottom. (See page 6 in the above linked report)

While productivity improvements are also possible I find it unlikely the rate of improvement would be enough to create the entire divergence.  Perhaps the lack of a growing home market and improved fuel usage (or the continued virtualization of our economy) are enough to close the gap between retail sales growth and flat fuel usage.  Only time and further research will tell.  Regardless this indicator bears watching.

Fuel usage and retail sales

Revising employment data

In my last post I promised to look at how employment data is being revised over time. On Friday the latest employment data was released and previous data was revised upwards in both the seasonal and non-seasonal data series. While this graph below shows data from just last months revision I may start showing multiple threads to see how the revisions change over time once we have more data.

I know, not much data to look at yet. Hopefully we'll see something interesting as time progresses. 

This post (and employment data) will be revised

The recent employment report has been a great point of contention between the bulls, bears, and the black helicopter crowd. I won't rehash the report but there's something I mentioned in a previous posting about employment seasonality that caught my attention.

The beginning of a new year brings a large number of layoffs as seasonal workers for the holiday shopping rush are released.  As you can see from this first graph the non seasonally adjusted data and adjusted data vary greatly right now.

Total nonfarm payroll 

The difference is rather obvious to see but lets transform the data a bit and look at the difference between the normalized and raw data.

Subtracting one from the other exposes just how much the raw data can vary from the the adjusted data in an attempt to smooth out the seasonality of the data.  As can be seen we are at the peak of this delta and it will most likely be revised in the future due to the fact we are that noisiest point in the data collection period.  Will it be revised up or down? I haven't a clue, but I'm going to watch it and report to you how much these data series change over time.  Stay tuned.

A housing update -- at best a flat market

Over the last few years during conversations with clients I've frequently been asked my opinion about the housing market and whether now is a good time to buy.  Home prices are naturally a point of conversation as they are a large part of most people's net worth and the loss of equity is preventing some people from moving up or refinancing.  So the question of whether we are at the bottom of home prices is an important one.  Unfortunately I don't think we are at the absolute bottom of home prices and we will most likely continue to see a slow decline in prices in the near future.  My non-prediction for 2012 is we will not see a rebound in home prices; at best we'll see a flat to slightly down market.

Home prices have strong local factors so this conversation is about national trends, your local market will vary.

Unfortunately right now home prices are continuing their decline nationwide:

Home prices still dropping - (Source: Paper Money)

Outstanding mortgages still contracting

Mortgage loan balance still declining
There are several headwinds the housing market needs to overcome before it is fully healed. This chart shows the change in mortgage values outstanding since 1975 (Source: Federal Reserve) Looking at loan balances to predict home prices may seem counter intuitive but remember a rising total national loan balance means there are more buyers (and borrowers) entering the market.  Some interesting aspects of this chart are how even during other previous recessions (shown in gray) the value of outstanding mortgages continued to rise on a year over year basis; until our most recent recession in 2008/2009.  This was the first time during this entire data series when the total value of all mortgages outstanding declined on a year over year basis. One would not be engaging in hyperbole to call our current decline in home prices exceptional.

An overhang of foreclosed homes
While it appears the primary wave of home foreclosures is past us there still is a large backlog of homes in the foreclosure process. Until this backlog is completely cleared and returns to more 'normal' levels, the amount of housing coming on the market by 3rd parties (not the person who currently lives/owns the home) will put downward pressure on prices.

Single family delinquency rate (Source: CalculatedRisk)

Another negative factor is the hidden inventory of homes out there from people who want to move up or out but are waiting until home prices stabilize before putting the place on the market. I personally know of a few people who are accidental landlords and are hoping and waiting until prices stabilize before putting their rentals on the market.  While this is purely anecdotal I'm sure its not just a local or isolated phenomenon.

Renting versus Owning coming into balance
Fortunately there are some positive factors which should mitigate a continued decline in home prices.  Home prices and mortgage rates have declined to the point where a mortgage now equal to rent.

Rent versus Owning (Source: Soberlook)

As you can see for a very long time it was cheaper to rent versus own. We are approaching a point where this may invert and owning a home would be cheaper than renting. There are other upkeep and time costs associated with home ownership (as a homeowner I can assure you there are many!) but the primary costs are approaching parity.  

Clearing the excess inventory
The number of unsold homes is beginning to stabilize as a percentage of US population.  The hidden inventory is of course hard to measure but at least we are getting closer to 'normal' for this data series

Unsold homes as % of population - (Source: Sober Look)

The long decline in construction spending does appear to be finally over which will help the building trade and stop being a drag on overall GDP growth.

Construction finally bottoming? (Source: Federal Reserve)

Even though the housing market decline appears to be slowing forecasting when we finally reach bottom is not something I'm willing to predict right now. I believe the worst of the declines are behind us so if you are looking for a home now would be a good time to start looking but be picky and drive a hard bargain! There is going to be lots of supply coming on the market over the next few years.

One aspect of the crushing decline in home prices is it has popped the speculative mindset so very prevalent in American thinking a few years ago. (I'll admit to falling a little under that spell myself)  Take your time and find a house to live in, not one for profit.

