by Calculated Risk on 1/05/2012 03:51:00 PM

Note: NFIB’s monthly small business survey for December will be released on Tuesday, January 10, 2012.

From the National Federation of Independent Business (NFIB): NFIB Jobs Statement: No Rally in Jobs at Close of 2011, but Small Business is Cautiously Optimistic about 2012

Chief economist for the National Federation of Independent Business (NFIB) William C. Dunkelberg, issued the following statement on the December job numbers, based on NFIB’s monthly economic survey that will be released on Tuesday, January 10, 2012. ...

“Unfortunately, December’s jobs numbers fizzled, with the net change in employment per firm turning negative again; small businesses lost an average .15 workers per firm. ... The good news is that the number of owners cutting jobs has ‘normalized’. In the past several months, reports of those cutting workers have been at the lowest levels since the recession started in December 2007. ... Over the next three months ... a seasonally adjusted net 6 percent of owners planning to create new jobs, a 1 point decline but still one of the strongest readings since September 2008.

Note: Small businesses have a larger percentage of real estate and retail related companies than the overall economy.

Here is a graph of the net hiring plans for the next three months since 1986.

Hiring plans declined slightly in December, but the trend is up.

It is no surprise that small businesses are struggling due to the high concentration of real estate related companies in the survey. This is another slightly discouraging survey before the BLS report tomorrow.

Earlier:
• Reis: Apartment Vacancy Rate falls to 5.2% in Q4, Lowest since 2001
• ADP: Private Employment increased 325,000 in December
• Weekly Initial Unemployment Claims decline to 372,000
• ISM Non-Manufacturing Index indicates slightly faster expansion in December
• Employment Situation Preview: Improved, but still not strong

by Calculated Risk on 1/05/2012 01:29:00 PM

Tomorrow (Friday) the BLS will release the December Employment Situation Summary at 8:30 AM ET. Bloomberg is showing the consensus is for an increase of 150,000 payroll jobs in December, and for the unemployment rate to increase slightly to 8.7%. The consensus is probably moving up based on recent reports.

Here is a summary of recent data:

• The ADP employment report showed an increase of 325,000 private sector payroll jobs in December. Although ADP seems to track the BLS over time, the ADP report hasn't been very useful in predicting the BLS report. Also note that government payrolls have been shrinking by about 24,000 on average per month this year, so this suggests around 325,000 private nonfarm payroll jobs added, minus 24,000 government workers - or around 301,000 total jobs added in December.

However we need to use caution with the ADP report in December. From Jan Norman at the O.C. Register:

... Joel Prakken, chairman of Macroeconomic Advisers, cautioned that the number may be inflated by an annual accounting correction that ADP does with its customers' data every December. That procedure tends to overstate seasonal adjustment of job gains in the aftermath of a recession.

And an explanation from Goldman's Andrew Tilton last year:

Because the ADP report counts the number of people on payrolls, regardless of how many hours they worked (or whether they worked at all), its accuracy depends on company payrolls being up to date. In reality, some companies do not immediately delete departing workers from their payroll records. Those that do not often wait until the end of the year. As a result, December in particular typically sees a meaningful decline in payrolls in the raw ADP data. The reported data are adjusted in an attempt to account for this behavior, but insofar as “purging” occurs to a greater or lesser extent than usual, it could affect the reported numbers. In particular, there was probably less purging in 2010 than in recent years, since data from the Labor Department make plain that the level of “separations” (layoffs or quits) declined this year. If this was less-than-fully accounted for by seasonal adjustment, the reported figure could show a large gain. (Note that the Labor Department’s survey does not suffer from the “purging” problem, since in that survey a person has to have actually reported hours in the survey period to be counted as employed.)

So ADP is probably overstating employment gains again this year.

• The ISM manufacturing employment index increased to 55.1% from 51.8% in November. Based on a historical correlation between the ISM index and the BLS employment report for manufacturing, this reading suggests the gain of ten thousand or so private sector payroll jobs for manufacturing in December.

The ISM service employment index increased to 49.4% from 48.9% in November. Based on a historical correlation between the ISM non-manufacturing employment index and the BLS employment report for service, this reading suggests the gain of around 45,000 private payroll jobs for services in December.

Overall the ISM surveys do not suggest a strong employment report.

• Initial weekly unemployment claims averaged about 375,000 in December, down from 396,000 per week in November, and down from 405,000 per week in October.

For the BLS reference week (includes the 12th of the month), initial claims were at the lowest level since May 2008. This is a very positive sign.

