Weekly Indicators: The Disappointment Syndrome edition

- by New Deal democrat

The big news this week, as usual for the first week of the month, was the 103,000 initial estimate of jobs added in December, and the decline of the unemployment rate to 9.4%. Had there not been people leaving the workforce, the unemployment rate still would have declined back down to 9.6%. Interestingly, almost every commentary on this morning's report headlined it as "disappointing" -- even though, only a week ago, expectations were for about 125,000 new jobs to be added. Likely the blowout ADP report so boosted expactations that a 6-digit initial BLS estimate perversely was a letdown.

Meanwhile, under the radar, October was revised up - again - to 210,000 jobs added (initially it was 151,000). Had that been the initial report there would have nearly been dancing in the streets. And remember last month's gut-punch of 39,000? As I predicted, that too was revised up - 31,000 - to 70,000. The odds are very good it will be revised upward again next month, and it is further likely that this month's number will wind up somewhere around 150,000 - which would of course have been in line with estimates and not a "disappointment" at all! But because it will be two months later, it will be all but ignored in the sturm und drang about the first estimate for February jobs, which will be the then-currently "disappointing" number.

In other news, it is worth noting that income and spending were once again up, that residential investment was up, and that the slide in nonresidential investment is slowing considerably.

Now here are this week's other high frequency data:

Gas at the pump went up 2 more cents to $3.07 a gallon last week, and Oil declined back below the $90 a barrel mark to ~$87.60. Gasoline usage was slightly above (1%) last year's levels. This will become a number to watch more closely.

The Mortgage Bankers' Association did reported for the last two weeks of 2010, a net decrease of 1.6% in seasonally adjusted mortgage applications. This number has been generally stable for several months now. Refinancing decreased about 3.3% further for the combined two weeks. Increased mortgage rates are killing refinancing. This is likely to impact consumer spending down the road.

The ICSC reported that same store sales for the week ending new Year's Day increased 3.6% YoY, and increased 0.4% week over week - not too shabby for a week that included a big snowstorm in the northeast. Shoppertrak was stronger, reporting that sales rose 6.1% YoY.

Railfax declined in all areas last week again, for seasonal reasons. It nevertheless remained steady in its comparative improvement over last year. Shipments of waste and scrap metal and auto shipments are no better than last year's levels.

The American Staffing Association Index fell 7.8% to 92 for the week ending December 26, entirely for seasonal reasons. This index will probably decline further for one more week, before it again gives reliable information.

The BLS reported initial jobless claims of 408,000, the third lowest initial estimate since the onset of the recession. The 4 week moving average fell to 411,000. (I will update the scatter graph of initial claims vs. payrolls on Monday).

M1 was up 2% for the week, down -0.4% month over month, and up 7%+ yoY, meaning "Real M1" was up 6%. M2 was up +0.16% for the week, +0.24% month over month, and +3.2% YoY, meaning "Real M2" was up ~2.2%. These numbers have told the same story for months on end. Real M1 is up sharply, Real M2 can't seem to improve above the red zone of +2.5%.

Weekly BAA commercial bond rates fell slightly to 6.07% last week from 6.10%. This compares with a .01% increase in the yields of 10 year treasuries. There is no sign of deflationary fear amound B grade corporate bonds.

The Daily Treasury Statement showed receipts in the first 3 reporting days of January of $39.2 B vs. $40.0 B a year ago, for a loss of $0.1 B. Over the last 20 reporting days, this year shows $164.4 B collected vs. $158.3 B one year ago. With the "temporary" reduction in Social Security payroll taxes of 2% capitulated to - I mean, negotiated - by President Obama in 2011, this metric will have to be approached very carefully to try to at least get a comparative handle on the data.

In summary, with the very real problem of gas prices, the economy continues to pick up steam, but this will be a very long and painful slog.

Have a nice weekend!

Unemployment Drops; Establishment Up 103,000

From the BLS:

The unemployment rate fell by 0.4 percentage point to 9.4 percent in December, and nonfarm payroll employment increased by 103,000, the U.S. Bureau of Labor Statistics reported today. Employment rose in leisure and hospitality and in health care but was little changed inother major industries.

First, let's loook at why the unemployment rate dropped. This data is from the household survey, and is a simple fraction of the total number of unemployed over the total civilian labor force. The good news is the total number of unemployed fell from 15,041,000 to 14,485,000. In addition, the civilian labor force also decreased from 153,950,000 to 153,690,000 (remember, a decrease in denominator increases the resulting percentage). Assuming that some people will argue the decrease is all due to people leaving the labor force, consider this: the number of unemployed decreased by 556,000 while the civilian labor force decreased 260,000. Even if the drop in the labor force is due to people giving up looking, there is still a drop of 296,000 in the total unemployed that is not due to people giving up. In addition, the total number of employed in the household survey increased from 138,909,000 to 139,206,000 (+297,000 which is in line with the ADP report) So, overall, the household report is actually pretty good.

In the establishment survey all the gains same in the service sector, as goods producing industries lost 2,000 jobs. Services added 115,000 jobs, with the bulk of the gains coming in education and health care (+44,000) and leisure/hospitality (+47,000). Average weekly hours were steady, but average hourly earnings increased by 3 cents, which led to an increase in average weekly earnings.

Finally, we have the following revisions:

The change in total nonfarm payroll employment for October was revised from +172,000 to +210,000, and the change for November was revised from +39,000 to +71,000.

In other words, an upward revision to this report is a strong possibility.

Overall, I'd give this report a 5.5 on a 1-10 scale.

