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

by Calculated Risk on 1/04/2012 10:25:00 AM

The key number for the economy is the seasonally adjusted annual sales rate (SAAR) compared to the last few months, not the year-over-year comparison provided by the automakers. Once all the reports are released, I'll post a graph of the estimated total December light vehicle sales (SAAR) - usually around 4 PM ET.

From the Detroit Free Press: Chrysler sales up 37% in December; Ford posts 10% gain; GM sees 5% uptick

Chrysler said today sales of new cars and trucks in the U.S. increased 37% in December compared to the same month a year ago ... it sold 138,019 vehicles in December, marking its best month since May 2008.

Ford gained a more modest 10% increase in December from a year ago on sales of 210,140 ...

General Motors reported a smaller 5% increase for the month for a total of 234,351 vehicles sold.

The consensus is for sales to be unchanged from November at around 13.6 million SAAR.

by Calculated Risk on 1/04/2012 08:16:00 AM

From the MBA: Mortgage Applications Decrease Over Two Week Holiday Period

The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the weeks ending December 23, 2011 and December 30, 2011.
...
The seasonally adjusted Purchase Index decreased 9.7 percent compared with levels reported two weeks ago. ...

"Mortgage application activity declined over the last two weeks, even after adjusting for the typical seasonal decline in activity. Refinance applications continue to account for the vast majority of total application volume, with the refinance share reaching its highest level in 2011. As part of legislation to extend the payroll tax holiday, guarantee fees for loans purchased by the GSEs and mortgage insurance premiums for FHA loans will eventually increase. Given the announced implementation of this change, we do not expect to see an impact on mortgage rates and application activity until at least February," said Michael Fratantoni, MBA's Vice President of Research and Economics.

The following graph shows the MBA Purchase Index and four week moving average since 1990.

Click on graph for larger image.

The purchase index decreased last week, and the 4-week average decreased slightly. This index has mostly been sideways for the last 2 years - and at about the same level as in 1997.

by Calculated Risk on 1/03/2012 07:13:00 PM

From Bloomberg: MBIA Wins Judgment Ruling Against Countrywide

MBIA, which says it was duped into guaranteeing payment on Countrywide mortgage bonds, need only show the lender made misrepresentations about the loans backing the bonds, instead of having to prove they caused the losses the insurer is seeking to recover, New York state Judge Eileen Bransten said in a decision.

“No basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy,” she wrote.

More from the WSJ: MBIA Wins Key Ruling in Mortgage Suit vs. Countrywide

Earlier:
• ISM Manufacturing index indicates faster expansion in December
• Construction Spending increased in November
• FOMC Minutes: Agreement to provide "projections of appropriate monetary policy" in January
• Question #7 for 2012: State and Local Governments

by Calculated Risk on 1/03/2012 04:14:00 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.

Many of the questions are interrelated. The question on monetary policy depends on inflation (question #9), the unemployment rate (question #6) and what happens in Europe (question #8). And the unemployment rate is related to GDP growth (question #4), and on and on ...

Question #7: State and Local Governments: It is starting to look like there will be less drag in 2012 than in 2011. How much of a drag will state and local budget problems have on economic growth and employment?

How about this headline from Bloomberg this morning: Michigan Fiscal Agency Anticipates $735 Million Budget Surplus for 2011-12? This doesn't mean the cuts are over because the budget assumes further cuts, especially for education. But it suggests progress.

There was a similar article about California a couple of weeks ago in the San Francisco Chronicle: California leaders say time for cuts may be ending. Once again there are more cuts coming, but the end may be in sight.

The National Conference of State Legislatures (NCSL) recently released a report "State Budget Update: Fall 2011,":

State fiscal conditions continue to improve, but at a very slow pace. A fall 2011 survey of state legislative fiscal officers found that the deterioration that dominated state finances in recent years has eased. Revenue performance has improved, expenditures in most states are stable and, in a significant departure from past years, few states are reporting budget gaps in the early months of fiscal year (FY) 2012. However, despite these positive developments, the effects of the Great Recession continue to linger. State tax collections still remain well below pre-recession levels.

With the enactment of their FY 2012 budgets, lawmakers successfully closed a cumulative budget gap of $91 billion. This is on top of shortfalls that states began
addressing in FY 2008. In total, lawmakers have resolved an aggregate gap of more than $500 billion over four consecutive years. But the tide may be turning. Halfway into the second quarter of FY 2012, new gaps are practically non-existent.

Note: "Fiscal years for all but four states—Alabama, Michigan, New York, and Texas—begin on July 1.", Source. So the FY 2012 budgets (and associated cuts) will end on June 30, 2012.

Here is a table of the annual change in state and local GDP and payroll employment for the last several years. State and local governments have been a significant drag on both GDP and payroll employment.

State and Local Government
	Change, Employment (000s)	Change in Real GDP
2008	160	0.0%
2009	-132	-0.9%
2010	-249	-1.8%
2011e	-246	-2.2%
2012f	-100	-1.0%

Note: estimate for 2011, forecast for 2012 (aka guess).

It is looking like there will be less drag from state and local governments in 2012, and that most of the drag will be over by the end of Q2 (end of FY 2012). This doesn't mean state and local government will add to GDP in the 2nd half of 2012, just that the drag on GDP and employment will probably end. Just getting rid of the drag will help.

This is a significant improvement from last year!

A final comment: there was a debate last year if there would be a large number of muni defaults in 2011. One analyst predicted "hundreds of billions of dollars' worth of defaults". I disagreed strongly with that prediction, and the total defaults was only a small fraction of that number. With improving finances, the threat of a huge number of muni defaults is even less likely in 2012.

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