• The final December Reuters / University of Michigan consumer sentiment index increased to 69.9, up from the November reading of 64.1. This is frequently coincident with changes in the labor market, but also strongly related to gasoline prices and other factors. In general this low level would suggest a weak labor market - but slightly better than in the July through November period (the BLS reported an average of 132,000 per month for those five months).

• And on the unemployment rate from Gallup: Gallup Finds U.S. Unemployment Holding at 8.5% in December

Gallup finds U.S. unemployment, not seasonally adjusted, at 8.5% in December -- the same as at the end of November, but down from 9.6% a year ago. Gallup's unemployment measure suggests the government is likely to report essentially no change for December 2011 in its seasonally adjusted unemployment rate, though this December is especially hard to predict.

NOTE: The Gallup poll results are Not Seasonally Adjusted (NSA), so use with caution. This does suggest little change in the headline seasonally adjusted unemployment rate.

There always seems to be some randomness to the employment report, but the overall situation has improved (lower initial weekly unemployment claims, more job openings). However the ADP report is probably overstating December job growth, and the ISM surveys still suggest sluggish job growth - I'll take the over (above 150,000), but I don't expect a strong report as suggested by ADP.

by Calculated Risk on 1/05/2012 10:00:00 AM

The December ISM Non-manufacturing index was at 52.6%, up from 52.0% in November. The employment index increased in December to 49.4%, up from 48.9% in November. Note: Above 50 indicates expansion, below 50 contraction.

From the Institute for Supply Management: December 2011 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in December for the 25th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee. "The NMI registered 52.6 percent in December, 0.6 percentage point higher than the 52 percent registered in November, and indicating continued growth at a slightly faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 56.2 percent, which is the same reading as reported in November, reflecting growth for the 29th consecutive month. The New Orders Index increased by 0.2 percentage point to 53.2 percent. The Employment Index increased 0.5 percentage point to 49.4 percent, indicating contraction in employment for the third time in the last four months. The Prices Index decreased 1.3 percentage points to 61.2 percent, indicating prices increased at a slower rate in December when compared to November. According to the NMI, 11 non-manufacturing industries reported growth in December. Respondents' comments are mixed and vary by industry and company. Economic growth continues to be slowed by the lag in employment."
emphasis added

Click on graph for larger image.

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

This was below the consensus forecast of 53.4% and indicates slightly faster expansion in December than in November.

by Calculated Risk on 1/05/2012 08:40:00 AM

The DOL reports (press release added):

In the week ending December 31, the advance figure for seasonally adjusted initial claims was 372,000, a decrease of 15,000 from the previous week's revised figure of 387,000. The 4-week moving average was 373,250, a decrease of 3,250 from the previous week's revised average of 376,500.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week to 373,250.

This is the lowest level for the 4-week average since June 2008.

And here is a long term graph of weekly claims:

The 4-week moving average is still falling and is now well below 400,000.

This suggests fewer layoffs and more payroll jobs added in December.

All current Employment Graphs

by Calculated Risk on 1/05/2012 08:15:00 AM

ADP reports:

Private-sector employment increased by 325,000 from November to December on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The ADP National Employment Report, created by Automatic Data Processing, Inc. (ADP®), in partnership with Macroeconomic Advisers, LLC, is derived from actual payroll data and measures the change in total nonfarm private employment each month. The estimated gain in employment from October to November was revised down slightly to 204,000 from the initially reported 206,000.

This was well above the consensus forecast of an increase of 160,000 private sector jobs in December. The BLS reports on Friday, and the consensus is for an increase of 150,000 payroll jobs in December, on a seasonally adjusted (SA) basis.

Government payrolls have been shrinking by about 24,000 per month this year. So this suggests around 325,000 private nonfarm payroll jobs added, minus 24,000 government workers - or around 301,000 total jobs added in December. Of course ADP hasn't been very useful in predicting the BLS report.

by Calculated Risk on 1/05/2012 12:36:00 AM

Reis reported that the apartment vacancy rate (82 markets) fell to 5.2% in Q4 from 5.6% in Q3. The vacancy rate was at 6.6% in Q4 2010 and peaked at 8.0% at the end of 2009.

From the WSJ: Apartment-Vacancy Rate Tumbles to 2001 Level

The nation's apartment-vacancy rate in the fourth quarter fell to its lowest level since late 2001 ... In the fourth quarter, the vacancy rate fell to 5.2% from 6.6% a year earlier and 5.6% at the end of the third quarter, according to Reis.

During the depths of the downturn, landlords had to offer incentives such as flat-screen TVs and months with no rent to attract tenants. But in the fourth quarter of 2011, landlords in 71 of the 82 of the markets that Reis follows were able to raise rents. ... Nationwide, landlords raised asking rents an average of 0.4% in the fourth quarter, to $1,064 a month. That's up from $1,026 in 2009.

