by Calculated Risk on 1/07/2011 06:12:00 PM

Twenty Eleven
First Commercial Bank Failure
Inauspicious start.
by Soylent Green is People
From the FDIC: First Southern Bank, Boca Raton, Florida, Assumes All of the Deposits of First Commercial Bank of Florida, Orlando, Florida

As of September 30, 2010, First Commercial Bank of Florida had approximately $598.5 million in total assets and $529.6 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $78.0 million. ... First Commercial Bank of Florida is the first FDIC-insured institution to fail in the nation this year, and the first in Florida.

And so it begins ...

by Calculated Risk on 1/07/2011 02:12:00 PM

An interesting question is why the unemployment rate fell so sharply, even with relatively few payroll jobs added (103,000 jobs added in December).

First, it is important to remember that there are two separate surveys for the Employment Situation Summary. The unemployment rate comes from the Current Population Survey (CPS: commonly called the household survey), a monthly survey of about 60,000 households.

The payroll jobs number comes from Current Employment Statistics (CES: payroll survey), a sample of "approximately 140,000 businesses and government agencies representing approximately 410,000 worksites". See this post for a discussion of the two surveys.

The following table is based on the Household survey (all seasonally adjusted):

Household Survey (000s)	November	December	Change
Civilian noninstitutional population (16 and over)	238,715	238,889	174
Civilian labor force	153,950	153,690	-260
Employed	138,909	139,206	297
Unemployed	15,041	14,485	-556
Participation Rate	64.49%	64.34%	-0.16%
Unemployment Rate	9.77%	9.42%	-0.35%

The household survey measures percentages for the 60,000 households (unemployment rate, participation rate) and then the BLS derives the other numbers based on the population estimate.

So the estimated number of unemployed dropped by 556,000. Some of this decline was due to higher employment, but some was also due to the decline in participation - even while the population increased.

The table helps explain why the reported unemployment rate fell from 9.8% to 9.4%. A key reason was the decline in the participation rate. If the participation rate had held steady at 64.5%, then the unemployment rate would have only declined to 9.64%.

So almost 2/3rds of the decline in the unemployment rate was related to the decline in the participation rate. Some of the decline might be from workers going back to school, but some is probably due to people just giving up.

A large portion of the decline in the participation rate was for people in the 16 to 24 age group. According to the BLS, the 16 to 24 civilian labor force declined by 244 thousand. Most of these people will probably return to the labor force as the economy improves - and that will put upward pressure on the unemployment rate.

Another group that saw a decline in the participation rate was men in the key 25 to 54 age group. I wonder if these people are just giving up?

Click on graph for larger image.

Here is a repeat of the graph showing the unemployment rate (red), the participation rate (blue), and the employment-population ratio (black).

The participation rate has fallen sharply from 66% at the start of the recession to 64.3% in December. That is almost 4 million workers who are no longer in the labor force and not counted as unemployed in U-3, although most are included as "discouraged workers" or "Marginally Attached to Labor Force" in U-6.

A decline in the unemployment rate mostly due to a decline in the participation rate is not good employment news.

Earlier Employment posts:
• Employment Summary and Part Time Workers, Unemployed over 26 Weeks
• December Employment Report: 103,000 Jobs, 9.4% Unemployment Rate

by Calculated Risk on 1/07/2011 12:53:00 PM

From Bloomberg: Banks Lose Pivotal Massachusetts Foreclosure Case

The state Supreme Judicial Court today upheld a judge’s decision saying two foreclosures were invalid because the banks didn’t prove they owned the mortgages, which he said were improperly transferred into two mortgage-backed trusts.

“We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure,” Justice Ralph D. Gants wrote.

The concurring opinion by Justice Cordy helps clarify the situation:

I concur fully in the opinion of the court, and write separately only to underscore that what is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosure in Massachusetts, but rather the utter carelessness with which the plaintiff banks documented the titles to their assets. There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure. Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order. Although there was no apparent actual unfairness here to the mortgagors, that is not the point. ...

The type of sophisticated transactions leading up to the accumulation of the notes and mortgages in question in these cases and their securitization, and, ultimately the sale of mortgaged-backed securities, are not barred nor even burdened by the requirements of Massachusetts law. The plaintiff banks, who brought these cases to clear the titles that they acquired at their own foreclosure sales, have simply failed to prove that the underlying assignments of the mortgages that they allege (and would have) entitled them to foreclose ever existed in any legally cognizable form before they exercised the power of sale that accompanies those assignments. The court's opinion clearly states that such assignments do not need to be in recordable form or recorded before the foreclosure, but they do have to have been effectuated.

These are important points:
• The "assignments do not need to be in recordable form or recorded before the foreclosure". That is a key point.
• This case is really about the "utter carelessness with which the plaintiff banks documented the titles to their assets".

And this means that
• These issues are curable, but will be costly for the banks. As Tanta frequently argued, the upfront "cost savings" would be paid for in arrears!
• This does not appear to be a systemic risk.

by Calculated Risk on 1/07/2011 10:01:00 AM

Here are a few more graphs based on the employment report ...

