The Almost Daily 2¢ - Twin Peaks?

Following up on a prior post, take a look at the trend and most recent state of the S&P 500 index and compare it to the last major bear market conditions that followed the dot-com bust.

There is a host of very interesting technical similarities (which are noted below) that may indicate that we have entered another bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.

It’s important to keep in mind that, at best, a bear market can be viewed as a transition into an period where there is a prolonged bias to sell into strength resulting in a successive series of lower highs yielding a clear downward trend.

At worst, there are periods (days or weeks) where particular stocks and the index as a whole will crash hard.

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.

Notice that I’ve updated the chart to reflect the fact that during the last week of trading the 200 day moving average broke through the 400 day moving average signaling a third “cross of death” that I will term the “cross of fiery gruesome death“ for all future posts.

Notice also, that I’ve added both the “effective” federal funds rate and an overlay indicating the period of the last recession.

As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.25% in the trough.

It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.




THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

NOW (Today’s Top?)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

Although the recent rally appears strong and Wall Street is feeling very optimistic, the prospects of a protracted bear market selloff are very real especially given the steady flow of poor macroeconomic, housing, consumer and employment data that will continue to flow throughout 2008.

Needless to say then next few weeks will be white-knuckle time…

Mid-Cycle Meltdown?: Jobless Claims May 08 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims declined 18,000 to 365,000 from last week’s revised 383,000 claims and “continued” claims declined 10,000 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.

NARcasting The Future: May 2008

Today, the National Association of Realtors (NAR) provided their latest estimate of annual existing home sales for 2008 increasing their prior “beginning of year” estimate slightly to a 4.95 million unit annual sales pace and decreasing their estimate for the “end of year” annual sales pace to 5.82 million units resulting in total year sales of 5.39 million units.

As I had noted last month, this type of “beginning year”-“end of year” reporting which in prior months estimated first and second half of the year sales pace and now estimates first and last quarter sales pace will probably be discontinued shortly as NAR goes back to stating only their total year sales estimate but for now I will chart all predictions.

Note that in this month’s chart I simply broke out each prediction and connected them to the 2007 year end result so as to best capture the flow of predictions.

As usual, the latest forecast comes with another dose of truly ridiculous spin.

In an effort to put their absurd bias into perspective I compiled all their existing home sales forecasts for 2007 and now 2008 into a chart along with a list of prominent quotes supplied with each forecast.

12/11/2006 Prediction: 6.40 million units.
Lereah "Most of the correction in home prices is behind us."

1/10/2007 Prediction: 6.42 million units.
Lereah "The good news is that the steady improvement in sales will support price appreciation moving forward."

2/7/2007 Prediction: 6.44 million units.
Lereah "After reaching what appears to be the bottom in the fourth quarter of 2006, we expect existing-home sales to gradually rise all this year and well into 2008."

3/13/2007 Prediction: 6.42 million units.
Lereah "Although existing-home sales will be marginally reduced due to subprime lending restrictions, they should be gradually rising this year and next."

4/11/2007 Prediction: 6.34 million units.
Lereah "Tighter lending standards will dampen home sales a bit, but by less than a couple of percentage points from initial projections."

4/30/2007
Lereah Leaves NAR for Move.com

5/9/2007 Prediction: 6.29 million units.
Yun "Housing activity this year will be somewhat lower than in earlier forecasts."

6/6/2007 Prediction: 6.18 million units.
Yun "Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year."

7/11/2007 Prediction: 6.11 million units.
Yun "Home prices are expected to recover in 2008 with existing-home sales picking up late this year."

8/8/2007 Prediction: 6.04 million units.
Yun “With the population growing, the demand for homes isn’t going away – it’s just being delayed.”

9/11/2007 Prediction: 5.92 million units.
Yun “Patient buyers in most areas who do their homework will recognize that housing remains a good long-term investment.”

