Mid-Cycle Meltdown?: Jobless Claims December 24 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims jumped 30,000 to 586,000 from last week’s revised 556,000 claims while “continued” claims declined 17,000 resulting in an “insured” unemployment rate of 3.3%.

It’s very important to understand that today’s report continues to reflect employment weakness that is strongly consistent with past severe recessionary episodes and that this signal is now so strong and sustained that a significant 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.

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 recently, one could make the case that we were again experiencing simply a mid-cycle slowdown but now that 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 recently, 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 – December 24 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 14 basis points since last week to 5.04% while the purchase application volume increased 10.63% and the refinance application volume jumped 62.62% compared to last week’s results.

It’s important to note though that although the steady decline in mortgage rates has likely played a significant role in the large increases in refinance application volume, it’s also altogether possible that the MBAA has some difficulty in seasonally adjusting their numbers around the November and December periods.

As you can see on the charts below, November through January usually brings some erratic spikes to the volume indices but the cause, at least in some part, is likely the result of troubles seasonally adjusting a noisy weekly series and not an actual spontaneous doubling of refinance activity.

As was noted last year, it’s probably sensible to wait until February to draw a final conclusion.

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).

GDP Report: Q3 2008 (Final)

Today, the Bureau of Economic Analysis (BEA) released third and final installment of the Q3 2008 GDP report showing the second contraction in four quarters with GDP declining at an annual rate of -0.5%.

Looking at the report more closely though, the top-line GDP result would have been much weaker had it not been for a surprise and truly unusual 18.0% surge in national defense spending that, combined with a healthy increases in other federal, state and local government spending, added over 1% of growth.

Fixed investment and personal consumption, on the other hand, provided significant drags on growth with non-residential investment declining -1.7%, residential investment declining -16.0% and personal consumption expenditures declining -3.8% led by a whopping -14.8% drop-off in durable goods.

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

Existing Home Sales Report: November 2008

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for November clearly showing a dramatic new leg down in the decline of home sales and prices as the historic economic shocks of September through November work to lay waste to consumer confidence and sideline buyers.

Furthermore, we are continuing to see stunning declines to the median sales price for both single family homes and condos across virtually every region.

The NAR leadership, which now includes their new president Charles McMillan, is continuing to become noticeably more pessimistic about the future while simultaneously turning to Washington for handouts as Lawrence Yun notes:

“The quickly deteriorating conditions in the job market, stock market, and consumer confidence in October and November have knocked down home sales to another level. We hope the home sales impact from the stock market crash turns out to be short-lived, as was the case in 1987 and 2001… It is, therefore, imperative to provide incentives for homebuyers to get back into the market. It also depends on how effectively Congress and the new administration can help facilitate the short sales process and unclog the mortgage pipeline – impediments remain for some buyers with good credit,”

The following (click for larger versions) are charts showing sales for single family homes, plotted monthly, for 2006, 2007 and 2008 as well as national existing home inventory and month supply.

New Home Sales: November 2008

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for November showing continued deterioration in demand for new residential homes across every tracked region resulting in a startling 35.29% year-over-year decline and a truly whopping 70.70% peak sales decline nationally.

It’s important to keep in mind that this stunning year-over-year decline is coming on the back of the significant declines seen in 2006 and 2007 further indicating the enormity of the housing bust and clearly dispelling any notion of a bottom being reached.

Additionally, although inventories of unsold homes have been dropping for well over a year, the sales volume has been declining so significantly that the sales pace now stands at an astonishing 11.5 months of supply.

The following charts show the extent of sales declines seen since 2005 as well as illustrating how the further declines in 2008 are coming on top of the 2006 and 2007 results (click for larger versions)


Look at the following summary of today’s report:

National

• The median sales price for a new home declined 11.52% as compared to November 2007.
• New home sales were down 35.29% as compared to November 2007.
• The inventory of new homes for sale declined 25.5% as compared to November 2007.
• The number of months’ supply of the new homes has increased 21.1% as compared to November 2007 and now stands at 11.5 months.