But rent increases showed signs of moderating in some markets and, overall, they were less than Reis had expected.

Click on graph for larger image.

This graph shows the apartment vacancy rate starting in 2005.

Reis is just for large cities, but this decline in vacancy rates is happening just about everywhere. More from Bloomberg: U.S. Apartment Vacancies Decline to a Decade Low of 5.2%, Rents Increase

“The sector is benefiting from some of the lowest figures for new construction on record,” Calanog said. “By 2013, the influx of new units may begin eroding any benefit the sector derives from tight supply conditions.”

A total of 8,865 new units became available in the fourth quarter, the second-fewest for any three-month period in Reis records dating to 1999. The first quarter of 2011 had the fewest units, at 7,473.

For all of 2011, 37,678 units were completed, the lowest annual total in 31 years of Reis data. The previous record was 49,303 in 1993 during the savings and loan crisis.

A few key points we've been discussing all year:
• Apartment vacancy rates are falling fast.

• A record low number of multi-family units were completed in 2011.

• Multi-family starts are increasing, and that is helping both GDP and employment growth this year. These new starts will not be completed until 2012 or 2013, so vacancy rates will probably continue to decline.

by Calculated Risk on 1/04/2012 09:10:00 PM

A few interesting reads ...

• From FT Alphaville: ‘Tis (still) the seasonality, ISM edition. An interesting discussion of seasonality, and how recent the recent ISM survey might be overstating strength.

• From the NY Fed: Forecasting with Internet Search Data. This is an attempt to get more recent information since data is released with a lag. I tried this with "New Homes" and it appears to track, but it is a little too noisy to use to predict new home sales from the Census Bureau.

• From Jon Lansner at the O.C. Register: Van line: Calif. jumps to No. 7 U.S. destination

Allied Van Lines’ 44th annual “Magnet States Report” says that at least by its own business patterns California is back as on the “inbound list” — states with more folks moving in than out. ... Illinois had the most net outbound losses followed by Pennsylvania, Michigan, New Jersey and New York.

• From Tim Duy at Fed Watch: Still Cautious Heading Into 2012

Bottom Line: I want to believe the recent improvement in the tenor of economic data signals that activity is set to accelerate substantially in 2012. But the ups and downs on the past two years smoothed out to nothing exciting or catastrophic, just a moderate path of activity that remains woefully insufficient to return the US economy to its pre-recession trend. For now, I will stick to that middle ground, while remaining watchful of the all-too-many downside risks that leave me just a little bit sleepless each night.

Earlier:
• U.S. Light Vehicle Sales at 13.56 million SAAR in December
• From the Federal Reserve: The U.S. Housing Market: Current Conditions and Policy Considerations
• Question #6 for 2012: Unemployment Rate

by Calculated Risk on 1/04/2012 04:44:00 PM

Based on an estimate from Autodata Corp, light vehicle sales were at a 13.56 million SAAR in December. That is up 8.9% from December 2010, and down 0.3% from the sales rate last month (13.60 million SAAR in Nov 2011).

This was at the consensus forecast of 13.6 million SAAR.

This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for December (red, light vehicle sales of 13.56 million SAAR from Autodata Corp).

Click on graph for larger image.

The annualized sales rate was essentially unchanged from November, and the last two months were the strongest since June 2008 excluding cash-for-clunkers.

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

This shows the huge collapse in sales in the 2007 recession. This also shows the impact of the tsunami and supply chain issues on sales, especially in May and June.

Note: dashed line is current estimated sales rate.

Growth in auto sales should make a strong positive contribution to Q4 GDP. Sales in Q3 averaged 12.45 million SAAR, and sales averaged 13.46 million SAAR in Q4, an increase of 8.1% over Q3.

by Calculated Risk on 1/04/2012 02:53:00 PM

From the Federal Reserve: The U.S. Housing Market: Current Conditions and Policy Considerations. Excerpt on converting REO to rental units:

At the same time that housing demand has weakened, the number of homes for sale is elevated relative to historical norms, due in large part to the swollen inventory of homes held by banks, guarantors, and servicers after completion of foreclosure proceedings. These properties are often called real estate owned, or REO, properties. While the total stock of REO properties is difficult to measure precisely, perhaps one-fourth of the 2 million vacant homes for sale in the second quarter of 2011 were REO properties. The combination of weak demand and elevated supply has put substantial downward pressure on house prices, and the continued flow of new REO properties--perhaps as high as 1 million properties per year in 2012 and 2013--will continue to weigh on house prices for some time. To the extent that REO holders discount properties in order to sell them quickly, the near-term pressure on home prices might be even greater.

