by Calculated Risk on 5/03/2014 06:05:00 PM

Another note on the labor force participation rate:

From Goldman Sachs chief economist Jan Hatzius:

• Since the start of the Great Recession in late 2007, the labor force participation rate has fallen by more than three percentage points, including a sharp drop in April back to the late-2013 lows. The extent of the decline has surprised many economists, ourselves included. What accounts for it, and will it continue?

• The first question is relatively easy to answer. Using an approach similar to that of a recent Philadelphia Fed study, we can show that the decline reflects a combination of 1) more retirements, 2) more disability, 3) higher school enrollment, and 4) more discouraged workers.

• The second question is more difficult, but we believe the answer is no. The most important reason is that the big increase in retirements in the last three years looks far less “structural” to us than generally believed. Many people seem to have pulled forward their retirement because of the weak job market. This leaves correspondingly fewer retirements for future years, and it means that the impact of retirements on participation is likely to become much less negative.

• The other drags on participation are also likely to abate or reverse. Inflows into disability insurance are now slowing sharply, consistent with past cyclical patterns. The school enrollment surge has started to reverse as young workers are finding better job opportunities. And stronger labor demand is likely to pull many discouraged workers back into the job market.

• If participation does stabilize or rise a bit, the decline in the unemployment rate should slow even if payroll growth stays at the sturdy levels seen in recent months. This is one key reason why we believe Fed rate hikes are still far off.

CR Notes:
1) Here is the referenced Philadelphia Fed study:

Analyzing people’s reasons for not participating in the labor force provides a relatively clear idea of the causes of declines in the labor force participation rate. The number of disabled persons has been steadily rising; retirement had not played much of a role until around 2010, at which point it started to make a large impact on the overall participation rate. In particular, the decline in the participation rate in the past one-and-a-half years (when the unemployment rate declined faster than expected) is mostly due to retirement. Furthermore, nonparticipation due to enrollment in school has been another significant contributor to the secular decline in the participation rate since 2000.

There is no question that more workers dropped out of the labor force due to discouragement during and after the Great Recession and that there are more discouraged workers now than before the recession. These facts clearly reflect the continued weakness of the U.S. labor market. However, it is not clear whether the overall participation rate will increase any time soon, given that the underlying downward trend due to retirement is likely to continue.

Several studies try to separate “cyclical” factors from “structural” factors when explaining the behavior of the participation rate. However, the foregoing analysis casts some doubt on the usefulness of such labeling. For example, the label “cyclical” often implies — whether implicitly or explicitly — that declines in the participation rate explained by “cyclical” factors will reverse as the economy improves. However, this presumption may not hold. In particular, the decision to retire is clearly affected by cyclical factors, but this decision is unlikely to be reversed.

2) Here are the most recent projections from BLS economist Mitra Toossi: Labor force projections to 2022: the labor force participation rate continues to fall. The participation rate is projected to decline for the next couple of decades.

3) Headlines that blare Workforce Participation at 36-Year Low as Jobs Climb aren't helpful. A large decline in the participation rate has been expected for some time, and those that keep saying "the participation rate is at a multi-decade low" are not contributing to the discussion. There is a question of how much of the decline is related to demographic trends (retirement, more young people staying in school are two key trends), and how much is cyclical - but some key recent research now supports my view that a majority is demographics.

by Calculated Risk on 5/03/2014 01:02:00 PM

This will be a light week for economic data.

The key reports are the Trade Balance report for March, and the ISM non-manufacturing (service) survey for April.

Also Fed Chair Janet Yellen will testify to Congress on the economic outlook.

----- Monday, May 5th -----
Early: the Black Knight Mortgage Monitor for March.

10:00 AM: ISM non-Manufacturing Index for April. The consensus is for a reading of 54.0, up from 53.1 in March. Note: Above 50 indicates expansion, below 50 contraction.

----- Tuesday, May 6th -----
8:30 AM: Trade Balance report for March from the Census Bureau.

Imports increased and exports decreased in February.

