Question(s) of The Day - Shouldn’t Heads Roll at The Fed?

Here is an excellent post by expert analyst Ira Artman on how the Fed quantitatively underestimated the housing bust.

Was (is) the Fed as inept with the housing bubble as the SEC was with Madoff?

Shouldn’t heads roll?

Confidence Game: Consumer, CEO and Investor Confidence February 2009 (Preliminary)

This post combines the latest results of the Rueters/University of Michigan Survey of Consumers, the Conference Board’s Index of CEO Confidence and the State Street Global Markets Index of Investor Confidence indicators into a combined presentation that will run twice monthly as preliminary data is firmed.

These three indicators should disclose a clear picture of the overall sense of confidence (or lack thereof) on the part of consumers, businesses and investors as the current recessionary period develops.

Today’s preliminary release of the Reuters/University of Michigan Survey of Consumers showed a continued slump for consumer sentiment with a reading of 56.2 and dropping 20.62% below the level seen in February 2008.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) declined notably to 49.1 remaining 21.31% below the result seen in February 2008.

As for the current circumstances, the Current Economic Conditions Index increased slightly to 67.1 but remained 19.93% below the result seen in February 2008.

As you can see from the chart below (click for larger), the consumer sentiment data is a pretty good indicator of recessions leaving the recent declines possibly predicting rough times ahead.

The latest quarterly results (Q4 2008) of The Conference Board’s CEO Confidence Index declined dramatically to a value of 24, the lowest reading in the history of the index.

The January release of the State Street Global Markets Index of Investor Confidence indicated that confidence for North American institutional investors increased 21.2% since December while European confidence increased 6.7% and Asian investor confidence declined 0.3% all resulting in an increase of 12.1% to the aggregate Global Investor Confidence Index which now rests 13.24% below the result seen last year.

Given that that the confidence indices purport to “measure investor confidence on a quantitative basis by analyzing the actual buying and selling patterns of institutional investors”, it’s interesting to consider the performance surrounding the 2001 recession and reflect on the performance seen more recently.

During the dot-com unwinding it appears that institutional investor confidence was largely unaffected even as the major market indices eroded substantially (DJI -37.9%, S&P 500 -48.2%, Nasdaq -78%).

But today, in the face of the tremendous headwinds coming from the housing decline and the mortgage-credit debacle, it appears that institutional investors are less stalwart.

Since August 2007, investor confidence has declined significantly led primarily by a material drop-off in the confidence of investors in North America.

The chart below (click for larger version) shows the Global Investor Confidence aggregate index.

Question(s) of The Day - Facebook Censors For Stimulus?

UPDATE: Facebook weenies put NoStimulus.com ad back up!

Earlier today...

The twerps over at Facebook admit now to pulling a paid ad from NoStimulus.com apparently because it upset and/or offended some of their users.

NoStimulus.com is an online petition (I strongly encourage you to sign) created by Americans for Prosperity that simply seeks to remind our inept and corrupt government that there are, in fact, plenty of Americans who feel strongly against attempting to spend our way out of our current economic predicament.

You are certainly free to agree or not but I can hardly imagine that the content of their online ad could have justified removal from the popular social networking website.

The Facebook management are obvious cowards... no?

I’m closing down my (useless) Facebook account today… no big loss.

To deactivate your useless Facebook account simply login, choose "Settings" from the menu in the upper right and then choose the last action on the list in the center of the screen titled "Deactivate Account"... Then when they ask you the reason for your leaving... let loose!

The following is a clip outlining the purpose of the petition.

Conspicuous Correlation: Retail Sales January 2009

Today, the U.S. Census Bureau released its latest nominal read of retail sales showing a “unexpected” increase of 1.0% from December 2008 and a 9.7% decline from January 2008 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 experienced another significant decline falling 9.76% compared to January 2008.

Further, adjusted for inflation, “real” discretionary retail sales declined 9.32% since January 2008.

On a “nominal” basis, there 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 charts show my initial analysis plotting the year-over-year change to an aggregate series consisting of the primary discretionary retail sales categories that I termed the “discretionary” retail sales series and the year-over-year change to the S&P/Case-Shiller Composite home price index since 1993 and since 2000.


As you can see there was, 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.

One problem with this initial analysis is that both retail sales and the S&P/Case-Shiller Composite index are reported in “nominal” (i.e. non-inflation adjusted) terms and thus result in a somewhat skewed view especially for the retail sales data.



As you can see from the above charts (click for larger 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.

Mid-Cycle Meltdown?: Jobless Claims February 12 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims declined 8,000 to 623,000 from last week’s revised 631,000 claims while “continued” claims increased 11,000 resulting in an “insured” unemployment rate of 3.6%.

It’s important to note that although the last several reports have indicated a slight decrease in the seasonally adjusted initial jobless claims, the non-seasonally adjusted numbers are showing very large increases.

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 but as you can see, the pattern is still indicating that recession has arrived.

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

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.

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.

Until late 2007, one could make the case (as Fed chief Ben Bernanke surly did) 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 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.

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 now has we have fully entered, instead, a mid-cycle meltdown.

