by Calculated Risk on 3/07/2011 12:40:00 PM

We continue to be reminded of the downside risks to economic growth this year: higher oil prices and the potential for a supply shock, the European financial crisis, state and local government fiscal issues, Federal government budget issues, and the two sides of the inflation coin (inflation increases or policymakers overreact).

• U.S. oil prices were near $107 per barrel this morning before declining slightly to $105. I think this is the key risk to U.S. economic growth in the short term.

Not only is the situation in Libya looking more and more like a prolonged civil war, but the unrest may spread to Bahrain and Saudi Arabia (March 11th is the "Day of Rage" in Saudi).

• The European financial crisis has been on the back burner, but yields are still elevated and there are key Euro Zone meetings scheduled in March - including a special eurozone debt crisis summit scheduled for Friday, March 11th. Ireland is asking to renegotiate the terms of their bailout, Greece debt was downgraded this morning, and Portugal is probably next in line. And the European Banking Authority has now launched the next round of bank stress tests.

I expect this to be front page news again soon.

• State and local governments reduced employment by 30,000 in February, and several state budgets are in the news, especially the ongoing Wisconsin political battles. I expect state and local government cutbacks to continue all year.

• On the Federal government, some drag from fiscal policy was expected due to some spending cuts, and also from the decline in spending from the 2009 fiscal stimulus package. However the "debt ceiling" debate is just political grandstanding, but it is possible that more cuts will be enacted this year - slowing growth in 2011.

• Inflation is a two sided coin: if inflation increases in the U.S., then the Fed might move quicker on tightening policy (I think core inflation will remain below the Fed's target all year), and it is possible policymakers will overreact to price increases in commodities and raise rates too soon. However if oil prices continue to increase, then QE3 is more likely:

"If [the rising price of oil] plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation," [Atlanta Fed President Dennis Lockhart said this morning].

These are all risks to 2011 economic growth. For now I'm sticking with my over forecast of 3.5% to 4.0% real GDP growth in 2011, but I'm watching all of these issues closely.

by Calculated Risk on 3/07/2011 08:57:00 AM

The following is a reminder that there is a special eurozone debt crisis summit scheduled for Friday, March 11th.

From MarketWatch: Moody’s cuts Greece rating, stokes debt fears

Moody’s Investors Service cut Greece’s sovereign-debt rating Monday by three notches to B1 ... The ratings agency, which also assigned a negative outlook to Greece’s ratings, highlighted the government’s difficulties with revenue collection and noted a risk that Athens might not meet the criteria for continued support from the International Monetary Fund and the European Union after 2013.

That could result in a voluntary restructuring of existing debt, the ratings agency said.

The Ten Year yield for Greece is at 12.4%.

Here are the Ten Year yields for Ireland, Portugal, Spain, and Belgium. All moving up some today ...

On U.S. economy:
• Summary for last week ending March 4th
• Schedule for Week of March 6th

by Calculated Risk on 3/06/2011 10:38:00 PM

I always pay close attention to Fed stories from Jon Hilsenrath at the WSJ: Fed Unlikely to Remove Its Economic Stimulus Just Yet

Hilsenrath makes several key points:
• QE2 will probably end in June: "the securities purchase program ... is likely to end in June as scheduled."

• Tapering off of purchases unlikely: "Though the idea of tapering has received some attention on Wall Street of late, officials seem unlikely to want to follow that course this time ..."

• Fed will probably take a wait and see approach after June to see "how the economy performs later in the year without [QE2]."

• The "hawks" aren't pushing hard to finish early.

As I noted in When will the Fed raise rates?, this suggests a timeline for the earliest Fed funds rate increase:
• End of QE2 in June.
• End of reinvestment 0 to 2 months later.
• Drop extended period language a couple months later
• Raise rates in early 2012.

That is probably the earliest the Fed will raise rates - and it could be later in 2012 or even later ...

