99ers and the Continual Decline

Reading through the comments trailing this article and posted at this website it is nearly impossible not to feel concerned for the plight of the millions of long term unemployed that appear to be sinking deeper with each passing day.

Worse yet, the economy is not going to be able to absorb these folks any time soon as historically weak hiring and the tarnish of multiple years of unemployment work to morph these poor souls from productive workers into a class of downtrodden and financially wrecked individuals with defunct skills.

Yet, what really is the obligation of the federal and state governments to mitigate the pain associated to the adjustments taking place in our macro-economy?

With the latest unemployment extension costing over $85 billion for just thirteen more months of long term benefits (excluding those that have exhausted their benefits at 99 weeks… the 99ers), the roughly $70 billion the feds dole out for food-stamps, and the hundreds of billions spent on all the other “safety net” policies, the government and the public needs to face a harsh truth.

With a downshifting economy, greater competition from emerging economies and the demographic nightmare of boomer retirement, hard choices will have to be made concerning the plight of those that will inevitably slide back down the wealth scale.

Is the role of government to artificially prop the gains made by generations of the middle class even when the trends have turned against them? ... even when the steps taken to lessen the pain are just temporary and inevitably hopeless?

The “99ers” provide a clear insight into this dilemma.

Those that have been unemployed for 99 weeks or longer are effectively in critical condition desperately hanging on for some sign of the return of their prior healthy self.

But sadly for many (maybe most) the future only holds a deeper despair as many face the prospect of significant career and lifestyle demotions, dashed plans and disappointments.

Any further assistance might bide some time, but as the macro-trends turn further against a generation, no amount of subsidies will bring back the past.

New Residential Construction Report: November 2010

Today’s New Residential Construction Report showed a gain to both single family permits and single family starts which, considering the truly depressed level of new home construction activity, appears to suggest that housing is continuing to remain historically weak.

Single family housing permits, the most leading of indicators, increased 3.0% on a month-to-month basis to 416K single family units (SAAR) but declined a notable 14.9% below the level seen in November 2009 and an astonishing 76.86% below the peak in September 2005.

Single family housing starts increased 6.9% to 465K (SAAR) units dropping 7.7% below the level seen in November 2009 and a whopping 74.49% below the peak set in early 2006.

With the substantial headwinds of rising unemployment, epic levels of foreclosure and delinquency, mounting bankruptcies, contracting consumer credit, and falling real wages, an overhang of inventory and still falling home prices, the environment for “organic” home sales remains weak and likely very fragile.

Extended Unemployment: Initial, Continued and Extended Unemployment Claims December 16 2010

Today’s jobless claims report showed a continued decline to initial and an increase in continued unemployment claims as a declining trend shaped up for initial claims and traditional continued claims continued to trend down.

Seasonally adjusted “initial” unemployment declined by 3,000 to 420,000 claims from last week’s revised 423,000 claims while seasonally adjusted “continued” claims increased by 22,000 resulting in an “insured” unemployment rate of 3.3%.

Since the middle of 2008 though, two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.

Currently there are some 4.83 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 4.21 million people that are currently counted as receiving traditional continued unemployment benefits, there are 9.04 million people on state and federal unemployment rolls.

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.

The following chart 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.

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

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings December 2010

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing a flattening for most measures with the "buyer traffic" index weakening to 11 as home builders continue to plod through the weakest activity seen in generations.

It's important to recognize that currently each sentiment index is showing year-over-year declines with each still sitting very near the lowest levels seen in over 20 years, a testament to the significance of the latest pullback.

Further, the "buyer traffic" index is showing the weakest results pulling back some 15.38% since December of 2009 and sitting just above the lowest level ever recorded.

The new home market will likely not resume any significant form of healthy function until the considerable overhang of inventory is cleared.

Production Pullback: Industrial Production November 2010

Today, the Federal Reserve released their monthly read of industrial production showing a notable improvement with total industrial production climbing 0.42% from October and 5.38% above the level seen in November 2009.

This report appears to indicate there November brought a notable improvement bucking the recent weakening trend and seemingly indicating that the expansion will continue.

The Empire State Manufacturing Index: December 2010

The Empire State Manufacturing Survey consists of a series of diffusion indices distilled from a monthly survey of New York regional manufacturing executives and seeks to identify trends across 22 different current and future manufacturing related activities.

