notes on the debt ceiling shenanigans, January’s regional Fed surveys, & December home sales reports

as we expected, congress has put off dealing with the debt ceiling for 3 months; but they didn't do it by raising the limit to cover 3 months of spending; instead, because House republicans were unwilling to go on record as allowing a statutory increase in the amount the Treasury would be allowed to borrow, they just proposed to ignore the debt ceiling for 3 months, and to suspend the law that applies until mid-May, then, in a fait accompli on May 19, “the debt limit would automatically be increased to account for the borrowing that occurred during that period.” ...there are a few provisions in this house bill that keep the hooks in; for one, the Treasury cant pay for any funding for which the payment wouldnt be due before May 19th, preventing the Treasury from funding commitments past that date (the Treasury would, however, be able to repay the amounts borrowed from Federal pension funds and such since the ceiling was hit Dec 31st, which would give them leeway to replay the same extraordinary accounting tricks they've used to date); furthermore, both the House and the Senate are required by this bill to pass their own budget resolutions before April 15th or their member's pay would be suspended; there is some question whether this provision is constitutional, as the 27th amendment says congress cant change its own current payroll, but nonetheless, this House passed bill is expected to have bi-partisan support in the Senate and be signed by the White House...

so, with the debt limit drama delayed until May 19th, the next budget confrontation on the calendar would seem to be when the automatic sequestered spending cuts, which were delayed 2 months in the fiscal cliff deal, and are now scheduled to take effect on March 1st; this would be one-tenth of the ten years worth of cuts specified by the budget control act of 2011, shown in the box above...those amounts would be about 7.5% of the amount in the 2013 defense budget, and an even larger percentage cut out of discretionary programs determined by the administration...at this point, no one seems to have a good guess how negotiations on these cuts will play out, but indications are strong that if the Republicans cant include “entitlement reform” in the bargain, then they’re willing to just let the sequestered cuts happen as scheduled…

  it's been a sparse week for economic releases, but we do have a few forward looking manufacturing surveys from the regional Fed banks, and can cover the two we missed last week while we're at it, since they've all been trending in the same downward direction...on Tuesday, the Richmond Fed reported on their survey of manufacturing activity in the central Atlantic region; their current business conditions index fell sharply, from 5 in December to -12 in January, indicating significant contraction; nearly all the other broad sub-indexes turned negative as well; the new orders index fell 27 points, from a mildly expansionary 10 in December to -17 in January; the order backlog, which was negative at -11, fell further into contraction at −19, while the shipments index fell 17 points to −11, capacity utilization fell 21 points to a negative 18, and the jobs index was down two points to −5...results from the Kansas City Fed, whose region encompasses a broad swath of the plains from the Rockies to missouri, werent much better; the Tenth District's January Survey of Manufacturers (pdf) indicated modest contraction for the 4th straight month, with the composite index at a -2, not much change from the -1 in December or the -3 in November; most of the weakness was with durables manufactures; while nondurable producers noted some slight improvement; again, most of the broad subindexes registered below zero, indicating a continuing slowdown for the month; the production index was at -3, slightly higher than December's -5 but still indicating contraction; the new orders index also inched higher in negative territory, rising from -5 to -2, as did the shipments index, rising from -4 to -3, while the order backlog index rose from -18 to -8, still contracting at a moderate pace...meanwhile the employment index fell from -1 to -8, its lowest level since mid-2009, and the new orders for export index fell from -2 to -8...many of the survey comments cited uncertainty about fiscal policy as the reason these managers or their customers were holding back on expansion…

last week, the NY Fed reported the results of the January Empire State Manufacturing Survey, which indicated contraction for the 6th consecutive month; the composite general business conditions index was nearly unchanged from last month's –7.3 at -7.8; the new orders index fell four points to -7.2, and the shipments index declined 15 points to -3.1; and both labor market indices remained below zero for the 4th month in a row, with the number of employees indicating reductions at 4.30 and the average workweek contracting at -5.3...meanwhile, the Philadelphia Fed Manufacturing Survey for January saw their broadest diffusion index of current activity decrease from a revised reading of 4.6 in December to ‐5.8 this month; the new orders index fell from 4.9 in December to ‐4.3  in January, the shipments index fell from 14.7 to 0.4, and both labor market indices fell as well; the number of employees reading declined to –5.2 from –0.2 and the average workweek reading came in at –8.3 after December’s barely positive 0.4…included here above is Bill Mcbride’s chart which shows the average of the NY and Philly Fed surveys, thought to be a leading indicator for the ISM manufacturing survey, as a dashed green line, the average of all regional Fed surveys indicated in blue, and the ISM manufacturing PMI as reported through December; the ISM will report this coming week and the regional Fed surveys suggest that it will show a resumption of contraction…

