Milton Friedman and Two Big Government Schmucks

Watch this reasonably interesting Charlie Rose segment from 1999 where Milton Friedman discusses the domestic and global economy followed by two big government schmucks, Laura Tyson and Paul Romer, spilling endless drivel while basking in the glow of their “new economy”… of course this segment was from June of 1999 roughly 8 months before it all fell apart with the “tech wreck”.

Romer actually believed that our government created computer science… not just the technology involved in the early internet… the whole entire academic discipline… supposedly… to him… created as a result of a simple government program.

Although both numskulls thought the government at that time was actually “managing the business cycle better”, Tyson admits that animal spirits could still pose a danger.

Reading Rates: MBA Application Survey – December 09 2009

The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages, 1 year ARMs as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage increased 9 basis point since last week to 4. 88% while the purchase application volume increased 4% and the refinance application volume increased 11.1% over the same period.

It’s important to recognize that despite the Federal Reserve’s “quantitative easing” measures and record low interest rates, the purchase application volume has now dropped to the lowest reading since 2000.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).


The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).

On The Stamp: Food Stamp Participation September 2009

As a logical consequence of the prolonged economic downturn it appears that participation in the federal food stamp program is on the rise.

In fact, household participation has been climbing so steadily that it has far surpassed the last peak set as a result of the immediate fallout following hurricane Katrina.

The latest data released by the Department of Agriculture shows that, on a year-over-year basis, household participation has increased 19.90% while individual participation, as a ratio of the overall population, has increased 16.72%.

The September results confirm that participation is continuing to climb dramatically, likely as a result of the recent jump in total unemployment, driving the nominal benefit costs up an astounding 46.71% on a year-over-year basis to $4,937,365,687 for the month.

Looking at the last chart that plots the total unemployment rate (unemployment rate of all traditionally unemployed workers plus all marginally attached and part time workers) and the population adjusted individual program participation rate normalized since 2005, one can plainly see that program participation would be expected to continue its surge.

Two Great Bounces! - December 08 2009

The following charts provide a simple comparison between the big stock bounce that occurred in the wake of the DOW crash of 1929 and the bounce we are seeing today in the S&P 500 index.

The method of alignment was simple… take the first definitive up trading day off the bottom of the preceding bear market low and set that as the start of the series… then simply re-base both series to a value of 100 so that they can be compared side-by-side.

The lower bar chart plots the cumulative percentage change since the start of each bounce.

The S&P 500 is up over 51% in a little over 180 trading days… an historically aggressive run with an obvious note of mania to it… and wholly comparable to… even far stronger than… the price movement seen in the 1930s-era DOW rally.

At this point for the 30s-era DOW, the bull-run was over as the bear trend resumed in earnest… today though the Bull is seriously on the move… how long will this boom last?

Only time will tell… But for now, let’s continue to keep a watchful eye…

Economic Jolt: Job Openings and Labor Turnover October 2009

Today, the Bureau of Labor Statistics released their latest monthly read of job availability and turnover (JOLT) showing that, on a year-over-year basis, private non-farm job “openings” declined 26.25%, job “hires” declined 11.44%, job “layoffs and discharges” decreased .05% and job quits declined substantially dropping 28.20%.

Job “openings” (click chart below for larger version), the reports most leading “demand side” indicator, has now declined on a year-over-year basis for 26 consecutive months.

Sliding down that slope of the Beveridge curve, the decline in the job vacancy rate is clearly corresponding with an equal but inverse movement up in the general unemployment rate as can be plainly seen in the following chart (click chart for larger version).

Job “hiring” activity (click chart for larger version) has also been declining significantly with the latest results posting the 30th consecutive decline on a year-over-year basis further confirming the tremendous weakness seen in the job market.

With the latest revisions by the BLS, job “separations”, whereby workers and their employers go their separate ways by one means or another (layoffs, retirement, termination, quitting, etc.), appear to be flattening as a result of nearly equivalent but opposing movements in quitting and layoff activity.

It’s important to understand that job “quits” are included as a component of the “separations” data series as “quitting” is a valid means of workers “separating” from employers but their inclusion tends to create an overall procyclical trend in what would otherwise be logically thought of as a countercyclical process (i.e. downturn leads to increase in separations not decrease).

As the economy slides further into recession and the employment situation worsens workers tend to reduce quitting activity presumably for fear that they could risk a long bout of unemployment and the latest results (click chart for larger version) confirm this with the some of the sharpest year-over-year declines on record.

