by Calculated Risk on 12/04/2011 09:08:00 PM

From Jon Hilsenrath and Luca Di Leo at the WSJ: Federal Reserve Prepares to Make Itself Perfectly Clear

The Fed has been working on revamping its communication strategy for months. ... Informally, the Fed already has made clear it wants the annual inflation rate to run at 2% or a bit lower over the long-run. A formal statement would codify the commitment. Such a declaration would likely run alongside a description of the Fed's goals for employment, which Congress requires it to mind along with inflation. Most Fed officials believe the unemployment rate could fall to 5% or 6% without triggering higher inflation.

To articulate its interest-rate strategy, the Fed would expand its quarterly release of the officials' projections for economic growth, inflation and unemployment. It would add details on the Fed's interest rate expectations underlying its economic projections, along with some description of the policy it expects to employ to reach its goals.

I think this would be helpful.

Yesterday:
• Summary for Week ending Dec 2nd
• Schedule for Week of Dec 4th

by Calculated Risk on 12/04/2011 05:35:00 PM

This will be an interesting week ...

From the WSJ: Euro Faces Tests From ECB, EU Summit

This Thursday, policy makers at the ECB will gather for a meeting that is widely expected to lead to a reduction in interest rates by at least 0.25 percentage point, to 1%. On Friday, European Union leaders have scheduled a summit meeting, where euro-zone officials are expected to lay out plans to enforce stricter budget rules across the currency bloc in an effort to keep the Continent's turmoil from worsening.

Market observers say the ECB and the EU summit are intertwined. Investors are eager for the central bank to take a more aggressive role in buying euro-zone government debt, driving down interest rates. But unless euro-zone countries overhaul their fiscal policies, the ECB is reluctant to expand its emergency bond-buying...

From the Financial Times: Monti cabinet agrees Italy austerity plans

Rome’s planned tax increases, pension changes and spending cuts amount to a savings of €30bn over the next three years, of which about €10bn will be put back into the economy through measures to promote growth, including cuts in the cost of labour and incentives to get more women and young people into the workforce.
excerpt with permission

Yesterday:
• Summary for Week ending Dec 2nd
• Schedule for Week of Dec 4th

by Calculated Risk on 12/04/2011 10:45:00 AM

Yesterday someone sent me a column from John Mauldin that had the following graph. The graph shows the BLS Employment-population ratio, 16 years and older, and based on the trend, the author is expecting the employment-population ratio to rise to 65% in 2020.


I think this forecast is incorrect - and this gives me a chance to discuss the participation rate and employment-population ratio.

The employment-population ratio really increased in the '70s and '80s for two reasons: 1) favorable demographics as the baby boom generation moved into their prime working years, and 2) a rising participation rate for women. But that trend was about to change even if there hadn't been a severe recession.

Some definitions:
Participation Rate = Labor force / Civilian noninstitutional population

Employment-population ratio = Employed / Civilian noninstitutional population

Unemployment Rate = Unemployed / Labor Force

If we know the participation rate and the unemployment rate, we can calculate the employment-population ratio as follows:
Employment-population ratio = participation rate * (1 - unemployment rate).

This means that if the unemployment rate stayed steady, the employment-population ratio would follow the participation rate. This is important because the participation rate is impacted by changes in demographics - and we can forecast some of those changes.

The second graph shows the actual annual participation rate and two forecasts based on changes in demographics - both forecasts were made before the recent recession. Now that the baby boom generation is approaching retirement, the participation rate will decline.

Here are the two earlier papers with all of the author's assumptions:
• 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.

I've made a similar calculation, and based on demographics, it is clear the participation rate would be falling even without a recession. Look back at the first graph - the projected increase in the employment-population ratio would require an increase in the participation rate (or a much lower unemployment rate than we've seen at full employment) - and that isn't going to happen.

The third graph shows the actual employment-population ratio. The two dashed lines are the calculated employment-population ratio using the actual participation rate - and two steady unemployment rates: 5% and 6%. You can see the impact of business cycles on the employment-population ratio (the participation rate is also impacted by business cycles, but much less than the employment-population ratio).

Using the participation projections from Professor Szafran and BLS economist Toossi, this would suggest an employment-population ratio in the 59% to 61% range in 2020 - not 65%.