Additional reading:
http://www.calculatedriskblog.com/2012/01/fannie-mae-serious-delinquency-rate.html
http://soberlook.com/2012/01/two-data-points-on-us-housing.html
http://paper-money.blogspot.com/2012/01/new-home-sales-december-2011.html
http://soberlook.com/2012/01/five-reasons-2012-will-be-start-of-us.html
http://paper-money.blogspot.com/2012/01/radar-watching-november-2011.html
http://paper-money.blogspot.com/2012/01/fhfa-monthly-home-prices-november-2011.html
http://paper-money.blogspot.com/2012/01/radar-watching-november-2011.html
http://pragcap.com/why-home-prices-have-much-further-to-fall
http://www.tilsonfunds.com/JohnBurnshousing.pdf
http://research.stlouisfed.org/fred2/graph/?graph_id=62720&category_id=4082
http://research.stlouisfed.org/fred2/graph/?graph_id=64527&category_id=4082
Calculated Risk calls a housing bottom
http://www.calculatedriskblog.com/2012/02/housing-bottom-is-here.html

Observation of the day: Greeks are not Germans

It may appear an obvious observation but to the euro and (for a while at least) the bonds markets Greeks and Germans were the almost exactly the same. Twins.

Two recent pieces on public radio highlight how very different from the Germans the Greeks can really be.

The first radio spot describes the failed efforts of a Greek computer scientist to make the revenue system (the tax man) more efficient in Greece. All he thought they needed was a little technological help to point them in the right direction.  Heh, not quite.
http://www.npr.org/blogs/money/2012/01/05/144747663/how-a-computer-scientist-tried-to-save-greece?ft=1&f=100

This longer piece (nearly an hour) aired this weekend and I caught it on Saturday.  It goes into the desire to create the euro and how Greece basically lied to get into the eurozone and the epic borrowing binge Greeks went on after 'easy money' appeared after the Euro was introduced.  While its long it is a good overview of how Europe got into this mess.
http://www.thisamericanlife.org/radio-archives/episode/455/continental-breakup

Greece's credit history is not the best.  Since their independence in the early 1800's they have spent more than 50% of their time in default. (This time is different, 2008, Reinhart & Rogoff, page 99) Do you really think they would adopt the fiscal discipline of Germany after being handed their unlimited gold card?

ht @BarbarianCap

Baltic Dry Index falls off a cliff

The Baltic Dry Index (spot shipping rate for bulk commodities like iron ore, grain, coal, etc) recently fell off a cliff and has not seen these levels since the dark days of early 2009.

While one can say there are legitimate supply problems (a huge overhang of new ships coming online from the order surge pre financial crisis of 2009); to see such a dramatic drop is impressive and deserving of attention. I have been quite bearish on China for quite a while on this blog (although now that their market has been thrashed and policy changes appear to be taking place I may have to alter that opinion) and the sudden fall in the index may be due to a lack of  import volume into China. We'll see in a little bit if this drop in the Baltic Dry foretells a real slowdown in China...

Source: Stockcharts

Obama shuts down Keystone pipeline. The oil must flow!

It appears the Obama administration will block approval of the Keystone pipeline.

Your political leanings aside, this will not stop 'dirty oil sands' oil from getting out. I was going to work up a nice post about how Canada can ship the oil east or west but NPR beat me to it:

Philip Verleger, an economist who specializes in oil markets, says even if environmentalists convince Obama to block the Keystone XL pipeline, it won't stop the growth of production in the Canadian oil sands.
"With prices around a hundred dollars a barrel globally, that oil is going to make it to the market somehow," Verleger says. "The development may be slowed for a year or two. But one can move the oil west on the existing Kinder Morgan pipeline. They could expand pipelines east. Those pipelines already exist, and they can be expanded."
In fact, Enbridge, a Canadian energy company, recently asked Canadian regulators for permission to reverse the direction of one of its pipelines in Ontario, which many see as the first step to move more Canadian oil to the American East Coast — and relieve some of the Canadian oil glut in the upper Midwest.

Not only is the oil going to flow east but the article mentions Kinder Morgan planning to increase the flow westward to British Columbia and then down to the Pacific Northwest and out to Asia as well.

The NPR article continues...

But demand is the key, say most economists. If you can get American drivers to buy less gas — by raising fuel efficiency standards, as the Obama administration recently did — then, they say, you stand a much better chance of slowing production in the oil sands.

Sorry but these are economists? American drivers are just one user of energy, don't forget all of Asia, India, South America, etc.  

All is not lost
For those of you worried the end is nigh and we will run out of oil soon and that will be the end of us all I would like to point you to this graph and article from the Economist

Energy used per unit of GDP has been declining in America since the 1920's. For nearly a century America has become more efficient at extracting more value out of each barrel/btu/pound of energy and the trend is to greater and greater efficiency.

Furthermore oil is not the only form of energy we have available in America.  Through new techniques the amount of natural gas in America is at all time highs and current prices are extremely low and production continues to rise. From Sober Look

But I digress from the Keystone pipeline.  Obama may feel the need to stop this project for political purposes but all he will succeed in doing is building more pipelines in Canada going east and west and sending that oil to Asia.   Would it not be better to have the cheaper oil captive in America and depressing our prices relative to the rest of the world? Believe it or not but oil has been cheaper in America than the rest of the world for nearly a year, and some of that is due to the increased production up north in Canada. 

 For those of you concerned about the risk of the Keystone pipeline, there are already skads of them all over America

The Keystone pipeline would not have reduced our energy 'dependence' from external sources but would you rather buy our oil from next door Canada or Saudi Arabia and Venezuela?

Additional Reading

http://soberlook.com/2011/12/us-net-oil-imports-lowest-since-1996.html

http://soberlook.com/2011/12/sober-look-at-us-natural-gas.html

http://soberlook.com/2012/01/whats-driving-brent-wti-spread-wider.html

http://soberlook.com/2011/12/six-common-myths-about-us-and-global.html