Mid-Cycle Meltdown?: Jobless Claims July 24 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims surged 34,000 to 406,000 from last week’s upwardly revised 372,000 claims while “continued” claims decreased 9,000 resulting in an “insured” unemployment rate of 2.3%.

NOTE: The charts below plot a “monthly” average NOT a 4 week moving average so the latest monthly results should be considered preliminary until the complete monthly results are settled by the fourth week of each following month (i.e. June results will be considered settled by the fourth week of July).

It’s very important to understand that today’s report continues to reflect employment weakness that is strongly consistent with past recessionary episodes and that this signal is now so strong and sustained that a contraction in the economy is fundamentally certain.

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.

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.


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.

So, looking at the post-“dot com” recession period we can see the telltale signs of a potential “mid-cycle” slowdown and if we were to simply reflect on the history of employment as an indicator of the health and potential outlook for the wider economy, it would not be irrational to conclude that times may be brighter in the very near future.

But, adding a little more data I think shows that we may in fact be experiencing 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.

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

I think there is enough evidence to suggest that our potential “mid-cycle” slowdown, having been traded for a less severe downturn in the aftermath of the “dot-com” recession, may now be turning into a mid-cycle meltdown.

Reading Rates: MBA Application Survey – July 23 2008

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 37 basis points since last week to 6.59% while the purchase application volume decreased by 6.7% and the refinance application volume decreased 5.6% compared to last week’s results.

It’s important to note that the average interest rate on an 80% LTV 30 year fixed rate loan remains near the top of the range seen throughout 2007 while the interest rate for an 80% LTV 1 year ARM remains significantly elevated now resting 57 basis points ABOVE the rate of an average 80% LTV 30 year fixed rate loan despite all the herculean efforts by the Federal Reserve to bring rates down.

Also note that all application volume values reflect only “initial” applications NOT approved applications… i.e. originations… actual originations would likely be notably lower than the applications.

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).

The Almost Daily 2¢ - Just Can’t Stop Bailin’

I suppose one of the downsides of bailouts is that once you start, you just don’t know when to stop.

First, its liquidity injections… then, under the cover of darkness, you throw $50 billion over the wall to Countrywide….then leap dramatically to the rescue of Bear Stearns account holders… now you’re really getting going!

Next up… Fannie and Freddie, only this time things are a little more difficult so you don’t talk too much about how you’re going to do it… Just keep it between you and Congress… particularly those congressmen sitting on the House Financial Services Committee and Senate Banking Committee… you know the ones (except Ron Paul) who get all the financial services campaign donations and special treatment.

Now though you're exhausted, you start to get a bit sloppy… any opportunity to talk to the public and you blurt out some new bailout plan… all you see is financial crisis and ripple effects.

Or so it seems with Treasury Secretary Paulson.

This morning Paulson spoke at the New York Library on “Reinforcing Market Stability” during which he suggested that WE need “additional powers to manage the resolution, or wind-down, of large non-depository financial institutions, such as larger hedge funds, so as to limit the impact of a failure on the broader financial system”

Larger Hedge Funds?

Anyone want to guess what “manage the resolution, or wind down” means?

The Almost Daily 2¢ - OK This One Is So Cool!

Wow! What a miss!

CNCB just reported that in Q2 2008 Amex (NYSE:AXP) posted a decline of 37% on a year-over-year basis.

Is anyone really surprised that credit card companies (even Amex) are facing significant losses (and preparing for far more) from the current economic decline?

I know Wall Street is… Why is that and when do you think they will start withdraw those coveted Amex Black cards?

Follow The Leader: Index of Leading Economic Indicators June 2008

Today’s results of the Conference Board’s Leading Economic Indicators continue to indicate troubled times ahead decreasing 0.1% from May and declining 2.12% compared to June 2007, leaving the index at 101.7.

