Production Pullback: Industrial Production September 2012

Today, the Federal Reserve released their monthly read of industrial production and capacity utilization showing an improvement in September with total industrial production increasing 0.41% since August and rising 2.81% above the level seen in September 2011.

Capacity utilization also increased rising 0.27% from August and climbing 1.37% above the level seen in September of 2011 to stand at 78.26%

It's important to recognize that though the "recovery" is well over two years old, both industrial production and capacity utilization are notably below the peaks set in late 2007.

Conspicuous Correlation: Retail Sales September 2012

Today, the U.S. Census Bureau released its latest nominal read of retail sales showing an increase of 1.1% from August and an increase of 5.4% on a year-over-year basis on an aggregate of all items including food, fuel and healthcare services.

Nominal "discretionary" retail sales including home furnishings, home garden and building materials, consumer electronics and department store sales also increased 1.1% from August climbing 3.31% above the level seen in September 2011 while, adjusting for inflation, “real” discretionary retail sales increased 1.86% over the same period.

On a “nominal” basis, there had appeared to be “rough correlation” between strong home value appreciation and strong retail spending preceding the housing bust and an even stronger correlation when home values started to decline.

The following chart shows the year-over-year change to nominal discretionary retail sales and the year-over-year change to nominal the S&P/Case-Shiller Composite home price index since 1993 and since 2000.

As you can see there is, at the very least, a coincidental change to home values and consumer spending during the boom and then the bust, but as home values have continued to decline, retail spending has remained low but has not continued to consistently contract.

Looking at the chart below (click for full-screen dynamic version), adjusted for inflation (CPI for retail sales, CPI “less shelter” for S&P/Case-Shiller Composite) the “rough correlation” between the year-over-year change to the “discretionary” retail sales series and the year-over-year S&P/Case-Shiller Composite series seems now even more significant.

University of Michigan Survey of Consumers October 2012 (Early)

Today's early release of the Reuters/University of Michigan Survey of Consumers for October indicated an increase in consumer sentiment from the prior month with a reading of 83.1, the highest level seen since September 2007, and improvement on an annual basis with the level increasing a notable 36.68% while one year inflation expectations declined to 3.1%.

The Index of Consumer Expectations (a component of the Conference Board's Index of Leading Economic Indicators) rose to 79.5, and the Current Economic Conditions Index rose to 88.6.

It's important to recognize that consumer sentiment has seriously eroded over the past few months with the current results remaining near levels not seen since 1980, a major indication that consumers are in the process of tightening even further on spending.

A Housing Recovery… at What Cost?

Looking at housing today, it's important to keep in mind the extent to which the Feds have gone in response to its collapse as well as the truly lackluster results we have seen so far.

From the first emergency measures taken during 2007's subprime meltdown to today's QE3 mortgage securities purchases, there has been a seemingly never ending list of plans and schemes conjured up in an effort to stave off, blunt, stimulate or otherwise fabricate grand macro-trends that were "better" than the ones that would have ordinarily occurred without such measures.

Yet, while even the most hardened anti-bubble pro-correctionist must acknowledged that these efforts have worked to build a base of sorts, however fraudulent and likely feeble, the fact is that it took unprecedented (even possibly "shows over" dangerous…. QE1, QE2, QE3, QEternity….) measures to generate what looks today to be a mere garden variety housing recovery.

The nation's housing markets have been hooked up on an extraordinary level of life support for over five years and yet there has only been a slight movement in the direction of recovery… a trend so insignificant for most measures that it pales in comparison to the extent of the preceding decline (home prices, housing permits, purchase applications, buyer traffic, etc.)

Given this, consider what these trends might look like in the face of a future crisis such as a new recession or an interest rate shock.

One of the most fundamental arguments in favor of allowing the "burn-out" collapse of the housing markets (i.e. resisting cowardice and allowing the natural market clearing function to operate unmolested by government schemes and “good intentions”) was that the end result, however brutal, would not be a fragile charade but a firm fundamental state for the housing markets, a state far more resilient and resistant to future shocks.