  both of the major reports on home sales were released this week; on Tuesday, the National Association of Realtors reported on existing home sales in December, and on Friday, the Census released their estimates on December new home sales...the NAR reported that total existing-home sales declined 1.0% to a seasonally adjusted annual rate of 4.94 million in December from a revised 4.99 million in November; November's home sales were originally reported at an annual rate of 5.04 million, so the effective sales decline from the November report was 2.0%; their preliminary total for existing-home sales during 2012 was 4.65 million, which would be up 9.2% from the 4.26 million homes sold in 2011, and the highest annual sales since 2007; however, on a monthly basis, home sales have not yet reached the annual rate achieved under the first time home buyer tax breaks during 2009, as you can see on the adjacent chart from bill mcbride; note also that each month's sales is shown at an adjusted annual rate...the NAR says too few homes on the market and tough mortgage loan standards have been limiting home sales, despite demand driven by low mortgage interest rates, which remained at a record low of 3.35% for a 30 year fixed rate mortgage; 1.82 million homes were available for sale in December, down 8.5% from November, a typical seasonal decline, but still reducing the number of available homes to the lowest level since January 2001, when there were just 1.78 million homes on the market....as a result of this contrived shortage and the low interest rates, which allow more home principal to be bought with a smaller monthly payment, the national median existing-home price stood at $180,800 in December, which was 11.5% above the median price of a year ago...also contributing to the rising median price was a change in the mix of homes sold; last December, distressed sales, which includes foreclosures and short sales, accounted for 32% of homes sold; this December, these distressed sales amounted to just 24% of the total; foreclosures were selling for 17% below market and short sales sold for 16% below market in december...the tight inventory of homes for sale also has reduced the time home spend on the market; the median time on market for all homes was 73 days in December, up from 70 days in November, but this was still below the 99 days it took to sell a year ago...short sales spent a median of 117 days on the market, while foreclosures typically sold in 45 days...investors, many buying with cash, continue to account for a big chunk of sales; they bought 21% of the homes for sale in December, the same percentage as last year; 29% of home sales transactions were all cash, compared with 30% in November and 31% a year ago, while first time buyers only accounted for 30% of home purchases in December, down from 31% a year ago, despite the low mortgage rates which would make ownership quite a bit cheaper than rent..

the report on New Residential Sales for December from the Census (pdf) covers only single family homes, so the totals are not comparable to the housing starts, permits, and completions report (pdf) that includes stats for multi-family units which we covered last week; moreover, a significant number of new home starts are owner built or contracted for and hence are not included in theses sales stats...but like that report, this report allows for a large margin of error which renders the widely watched and reported monthly data nearly useless...the census reports "Sales of new single-family houses in December 2012 were at a seasonally adjusted annual rate of 369,000...7.3 percent (±15.3%)* below the revised November rate of 398,000"; virtually all reports on this data focus on just the annualized number and the monthly change without mentioning the large margin of error...the actual census estimate for homes sold in december was a much less impressive 26,000, with 15,000 of those in the South, and 5,000 in the West...census takes that rough estimate of 26,000 and plugs it into a program which compares it to other recent Decembers and computes what annual sales would be if that december sales level were continued through the entire year; so when they say "sales were (±15.3%)* below the revised November rate of 398,000" they mean they are 90% confident that the seasonally adjusted annual rate of new home sales would fall someplace between 337,106 and 458,894, or that it's fairly likely that the monthly change in new home sales was somewhere between a gain of 8.0% and a decline of  22.6% at a seasonally adjusted annual rate...the comparison to last December's home sales is no more useful: "(December 2012's seasonally adjusted annual rate) is 8.8 percent (±24.8%)* above the December 2011 estimate of 339,000"   that's almost a range of 50%!  about the only new homes sales data from this report that we can bank on is annual estimate for all new homes sold in 2012: "An estimated 367,000 new homes were sold in 2012. This is 19.9 percent (±4.8%) above the 2011 figure of 306,000." so it's reasonable to say new home sales for this year were roughly 20% above last year, which was the worst year in the half century of census record keeping...census also report that the median sales price of new houses sold in December was $248,900 and the average sales price was $304,000, and that the seasonally adjusted estimate of new houses for sale at the end of December was 151,000, of which 25,000 had not yet been started and only 43,000 were completed...they call that a 4.9 month supply at the current sales rate...we'll include two graphs referencing this report which should help complete the picture of what this report tells us... on the left, we have Bill McBride's graph of actual monthly sales for the last 8 years; each year is color coded and sales in thousands are indicated on the left, with red indicating 2012 sales; if you click to enlarge you'll see that 12/12 sales at 26,000 was actually the highest December estimate since 2008...on the right we have the FRED graph of the inventory of new single family homes for sale over the 50 years of this report; December's inventory was 1.3% from November and 0.7% below a year ago, with a margin of error of ±1.6%; clearly, new homes for sale are near an all time low, suggesting any increase in demand will both increase prices and jumpstart new construction...

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(the above is my weekly commentary that accompanied my sunday morning links emailing, which in turn was mostly selected from my weekly blog post on the global glass onion, and also includes other links of interest…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me…)