by Calculated Risk on 7/03/2014 10:00:00 AM

The June ISM Non-manufacturing index was at 56.0%, down from 56.3% in May. The employment index increased in June to 54.4%, up from 52.4% in May. Note: Above 50 indicates expansion, below 50 contraction.

From the Institute for Supply Management: June 2014 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in June for the 53rd 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, CPSM, C.P.M., CFPM, chair of the Institute for Supply Management® (ISM®) Non-Manufacturing Business Survey Committee. "The NMI® registered 56 percent in June, 0.3 percentage point lower than the May reading of 56.3 percent. This represents continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased to 57.5 percent, which is 4.6 percentage points lower than the May reading of 62.1 percent, reflecting growth for the 59th consecutive month at a slower rate. The New Orders Index registered 61.2 percent, 0.7 percentage point higher than the reading of 60.5 percent registered in May. The Employment Index increased 2 percentage points to 54.4 percent from the May reading of 52.4 percent and indicates growth for the fourth consecutive month and at a faster rate. The Prices Index decreased 0.2 percentage point from the May reading of 61.4 percent to 61.2 percent, indicating prices increased at a slightly slower rate in June when compared to May. According to the NMI®, 14 non-manufacturing industries reported growth in June. Respondents' comments vary by industry and company; however, the majority indicate that steady economic growth is continuing."
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 56.2% and suggests slightly slower expansion in June than in May.

by Calculated Risk on 7/03/2014 08:30:00 AM

From the BLS:

Total nonfarm payroll employment increased by 288,000 in June, and the unemployment rate declined to 6.1 percent, the U.S. Bureau of Labor Statistics reported today.
...
The change in total nonfarm payroll employment for April was revised from +282,000 to +304,000, and the change for May was revised from +217,000 to +224,000. With these revisions, employment gains in April and May were 29,000 higher than previously reported.

Click on graph for larger image.

The first graph shows the monthly change in payroll jobs, ex-Census (meaning the impact of the decennial Census temporary hires and layoffs is removed to show the underlying payroll changes).

This was the fifth month in a row with more than 200 thousand jobs added, and employment is now up 2.495 million year-over-year.

Total employment is now 415 thousand above the pre-recession peak.

The second graph shows the employment population ratio and the participation rate.

The Labor Force Participation Rate was unchanged in June at 62.8%. This is the percentage of the working age population in the labor force.   A large portion of the recent decline in the participation rate is due to demographics.

The Employment-Population ratio increased in June to 59.0% (black line).

I'll post the 25 to 54 age group employment-population ratio graph later.

The third graph shows the unemployment rate.

The unemployment rate declined in June to 6.1%.

This was another solid employment report, and 2014 is on pace to be the best year for employment gains since 1999.

I'll have much more later ... 

by Calculated Risk on 7/02/2014 07:35:00 PM

Thursday will feel like a Friday  - all day!

Thursday:
• Early, Reis Q2 2014 Mall Survey of rents and vacancy rates.

• At 8:30 AM ET, the Employment Report for June. The consensus is for an increase of 211,000 non-farm payroll jobs added in June, down from the 217,000 non-farm payroll jobs added in May. The consensus is for the unemployment rate to be unchanged at 6.3% in May.

• Also at 8:30 AM, the Trade Balance report for May from the Census Bureau. The consensus is for the U.S. trade deficit to be at $45.1 billion in May from $47.2 billion in April.

• Also at 8:30 AM, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 314 thousand from 312 thousand.

• At 10:00 AM, ISM non-Manufacturing Index for June. The consensus is for a reading of 56.2, down from 56.3 in May. Note: Above 50 indicates expansion.

Here is a table of the annual change in total nonfarm and private sector payrolls jobs since 1999.  The last three years have been near the best since 1999 (2005 was the best year for total nonfarm, and 2011 the best for private jobs).

Note: "2014" shows the annualized pace through May.

It is possible that 2014 will be the best year since 1999 for both total nonfarm and private sector employment.

