Envisioning Employment: Employment Situation November 2008

Today’s Employment Situation Report showed unequivocal and truly dramatic signs of a significantly contracting recessionary economy with the Household survey indicating a decline of a whopping 673,000 in employment and a 251,000 increase in unemployment since October resulting in an unemployment rate of 6.7% while the Establishment survey showed a massive decline of 533,000 non-farm jobs over the same period.

Further, there were considerable revisions to prior months with September actually registering a whopping 403,000 non-farm job decline from August and October registering 320,000 non-farm job decline from September resulting in over 1.2 million non-farm jobs lost in just three months and 2,043,000 private non-farm jobs shed so far this year.

With the latest news just littered with reports of job cuts and layoffs cutting across many regions and industries and the recessionary job loss trend now firmly established, only the extent of job loss is now in question.

The report also confirmed declining 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 18.91% or 653,400 jobs since then, appear to be headed lower.

Also note that independently, “residential building” has lost 20.71% of its payrolls or 211,400 jobs since it peaked during September 2006 and that “residential specialty trade contractors” have lost 18.40% of its payrolls or 449,100 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 6.10%) 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 now seems to be coming down.

As you can see, although 3.01% of the population currently is employed in a construction occupation, there is a chance that this percentage could drop below the trend.

Question of The Day - S&Ls To Collapse Next?

Will S&Ls meltdown next?

Why would they perform any better during this downturn than they did during the housing bust of late 80s and early 90s?

Aren’t we simply just now entering the period where supposedly “prime” mortgage portfolios will come under significant stress as rampant unemployment lays waste to the cash-strapped and largely insolvent middle-class?

The Arlington Artifice: October 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 October 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 recent results is unquestionably the low number of home sales with only 221 sales for the entire year to date, the lowest readings since the recessionary period of 1990.

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.

The following chart (click for much larger version) shows a history of Arlington’s October median sales price since 1988 along with the annual outcome.

Regular readers will notice that the “year-to-date” median selling price, a more accurate median indicator, has declined significantly from where it stood earlier in the year as the number of home sales have slowly accumulated and now stands at $475,000.

My expectation, now that we are in the weakest season for home sales, is for the median selling price to slide well below $470,000 by the end of the year.

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 221 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 have changed since 1988.

Notice again that as sales have mounted for the year, the median values are looking generally flat to trending down.

My expectation is that all the towns except for Cambridge (which will likely be flat to modestly up on an extremely low number of single family sales) will have lower medians than 2007.

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.

Mid-Cycle Meltdown?: Jobless Claims December 04 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims declined 21,000 to 509,000 from last week’s revised 530,000 claims while “continued” claims increased 89,000 resulting in an “insured” unemployment rate of 3.1%.

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.

Question of The Day - Noise of Convenience?

Rates fell and mortgage application volume jumped dramatically but (looking at the chart above) does anyone seriously believe that the volume of mortgage “purchase” applications (applications for the purchase of a home) during the week that included Thanksgiving reached the same level seen during June and July, the peak of the home selling season?

Why doesn’t the MBAA simply admit that they have lots of noise when seasonally adjusting their data during the holidays?

Are they just trying to benefit from the regular distortion?

Reading Rates: MBA Application Survey – December 03 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 52 basis points since last week to 5.47% while the purchase application volume jumped 38% and the refinance application volume increased a whopping 203.3% compared to last week’s results.

It’s important to note that although the steady decline in rates has likely played a significant role in the large increases in refinance and purchase 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 during the holiday season 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).

On The Stamp: Food Stamp Participation September 2008

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 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 a whopping 17.11% while individual participation, as a ratio of the overall population, has increased 16.34%.

September’s numbers show a marked surge in program participation, likely resulting from the recent jump in total unemployment, driving the nominal benefit costs up 30.48% on a year-over-year basis to $3,365,077,075 for the month and $26,292,110,075 year to date.

Looking at the last chart that plots the total unemployment rate (unemployment rate of all traditionally unemployed workers plus all marginally attached and part time workers) and the population adjusted individual program participation rate normalized since 2005, one can plainly see that program participation would be expected to continue its surge into October and likely beyond.

On The Margin: Total Unemployment October 2008

Today, I’m adding a new recurring post that will track the course of “total unemployment”, i.e. the unemployment rate that includes all measures of employment underutilization.

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 has been skyrocketing as of late and has now with the latest 40% year-over-year increase has reached the highest level seen since the government began tracking the many measures of marginalized workers.

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

Notice that while the total unemployment rate has increased 40% since last year, the difference between the total unemployment rate and the traditional rate has jumped nearly 50%, its highest annual increase on record leaving the spread at its widest on record.

Ticking Time Bomb?: Fannie Mae Monthly Summary October 2008

Decades from now the summer of 2008 will likely be remembered to mark the turning point where legislative blundering took an otherwise serious financial crisis and molested it into an epic financial collapse.

By fully assuming the liabilities of Fannie Mae and Freddie Mac, the two colossal and corrupt (and conduit of corruptness funneling junk Countrywide Financial loans onto the implied balance sheet of the federal government) government sponsored enterprises, the federal government, led by Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke, has thrust taxpayers into an abyss of insolvency with one mighty shove.

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) this legislative reversal making certain the “implied” government guarantee is reckless to say the least.

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 might likely look a lot worse.

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.

Question(s) of The Day - In Recession ... Now How Long?

The NBER today announced that the recession is official… it started in December 2007 and by all accounts we are fully entrenched and sliding still lower.

Anyone surprised?

Why was there ever a debate?

Now though I suppose the Bear-Bull squabbling will shift to how long… How long will this recession run?

Bernanke’s Nightmare: Commercial Paper December 01 2008

This post is a follow up and further elaboration showing the current and historical values for some key interest rates.

These interest rates are for short term (30 day) commercial paper that is typically issued by corporations to “raise needed cash for current transactions”.

A key in reading these rates is to recognize that the AA non-financial is more highly rated than A2/P2 non-financial and that, in general, the AA non-financial tends to track the Federal Reserve’s target rate while the others typically track slightly higher.

Normally, the spread between the weakest quality paper (A2/P2 non-financial) and the highest (AA non-financial) is 15-20 basis points but as of the latest Fed posting, the spread has remained dramatically elevated at 586 basis points… truly a worrying sign.

The first chart shows the spread between the A2/P2 and AA non-financial while the lower two charts show the how all the short term commercial paper rates have tracked since 1998 and mid-2007 respectively.

Notice that prior to mid-2007, the Federal Reserve had been able to keep these rates fairly tight and in-line with the target rate but now we are seeing significant trouble.

In as sense, the current crisis has effectively erased all the rate cuts Bernanke has made this cycle and even added another 90 basis points.

Construction Spending: October 2008

Today, the U.S. Census Bureau released their October 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 appear to have begun to show the telltale signs of contraction.

With the tremendous weakening trend continuing, total residential construction spending fell 24.20% as compared to October 2007 and 49.91% from the peak set in March 2006.

Worse off though was private single family residential construction spending which declined 41.02% as compared to October 2007 and a truly grotesque 65.06% from the peak set in February 2006.

Non-residential construction spending, currently accounting for just under half of all private construction spending, has been expanding at a slower rate in recent months with October showing a 9.09% increase as compared to October 2007.

As was noted in prior posts, commercial real estate (CRE) appears to be coming under some pressure with reports of increasing vacancy rates and falling prices and now a back-to-back monthly decline in spending.

Keep your eye on the last two charts in the months to come for a clearer indication of a 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.