by Calculated Risk on 6/08/2015 08:35:00 PM

The endless Greek tragedy continues, from the WSJ: Greece, Creditors Discuss Extending Bailout in Bid to Break Deadlock

The eurozone’s portion of Greece’s €245 billion ($276 billion) rescue program runs out at the end of June, raising questions over how Athens will pay off its debt beyond this month and remain in Europe’s currency union. ...

A nine-month extension would help carry Athens over its current funding gap. It would also give both Prime Minister Alexis Tsipras and his country’s creditors—the eurozone and the International Monetary Fund—more time to chart a new path for Greece’s economy. But it leaves open questions over whether the government would, indeed, be able to finance itself beyond March, or need even more support.

To help keep Greece solvent over the proposed bailout extension, Greece would receive financing from some €10.9 billion in aid money that had originally been set aside to prop up Greek banks, three people familiar with the negotiations said.

Tuesday:
• At 9:00 AM ET, the NFIB Small Business Optimism Index for May

• At 10:00 AM, the Job Openings and Labor Turnover Survey for April from the BLS. Jobs openings decreased in March to 4.994 million from 5.144 million in February. The number of job openings were up 19% year-over-year in March, and Quits were up 14% year-over-year.

by Calculated Risk on 6/08/2015 04:21:00 PM

For fun ... tomorrow is the tenth anniversary of then Fed Chairman Alan Greenspan's "Froth" testimony on June 9, 2005:

Although a "bubble" in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels.

The housing market in the United States is quite heterogeneous, and it does not have the capacity to move excesses easily from one area to another. Instead, we have a collection of only loosely connected local markets. Thus, while investors can arbitrage the price of a commodity such as aluminum between Portland, Maine, and Portland, Oregon, they cannot do that with home prices because they cannot move the houses. As a consequence, unlike the behavior of commodity prices, which varies little from place to place, the behavior of home prices varies widely across the nation.

Speculation in homes is largely local, especially for owner-occupied residences. For homeowners to realize accumulated capital gains on a residence--a precondition of a speculative market--they must move. Another formidable barrier to the emergence of speculative activity in housing markets is that home sales involve significant commissions and closing costs, which average in the neighborhood of 10 percent of the sales price. Where homeowner sales predominate, speculative turnover of homes is difficult.

But in recent years, the pace of turnover of existing homes has quickened. It appears that a substantial part of the acceleration in turnover reflects the purchase of second homes--either for investment or vacation purposes. Transactions in second homes, of course, are not restrained by the same forces that restrict the purchases or sales of primary residences--an individual can sell without having to move. This suggests that speculative activity may have had a greater role in generating the recent price increases than it has customarily had in the past.

The apparent froth in housing markets may have spilled over into mortgage markets. The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other relatively exotic forms of adjustable-rate mortgages, are developments of particular concern. To be sure, these financing vehicles have their appropriate uses. But to the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace.

The U.S. economy has weathered such episodes before without experiencing significant declines in the national average level of home prices. In part, this is explained by an underlying uptrend in home prices. Because of the degree of customization of homes, it is difficult to achieve significant productivity gains in residential building despite the ongoing technological advances in other areas of our economy. As a result, productivity gains in residential construction have lagged behind the average productivity increases in the United States for many decades. This shortfall has been one of the reasons that house prices have consistently outpaced the general price level for many decades.

Although we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications.

Yes. Maybe a little "froth" in housing, but no "substantial macroeconomic implications"! Oops ...

by Calculated Risk on 6/08/2015 12:08:00 PM

Every month, with the release of the employment report, we see commentary that says "the labor force participation rate is at or near a 30 year low". Duh! That was expected based on demographics and is not worth reading (Note: the participation rate might move sideways for a couple of years, but is projected to decline for another decade or more).

There is usually some discussion about the decline in the prime working age participation rate - and this is more interesting. However a careful analysis shows that the participation rate for prime workers is now close to the expected rate.

A year ago I wrote: 41-Year-Olds and the Labor Force Participation Rate and I discussed a few key points:

1) Analyzing and forecasting the labor force participation requires looking at a number of factors. Everyone is aware that there is a large cohort has moved into the 50 to 70 age group, and that that has pushing down the overall participation rate. Another large cohort has been moving into the 16 to 24 year old age group - and many in this cohort are staying in school (a long term trend that has accelerated recently) - and that is another key factor in the decline in the overall participation rate.

2) But there are other long term trends. One of these trends is for a decline in the participation rate for prime working age men (25 to 54 years old).

3) There has been some discussion that the decline in prime working age workers is due to "weakness of the labor market", however this decline was happening long before the Great Recession. For some reasons, see: Possible Reasons for the Decline in Prime-Working Age Men Labor Force Participation and on demographics from researchers at the Atlanta Fed: "Reasons for the Decline in Prime-Age Labor Force Participation"

Here is a look at the trend for 40 to 44 year old men (BLS data, only available Not Seasonally Adjusted since 1976). I choose men only to simplify.