Percent Job Losses During Recessions

Click on graph for larger image.

This graph shows the job losses from the start of the employment recession, in percentage terms - this time from the start of the recession.

In the previous post, the graph showed the job losses aligned at the bottom.

The dotted line shows payroll employment excluding temporary Census workers.

This is by far the worst post WWII employment recession.

Part Time for Economic Reasons

From the BLS report:

The number of persons employed part time for economic reasons (some-times referred to as involuntary part-time workers) was essentially unchanged in December at 8.9 million. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) declined slightly to 8.931 million in December. This has been around 9 million since early 2009 - a very high level.

These workers are included in the alternate measure of labor underutilization (U-6) that declined to 16.7% in December. Still very grim.

Unemployed over 26 Weeks

This graph shows the number of workers unemployed for 27 weeks or more.

According to the BLS, there are 6.441 million workers who have been unemployed for more than 26 weeks and still want a job. This was up from 6.328 million in November. It appeared the number of long term unemployed had peaked, however the increases over the last three months are very concerning.

Summary

This was a mixed report.

The best news was the decline in the unemployment rate to 9.4% from 9.8% in November. However this was partially because the participation rate declined to 64.3% - a new cycle low, and the lowest level since the early '80s. Note: This is the percentage of the working age population in the labor force (here is the graph in the galleries of the participation rate).

The 103,000 payroll jobs added was below expectations of 140,000 jobs, however payroll for October payroll was revised up 38,000 and November was revised up 70,000 32,000 for a total of 70,000 (ht Mish).

The increase in the long term unemployed, and the high level of part time workers for economic reasons are ongoing concerns. The average workweek was steady at 34.3 hours, and average hourly earnings ticked up 3 cents.

• Earlier Employment post: December Employment Report: 104,000 Jobs, 9.4% Unemployment Rate

by Calculated Risk on 1/07/2011 08:30:00 AM

From the BLS:

The unemployment rate fell by 0.4 percentage point to 9.4 percent in
December, and nonfarm payroll employment increased by 103,000, the U.S. Bureau of Labor Statistics reported today.

Payroll for October payroll was revised up 38,000, and November was revised up 32,000 (total of 70,000). (edit)

The following graph shows the employment population ratio, the participation rate, and the unemployment rate.

Click on graph for larger image.

The unemployment rate decreased to 9.4% (red line).

The Labor Force Participation Rate declined to 64.3% in December (blue line). This is the lowest level since the early '80s. (This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years.)

The Employment-Population ratio increased to 58.3% in December (black line).

The second graph shows the job losses from the start of the employment recession, in percentage terms aligned at maximum job losses. The dotted line is ex-Census hiring.

For the current employment recession, employment peaked in December 2007, and this recession 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 was slightly below expectations, although the upward revision to October and November were signficant. I'll have much more soon ...

by Calculated Risk on 1/06/2011 10:57:00 PM

From Alejandro Lazo at the LA Times: Housing bust creates new kind of declining city

"Some neighborhoods are going to suffer tremendously or are never going to come back or come back very, very slowly," said James R. Follain, senior fellow at the Rockefeller Institute of Government ...

Potential candidates for long-term decline named by the study are the areas hit hardest by the drop in home prices in recent years. They include several inland California metropolitan areas that grew rapidly during the boom, including Stockton, Modesto, Fresno, Riverside and San Bernardino. Las Vegas and Miami also made the list.

A traditional city in decline is one that has suffered a sustained population drop, leaving behind empty houses, apartment buildings, offices and storefronts. Cleveland and Detroit, for instance, suffered from the erosion of manufacturing and the loss of residents, who left in search of jobs.

Instead of eroding a particular industry, however, the housing bust left a glut of homes because of overbuilding and the foreclosure crisis. Follain argues that the future of these cities is threatened in similar ways to that of Rust Belt cities.

Here is the report: A Study of Real Estate Markets in Declining Cities

There is a "particular industry" gone in these new declining cities - construction!

Earlier: Employment Report Preview

by Calculated Risk on 1/06/2011 07:29:00 PM

From National Federation of Independent Business (NFIB): Small Business Hiring Stagnant in December; Likely to Improve in 2011

“Reports of net job creation continued to oscillate around the “0” line in December. Asked about changes in total employment over the last three months, 13 percent of owners reported increasing employment at their firms by an average of 3.5 workers while 14 percent reported (down two points from November) reducing total employment an average of 2.9 workers per firm. Clearly, December showed no surge in small business hiring. ... Still, the percentage of owners reporting higher employment levels is the second highest reading since December 2007...

“The good news is that the two job creation indicators, job openings and job creation plans, both reached new recovery highs. The percent of owners reporting hard to fill job openings rose four points to 13 percent, the best reading in 24 months. Plans to create jobs gained two points, rising to a net 6 percent of all owners, the best reading in 27 months. These indicators point to a pickup in job creation activity for the first quarter of 2011. However, the small business sector continues to underperform on job creation in this recovery compared to other recovery periods.”

