by Calculated Risk on 10/03/2014 07:53:00 PM

Some interesting analysis from Hui Shan, Marty Young, Chris Henson at Goldman Sachs: Fed likely still holds $1 trillion MBS by the end of 2020

The QE program is set to end after the October FOMC meeting. In the updated exit strategy principles released on September 17, the committee announced that it anticipates (1) portfolio reinvestments will continue until after the first rate hike and (2) sales of MBS will not occur during the normalization process. The Federal Reserve currently holds close to $1.8 trillion agency MBS, accounting for one third of the total outstanding. Our US economics team forecasts the first Federal funds rate hike in 2015Q3 and the portfolio reinvestment continuing through 2015. This projection combined with the FOMC’s exit strategy principles suggests that the Federal Reserve is likely to remain the largest agency MBS investor for a long time.
...
The speed of the portfolio rundown when the Fed stops reinvesting depends on the speed of principal payments, both scheduled (i.e., through amortization) and unscheduled (i.e., through refinancing, home sales, and defaults). While scheduled principal payments are pre-determined, unscheduled principal payments depend on a host of factors such as interest rates, house prices, and economic conditions. ...

Under our baseline scenario, the Federal Reserve continues reinvesting principal payments through 2015. After that, the Fed portfolio declines slowly, with the Fed still holding $1 trillion MBS by the end of 2020. Such a gradual pace suggests that Fed portfolio rundown is unlikely to create a surge in the net supply of agency MBS for private investors to absorb after the end of QE.
emphasis added

by Calculated Risk on 10/03/2014 02:31:00 PM

Reis reported that the vacancy rate for regional malls was unchanged at 7.9% in Q3 2014. This is down from a cycle peak of 9.4% in Q3 2011.

For Neighborhood and Community malls (strip malls), the vacancy rate was also unchanged at 10.3% in Q3. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011.

Comments from Reis Senior Economist Ryan Severino:

[Strip Malls] The national vacancy rate for neighborhood and community shopping centers was unchanged at 10.3% during the third quarter. This is similar to last quarter when the vacancy rate did not change. The national vacancy is now down 80 basis points from its historical peak during the third quarter of 2011. Of course, this means the pace of improvement is slow and consistent.

Completions during the quarter were low, even by the standards of this tepid recovery. Construction has yet to mount any meaningful recovery since the recession. Most of the construction occurring is small and almost always predicated on preleasing. There is still virtually no new speculative development five years removed from the start of the economic recovery.
...
Ecommerce remains a potent threat to many retail centers, but at this point, that is not what is holding the market back. The overwhelming majority of retail sales activity, roughly 94%, still occurs in physical retail locations. Surely that has imperiled some centers, but not the majority. Though ecommerce's share of the market will continue to grow and pose a larger threat over time, it will not prevent a recovery in the retail sector.

[Regional] Much like with neighborhood and community centers, the regional mall vacancy rate was unchanged this quarter at 7.9%. Although this is down 30 basis points from the third quarter of 2013, that was the last quarter during which the national vacancy rate for malls declined. Malls have been stuck at 7.9% for a year.

Click on graph for larger image.

This graph shows the strip mall vacancy rate starting in 1980 (prior to 2000 the data is annual). The regional mall data starts in 2000. Back in the '80s, there was overbuilding in the mall sector even as the vacancy rate was rising. This was due to the very loose commercial lending that led to the S&L crisis.

In the mid-'00s, mall investment picked up as mall builders followed the "roof tops" of the residential boom (more loose lending). This led to the vacancy rate moving higher even before the recession started. Then there was a sharp increase in the vacancy rate during the recession and financial crisis.

Mall vacancy data courtesy of Reis.

by Calculated Risk on 10/03/2014 01:05:00 PM

Earlier the Department of Commerce reported:

[T]otal August exports of $198.5 billion and imports of $238.6 billion resulted in a goods and services deficit of $40.1 billion, down from $40.3 billion in July, revised. August exports were $0.4 billion more than July exports of $198.0 billion. August imports were $0.2 billion more than July imports of $238.3 billion.

The trade deficit was smaller than the consensus forecast of $40.7 billion and the trade deficit was revised down slightly for July.

The first graph shows the monthly U.S. exports and imports in dollars through August 2014.

Click on graph for larger image.

Imports and exports increased in August.  

Exports are 19% above the pre-recession peak and up 4% compared to August 2013; imports are 3% above the pre-recession peak, and up about 4% compared to August 2013. 

The second graph shows the U.S. trade deficit, with and without petroleum, through August.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Oil imports averaged $96.32 in August, down from $97.81 in July, and down from $100.27 in August 2013.  The petroleum deficit has generally been declining and is the major reason the overall deficit has declined since early 2012.

