by Calculated Risk on 7/09/2012 11:55:00 AM

From San Francisco Fed President John Williams: The Economic Outlook and Challenges to Monetary Policy. Excerpt:

I expect that the unemployment rate will remain at or above 8 percent until the second half of 2013. What that means is that progress on bringing down the unemployment rate has probably slowed to a snail’s pace and perhaps even stalled.

Turning to inflation, I expect the inflation rate to come in below the Fed’s 2 percent target both this year and next. This forecast reflects several factors. A sluggish labor market is keeping a lid on compensation costs. A stronger dollar is holding down import prices. And the global growth slowdown has pushed down the prices of crude oil and other commodities.

My forecast is based on what I consider the most likely scenario. However, I am much more uncertain than usual about this forecast. I’ve mentioned the threat of automatic large tax increases and spending cuts at the start of 2013. But the most important wild card for the U.S. economy is Europe.

My forecast assumes that Europe’s distressed pattern of the past two years will continue, but that the situation won’t spin out of control. However, it is impossible to predict with any certainty how these circumstances will play out. Europe’s crisis could escalate much more than I expect.
...
What does this mean for the Fed? We are falling short on both our employment and price stability mandates, and I expect that we will make only very limited progress toward these goals over the next year. Moreover, strains in global financial markets raise the prospect that economic growth and progress on employment will be even slower than I anticipate. In these circumstances, it is essential that we provide sufficient monetary accommodation to keep our economy moving towards our employment and price stability mandates.
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If further action is called for, the most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities. These purchases have proven effective in lowering borrowing costs and improving financial conditions.

At the Fed, we take our dual mandate with the utmost seriousness. This is a period when extraordinary vigilance is demanded. We stand ready to do what is necessary to attain our goals of maximum employment and price stability.

A strong push for QE3 from a key member of the FOMC.

by Calculated Risk on 7/09/2012 08:45:00 AM

LPS released their Mortgage Monitor report for May today. According to LPS, 7.20% of mortgages were delinquent in May, up slightly from 7.12% in April, and down from 7.96% in May 2011.

LPS reports that 4.12% of mortgages were in the foreclosure process, down slightly from 4.14% in April, and up slightly from 4.11% in May 2011.

This gives a total of 11.32% delinquent or in foreclosure. It breaks down as:

• 1,967,000 loans less than 90 days delinquent.
• 1,575,000 loans 90+ days delinquent.
• 2,027,000 loans in foreclosure process.

For a total of 5,569,000 loans delinquent or in foreclosure in May. This is down from 6,350,000 in May 2011.

This following graph shows the total delinquent and in-foreclosure rates since 1995.

Click on graph for larger image.

The total delinquency rate has fallen to 7.20% from the peak in January 2010 of 10.97%. A normal rate is probably in the 4% to 5% range, so there is a long ways to go.

The in-foreclosure rate was at 4.12%, down from the record high in October 2011 of 4.29%. There are still a large number of loans in this category (about 2.03 million).

The second graph shows percent of loans in the foreclosure process by process (Judicial vs. non-judicial).

From LPS: "Foreclosure inventory in judicial states is 6.5% - more than 2.5X that of non-judicial states (2.46%); national average is 4.14%. ... Aged foreclosure inventory - loans delinquent more than two years - is also much higher in judicial states, where it accounts for 53% of total foreclosure inventory, as opposed to just over 30% in non-judicial states ... The average YoY change in percentage of non-current loans for judicial states is -0.8%; in non-judicial states, it's -7.1%"

The third graph shows new problem loan rates continue to decline...

This graph shows the percent of loans that are seriously delinquent that were current 6 months ago.

From LPS: "New problem loan rates continue to improve, reaching a low not seen since July of 2007, after eight consecutive monthly declines"

There is much more in the Mortgage Monitor report.

The good news is the flow into the pipeline has slowed. The bad news - especially in judicial states - is that the pipeline is still very full.

by Calculated Risk on 7/08/2012 10:26:00 PM

This will be a light week for economic data.

• At 8:45 AM ET, the LPS Mortgage Monitor for May will be released. This report provides monthly data on the mortgage market, especially on delinquencies.

• At 3:00 PM, the consumer credit report for June will be released. The consensus is for credit to increase $8.5 billion..

Also, at 11:55 AM, San Francisco Fed President John Williams will speak on the economic outlook.

The Asian markets are red tonight. The Nikkei is off 0.75%, and the Shanghai Composite is off 0.5%.

From CNBC: Pre-Market Data and Bloomberg futures: the US futures are mostly flat.

