by Calculated Risk on 9/04/2009 09:40:00 AM

Note: earlier Employment post: Employment Report: 216K Jobs Lost, 9.7% Unemployment Rate . The earlier post includes a comparison to previous recessions.

Stress Test Scenarios

Click on graph for larger image in new window.

This graph shows the unemployment rate compared to the stress test economic scenarios on a quarterly basis as provided by the regulators to the banks (no link).

This is a quarterly forecast: the Unemployment Rate for Q3 is an average of July and August (rounded to 9.6%), and will probably move higher. Once again, the unemployment rate is already higher than the "more adverse" scenario.

Note also that the unemployment rate has already exceeded the peak of the "baseline scenario".

Unemployed over 26 Weeks

The DOL report yesterday showed seasonally adjusted insured unemployment at 6.2 million, down from a peak of about 6.9 million. This raises the question of how many unemployed workers have exhausted their regular unemployment benefits (Note: most are still receiving extended benefits, although this is about to change).

The monthly BLS report provides data on workers unemployed for 27 or more weeks, and here is a graph ...

The blue line is the number of workers unemployed for 27 weeks or more. The red line is the same data as a percent of the civilian workforce.

According to the BLS, there are almost 5.0 million workers who have been unemployed for more than 26 weeks (and still want a job). This is 3.2% of the civilian workforce.

The good news is there wasn't much of an increase from July. The bad news is many of these 5 million long term unemployed will start exhausting their extended unemployment benefits soon. According to the projections by the National Employment Law Project about 0.5 million will have exhausted their benefits by the end of this month (September) and about 1.5 million by the end of the year.

In California alone, from the O.C. Register: "an estimated 143,000 unemployed workers in California [exhausted] their jobless benefits by Sept. 1, according to new figures released by the state Employment Development Department".

Diffusion Index

Here is a look at how "widespread" the job losses are using the employment diffusion index from the BLS.

Although job losses continued in many of the major industry sectors in August, the declines have moderated in recent months.
BLS, August Employment Report

The BLS diffusion index is a measure of how widespread changes in employment are. Some people think it measures the percent of industries increasing employment, but that isn't quite correct.

From the BLS handbook:

The diffusion indexes for private nonfarm payroll employment are based on estimates for 278 industries, while the manufacturing indexes are based on estimates for 84 industries. Each component series is assigned a value of 0, 50, or 100 percent, depending on whether its employment showed a decrease, no change, or an increase over a given period. The average (mean) value is then calculated, and this percent is the diffusion index number.

Think of this as a measure of how widespread the job losses are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS.

Before last Summer, the all industries employment diffusion index was in the 40s, suggesting that job losses were limited to a few industries. However starting in September the diffusion index plummeted. In March, the index hit 19.6, suggesting job losses were very widespread. The index has recovered since then to 35.2 in August, suggesting job losses are not as widespread across industries as early this year - but losses continue in many industries.

The manufacturing diffusion index fell even further, from 40 in May 2008 to just 6 in January 2009. The manufacturing index has rebounded to 29.5 in August, indicating improvement, but still fairly widespread job losses across manufacturing industries.

by Calculated Risk on 9/04/2009 08:30:00 AM

From the BLS:

Nonfarm payroll employment continued to decline in August (-216,000), and the unemployment rate rose to 9.7 percent, the U.S. Bureau of Labor Statistics reported today. Although job losses continued in many of the major industry sectors in August, the declines have moderated in recent months.

Click on graph for larger image.

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 216,000 in August. The economy has lost almost 5.83 million jobs over the last year, and 6.93 million jobs during the 20 consecutive months of job losses.

The unemployment rate increased to 9.7 percent. This is the highest unemployment rate in 26 years.

Year over year employment is strongly negative.

The second graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost).

For the current recession, employment peaked in December 2007, and this recession was a slow starter (in terms of job losses and declines in GDP).

However job losses have really picked up over the last year, and the current recession is now the 2nd worst recession since WWII in percentage terms (and the 1948 recession recovered very quickly) - and also in terms of the unemployment rate (only early '80s recession was worse).

The economy is still losing jobs at about a 2.6 million annual rate, and the unemployment rate will probably be above 10% soon. This is still a weak employment report - just not as bad as earlier this year. Much more to come ...

by Calculated Risk on 9/03/2009 09:25:00 PM

John Burns Consulting sent out a note today titled: FHA Likely To Be The Next Shoe To Drop

"The FHA's aggressive lending programs have continued throughout the housing downturn, causing its market share of the mortgage industry to grow from 2% in 2005 to 23% today. ... The FHA insurance fund, however, is likely running dry. ...

While almost all of the experts believe that Congress would support the FHA if necessary (it's currently self-funded), we wonder if FHA officials will be under pressure to continue tightening their lending policies, which currently allow 96.5% mortgages to people with 600 FICO scores. ... Claims against the insurance fund have climbed, with roughly 7% of all FHA-insured loans now delinquent.