Click on graph for larger image.

This graph shows the 40 to 44 year old men participation rate since 1976 (note the scale doesn't start at zero to better show the change).

There is a clear downward trend, and a researcher looking at this trend in the year 2000 might have predicted the 40 to 44 year old men participation rate would about the level as today (see trend line).

Clearly there are other factors than "economic weakness" causing this downward trend.   I listed some reasons a few months ago, and new research from Pew Research suggests stay-at-home dads is one of the reasons: Growing Number of Dads Home with the Kids

Just looking at this graph, I don't think there are many "missing 41-Year-Old" men that will be returning to the labor force.

The second graph shows the trends for each prime working age men 5-year age group.

Note: This is a rolling 12 month average to remove noise (data is NSA), and the scale doesn't start at zero to show the change.

Clearly there is a downward trend for all 5 year age groups. When arguing about how many workers are "missing", we need to take these long term trends into account.

The third graph shows the same data but with the full scale (0% to 100%).  The trend is still apparent, but the decline has been gradual.

The trend is more complicated for women.

Here is a look at the participation rate of women in the prime working age groups over time.

This graph shows the trends for each prime working age women 5-year age group.

Note: This is a rolling 12 month average to remove noise (data is NSA), and the scale doesn't start at zero to show the change.

For women, the participation rate increased significantly until the late 90s, and then started declining slowly.  This is a more complicated story than for men, and that is why I used prime working age men above to show the gradual downward decline in participation that has been happening for decades (and is not just recent economic weakness).

This graph shows the same data for women but with the full scale (0% to 100%).  The upward participation until the late 80s is very clear, and the decline since then has been gradual.

The bottom line is that the participation rate was declining for prime working age workers before the recession, there are several reasons for this decline (not just recent "economic weakness") and many estimates of "missing workers" are probably way too high.

by Calculated Risk on 6/08/2015 09:54:00 AM

Some excerpts from two research reports ...

From Merrill Lynch: To everything, there is a season

After a dismal start to the new year, we think that the worst is behind us. At its low, our tracking model for 1Q GDP pegged growth at -1.2%; now it is tracking -0.2%. The low for 2Q was 2.3%; now it is tracking 2.9%. On a similar note, key monthly data releases have shifted from negative to neutral. On a negative note, both core retail sales and manufacturing output were flat in April; on a positive note, the latest housing starts and auto sales data were strong and the labor market continues to motor along, with 200,000-plus job gains and a modest pick-up in wage growth.
emphasis added

From Goldman Sachs: After the Pothole

We view the recent turnaround in the US economic data as further confirmation that weak Q1 GDP growth was largely a result of temporary factors and statistical distortions with little bearing on the outlook for the rest of the year. Once again, the US economy seems to be climbing out of a Q1 pothole.
...
We continue to expect strong growth for the remainder of 2015. We are currently tracking Q2 GDP growth at 2.7% and expect a slight acceleration to 3% in 2015H2. We expect a pick-up in consumer spending to provide the largest contribution to stronger growth over the remainder of this year. Consumption grew a puzzlingly soft 1.8% in 2015Q1 despite strong disposable income growth and high consumer confidence. While many have expressed concern about softer spending in recent months, it is worth recalling that consumption has risen a respectable 2.7% over the last year ... We expect a rebound in coming quarters as the 1 percentage point (pp) increase in the saving rate seen over the last six months reverses.

Based on recent data, Q1 GDP will probably be revised up with the next release. And it looks like there will be a bounce back in Q2 (although the Atlanta Fed GDPNow model is only tracking 1.1% for Q2.

by Calculated Risk on 6/08/2015 08:06:00 AM

Black Knight Financial Services (BKFS) released their Mortgage Monitor report for April today. According to BKFS, 4.77% of mortgages were delinquent in April, up from 4.70% in March. BKFS reported that 1.51% of mortgages were in the foreclosure process, down from 2.02% in April 2014.

This gives a total of 6.28% delinquent or in foreclosure. It breaks down as:

• 1,463,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 952,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 764,000 loans in foreclosure process.

For a total of ​​3,179,000 loans delinquent or in foreclosure in April. This is down from 3,837,000 in April 2014.

Click on graph for larger image.