10/10/2007 Prediction: 5.78 million units.
Yun "The speculative excesses have been removed from the market and home sales are returning to fundamentally healthy levels, while prices remain near record highs, reflecting favorable mortgage rates and positive job gains."

11/13/2007 Prediction: 5.5 million units.
Yun "In some ways, the extended real estate boom from 2001 to 2005 created unrealistic expectations that housing is a short-term high-yield investment… 2007 will be the fifth best year for housing on record"

12/10/2007 Prediction: 5.67 million units in 2007, 5.7 million units in 2008.
Yun "The broad trend over the coming year will be a gradual rise in existing-home sales, but because sales are exceptionally low in the final months of 2007, total sales for 2008 will be only modestly higher than 2007."

01/08/2008 Prediction: 5.66 million units in 2007, 5.7 million units in 2008.
Yun "A meaningful recovery in existing-home sales could occur as early as this spring, or it may be further delayed toward late 2008."

02/07/2008 Prediction: 4.9 million units in H1, 5.8 million units in H2, 5.38 million units full year.
Yun "Where builders have cut construction sharply, and in most areas with improving affordability conditions, we’ll generally see moderately higher home prices."

03/06/2008 Prediction: 4.9 million units in H1, 5.8 million units in H2, 5.38 million units full year.
Yun "Significant price declines in some local markets have sharply and quickly improved local affordability conditions, and are inducing buyers to return to the marketplace"

04/08/2008 Prediction: 4.9 million units in Q1, 5.9 million units in Q4, 5.39 million units full year.
Yun "Exceptionally weak home sales related to jumbo loans problems will depress home prices in the first half of the year, but steady liquidity improvements in the conforming jumbo-loan market will help prices recover in the second half of the year"

05/08/2008 Prediction: 4.95 million units in Q1, 5.82 million units in Q4, 5.39 million units full year.
Yun "Although more than half of local markets are expected to see price growth this year, the aggregate existing-home price will decline 2.4 percent in 2008, driven by a relatively few markets that are very oversupplied"

Pending Home Sales: March 2008

Today, the National Association of Realtors (NAR) released their Pending Home Sales Report for March showing a weakening to existing home sales activity and a clear continuation of the historic decline to residential housing on a year-over-year basis, both nationally and across every region.

As the decline in demand for residential housing slumps through its third year, it’s important to consider the significance of both the extent of the decline and the severity of the oncoming declines to existing home sales activity clearly indicated by the current 20.1% year-over-year drop-off in pending home sales.

It is very likely that we are now seeing the spiraling feedback effect of sharply declining prices and both the palpable sense and actual effects of recession working to depress buyer confidence thereby causing continued even accelerating declines in housing demand.

As usual, NAR Senior Economist Laurence Yun continues the spin suggesting that his predictions of a weak first half of the year and an improved second half are coming to fruition as anticipated.

"Things are beginning to improve, but the availability of affordable mortgages is uneven around the country and sometimes within metropolitan areas, … As anticipated, we continue to look for a soft first half of the year, for both housing and the economy, before notable improvements in the second half. Some time is needed for FHA and new conforming jumbo loans to become widely available."

The following chart shows the national pending homes sales index since 2005 compared monthly. Notice that each year, the months value is decreasing consistently (click for larger version).

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).

Note that in the above charts, I had to use the Not Seasonally Adjusted (NSA) data series as NAR changed the methodology for their Seasonally Adjusted (SA) series a while back and never republished the numbers.

Look at March’s seasonally adjusted pending home sales results and draw your own conclusion:

• Nationally the index was down 20.1% as compared to March 2007.
• The Northeast region was down 15.4% as compared to March 2007.
• The Midwest region was down 22.3% as compared to March 2007.
• The South region was down 26.7% as compared to March 2007.
• The West region was down 9.5% as compared to March 2007.

Reading Rates: MBA Application Survey – May 07 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 10 basis points since last week to 5.91% while the purchase application volume increased by 12.1% and the refinance application volume jumped 19.3% 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 remains well within the range seen throughout 2007 while the interest rate for an 80% LTV 1 year ARM remains elevated now resting 86 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).

