Recessionary Transfer Payment Expansion

Personal current transfer receipts represent the total of all benefits received by persons for which no current services are performed and include all payments that are made by the government and businesses to individuals and nonprofit institutions.

These payments include everything from old age and disability benefits to workers’ compensation to Medicare, public assistance, food stamps, the earned income tax credit and unemployment insurance as well as a whole host of other benefit and transfer receipts.

Not surprisingly, annual increases in the rate of personal current transfer receipts correlates well with recessions and their associated unemployment spikes.

Currently, transfer receipts are increasing at an annual rate of 13.65% and stand at just over $2.175 trillion.

Looking at the chart below (click for dynamic full screen version) that plots the annual percent change to personal current transfer receipts against the annual percent change of the civilian unemployment rate you can see that not only did the 2000s see a weak jobs “recovery” (one of the slowest post-recession declines of the unemployment rate) but the annual rate of increase of transfer payments has been, more or less, trending up since hitting a low of 3.82% in early 2003.

Also note that transfer payments have virtually never declined… they tend to trend up during expansions and absolutely explode larger during recessions.

Reading Rates: MBA Application Survey – February 10 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 declined 7 basis points since the last week to 4.94% while the purchase application volume declined 7.0% and the refinance application volume increased 1.4% 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).

Economic Jolt: Job Openings and Labor Turnover December 2009

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 24.82%, job “hires” declined 9.44%, job “layoffs and discharges” decreased 12.85% and job quits declined dropping 16.68%.

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 28 consecutive months.

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 32nd consecutive decline on a year-over-year basis further confirming the tremendous weakness seen in the job market.

With the latest revisions by the BLS, job “separations”, whereby workers and their employers go their separate ways by one means or another (layoffs, retirement, termination, quitting, etc.), appear to be flattening as a result of nearly equivalent but opposing movements in quitting and layoff 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.

Layoff activity, now separated into its own series and as you can see from the chart below is showing a dramatic surge that is roughly equivalent but opposite to the decline seen in quitting activity.

Making His Case: The Poet

Karl Case may be retired from teaching but he’s still very engaged in housing affairs as witnessed by his recent appearance on News Hour as well as this interesting poem he penned reciting his perspective on the housing bubble and its ongoing unwind.

Liquidate, Liquidate, Liquidate!

At the onset of the Great Depression, then treasury secretary Andrew Mellon became a very unpopular public servant by advising president Hoover to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

Popular interpretation, particularly among Keynesians and other conventional economists, will have you believe that Mellon’s advice was tantamount to disaster, ushering in the worst dynamics of the depression years.

Yet, we all fully accept that the "roaring 20s" brought many rotten excesses not the least of which was over-indebtedness and excessive stock speculation.

Similarly, today it’s generally accepted that we have become unsustainably indebted (households, firms, the state) while simultaneously participating in two of the largest speculative bubbles in human history in the form of internet stocks and housing.

We acknowledge that the “rottenness” is a direct result of many years of easy money, financialization and speculative behavior… we all know that the cost of living, particularly as a consequence of housing prices, is too high… we have a hunch that people don’t work very hard yet the government has seen fit only to prop in an Keynesian effort to not repeat the “mistakes” of Mellon and the response of the early 1930s.

So, how can government propping present a better path through these troubling economic times?

Would it not be absurd for today’s administration to suggest “prop labor, prop stocks, prop business, prop real estate… it will preserve the excesses and rottenness of the system. High costs of living and high living will be safeguarded…”?

In any event, however slowly, the excesses will continue to purge.

On that note, the latest read of business bankruptcies indicates that chapter 7 (total liquidation) filings are up significantly on an annual basis and now sit at a level not seen since the late 1980s.

In the second quarter of 2009 there were over 10,600 chapter 7 filings, nearly double the average seen throughout the 2000s and even significantly higher than the filing spike seen as a result of the 2005 legislative changes.

The Seven Faces of Malaise

The following is a run-down of seven of the most important trends currently playing out for individuals and households.

Any durable recovery must include an easing of all of these measures though some may lead while others lag.

Total Unemployment represents the broadest measure of unemployment and includes the “traditional” unemployment measure combined with all “marginally attached” and otherwise “underutilized” workers (including discouraged workers).