The trade deficit with China increased to $30.2 billion in August, from $29.8 billion in August 2013.

by Calculated Risk on 10/03/2014 09:42:00 AM

Earlier: September Employment Report: 248,000 Jobs, 5.9% Unemployment Rate

This was a solid report with 248,000 jobs added and combined upward revisions to July and August of 69,000. As always we shouldn't read too much into one month of data, but at the current pace (through September), the economy will add 2.72 million jobs this year (2.64 million private sector jobs). Right now 2014 is on pace to be the best year for both total and private sector job growth since 1999.

A few other positives:  the unemployment rate declined to 5.9% (the lowest level since July 2008), U-6 (an alternative measure for labor underutilization) was at the lowest level since 2008, the number of part time workers for economic reasons declined slightly (lowest since October 2008), and the number of long term unemployed declined to the lowest level since January 2009.

Unfortunately wage growth is still subdued.   From the BLS: "Average hourly earnings for all employees on private nonfarm payrolls, at $24.53, changed little in September (-1 cent). Over the year, average hourly earnings have risen by 2.0 percent. In September, average hourly earnings of private-sector production and nonsupervisory employees were unchanged at $20.67."

With the unemployment rate at 5.9%, there is still little upward pressure on wages. Wages should pick up as the unemployment rate falls over the next couple of years, but with the currently low inflation and little wage pressure, the Fed will likely remain patient.

A few more numbers:

Total employment increased 248,000 from August to September and is now 1.07 million above the previous peak.  Total employment is up 9.78 million from the employment recession low.

Private payroll employment increased 236,000 from August to September, and private employment is now 1,547,000 above the previous peak (the unprecedented large number of government layoffs has held back total employment). Private employment is up 10.34 million from the low.

Through the first nine months of 2014, the economy has added 2,040,000 payroll jobs - up from 1,736,000 added during the same period in 2013.   My expectation at the beginning of the year was the economy would add between 2.4 and 2.7 million payroll jobs this year.  That still looks about right.

Employment-Population Ratio, 25 to 54 years old

Since the overall participation rate declined recently due to cyclical (recession) and demographic (aging population, younger people staying in school) reasons, an important graph is the employment-population ratio for the key working age group: 25 to 54 years old.

In the earlier period the participation rate for this group was trending up as women joined the labor force. Since the early '90s, the participation rate moved more sideways, with a downward drift starting around '00 - and with ups and downs related to the business cycle.

The 25 to 54 participation rate decreased in September to 80.7% from 81.1% in August, and the 25 to 54 employment population ratio decreased to 76.7% from 76.8%.  As the recovery continues, I expect the participation rate for this group to increase a little - although the participation rate has been trending down for this group since the late '90s.

Year-over-year Change in Employment

This graph shows the year-over-year change in total non-farm employment since 1968.

In September, the year-over-year change was 2.635 million jobs, and it appears the pace of hiring is increasing.

Right now it looks like 2014 will be the best year since 1999 for both total nonfarm and private sector employment growth.

Part Time for Economic Reasons

From the BLS report:

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in September at 7.1 million. These individuals, who would have preferred full-time employment, were working part time because their hours had been cut back or because they were unable to find a full-time job.

The number of persons working part time for economic reasons decreased in September to 7.103 million from 7.277 million in August.  This suggests significantly slack still in the labor market.  These workers are included in the alternate measure of labor underutilization (U-6) that decreased to 11.8% in September from 12.0% in August.

This is the lowest level for U-6 since October 2008.

Unemployed over 26 Weeks

This graph shows the number of workers unemployed for 27 weeks or more.

According to the BLS, there are 2.954 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 2.963 in August. This is trending down, but is still very high.

This is the lowest level for long term unemployed since January 2009.

State and Local Government

This graph shows total state and government payroll employment since January 2007. State and local governments lost jobs for four straight years. (Note: Scale doesn't start at zero to better show the change.)

In September 2014, state and local governments added 14,000 jobs.  State and local government employment is now up 143,000 from the bottom, but still 601,000 below the peak.

Clearly state and local employment is now increasing.  And Federal government layoffs have slowed (payroll decreased by 2 thousand in September), but Federal employment is still down 25,000 for the year.

by Calculated Risk on 10/03/2014 08:30:00 AM

From the BLS:

Total nonfarm payroll employment increased by 248,000 in September, and the unemployment rate declined to 5.9 percent, the U.S. Bureau of Labor Statistics reported today.
...
The change in total nonfarm payroll employment for July was revised from +212,000 to +243,000, and the change for August was revised from +142,000 to +180,000. With these revisions, employment gains in July and August combined were 69,000 more 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).

Employment is now up 2.63 million year-over-year.

Total employment is now 1.07 million above the pre-recession peak.

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

The Labor Force Participation Rate decreased in September to 62.7% from 62.8% in August. 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 was unchanged at 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 decreased in September to 5.9%.

This was above expectations, and the revisions to prior months were strongly positive.  A solid report!

I'll have much more later ...