Earlier:
• Summary for last week ending March 4th
• Schedule for Week of March 6th

by Calculated Risk on 3/06/2011 08:32:00 PM

• Libya: Looking like a prolonged civil war ...

From the NY Times: Rebel Advance in Libya Set Back by Heavy Assault

From al Jazeera: Libya Live Blog - March 7

• WTI oil prices at $105.03

• From Brent Hunsberger at The Oregonian: Hundreds of Oregon foreclosure sales stopped after judges' rulings (ht azurite)

Earlier:
• Summary for last week ending March 4th
• Schedule for Week of March 6th

by Calculated Risk on 3/06/2011 02:17:00 PM

The National Federation of Independent Business (NFIB) will release their February survey on Tuesday, but here is a pre-release of the employment data ... from NFIB: Positive Trend in Job Growth

“February brought us good news on the jobs front: The trend for job creation is, at last, decidedly positive. While job creation reports have been improving for almost two years, they have consistently been negative or near zero, indicating that employment at the nation’s small firms was still contracting, albeit at slower and slower rates. But this month’s reading confirms that we are moving in the right direction. Equally important, small firms’ plans to hire have been consistently positive for the past five consecutive months.

Note: Small businesses have a larger percentage of real estate and retail related companies than the overall economy. With the high percentage of real estate (including small construction companies), small businesses will be slow to recover this cycle.

Click on graph for larger image in new window.

This graph shows the net hiring plans for the next three months.

Hiring plans increased slightly in February. According to NFIB: “The percent of owners reporting hard-to-fill job openings rose two points to 15 percent, indicating that a reduction in the unemployment rate is likely within the next few months. Plans to create jobs strengthened; up two points to a net 5 percent of all firms. While this is still low, it is 15 points better than the recession low reading of negative 10 percent, reached in March 2009."

Baby steps in the right direction.

Earlier:
• Summary for last week ending March 4th
• Schedule for Week of March 6th

by Calculated Risk on 3/06/2011 08:33:00 AM

Note: Here is the Summary for last week ending March 4th

The key economic reports this week will be the trade balance report on Thursday and February retail sales on Friday.

----- Monday, March 7th -----
8:00 AM ET: Atlanta Fed President Dennis Lockhart speaks at the NABE conference in Arlington, VA. "A View from the Fed"

9:15 AM: Dallas Fed President Richard Fisher speaks at the Institute of International Bankers conference in D.C. "Challenges and Opportunities Facing the U.S. and Global Economy and Financial Markets"

3:00 PM: Consumer Credit for January. The consensus is for a $3.4 billion increase in consumer credit. Consumer credit has increased for three straight months after declining sharply during and after the recession.

----- Tuesday, March 8th -----
7:30 AM: NFIB Small Business Optimism Index for February. This index has been showing some increases in optimism.

Click on graph for larger image in graph gallery.

This graph shows the small business optimism index since 1986. The index increased to 94.1 in January from 92.6 in December.

Although still fairly low, this is the highest level for the index since December 2007.

10:00 AM: Senate confirmation hearing for Federal Reserve Board nominee and Nobel laureate Peter Diamond

----- Wednesday, March 9th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. This index has been very weak over the last couple months suggesting weak home sales through the first few months of 2011.

9:00 AM ET: Ceridian-UCLA Pulse of Commerce Index™ This is the diesel fuel index for February (a measure of transportation).

10:00 AM: Monthly Wholesale Trade: Sales and Inventories for January. The consensus is for a 0.9% increase in inventories.

----- Thursday, March 10th -----
8:30 AM: The initial weekly unemployment claims report will be released. The number of initial claims had been trending down over the last few months. The consensus is for a slight increase to 378,000 from 368,000 last week.

8:30 AM: Trade Balance report for January from the Census Bureau.

This shows the monthly U.S. exports and imports in dollars through December 2010.

Imports had been mostly flat since May, but increased again in December. Exports have started increasing again after the mid-year slowdown.

The consensus is for the U.S. trade deficit to be around $41.5 billion, up from $40.6 billion in December.