Persons unemployed for 27 or more weeks represents the total of all long term unemployed individuals who have yet to exhaust their unemployment benefits.

Total extended unemployment claims represents the total of all individual receiving traditional continued unemployment benefits as well as participating in both of the federal extended benefit programs (the “extended benefits” and “EUC 2008” from recent legislation).

The S&P/Case-Shiller Composite 10 home price index represents the general price movement of residential real estate nationally.

The Fannie Mae seriously delinquent series captures the severity of the foreclosure wave currently washing over the nation as well as discloses a serious conundrum for Washington as it seeks to “prop” the housing market at the expense of the solvency of these colossal government sponsored boondoggles.

The number of households participating in the federally sponsored food stamps program has been dramatically increasing over the past two years and clearly reflects the tremendously weak economic times for a large percentage of the U.S. population.

As expected total non-business bankruptcies, including Chapter 7, 11 and 13 across all regions, have increased significantly throughout the economic crisis.

Note: the dramatic surge and decline in 2005 was a result of a surge of filings in advance of the 2005 legislative changes to the process of personal bankruptcy.

On The Stamp: Food Stamp Participation November 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 25.45% while individual participation, as a ratio of the overall population, has increased 21.79%.

The November 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 43.41% on a year-over-year basis to $5,107,017,838 for the month.

Recovery-less Recovery: Unemployment Duration January 2010

Nothing says recovery less than a steadily increasing pool of unemployed workers facing the specter of a quickly increasing average (and median) length stint on unemployment.

In fact, as has been widely reported, the median and average stay on unemployment has simply exploded far surpassing the highest levels seen since records have been regularly kept.

Looking at the charts below (click for super interactive versions) you can see that today’s sorry situation far exceeds even the conditions seen during the double-dip recessionary period of the early 1980s, long considered by economists to be the worst period of unemployment since the Great Depression.

Currently, there are some 6.313 million civilian workers that have been unemployed for 27 weeks or more with the average stay on unemployment standing at a whopping 30.2 weeks and the median stay reaching 19.9 weeks.



Further, as you can see from past cycles, all three of these measures will likely eventually reach their peaks well after the official end of our current economic contraction.

In fact, the most recent two completed cycles (90s S&L crisis and dot-com bust contractions) saw duration of unemployment continue to grow for some two to four years after the technical end of their respective recessions… a solemn notion indeed.

One might consider, with such stark examples of epic structural unemployment, whether the future negative feedback functions associated to this brutal a bout of joblessness are currently being underestimated.

Full Time Workers Fully Under Pressure: January 2010

Today’s employment situation report showed that the full time unemployment rate declined notably to 10.4% of the civilian workforce but still remaining 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 January 2010

Today’s Employment Situation report showed that in January “total unemployment” declined notably to 16.5%.

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 increased 17.86% on a year-over-year basis while the spread between the “traditional” and “total” unemployment rates declined to 6.8%.

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

Envisioning Employment: Employment Situation January 2010

Today’s Employment Situation Report showed continued weakness with the unemployment rate declining slightly to 9.7% while the Establishment survey showed a decline of 20,000 net non-farm jobs since December.

It's important to recognize that with today's release the BLS revised the establishment non-farm payrolls series for the full year of 2009 (mostly as a result of the birth-death model) resulting in an additional 617,000 job decline for the year.

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 129.5 million non-farm jobs, we are currently at a literal level of employment first seen in September 1999 while as a ratio of the civilian population we are at 54.69%, the lowest level of participation seen since May 1985.

Further, 54 of the last 120 months showed declining jobs, easily the weakest decade long streaks in the post-war period with net monthly job losses occurring 45% of the time.

Finally, it’s important to recognize that today’s report brings the total private non-farm job losses to 8.5 million jobs or a 7.37% 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 37.64% or 1,298,800 jobs since then, appear to be headed still lower.

Also note that independently, “residential building” has lost 42.35% of its payrolls or 433,700 jobs since it peaked during September 2006 and that “residential specialty trade contractors” have lost 35.85% of its payrolls or 872,500 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 6.67% (now 5.87%) 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.