Envisioning Employment: Employment Situation April 2008

Today’s Employment Situation Report showed conflicting data with the Household survey indicating an increase of 362,000 jobs since March resulting in an unemployment rate of 5.0% while the Establishment survey showed a decline of 20,000 jobs.

Additionally, along with the weak establishment survey results seen in April comes additional downward revisions to February and March resulting in 233,000 private non-farm jobs being shed this year.

The report also confirmed continued and even peaking below trend growth overall and substantial declines in sectors directly related to residential real estate and construction.

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 March 2006 and declined 13.83% or 477,900 jobs since then, appear to be headed lower.

Also note that independently, “residential building” has lost 15.68% of its payrolls or 160,000 jobs since it peaked during September 2006 and that “residential specialty trade contractors” have lost 13.31% of its payrolls or 325,000 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.

As you can see, the “directly impacted” payrolls are declining at an increasing rate and that overall private non-farm payrolls, while continuing to increase, are doing so at a declining rate.

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% of Total Private Non-Farm Payrolls and now contracted to a degree similar to 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 latest expansion of payrolls has not been strong.

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 seems to be coming down.

As you can see, although 3.12% of the population currently is employed in a construction occupation, there is a chance that this percentage could drop below the trend.

Of course these lost jobs could shift to some other part of the labor force but the point is, the current ratio appears poised to drop and with it will inevitably go many construction jobs.

The Almost Daily 2¢ - A Better Path

Could there be anything more ironic than Larry Kudlow and his cadre of proud American “free” marketeers beaming with glee over yesterday’s GDP report which showed positive growth due in large part to a substantial increase in federal government spending?

I suppose under the current circumstances, big government consumption and the ultimate in “shock and awe” centrally planned manipulation of the markets of the “goldilocks” economy fit well with the Kudlow Creed.

Hypocrites.

For those looking for something a little more substantial I offer you a better path.

It’s called… (drum roll please)… “Reality”!

The truth is, the GDP report yesterday disclosed a number interesting data-points that, taken together with our working knowledge of the major issues at hand, provide clear evidence that the economy has hit the skids.

First, noting the obvious, Residential Fixed Investment is WAY down registering the ninth consecutive, and largest, negative quarter and the fifth (third consecutive) in which the decline erased over a full percent point from overall GDP.

Non-residential fixed investment declined substantially with both investments in structures and equipment and software simultaneously showing a notable drop-off, an unusual occurrence in an expanding economy.

Durable goods showed a rare and solid decline with the most notable weakness coming from motor vehicle, housing and furniture related spending.

Non-durable goods spending declined for food, fuel and other items and showed anemic growth for clothing and shoes while personal recreational services declined for the first time in at least three years.

Finally, aside from the strong contributions made by Federal government spending, there was a jump in private non-farm inventories that, although contributing .93% to overall GDP, may be signaling an unhealthy inventory build consistent with a recessionary environment of lower consumer spending.

Given what we know about the severity of the collapse of housing economy and its obvious effects on households and firms across America, should any of the above come as a surprise?

Would a recession really be a surprise? Even a severe recession?

So while Kudlow et al. continue to turn to the “predictions” rendered through the use of the internet gambling site Intrade for encouragement, why not stick to the fundamental trends that are so clearly taking shape and plan accordingly.

The Arlington Artifice: March 2008

This recurring monthly post tracks the latest results of the housing market seen in Arlington Massachusetts.

I choose Arlington as a result of the Boston Globe’s recently published and absurdly anecdotal and ludicrous farce about the town’s “hot” housing market.

The ridiculous tone and outright mishandling of the housing data by the Boston Globe “reporter” would almost be comical if it weren’t for the fact that the Globe’s editor, Martin Baron, ALSO blundered seriously when he responded to my email about the discrepancies.

Baron attempted to justify the articles contents and in so doing, he disclosed his disgracefully poor and obviously unsophisticated abilities with even the most basic economic data.

The March results again confirm that Arlington is by no means a “stand out” amongst its neighboring towns as Baron suggested in his email and, in fact, is following along on a path wholly consistent with the trend seen in the county, state, region and nation.

Why would an editor of a nationally recognized newspaper think that a single town would continue to function as an isolated bubble amongst a backdrop of the most significant nationwide housing recession since the Great Depression?

As I have shown in my prior posts, this data when charted and compared to other towns in the region proves there are absolutely no grounds to call Arlington’s market exceptional.

The most notable feature of the March results is unquestionably the low number of home sales with only 15 sales in March and 36 sales for the entire year to date, the lowest readings since the recessionary period of 1991.

