by Calculated Risk on 2/03/2011 08:19:00 PM

From the NY Times: White House, Egypt Discusses Plan for Mubarak’s Exit

The Obama administration is discussing with Egyptian officials a proposal for President Hosni Mubarak to resign immediately, turning over power to a transitional government headed by Vice President Omar Suleiman with the support of the Egyptian military, administration officials and Arab diplomats said Thursday.

Here is the al Jazeera English site, and the live blog for Feb 4th (currently unavailable).

by Calculated Risk on 2/03/2011 06:15:00 PM

With the key European meeting tomorrow, here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released today (graph as of Feb 1st):

Click on graph for larger image in new window.

From the Atlanta Fed:

While there has been some improvement since the start of the year, most peripheral European bond spreads (over German bonds) continue to be elevated, particularly those of Greece, Ireland, and Portugal.

Since the start of the year, the 10-year Greece-to-German bond spread has narrowed by 183 basis points (bps), through February 1. Similarly, the spread for Ireland is 41 bps lower, 54 bps lower for Spain, and down 42 bps for Italy.

Portugal’s spread, however, is essentially unchanged over the period.

The bond yields are up slightly today. The Portugal 10 year is at 6.99%, the Ireland 10-year bond yield is at 8.86%, and the Greece 10-year bond yield has fallen to 10.9%.

From MarketWatch: Merkel: EU to discuss competitiveness on Friday

"We're going to start the talks, and then between now and the March summit, we will firm up the details," [German Chancellor Angela Merkel] said ... The meeting is expected to see plans to expand the [EFSF], with Germany pushing for efforts to boost competitiveness and fiscal discipline

by Calculated Risk on 2/03/2011 02:36:00 PM

The numbers are grim: almost 15 million Americans are unemployed, another 9 million are working part time for economic reasons, and about 4 million more have left the labor force since the start of the recession (we can see this in the dramatic drop in the labor force participation rate). Of those unemployed, 6.4 million have been unemployed for six months or more.

And the situation is also bleak for many of those who have jobs. A recent report showed most of the employment growth has been in low-to-mid wage industries (more skewed than in previous recoveries). And real earnings for most Americans have been under pressure for some time.

Against that backdrop, the recent spate of good employment news might seem almost insignificant, but it is a start.

Tomorrow the BLS will release the January Employment Situation Summary at 8:30 AM ET. The consensus is for an increase of 150,000 payroll jobs in January, and for the unemployment rate to increase slightly to 9.5% (from 9.4% in December).

That would be an improvement – the U.S. economy only added about 95,000 jobs per month in 2010 - however 150,000 additional payroll jobs is still pretty small compared to the number of unemployed. And that is barely enough to keep up with the growth of the working age population.

So while news reports might suggest “improvement”, many of the unemployed and marginally employed will not see it, at least not yet, and probably not for some time.

Here is a look at a few of the recent employment related reports:

• ADP reported Private Employment increased by 187,000 in January, and has averaged 217,000 over the last two months.

• Weekly initial unemployment claims were down significantly over the last few months. The graph is here. The average over the last 5 weeks was 425,000 initial claims per week, down sharply from the October the average of 456,000.

• The ISM indexes showed significantly stronger employment growth. The ISM manufacturing manufacturing Employment Index registered 61.7 in January, 2.8 percentage points higher than the 58.9 percent reported in December. The ISM Non-manufacturing employment index showed faster expansion in December at 54.5%, up from 52.6% in December. (graph is here)

• All of the Regional Fed manufacturing surveys reported employment expansion.

Also Madeline Schnapp, Director, Macroeconomic Research at TrimTabs Investment Research sent me the following note:

Our withholding tax model for jobs was crippled this past month by the withholding tax changes (2% payroll tax deduction). We did come up with a "guestimate" for January job growth of 175,000 to 215,000 new jobs using data from the last week of January (poor substitute) and all of the other jobs related indicators we track. Those indicators are very bullish. In sum, from a qualitative (not quantitative) viewpoint, we expect the job growth reported by the BLS to surprise on the upside.

In addition to the above indicators, Ms. Schnapp noted:

• The TrimTabs Online Job Postings Index rose 4.5% in January, the biggest gain since October 2010.

• Commercial and industrial loan growth accelerated to 1.0% in the past month. Stronger commercial and industrial loan growth often accompanies a pickup in job growth.

• The Federal Reserve’s Senior Loan Officer Opinion Survey reported that demand for business loans picked up in Q4 2010, and demand for commercial and industrial loans was the strongest since 2006.