Oil: WTI futures are up to $84.89 (this is down from $109.77 in February, but up last week) and Brent is at $97.69 per barrel. According to a formula from Professor Hamilton, the price of Brent would suggest gasoline at around $3.28 per gallon (the current national average price is $3.36) so gasoline prices might fall a little further.

Yesterday:
• Summary for Week Ending July 6th
• Schedule for Week of July 8th

A couple of questions for the July contest (to be released later in the week):

by Calculated Risk on 7/08/2012 06:22:00 PM

There is a renewed focus on the Fed following the weak employment report for June.

First, on Friday, Jon Hilsenrath wrote at the WSJ: Weak Report Lifts Chance of Fed Action

Friday's disappointing jobs report increases the likelihood that the Federal Reserve will launch a new bond-buying program to boost economic growth, though it doesn't ensure such a move.
...
The central bank's more activist camp believes more action is already justified because the economy isn't making progress toward reducing unemployment and inflation is low. Its hawkish wing, which worries more about inflation and which has been skeptical of the central bank's responses to financial crisis and recession, accepts that more action might be needed but wants to hold it in reserve for serious threats like recession or deflation.

Some Fed officials in the middle don't have as high a bar to action as the hawks but are waiting to see if the outlook deteriorates anymore. "I am more leaning toward the view further action would be a response to deteriorating conditions and a deteriorating outlook," Atlanta Fed president Dennis Lockhart said in an interview with Dow Jones Newswires last month.

Dennis Lockhart is a voting member of the FOMC and he speaks this week to the Mississippi Economic Council on Friday at 1:20 PM ET. As Hilsenrath notes, Lockhart is in the "middle", and his speech will be analyzed to see if he is moving towards QE3.

Note: On Monday, FOMC voting member San Francisco Fed President John Willams will speak at 11:55 AM in Idaho, and on Wednesday the minutes from the FOMC meeting of June 19-20, 2012 will be released.

The following week, on July 17th, Fed Chairman Ben Bernanke will testify before the Senate Banking Committee, and on July 18th he will testify House Financial Services Committee. The next FOMC meeting is on July 31st and August 1st.

The key piece of economic data to be released before the next FOMC meeting is the Q2 advance GDP report on Friday, July 27th. Right now this report is expected to show GDP growth of around 1.5% annualized in Q2.

Some analysts think the Fed will wait for more data, so they think August 1st is too soon for QE3. Still the debate about QE3 will pickup over the next few weeks.

Yesterday:
• Summary for Week Ending July 6th
• Schedule for Week of July 8th

And on Employment:
• June Employment Report: 80,000 Jobs, 8.2% Unemployment Rate
• Employment: Another Weak Report (more graphs)
• Percent Job Losses: Great Recession and Great Depression
• All Employment Graphs

by Calculated Risk on 7/08/2012 11:24:00 AM

Below are three more graphs based on the June employment report.

For more employment graphs and analysis, see:
• June Employment Report: 80,000 Jobs, 8.2% Unemployment Rate
• Employment: Another Weak Report (more graphs)
• Percent Job Losses: Great Recession and Great Depression
• All Employment Graphs

Participation Rate
The following graph shows the changes in the participation rates for men and women since 1960 (in the 25 to 54 age group - the prime working years).

Click on graph for larger image in graph gallery.

The participation rate for women increased significantly from the mid 30s to the mid 70s. This rate was at 75.5% prior to the recession, and declined to a post-recession low of 74.3%. There has been almost no recovery in the participation rate for prime working age women. This rate has mostly flattened out this year, and was still near the low in June at 74.4%.

The participation rate for men has decreased from the high 90s a few decades ago, to a low of 88.3% after the recession. This rate has increased a little and was at 88.8% in June.

There might be some "bounce back" for both men and women (some of the recent decline is probably cyclical), but the long term trend for men is down.

For more on this, see The Declining Participation Rate.

Duration of Unemployment
This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more.

All categories are generally moving down, but there was an increase in the less than 5 week category in June. The other categories remain elevated.

Unfortunately the long term unemployed remains very high at 3.5% of the labor force in June.

Diffusion Indexes
Diffusion indexes are a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS. If there are employment gains, the more widespread, the better - even if job growth is slow. From the BLS:

Figures are the percent of industries with employment increasing plus one-half of the industries with unchanged employment, where 50 percent indicates an equal balance between industries with increasing and decreasing employment.

The BLS diffusion index for total private employment was at 57.9 in June, down from 59.8 in May. For manufacturing, the diffusion index declined to 51.2 from 53.7 in May.

Even though job growth was weak in June, job growth was still somewhat widespread across industries (a small positive).

Yesterday:
• Summary for Week Ending July 6th
• Schedule for Week of July 8th