Regional

• In the Northeast, new home sales were down 27.3% as compared to November 2007.
• In the Midwest, new home sales were down 34.9% as compared to November 2007.
• In the South, new home sales were down 38.1% as compared to November 2007.
• In the West, new home sales were down 32.2% as compared to November 2007.

Crashachusetts Existing Home Sales and Prices: November 2008

Today, the Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for November showing that single family home sales completely collapsed dropping 21.8% on a year-over-year basis while condo sales crumpled a staggering 27.3% over the same period firmly indicating that a new and dramatic leg of the housing downturn has commenced.

Further, the single family median home value declined a whopping 14.2% on a year-over-year basis to $283,000 while condo median prices dropped 9.1% to $250,000.

Clearly, the impact of the recent stock market crash and ongoing economic crisis is bearing down on both consumer sentiment and, more fundamentally, credit availability resulting in a significant pullback in spending on homes and other costly purchases.

It’s perfectly clear now that home sellers that choose to wait out the “down market” did so in vain as the 2008 selling season draws to a close likely the last opportunity to sell any residential property at anywhere near the prices set in the peak boom years.

With confidence depressed and eroding and sales volumes this low Boston area home prices have nowhere left to go but down.

MAR reports that in November, single family home sales decreased 21.8% as compared to November 2007 with a 13.0% decline in inventory translating to 12.2 months of supply and a median selling price decline of 14.2% while condo sales dropped 27.3% with an 21% decline in inventory translating to 13.2 months of supply and a median selling price decline of 9.1%.


As in months past, be on the lookout for the inflation adjusted charts produced by BostonBubble.com for an even more accurate "real" view of the current home price movement.

November’s key MAR statistics:

• Single family sales declined 21.8% as compared to November 2007
• Single family median selling price declined 14.2% as compared to November 2007
• Condo sales declined 27.3% as compared to November 2007
• Condo median price declined 9.1% as compared to November 2007
• The number of months supply of single family homes stands at 12.2 months.
• The number of months supply of condos stands at 13.2 months.
• The average “days on market” for single family homes stands at 137 days.
• The average “days on market” for condos stands at 149 days.

Collapsedachusetts Existing Home Sales Preview: November 2008

Sources inside the Massachusetts Association of Realtors (MAR) report that this tomorrow's monthly existing home sales results will show that November’s single family home sales completely collapsed dropping 21.8% on a year-over-year basis while condo sales crumpled a staggering 27.3% over the same period firmly indicating that a new and dramatic leg of the housing downturn has commenced.

Further, the single family median home value declined a whopping 14.2% on a year-over-year basis to $283,000 while condo median prices dropped 9.1% to $250,000.

Clearly, the impact of the recent stock market crash and ongoing economic crisis is bearing down on both consumer sentiment and, more fundamentally, credit availability resulting in a significant pullback in spending on homes and other costly purchases.

It’s perfectly clear now that home sellers who choose to wait out the “down market” did so in vain as the 2008 selling season draws to a close likely the last opportunity to sell a residential property at anywhere near the prices set in the peak boom years.

With confidence depressed and eroding, economic conditions weakening, credit standards tightening and sales volumes crumbling, Boston area home prices have nowhere left to go but down.

It’s also important to note that the November’s single family home sales count was the lowest November count on record since 1991 and at 2339 units sold was 43.63% below the record November peak set in November 1998.

The following charts (click for larger) show the decline in single family home sales since 2005.

Notice that November 2008 registered a home sales count well below the 2007 level as well as indicating that the December’s results may very well drop below 2000 units, a significant decline.

U.S. Invasion: U.K. Home Prices November 2008

The two most prominent and long running monthly U.K. housing price indices continue to register accelerating year-over-year declines resulting in the largest peak decline seen in at least 17 years.

