by Calculated Risk on 6/06/2014 07:14:00 PM

An interesting piece from Larry Summers in the Financial Times: Lawrence Summers on ‘House of Debt’ A short excerpt:

Atif Mian and Amir Sufi’s House of Debt, despite some tough competition, looks likely to be the most important economics book of 2014; it could be the most important book to come out of the 2008 financial crisis and subsequent Great Recession. Its arguments deserve careful attention, and its publication provides an opportunity to reconsider policy choices made in 2009 and 2010 regarding mortgage debt.
...
Mian and Sufi ... argue that, rather than failing banks, the key culprits in the financial crisis were overly indebted households. ... Mian and Sufi highlight how harsh leverage and debt can be – for example, when the price of a house purchased with a 10 per cent downpayment goes down by 10 per cent, all of the owner’s equity is lost. They demonstrate powerfully that spending fell much more in parts of the country where house prices fell fastest and where the most mortgage debt was attached to homes. So their story of the crisis blames excessive mortgage lending, which first inflated bubbles in the housing market and then left households with unmanageable debt burdens. These burdens in turn led to spending reductions and created an adverse economic and financial spiral that ultimately led financial institutions to the brink.
emphasis added

I have my copy of the book and will probably post a few comments soon too (thanks for nice mention of Calculated Risk on page 147).

by Calculated Risk on 6/06/2014 04:34:00 PM

By request, here is an update on an earlier post through the May employment report.

Important: There are many differences between these periods. Overall employment was smaller in the '80s, so a different comparison might be to look at the percentage change.   Of course the participation rate was increasing in the '80s (younger population and women joining the labor force), and the participation rate is declining now.  But these graphs give an overview of employment changes.

The first graph shows the change in private sector payroll jobs from when each president took office until the end of their term(s).  President George H.W. Bush only served one term, and President Obama is just starting the second year of his second term. 

Mr. G.W. Bush (red) took office following the bursting of the stock market bubble, and left during the bursting of the housing bubble.  Mr. Obama (blue) took office during the financial crisis and great recession.  There was also a significant recession in the early '80s right after Mr. Reagan (yellow) took office.

There was a recession towards the end of President G.H.W. Bush (purple) term, and Mr Clinton (light blue) served for eight years without a recession.

Click on graph for larger image.

The first graph is for private employment only.

The employment recovery during Mr. G.W. Bush's (red) first term was very sluggish, and private employment was down 841,000 jobs at the end of his first term.   At the end of Mr. Bush's second term, private employment was collapsing, and there were net 462,000 private sector jobs lost during Mr. Bush's two terms. 

Private sector employment increased slightly under President G.H.W. Bush (purple), with 1,510,000 private sector jobs added.

Private sector employment increased by 20,955,000 under President Clinton (light blue), by 14,717,000 under President Reagan (yellow), and 9,041,000 under President Carter (dashed green).

There were only 1,998,000 more private sector jobs at the end of Mr. Obama's first term.  Sixteen months into Mr. Obama's second term, there are now 5,197,000 more private sector jobs than when he initially took office.

 A big difference between the presidencies has been public sector employment.  Note the bumps in public sector employment due to the decennial Census in 1980, 1990, 2000, and 2010. 

The public sector grew during Mr. Carter's term (up 1,304,000), during Mr. Reagan's terms (up 1,414,000), during Mr. G.H.W. Bush's term (up 1,127,000), during Mr. Clinton's terms (up 1,934,000), and during Mr. G.W. Bush's terms (up 1,744,000 jobs).

However the public sector has declined significantly since Mr. Obama took office (down 710,000 jobs). These job losses have mostly been at the state and local level, but more recently at the Federal level.  This has been a significant drag on overall employment.

Looking forward, I expect the economy to continue to expand for the next few years, so I don't expect a sharp decline in private employment as happened at the end of Mr. Bush's 2nd term (In 2005 and 2006 I was warning of a coming recession due to the bursting of the housing bubble).

A big question is when the public sector layoffs will end.  It appears the cutbacks are over at the state and local levels in the aggregate, but there are ongoing cutbacks at the Federal level.  Right now I'm expecting some increase in public employment in 2014.

by Calculated Risk on 6/06/2014 01:58:00 PM

As a follow-up to my earlier posts comparing employment recoveries from recent recessions, here is a graph comparing the recent recovery to other financial crises.

Even though it took 6+ years to exceed the previous employment peak, this is actually better than most recoveries from a financial crisis. (Note: this recovery was during a period of declining participation - partially due to demographics - and that makes this milestone even better).

From Josh Lehner today: U.S. Jobs Are Back … To Pre-Recession Levels

With the May jobs report, the U.S. economy is now back to pre-recession peak levels of employment. While this is the longest post WWII recovery the U.S. has experienced — by a good margin — it is important to keep in mind that financial crises are different. When comparing the Great Recession against other advanced economies’ financial crises in recent decades, the current U.S. cycle has outperformed in terms of employment, even as most other measures of financial crises were just as bad — home prices, stock prices, GDP per capita, government debt and the like.

