Yellen’s Myth (Part 1)

Notwithstanding Fed Chair Yellen’s certainty about her “myths”, recession indicators are continuing to accumulate as the current U.S. economic expansion continues to clearly trend into its twilight period.

While Yellen is apparently not able to “see anything in the underlying strength of the economy that would lead me to be concerned” about recession, let’s take a look at just a few points of interest that she clearly must have missed.

First, there has been notable protracted weakness in industrial production which is now showing a year-over-year decline of over 1%, a VERY strong indicator of fundamental weakness that is virtually always associated either directly with current or looming recession.


Additionally, both Industrial Production and Capacity Utilization have now show simultaneous notable year-over-year declines, an event that is literally associated with every recession since both data sets have been tracked.


Next, jobless claims appear to have hit the low for this expansion which, as we know from all other past expansions, generally does not stay at this level for very long.

In fact, population adjusted Continued Jobless Claims (continued claims as a percentage of non-institutional population) is at the lowest level since 1969, a strong indicator that insurance claims, and by proxy the general employment situation, has reached its best levels of the expansion.

Weekly Unemployment Claims: Initial and Continued December 31 2015

Today’s jobless claims report showed a notable increase to initial unemployment claims as well as an slight increase to continued unemployment claims as seasonally adjusted initial claims remained just below the 300K level.

Seasonally adjusted “initial” unemployment claims jumped by 20,000 to 287,000 claims while seasonally adjusted “insured” claims increased by 3,000 to 2.198 million resulting in an “insured” unemployment rate of 1.6%.

Yellen’s “Bernanke Moment”

In Mid 2007, then Federal Reserve Chairman Ben Bernanke apparently (as he recently suggested in his book about the crisis) completely missed the significance of the housing decline when he asserted that the subprime implosion and the wider housing troubles were “contained” and economic growth would continue.

In her most recent statement following the Feds decision to raise interest rates, the current Federal Reserve Chair, Janet Yellen, made just as significant a blunder.

“It’s a myth that expansions die of old age,” Yellen said. “I don’t see anything in the underlying strength of the economy that would lead me to be concerned” about a recession.

If you have spent any time evaluating macroeconomic trends you will know that this is more than just a preposterous statement… it is wishful thinking or willful neglect… but in either case, Yellen invoked this statement for the same reason as Bernanke before her.

Just as Bernanke should have had the total implosion of the nation’s housing sector as his top concern in 2007 and 2008 (very obviously by this point), Yellen’s priority should be on the looming recession and the potential systemic shock it could bring (particularly in light of the weak expansion from the worst recession since the Great Depression) and NOT attempting to bluff her way through the inevitable.

In 2016, we may well see the end of the current expansion… there are, in fact, the beginnings of “old age” signals starting to show in the macroeconomic trends and we DO know with absolute certainty (from past experience and common sense) that periods of expansion do, eventually, all “die” and give way to periods of contraction.

So the question is, now that Yellen has indicated that she plans to go with the same failed “bluffing” strategy as her predecessor, is she up for the challenge of what is inevitably going to come?

Based on her recent performance addressing the University of Massachusetts-Amherst, I think not.

The Chicago Fed National Activity Index: November 2015

The latest release of the Chicago Federal Reserve National Activity Index (CFNAI) indicated that the national economic activity remained weak in November with the index weakening to a level of -0.30 from a level of -0.17 a month earlier while the three month moving average weakened to a level of -0.20.

The CFNAI is a weighted average of 85 indicators of national economic activity collected into four overall categories of “production and income”, “employment, unemployment and income”, “personal consumption and housing” and “sales, orders and inventories”.

The Chicago Fed regards a value of zero for the total index as indicating that the national economy is expanding at its historical trend rate while a negative value indicates below average growth.

A value at or below -0.70 for the three month moving average of the national activity index (CFNAI-MA3) indicates that the national economy has either just entered or continues in recession.

ADP National Employment Report: November 2015

Today, private staffing and business services firm ADP released the latest installment of their National Employment Report indicating that the situation for private employment in the U.S. improved in November as private employers added 217,000 jobs in the month bringing the total employment level 2.06% above the level seen in November 2014.

Look for Friday’s BLS Employment Situation Report to likely show somewhat similar trends.

