by Calculated Risk on 3/03/2011 01:00:00 PM

Tomorrow the BLS will release the February Employment Situation Summary at 8:30 AM ET. The consensus is for an increase of 179,000 payroll jobs in February, and for the unemployment rate to increase slightly to 9.1% (from 9.0% in January).

Two quick comments and then a review of recent data:
• Remember that the weak payroll report in January (only 36,000 jobs added) was blamed on the snow. Usually I don't buy the weather excuse, but it did appear weather played a role this time. If there is a bounce back, it will be useful to average the last two months together to estimate the current pace of payroll growth. If there is no bounce back - that would definitely be bad news.

• Even if the payroll report shows improvement, the employment situation remains grim. There are 7.7 million fewer payroll jobs now than before the recession started in 2007 with almost 14 million Americans currently unemployed. Another 8.4 million are working part time for economic reasons, and about 4 million more workers have left the labor force. Of those unemployed, 6.2 million have been unemployed for six months or more.

So, while the report tomorrow will hopefully 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:

• The ISM non-manufacturing (service) employment index increased to 55.6 in February, up from 54.5 in January.

Click on graph for larger image in graph gallery.

This graph shows the relationship between the ISM non-manufacturing employment index and the change in BLS private service employment (as a percent of the previous month employment).

There is plenty of noise (R-squared is 0.68), but a reading of 55.6 suggests a fairly strong increase in service sector employment (blue dot on graph). This is about a 0.23% increase or around 200,000 service sector jobs.

• The ISM manufacturing employment index increased to 64.5 in February, up from 61.7 in January. This was the highest level since January 1973, however manufacturing employment is a much smaller percentage of overall U.S. employment now - so the impact on overall employment is less.

This graph shows the relationship between the ISM manufacturing employment index and the change in BLS manufacturing employment (as a percent of the previous month employment).

The two yellow dots are for January 2011 (61.7 ISM and 49,000 jobs), and a forecast for February based on the ISM employment reading of 64.5. The ISM survey suggests manufacturing employment grew close to 60,000 in February.

• ADP reported Private Employment increased by 217,000 from January to February on a seasonally adjusted basis, and has averaged 217,000 over the last three months.

• Weekly initial unemployment claims were down significantly in February.

This graph shows the 4-week moving average of weekly claims for the last 40 years.

The average in February was 388,500 initial claims per week, down sharply from the October average of 456,000.

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

• The Federal Reserve’s “Beige Book” reported that "Labor market conditions continued to strengthen modestly, with all Districts reporting some degree of improvement."

• Consumer Sentiment increased in February (frequently coincident with improvements in the labor market). The final February Reuters / University of Michigan consumer sentiment index increased to 77.5, the highest level in three years.

• However on unemployment: Gallup Finds U.S. Unemployment Hitting 10.3% in February NOTE: The Gallup poll results are Not Seasonally Adjusted (NSA), so use with caution. But this does suggest a much larger increase in the unemployment rate than the consensus.

My guess is we see the opposite of January when payroll employment was weak, but the unemployment rate dropped sharply. I expect payroll employment was up sharply in February, but the unemployment rate probably increased too.

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).

by Calculated Risk on 3/02/2011 11:55:00 AM

The Department of Transportation (DOT) reported that vehicle miles driven in December were up 0.6% compared to December 2009:

Travel on all roads and streets changed by +0.6% (1.4 billion vehicle miles) for December 2010 as compared with December 2009. Travel for the month is estimated to be 243.4 billion vehicle miles.

Cumulative Travel for 2010 changed by +0.7% (20.5 billion vehicle miles).

Click on graph for larger image in graph gallery.

This graph shows the rolling 12 month total vehicle miles driven.

• Note: in the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months. Currently miles driven has been below the previous peak for 37 months - another record that will be broken soon.

• For the year (2010), this was the most vehicle miles traveled since 2007 and the third-highest ever behind both 2006 and 2007.

• In December U.S. oil prices averaged just under $90 per barrel, and we might see $100 oil lead to a decrease in driving in March or April.

by Calculated Risk on 3/02/2011 10:06:00 AM

Fed Chairman Ben Bernanke is testifying before the House Committee on Financial Services today. The prepared testimony will be the same as yesterday (before the Senate).

Here is the CSpan feed.

Here is the CNBC feed.

It is probably a good time to revisit then Fed Chairman Alan Greenspan's testimony to the same committee 10 years ago today. Here is his testimony on March 2, 2001:

Both the Bush Administration and the Congressional Budget Office project growing on-budget surpluses under current policy over the next decade.
...
The most recent projections from OMB and CBO indicate that, if current policies remain in place, the total unified surplus will reach about $800 billion in fiscal year 2010, including an on-budget surplus of almost $500 billion. Moreover, the admittedly quite uncertain long-term budget exercises released by the CBO last October maintain an implicit on-budget surplus under baseline assumptions well past 2030 despite the budgetary pressures from the aging of the baby-boom generation, especially on the major health programs.

These most recent projections, granted their tentativeness, nonetheless make clear that the highly desirable goal of paying off the federal debt is in reach and, indeed, would occur well before the end of the decade under baseline assumptions.

How did that work out?

As an aside, the policy of returning the surpluses to the people was supported by both Rep. Ron Paul (current Chairman House Committee on Financial Services) and Rep. Paul Ryan (current Chairman House Subcommittee for Domestic Monetary Policy and Technology).

In Greenspan's defense, he did suggest any tax cut to reduce the surpluses should have a trigger to reduce the tax cut if deficits reappeared:

Conceivably, [a surplus reduction tax plan] could include provisions that, in some way, would limit surplus-reducing actions if specified targets for the budget surplus or federal debt levels were not satisfied. Only if the probability were very low that prospective tax cuts or new outlay initiatives would send the on-budget accounts into deficit, would unconditional initiatives appear prudent.
...
With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating. We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake.

Of course that never happened.

by Calculated Risk on 3/02/2011 08:15:00 AM

ADP reports:

Private-sector employment increased by 217,000 from January to February on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from December 2010 to January 2011 was revised up to 189,000 from the previously reported increase of 187,000.

This month’s ADP National Employment Report suggests continued solid growth of nonfarm private employment early in 2011. The recent pattern of rising employment gains since the middle of last year was reinforced by today’s report, as the average gain from December through February (217,000) is well above the average gain over the prior six months (63,000).

Note: ADP is private nonfarm employment only (no government jobs).

This was above the consensus forecast of an increase of about 180,000 private sector jobs in February.

The BLS reports on Friday, and the consensus is for an increase of 180,000 payroll jobs in February, on a seasonally adjusted (SA) basis, and for the unemployment rate to increase slightly to 9.1%.