This graph from Lehner shows employment recoveries for several different financial crises. 

The U.S. Great Recession is in red.

The Great Depression is in dark blue.

by Calculated Risk on 6/06/2014 10:10:00 AM

First, I promised the headline for this post last week!

Second, this means I'll be retiring the graph many called the "scariest jobs chart ever" (first graph in previous post).

Earlier: May Employment Report: 217,000 Jobs, 6.3% Unemployment Rate

Now some numbers: Through the first five months of 2014, the economy has added 1,068,000 payroll jobs - slightly better than during the same period in 2013 even with the severe weather early this year. (For comparison, there were 1,020,000 payroll jobs added during the first five months of 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, and that still looks about right.

Here is a table of the annual change in total nonfarm and private sector payrolls jobs since 1999.  The last three years have been near the best since 1999 (2005 was the best year for total nonfarm, and 2011 the best for private jobs).

It is possible that 2014 will be the best year since 1999 for both total nonfarm and private sector employment.

Change in Payroll Jobs per Year (000s)
	Total, Nonfarm	Private
1999	3,177	2,716
2000	1,946	1,682
2001	-1,735	-2,286
2002	-508	-741
2003	105	147
2004	2,033	1,886
2005	2,506	2,320
2006	2,085	1,876
2007	1,140	852
2008	-3,576	-3,756
2009	-5,087	-5,013
2010	1,058	1,277
2011	2,083	2,400
2012	2,236	2,294
2013	2,331	2,365
20141	2,563	2,527
1 2014 is current pace annualized (through May).

Also employment has reached another milestone: total employment is now 98,000 above the previous peak, and and at a new all time high in May.   Of course the labor force has continued to increase over the last 6+ years, and there are still millions of workers unemployed - so the economy still has a long way to go.

Note:  Private payroll employment increased 216,000 in May and private employment is now 617,000 above the previous peak (the unprecedented large number of government layoffs has held back total employment).

Overall this was another solid employment report.

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 has mostly moved sideways (with a downward drift started around '00) - and with ups and downs related to the business cycle.

The 25 to 54 participation rate was unchanged in May at 80.8%, and the 25 to 54 employment population ratio decreased to 76.4% from 76.5%.  As the recovery continues, I expect the participation rate for this group to increase. 

Percent Job Losses During Recessions


This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses.  Employment is now back above pre-recession levels and this graph will be retired until the next recession (Of course this doesn't include population growth).

In the earlier post, the graph showed the job losses aligned at the start of the employment recession.

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), at 7.3 million, changed little in May. These individuals 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 declined in May to 7.269 million from 7.465 million in April.  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 12.2% in May from 12.3% in April. 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 3.374 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 3.452 in April. This is trending down, but is still very high.  This is the lowest level for long term unemployed since March 2009.

Long term unemployment remains one of the key labor problems in the US.

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 May 2014, state and local governments added 6,000 jobs.  State and local government employment is now up 107,000 from the bottom, but still 637,000 below the peak.

It appears state and local employment employment is now increasing.  Of course Federal government layoffs are ongoing (another 5,000 jobs lost in May).

by Calculated Risk on 6/06/2014 08:30:00 AM

From the BLS:

Total nonfarm payroll employment rose by 217,000 in May, and the unemployment rate was unchanged at 6.3 percent, the U.S. Bureau of Labor Statistics reported today.
...
After revision, the change in total nonfarm employment for March remained +203,000, and the change for April was revised from +288,000 to +282,000. With these revisions, employment gains in March and April were 6,000 lower than previously reported.

Click on graph for larger image.

The headline number was at expectations of 213,000 payroll jobs added.

The first graph shows the job losses from the start of the employment recession, in percentage terms, compared to previous post WWII recessions. The dotted line is ex-Census hiring.

This shows the depth of the recent employment recession - worse than any other post-war recession - and the relatively slow recovery due to the lingering effects of the housing bust and financial crisis.


Total employment is now 98 thousand above the pre-recession peak and at an all time high.  It is probably time to retire this graph - until the next recession. 

NOTE: The second graph is the 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.

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

The Labor Force Participation Rate was unchanged in May at 62.8%. 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 in May at 58.9% (black line).

I'll post the 25 to 54 age group employment-population ratio graph later.

The fourth graph shows the unemployment rate.

The unemployment rate was unchanged in May at 6.3%.

This was a solid employment report, and total non-farm employment is now at a new all time high.

I'll have much more later ... 

by Calculated Risk on 6/05/2014 09:47:00 PM

Some great graphs from Nick Timiraos at the WSJ: Mortgage Rates Are Falling, So Where Are the Home Buyers?