NFIB will release their December Small Business Optimism survey on Tuesday.

Note: Small businesses have a larger percentage of real estate and retail related companies than the overall economy, so it is no surprise that hiring has lagged.

by Calculated Risk on 1/06/2011 04:33:00 PM

The BLS will release the December Employment Report at 8:30 AM tomorrow. The consensus is for an increase of 140,000 payroll jobs in December, and for the unemployment rate to decline to 9.7% (from 9.8% in November).

Gregg Robb at MarketWatch reports there have been some upward revisions: Optimism over government’s job report grows

Economists polled by MarketWatch are now expecting 175,000 nonfarm jobs created in December, up from 143,000 just a few days ago.

The unemployment rate is expected to remain steady at 9.8%.

Click on graph for larger image in graph gallery.

This graph shows the net payroll jobs per month (excluding temporary Census jobs) since the beginning of the recession. The estimate for December is in blue.

Last month the BLS reported a disappointing 39,000 jobs added in November. That was significantly below expectations of 145,000 jobs.

However - as always - we should be careful not to read too much into any one month of data. A good example was in 1997. The economy added 280,000 jobs per month on average, but in August 1997 the BLS reported a decline of 18,000 jobs! Was the employment boom over? Nope. The following month the BLS reported a gain of 508,000 jobs.

And that also suggests the possibility of some bounce back from November (or an upward revision to the November payroll numbers).

Here is a look at a few of the recent employment related reports:

• ADP reported Private Employment increased by 297,000 in December, the largest gain ever for the ADP series (started in 2001). This was well above expectations of 100,000 private sector jobs - and there is widespread skepticism that the economy actually added anywhere near that number of jobs. Andrew Tilton at Goldman Sachs noted yesterday:

[W]e view the dramatic improvement shown in the ADP report with skepticism ... while we do expect a meaningful pickup in employment growth in 2011, we have not changed our forecast of a 100,000 increase in nonfarm payrolls in December.

• Weekly initial unemployment claims were down significantly over the last couple of months.

The average over the last 5 weeks was 413,000 initial claims per week.

This was down sharply from the October the average of 456,000, and the November average of 431,000.

• However the ISM indexes showed slower employment growth.

The ISM manufacturing manufacturing Employment Index registered 55.7 percent in December, 1.8 percentage points lower than the 57.5 percent reported in November. The ISM Non-manufacturing employment index showed slower expansion in December at 50.5%, down from 52.7% in November.

• The Job Openings and Labor Turnover Survey has been showing an increase in job openings.

This data is only through October.

The yellow line (job openings) has been increasing steadily since early last year.

Overall I think the labor market is improving. Anything less than the addition of 100,000 nonfarm payroll jobs would be disappointing, and there appears to be the potential for an upside surprise. However I expect little change in the unemployment rate.

by Calculated Risk on 1/06/2011 02:03:00 PM

From the WSJ: EU Proposes Plan for Bank Failure

The EU executive arm, the European Commission, Thursday released a hefty 100-plus page consultation paper open to public comments until March 3, which aims to abolish the excuse that a bank is too big to fail. It asks whether bank bond holders should share in paying for future bailouts ...

[A] diplomat added: "The overriding objective is to make sure creditors bear the appropriate share of losses of a failing bank and these aren't immediately passed along to taxpayers."

Here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released today (graph as of Jan 4th):

Click on graph for larger image in new window.

From the Atlanta Fed:

Greek, Irish, and Portuguese bond spreads (over German bonds) continue to be elevated, rising since the December FOMC meeting.

Since the December FOMC meeting, the 10-year Greek-to-German bond spread has widend by 105 basis points (bps) (from 8.85% to 9.90%) through January 4.

Similarly with other European peripherals’ spreads, Portugal’s is 38 bps higher, and Ireland’s spread is 88 bps higher.

Note: the Atlanta Fed has added Belgium.

The bond yields have increased today. The Portugal 10 year is at 6.96%, the Ireland 10-year bond yield is over 9%, and the Greece 10-year bond yield is at a record 12.64%.

Clearly investors are pricing in a haircut.

by Calculated Risk on 1/06/2011 11:55:00 AM

A weekly update on hotels from HotelNewsNow.com: STR: Luxury segment tops ADR weekly increases

Overall the U.S. hotel industry’s occupancy increased 4.2% to 47.4%, ADR was up 2.3% to US$102.76, and revenue per available room finished the week up 6.6% to US$48.75.

The following graph shows the four week moving average for the occupancy rate as a percent of the median occupancy rate from 2000 through 2007.

Click on graph for larger image in graph gallery.

Note: I've changed this graph. Since this is the percent of the median from 2000 to 2007, the percent can be greater than 100%.

The down spike in 2001 was due to 9/11. The up spike in late 2005 was hurricane related (Katrina and Rita).

This shows how deep the slump was in 2009 compared to the period following the 2001 recession. This also shows hotels are recovering, but the occupancy rates are still below normal.

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