by Calculated Risk on 2/08/2010 12:54:00 AM

The Federal Government is shut down in D.C. Monday because of snowmageddon!

Also dig out your Dow 10K hats again ... the U.S. futures are off a little tonight:

Futures from CNBC show the Dow fair value at 9,968.

Here are the futures from barchart.com

The Asian markets are mostly off tonight (Nikkei off 1.0%)

Best to all.

by Calculated Risk on 2/07/2010 09:51:00 PM

From the WSJ: Housing Rebound in Canada Spurs Talk of a New Bubble

Canada's housing recovery has been so rapid that some here are worrying about a bubble.

Last Wednesday, a housing-price index for Canada's six biggest cities posted its seventh straight monthly gain, showing home prices in November are now back to their prerecession peak. Another broader measure shows the average home price in 2009 hitting a record.
...
Canadian banks typically reset adjustable-rate mortgages every few years, those who are buying now at low rates will likely see increases soon. ... The Bank of Canada warned in its December report that if interest rates increase as expected, by mid-2012 about 9% of Canadian households could have so much debt that they'd be "financially vulnerable."

Just something to consider ...

by Calculated Risk on 2/07/2010 03:41:00 PM

First, via NPR: The Super Bowl Stock Market Predictor

The Super Bowl Stock Market Predictor holds that if a team from the old NFL wins, the market will rise in that year; if a team from the old AFL wins, the market will fall.

Both the Colts and the Saints qualify as "old NFL", so that is bad news for the bears!

Second, from Bloomberg: Greenspan Says Unemployment Not Likely to Fall Soon

Former Federal Reserve Chairman Alan Greenspan said it is “very difficult” to see U.S. unemployment falling soon and that an economic recovery is “going to be a slow, trudging thing.” He also expressed concern about falling stock prices.

Uh oh, it makes me nervous when I agree with Greenspan, so maybe the recovery will be "V-shaped" and unemployment will fall quickly!

Just joking of course - I still think the recovery will be sluggish and unemployment will stay elevated for some time.

by Calculated Risk on 2/07/2010 11:59:00 AM

People will be watching the so called PIGS (Portugal, Ireland, Greece and Spain) this week for any updates on a possible sovereign debt crisis. And don't forget Eastern Europe and the Baltic states too, especially Latvia.

The Economist has a preview on Greece:

TAX-COLLECTORS and customs officers in Greece have already walked out in protest against planned austerity measures by the government. On Wednesday February 10th it will be the turn of civil servants, doctors and other state workers. A much bigger strike is expected later in the month and past experience suggests that protests could turn nasty. Yet unless Greece gets a grip on its public finances, the government will struggle to finance its loans. Similar anxieties are emerging elsewhere in Europe.

On Tuesday, the NFIB Small Business Optimism for January will be released, the Job Openings and Labor Turnover Survey (JOLTS) survey for December, and Wholesale Inventories report for December.

On Wednesday, the Census Bureau will release the December Trade Balance report (consensus is for a trade deficit of about $36 billion, the same as last month) and the MBA will release the weekly Mortgage Applications report. Also Wednesday will be a busy day for Fed Speak.

On Thursday, the Retail Sales report for January will be released. Consensus is for a 0.4% increase (Bloomberg consensus 0.3%), and 0.6% ex-autos. The weekly initial unemployment claims report will be closely watched, and the consensus is for a decline to under 460,000. Business inventories will also be released on Thursday.

Consumer sentiment will be released on Friday, and the West Coast port traffic will probably also be released this week - and of course more bank failures.

And a summary of last week ...

Employment Report: 20K Jobs Lost, 9.7% Unemployment Rate

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 20,000 in January and the unemployment rate decreased to 9.7%. The economy has lost almost 4.0 million jobs over the last year, and 8.42 million jobs since the beginning of the current employment recession.

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 employment recession, employment peaked in December 2007, and this is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only the early '80s recession with a peak of 10.8 percent was worse).

This graph shows the employment-population ratio; this is the ratio of employed Americans to the adult population.