Commercial Catastrophe?: MIT/CRE Commercial Property Index Q1 2008

There has been growing speculation and concern that the commercial real estate (CRE) markets will inevitably follow the lead of the residential markets down into a recessionary decline.

The notion of commercial real estate markets suffering a similar downturn as residential is both supported by historical correlations (e.g. residential and non-residential investment) as well as the anecdotally logical outcome for a market that has seen similar levels of loose over-lending.

Fortunately, we need not speculate about the current state of CRE as the MIT Center for Real Estate tracks commercial property prices with a series of indexes that cover Apartment, Office, Industrial and Retail property types.


Notice in the top aggregate chart, after having some substantial growth between 2003 and Q2 2007 (particularly during 2005 – 2006), there appears to be a pullback of sorts that started to form during the second half of 2007 leaving prices now 6.18% below the high seen in Q2 2007.

Furthermore, in Q1 2008 the Industrial and Retail components continue to show significant peak declines of 8.20% and 5.27% respectively while the Office component remained flat.

Looking at the supply and demand indices of the Retail component appears to shed some light on the factors now working to drive prices lower for that market.

Notice that while supply of retail properties have increased substantially in recent years, demand that remained largely flat since the middle of 2005 has now started to decline precipitously registering the largest year-over-year decline since at least 1994.

It will likely take another 2-3 quarters to get a firm picture of what exactly is occurring in the nation’s commercial real estate market but the latest MIT/CRE seems to be suggesting further weakness ahead.

The Almost Daily 2¢ - Nouvelle Bon Marché

In a whispery tone… “If you build it, they might come… or… maybe not!”

Regular readers can imagine my (slightly morbid, can’t turn away from train wreck style) excitement at finding this article in the Sunday Boston Globe concerning the poor results seen at the “Natick Collection”, a chic suburban mall recently (re)opened 20 miles outside of Boston.

Although this topic is clearly of local interest, I believe that the success or failure of this project has national implications as it represents both an expression of the ill founded concepts made possible by the era of easy borrowed capital (for households an firms alike) as well as crescendo of sorts for consumerism.

In short, the “Natick Collection” and its attached “luxury” residential condominium complex, the “Nouvelle at Natick”, were the brainchild of General Growth Properties (NYSE:GGP), the country’s second largest mall operator who, in what now appears firmly to be an experiment in “mixed use” mall development, apparently sought not only to capture the attention of the suburban “luxury” consumer but the “luxury” homebuyer as well.

But this project continues to look like a major blunder both because of the poor sales of the condos and now for what appears to be a significant failure of the luxury retail wing of the mall itself.

As the Boston Globe article points out, while some retailers are feeling pressure from low traffic and sales, others have either delayed store openings or pulled out altogether.

But rather than go into a lengthy blow by blow concerning the development and its viability drawing comparisons to other similar blunders and the like, consider what this disaster might be saying about the plight of the American consumer and further the firms who bet the party would never end.

Natick and the surrounding area is a typical middle to upper middle class region with relatively good access to Boston and likely a large population of youngish dual income families.

Also, although the housing bust has brought a measure of pain to the region, Massachusetts has not been crippled by the debacle to the extent that has been seen in some of the nations other comparable bubble regions.

So, while those cited in the Boston Globe article blame “yankee thriftiness” or even “poor taste” for the current failures seen at the Natick Collection, I believe the reality is something far more significant.

Consistent with recent sentiment surveys and a raft of other macroeconomic and retail data, the failure to thrive of a suburban luxury mall/residential franken-development seems to clearly confirm that the era of needless debt-fueled consumption is over.

While “Luxury” was a theme that played a significant role in the marketing of all manner of product and service during the eras of the dot-com and housing booms, “Thrift” doesn’t go nearly far enough in capturing the feel of the aftermath.

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.