• The Federal Reserve’s “Beige Book” reported that labor markets improved in most districts. Temporary staffing firms in six of 12 districts gave positive reports. Eight of 12 districts reported that their business contacts planned to hold hiring steady or increase hiring in 2011.

• Personal consumption expenditures rose 4.4% in Q4 2010, the largest increase since Q1 2006. Meanwhile, final sales increased 7.1%, the strongest growth since 1984.

We are a long way from blue skies, but maybe we are seeing a lighter shade of gray.

A few notes:
1) The BLS will release the annual benchmark revision tomorrow. Last October the BLS released the preliminary annual benchmark revision of minus 366,000 payroll jobs as of March 2010. Usually the preliminary estimate is pretty close to the final benchmark estimate.
2) Some people are concerned about the impact of the January snow storms on the employment report. If there is a significant impact, the BLS will mention it in the release.
3) My forecast is for something close to 200 thousand private sector jobs on average per month this year.

by Calculated Risk on 2/03/2011 12:30:00 PM

Bernanke says the economy is improving, but QE2 will remain ...

From Fed Chairman Ben Bernanke: The Economic Outlook and Macroeconomic Policies

[W]e have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold. ... [A]lthough economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain persistently below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate from the Congress to foster maximum employment and price stability. Under such conditions, the Federal Reserve would typically ease monetary policy by reducing the target for its short-term policy interest rate, the federal funds rate. However, the target range for the funds rate has been near zero since December 2008, and the Federal Reserve has indicated that economic conditions are likely to warrant an exceptionally low target rate for an extended period. As a result, for the past two years we have been using alternative tools to provide additional monetary accommodation.

Unemployment is too high. Inflation (core measures) still too low. So QE2 will continue ...

And on inflation:

On the inflation front, we have recently seen significant increases in some highly visible prices, notably for gasoline. Indeed, prices of many commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply. Nevertheless, overall inflation remains quite low: Over the 12 months ending in December, prices for all the goods and services purchased by households increased by only 1.2 percent, down from 2.4 percent over the prior 12 months. To assess underlying trends in inflation, economists also follow several alternative measures of inflation; one such measure is so-called core inflation, which excludes the more volatile food and energy components and therefore can be a better predictor of where overall inflation is headed. Core inflation was only 0.7 percent in 2010, compared with around 2-1/2 percent in 2007, the year before the recession began. Wage growth has slowed as well, with average hourly earnings increasing only 1.8 percent last year. These downward trends in wage and price inflation are not surprising, given the substantial slack in the economy.

by Calculated Risk on 2/03/2011 10:00:00 AM

The January ISM Non-manufacturing index was at 59.4%, up from 57.1% in December. The employment index showed faster expansion in December at 54.5%, up from 52.6% in December. 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 January for the 14th 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 (Non-Manufacturing Index) registered 59.4 percent in January, 2.3 percentage points higher than the seasonally adjusted 57.1 percent registered in December (the seasonal adjustment did not change the reading that was originally reported), and indicating continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased 1.7 percentage points to 64.6 percent, reflecting growth for the 18th consecutive month and at a faster rate than in December. The New Orders Index increased 3.5 percentage points to 64.9 percent, and the Employment Index increased 1.9 percentage points to 54.5 percent, indicating growth in employment for the fifth consecutive month and at a faster rate. The Prices Index increased 2.6 percentage points to 72.1 percent, indicating that prices increased at a faster rate in January. According to the NMI, 13 non-manufacturing industries reported growth in January. Respondents' comments are mostly positive about business conditions; however, they still remain cautious about the sustainability."
emphasis added

This was a solid report and above expectations of 57.0%.

by Calculated Risk on 2/03/2011 08:30:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Jan. 29, the advance figure for seasonally adjusted initial claims was 415,000, a decrease of 42,000 from the previous week's revised figure of 457,000. The 4-week moving average was 430,500, an increase of 1,000 from the previous week's revised average of 429,500.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims for the last 10 years. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased this week by 1,000 to 430,500.

This was slightly lower than consensus expectations. The decline in the four week average over the last few months has been good news.

by Calculated Risk on 2/02/2011 10:06:00 PM

On Egypt ...
• From al Jazeera, another day: Live blog Feb 3 - Egypt protests

• From the Telegraph: Egypt crisis: violent clashes over country's future

Anti-government protesters who had been assembling relatively calmly for days found themselves under assault by demonstrators in favour of the regime of President Hosni Mubarak. In the most dramatic clashes thugs on horse and camelback charged and whipped the protesters, and dropped concrete blocks onto them.

By nightfall, several buildings were ablaze from petrol bombs, with the army making belated attempts to act as a barrier between the two sides.