From Black Knight:

From Black Knight’s ‘First Look’ report, a high level view at the month’s mortgage performance data, we saw a slight seasonal uptick in delinquencies push the national rate back up to nearly 4.8 percent

As of April month-end, the nation’s foreclosure inventory fell by 18,000 to 764,000 total, a drop of over 250,000 from this time last year

April saw a slight uptick in delinquency rates – rising 1.5 percent month-over month

Seasonal increases in April are typical (they’ve been seen in eight of the past 10 years)

Also: Black Knight’s April Mortgage Monitor: 62 Percent of Seriously Delinquent Loans Have Undergone Home Retention Actions; Florida Sees Greatest Backlog Improvement

This month, Black Knight examined the most recent data on home retention actions – i.e., loan modifications and repayment plans – and found that of the approximately 952,000 borrowers who are 90 or more days past due but not yet in foreclosure, 62 percent have been through some form of home retention program. As Black Knight Data & Analytics Senior Vice President Ben Graboske explained, while overall retention actions have decreased over the past two years, they are making up a greater share of that seriously delinquent inventory.

“In analyzing the data around home retention initiatives, we found that nearly one in five seriously delinquent borrowers are currently taking part in an active trial modification or payment plan,” said Graboske. “With 62 percent of loans 90 or more days delinquent but not yet in foreclosure having been through some form of home retention action, we’re currently seeing the highest level of saturation yet, but that’s only marginally up from last year – in other words, that saturation level is beginning to flatten. Overall, home retention actions have declined 42 percent over the past two years, but at the same time have increased nine percent as a share of that seriously delinquent inventory. We’re also starting to see some redundancy in this activity – 70 percent of all new trial modifications and repayment plans have already been through one or more home retention actions previously.”

Home retention actions have declined 42 percent over the past two years, but at the same time, have increased 9 percent as share of 90+ days delinquent inventory

In Q1 2015, 15 percent of loans 90 or more days delinquent saw some form of home retention action each month (using a 3-month weighted average)

There is much more in the mortgage monitor.

by Calculated Risk on 6/07/2015 09:25:00 PM

From Nick Timiraos at the WSJ: New Housing Headwind Looms as Fewer Renters Can Afford to Own

Demographics tell the story. Urban Institute researchers predict that more than 3 in 4 new households this decade, and 7 of 8 in the next, will be formed by minorities. These new households—nearly half of which will be Hispanic—have lower incomes, less wealth and lower homeownership rates than the U.S. average.

The upshot is that fewer than half of new households formed this decade and next will own homes. By contrast, almost three-quarters of new households in the 1990s became homeowners. The downtrend would push homeownership below 62% in 2020, and it would hold the rate near 61% in 2030, below the lowest level since records began in 1965.
...
Economists at Goldman Sachs say demographics could ultimately be a tailwind. They noted in an April report that even though Hispanics, for example, have lower homeownership rates than non-Hispanic whites, those rates have been rising for the past four decades. They see the homeownership rate stabilizing next year after it falls to 63.5%.

My sense is that the homeownership rate is near a bottom.

Monday:
• At 10:00 AM ET, The Fed will release the monthly Labor Market Conditions Index (LMCI).

Weekend:
• Schedule for Week of June 7, 2015

From CNBC: Pre-Market Data and Bloomberg futures: currently S&P futures are down 2 and DOW futures are down 15 (fair value).

Oil prices were down over the last week with WTI futures at $58.67 per barrel and Brent at $62.90 per barrel.  A year ago, WTI was at $103, and Brent was at $109 - so prices are down 40%+ year-over-year.

Below is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.76 per gallon (down about $0.90 per gallon from a year ago).

If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent; gasoline prices in most of the U.S. are impacted more by Brent prices.

Orange County Historical Gas Price Charts Provided by GasBuddy.com

by Calculated Risk on 6/07/2015 12:33:00 PM

An update: Last year, I posted some demographic data for the U.S., see: Census Bureau: Largest 5-year Population Cohort is now the "20 to 24" Age Group, Decline in the Labor Force Participation Rate: Mostly Demographics and Long Term Trends, and The Future's so Bright ...

I pointed out that "even without the financial crisis we would have expected some slowdown in growth this decade (just based on demographics). The good news is that will change soon."

Changes in demographics are an important determinant of economic growth, and although most people focus on the aging of the "baby boomer" generation, the movement of younger cohorts into the prime working age is another key story in coming years. Here is a graph of the prime working age population (this is population, not the labor force) from 1948 through May 2015.

Click on graph for larger image.

There was a huge surge in the prime working age population in the '70s, '80s and '90s - and the prime age population has been mostly flat recently (even declined a little).

The prime working age labor force grew even quicker than the population in the '70s and '80s due to the increase in participation of women. In fact, the prime working age labor force was increasing 3%+ per year in the '80s!

So when we compare economic growth to the '70s, '80, or 90's we have to remember this difference in demographics (the '60s saw solid economic growth as near-prime age groups increased sharply).