The Employment-Population ratio ticked up slightly to 58.4% in January, after plunging since the start of the recession. This is about the same level as in 1983.

Note: the above graph doesn't start at zero to better show the change.

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

According to the BLS, there are a record 6.31 million workers who have been unemployed for more than 26 weeks (and still want a job). This is a record 4.1% of the civilian workforce. (note: records started in 1948)

The number of long term unemployed, and the dramatic plunge in Employment-Population ratio, are two of the key stories of this recession.

U.S. Light Vehicle Sales 10.8 Million SAAR in January

This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for January (red, light vehicle sales of 10.78 million SAAR from AutoData Corp).

This is the lowest level since October and below the levels of last July. Obviously sales were boosted significantly by the "Cash-for-clunkers" program in August and some in July.

The current level of sales are still very low, and are still below the lowest point for the '90/'91 recession (even with a larger population).

Homeownership Rate Declines to Early 2000 Level

The homeownership rate declined to 67.2% in Q4 and is now at the levels of early 2000.

Note: graph starts at 60% to better show the change.

The Census report also showed the homeowner vacancy rate increase to 2.7%, and the rental vacancy rate was at 10.7% (see graphs here).

This data suggests there are about 1.8 million excess vacant housing units in the U.S. (above the normal levels). For analysis, see: Housing Stock and Flow

Construction Spending Declines in December

Residential construction spending decreased in December, and nonresidential spending increased slightly.

Private residential construction spending is now 61.5% below the peak of early 2006.

Private non-residential construction spending is 22.0% below the peak of October 2008.

Other Economic Stories ...

From David Streitfeld at the NY Times: No Aid or Rebound in Sight, More Homeowners Just Walk Away

From the Fed: Banks Cease Tightening Standards, Loan Demand Weakens Further

From Dina ElBoghdady and Dan Keating at the WaPo: Rising FHA default rate foreshadows a crush of foreclosures

Q4: Office, Mall and Lodging Investment

From the Institute for Supply Management: ISM Manufacturing Index Shows Expansion in January

From the Institute for Supply Management: ISM Non-Manufacturing Shows Slight Expansion in January

From the National Multi Housing Council (NMHC): Apartment Market Conditions Steady; Sales Volume and Equity Financing Improve, According to NMHC Quarterly Survey

December PCE and Saving Rate

From the American Bankruptcy Institute: January Consumer Bankruptcy Filings Decrease 10 Percent from December

Unofficial Problem Bank Lists Increases to 605

Best wishes to all.

by Calculated Risk on 2/07/2010 08:37:00 AM

From Kenneth Harney in the LA Times: 'Cash-in' refis growing in popularity

In Freddie Mac's latest quarterly survey of refinancings, 33% of homeowners put cash into the deal to lower their mortgage balances, the highest percentage ever. By contrast, only 27% of refinancers took cash out -- the lowest percentage on record.

... there has been a steady rise since the fourth quarter of 2007, when cash-ins hit 9%, up from just 5% of all refis earlier that year.

By early 2009, they accounted for 13% of refinancings, then grew to 18% in the third quarter. After that, cash-ins jumped to 33% in the final three months of 2009.

Harney discusses two reasons for "cash-in" refis: 1) Paying down the mortgage can get the borrower a better loan and avoid PMI, and 2) with interest rates so low on money market funds and CDs, paying down the mortgage offers a higher return.

This "cash-in" has shown up in the Fed's Flow of Funds data.

Click on graph for larger image in new window.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.

For Q3 2009, the Net Equity Extraction was minus $91 billion, or negative 3.3% of Disposable Personal Income (DPI). Q4 data will be released on March 11th.

This decline was partially because of debt cancellation per foreclosure sales, and some from modifications, like Wells Fargo's principal reduction program, and partially due to homeowners paying down their mortgages as opposed to borrowing more.

Maybe "mortgage burning parties" will make a comeback too.