Layoff activity, now separated into its own series and as you can see from the chart below is showing a dramatic surge that is roughly equivalent but opposite to the decline seen in quitting activity.

Sir James Goldsmith... Genius, Laura D'Andrea Tyson... an Idiot and a Fraud

This is a simply amazing debate from 1994 whereby Sir James Goldsmith outlines with superb detail the downside of unfettered global trade liberalization and more or less calls the next 15 years with stunning accuracy while Laura Tyson, then chair of the Council of Economic Advisers under the Clinton administration, blathers on in an incredible show of utter foolishness.

How do you like the "facts" now?

Listen closely to the last 6 or 8 minutes where Goldsmith talks about the risks of derivatives and the speculative nature of the financial system and its implication for the real economy... simply genius... really pretty amazing and almost shocking accuracy... remember this segment was from 1994.

The Fed's Foot Still Firmly Planted on Accelerator

While the traditional business media is littered with speculation and punditry about the Federal Reserve’s strategy for backing out of their current bailing, propping and supposed re-liquefying monetary strategy, one look at the latest release of the H.4.1 statistical release, "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks” leaves one with significant doubt that the Feds efforts have even yet reached a crescendo.

In short, the Fed is still propping the commercial paper market, still purchasing record breaking amounts of agency mortgage-backed securities and continuing to directly assist in the unwind of both AIG and Bear Stearns.

“Securities held outright”, which includes (amongst other items) U.S. Treasury securities, Federal agency debt securities, and mortgage backed securities, has increased $1.295 trillion in the last twelve months more than doubling the prior highest amount held on record and appears only to be increasing.

Further, “Other Liabilities and Capital” which includes liabilities related to the commercial paper lending facility as well as various facilities created to assist both Bear Stearns and AIG (Maiden Lane LLC I, II and III) also appears to be increasing notably and now stands at $65.5 billion.

Finally, “Other Federal Reserve Assets” which includes interest in two newly announced special purpose vehicles (AIA Aurora LLC and ALICO Holdings LLC) created to assist in the restructuring of AIG is also continuing to rise and now stands at just over $90 billion.

Jobless Decade

With one month left to report, it’s clear that for the typical American worker this has been the worst decade in the post-WWII era.

The general economy was so weak, in fact, that throughout the 2000s non-farm jobs were shed on a month-to-month basis 44.5% of the time.

That’s an astounding number considering the fact that it is over twice as frequent as was witnessed during the 60s, 70s, 80s, and 90s and over 30% higher than in the 50s when the economy was primarily manufacturing based and experienced frequent and wide swings in labor.

Worse yet, there have been historically few net jobs created with only 464,000 added non-farm payrolls created since December 1999, the weakest performance seen by far in the post-WWII era.

Finally, this was the first decade on record where work age population growth outstripped job creation and not by a small margin.

Outstanding Contraction!: Commercial Paper Outstanding December 5 2009

The Commercial Paper (CP) market is essentially a private debt market used by corporations as a cheaper means of funding typical recurring operations than drawing on a line of bank credit.

Commercial paper, as financial instrument, is by no means a recent innovation and, in fact, you can read about how the CP market was affected by the many historic financial shocks experienced by the U.S. (read Panic on Wall Street: A History of America’s Financial Disasters)

Although the Federal Reserve was able to artificially bring CP rates down significantly since the shocking 615 basis point spread blowout (A2/P2 spread) of late 2008, they have apparently not been successful in preventing an overall contraction in the CP market.

The Federal Reserve calculates and published the total amount of CP outstanding every week and as of the latest published period, commercial paper outstanding is contracting at nearly the fastest rate on record, registering a whopping 25.19% decline year-over-year.

Full Time Workers Fully Under Pressure: November 2009

Today’s employment situation report showed that the full time unemployment rate declined slightly to 11% of the civilian workforce, very near the highest rate seen in 41 years.

The Bureau of Labor Statistics considers full time workers to be those “who have expressed a desire to work full time (35 hours or more per week) or are on layoff from full-time jobs”.

Full time jobless workers currently account for 88.5% of all unemployed workers.

On The Margin: Total Unemployment November 2009

Today’s Employment Situation report showed that in September “total unemployment” declined slightly to 17.2% of the civilian population or 40.6 million people.

The traditional unemployment rate is calculated from the monthly household survey results using a fairly explicit qualification of “unemployed” (essentially unemployed and currently looking for full time employment) leaving many workers to be considered effectively “on the margin” either employed in part time work when full time is preferred or simply unemployed and no longer looking for work.