Another important point to remember is that when sales decline dramatically the median selling price can jump wildly up or down since the small number of sales provides a small set with which to determine the “middle” selling price.

For example, for March the Cambridge median selling price of a single family home fell substantially, resting just a few thousand dollars above the median single family selling price for Arlington, an obvious distortion.

The following chart (click for much larger version) shows a history of Arlington’s March median sales price since 1988 along with the annual outcome. Notice first that although the latest result spiked up to a high of $540,000, the low sales count is clearly impacting the median selling price and March may end up being a little misleading as home sales pick up later this spring.

The next chart (click for much larger version) shows that home sales in Arlington have been essentially flat during the last 15 years, a result that is generally to be expected when looking only at the sales of one town in isolation. That being said though, Arlington has seen only 36 home sales this year, the lowest result on record since 1991.

The final chart shows how the year-to-date median sales price and combined sale count for Arlington, Bedford, Belmont, Cambridge and Lexington has changed since 1988. Notice again that the one month median price data is very volatile jumping radically up or down for each of town.

In review, the data shows that there is nothing exceptional about Arlington’s housing market proving clearly that the claims made in the Boston Globe article and later endorsed by its editor Martin Baron were entirely erroneous.

Construction Spending: March 2008

Today, the U.S. Census Bureau released their March read of construction spending again demonstrating the significant extent to which private residential construction is contracting particularly for single family structures while non-residential spending continued to grow essentially in-line with its recent expansion.

With the tremendous weakening trend continuing, total residential construction spending fell 19.90% as compared to March 2007 and 36.06% from the peak set in February 2006.

Worse off though was private single family residential construction spending which declined 36.14% as compared to March 2007 and a truly grotesque 54.56% from the peak set in February 2006.

Non-residential construction spending, currently accounting for just under half of all private construction spending, remains the only pillar of strength gaining 15.43% as compared to March 2007.

As was noted in prior posts, commercial real estate (CRE) appears to be coming under some pressure with increasing vacancy rates and falling prices.

Keep your eye on the last chart in the months to come for a clear indication of an continued pullback.

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.

Mid-Cycle Meltdown?: Jobless Claims May 01 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims increasing 35,000 to 380,000 from last week’s revised 345,000 claims and “continued” claims increased 74,000 resulting in an “insured” unemployment rate of 2.3%.

It’s very important to understand that today’s report continues to reflect employment weakness that is wholly consistent with past recessionary episodes and that unequivocal clarity will more than likely come in the next few releases.

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 (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.


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.

So, looking at the post-“doc com” recession period we can see the telltale signs of a potential “mid-cycle” slowdown and if we were to simply reflect on the history of employment as an indicator of the health and potential outlook for the wider economy, it would not be irrational to conclude that times may be brighter in the very near future.

But, adding a little more data I think shows that we may in fact be experiencing 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.

One 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.

I think there is enough evidence to suggest that our potential “mid-cycle” slowdown, having been traded for a less severe downturn in the aftermath of the “dot-com” recession, may now be turning into a mid-cycle meltdown.

GDP Report: Q1 2008 (Advance)

Today, the Bureau of Economic Analysis (BEA) released their first preliminary installment of the Q1 2008 GDP report showing a truly anemic annual growth rate of 0.6%.

This continuation of dramatically slower growth was primarily the result of accelerating declines in fixed residential investment, a substantial decline in fixed non-residential investment (particularly a 6.2% decline to non-residential structures), and far from outstanding growth in both the export of goods and services.

In fact, the continuation of typical growth rates for exports seems to further suggest that the exceptional growth seen during Q3 2007 was an temporary aberration, a result of there being a brief disconnect between the slowing U.S. economy (and weak dollar) and the rest of the world economies relative strength.

Now that the world economies are slowing as well, it’s unlikely that exports will provide much of a crutch against which the weakening U.S. economy can lean.

Residential fixed investment, that is, all investment made to construct or improve new and existing residential structures including multi–family units, continued its historic fall-off registering a whopping upwardly revised decline of 26.7% since last quarter shaving 1.23% from overall GDP.

Furthermore, combined with the sharp drop-off in Non-residential fixed investment, total fixed investment subtracted a whopping 1.5% from overall GDP easily exceeding the positive contributions made by all personal consumption of services in the quarter.

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

Reading Rates: MBA Application Survey – April 30 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 3 basis point since last week to 6.01% while the purchase application volume decreased by 4.8% and the refinance application volume plunged 16.7% compared to last week’s results.