The “Nationwide” series, which reported data through November, indicated that U.K. home prices declined 13.9% on a year-over-year basis while the “Halifax” series, which reported data through November, indicated that U.K. home prices declined 16.44% on a year-over-year basis.

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 charts (click for larger) show the price movement since 1991 to each index.
Notice that annual price appreciation peaked in 2003 and continued to weaken consistently until early 2008 when it actually devolved into annual depreciation.

Question(s) of The Day - NAR Should Pay A Serious Price?

Given that Americans likely still see their homes as their most valuable and important asset and given all the financialization and brokering that has co-opted the exchange process, shouldn’t the housing industry-asset class-market be regulated like any other publicly traded security or investment?

Why should the National Association of Realtors (NAR) be allowed to make outrageous claims and growth predictions without having to disclose their inherent interest or even a “past performance is not a guarantee of future results …” statement?

Why should NAR be allowed to control all the current and historical sales, selling price, inventory, supply and listing information as well as being the main interface to the media for its interpretation?

Isn’t it time we acknowledge the fact that NAR was one of the four (Wall Street [investment banks, ratings agencies, etc.], Government [Barney Frank, Greenspan, Fannie and Freddie], NAR and American “Homeowners”) main perpetrators of the Great Asset Bubble?

Shouldn’t NAR pay a serious price for its contribution?

Shouldn’t controls be put in place to prohibit their mischief in the future?

Unemployment Mashup – MA vs. RI November 2008

As I had noted in my prior posts, historically it has been very unusual for there to be more than a 1.5% difference (either more or less) between the unemployment rates if Massachusetts and Rhode Island.

Lately though, we are seeing a historically unusual spread between Rhode Island’s high and accelerating rate and Massachusetts’ far lower but rising rate.

In fact, the current 3.7% spread now significantly exceeds all spreads seen in at least 40 years.
This indicates that either Rhode Island’s current rate would need to fall dramatically or the Massachusetts rate would need to increase sharply…. My sense, especially in light of the financial turmoil seen since September, is that Mass will be the one playing catch-up.

Today’s state and regional unemployment report shows that, in November, the Rhode Island unemployment rate rose again to 9.6% while the Massachusetts rate jumped to 5.9%.

In November, Massachusetts experienced the largest year-over-year gain since the recessionary environment that followed the tech-led dot-com bust forcing the spread between Rhode Island and Mass to shrink slightly for the first time, to 3.7%, indicating that Mass may finally have reached a point of explosive unemployment growth that will ensue over the next several months.

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

Today, the Federal Reserve Bank of Philadelphia released the results of their Business Outlook Survey for December showing a dramatic resumption of deterioration of the regions manufacturing sector with the current activity index indicating substantial contraction at -32.9.

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 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 the charts below, and now having been officially confirmed by the NBER, the business outlook survey again very accurately predicted the start of the current recession and further continues to indicate contraction.


Also, today’s results now certainty show that any recent parallel to the stagflationary eras of the 70s and early 80 have given way to a stronger deflationary force bringing down prices, new orders and employment simultaneously.

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 that current orders, future employment and current prices paid are all now trending down.

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.

Follow The Leader: Index of Leading Economic Indicators November 2008

Today’s results of the Conference Board’s Leading Economic Indicators continue to indicate troubled times ahead declining 0.4% from October and declining 3.70% compared to November 2007, leaving the index at 99.0.

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 11 consecutive and significant year-over-year declines strongly suggests that overall the components of the index are indicating that recession is upon us.

Mid-Cycle Meltdown?: Jobless Claims December 18 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims declined 21,000 to 554,000 from last week’s revised 575,000 claims while “continued” claims declined 47,000 resulting in an “insured” unemployment rate of 3.3%.

It’s very important to understand that today’s report continues to reflect employment weakness that is strongly consistent with past severe recessionary episodes and that this signal is now so strong and sustained that a significant 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.

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 recently, one could make the case that we were again experiencing simply a mid-cycle slowdown but now that 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 recently, 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.