Instead though, the measures taken by the Feds have just projected major uncertainty into the future.

Make no mistake; at BEST, a recession is coming… they always do… in post-WWII era, recessions have been typical every 7-10 years… so there is no reason to expect any different today.

At worst though, all the liabilities amassed through the extraordinary efforts taken by the Feds (Government debt, Fed balance sheet, massively distorted macro-economy) to buy out the housing led economic collapse may work to setup a shock of a far more difficult sort.

Extended Unemployment: Initial, Continued and Extended Unemployment Claims October 11 2012

Today’s jobless claims report indicated that both initial and continued unemployment claims declined as seasonally adjusted initial claims trended well below the closely watched 400K level.

Seasonally adjusted “initial” unemployment claims declined by a notable 30,000 to 339,000 claims from a revised 369,000 claims for the prior week while seasonally adjusted “continued” dropped to 3.273 million resulting in an “insured” unemployment rate of 2.6%.

Since the middle of 2008 though, two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.

Currently there are some 2.14 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 2.82 million people that are currently counted as receiving traditional continued unemployment benefits, there are 4.96 million people on state and federal unemployment rolls.

Reading Rates: MBA Application Survey – October 10 2012

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 as well as the volume of 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 (from FHA and conforming GSE data) went flat at 3.45% since last week while the purchase application volume declined 3% and the refinance application volume declined 2% over the same period.

Clearly, the Federal Reserve's QE3 announcement and implementation has had a notable effect on mortgage rates in recent weeks continuing to lift refinance application activity and possibly helping to establish a base of sorts to purchase applications.

The question is though, if the Fed is stimulating this activity by forcing artificially low rates, what would these trends look like if prevailing rates were based on a more fundamental market function?

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages since 2006 as well as the purchase, refinance and composite loan volumes (click for larger dynamic full-screen version).

On The Stamp: Food Stamp Participation July 2012

As a logical consequence of the prolonged economic downturn it appears that participation in the federal food stamp program is continuing to rise.

In fact, household participation has been climbing so steadily that it has far surpassed the last peak (which looks like a minor blip by comparison) set as a result of the immediate fallout following hurricane Katrina.

The latest data released by the Department of Agriculture indicated that in July, 11,532 recipients were added to the food stamps program with the current total increasing 2.95% on a year-over-year basis while household participation increased 5.05% over the same period.

Individual participation as a ratio of the overall civilian non-institutional population has increased 1.39% over the same period.

Participation continues to swell with nominal benefit costs climbing 2.91% on a year-over-year basis to $6.26 billion for the month.

Envisioning Employment: Employment Situation September 2012

Today’s Employment Situation Report indicated that in September, net non-farm payrolls increased adding 114,000 jobs overall with the private non-farm payrolls sub-component adding just 104,000 jobs while the civilian unemployment rate declined to 7.8% over the same period.

Net private sector jobs increased just 0.09% since last month climbing 1.69% above the level seen a year ago but remained a whopping 3.55% below the peak level of employment seen in December 2007.

Recovery-less Recovery: Unemployment Duration September 2012

Be sure to bookmark the "Scary Unemployment Dashboard"... it's live.

Today's employment situation report showed that conditions for the long term unemployed went mixed in September remaining epically distressed by historic standards.

Workers unemployed 27 weeks or more declined to 4.844 million or 40.1% of all unemployed workers while the median number of weeks unemployed climbed to 18.5 weeks and the average stay on unemployment rose to 39.8 weeks.

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

On The Margin: Total Unemployment September 2012

Today’s Employment Situation report showed that in September “total unemployment” including all marginally attached workers went flat at 14.7% while the traditionally reported unemployment rate declined to 7.8%.

The traditional unemployment rate is calculated from the monthly household survey results using a fairly explicit definition 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.