It’s important to note that the average interest rate on an 80% LTV 30 year fixed rate loan is now well within the range seen throughout 2007 while the interest rate for an 80% LTV 1 year ARM remains elevated now resting 85 basis points ABOVE the rate of an average 80% LTV 30 year fixed rate loan despite all the herculean efforts by the Federal Reserve to bring rates down.

Also note that all application volume values reflect only “initial” applications NOT approved applications… i.e. originations… actual originations would likely be notably lower than the applications.

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).

S&P/Case-Shiller: February 2008

Today’s release of the S&P/Case-Shiller home price indices for February continues to reflect the extraordinary weakness seen in the nation’s housing markets with now 19 of the 20 metro areas tracked reporting year-over-year declines and ALL metro areas showing substantial declines from their respective peaks.

Furthermore, the decline to the 10 city composite index declined a record 13.55% as compared to February 2007 far surpassing the all prior year-over-year decline records firmly placing the current decline in uncharted territory in terms of relative intensity.

This report indicates that we have now firmly entered the serious price “free-fall” phase (look at the charts below) of the housing bust.

Topping the list of peak decliners was Las Vegas at -24.53%, Phoenix at -24.05%, San Diego at -23.97%, Detroit at -23.17%, Miami at -22.12%, Los Angeles at -21.58%, Tampa at -20.79%, San Francisco at -20.07%, Washington DC at -17.53%, Minneapolis at -14.72%, Cleveland at -13.50% and Boston at -12.13%

Additionally, both of the broad composite indices showed accelerating declines slumping -15.78% for the 10 city national index and 14.81% for the 20 city national index on a peak comparison basis.

Also, it’s important to note that Boston, having been cited as a possible example of price declines abating, has continued its decline dropping -4.60% on a year-over-year basis and a solid -12.13% from the peak set back in September 2005.

As I had noted in prior posts, Boston has a strong degree of seasonality to its price movements and with both the seasonal drop in sales and the recent stunning new decline to sales as a result of both the looming recession working to erode confidence and the continued lack of affordable Jumbo and Alt-A loans, Boston may continue to decline even through the traditionally string spring selling season.

To better visualize the results use the PaperEconomy S&P/Case-Shiller/Futures Charting Tool as well as the PaperEconomy Home Value Calculator and be sure to read the Tutorial in order to best understand how best to utilize the tool.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as compared to each metros respective price peak set between 2005 and 2007.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as on a year-over-year basis.

Additionally, in order to add some historical context to the perspective, I updated my “then and now” CSI charts that compare our current circumstances to the data seen during 90s housing decline.

To create the following annual charts I simply aligned the CSI data from the last month of positive year-over-year gains for both the current decline and the 90s housing bust and plotted the data with side-by-side columns (click for larger version).

What’s most interesting about this particular comparison is that it highlights both how young the current housing decline is and clearly shows that the latest bust has surpassed the prior bust in terms of intensity.

Looking at the actual index values normalized and compared from the respective peaks, you can see that we are only eighteen months into a decline that, last cycle, lasted for roughly fifty four months during the last cycle (click the following chart for larger version).

The “peak” chart compares the percentage change, comparing monthly CSI values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.


In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 97 months (over 8 years) peak to peak including roughly 43 months of annual price declines during the heart of the downturn.

Notice that peak declines have been FAR more significant to date and, keeping in mind that our current run-up was many times more magnificent than the 80s-90s run-up, it is not inconceivable that current decline will run deeper and last longer.

Crashachusetts Existing Home Sales and Prices: March 2008

Today, the Massachusetts Association of Realtors (MAR) released their Existing Home Sales Report for March showing, perfectly clearly, the truly grim circumstances that have befallen the Bay State’s housing market.

Whether it was a slow depression brought on by a local economy that has been eroding for over eight years, well over two years of steadily declining home sales and prices, the credit crunch, a looming recession, a palpable increase in inflation of necessities like food and fuel or just simply a change in attitudes toward the notion of a house as a vehicle for untold wealth, the regions housing markets have now hit a dangerous tipping point.

It appears that we have entered the “price freefall” phase of the housing decline where mounting inventory, declining sales, and negative sentiment all combine to result in plunging home prices which, quite possibly, may continue to decline substantially even through the spring and summer months which are typically strong periods in any selling season.

The Massachusetts Realtor leader Susan Renfrew, apparently a bit punch drunk from the shocking results, seems to struggle nonsensically to find the right words to describe the current state of affairs.

“These numbers reflect transactions which began earlier in the year. So, with questions about the economy beginning to accelerate at the end of 2007 and the beginning of 2008 and increased difficulty in accessing credit in the marketplace, we are not surprised by these results in March,”

Timothy Warren Jr., chief executive of the Warren Group, a Boston real estate research and publishing firm, presented a more accurate and sobering view.