On Europe, another attempt to find a resolution to the financial crisis ...
• From the WSJ: Summit Marks Key Moment for Euro Zone

European leaders in Brussels on Friday are expected to confirm the broad outline of a strategy for solving the debt crisis, in a move that is seen as a decisive moment for the euro zone.
...
The solvent majority is offering to boost the effective size of the euro zone's bailout fund for crisis-hit countries—known as the European Financial Stability Facility, or EFSF—and to broaden its mandate. In return, Germany, with French support, is calling for a shake-up of how national governments manage their economies, to make the weaker countries more competitive and future crises less likely.

I'll believe it when I see the details.

And earlier on U.S. data ...
• Daily Color: D-List Data

by Calculated Risk on 2/02/2011 05:30:00 PM

CR: This is an interesting question and hard to answer ... the following is from economist Tom Lawler ...

How Many Folks Have “Lost Their Homes” to Foreclosure/Short Sales/DILs Over the Past Few Years?

According to Hope Now estimates, completed foreclosure sales (rounded) were about as follows over the past few years.

Year	Completed Foreclosure
2007	514,000
2008	914,000
2009	949,000
2010	1,070,000

While these numbers are disturbingly high, they are not nearly as large as one would have expected given the surge in seriously delinquent loans and loans in the process of foreclosure. For the latter, here is a chart based on data from the MBA’s National Delinquency Survey, which covers “over 85%” of total 1-4 family first-lien mortgages.


On one side, the “completed foreclosure sales” understates the number of homes “lost,” given that many homeowners have “lost” their homes but been able to negotiate a short sale or (much less likely) done a deed in lieu of foreclosure. While there are no official estimates of either short sales or DILs, there is no doubt that the volume of short sales increased dramatically in 2009 and 2010.

Using CoreLogic’s estimates and grossing them up to reflect its incomplete geographic coverage, one would get short sales estimates of around 78,000 for 2007, 164,000 for 2008, 278,000 for 2009, and 331,000 for 2010. However, based on data reported by lenders on short sales in the OCC/OTS mortgage metrics reports, the CoreLogic estimates of short sales look way too high for 2007 and 2008 (the 2009 estimates look OK, but the 2010 estimates – which admittedly are not available for the full year – look a tad low). Using instead my own estimates for 2008 through 2010, here’s what completed foreclosure sales plus short sales might look like (I don’t have a DIL estimate, but it appears as if the volume of DILs was pretty low).

Year	Completed Foreclosure Sales	Short Sales	Total
2008	914,000	95,000	1,009,000
2009	949,000	263,000	1,212,000
2010	1,070,000	375,000	1,445,000

On the other hand, the above numbers could well OVERSTATE significantly the number of homeowners who lost their primary home either to foreclosure or to a short sale. A “significant” % of completed foreclosure sales has been completed foreclosures on non-owner-occupied homes, though estimates vary as to what that % has been. In addition, not all short sales have involved homeowners “involuntarily” leaving their home, but who instead wanted to (for economic or other reasons) move and who were able to negotiate a short sale with their lender.

So what is the right number for folks who lost their residence to foreclosure, a short sales, or a DIL? I don’t rightly know.

It is pretty clear, however, that overall foreclosure moratoria, foreclosure delays, modifications, and other workout activity continued to keep the number of homeowners who “lost” their homes to foreclosure massively lower than one would have expected given the delinquency/in foreclosure numbers.

Year	Completed Foreclosure Sales plus Short Sales	Loans in Foreclosure/90+ Delinquent at end of previous year
2008	1,009,000	1,664,760
2009	1,212,000	2,859,959
2010	1,445,000	4,296,018

Note: the loans in foreclosure/90+ delinquent are derived from the MBA National Delinquency Survey, which only covers somewhere around 85-87% of the total 1-4 family first-lien mortgage market. A crude estimate of the “total” market would “gross up” the above numbers by around 1.163 (or 1/0.86).

CR Note: This was from housing economist Tom Lawler.

by Calculated Risk on 2/02/2011 02:10:00 PM

Not all data are created equal.

For me, the ‘A List’ for understanding the current situation includes the monthly employment report from the Bureau of Labor Statistics (BLS), and the quarterly GDP report from the Bureau of Economic Analysis (BEA). My ‘B List’ usually includes several housing reports, the ISM manufacturing survey, retail sales and the monthly Personal Income and Outlays report from the BEA.

This brings up a key point: these lists are not static.

As an example, right now initial weekly unemployment claims is ‘B List’ data. This is a high frequency indicator for the labor market. I watch this closely when I think a recession is possible, during a recession, and then during the early stages of a recovery (like right now). During an expansion, initial weekly claims are ‘D List’ at best; “Don’t call us, we’ll call you!”