Change in Payroll Jobs per Year (000s)
	Total, Nonfarm	Private
1999	3,177	2,716
2000	1,946	1,682
2001	-1,735	-2,286
2002	-508	-741
2003	105	147
2004	2,033	1,886
2005	2,506	2,320
2006	2,085	1,876
2007	1,140	852
2008	-3,576	-3,756
2009	-5,087	-5,013
2010	1,058	1,277
2011	2,083	2,400
2012	2,236	2,294
2013	2,331	2,365
20141	2,563	2,527
1 2014 is the hiring pace through May.

by Calculated Risk on 7/02/2014 02:01:00 PM

Thursday at 8:30 AM ET, the BLS will release the employment report for June. The consensus, according to Bloomberg, is for an increase of 211,000 non-farm payroll jobs in June (range of estimates between 199,000 and 290,000), and for the unemployment rate to be unchanged at 6.3%.

Note: The BLS reported 217,000 payroll jobs added in May with the unemployment rate at 6.3%.

Here is a summary of recent data:

• The ADP employment report showed an increase of 281,000 private sector payroll jobs in June. This was above expectations of 210,000 private sector payroll jobs added. The ADP report hasn't been very useful in predicting the BLS report for any one month, but in general, this suggests employment growth above expectations.

• The ISM manufacturing employment index was unchanged in June at 52.8%. A historical correlation between the ISM manufacturing employment index and the BLS employment report for manufacturing, suggests that private sector BLS manufacturing payroll jobs decreased about 5,000 in June. The ADP report indicated a 12,000 increase for manufacturing jobs in June.

The ISM non-manufacturing employment index for June will be released tomorrow (after the employment report is released).

• Initial weekly unemployment claims averaged close to 314,000 in June, up slightly from May. For the BLS reference week (includes the 12th of the month), initial claims were at 314,000; this was down from 327,000 during the reference week in May.

The lower reference week reading suggests some upside to the consensus forecast.

• The final June Reuters / University of Michigan consumer sentiment index increased slightly to 82.5 from the May reading of 81.9. This is frequently coincident with changes in the labor market, but there are other factors too.

• On small business hiring: The small business index from Intuit showed a 20,000 increase in small business employment in June.  From Intuit:

U.S. small business employment grew for the fourth consecutive month in June, adding 20,000 jobs. While the labor market continues to show signs of revival, small business employment remains 900,000 workers shy of the peak reached in March of 2007.
...
"This month's employment data makes for the fourth consecutive month of small business job growth after a flat job market early in 2014. While employment growth continued this month, changes for compensation and hours worked were mixed but very small. This indicates that while the employment picture has improved, there is little pressure on wages or hours," said Susan Woodward, the economist who works with Intuit to create the indexes.

"The revenue figures for small businesses are better than they have been in some years – they were up in April, and are up even more in May. The rise in revenues for all businesses is about three-fourths of one percent, which is a lot, and if it continued for a year, would give us an increase of 10 percent."

• A few comments from Goldman Sachs economist Kris Dawsey:

We forecast a 210k increase in June payroll employment, just a bit less than the consensus expectation of 215k. On the one hand, ADP, initial claims, the labor differential, and the employment components of service sector surveys argue for a stronger report. On the other hand, consensus tends to be a bit too optimistic on June payrolls, and the "weather bounce-back" in employment after this winter's slowdown could be losing some steam.
...
Labor differential heading north. The Conference Board's labor differential―the net percent of respondents in the consumer confidence survey describing jobs as plentiful vs. hard to get―improved by 0.9pt in June to -17.1.

• Conclusion: Most of the data was fairly positive in June with the exception of small business hiring. The ADP report was higher in June than in May, and well above forecasts, and weekly unemployment claims were lower during the reference period. However the Intuit small business index showed somewhat less hiring in June.

Last year the consensus was for 161,000 payroll jobs added in June, and the BLS reported 195,000 jobs added (since revised up to 201,000).  In  June 2012, the consensus was for 90,000 payroll jobs added, and the BLS reported 80,000 jobs added (revised up to 88,000).

There is always some randomness to the employment report, but the I'll take the over on the consensus forecast of 211,000 nonfarm payrolls jobs added in June.  Note: This might be "wishcasting" (as opposed to forecasting) because 222,000 would put the year-over-year increase at a nice round 2.4 million or 200,000 per month.

by Calculated Risk on 7/02/2014 11:13:00 AM

From Fed Chair Janet Yellen: Monetary Policy and Financial Stability. A few excerpts:

I am also mindful of the potential for low interest rates to heighten the incentives of financial market participants to reach for yield and take on risk, and of the limits of macroprudential measures to address these and other financial stability concerns. Accordingly, there may be times when an adjustment in monetary policy may be appropriate to ameliorate emerging risks to financial stability.
...
[M]onetary policy has powerful effects on risk taking. Indeed, the accommodative policy stance of recent years has supported the recovery, in part, by providing increased incentives for households and businesses to take on the risk of potentially productive investments. But such risk-taking can go too far, thereby contributing to fragility in the financial system. This possibility does not obviate the need for monetary policy to focus primarily on price stability and full employment--the costs to society in terms of deviations from price stability and full employment that would arise would likely be significant.
...
In recent years, accommodative monetary policy has contributed to low interest rates, a flat yield curve, improved financial conditions more broadly, and a stronger labor market. These effects have contributed to balance sheet repair among households, improved financial conditions among businesses, and hence a strengthening in the health of the financial sector. Moreover, the improvements in household and business balance sheets have been accompanied by the increased safety of the financial sector associated with the macroprudential efforts I have outlined. Overall, nonfinancial credit growth remains moderate, while leverage in the financial system, on balance, is much reduced. Reliance on short-term wholesale funding is also significantly lower than immediately before the crisis, although important structural vulnerabilities remain in short-term funding markets.

Taking all of these factors into consideration, I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns. That said, I do see pockets of increased risk-taking across the financial system, and an acceleration or broadening of these concerns could necessitate a more robust macroprudential approach. For example, corporate bond spreads, as well as indicators of expected volatility in some asset markets, have fallen to low levels, suggesting that some investors may underappreciate the potential for losses and volatility going forward. In addition, terms and conditions in the leveraged-loan market, which provides credit to lower-rated companies, have eased significantly, reportedly as a result of a "reach for yield" in the face of persistently low interest rates. The Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued guidance regarding leveraged lending practices in early 2013 and followed up on this guidance late last year. To date, we do not see a systemic threat from leveraged lending, since broad measures of credit outstanding do not suggest that nonfinancial borrowers, in the aggregate, are taking on excessive debt and the improved capital and liquidity positions at lending institutions should ensure resilience against potential losses due to their exposures. But we are mindful of the possibility that credit provision could accelerate, borrower losses could rise unexpectedly sharply, and that leverage and liquidity in the financial system could deteriorate. It is therefore important that we monitor the degree to which the macroprudential steps we have taken have built sufficient resilience, and that we consider the deployment of other tools, including adjustments to the stance of monetary policy, as conditions change in potentially unexpected ways.
emphasis added

by Calculated Risk on 7/02/2014 09:51:00 AM

Reis reported that the apartment vacancy rate was unchanged in Q2 at 4.1%. In Q2 2013 (a year ago) the vacancy rate was at 4.3%, and the rate peaked at 8.0% at the end of 2009.

Some interesting comments from Reis Senior Economist Ryan Severino:

Vacancy was unchanged during the second quarter at 4.1%, a slight worsening versus last quarter. Over the last twelve months the national vacancy rate has declined by 20 basis points, slightly below the pace of the last few quarters. We have been anticipating this slowdown in vacancy compression as demand moderates while supply growth accelerates. The national vacancy rate now stands 390 basis points below the cyclical peak of 8.0% observed right after the recession concluded in late 2009. However, at 4.1%, the national vacancy rate remains low by historical standards. The only time vacancy in the US was lower was during the dot.com boom‐and‐bust days of 1999 and 2000.

Demand remained relatively strong during the second quarter, as the sector absorbed 35,102 units. This is down slightly versus last quarter's 40,853 units absorbed but was the largest figure for a second quarter since 2011. Year to date, net absorption is tracking ahead of last year's pace, indicating that demand remains resilient even after more than four years of an apartment market recovery.

Completions during the second quarter totaled 33,210 units. This is a rebound from the first quarter, when construction activity was likely muted by severe winter weather. The overall trend in construction is clearly upward. Despite first quarter's severe winter weather, new construction is already ahead of last year's pace. The market remains on track to deliver the highest level of new completions since 1999 when the economy was growing at a far faster pace than it is today.
...
Asking and effective rents both grew by 0.8% during the second quarter. This is an increase from growth during the first quarter which now appears to be just a temporary slow down, likely due to seasonal factors. Rent growth, though weak by historical standards given such a low vacancy rate, continues to accelerate.
emphasis added

Click on graph for larger image.

This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999). Note: Reis is just for large cities.