And from the WSJ: Loan Losses Spark Concern Over FHA

The Federal Housing Administration ... is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.
...
Resulting FHA losses are offset by premiums paid by borrowers. Federal law says the FHA must maintain, after expected losses, reserves equal to at least 2% of the loans insured by the agency. The ratio last year was around 3%, down from 6.4% in 2007.
...
Officials said as recently as May that they didn't expect to fall below the 2% limit, but home price declines have exceeded those used to model their expected losses. Given the pace of those declines, "there is no way they will make the 2%" if the current study follows last year's methodology, says [Thomas Lawler, an independent housing economist].

Based on the issues at the FHA, the end of the tax credit, and more supply coming on the market, Burns concluded that "housing could see another leg down later this year or early next year":

[W]atch the growing controversy regarding the FHA very carefully. The decisions made to allow the FHA to continue lending will have a huge impact on the housing market, particularly when so few entry-level buyers have a substantial down payment.

by Calculated Risk on 9/03/2009 08:09:00 PM

From Rolfe Winkler at Reuters: U.S. junk bond default rate rises to 10.2 pct -S&P

The U.S. junk bond default rate rose to 10.2 percent in August from 9.4 percent in July ... Standard & Poor's data showed on Thursday.

The default rate is expected to rise to 13.9 percent by July 2010 and could reach as high as 18 percent if economic conditions are worse than expected, S&P said in a statement.
...
In another sign of corporate distress, the rating agency has downgraded $2.9 trillion of company debt year to date, up from $1.9 trillion in the same period last year.

Bad loans everywhere ...

by Calculated Risk on 9/03/2009 04:30:00 PM

Just another mention: the Atlanta Fed puts out an Economic Highlights and Financial Highlights every week. They highlight different data each week ...

The Federal Reserve released the Factors Affecting Reserve Balances today. Total assets increased slightly to $2.119 trillion. This graph from the Atlanta Fed shows the breakdown in the assets (as of yesterday):

Click on graph for larger image in new window.

From the Atlanta Fed:

The size of the Fed’s balance sheet has largely been flat since March, remaining within a range of $2 trillion to $2.2 trillion.

The overall size of the Fed’s balance sheet has been flat during the past few months, and the broad trends remain little changed. That is, the sizeable declines in short-term lending to financials and nonbank credit markets have largely been offset by increases in holdings of Treasury securities, mortgage-backed securities (MBS), and agency debt.

On Friday, the Federal Reserve Board announced a reduction for the two September TAF auctions, lowering both from $100 billion to $75 billion. The Board has cut the amounts available in the TAF auctions three times in $25 billion increments (from the program’s maximum of $150 billion, last available in June).

The second graph shows a breakdown of Fed Treasury purchases by maturity. From the Atlanta Fed:

Decomposing the Fed’s purchases of Treasury securities by maturity shows a heavy focus in the four-to-seven-year and seven-to-10-year sectors, together making up half of all purchases so far.

But the last four Treasury purchases have been focused elsewhere, with the biggest purchases in the shorter end of the yield curve.

The Fed has purchased a total of $276.4 billion of Treasury securities through September 2. Of the $271.8 billion in non-TIPS securities, the Fed has focused on the four-to-seven-year and seven-to-10-year sectors the most, purchasing approximately $65 billion in each (totaling about half of all purchases).

The two-to-three-year and three-to-four-year sectors have also received a fair amount of attention, especially following two large purchases in the last week and a half in each sector. Recently, the Fed purchased $6.1 billion in the two-to-three-year sector on August 24, $2.3 billion in the 17-to-30-year sector on August 26, and $5.6 billion in the three-to-four-year sector on September 1.

The FOMC statement released on Wednesday, August 12, said the Fed is “in the process of buying $300 billion of Treasury securities” by the end of October. This statement was an adjustment from previous statements that stated “up to” $300 billion in purchases would be made “by autumn.”

There is much more in the highlights. Enjoy.

by Calculated Risk on 9/03/2009 02:35:00 PM

From The Oregonian: Portland's hotels face grim prospects (ht Shawn)

[F]or two weeks in November and one week each in December and January, the Hilton's presidential suite -- along with all other rooms in [the original 23-story building] -- will go dark. [The newer Hilton will remain open.]
...
Downtown Portland hotels are also facing stiffer competition after Sage Hospitality Resources of Denver opened two new hotels with more than 500 rooms just as market went into its funk. At one of those hotels, The Nines, Sage's business was off so much that it sought a delay in loan payments to the City of Portland's urban renewal agency.

Marks, the Hilton general manager, said early this week that the hotel routinely shuts entire floors during slow weeks to cut cleaning and energy costs. He projects the Hilton's occupancy could be as low as 30 percent in some winter weeks.

It is routine for hotels to close floors, but unusual to close an entire building (although Hilton has a newer tower across the street).

There are a couple of key points in this story: occupancy has declined, especially business related travel, and there is too much new supply on the market. Lower demand meets higher supply, and the result is lower prices - and hotels cutting costs, closing buildings, and more and more hotels unable to meet their debt payments - and some even unable to make their payroll.

by Calculated Risk on 9/03/2009 12:36:00 PM

Note: Last year Labor Day was a week earlier (Sept 1st in 2008, Sept 7th this year) and the Democratic National Convention was held August 25th to the 28th, both make the year-over-year comparison more difficult this week.