The consensus is for the U.S. trade deficit to be at $40.2 billion in March from $42.3 billion in February.

----- Wednesday, May 7th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

10:00 AM: Testimony by Fed Chair Janet Yellen, The Economic Outlook, Before the Joint Economic Committee, U.S. Congress

3:00 PM: Consumer Credit for March from the Federal Reserve.  The consensus is for credit to increase $15.1 billion.

----- Thursday, May 8th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 330 thousand from 344 thousand.

Early: Trulia Price Rent Monitors for April. This is the index from Trulia that uses asking house prices adjusted both for the mix of homes listed for sale and for seasonal factors.

9:30 AM: Testimony by Fed Chair Janet Yellen, The Economic Outlook, Before the Committee on the Budget, U.S. Senate

----- Friday, May 9th -----
10:00 AM: Job Openings and Labor Turnover Survey for March from the BLS.

This graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

In February, the number of job openings (yellow) were up 4% year-over-year compared to February 2013, and Quits were up about 5% year-over-year.

10:00 AM: Monthly Wholesale Trade: Sales and Inventories for March. The consensus is for a 0.5% increase in inventories.

by Calculated Risk on 5/03/2014 08:15:00 AM

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for May 2, 2014.

Changes and comments from surferdude808:

With four removals this week, the Unofficial Problem Bank List fell to 509 institutions with assets of $163.3 billion. A year ago, the list held 773 institutions with assets of $284.9 billion.

Actions were terminated against Ocean Bank, Miami, FL ($3.3 billion); TruPoint Bank, Grundy, VA ($441 million); and Liberty Bank, South San Francisco, CA ($219 million). First Federal Savings and Loan Association of Hammond, Hammond, IN ($40 million) found its way off the list through an unassisted merger. Next week should be light in terms of changes to the list as we will not receive an update from the OCC for another two weeks.

by Calculated Risk on 5/02/2014 06:30:00 PM

The data flow suggests Q1 was even weaker than the 0.1% real annualized growth rate reported earlier this week. From Merrill Lynch:

The advance 1Q GDP report revealed growth of only 0.1% qoq saar, about a full percentage point less than we had expected. After accounting for weaker-than-expected construction spending and nondurable inventories in March, 1Q GDP is now tracking -0.4%. This is clearly disappointing and pulls down estimates for annual GDP growth.
...
With all the optimism to start this year, nobody was predicting the economy would contract in 1Q. Based on the Blue Chip forecasts in December last year, the average forecast for 1Q was 2.5% with the top 10 highest forecasts of 3.2% and bottom 10 of 2.0%. Obviously, we were all taken by surprise by this brutally cold winter.

It seems that the economy cannot catch a break – each year there is some explanation for a lack of momentum. It was the European crisis in 2010, the US debt rating downgrade/Greek exit in 2011, gridlock in Washington in 2012 and fiscal tightening/government shutdown in 2013. But the shock from weather does not linger and actually reverses quite quickly. With the harsh winter weather in our rearview mirror, we can focus on the underlying healing of the economy, which we think has been significant.

We believe the economy is on track to bounce back, leading us to revise up 2Q GDP growth to 3.6% from 3.2%. However, this increase does not entirely offset the weakness in 1Q, leaving our forecast for annual GDP growth to slip to 2.5% from 2.7%.
...
Importantly, we think the strength in 2Q is not just a one-quarter bounce. We expect growth to remain strong, averaging 3.4% growth in both 3Q and 4Q.

by Calculated Risk on 5/02/2014 03:35:00 PM

Standard Pacific Corp. reported that net home orders (ex jvs) in the quarter ended March 31, 2014 totaled 1,311, down 6.0% from the comparable quarter of 2013. Net orders per active community last quarter were down 14.6% from a year ago. The company’s sales cancellation rate, expressed as % of gross orders, was 14% last quarter, up from 10% a year earlier. Home deliveries last quarter totaled 995, up 5.1% from the comparable quarter of 2013, at an average sales price of $449,000, up 19.7% from a year ago. The company’s order backlog at the end of March was 2,016, up 8.9% from last March. The company attributed the big YOY gain in average sales price to “general price increases within a majority of the Company’s markets, a shift to more move-up product, and a decrease in the use of sales incentives.” Standard Pacific owned or controlled 35,715 lots at the end of March, up 11.2% from last March.