It’s important to note that a year-over-year decline greater than 1.5% has ONLY preceded EVERY recession that has occurred in the last 59 years so the six significant consecutive year-over-year declines strongly suggests that overall the components of the index are indicating that recession is either here or very near.

Note that with today’s release The Conference Board has incorporated its annual benchmark revision to the complete series.

The Almost Daily 2¢ - Twin Peaks?

Subtitle: Bounce or Bust?

The S&P 500 bounced sharply off of the 1215 level on the euphoric but shortsighted notion that Fannie and Freddie had been successfully bailed out of their current predicament.

Of course, the GSEs are no better off now than before the latest panic but Paulson and Bernanke appear to have succeeded in, at least temporarily, restoring a measure of confidence and stemming the tide of anxiety and dread.

So the question is … Are we headed back up to the 200 day simple moving average or will the rally fail prematurely as the news-flow further illustrates the ongoing and worsening effects of the recession?

My take is that stemming panic will always lead to a continuation and even an amplification of panic in the future. … This is merely a postponement of the inevitable and is possibly even teeing it up for a larger crisis.

There were REAL reasons to panic about both Bear Stearns and Fannie Freddie … the economic deterioration continues and these institutions are, in fact, essentially insolvent.

Postponing a full recognition of that fact does nothing to address the actual problems at hand.

There are a host of very interesting technical similarities (which are noted below) that indicates that we have fully entered into another bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.

It’s important to keep in mind that, at best, a bear market can be viewed as a transition into an period where there is a prolonged bias to sell into strength resulting in a successive series of lower highs yielding a clear downward trend.

At worst, there are periods (days or weeks) where particular stocks and the index as a whole will crash hard.

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.

Notice also, that I’ve added both the “effective” federal funds rate (light grey line) and an overlay indicating the period of the last recession.

As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.00% in the trough.

It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.


THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

NOW (Today’s Top)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

Although the recent, highly optimistic, Wall Street rally appeared strong, it’s collapse indicates that the prospects of a protracted bear market selloff is very real especially given the steady flow of poor macroeconomic, housing, consumer, retail sales and employment data that will continue to flow throughout 2008.

The Almost Daily 2¢ - Representative Frank Losing Control

The following clip clearly demonstrates how dysfunctional and truly counterproductive a career politician can become after some 27 long years “service”.

Representative Barney Frank (D-MA) has enjoyed the benefit of an essentially uncontested seat in the House of Representatives for nearly a third of a century begging the question… Is this the best that the 4th District of Massachusetts can do?

During his lengthy rein Rep. Frank has acquired substantial power now lording over one of the most powerful and influential positions as the Chairman of the House Financial Services Committee.

But as I have demonstrated in our exchange recently, he is simply not qualified for the position and as such will almost certainly act as a destructive force pushing our country further into the abyss of insolvency and depression.

People of the country… Can you afford a substantial legislative blunder right now?

People of the 4th district… Do you want to be known as the district that clearly put self interest (i.e. earmarks or simply lackluster civic participation) in front of the public good?

Click to watch the complete Barney Frank clip from News Hour.

Philadelphia Feeling: Federal Reserve Bank of Philadelphia Business Outlook Survey July 2008

Today, the Federal Reserve Bank of Philadelphia released the results of their Business Outlook Survey for July showing continued weakness to the regions manufacturing sector with the current activity index indicating contraction at –16.3, the eighth consecutive negative monthly result.

The survey of the Philadelphia regions manufacturing sector has been a pretty solid leading indicator of the overall strength or weakness and recession experienced by general economy.

As you can see by the following chart (click for larger version), during the past three
post-recession expansion periods, the “current” diffusion index (more on diffusion indices later) generally vacillated between 0 and 35 while the “future” index left the period of contraction at an elevated level and eventually joining the “current” index.

Finally, as the economy pushes closer to contraction, both indices decline dramatically with a breach of -20 by the “current” index generally indicating that recession is upon us.