From HotelNewsNow.com: Labor Day, Democratic National Convention hampers US weekly numbers

Overall, the U.S. industry’s occupancy fell 12.4 percent in year-over-year comparisons to end the week at 54.4 percent. Average daily rate dropped 11.0 percent to finish the week at US$94.01. Revenue per available room for the week decreased 22.0 percent to finish at US$51.10.

Click on graph for larger image in new window.

This graph shows the YoY change in the occupancy rate (3 week trailing average).

The three week average is off 8.9% from the same period in 2008.

The average daily rate is down 11%, and RevPAR is off 22% from the same week last year.

Earlier this year business travel was off much more than leisure travel. So it was expected that the summer months would not be as weak as earlier in the year. September - after Labor Day (Sept 7th) - will be the real test for business travel, and for the hotel industry.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 9/03/2009 10:00:00 AM

The August 2009 Manufacturing ISM report showed expansion, but the non-manufacturing sector was still contracting in August.

From the Institute for Supply Management: August 2009 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector contracted in August, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

... "The NMI (Non-Manufacturing Index) registered 48.4 percent in August, 2 percentage points higher than the 46.4 percent registered in July, indicating contraction in the non-manufacturing sector for the 11th consecutive month but at a slower rate. The Non-Manufacturing Business Activity Index increased 5.2 percentage points to 51.3 percent. This is the first time this index has reflected growth since September 2008. The New Orders Index increased 1.8 percentage points to 49.9 percent, and the Employment Index increased 2 percentage points to 43.5 percent. The Prices Index increased 21.8 percentage points to 63.1 percent in August, indicating a substantial increase in prices paid from July. According to the NMI, six non-manufacturing industries reported growth in August. Respondents' comments are mixed about business conditions and the overall economy; however, there is an increase in comments indicating that there are signs of improvement going forward."
emphasis added

The service sector was still contracting in August, although contracting at a slightly slower pace than in July.

No recovery yet in the service sector ...

by Calculated Risk on 9/03/2009 08:30:00 AM

The DOL reports weekly unemployment insurance claims decreased to 570,000:

In the week ending Aug. 29, the advance figure for seasonally adjusted initial claims was 570,000, a decrease of 4,000 from the previous week's revised figure of 574,000. The 4-week moving average was 571,250, an increase of 4,000 from the previous week's revised average of 567,250.
...
The advance number for seasonally adjusted insured unemployment during the week ending Aug. 22 was 6,234,000, an increase of 92,000 from the preceding week's revised level of 6,142,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims increased this week by 4,000 to 571,250, and is now 87,500 below the peak in April.

It appears that initial weekly claims have peaked for this cycle. However it seem that weekly claims are stuck at a very high level; weekly claims have been around 570,000 for the last 8 weeks. This indicates continuing weakness in the job market. The four-week average of initial weekly claims will probably have to fall below 400,000 before the total employment stops falling.

by Calculated Risk on 9/02/2009 11:15:00 PM

We've been discussing accidental landlords for a couple of years. Here is another article about homeowners becoming landlords out of necessity, from the WSJ: The Reluctant Landlords

With housing prices still in the dumps, many Americans are finding themselves in the uncomfortable position of landlord.
...
Hard data are scant on how many homeowners are renting out their homes, but anecdotal evidence suggests numbers are up. In one indication of the trend: More homeowners are converting their homeowners insurance to landlord policies that cover the additional risks of leasing out a home. Allstate Corp., the second largest home insurer in the U.S., reported a 27% increase in conversions in the first quarter from the previous year.

The article discusses a few hapless homeowners, and I'll give the same advice as last year:

[T]hese accidental landlords are looking at prices from a few years ago, and deciding to wait to sell. In general this is a mistake. Owners should analyze the rent or sell decision based on current prices - and consider the probability that nominal prices will move lower or at best stay flat for several years.

This is part of the shadow inventory that will eventually be sold and will help keep inventory levels high for years.

And on the shadow inventory, here is an excerpt from: The Surge in Rental Units

The supply of rental units has been surging:

Click on graph for larger image in new window.

This graph shows the number of occupied (blue) and vacant (red) rental units in the U.S. (all data from the Census Bureau).

The total number of rental units (red and blue) bottomed in Q2 2004, and started climbing again. Since Q2 2004, there have been over 4.3 million units added to the rental inventory.
...
This increase in units has more than offset the recent strong migration from ownership to renting, so the rental vacancy rate is now at a record 10.6%.

Where did these approximately 4.3 million rental units come from?

The Census Bureau's Housing Units Completed, by Intent and Design shows 1.1 million units completed as 'built for rent' since Q2 2004. This means that another 3.2 million or so rental units came mostly from conversions from ownership to rentals.

These could be investors buying REOs for cash flow, condo "reconversions", builders changing the intent of new construction (started as condos but became rentals), flippers becoming landlords, or homeowners renting their previous homes instead of selling.

Whatever the reason for the conversion, many of these 3.2 million units are part of the shadow housing inventory. Especially the properties owned by accidental landlords, who will sell as soon as possible.