Professor Krugman also used the employment-population ratio on Friday, but with one very important difference: he only used the 25 to 54 age group. From Krugman: Meh. And I Say That With Feeling

It could have been worse, but the basic story remains the same as it has been for 2 1/2 years: an economy that’s growing, but not enough to feel anything like a real recovery. The measured unemployment rate has trended down for a while, but it’s all basically reduced numbers of people actively searching. My favorite measure these days is the employment-population ratio for prime-age workers, which isn’t affected by changing demography. Here it is for the past decade; see the trend since the recession officially ended? Neither do I.

As Krugman suggests, the participation rate for the 25 to 54 age group has been fairly flat for the last 20 years so we can just look at the employment-population ratio.

This graph shows the participation rate for men, women and all in the 25 to 54 age group.

The participation rate for women had been increasing for decades, and really increased in the '70s and '80s. This is a key reason why the employment-population ratio was increasing (back to the first graph). But the participation rate for women has flattened out.

The participation rate for men has been slowly decreasing for some time. But the overall participation rate has been fairly flat - so for a quick look at the overall employment situation, the 25 to 54 employment population ratio is very useful.

However, when looking at the 16 and over population-employment ratio, we have to also analyze the trends for the participation rate. And the participation rate is expected to decline for the next couple of decades.

by Calculated Risk on 12/04/2011 08:15:00 AM

From HotelNewsNow.com: STR: US results for week ending 26 November

In year-over-year comparisons for the week, occupancy rose 3.4 percent to 45.0 percent, average daily rate increased 3.7 percent to US$90.51 and revenue per available room finished the week with an increase of 7.2 percent to US$40.74.

Note: ADR: Average Daily Rate, RevPAR: Revenue per Available Room.

The following graph shows the seasonal pattern for the hotel occupancy rate using a four week average for the occupancy rate.

Click on graph for larger image.

The fall business travel season is over, and the 4-week average of the occupancy rate will decline into early next year. The occupancy rate is now running pretty close to the median rate for 2000 - 2007. But this is just the occupancy rate, room rates are still lower ...

From HotelNewsNow.com: Data shows full recovery still far away

Jan Freitag, senior VP of global development for STR (the parent company of HotelNewsNow.com), said if the metrics are adjusted for inflation it could be even longer. Specifically, he said the 12-month moving average for U.S. average daily rate was US$107.72 at its peak in September 2008. In October 2011 it was US$101.13.

“You can argue that US$107 versus US$101 is just a US$6 difference,” Freitag said. “But adjusted with inflation you suddenly have to make up US$7 or US$8. It’s at least 24 months away before we do that, and probably longer.”
...
The other metrics are a bit more complicated to calculate. Occupancy in the U.S., for example, was 63.5% at its peak in 2006 and in October 2011 was at 59.8%. But getting back to 63.5% might not be the right goal to shoot for, Freitag said, because the amount of supply added to the landscape has skewed what would be a common denominator.

Instead, Freitag suggested the industry aim to sell more rooms today than it did in 2008—a goal it has already accomplished. The industry sold 40 million more rooms from January to October 2011 than it did from January to October 2008, although there are 100 million more rooms available today than there were at this time three years ago.

“Going back to pre-recession occupancy levels might not be the right goal,” Freitag said. “The right questions might be: ‘Can we sell more rooms?’ And ‘Can we make more revenue?’”

Measuring revenue, the U.S. hotel industry grossed US$109 billion from January to September 2008 and US$106 billion through the same time frame in 2011. “Even though we’re selling more rooms, we’ve made US$3 billion less,” Freitag said. “That’s purely a function of rate.”

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

Yesterday:
• Summary for Week ending Dec 2nd
• Schedule for Week of Dec 4th

by Calculated Risk on 12/03/2011 08:30:00 PM

This is one of the few remaining undeveloped coastal areas of Orange County (probably the largest undeveloped coastal parcel). Of course this property went into bankruptcy in 2008 (Lehman provided the funding). It looks like it is moving ahead now ...

From the O.C. Register: Future O.C. outlet mall names 21 stores

Plaza San Clemente, an outlet shopping center, has released the names for 21 retailers that have signed leases to open there.

The outlet shopping center, located at Avenida Vista Hermosa off the 5 Freeway, is part of the Marblehead oceanfront development. Plaza San Clemente will feature nearly 600,000 square feet of multiple retail uses. It will include 350,000 square feet of outlets and complementing retail, a large multiplex cinema, a mixture of dinner houses and casual dining, a hotel with conference facilities and neighborhood services.

The center is targeting a 2012 start date for construction, but does not have a specific opening date yet ...

Earlier:
• Summary for Week ending Dec 2nd
• Schedule for Week of Dec 4th