As you can see from recent results, -20 has been breached by the “current” index which now stands at -16.3 while the “future” index stands at 18.

Clearly, there is trouble afoot but components of the latest results also display a potential dangerous parallel to the stagflationary eras of the 70s and early 80s.

The following chart shows the latest results of the “current new orders” “current prices paid” and “future employment” components (click for larger versions).

Notice that while current orders and future employment declined, current prices paid have increased indicating a potential return to a stagflationary environment that hasn’t been seen since the early 80s.

It’s important to note that these three indicators have moved, more or less, together since the expansion of 1983 and have especially moved together during the recessionary periods of 1990 and 2001.

Now though, it appears that we may be seeing a divergence with an increase in prices paid and simultaneous decrease in growth.

The following chart (click for larger) shows these measures during the last stagflationary era seen between 1976 – 1980. Notice the clear divergence of rising prices and falling growth.

Mid-Cycle Meltdown?: Jobless Claims July 17 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims increased 18,000 to 366,000 from last week’s 348,000 claims while “continued” claims decreased 81,000 resulting in an “insured” unemployment rate of 2.3%.

NOTE: The charts below plot a “monthly” average NOT a 4 week moving average so the latest monthly results should be considered preliminary until the complete monthly results are settled by the fourth week of each following month (i.e. June results will be considered settled by the fourth week of July).

It’s very important to understand that today’s report continues to reflect employment weakness that is strongly consistent with past recessionary episodes and that this signal is now so strong and sustained that a contraction in the economy is fundamentally certain.

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.
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.


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.

So, looking at the post-“dot com” recession period we can see the telltale signs of a potential “mid-cycle” slowdown and if we were to simply reflect on the history of employment as an indicator of the health and potential outlook for the wider economy, it would not be irrational to conclude that times may be brighter in the very near future.

But, adding a little more data I think shows that we may in fact be experiencing 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.

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

I think there is enough evidence to suggest that our potential “mid-cycle” slowdown, having been traded for a less severe downturn in the aftermath of the “dot-com” recession, may now be turning into a mid-cycle meltdown.

New Residential Construction Report: June 2008

Today’s New Residential Construction Report continues to firmly demonstrate the intensity and completeness of the washout conditions that now exist in the nation’s housing markets particularly for new residential construction showing tremendous declines on both a peak and year-over-year basis to single family permits both nationally and across every region.

Single family housing permits, the most leading of indicators, again suggests extensive weakness in future construction activity dropping 39.67% nationally as compared to June 2007 and an astonishing 62.04% since the peak in January 2005.

Moreover, every region showed significant double digit declines to permits with the West declining 43.55%, the Midwest declining 39.4%, the South declining 37.6%, and the Northeast declining a stunning 41.4% on a year-over-year basis.

Keep in mind that these declines are coming on the back of last year’s record declines.

To illustrate the extent to which permits and starts have declined, I have created the following charts (click for larger versions) that show the percentage changes of the current values on a year-over-year basis as well as compared to the peak year of 2004.

Declines to single family permits have contracted measurably in terms of monthly YOY declines, and the fact that we are now seeing declines of roughly 30%-50% on the back of 2006 and 2007 declines should provide a an unequivocal indication that the housing markets are by no means stabilizing.




Here are the statistics outlined in today’s report:

Housing Permits

Nationally

• Single family housing permits down 39.7% as compared to June 2007.

Regionally

• For the Northeast, single family housing down 41.4% as compared to June 2007.
• For the Midwest, single family housing permits down 39.4% as compared to June 2007.
• For the South, single family housing permits down 37.6% compared to June 2007.
• For the West, single family housing permits down 43.5% as compared to June 2007.

Housing Starts

Nationally

• Single family housing starts down 43.0% as compared to June 2007.

Regionally

• For the Northeast, single family housing starts down 44/9% as compared to June 2007.
• For the Midwest, single family housing starts down 45.7% as compared to June 2007.
• For the South, single family housing starts down 36.9% as compared to June 2007.
• For the West, single family housing starts down 52.7% as compared to June 2007.