Here are some summary stats for nine large publicly-traded builders.

	Net Orders			Settlements			Average Closing Price
Qtr. Ended:	3/14	3/13	% Chg	3/14	3/13	% Chg	3/14	3/13	% Chg
D.R. Horton	8,569	7,879	8.8%	6,194	5,463	13.4%	$271,230	$242,548	11.8%
Pulte Group	4,863	5,200	-6.5%	3,436	3,833	-10.4%	$317,000	$287,000	10.5%
NVR	3,325	3,510	-5.3%	2,211	2,272	-2.7%	$361,400	$330,400	9.4%
The Ryland Group	2,186	2,052	6.5%	1,470	1,315	11.8%	$327,000	$277,000	18.1%
Beazer Homes	1,390	1,521	-8.6%	977	1,127	-13.3%	$272,400	$253,300	7.5%
Standard Pacific	1,311	1,394	-6.0%	995	947	5.1%	$449,000	$375,000	19.7%
Meritage Homes	1,525	1,547	-1.4%	1,109	1,052	5.4%	$365,896	$314,363	16.4%
MDC Holdings	1,236	1,300	-4.9%	873	1,018	-14.2%	$377,000	$339,400	11.1%
M/I Homes	982	1,047	-6.2%	737	627	17.5%	$299,000	$284,000	5.3%
Total	25,387	25,450	-0.2%	18,002	17,654	2.0%	$317,582	$285,200	11.4%

For the group as a whole, net orders per active community last quarter were down about 6% from a year earlier.

The combined order backlog (in units) for these nine builders at the end of March was 36,257, up just 0.5% from last March.

While home deliveries in units for these builders last quarter were up just 2% from a year earlier, home deliveries in dollar terms were up 13.5% YOY, reflecting the sizable increases in average sales price. Most builders attributed the ASP gains to a combination of general price gains in many of their markets and a product-shift mix toward larger homes/move-up buyers. While not all builders commented on first-time buyers, comments from those that did suggest that first-time buyer purchases of new homes were down from a year ago. Operating margins on average were up significantly from a year ago, with some builders reporting their highest margins in 7-8 years.

While land/lot acquisitions varied significantly across these builders, in aggregate they increased sharply their land/lot acquisitions during the second half of 2012 through the third quarter of 2013. Longer-than-normal development timelines, however, partly related to “supply-chain” issues, limited their ability to meet the strong demand in the first half of 2013, and limited supply enabled builders to increase prices significantly last year.

Such “supply” problems should not be an issue in 2014, and in aggregate these 9 builders expect (and plan) to increase their number of active communities in 2014 at a double-digit pace. A key issue, however, will be demand: both interest rates and home prices are higher than they were in the first half of 2013, with prices up significantly in many parts of the country. As noted before, many builders hiked prices sharply because they could not meet demand in the first half of 2013. With supply issues unlikely to be an “issue” in 2014, it seems highly likely that the “pricing power” builders had in 2013 will not be evident in 2014, and in fact “effective” home prices may ease a bit as builders significantly increase their use of sales incentives from 2013’s unusually low level.

So SF home sales will probably move higher over the course of 2014, though prices will not. But the pace of increase is likely to be slower than most folks thought as the year began, and the hoped for recovery in home purchases by first-time home buyers in 2014 has not only not been seen, but it appears to have dipped somewhat from a year ago. So far the only builder to react to this trend is D.R. Horton, who is rolling out a new “express homes” product line in select markets with price targets in the $120,000 to $150,000 range. As a Horton official noted in the company’s latest conference call, the sharp price increases by builders last year had priced a “lot” of first-time buyers out of the market.