10:00 AM Regional and State Employment and Unemployment (Monthly) for January 2010

12:00 PM: Q4 Flow of Funds Accounts from the Federal Reserve.

----- Friday, March 11th -----
8:30 AM: Retail Sales for February.

This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline).

Retail sales are up 13.7% from the bottom, and now 0.4% above the pre-recession peak.

The consensus is for retail sales to rise sharply in February, a 1.0% increase from January. (0.7% increase ex-auto).

9:55 AM: Reuters/University of Mich Consumer Sentiment preliminary for March. The consensus is for a slight decrease to 76.5 from 77.5 in February.

10:00 AM: Manufacturing and Trade: Inventories and Sales for January. The consensus is for a 0.8% increase in inventories.

10:00 AM: Job Openings and Labor Turnover Survey for January from the BLS. This report has been showing a general increase in job openings, but very little turnover in the labor market.

Best Wishes to All!

by Calculated Risk on 3/05/2011 11:07:00 PM

Earlier: Here is the Summary for last week ending March 4th

• From Nelson Schwartz and David Streitfeld at the NY Times: Mortgage Modification Overhaul Sought by States

State attorneys general have presented the nation’s five biggest banks with a list of demands that could drastically alter the foreclosure process ...

Under the blueprint, banks would be prohibited from starting foreclosure proceedings while a borrower was actively trying to lower the interest rate or ease other terms of the home loan, a process known as a mortgage modification.

Any borrower who successfully made three payments in a trial modification would be given a permanent modification. When a modification was denied, it would be automatically reviewed by an ombudsman or independent review panel.

It was absurd that servicers would deny a modification when the borrower was making all the payments in a trial program - that just seemed like the servicer was taking advantage of the borrower. This is definitely a needed change.

• From Nick Timiraos and Ruth Simon at the WSJ: Mortgage Practices Overhaul Proposed

Current government modification programs are largely voluntary, and there are few rules governing servicers' practices. But on Thursday, the nation's largest banks, including Wells Fargo & Co., Bank of America Corp., and Citigroup Inc., received a detailed 27-page proposal from state attorneys general and federal agencies to force a shakeup in banks' mortgage-servicing policies.

One mortgage industry executive familiar with the document described it as "almost like a wish list."

Obviously this is just the beginning ...

by Calculated Risk on 3/05/2011 05:27:00 PM

As I noted yesterday, a key question is what happens to the labor force participation rate as the economy hopefully improves. The current participation rate is 64.2%.

Here are a two earlier analysis pieces:
• From BLS economist Mitra Toossi in November 2006: A new look at long-term labor force projections to 2050
• From Austin State University Professor Robert Szafran in September 2002: Age-adjusted labor force participation rates, 1960–2045

Those papers were written when the participation rate was in the mid-66% range. Based on demographics, Szafran had forecast the participation rate to fall to 64.6% in 2015, and Toosi had forecast the rate to fall to 64.5% in 2020. So some of the recent decline was expected - although it happened sooner and faster than either expected because of the severe recession.

And there might be reasons those forecasts were too high. First the participation rate of the 16 to 19 age group has fallen much faster than Toosi forecast (and might not bounce back much after the recession), and second, some people might have permanently given up.

Sudeep Reddy and Sara Murray at the WSJ wrote: Jobless Rate Falls Further

A growing number of workers with health problems are applying for Social Security Disability Insurance benefits. The disability rolls, where many beneficiaries remain for life, have surged more than 14% since the recession began, to nearly 10.2 million in December 2010.

"We already know from the number of people who have entered the disability rolls that there's going to be a permanent hit to the labor force participation rate," said Lawrence Katz, a Harvard University economist. "That's both costly to them—they're going to be less happy—and costly to us to lose someone who could be a productive worker."

I still expect some bounce back in the participation rate, and how many people return to the labor force is key in estimating how many jobs are needed to reduce the unemployment rate.