Housing Completions

Nationally

• Single family housing completions down 30.1% as compared to June 2007.

Regionally

• For the Northeast, single family housing completions down 39.3% as compared to June 2007.
• For the Midwest, single family housing completions down 14.1% as compared to June 2007.
• For the South, single family housing completions down 33.0% as compared to June 2007.
• For the West, single family housing completions down 31.1% as compared to June 2007.

Keep in mind that this particular report does NOT factor in the cancellations that have been widely reported to be occurring in new construction.

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings July 2008

Yesterday, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing continued evidence that the new home market is experiencing a prolonged bout of depression.

The release came along with a truly dire outlook and a continued plea for a government bailout of the housing debacle from Chief Economist David Seiders.

“Builders are reporting that traffic of prospective buyers has fallen off substantially in recent months … Given the systematic deterioration of job markets, rising energy costs and sinking home values aggravated by the rising tide of foreclosures, many prospective buyers have simply returned to the sidelines until conditions improve … An $8,000 tax credit, made available for a limited time, could be just the incentive needed to draw them into the game, and a policy-induced pickup in home sales could gain momentum further down the line.”

Each component of the NAHB housing market index is now sitting WELL BELOW the worst levels ever seen in the over 20 years the data has been being compiled strongly suggesting that the current severe contraction has surpassed all other events seen in the last 22 years and is now firmly in uncharted territory.

Production Pullback: Industrial Production June 2008

Yesterday, the Federal Reserve released their monthly read of industrial production showing continued declines across many industries, particularly for those related to consumer spending, construction and business vehicles, resulting in a tepid increase of 0.5% to total aggregate production since last month and a meager .33% increase on a year-over-year basis.

“Final product” consumer durable goods continue to show accelerating weakness falling 7.13% as an aggregate on a year-over-year basis, with particularly significant declines coming specifically from home appliances, furniture and carpeting which declined for the twenty sixth consecutive month by 11.65% on a year-over-year basis.

Construction supply production has been showing the most severe contraction to wood products seen in at least the last 20 years.

Although automotive production has been showing weakness since the middle of 2004, business vehicle production is now showing a stark contraction.

The following charts (click for larger) show the overall consumer durable component along with the Home Appliances, Furniture and Carpeting sub-component on both a time series and year-over-year basis, construction supply production with the wood products sub-component, and general and business related vehicle production all overlaid with the last two recessions for comparisons purposes.

The Almost Daily 2¢ - Feldstein’s Grim Outlook

Today I will respectfully stand aside and keep my 2¢ to myself… why you say?

Because I could NOT HAVE POSSIBLY painted a more grim (but accurate) picture of the future than one presented by the respected economist, Martin Feldstein, in the following “On Point” segment that aired on NPR yesterday.

This is a MUST LISTEN interview… grab lunch, headphones, dim the lights in the cube and listen to one of the country’s most respected economist recount the details of the Great Housing Bubble, the mistakes made by a lax and easy Fed, calamitously declining home values, inflation trouble and the dire and historic economic downturn we are now fully embroiled in.

Click here to listen to the entire segment.

Reading Rates: MBA Application Survey – July 16 2008

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 21 basis points since last week to 6.22% while the purchase application volume increased by 1.7% and the refinance application volume increased 6.9% compared to last week’s results.

It’s important to note that the average interest rate on an 80% LTV 30 year fixed rate loan remains near the middle of the range seen throughout 2007 while the interest rate for an 80% LTV 1 year ARM remains significantly elevated now resting 94 basis points ABOVE the rate of an average 80% LTV 30 year fixed rate loan despite all the herculean efforts by the Federal Reserve to bring rates down.

Also note that all application volume values reflect only “initial” applications NOT approved applications… i.e. originations… actual originations would likely be notably lower than the applications.

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).