by Calculated Risk on 3/03/2011 10:11:00 AM

The February ISM Non-manufacturing index was at 59.7%, up from 59.4% in January. The employment index indicated faster expansion in February at 55.6%, up from 54.5% in January. Note: Above 50 indicates expansion, below 50 contraction.

Click on graph for larger image in graph gallery.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

From the Institute for Supply Management: January 2011 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in February for the 15th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee. "The NMI registered 59.7 percent in February, 0.3 percentage point higher than the 59.4 percent registered in January, and indicating continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased 2.3 percentage points to 66.9 percent, reflecting growth for the 19th consecutive month and at a faster rate than in January. The New Orders Index decreased 0.5 percentage point to 64.4 percent, and the Employment Index increased 1.1 percentage points to 55.6 percent, indicating growth in employment for the sixth consecutive month and at a faster rate. The Prices Index increased 1.2 percentage points to 73.3 percent, indicating that prices increased at a faster rate in February. According to the NMI, 13 non-manufacturing industries reported growth in February. Respondents' comments overall are mostly positive about business conditions and the direction of the economy."
emphasis added

This was a solid report, except for prices, and slightly above expectations of 59.5%. And this is another report suggesting an improvement in the labor market.

by Calculated Risk on 3/03/2011 08:30:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Feb. 26, the advance figure for seasonally adjusted initial claims was 368,000, a decrease of 20,000 from the previous week's revised figure of 388,000. The 4-week moving average was 388,500, a decrease of 12,750 from the previous week's revised average of 401,250.

Click on graph for larger image in graph gallery.

This graph shows the 4-week moving average of weekly claims for the last 40 years. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week by 12,750 to 388,500 - the first time under 400,000 since July 2008.

There is nothing magical about the 400,000 level, but breaking below 400,000 is a good sign. The sharp drop in weekly claims suggests improvement in the labor market.

by Calculated Risk on 3/02/2011 11:28:00 PM

Actually an update on the lack of progress ...

From Nelson Schwartz and David Streitfeld at the NY Times: Officials Disagree on Penalties for Mortgage Mess

The newly created Consumer Financial Protection Bureau is pushing for $20 billion or more in penalties, backed up by the attorneys general and the Federal Deposit Insurance Corporation.

But other regulators, including the Office of the Comptroller of the Currency, which oversees national banks, and the Federal Reserve, do not favor such a large fine, contending a small number of people were the victims of flawed foreclosure procedures.

A key issue is what "$20 billion" means. Some regulators want the lenders to use the money to reduce principal for underwater borrowers or other modification efforts. Others argue that would be "a back-door bailout for delinquent homeowners" who weren't even harmed by the processing errors.

There is a long way to go - but it sounds like criminal charges are off the table.

by Calculated Risk on 3/02/2011 08:11:00 PM

From Fed Chairman Ben Bernanke: Challenges for State and Local Governments

As the recession took hold, revenues dropped precipitously, especially at the state level. Driven partly by balanced-budget requirements under their constitutions, many governments have responded by cutting numerous programs and reducing workforces. As necessary as these cuts may have been, they have left some jurisdictions struggling to maintain essential services. The fiscal problems of state and local governments have also had national implications, as their spending cuts and tax increases have been a headwind on the economic recovery. Moreover, concerns about both the current fiscal condition of these governments and their longer-term commitments to provide pensions and health benefits have recently led to strains in municipal bond markets.

This is one of the key downside risks this year along with oil prices, the European financial crisis and housing.

And on the muni bond market:

Around the turn of the year ... investor concerns about the fiscal situations of many governments, including those of some populous states, resulted in increased yields on municipal bonds relative to Treasury bonds as well as a widening of credit default swap spreads for a number of states. Fortunately, although these measures of risk in the municipal bond market remain elevated, they have been looking somewhat better recently, presumably reflecting expectations of continuing improvement in the finances of states and localities. The Federal Reserve will continue to monitor the municipal bond market closely.

And on the long run challenges:

[S]tate and local governments are also confronting some difficult fiscal challenges in the longer term. Indeed, with the retirement of public employees who are part of the baby-boom generation and the continued rise in health-care costs, meeting obligations for pension and retiree health-care expenses will become increasingly difficult for many states and localities. Estimates of state and local governments' unfunded pension liabilities for the nation as a whole span a wide range, with some researchers putting the figure in the neighborhood of $2 trillion to $3 trillion.

by Calculated Risk on 3/02/2011 06:29:00 PM

The following graph shows the monthly personal consumption expenditures (PCE) at a seasonally adjusted annual rate (SAAR) for gasoline, oil and other energy goods compared to the U.S. spot price for oil (monthly).

Click on graph for larger image in graph gallery.

As oil prices fell sharply in late 2008, consumption of gasoline and other energy goods fell sharply too. On a quarterly basis, PCE, "Gasoline and other energy goods" peaked at $467 billion (SAAR) in Q3 2008, and fell sharply to $265 billion (SAAR) in Q1.

The sharp decline in oil prices provided a cushion for the U.S. economy in early 2009.

Now, with U.S. spot prices over $100 per barrel, gasoline and other energy goods PCE will probably come in around $425 billion (SAAR) in Q1 2011 (up from $379 billion (SAAR) in Q4 2010. This was already over $400 billion SAAR in January.

This is a drag on consumers of about $5 to $6 billion per month, at the current oil price, compared to the average for 2010.

Data sources: PCE from BEA underlying detail tables: Table 2.4.5U. Personal Consumption Expenditures by Type of Product

Oil prices from EIA: U.S. Spot Prices

by Calculated Risk on 3/02/2011 02:00:00 PM

Fed's Beige Book:

Reports from the twelve Federal Reserve Districts indicated that overall economic activity continued to expand at a modest to moderate pace in January and early February.
...
Retail sales increased in all Districts, except Richmond and Atlanta, although Boston, New York, Philadelphia, Atlanta, and Kansas City noted that severe snowstorms had a negative impact on merchant activity.
...
All Districts, except St. Louis, experienced solid growth in manufacturing production, and new orders improved for Philadelphia, Atlanta, Chicago, Kansas City, and San Francisco.
...
Manufacturing and retail contacts across Districts reported rising input costs. Manufacturers in many Districts conveyed that they were passing through higher input costs to customers or planned to do so in the near future. ... There is little evidence of wage pressures across Districts.
...
Labor market conditions continued to strengthen modestly, with all Districts reporting some degree of improvement. The Boston, Cleveland, Minneapolis, and Dallas Districts cited noticeable improvements in the manufacturing sector, and the Boston and Cleveland Districts also observed increased labor demand in the healthcare and medical sectors.

And on real estate:

Recent activity in residential real estate varied, but overall sales and construction remained at low levels across all Districts.
...
Reports on home prices were mixed. Atlanta and Kansas City observed persistent downward price pressure. Home prices continued to fall according to Philadelphia reports, but mainly at the high-end of the market. Cleveland and Chicago contacts described prices as little changed.
...
Commercial real estate activity showed signs of gaining traction according to a number of District reports. Boston, Chicago and Dallas reported that commercial real estate activity improved overall, while Richmond, Kansas City, and San Francisco noted increases in leasing activity. Kansas City described the market as stabilizing, while Philadelphia and Minneapolis reported that markets were flat overall, and New York described conditions as "slack" and St. Louis as "soft."

Still "modest to moderate expansion". The good news is "labor market conditions continued to strengthen", but unfortunately "modestly". The bad news is rising input costs. This was based on data gathered before February 18th (late January, early February).