As I noted yesterday, if the Civilian noninstitutional population (over 16 years old) grows by about 2 million per year - and the participation rate stays flat - the economy will need to add about 100 thousand jobs per month to keep the unemployment rate steady at 8.9%.

If the population grows faster (say 2.5 million per year), and/or the participation rate rises, it could take significantly more jobs per month to hold the unemployment rate steady. As an example, if the working age population grows 2.5 million per year and the participation rate rises to 65% (from 64.2%) over the next two years, the economy will need to add 200 thousand jobs per month to hold the unemployment rate steady.

One thing is clear - we need more jobs!

Earlier:
• Summary for Week ending March 4th

by Calculated Risk on 3/05/2011 11:52:00 AM

The U.S. expansion seems to be slowly improving; however there are several downside risks, notably higher oil prices. Let’s start with employment:

The BLS reported that payroll employment increased 192,000 in February and that the unemployment rate declined to 8.9%. If we average the last two months together - the 63,000 payroll jobs added in January and the 192,000 payroll jobs in February - there were 127,500 payroll jobs added per month. That is a barely enough to keep up with the growth in the labor force. Private payrolls were a little better at an average of 145,000 per month, as state and local governments continued to lay off workers (something we expect all year).

The decline in the unemployment rate from 9.0% to 8.9% was good news, especially since the participation rate was unchanged at 64.2%. More welcome news included the decreases in the number of long term unemployed, a slight decline in the number of part time workers for economic reasons, and the decline in U-6 to 15.9% - although the levels are still very high.

Some disappointing news was that the average workweek was unchanged at 34.2 hours, and average hourly earnings only ticked up 1 cent. It is interesting to note that construction has now added payroll jobs in 2011. I think construction will add payroll jobs this year for the first time since 2005.

Overall this was a small step in the right direction, but the overall employment situation remains grim: There are 7.5 million fewer payroll jobs now than before the recession started in 2007 with 13.7 million Americans currently unemployed. Another 8.3 million are working part time for economic reasons, and about 4 million more workers have left the labor force. Of those unemployed, 6 million have been unemployed for six months or more.

We were once again reminded last week of several potential downside risks to the U.S. economy as oil prices increased, and the European financial crisis is starting to make news again. Also state and local government cutbacks negatively impacted the employment report – with more to come.

A key focus remains on the Middle East and North Africa, and especially on the tragic events in Libya. These events have pushed U.S. oil prices to around $104 per barrel and have raised questions about the possible drag of higher oil prices on the U.S. economy.

The European financial crisis has been on the back burner, but yields are still elevated and there are key Euro Zone meetings scheduled in March. I expect this to be front page news again soon.

State and local governments reduced employment by 30,000 in February, and several state budgets were in the news, especially the ongoing Wisconsin political battles.

These are all risks to 2011 economic growth.

But most of the other economic news was positive. Growth in manufacturing continues to be strong. The ISM manufacturing index matched the May 2004 level - the highest since 1983, and the employment index was the highest since December 1973. The ISM non-manufacturing index index was also strong at 59.7%, with the employment index indicating faster expansion in February at 55.6%.

Auto sales continued to increase, reaching an estimated 13.44 million in February on a seasonally adjusted annual rate basis (SAAR). That is up 28% from February 2010, and up 6.8% from the sales rate last month (Jan 2011). This is the highest sales rate since August 2008, excluding Cash-for-clunkers in August 2009.

There was some weakness, construction spending declined in January (no surprise), and personal consumption expenditures in January were weak, but overall the expansion seems to be improving.

Below is a summary of economic data last week mostly in graphs:

• February Employment Report: 192,000 Jobs, 8.9% Unemployment Rate

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

Click on graphs for larger image in graph gallery.

The unemployment rate decreased to 8.9% (red line).

The Labor Force Participation Rate was unchanged at 64.2% in February (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, although some of the decline is due to the aging population.)

The Employment-Population ratio was unchanged at 58.4% in February (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.

The current employment 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).