Reading Rates: MBA Application Survey – February 11 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 indicates that the average rate for a 30 year fixed rate mortgage decreased 9 basis points since last week to 5.19% while the purchase application volume declined 9.76% while the refinance application volume decreased a whopping 30.30% compared to last week’s results.

In past weeks I have speculated that the MBA has some difficulty seasonally adjusting their weekly series during the months of November to February and with the latest release I’m feeling more certain of this.

For example, although it’s obvious that when rates decline refinancing and purchase activity increases, the last two months of release would have you believe that purchase activity during the weeks just preceding and just after Christmas met or even exceeded the activity seen throughout the height of the summer selling season… an unlikely result that MUST carry with it some element of distortion.

It’s important to note that the purchase application volume now sits at the lowest point in at least two years even as rates remain exceptionally low.

In the coming weeks I hope to provide more evidence that demonstrates that these indices are slightly broken.

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).

Question(s) of The Day - Worse than Hank Paulson?

Are Secretary Geithner and his Treasury completely inept?

What’s with this website FinancialStability.gov? (pictured above)

Is that some sort of joke?

What did they spin that with, a 1996 copy of Microsoft FrontPage? Where is the rotating red animated gif that flashes “new… new... new” or the little digging construction worker?

Luckily the site included a few pages of bullet points to give us at least a little something…

Am I alone in concluding that there is literally nothing new in this new “attack” on the credit crisis?

Is this a worse Treasury than Paulson’s?

Economic Jolt: Job Openings and Labor Turnover December 2008

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 34.06%, job “hires” declined 21.21%, and “separations” jumped a whopping 15.17% fueled by the recent wave of job cuts and despite a 20.14% drop in “quits”.

These results are clearly indicating that the slowdown in the employment market has developed substantially over the last six months and now is quickly accelerating down into territory typical of severe recessionary contraction.

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 sixteen consecutive months strongly suggesting that the private sector is curtail future hiring activity.

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 twentieth consecutive decline on a year-over-year basis further confirming the tremendous weakness seen in the job market.

Job “separations”, whereby workers and their employers go their separate ways by one means or another (layoffs, retirement, termination, quitting, etc.), appear to be rising dramatically despite the inclusion of steadily decreasing “quitting” 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.

The Vicious Cycle: Personal Incomes and Expenditures Q4 2008

Keeping with my 2009 theme of the economic downturn spinning into a vicious cycling “prime bomb” let’s look today at how nominal and real personal income and consumption has performed during recent periods of recession.

Looking at the charts below (click for larger) it’s plain to see that nominally, recessionary periods prior to our current have tended to only slightly flatten personal income and personal consumption patterns.

The dot-com recession led to the most notable slowdown in nominal personal income with a 1.45% year-over-year increase seen at the start of 2002 while personal consumption appeared largely unaffected (likely as a result of mortgage equity withdrawal and poor education in matters of basic finance).

In “real” terms though (deflated with the PCE deflator), both personal income and personal consumption expenditures can show more notable flattening and even moderate contraction during recessionary episodes.

Looking at our current period you can see that we are experiencing a substantial decline in personal consumption while personal income is showing, more or less, the typical pattern despite a full quarter of deflationary prices.

Throughout 2009, I would expect that serious nationwide unemployment as well as lower earnings by firms will work to hold down incomes and likely even force them lower in both nominal and real terms.

This will result in a continued pullback in personal consumption expenditures and, in turn, more lower earnings by firms.

The vicious-cycle is now firmly in place with only its duration in question.

On The Margin: Total Unemployment January 2009

Today’s Employment Situation report showed that in January “total unemployment” continued its ascent and now stands at 13.9% of the civilian population or 32.6 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 has been skyrocketing as of late and has now with the latest 54.44% year-over-year increase has reached the highest level seen since the government began tracking the many measures of marginalized workers.

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

Notice that while the total unemployment rate has increased 54.44% since last year, the difference between the total unemployment rate and the traditional rate has jumped nearly 53.66%, its highest annual increase on record leaving the spread at its widest on record.

Envisioning Employment: Employment Situation January 2009

Today’s Employment Situation Report showed continued unequivocal and truly dramatic signs of a severely contracting recessionary economy with the unemployment rate jumping to 7.6% while the Establishment survey showed a massive decline of 598,000 non-farm jobs over the same period.

Further, there were considerable revisions to all periods from January 2004 on resulting in a stunning 2,648,000 million non-farm jobs lost in just the last six months and 3,742,000 private non-farm jobs shed so since the peak in December 2007.

With the latest news just littered with poor earnings reports and announcements of job cuts and layoffs cutting across all regions and most industries, the recessionary job loss trend now appears to be following a far more severe trend than seen during our prior two recessions.

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 24.93% or 861,600 jobs since then, appear to be headed lower.

Also note that independently, “residential building” has lost 26.65% of its payrolls or 272,500 jobs since it peaked during September 2006 and that “residential specialty trade contractors” have lost 24.43% of its payrolls or 595,900 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 6.13%) 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 now has dropped significantly below trend.