In contrast to the market for owner-occupied houses, the market for rental housing across the nation has recently strengthened somewhat. Rents have turned up in the past year, and the national vacancy rate on multifamily rental properties has dropped noticeably from its peak in late 2009. These developments have been fairly widespread across metropolitan areas. The relative strength of the rental market reflects increased demand as families who are unable or unwilling to purchase homes are renting properties instead. Rental demand has also been supported by families who have lost their homes to foreclosure--the majority of whom move to rental housing, most commonly to single-family rentals.

The price signals in the owner-occupied and rental housing markets--that is, the decline in house prices and the rise in rents--suggest that it might be appropriate in some cases to redeploy foreclosed homes as rental properties. In addition, the forces behind the decline in the homeownership rate, such as tight credit conditions, are unlikely to unwind significantly in the immediate future, indicating a longer-term need for an expanded stock of rental housing.

Although small investors are currently buying and converting foreclosed properties to rental units on a limited scale, larger-scale conversions have not occurred for at least three interrelated reasons. First, it can be difficult for an investor to assemble enough geographically proximate properties to achieve efficiencies of scale with regard to the fixed costs of a rental program. Second, attracting investors to bulk sales opportunities--whether for rental or resale--has typically required REO holders to offer significantly larger price concessions relative to direct sales to owner occupants through conventional realtor-listing channels, in part because it can be difficult for investors to obtain financing for such sales. Third, the supervisory policy of GSE and banking organization regulators has generally encouraged sales of REO property as early as practicable. We discuss each of these issues in more detail later [in the white paper].

I suspect the FHFA will announce a bulk sale program of REO to investors within the next month or two.

by Calculated Risk on 1/04/2012 12:54:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2012. I'm trying to add some thoughts, and a few predictions for each question.

6) Unemployment Rate: What will the unemployment rate be in December 2012?

Last year, my prediction was for the unemployment rate to still be above 9% in December 2011. As of November, the unemployment rate had fallen to 8.6%. My guess was the participation rate would increase a little in 2011, however the participation rate continued to decline, and that pushed down the unemployment rate.

This is a reminder that forecasting the participation rate is critical in forecasting the unemployment rate.

First a few definitions from the BLS Glossary:

• Civilian noninstitutional population: Included are persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.

• Labor force: The labor force includes all persons classified as employed or unemployed in accordance with the definitions contained in this glossary.

• Labor force participation rate: The labor force as a percent of the civilian noninstitutional population.

Say the Civilian noninstitutional population was 1 million, and 650,000 participated in the labor force. And say 600,000 were employed leaving 50,000 unemployed. Then the labor force participation rate would be 65%, and the unemployment rate would be 50,000 / 650,000 equals 7.7%.

But if only 640,000 people participated in the labor force, then with the same level of employment (600,000), only 40,000 will be unemployed - and the unemployment rate would be 40,000 / 640,000 equals 6.3%.

So, with the same population and employment level, the participation rate makes a huge difference in the unemployment rate.

There are many reasons why people do not participate in the labor force. Some are in school, some are stay at home spouses, some are retired, and others may have given up looking for a job.

Even before the recent recession started, the participation rate was expected to decline because of the aging of the population. But, with the recession, the participation rate has plummeted.

Here is a graph showing the current unemployment rate (red) and the participation rate (blue).

Click on graph for larger image.

The unemployment rate is currently at 8.6%, and the Labor Force Participation Rate (blue) was at 64.0% in November.

Although I expect the participation rate to decline over the next couple of decades as the population ages, I think the participation rate will rise a little in 2012.

Below is a table showing the sensitivity of the unemployment rate to various levels of the participation rate and the job creation for 2012.

Unemployment Rate based on Jobs added and Participation Rate
		Participation Rate
		63.5%	64.0%	64.5%	65.0%
Jobs added per month (000s)	150	7.4%	8.2%	8.9%	9.6%
	200	7.0%	7.8%	8.5%	9.2%
	250	6.7%	7.4%	8.1%	8.8%

Although I'm still looking at GDP and employment for 2012, I think the unemployment rate will be mostly unchanged in 2012. A couple of predictions.
• The participation rate will rise slightly in 2012 and probably end the year in the 64.0% to 64.5% range.
• The unemployment rate will still be in the 8% to 9% range in December 2012.

Earlier:
• Question #7 for 2012: State and Local Governments
• Question #8 for 2012: Europe and the Euro
• Question #10 for 2012: Monetary Policy
• Question #9 for 2012: Inflation