Pending Home Sales: October 2015

Today, the National Association of Realtors (NAR) released their Pending Home Sales Report for October showing that pending home sales increased with the seasonally adjusted national index increasing 0.2% from September to stand 3.9% above the level seen in October 2014.

The following chart shows the seasonally adjusted national pending home sales index along with the percent change on a year-over-year basis as well as the percent change from the peak set in 2005 (click for larger version).

Employment Situation: Nonfarm Payrolls and Civilian Unemployment October 2015

Today's Employment Situation Report indicated that in October, net non-farm payrolls increased by a by a notable 271,000 jobs overall with the private non-farm payrolls sub-component adding 268,000 jobs while the civilian unemployment rate declined to 5.0% over the same period.

Net private sector jobs increased 0.22% since last month climbing 2.30% above the level seen a year ago and climbing 4.32% above the peak level of employment seen in December 2007 prior to the Great Recession.

Employment Situation: Unemployment Duration October 2015

Today's employment situation report showed that conditions for the long term unemployed generally went flat in October.

Workers unemployed 27 weeks or more increased to 2.142 million or 26.8% of all unemployed workers while the median term of unemployment declined to 11.2 weeks and the average stay on unemployment increased to 28.0 weeks.

Employment Situation: Total Unemployment October 2015

Today's Employment Situation report showed that in October “total unemployment” including all marginally attached workers declined to 9.8% while the traditionally reported unemployment rate declined to 5.0%.

The traditional unemployment rate is calculated from the monthly household survey results using a fairly explicit definition 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.

Existing Home Sales Report: September 2015

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for September showing strong sales with total home sales rising 4.7% since August and climbing 8.8% above the level seen in September 2014.

Single family home sales also increased with sales rising 5.3% from August but and climbing 9.6% above the level seen in September 2014 while the median selling price increased 6.6% above the level seen a year earlier.

Inventory of single family homes decreased from August to 1.96 million units falling 3.0% below the level seen in September 2014 which, along with the sales pace, resulted in a monthly supply of 4.8 months.

The following charts (click for full-screen dynamic version) shows national existing single family home sales, median home prices, inventory and months of supply since 2005.

FHFA Monthly Home Prices: August 2015

Today, the Federal Housing Finance Agency (FHFA) released the latest results of their monthly house price index (HPI) showing that in August, nationally, home prices increased 0.27% from July rising 5.52% above the level seen in August 2014.

The FHFA monthly HPI are formulated from home purchase information collected from mortgages that have been sold to or guaranteed by Fannie Mae and Freddie Mac.

The Chicago Fed National Activity Index: September 2015

The latest release of the Chicago Federal Reserve National Activity Index (CFNAI) indicated that the national economic activity remained weak in September with the index going flat at a level of -0.37 from a level of -0.39 in August while the three month moving average weakened to a level of -0.09.

The CFNAI is a weighted average of 85 indicators of national economic activity collected into four overall categories of “production and income”, “employment, unemployment and income”, “personal consumption and housing” and “sales, orders and inventories”.

The Chicago Fed regards a value of zero for the total index as indicating that the national economy is expanding at its historical trend rate while a negative value indicates below average growth.

A value at or below -0.70 for the three month moving average of the national activity index (CFNAI-MA3) indicates that the national economy has either just entered or continues in recession.

NAHB/Wells Fargo Home Builder Sentiment: October 2015

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing that overall assessments of housing activity generally improved in October with the composite HMI index climbing to at 64 while the "buyer traffic" index went flat at a level of 47.

ADP National Employment Report: September 2015

Today, private staffing and business services firm ADP released the latest installment of their National Employment Report indicating that the situation for private employment in the U.S. improved in September as private employers added 200,000 jobs in the month bringing the total employment level 2.17% above the level seen in September 2014.

Look for Friday’s BLS Employment Situation Report to likely show somewhat similar trends.

Reading Rates: MBA Application Survey – September 30 2015

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 as well as the volume of 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 (from FHA and conforming GSE data) decreased 2 basis point to 3.97% since last week while the purchase application volume declined 6% and the refinance application volume declined 8% over the same period.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages since 2006 as well as the purchase, refinance and composite loan volumes (click for larger dynamic full-screen version).