"The Bay State's housing market is looking a lot like it did at the end of 1990, … It might be awhile before we pull out of the current housing slump,".

MAR reports that in March, single family home sales plummeted 32.3% as compared to March 2007 with a 4.8% increase in inventory translating to a truly massive 14.1 months of supply and a median selling price decline of 8.4% while condo sales plunged 38.0% with a 1.8% increase in inventory translating to a startling 14.5 months of supply and a median selling price decrease of 5.3%.


Ahead of tomorrow’s release of the S&P/Case-Shiller (CSI) home price index for Boston, a far more accurate and analytical measure of home price movement than the Realtor’s favored median selling price method, take a look at a the most recent Radar Logic data (a comparable dataset updated daily) as it appear that it may be giving an indication of a substantial price decline.

Check back tomorrow as I will post the complete CSI results for Boston specifically charting the decline and weighing its outcome versus the latest readings from Radar Logic.

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.

March’s Key MAR Statistics:

• Single family sales declined 32.3% as compared to March 2007
• Single family median price decreased 8.4% as compared to March 2007
• Condo sales declined 38.0% as compared to March 2007
• Condo median price declined 5.3% as compared to March 2007
• The number of months supply of single family homes stands at 14.1 months.
• The number of months supply of condos stands at 14.5 months.
• The average “days on market” for single family homes stands at 162 days.
• The average “days on market” for condos stands at 168 days.

Ticking Time Bomb?: Fannie Mae Monthly Summary March 2008

With the federal bailout now well underway and seeing that the battered massive “linchpin” mortgage enterprises of Fannie Mae and Freddie Mac will, with the help of the “temporary” increase of the conforming loan limits, the brazen lowering of their capital requirements and other even more novel actions, ride to the rescue of the nation’s housing markets!

But who will rescue them when the time comes?

I suppose you and me, our children and their children too…. It’s a real shame since these enterprises seemed to be doing so well recently, short of that stint in 2004 where Fannie Mae executives fleeced the company of over $100 million in fraudulent bonuses and the like…

Oh well, how’s another socialized bailout of private swindlers going hurt a country so deep in debt that dollar amounts on the order of billions just don’t seem to sting anymore… even trillions of dollars now seem a bit passé.

It’s important to note that all the recent changes are taking place with no required modifications to the GSEs operational practices and no additional powers granted to their Federal regulator the Office of Federal Housing Enterprise Oversight (OFHEO).

Given the sheer size of these government sponsored companies, with loan guarantee obligations recently estimated by Federal Reserve Bank of St. Louis President William Poole of totaling $4.47 Trillion (That’s TRILLION with a capital T… for perspective ALL U.S. government debt held by the public totals roughly $4.87 Trillion) and the “fuzzy” interpretation of their “implied” overall Federal government guarantee should they experience systemic crisis, these changes are reckless to say the least.

One key to understanding the potential risk that these entities face as the nation’s housing markets continue to slide lies in considering their current lending practices.

Although it’s been widely assumed by many that Fannie Mae and Freddie Mac have utilized a more conservative and risk averse standard for their loan operations, it now appears that that assumption is weak.

Whether it’s their subprime loan production, low-no down payment “prime” lending practices, or their conforming loan-piggyback loophole, the GSEs participated as aggressively in the lending boom as any of the now infamous bankrupt or near-bankrupt mortgage lenders.

Additionally, it’s important to understand that Countrywide Financial has been and continues to be Fannie Mae’s largest lender customer and servicer responsible for 28% (up from 26% in FY 2006) of Fannies credit book of business.

To that end, let’s compare the performance of Fannie Mae’s operations with that of Countrywide Financial.

The following chart (click for larger) shows what Fannie Mae terms the count of “Seriously Delinquent” loans as a percentage of all loans on their books.

It’s important to understand that Fannie Mae does NOT segregate foreclosures from delinquent loans when reporting these numbers and that should they report the delinquent results as a percentage of the unpaid principle balance, things would likely look a lot worse.

In order to get a better sense of the relative performance of Fannie Mae as compared to Countrywide Financial, the following chart (click for larger) compares Fannie Mae’s “Seriously Delinquent” loans (which include foreclosures) to Countrywide Financials loans in foreclosure.

Finally, the following chart (click for larger) shows the relative movements of Fannie Mae’s credit and non-credit enhanced (insured and non-insured) “Seriously Delinquent” loans versus Countrywide Financials delinquencies as a percentage of total loans.