Today’s report indicated expansion for current activity and a slight weakening for future activity with the current business conditions index leaping to 10.57 while the future conditions index declined to 48.86.

Current new orders increased to a weak expansion of 2.60 while future new orders improved slightly to 53.41.

Reading Rates: MBA Application Survey – December 15 2010

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 surged another 18 basis points to 4.84% since last week marking the fifth consecutive weekly increase while the purchase application volume declined 5.0% and the refinance application volume declined a 0.7% over the same period.

It's important to note that rates have been, more or less, trending up for about nine weeks now and coincidentally somewhat in-line with the Fed making QE2 official.

While early scuttlebutt about QE2 measures worked to depress mortgage rates earlier this year, it appears that the actual implementation of the measures is not currently working to force them down any lower resulting in continued poor trends for purchase and refinance activity.

The purchase application volume remains near the lowest level seen in well over a decade while refinance activity continues to slow.

Could the Fed have reached a limit on the long end of the rate curve? We will have to wait to find out.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages as well as one year ARMs since 2006 (click for larger dynamic full-screen version).

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

Conspicuous Correlation: Retail Sales November 2010

Today, the U.S. Census Bureau released its latest nominal read of retail sales showing a notable increase of 0.8% since October bringing the total increase since last year to 7.7% on an aggregate of all items including food, fuel and healthcare services.

Discretionary retail sales including home furnishings, home garden and building materials, consumer electronics and department store sales increased 0.74% from October and climbed 5.81% above the level seen in November 2009 while, adjusting for inflation, “real” discretionary retail sales increased 4.68% over the same period.

On a “nominal” basis, there had appeared to be “rough correlation” between strong home value appreciation and strong retail spending preceding the housing bust and an even stronger correlation when home values started to decline.

The following chart shows the year-over-year change to nominal discretionary retail sales and the year-over-year change to nominal the S&P/Case-Shiller Composite home price index since 1993 and since 2000.

As you can see there is, at the very least, a coincidental change to home values and consumer spending during the boom and then the bust, but as home values have continued to decline, retail spending has remained low but has not continued to consistently contract.

Looking at the chart below (click for full-screen dynamic version), adjusted for inflation (CPI for retail sales, CPI “less shelter” for S&P/Case-Shiller Composite) the “rough correlation” between the year-over-year change to the “discretionary” retail sales series and the year-over-year S&P/Case-Shiller Composite series seems now even more significant.

Recession Redux?: December 2010

With much of the econ-finance talk these days still centered around the possibility of a looming “double-dip” let’s take a closer look at two particularly sensitive and accurate leading indicators of our economic health to see if we can tease out the future trends.

First, the Federal Reserve Bank of New York is known to use the yield curve (or more specifically the spread between the 10 year and the 3 month treasury yields) to calculate a probability of recession.

This method appears to have been spearheaded by Professor Arturo Estrella of the Rensselaer Polytechnic Institute and Professor Frederic Mishkin of the Columbia Business School as outlined in the June 1996 issue of Current Issues in Economic and Finance, a journal published by the Federal Reserve Bank of New York.

The yield curve probability method is said to have a nearly perfect track record at predicting recessions some two to six quarters ahead with only one false positive, a period in 1967 that many economists, most notably the late Milton Friedman, considered to have been a credit crunch/mini-recession even though the NBER does not officially recognize it as such.

Another important leading indicator with a solid track record is the Economic Cycle Research Institutes (ECRI) weekly leading indicator (WLI).

When the growth component of the WLI turns strongly negative (< -6) it generally means a notable slowdown or recession is in the offing.

So what are these two important indicators saying about our current economic situation?

The yield curve spread indicator is indicating that the probability of recession is nearly zero while the ECRI leading index is still showing significant weakness with the growth component currently at a negative level of -1.5.

Index of Stress: December 2010

The Federal Reserve Bank of St. Louis recently began publishing a new weekly index that seeks to track the general level of financial stress.

As periods of financial stress come and go a whole host of fundamental economic indicators immediately adjust to meet the near and long term expectations of market participants

Interest rates, yields spreads, popular market volatility indices all move in real time giving observers unequivocal evidence of changes general sentiment.

The St. Louis Fed has devised a method of crunching eighteen of these sensitive indices down into one convenient index it calls the St. Louis Fed Financial Stress Index (STLFSI).

The latest results of the STLFSI indicate that the level of financial stress has remained largly flat in the last few weeks hovering at a level of .35 at since mid-October.