Note: Mortgage burning link is to an audio of NPR story last year: Mortgage-Burning Parties Almost Extinct

by Calculated Risk on 2/06/2010 11:15:00 PM

A couple of past favorites, standup economist Yoram Bauman (see his classic Principles of economics, translated ) and singer Merle Hazard (Inflation or Deflation? and H-E-D-G-E ), appear in the video ...

by Calculated Risk on 2/06/2010 07:41:00 PM

From Michelle Singletary at the WaPo: Paying your credit card bill before the mortgage

TransUnion ... recently released a report showing that an increasing number of consumers are choosing to pay their credit card bills before their monthly mortgages. ... The percentage of people delinquent on their mortgages but current on credit cards jumped to 6.6 percent in the third quarter of 2009, up from 4.9 percent in the third quarter of 2008.
...
The percentage of consumers current on their credit cards but delinquent on their mortgages first surpassed the percentage of consumers up to date on their mortgages but delinquent on their credit cards in the first quarter of 2008, according to TransUnion.

"The implosion of the mortgage industry over the last 24 months, the resetting of adjustable-rate mortgages and the weak job market have all come together to redefine how consumers are managing their finances and meeting or not meeting their credit obligations," said Ezra Becker, director of consulting and strategy in TransUnion's financial services business unit.

Check out the numbers for California and Florida!

This behavior first showed up with subprime borrowers, from Bloomberg in June 2007: Subprime Borrowers More Apt to Pay Card Debt, Ignore Mortgages

The riskiest borrowers in the U.S. are more likely to pay off their credit-card debt than their mortgage, bucking historical trends, a new study shows.
...
Bankers in the past have reasoned that consumers would give up everything else before they risked losing their homes, making mortgages less risky than other forms of lending. The report found borrowers with strong ratings still follow the historic trend of paying their mortgage before their credit-card debt.

The penchant of subprime borrowers to do the opposite may be ``a potential shift in this payment paradigm,'' the study said.

Another "subprime" behavior goes mainstream ...

by Calculated Risk on 2/06/2010 03:57:00 PM

TIME asks: The Great Recession: Will Construction Workers Survive?

Nationally, unemployment fell to 9.7% in January, but in construction it jumped to 24.7% ... "In the previous 14 years, I had not been out of work for more than one week," says Pat O'Connor, 57, a Connecticut carpenter. With no work since July, O'Connor says, "It is a bad dream turning into a nightmare. Is construction dead? It's just horrible right now. No one expected this. It's a depression."

And it won't get better in 2010.

The following graph shows construction employment (total) and as a percent of non-farm payroll employment.

Click on graph for larger image in new window.

Although construction employment is off 2.1 million workers since the peak, there will be no increase any time soon.

Looking at the graph, it appears construction employment continues to decline for a time after a recession ends - or only picks up a little. However this masks the contributions from the two components of construction: residential and non-residential.

Residential investment (and residential construction) usually leads the economy out of recession, and non-residential construction lags the economy. Unfortunately the BLS didn't start breaking out residential construction employment until recently, but that is the pattern.

This time any improvement in residential construction employment will be small, in fact completions in 2010 will be at an all time record low (see: Housing Stock and Flow).

The TIME article notes:

In downtown Los Angeles, just east of Little Tokyo, one of the only active construction sites is a 53-unit apartment building at Alameda and 4th Street.

And when that is completed, the opportunities will be few. In 2010 the number of 5+ unit completions will collapse:

The blue line is for multifamily starts and the red line is for multifamily completions. For the most part, all the multifamily units that will be delivered in 2010 have already been started since, according to the Census Bureau, it takes on average over 1 year to complete these projects.

Since multifamily starts collapsed in 2009, completions will collapse in 2010 - and construction employment will suffer.

And non-residential investment (and employment) is still getting crushed (see: Q4: Office, Mall and Lodging Investment). As these projects are completed, more construction workers will be let go.

So the outlook for construction employment in 2010 is grim.

by Calculated Risk on 2/06/2010 12:38:00 PM

This is probably worth reviewing again, and I've added several graphs to show the relationship between net payroll jobs (establishment survey) and the unemployment rate (household survey) over different periods.