The Bureau of Labor Statistics considers “marginally attached” workers (including discouraged workers) and persons who have settled for part time employment to be “underutilized” labor.

The broadest view of unemployment would include both traditionally unemployed workers and all other underutilized workers.

To calculate the “total” rate of unemployment we would simply use this larger group rather than the smaller and more restrictive “unemployed” group used in the traditional unemployment rate calculation.

Below is a chart (click for larger version) showing the “total” unemployment rate versus the “traditional” unemployment rate along with the year-over-year percent change to the “total” unemployment rate.

Notice that the “total” unemployment rate jumped 36.51% on a year-over-year basis while the spread between the “traditional” and “total” unemployment rates now stands at 7.2%.

The chart below (click for larger) calculates the spread between the “total” unemployment rate and the “traditional” unemployment rate.

Envisioning Employment: Employment Situation November 2009

Today’s Employment Situation Report showed an unexpected turn in the direction of a jobs recovery with the unemployment rate declining to 10.0% while the Establishment survey showed a decline of only 11,000 net non-farm jobs since October.

Although this is a clear turn for the better for jobs and likely indicates that we are essentially in the trough of the non-farm payroll decline, our current situation needs to be put in perspective before getting too optimistic about the strength of any ongoing recovery.

First, it’s important to recognize that at roughly 130 million non-farm jobs, we are currently at a literal level of employment first seen in March 2000 while as a ratio of the civilian population we are at the lowest level of participation seen since December 1986.

Further, 53 of the last 119 months showed declining jobs, easily one of the weakest decade long streaks in the post-war period with net monthly job losses occurring 44.5% of the time.

Finally, it’s important to recognize that today’s report brings the total private job losses to 7.288 million jobs or a 6.29% decline since the contraction began in December 2007.

The following chart combines both the “residential building” and “residential specialty trade contractors” into one payroll series and then plotting the data since 2002.

Notice that, in aggregate, these payrolls, having peaked in February 2006 and declined 31.74% or 1,096,900 jobs since then, appear to be headed still lower.

Also note that independently, “residential building” has lost 33.94% of its payrolls or 347,000 jobs since it peaked during September 2006 and that “residential specialty trade contractors” have lost 31.02% of its payrolls or 756,700 jobs since it peaked during February 2006.

Next, let’s take a look a slightly broader set of industry sectors that have been directly impacted both by the housing boom and now the bust (click for larger chart).

Note that I carefully selected sectors that showed either an obvious expansion-to-contraction trend OR a flattening-to-contraction trend and that ALL sectors have both a historical and logical relationship to residential housing as well as recent industry press releases disclosing declining profits as a result of the housing bust.

As you can see, sectors that are now being directly impacted by the current housing decline are numerous and cut across many levels of the job market from construction and materials to manufacturing and finally to retail.

Combining these series into an aggregate of payrolls “directly impacted” by the housing boom and bust cycle and plotting it, along with the S&P/Case-Shiller Composite Home Price Index (click on chart below for larger version) since 1997 provides some pretty solid evidence that a relationship exists.

To expand the analysis a bit look at the following chart that shows percent change on year-over-year basis to BOTH the “directly impacted” payrolls sectors and ALL private non-farm payroll overlaid with the S&P/Case-Shiller Composite Home Price Index.

To get a sense of the relative intensity of the pullback to the “directly impacted” payrolls by plotting both the percentage of overall private non-farm payrolls that the “directly impacted” aggregate represents as well as the contributions it is making to the rate of change of the underlying total private non-farm payrolls.

Notice that at its peak the “directly impacted” payrolls represented over 6.7% (now 6.05%) of Total Private Non-Farm Payrolls and now contracted to a far more significant degree than that seen during the entire course of the 2001-2003 contraction.

Plotting the ratio of overall and private non-farm payroll as well as the payroll of various business sectors to overall non-institutional population (above 16 years old and not in jail or “juvee”), the last eight years seem to pose more questions than answers.

The payroll-population ratio concept simply provides a mechanism for better isolating the changes to payroll rosters by calculating the percentage of population that is employed in a given sector at any given time.

In the following chart (click for larger version) you can see the ratio of overall non-farm payroll and private non-farm payroll to non-institutional population from 1948 overlaid with all U.S. recessions in that period.