IEIF France and European Property Prices: November 2010

One of the most interesting and damming bits of evidence that tipped many off to the existence of a significant real estate bubble during the early 2000s was the fact that dramatically increasing property prices were occurring in most industrialized nations.

The U.S., U.K., France, Ireland, most of continental Europe, Canada, Australia and elsewhere were all simultaneously experiencing significant property booms thereby thwarting, more or less, many of the “limited supply” and “Superstar Cities” arguments that sought to justify individual regions explosive appreciation.

Today we know that this massive boom in real estate was more a function of financialization and credit availability rather than fundamentals.

The latest data from the Institut de l'Epargne Immobilière et Foncière (IEIF), a French research and analysis firm, suggests that property prices in France and Europe declined during most of November but now appear to be climbing a bit and continuing to increase at annual rate of about 11%.

U.S. vs Canadian Housing Price Mashup!: September 2010

Teranet/National Bank of Canada produces a complete line of Canadian home prices indices using the same repeat sale methodology as the S&P/Case-Shiller allowing for an interesting comparison against home prices here in the US.

Mashing-up the Teranet/NBC Composite-6 index to the S&P/CSI Composite-10 both rebased to the year 1999 provides a pretty decent “apples-apples” comparison as both the Teranet/NBC Composite-6 and S&P/CSI Composite-10 share the purpose of narrowly including just the top largest metros for their respective country.

Looking at the chart (click for full-screen dynamic version) you can see that while the Teranet/NBC index is currently showing a pretty exceptional rebound with annual percentage increases of nearly 7.86%, it still has a ways to go in order to match the pre-bust US levels.

Further, both series are showing a notable slowdown to price appreciation on a year-over-year basis.

Browse the full catalog of Canadian home price indices provided by Teranet/National Bank of Canada.

The Globe of Bubbles!?: U.K. vs U.S. Home Prices November 2010

One of the more interesting and most dramatic features of the housing bubble days was how pervasive and broad the mania was, encompassing a multitude of regional housing markets across the United States and around the globe.

Today, post-housing crash, we are still seeing property markets continuing to move together somewhat as governments around the globe scramble to prop up quickly deflating housing assets with boondoggles that quickly reveal themselves as being mere temporary distortions to a trend the remains "organically" in decline.

Comparing the S&P/Case-Shiller (CSI) index to that of the two popular U.K. home prices indices you can see that now all three indices are showing some significant signs of deceleration.

The following chart (click for dynamic full-screen version) shows S&P/Case-Shiller Composite-10 series along with the Nationwide and Halifax U.K. series.

U.K. Home Prices: Halifax and Nationwide November 2010

The latest release of the two most prominent home price indices for the United Kingdom are continuing to signal that the recent up-trend seen in U.K. home prices may be drawing to a close.

The “Nationwide” series, indicated that U.K. home prices declined since October dropping 0.6% and remaining just 0.39% above the level seen last year while the “Halifax” series declined by a whopping 1.25% since October and falling 2.42% below the level seen in November 2009.

Both indices are similar to our own S&P/Case-Shiller data series in that they both implement a methodology that seeks to standardize the quality homes included as source data and track the price changes occurring between sales instead of simply tracking the distorted average or median sales price.

The following chart (click for full-screen dynamic chart) show the price movement since 1991 to each index.

Radar Watching: Look Out Below!

As I have noted in the past, since the home price index data provided by Radar Logic is more timely, unadjusted and un-smoothed it is particularly useful for gaining deeper visibility over our housing markets especially in light of the distortions created by the massive government tax gimmick and other malfeasance.

By contrast, recognize that because the S&P/Case-Shiller (CSI) data is a two month lagged and a three month moving average, the index data will reflect price movement resulting from the government's housing tax scam (as BostonBubble pointed out) until at least the February 2011 release.

The Radar logic data, on the other hand, while lagged by 60 days is reported daily and, more importantly, is NOT SMOOTHED or adjusted so you can expect to see the underlying trends more precisely and substantially sooner than with the CSI.

As for the latest trends, it’s important to note that the 25-MSA Composite is continuing to show significant year-over-year declines and a slumping direction that appears bound to wipe-out the low value reached in March of 2009 prior to the government's massive housing boondoggle.

The latest data shows that as of the middle of early October, prices are 1.91% below the level seen in October 2009.