As I noted yesterday, a common question is: How could there be fewer payroll jobs, but the unemployment rate declined? This is because the data comes from two separate surveys. The establishment survey showed a loss of 20,000 payroll jobs in January, but the household survey showed an increase in the employment level of 541,000.

The number to use for jobs is the establishment survey, but the unemployment number is based on the household survey. The two surveys can diverge over the short period, but over time it will all work out. This was a hot topic last year when the unemployment rate decline to 9.4% in July, and some commentators wondered if the unemployment rate had peaked (see: Unemployment and Net Jobs).

Here are a series of graphs showing this relationship over several different periods.

The first graph shows the one month change in net jobs (on the x-axis) as a percentage of the payroll jobs, and the change in the unemployment rate on the y-axis.

The data is for the last 40 years: 1969 through January 2010.

Click on graph for large image.

Obviously there is a correlation - the more jobs added (further right on the x-axis), the more the unemployment rate declines (y-axis). And generally the more jobs lost, the more the unemployment rate increases. But R² is only 0.31 on a monthly basis - pretty noisy.

The large Red triangle (with arrow) is the most recent month. It is somewhat of an outlier, but still on the edge of the scatter pattern.

The second graph covers the same period but on a three month basis (note: this graph uses rolling three month periods, so the data is not all independent).

Now we see a much sharper correlation. R² is 0.69.

The red triangle is the most recent three month period, and this is somewhat of an outlier.

Note that the trend line is a 2nd order polynomial. When the economy starts to add jobs, more people start looking for work - and the relationship between net jobs and the unemployment rate is not linear.

Lets expand this to two longer periods: six months and one year.

The third graph is for the six month change in payroll jobs and the unemployment rate. R² is 0.79.

Once again the red triangle is for the most recent period. The change is on the edge of the scatter, but appears pretty normal. The increase in the unemployment rate is a little lower than expected over the last six months, probably because of the sharp decline in the number of people participating in the labor force.

And the final graph is for the annual change. R² is 0.81.

Once again this graph uses rolling periods, so the data is not independent.

The red triangle is for the most recent year, and is probably low because of the sharp decline in employment participation (one of the unusual features of the current employment recession).

So what does this mean going forward for the unemployment rate? It is probably reasonable to expect that the employment-population ratio has stopped falling. Therefore, to see consistent declines in the unemployment rate, we would probably have to see sustained payroll growth of over 150 thousand per month.

Since I expect the recovery to be sluggish, I wouldn't be surprised to see the unemployment rate at or near this level (or even higher) for some time.

by Calculated Risk on 2/06/2010 09:18:00 AM

“We have control of the ship, we have a plan.”
María Teresa Fernández de la Vega, Spain’s deputy premier
From the Financial Times: Spain and Portugal fight to calm investors

Spanish and Portuguese debt and equity markets were hard hit by Greece-related doubts among investors, partly because Madrid and Lisbon ran up budget deficits to dampen the effects of the economic crisis and partly because of fears for eurozone cohesion.
...
“In a country with such high unemployment, how will it be possible to reduce the public deficit?” asked Prof [Juan José Toribio, economics professor at Iese Business School]
excerpted with permission

Reuters is quoting European Central Bank Governing Council member Ewald Nowotny as saying talk of a Eurozone breakup is "absurd". And Bloomberg is quoting Nowotny on the exchange rate:

“There’s no worrying development. Foreign exchange rates naturally fluctuate.”

And more from the NY Times: Debt Problems Chip Away at Fortress Europe

And from the WaPo: Debt crisis unsettles European economy

Senior officials at the major rating agencies on Friday played down the risk of an immediate debt crisis, saying even nations such as Greece have enough reserves to put off for months a day of financial reckoning. ... is especially hitting banks and other institutions with broad exposure to the sovereign debt of the "PIGS" of Europe -- Portugal, Ireland, Greece and Spain.

And more from Paul Krugman on the problems of a single currency: The Spanish Tragedy

We might get further updates on Sunday ...