True, mortgage rates are low—as low as they’ve been in almost 12 months. But in the same way that shoppers may not be lured by “low prices” at a department store that is always advertising a sale, mortgage rates at 4.1% may not be seen as a steal by buyers who lived with rates that were even lower for all of 2012 and the first half of 2013—especially considering that prices have moved higher.

Check out the graphs!

Friday:
• At 8:30 AM ET, the Employment Report for May. The consensus is for an increase of 213,000 non-farm payroll jobs in May, down from the 288,000 non-farm payroll jobs added in April. The consensus is for the unemployment rate to increase to 6.4% in May. There are 406 thousand more private sector jobs now than when the recession started in 2007, but total employment is still 113 thousand below the pre-recession peak.

• At 3:00 PM, Consumer Credit for April from the Federal Reserve. The consensus is for credit to increase $15.5 billion.

by Calculated Risk on 6/05/2014 06:55:00 PM

Note: This is not Mortgage Equity Withdrawal (MEW) data from the Fed. The last MEW data from Fed economist Dr. Kennedy was for Q4 2008.

The following data is calculated from the Fed's Flow of Funds data (released this morning) and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity - hence the name "MEW", but there is little MEW right now - and normal principal payments and debt cancellation.

For Q1 2014, the Net Equity Extraction was minus $74 billion, or a negative 2.3% of Disposable Personal Income (DPI). 

Click on graph for larger image.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.

There are smaller seasonal swings right now, perhaps because there is a little actual MEW (this is heavily impacted by debt cancellation right now).

The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding decreased by $37 billion in Q1. Compared to recent years, this was a small decrease in mortgage debt.

The Flow of Funds report also showed that Mortgage debt has declined by almost $1.3 trillion since the peak. This decline is mostly because of debt cancellation per foreclosures and short sales, and some from modifications. There has also been some reduction in mortgage debt as homeowners paid down their mortgages so they could refinance. With residential investment increasing, and a slower rate of debt cancellation, it is possible that MEW will turn positive again soon.

For reference:

Dr. James Kennedy also has a simple method for calculating equity extraction: "A Simple Method for Estimating Gross Equity Extracted from Housing Wealth". Here is a companion spread sheet (the above uses my simple method).

For those interested in the last Kennedy data included in the graph, the spreadsheet from the Fed is available here.

by Calculated Risk on 6/05/2014 03:17:00 PM

Friday at 8:30 AM ET, the BLS will release the employment report for May. The consensus, according to Bloomberg, is for an increase of 213,000 non-farm payroll jobs in May (range of estimates between 110,000 and 240,000), and for the unemployment rate to increase to 6.4% (a slight bounce back following the sharp decline in April).

Note: The BLS reported 288,000 payroll jobs added in April with the unemployment rate at 6.3%.

Here is a summary of recent data:

• The ADP employment report showed an increase of 179,000 private sector payroll jobs in May. This was below expectations of 210,000 private sector payroll jobs added. The ADP report hasn't been very useful in predicting the BLS report for any one month, but in general, this suggests employment growth below expectations.

• The ISM manufacturing employment index decreased in May to 52.8%. A historical correlation between the ISM manufacturing employment index and the BLS employment report for manufacturing, suggests that private sector BLS manufacturing payroll jobs decreased about 5,000 in May. The ADP report indicated a 10,000 increase for manufacturing jobs in May.

The ISM non-manufacturing employment index increased in May to 52.4%. A historical correlation between the ISM non-manufacturing employment index and the BLS employment report for non-manufacturing, suggests that private sector BLS non-manufacturing payroll jobs increased about 135,000 in May.

Combined, the ISM surveys suggest about 130,000 payroll jobs added in May (note that the ISM diffusion indexes are based on number of firms, not employees - and the timing is different).

• Initial weekly unemployment claims averaged close to 310,000 in May, the lowest level since 2007. However for the BLS reference week (includes the 12th of the month), initial claims were at 327,000; this was up from 305,000 during the reference week in April.

The higher reference week reading suggests some downside to the consensus forecast.

• The final May Reuters / University of Michigan consumer sentiment index decreased to 81.9 from the March reading of 84.1. This is frequently coincident with changes in the labor market, but there are other factors too.

• On small business hiring: The small business index from Intuit showed a 35,000 increase in small business employment in May - the largest gain in more than a year. From Intuit:

"This month's employment increase is the largest we've seen in more than a year. In addition to the impressive increase of jobs this month, the hiring rate is also at the highest level we've seen since early 2009," said Susan Woodward, the economist who works with Intuit to create the indexes.

And from NFIB: NFIB Jobs Statement: Employment Improves a Bit, Raises New Hopes?

“NFIB owners increased employment by an average of 0.11 workers per firm in May (seasonally adjusted), the eighth positive month in a row and the best string of gains since 2006. ... Job creation plans continued to strengthen ..."