Watching initial weekly claims helped me call the 2007 recession in real time. However this data is not forward looking. At the end of 2006, when I predicted a recession would start in 2007, I wasn’t using weekly claims at all – I was mostly using housing data and my sense of how the housing bust would play out.

Deciding what data is important and when comes from experience.

The data released this morning – the Mortgage Bankers Association (MBA) Purchase Activity Index and the ADP Employment report – are pretty much ‘D-List’ data. They give us hints about other economic data (the MBA index about home sales, and ADP about the BLS employment report). Some people would argue either or both are a little more important – OK, call them ‘C-List’ data (I’m not here to quibble, but ‘D-List’ made for a better post title).

The MBA index has been very weak since the end of the housing tax credit last year. This weakness suggests that home sales will be weak for at least the next couple of months (homebuyers usually apply for a mortgage 30 to 60 days before closing on a home purchase). It is also important to remember that a fairly large percentage of recent homebuyers have been paying cash (many of these purchases are low end homes being bought by investors) and cash buyers aren’t captured by the MBA index.

It is also important not to use data in a vacuum, and the MBA index provides an excellent example. Here are a couple of articles quoting former Fed Chairman Alan Greenspan in 2006:

From Bloomberg in August 2006: Greenspan Says `Worst' May Be Past in U.S. Housing

Former Federal Reserve Chairman Alan Greenspan said the ``worst may well be over'' for the U.S. housing industry that's suffering its worst downturn in more than a decade.

Greenspan, speaking at a conference in Calgary today, pointed to a ``flattening out'' of weekly mortgage applications after they went down ``very dramatically.''

And from Reuters in October 2006: Greenspan: Housing market worst may be over

The U.S. housing market appears to be emerging from its recent travails and the “worst may well be over,” former Federal Reserve Chairman Alan Greenspan was quoted as saying on Friday.

“I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out,” Greenspan said at an event in Calgary, Canada ...

The housing downturn had just started, and I made fun of Greenspan's comments in 2006!

Here is a repeat of the MBA index graph from this morning:

Click on graph for larger image in new window.

You can see the "flattening out" in the middle of 2006, and the increase at the end of 2006 and again in 2007.

This brings up a couple of points:

• The MBA data was NEVER the “most important series”.

• In mid-2006, the MBA index did flatten out, and in late 2006 the index increased (and increased further in 2007). At that time I spoke with some mortgage brokers, and there was clear evidence of homebuyers applying for mortgages with multiple brokers - this lead to some double counting by the MBA. And in late 2006 the increase was because mortgage brokers started going out of business (this skewed the data, because the MBA samples only certain large brokers – and the large brokers were getting more applications as the weaker companies went under). I identified these flaws and stopped using the MBA index, but Greenspan blindly used the index and drew the wrong conclusion.

The lesson: Never listen to Greenspan Always ask if the data is being impacted by changes in behavior or sample.

Now to the ADP employment report: this report is intended to help predict the BLS employment numbers, but the record on a monthly basis is very spotty. Just look at December: The ADP report showed 297,000 private sector jobs added, but the BLS report only showed 113,000 private sector payroll jobs added (103,000 Total). Not close.

Here is the ADP purpose and methodology:

Employment is an intrinsically important statistic. Furthermore, financial markets react, sometimes strongly, to “surprises” in the BLS estimates of establishment employment that might signal future changes in monetary policy. Hence, information that helps analysts anticipate monthly changes in employment is valuable. ... The ADP National Employment Report ... can be used, in real time, to improve upon consensus forecasts of the monthly change in establishment employment.

The report sure doesn't seem useful in "real time" to improve on forecasts. Sometimes the ADP report is close. Sometimes it is not (like last month). The ADP data is from a statistical black box based partially on the BLS data (as opposed to a completely independent report of payroll jobs added), and it is not as useful as some analysts had hoped.

Right now I think the ADP report is suggesting stronger job growth (a good thing). The ADP report has averaged 217,000 jobs added per month over the last two months, and maybe that indicates the BLS report will be higher than expected (current expectations are for an increase of 150,000 payroll jobs in January). But the ADP report really isn’t useful in predicting the BLS numbers on a month to month basis. I just use it as a “hint”.

by Calculated Risk on 2/02/2011 10:46:00 AM

For discussion (I have no special insights - just hoping for the best).

• From the WSJ: Clashes After Egypt's Army Calls for End to Protests

• From the NY Times: Clashes Erupt in Cairo Between Mubarak’s Allies and Foes

• From al Jazeera: Live blog Feb 2 - Egypt protests