The third graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at the start of the recession.

Here are the employment posts yesterday with graphs:
Employment Summary and Part Time Workers, Unemployed over 26 Weeks

Duration of Unemployment, Unemployment by Education, Diffusion Indexes

And some analysis on the participaton rate: Participation Rate Update

To see all the graphs: Employment Graph Gallery

• Personal Income and Outlays Report for January

This graph shows real Personal Consumption Expenditures (PCE) through January (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

Real PCE declined in January after increasing sharply in Q4. Note: The quarterly change in PCE is based on the change from the average in one quarter, compared to the average of the preceding quarter - so this still shows growth over Q4.

• ISM Manufacturing Index increases in February

From the Institute for Supply Management: January 2011 Manufacturing ISM Report On Business®. PMI at 61.% in February, up from 60.8% in January, matching the level in May 2004 - the highest since 1983.

Here is a long term graph of the ISM manufacturing index.

This was a strong report and above expectations. The new orders and employment indexes were especially strong, with employment at 64.5, the highest since January 1973.

• ISM Non-Manufacturing Index indicates expansion in February

The February ISM Non-manufacturing index was at 59.7%, up from 59.4% in January. The employment index indicated faster expansion in February at 55.6%, up from 54.5% in January. Note: Above 50 indicates expansion, below 50 contraction.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

This was a solid report, except for prices, and slightly above expectations of 59.5%.

• U.S. Light Vehicle Sales 13.44 million SAAR in February

Based on an estimate from Autodata Corp, light vehicle sales were at a 13.44 million SAAR in February. That is up 28% from February 2010, and up 6.8% from the sales rate last month (Jan 2011).

This graph shows light vehicle sales since the BEA started keeping data in 1967.

This is the highest sales rate since August 2008, excluding Cash-for-clunkers in August 2009.

Note: dashed line is current estimated sales rate. The current sales rate is finally off the bottom of the '90/'91 recession - and there were fewer registered drivers and a smaller population back then.

This was well above the consensus estimate of 12.7 million SAAR. But, with rising oil prices, the automakers might be under pressure in March.

• Private Construction Spending decreased in January

This graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted.

From the Census Bureau: "Residential construction was at a seasonally adjusted annual rate of $245.6 billion in January ... Nonresidential construction was at a seasonally adjusted annual rate of $244.4 billion in January ..."

Residential spending is 64% below the peak in early 2006, and non-residential spending is 41% below the peak in January 2008.

This is the first time since December 2007 that private residential construction spending has been higher than non-residential spending. Not by much, but that is something I've been expecting.

• Other Economic Stories ...
• Prepared testimony from Fed Chairman Ben Bernanke: Semiannual Monetary Policy Report to the Congress
• ADP: Private Employment increased by 217,000 in February
• DOT: Vehicle Miles Driven increased in December
• Fed's Beige Book: Economic activity continued to expand at a modest to moderate pace.
• From Fed Chairman Ben Bernanke: Challenges for State and Local Governments
• Unofficial Problem Bank list increases to 962 Institutions

Best wishes to all!

by Calculated Risk on 3/05/2011 09:08:00 AM

Note: this is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for Mar 4, 2011.

Changes and comments from surferdude808:

It almost was a safe & sound banking week as the FDIC did not close a single institution; however, the OTS did not stop issuing enforcement actions.

This week there were one removal and three additions to the Unofficial Problem Bank List. The List now stands at 962 institutions with assets of $417.9 billion, up from 960 institutions and assets of $413.8 billion last week.

The one removal was a terminated action against The Felton Bank, Felton, DE ($81 million Ticker: SHBI), which merged without assistance into CNB, Centerville, MD.

The three additions were First Place Bank, Warren, OH ($3.2 billion Ticker: FPFC); Continental Bank, Plymouth Meeting, PA ($515 million); and First Community Bank of America, Pinellas Park, FL ($471 million Ticker: FCFL). Perhaps during the coming week there will not be a failure nor a new addition.