Apartment vacancy data courtesy of Reis.

by Calculated Risk on 7/02/2014 08:27:00 AM

From ADP:

Private sector employment increased by 281,000 jobs from May to June according to the June ADP National Employment Report®. ... The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis.
...
Mark Zandi, chief economist of Moody’s Analytics, said, "The job market is steadily improving. Job gains are broad based across all industries and company sizes. Judging from the job market, the economic recovery remains fully intact and is gaining momentum.”

This was above the consensus forecast for 210,000 private sector jobs added in the ADP report. 

Note: ADP hasn't been very useful in directly predicting the BLS report on a monthly basis, but it might provide a hint. The BLS report for June will be released on Thursday (since Friday is a holiday).

by Calculated Risk on 7/02/2014 07:01:00 AM

From the MBA: Mortgage Applications Decrease Slightly in Latest MBA Weekly Survey

Mortgage applications decreased 0.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending June 27, 2014. ...

The Refinance Index increased 0.1 percent from the previous week. The seasonally adjusted Purchase Index decreased 1 percent from one week earlier. ...
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.28 percent from 4.33 percent, with points decreasing to 0.14 from 0.18 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Click on graph for larger image.


The first graph shows the refinance index.

The refinance index is down 75% from the levels in May 2013.

As expected, refinance activity is very low this year.


The second graph shows the MBA mortgage purchase index.  

According to the MBA, the unadjusted purchase index is down about 16% from a year ago.

by Calculated Risk on 7/01/2014 07:40:00 PM

The BLS released the Metropolitan Area Employment and Unemployment report for May today.

Unemployment rates were lower in May than a year earlier in 357 of the 372 metropolitan areas, higher in 11 areas, and unchanged in 4 areas, the U.S. Bureau of Labor Statistics reported today. Twelve areas had jobless rates of at least 10.0 percent and 93 areas had rates of less than 5.0 percent. ...

Yuma, Ariz., and El Centro, Calif., had the highest unemployment rates in May, 26.5 percent and 21.1 percent, respectively. Bismarck, N.D., had the lowest unemployment rate, 2.2 percent.

It is interesting to look at a few areas I've been tracking. As an example, the unemployment rate in Sacramento has fallen from a high of 12.9% to 6.7% in May. No wonder housing has improved!

And another area I've been tracking is the Inland Empire in California.  Way back in 2006 I disagreed with some analysts on the outlook for the Inland Empire in California. I wrote:

As the housing bubble unwinds, housing related employment will fall; and fall dramatically in areas like the Inland Empire. The more an area is dependent on housing, the larger the negative impact on the local economy will be.

So I think some pundits have it backwards: Instead of a strong local economy keeping housing afloat, I think the bursting housing bubble will significantly impact housing dependent local economies.

And sure enough, the economies of housing dependent areas like the Inland Empire were devastated during the housing bust. The good news is the Inland Empire is now recovering.

Click on graph for larger image.

This graph shows the unemployment rate for the Inland Empire (using MSA: Riverside, San Bernardino, Ontario), and also the number of construction jobs as a percent of total employment.

The unemployment rate is falling, but still high at 8.0% (down from 15.0% in 2010). And construction employment is still low, but starting to increase.

Obviously the outlook for the Inland Empire is much better today.

Wednesday:
• Early, Reis Q2 2014 Apartment Survey of rents and vacancy rates.

• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 8:15 AM, the ADP Employment Report for June. This report is for private payrolls only (no government). The consensus is for 210,000 payroll jobs added in June, up from 180,000 in May.

• At 10:00 AM, Manufacturers' Shipments, Inventories and Orders (Factory Orders) for May. The consensus is for a 0.3% decrease in May orders.

• At 11:00 AM, Speech by Fed Chair Janet Yellen, Financial Stability, At the Inaugural Michel Camdessus Central Banking Lecture at the International Monetary Fund, Washington, D.C.

by Calculated Risk on 7/01/2014 02:55:00 PM

Based on an WardsAuto estimate, light vehicle sales were at a 16.9 million SAAR in June. That is up 7% from June 2013, and up 1% from the 16.7 million annual sales rate last month.

This was above the consensus forecast of 16.4 million SAAR (seasonally adjusted annual rate).

Click on graph for larger image.

This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for June (red, light vehicle sales of 16.9 million SAAR from WardsAuto).

Severe weather clearly impacted sales in January and February.  Since then vehicle sales have been very strong.

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

Note: dashed line is current estimated sales rate.

Unlike residential investment, auto sales bounced back fairly quickly following the recession and were a key driver of the recovery.