As you can see, there is a fairly strong correlation to declining percent of population employed in non-farm and private non-farm endeavors and recession with particularly good peak-trough alignment for all recessions prior to 1990.

During the 2001 recession (and to a far lesser extent in 1990), although there where large declines to the ratio during the official recession period, the economy seemed to be able resume growth while the ratio continued to slide or stayed well below the peak of the prior expansion.

This is an interesting situation in that, although increases in population have been steady and could have replenished the literal number of jobs lost during the downdraft of 2000-2003, the 2000s expansion of payrolls was not strong (jobless recovery).

The following chart (click for larger version), on the other hand, the payroll ratio related to construction has remained above even the peak set in the 90s expansion but has dropped significantly below trend.

Two Great Bounces! - December 03 2009

The following charts provide a simple comparison between the big stock bounce that occurred in the wake of the DOW crash of 1929 and the bounce we are seeing today in the S&P 500 index.

The method of alignment was simple… take the first definitive up trading day off the bottom of the preceding bear market low and set that as the start of the series… then simply re-base both series to a value of 100 so that they can be compared side-by-side.

The lower bar chart plots the cumulative percentage change since the start of each bounce.

The S&P 500 is up over 52% in a little over 180 trading days… an historically aggressive run with an obvious note of mania to it… and wholly comparable to… even far stronger than… the price movement seen in the 1930s-era DOW rally.

At this point for the 30s-era DOW, the bull-run was over as the bear trend resumed in earnest… today though the Bull is seriously on the move… how long will this boom last?

Only time will tell… But for now, let’s continue to keep a watchful eye…

Mid-Cycle Meltdown!: Jobless Claims December 03 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims declined by 5,000 to 457,000 claims from last week’s revised 462,000 claims while “continued” claims increased 28,000 resulting in an “insured” unemployment rate of 4.1%.

Today’s results, though still significantly elevated, continues to indicate that the descent to both initial and continued claims is continuing in earnest resulting in an almost textbook peak.

At this point, we are either in the "post-crisis" recovery or the "eye before the storm" of a double-dip.

Could the worst of the job-shedding be behind us? Is a major disappointment shaping up for 2010?

We will have to wait to find out.

Clearly, careful attention needs to be paid to these indices to see how they reflect the state of the job market as we move further into the end of the year and start of 2010.

***

The following chart shows the recent trend in initial non-seasonally adjusted initial jobless claims with the year-over-year percent change acting as a rough equivalent of a seasonally adjustment.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

I have added a chart to the lineup which shows “population adjusted” continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967 and from 2000.

As you can see, acceleration to claims generally precedes recessions and vice versa.


Also, acceleration and deceleration of unemployment claims has generally preceded comparable movements to the unemployment rate by 3 – 8 months (click for larger version).


In the above charts you can see, especially for the last three post-recession periods, that there has generally been a steep decline in unemployment claims and the unemployment rate followed by a “flattening” period of employment and subsequently followed by even further declines to unemployment as growth accelerated.

This flattening period demarks the “mid-cycle slowdown” where for various reasons growth has generally slowed but then resumed with even stronger growth.

Until late 2007, one could make the case (as Fed chief Ben Bernanke did on several occasions) that we were again experiencing simply a mid-cycle slowdown but now those hopes are long gone.

Adding a little more data shows that in the early 2000s we experienced a period of economic growth unlike the past several post-recession periods.

Look at the following chart (click for larger version) showing “initial” and “continued” unemployment claims, the ratio of non-farm payrolls to non-institutional population and single family building permits since 1967.

The most notable feature of the post-“dot com” recession era that is, unlike other recent post-recession eras, job growth had been very weak, not succeeding to reach trend growth as had been minimally accomplished in the past.

Another feature is that housing was apparently buffeted by the response to the last recession, preventing it from fully correcting thus postponing the full and far more severe downturn to today.

It is now completely clear that the potential “mid-cycle” slowdown that appeared to be shaping up in late 2007, had been traded for a less severe downturn in the aftermath of the “dot-com” recession, and resulted, instead, in a mid-cycle meltdown.

Reading Rates: MBA Application Survey – December 02 2009

The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages, 1 year ARMs as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage decreased 3 basis point since last week to 4. 79% while the purchase application volume increased 4.1% and the refinance application volume increased 1.7% over the same period.

It’s important to recognize that despite the Federal Reserve’s “quantitative easing” measures and record low interest rates, the purchase application volume has now dropped to the lowest reading since 2000.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).


The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).