S&P/Case-Shiller: July 2015

Today's release of the S&P/Case-Shiller (CSI) home price indices for July reported that the non-seasonally adjusted National index increased from June with prices rising 0.72% while the non-seasonally adjusted Composite-10 city index increased 0.59% and the Composite-20 city index increased 0.64% over the same period.

On an annual basis, the National index increased 4.69% above the level seen in July 2014 while the Composite-10 city index increased 4.55% and the Composite-20 city index increased 4.96% over the same period.

On a peak basis, all three indices still show significant peak declines slumping 5.15% for the National index, -13.01% for the Composite-10 city index and -11.92% for the Composite-20 city index on a peak comparison basis.

Weekly Unemployment Claims: Initial and Continued September 24 2015

Today’s jobless claims report showed an increase to initial unemployment claims and a decrease to continued unemployment claims as seasonally adjusted initial claims remained below the 300K level.

Seasonally adjusted “initial” unemployment claims increased by 3,000 to 267,000 claims while seasonally adjusted “insured” claims declined by 1,000 to 2.242 million resulting in an “insured” unemployment rate of 1.7%.

New Home Sales: August 2015

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for August showing sales jumped a notable 5.7% from July rising 21.6% above the level seen in August 2014 but still remaining near an historically low level with 552K SAAR units.

The monthly supply declined to 4.7 months while the median selling price increased 0.34% and the average selling price declined 0.79% from the year ago level.

The following chart show the extent of sales decline to date (click for full-larger version).

The Chicago Fed National Activity Index: August 2015

The latest release of the Chicago Federal Reserve National Activity Index (CFNAI) indicated that the national economic activity weakened in August with the index falling to a level of -0.41 from a level of 0.51 in July while the three month moving average improved to a level of 0.02.

The CFNAI is a weighted average of 85 indicators of national economic activity collected into four overall categories of “production and income”, “employment, unemployment and income”, “personal consumption and housing” and “sales, orders and inventories”.

The Chicago Fed regards a value of zero for the total index as indicating that the national economy is expanding at its historical trend rate while a negative value indicates below average growth.

A value at or below -0.70 for the three month moving average of the national activity index (CFNAI-MA3) indicates that the national economy has either just entered or continues in recession.

Reading Rates: MBA Application Survey – September 23 2015

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 as well as the volume of 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 (from FHA and conforming GSE data) decreased 2 basis point to 3.99% since last week while the purchase application volume increased 9% and the refinance application volume increased 18% over the same period.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages since 2006 as well as the purchase, refinance and composite loan volumes (click for larger dynamic full-screen version).

NAHB/Wells Fargo Home Builder Sentiment: September 2015

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing that overall assessments of housing activity generally improved in September with the composite HMI index climbing to 62 while the "buyer traffic" index rose to a level of 47 from 45 in the prior month.

Overall, conditions for new home construction appear to have remained stable recently but still remain below the peak assessments see prior to the Great Recession.

Reading Rates: MBA Application Survey – September 16 2015

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 as well as the volume of 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 (from FHA and conforming GSE data) decreased 1 basis point to 4.00% since last week while the purchase application volume decreased 4% and the refinance application volume declined 9% over the same period.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages since 2006 as well as the purchase, refinance and composite loan volumes (click for larger dynamic full-screen version).

Employment Situation: Nonfarm Payrolls and Civilian Unemployment August 2015

Today's Employment Situation Report indicated that in August, net non-farm payrolls increased by a by 173,000 jobs overall with the private non-farm payrolls sub-component adding 140,000 jobs while the civilian unemployment rate declined to 5.1% over the same period.

Net private sector jobs increased 0.12% since last month climbing 2.37% above the level seen a year ago and climbing 4.00% above the peak level of employment seen in December 2007 prior to the Great Recession.

Employment Situation: Unemployment Duration August 2015

Today's employment situation report showed that conditions for the long term unemployed worsened in August while still remaining distressed by historic standards.

Workers unemployed 27 weeks or more increased to 2.187 million or 27.7% of all unemployed workers while the median term of unemployment increased to 12.1 weeks and the average stay on unemployment increased to 28.4 weeks.