On The Stamp: Food Stamp Participation October 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 24.04% while individual participation, as a ratio of the overall population, has increased 21.14%.

The October 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 37.03% on a year-over-year basis to $5,066,750,340 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.

Market Conflict

As I noted in the prior post, the commercial paper (CP) market is essentially a private debt market used by corporations to fund typical recurring operations and as such, should reflect general business conditions.

Likewise the S&P 500 index is accepted as a general measure of business activity.

As we know, the S&P 500 has been on a tear since March 2009 as “investors” have determined that current and future business conditions warrant a substantial increase in share price valuation.

But what is the commercial paper market telling us about general business conditions?

As I noted before, the latest CP outstanding shows the greatest year-over-year contraction on record providing a stark contrast to the movement seen for the more speculative S&P 500 index.

One of these measures is depicting the reality for general business conditions but giving the speculative nature of the stock market and the fundamental function of the commercial paper market, I suspect business activity is continuing to contract and that the CP market is the more realistic gauge.

Outstanding Contraction!: Commercial Paper Outstanding January 11 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 39.03% decline year-over-year.

It's important to note that at $1.075 trillion, total commercial paper outstanding is 15.4% smaller that the level seen in the trough of the dot-com recession and just .01% above the low seen of this cycle.

Envisioning Employment: Employment Situation December 2009

Today’s Employment Situation Report showed continued weakness with the unemployment rate holding steady at 10.0% while the Establishment survey showed a decline of 85,000 net non-farm jobs since November.

Although the severity of the jobs decline continues to abate, 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 February 2000 while as a ratio of the civilian population we are at the lowest level of participation seen since August 1986.

Further, 53 of the last 120 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 non-farm job losses to 7.340 million jobs or a 6.34% 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 32.44% or 1,121,000 jobs since then, appear to be headed still lower.

Also note that independently, “residential building” has lost 34.34% of its payrolls or 351,100 jobs since it peaked during September 2006 and that “residential specialty trade contractors” have lost 31.84% of its payrolls or 776,800 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 6.04%) 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.

Full Time Workers Fully Under Pressure: December 2009

Today’s employment situation report showed that the full time unemployment rate declined slightly to 10.9% 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 December 2009

Today’s Employment Situation report showed that in September “total unemployment” declined slightly to 17.2%.

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 26.28% on a year-over-year basis while the spread between the “traditional” and “total” unemployment rates increased slightly to 7.3%.

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

Benefit Explosion!: Extended Unemployment Claims January 07

While today’s jobless claims report continued to show a steady trend down to both initial and continued unemployment claims with a nearly textbook peak shaping up, considering the federal extended claims data offers a more dire view of the state of the job market and of the economy as a whole.

Since the middle of 2008 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 5.43 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 5.09 million people that are currently counted as receiving traditional continued unemployment benefits, there are well over 10 million people on state and federal unemployment rolls.

Mid-Cycle Meltdown!: Jobless Claims January 07 2010

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims increased by 1,000 to 434,000 claims from last week’s revised 433,000 claims while “continued” claims decreased 179,000 resulting in an “insured” unemployment rate of 3.6%.

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.

On the other hand, it's important to note that the majority of the claimants falling out of the continued claims series have ended up on the federal extended benefit and EUC 2008 rolls so caution should be used when interpreting nature of the peak in continued claims.

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 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 – January 06 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 jumped 26 basis points since the last reporting period (December 23rd) to 5.18% while the purchase application volume decreased 0.4% and the refinance application volume decreased 32.10% 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).

Pending Home Sales: November 2009

Today, the National Association of Realtors (NAR) released their Pending Home Sales Report for November showing a significant 16% decline since October as buying activity abated likely as a result of the extension of the government sponsored housing tax gimmick lessening the urgency of the manic herd buying behavior seen in October.

Still, on a year-over-year basis, pending home sales increased notably jumping 15.5%.

Meanwhile, the NARs chief economist Lawrence Yun is gearing up for another "surge" in the Spring as "buyers" panic into home purchases as a means of capturing a mere $8000 tax carrot.