Extended Unemployment: Initial, Continued and Extended Unemployment Claims October 04 2012

Today’s jobless claims report indicated that both initial unemployment increase slightly while continued unemployment claims went flat as seasonally adjusted initial claims remained just below the closely watched 400K level.

Seasonally adjusted “initial” unemployment claims increased by 4,000 to 367,000 claims from a revised 363,000 claims for the prior week while seasonally adjusted “continued” went flat 3.281 million resulting in an “insured” unemployment rate of 2.6%.

Since the middle of 2008 though, two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.

Currently there are some 2.14 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 2.84 million people that are currently counted as receiving traditional continued unemployment benefits, there are 5.00 million people on state and federal unemployment rolls.

Reading Rates: MBA Application Survey – October 03 2012

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 as well as the volume of 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 (from FHA and conforming GSE data) declined a notable 9 basis points to 3.45% since last week while the purchase application volume increased 4% and the refinance application volume increased 20% over the same period.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages since 2006 as well as the purchase, refinance and composite loan volumes (click for larger dynamic full-screen version).

ADP National Employment Report: September 2012

Yesterday, private staffing and business services firm ADP released the latest installment of their National Employment Report indicating that the situation for private employment in the U.S. improved in September as private employers added 162,000 jobs in the month bringing the total employment level 1.99% above the level seen in September 2012.

Perusing the rest of the data in the ADP dataset you can see the the economy is currently showing the most growth for small to mid-sized service providing jobs with goods-producing jobs remaining near trough levels.

Look for Friday’s BLS Employment Situation Report to likely show somewhat similar trends.

ISM Manufacturing Report on Business: September 2012

Today, the Institute for Supply Management released their latest Report on Business for the manufacturing sector indicating that manufacturing activity improved in September.

At 51.5 the purchasing manager’s composite index (PMI) rose 3.83% since August remaining 1.90% below the level seen a year earlier.

Respondents now appear to have mixed assessments of the current state of the economy with some reporting continued weakness while others see a better Q4:

"Appears that our so-called 'slowdown' was a summer thing. September brings with it increasing requirements and business." (Paper Products)

"Business improved through Q3, but is beginning to show signs of slowing down in Q4; this has been a typical trend over the last few years." (Wood Products)

"Business has picked up going into the last quarter." (Plastics & Rubber Products)

"We are sticking to our manufacturing plan, but have slowed production down considerably. Haven't added any new units to the 2012 plan, and still have no forecast for 2013 released." (Computer & Electronic Products)

"Sales have tanked over the last two months, bringing a very concerned and stressed management team. Not very optimistic for the near-term future." (Apparel, Leather & Allied Products)

"Uncertainty in the healthcare legislation (reform) continues to be the underlying force keeping our sales revenue below its full potential." (Miscellaneous Manufacturing)

"Steel and aluminum prices still dropping, and auto production orders are up." (Transportation Equipment)

"Domestic business is up; international is down." (Electrical Equipment, Appliances & Components)

"Demand seems to have stabilized from August. New orders are appearing this month without advanced notice from our customers." (Chemical Products)

Constuction Spending: August 2012

Today, the U.S. Census Bureau released their latest read of construction spending showing mixed results August with total construction spending (residential and non-residential) declining while single family residential construction spending improved. 

On a month-to-month basis, total residential spending increased 0.87% from July climbing 18.96% above the level seen in August 2011 while remaining a whopping 59.57% below the peak level seen in 2006.

Single family construction spending climbed 2.83% since July rising 23.05% since August 2011 but remained a whopping 72.12% below it's peak in 2006.

Non-residential construction spending declined 1.70% since July but climbed 4.55% above the level seen in August 2011 and remained a whopping 32.27% below the peak level reached in October 2008.

The following charts (click for larger dynamic 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, month-to-month and peak percent change to each since 1994 and 2000 – 2005.