See: Demographics and GDP: 2% is the new 4%

The prime working age population peaked in 2007, and appears to have bottomed at the end of 2012.  The good news is the prime working age group has started to grow again, and is now growing close to 0.4% per year - and this should boost economic activity.

by Calculated Risk on 6/06/2015 06:39:00 PM

This is a key distressed market to follow since Phoenix saw a large bubble / bust followed by strong investor buying.  These key markets hopefully show us changes in trends for sales and inventory.

For the sixth consecutive month, inventory was down year-over-year in Phoenix. This is a significant change from last year.

The Arizona Regional Multiple Listing Service (ARMLS) reports (table below):

1) Overall sales in May were up 11.4% year-over-year.

2) Cash Sales (frequently investors) were down to 24.0% of total sales.

3) Active inventory is now down 15.4% year-over-year.  

More inventory (a theme in 2014) - and less investor buying - suggested price increases would slow sharply in 2014.  And prices increases did slow.

Now, with falling inventory, prices might increase a little faster in 2015 (something to watch if inventory continues to decline).

May Residential Sales and Inventory, Greater Phoenix Area, ARMLS
	Sales	YoY Change Sales	Cash Sales	Percent Cash	Inventory	YoY Change Inventory
May-08	5,6371	---	1,062	18.8%	54,1611	---
May-09	9,284	64.7%	3,592	38.7%	39,902	-26.3%
May-10	9,067	-2.3%	3,341	36.8%	41,326	3.6%
May-11	9,811	8.2%	4,523	46.1%	31,661	-23.4%
May-12	8,445	13.5%	3,907	46.3%	20,162	-36.3%
May-13	9,440	11.8%	3,669	38.9%	19,734	-2.1%
May-14	7,442	-21.2%	2,193	29.5%	29,091	47.4%
May-15	8,293	11.4%	1,988	24.0%	24,616	-15.4%
1 May 2008 does not include manufactured homes, ~100 more

by Calculated Risk on 6/06/2015 08:41:00 AM

The key economic report this week is May Retail sales on Thursday.

----- Monday, June 8th -----
At 10:00 AM ET: The Fed will release the monthly Labor Market Conditions Index (LMCI).

----- Tuesday, June 9th -----
9:00 AM: NFIB Small Business Optimism Index for May.

10:00 AM: Job Openings and Labor Turnover Survey for April from the BLS.

This graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Jobs openings decreased in March to 4.994 million from 5.144 million in February.

The number of job openings (yellow) were up 19% year-over-year, and Quits were up 14% year-over-year.

----- Wednesday, June 10th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

10:00 AM: The Q1 Quarterly Services Report from the Census Bureau.

2:00 PM ET: The Monthly Treasury Budget Statement for May.

----- Thursday, June 11th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to increase to 276 thousand from 275 thousand.

8:30 AM ET: Retail sales for May will be released.

This graph shows retail sales since 1992 through April 2015. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). On a monthly basis, retail sales were unchanged from March to April (seasonally adjusted), and sales were up 0.9% from April 2014.

The consensus is for retail sales to increase 1.3% in May, and to increase 0.8% ex-autos.

10:00 AM: Manufacturing and Trade: Inventories and Sales (business inventories) report for April.  The consensus is for a 0.2% increase in inventories.

12:00 PM: Q1 Flow of Funds Accounts of the United States from the Federal Reserve.

----- Friday, June 12th -----
8:30 AM ET: The Producer Price Index for May from the BLS. The consensus is for a 0.4% increase in prices, and a 0.1% increase in core PPI.

10:00 AM: University of Michigan's Consumer sentiment index (preliminary for June). The consensus is for a reading of 91.2, up from 90.7 in May.

by Calculated Risk on 6/05/2015 09:09:00 PM

More good news ... the budget deficit in fiscal 2015 will probably be lower than the recent CBO March forecast.

From the Congressional Budget Office (CBO) today: Monthly Budget Review for May 2015

The federal government ran a budget deficit of $368 billion for the first eight months of fiscal year 2015, CBO estimates. That deficit was $68 billion smaller than the one recorded during the same period last year. Revenues and outlays were both higher than the amounts recorded during the same period in fiscal year 2014—by 9 percent and 4 percent, respectively. If not for shifts in the timing of certain payments (which otherwise would have fallen on a weekend), the deficit for the eight-month period would have been $33 billion less this year than it was in fiscal year 2014. ...

And for May 2015:

The federal government recorded a deficit of $85 billion in May 2015, CBO estimates—$45 billion less than the deficit in May 2014. If not for the effects of timing shifts that occurred in May 2014, the deficit in May 2015 would have been $9 billion (or 10 percent) smaller than it was in the same month last year.
emphasis added

The consensus was the deficit for May would be around $97 billion, and it appears the deficit for fiscal 2015 will be smaller than the CBO currently expects (less than 2.7% of GDP).