"The fact that pending home sales are comfortably above year-ago levels shows the market has gained sufficient momentum on its own. We expect another surge in the spring as more home buyers take advantage of affordable housing conditions before the tax credit expires."

The following chart shows the 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).

Look at the seasonally adjusted pending home sales results:

• Nationally the index increased 15.5% as compared to November 2008.
• The Northeast region increased 14.7% as compared to November 2008.
• The Midwest region increased 9.2% as compared to November 2008.
• The South region increased 14.7% as compared to November 2008.
• The West region increased 21.4% as compared to November 2008.

Construction Spending: November 2009

Today, the U.S. Census Bureau released their November read of construction spending showing a continued slowing of the government’s tax-carrot fueled bounce in residential construction spending while indicating continued weakness to non-residential construction spending.

Even with the governments tax-credit gimmick, residential construction spending is still 19.24% below the level seen last year and a whopping 62.93% below the peak set in March 2006.

Worse off though was private single family residential construction spending which declined 25.24% as compared to November 2008 and a truly grotesque 75.72% from the peak set in February 2006.

Non-residential construction spending, currently accounting for over half of all private construction spending, posted another significant year-over-year decline of 20.62%.

The following charts (click for larger versions) show private residential construction spending, private residential single family construction spending and private non-residential construction spending broken out and plotted since 1993 along with the year-over-year and peak percent change to each since 1994 and 2000 – 2005.

Double-Dip?... Try Triple

Much of the bearish attention these days is focused on discerning a so called “double dip” shaping up as the next major macroeconomic trend yet a look back at many decades of recessionary circumstances shows scant evidence that such phenomena occur organically.

On the other hand, what is the true definition of a double dip?

How long or short does an expansion have to run between dips and what are the primary measures that determine the thoroughness and validity of that expansion?

The following chart shows the consumer price index for food goods running back to 1913 along with band overlays indicating each recession and depression.

Although there have been a good number of recessions since 1913 (nearly 20), since the Great Depression the only generally accepted occurrence of a “double dip” recession was the period between 1980-82 when former Federal Reserve chairman Volcker forced the condition as a means of stamping out a serious bout of inflation.

So, although the early 80s period is our prototypical example of “double dip” it came about as a direct result of monetary policy not as a result of naturally weak economic conditions yielding to another leg down as we speculate might occur today.

This would seem to indicate that recessionary periods generally tend to flush enough of the bad out of the system so as to provide for a subsequent period of growth not ongoing fragility.

Yet, considering the weak definition of economic double dips and their intervening expansion as well as some unprecedented recent trends may lead one to hold a more dire outlook.

First, consider the following chart showing the “Real” S&P 500 index (inflation adjusted using CPI) and non-farm population ratio since 1950.

As you can see from the chart above, between the early 1960s and 2000 economic expansions (except the 80s double dip) typically brought an increasingly larger percentage of the work age population into the workforce.

Since 2000 though, the job picture has been so weak that participation in the workforce has been effectively in decline for a decade… a lost decade for jobs where over 44% of the time workers were facing an economy that was shedding jobs.

The 2000s were so weak, in fact, that less than 500K net new non-farm jobs were created for the entirety of the decade while the work age population grew by more than 20 million.

Further, real stock values (given by the S&P 500 adjusted with CPI) peaked and trended down very similarly to the weak job participation.

This begs the questions “Was the 2000s really one large double-dip?” and “Are we actually headed for a triple-dip?”

The answer to those questions will likely be definitively determined decades from now when the economic dust of this whole ugly period settles but considering the severity of the jobs situation and the weakness of stocks it would appear easy to conclude that the post-dot-com recession and the great housing recession were effectively united by only the very weakest of technical expansions.

This would appear to argue for the 2000s being considered nothing short of a major “organic” double dip episode.

If you accept the notion that an organic double-dip actually occurred throughout the 2000s then the future may be somewhat of a foregone conclusion… more weak job conditions, more weak economy and likely another leg down.

Yet, as with the period between 2002-2006, any weak expansion may feel legitimate and may trend longer than our quick prototypical 80s double-dip so while the third dip may be approaching, it may not feel like it until it’s upon us.