• Conclusion: Most of the data was on the downside with the exception of small business hiring. The ADP report was lower in May than in April, and below forecasts.  Weekly unemployment claims were higher during the reference period, and the ISM indexes suggest lower hiring. However the Intuit small business index showed the most hiring in a year.

Also - any bounce back from the severe winter weather probably happened in March and April.

There is always some randomness to the employment report, but the I'll take the under on the consensus forecast of 213,000 nonfarm payrolls jobs added in May.

Final note: A key number will be 113,000 jobs added (including all revisions).  This will put employment above the pre-recession peak.

by Calculated Risk on 6/05/2014 01:31:00 PM

From Trulia chief economist Jed Kolko: Home Price Gains Finally More Balanced, Sustainable, and Widespread

Asking home prices rose at their slowest rate in 13 months, rising just 8.0% year-over-year (7.2% excluding foreclosures). Although this year-over-year increase is slower than in previous months, an 8.0% increase is still far above the long-term historical norm for home-price appreciation. Furthermore, prices continue to climb in the most recent quarter: the 2.4% quarter-over-quarter increase in May 2014 is equivalent to 9.9% on an annualized basis. Finally, price gains continue to be widespread, with 93 of the 100 largest metros clocking quarter-over-quarter price increases, seasonally adjusted.

Nationally, asking home prices are rising slower than in previous months, but the real change has been the price slowdown in the hyper-rebounding markets of the West. In May 2014, none of the 100 largest metros had a year-over-year price gain of more than 20%; the steepest increase was 18.8%, in Riverside-San Bernardino. Among the markets with the biggest price gains today, three – Las Vegas, Sacramento, and Oakland – have had significant slowdowns in year-over-year gains, from around 30% in May 2013 to around 15% in May 2014. In contrast, price gains accelerated dramatically in Chicago, up 13.5% year-over-year in May 2014 versus just 3.6% in May 2013. Overall, half of the top 10 markets with the largest price gains are outside the West, another big change from last year when almost all of the biggest price increases were in the West.
...
Rents are up 5.1% year-over-year nationally, with apartment rents up 5.8% and single-family rents up 2.1%.
emphasis added

Here is the slowdown: In November 2013, year-over-year asking prices were up 12.2%. In December, the year-over-year increase slowed slightly to 11.9%. In January 11.4%, in February 10.4%, in March 10.0%, April 9.0% and now in May 8.0%.

This suggests prices are still increasing, but at a slower pace.

Note: These asking prices are SA (Seasonally Adjusted) - and adjusted for the mix of homes - and this suggests further house price increases, but at a slower rate, over the next few months on a seasonally adjusted basis.

by Calculated Risk on 6/05/2014 12:00:00 PM

The Federal Reserve released the Q1 2014 Flow of Funds report today: Flow of Funds.

According to the Fed, household net worth increased in Q1 compared to Q4, and is at a new record high. Net worth peaked at $68.9 trillion in Q2 2007, and then net worth fell to $55.6 trillion in Q1 2009 (a loss of $13.3 trillion). Household net worth was at $81.8 trillion in Q1 2014 (up $26.2 trillion from the trough in Q1 2009).

The Fed estimated that the value of household real estate increased to $20.2 trillion in Q1 2014. The value of household real estate is still $2.5 trillion below the peak in early 2006.

Click on graph for larger image.

The first graph shows Households and Nonprofit net worth as a percent of GDP.  Although household net worth is at a record high, as a percent of GDP it is still slightly below the peak in 2006 (housing bubble), but above the stock bubble peak.

This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.

This ratio was increasing gradually since the mid-70s, and then we saw the stock market and housing bubbles. The ratio has been trending up and increased again in Q1 with both stock and real estate prices increasing.

This graph shows homeowner percent equity since 1952.

Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008.

In Q1 2014, household percent equity (of household real estate) was at 53.6% - up from Q4, and the highest since Q1 2007. This was because of both an increase in house prices in Q1 (the Fed uses CoreLogic) and a reduction in mortgage debt.

Note: about 30.3% of owner occupied households had no mortgage debt as of April 2010. So the approximately 50+ million households with mortgages have far less than 50.7% equity - and millions have negative equity.

The third graph shows household real estate assets and mortgage debt as a percent of GDP.

Mortgage debt decreased by $37 billion in Q1.  

Mortgage debt has now declined by $1.28 trillion from the peak. Studies suggest most of the decline in debt has been because of foreclosures (or short sales), but some of the decline is from homeowners paying down debt (sometimes so they can refinance at better rates).

The value of real estate, as a percent of GDP, was up in Q1 (as house prices increased), and somewhat above the average of the last 30 years (excluding bubble). However household mortgage debt, as a percent of GDP, is still historically high, suggesting still a little more deleveraging ahead for certain households.