Yesterday's Market

Food Prices Are Under Pressure

From the NY Times:

World food prices continued to rise sharply in December, bringing them close to the crisis levels that provoked shortages and riots in poor countries three years ago, according to newly released United Nations data.

Prices are expected to remain high this year, prompting concern that the world may be approaching another crisis, although economists cautioned that many factors, like adequate stockpiles of key grains, could prevent a serious problem.

The United Nations data measures commodity prices on the world export market. Those are generally far removed from supermarket prices in wealthy countries like the United States. In this country, food price inflation has been relatively tame, and prices are forecast to rise only 2 to 3 percent this year.

But the situation is often different in poor countries that rely more heavily on imports. The food price index of the United Nations Food and Agriculture Organization rose 32 percent from June to December, according to the report published Wednesday. In December, the index was slightly higher than it was in June 2008, its previous peak. The index is not adjusted for inflation, however, making an exact comparison over time difficult.

Adding to the problem is this:

The winter wheat crop in Kansas looks increasingly a market "flashpoint" in the making thanks to the dry start to the season, which has left its condition already well below average with a freeze on its way.

The decline in the condition of the winter crop in America's top wheat-producing state - where officials this week rated only 27% of the crop in "good" or "excellent" condition, less than half the recent average – has stoked expectations that a three-year run of above-average yields is at an end

"Increasingly, the current Kansas winter wheat crop looks to be tracking conditions similar to the three worst years in recent times – 1989, 1996 and 2002," Australia & New Zealand Bank said.

Such a comparison implies a steep drop in the harvest this year, with production tumbling by 34% in 1989, 11% in 1996 and 18% in 2002.

Economic News Prints Impressive Numbers

From ADP:

Private-sector employment increased by 297,000 from November to December on a seasonally adjusted basis, according to the latest ADP National Employment Report^® released today. The estimated change of employment from October to November was revised down, but only slightly, from the previously reported increase of 93,000 to an increase of 92,000. This month’s ADP National Employment Report suggests nonfarm private employment grew very strongly in December, at a pace well above what is usually associated with a declining unemployment rate. After a mid-year pause, employment seems to have accelerated as indicated by September’s employment gain of 29,000, October’s gain of 79,000, November’s gain of 92,000 and December’s gain of 297,000. Strength was also evident within all major industries and every size business tracked in the ADP Report.

The reports internals are very strong as well: small business added 117,000 jobs and medium sized businesses added 144,000. Most of the gains were in the service industries which accounted for 270,000 jobs. This report puts that much more pressure on Friday's jobs report.

ISM prints solid gain:

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee. "The NMI (Non-Manufacturing Index) registered 57.1 percent in December, 2.1 percentage points higher than the 55 percent registered in November, and indicating continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased 6.5 percentage points to 63.5 percent, reflecting growth for the 13th consecutive month at a faster rate than in November. The New Orders Index increased 5.3 percentage points to 63 percent, and the Employment Index decreased 2.2 percentage points to 50.5 percent, indicating growth in employment for the fourth consecutive month, but at a slower rate. The Prices Index increased 6.8 percentage points to 70 percent, indicating that prices increased significantly in December. According to the NMI, 14 non-manufacturing industries reported growth in December. Respondents' comments vary by company and industry, but overall are mostly positive about business conditions."

Let's look at the anecdotal quotes from the report:

• "Overall business climate remains reasonably positive." (Management of Companies & Support Services)
• "Pricing pressures are starting to heat up." (Construction)
• "Outlook for 2011 is positive with an increase in spending." (Finance & Insurance)
• "Looks like more budget reductions are coming in the next year." (Educational Services)
• "Cotton prices are moving upward, but prices are being kept in line as the overall Asian market cools somewhat."(Retail Trade)
• "Business picking up for holiday — above expectations." (Transportation & Warehousing)

Notice two themes:

1.) The economy is picking up steam, leading to
2.) An increase in pricing pressures.

These two reports -- in conjunction with the ISM manufacturing report -- are very good news and a great way to start the new year.

A Closer Look At Banks; $1 Billion to $10 Billion

Let's continue our look at financial institutions by focusing on the larger banks -- $1 billion to $5 billion in size.


Total non-performing loans are at 20 year highs.


Commercial charge-offs peaked, and have moved lower. However, the overall level is still high by historical measures.


Interestingly, non-performing commercial loans were higher during the S&L crisis. However, their current level is still high and is still increasing.


Total net loan charge-offs appear to have peaked, but these are also at very high levels.



The net interest margin is at near 20 year lows.

The return on average assets was at a 20 year low, but has since rebounded. However, this number is still low by historical standards.


Average return on equity is also at low levels by historical standards.

Despite their size, these institutions are facing the same problems smaller banks are: high non-performing loans and low earning power.

Yesterday's Market

The above charts paint the following picture:

1.) Equities are rallying on the strength of recent economic numbers
2.) The bond market, after a long sell off, is looking for direction. The EMAs indicate the overall trend is still lower, however. This would make sense given the recovery appears to be gaining steam
3.) The dollar's EMAs indicate a continued sideways move

Auto Sales Gain in December

From Auto Week:

Fueled by holiday and year-end discounts, as well as the introduction of new models, automakers finished 2010 on a high note by posting the year’s best monthly sales in December.

U.S. light vehicle demand climbed 11 percent last month to 1.1 million units--the best month of the year on a unit basis. Still, it was one of the weaker percentage increases of the year because of a tough comparison to December 2009, one of that year’s strongest months.

Most every automaker gained sales in December, a month highlighted by a 37 percent surge for Hyundai-Kia and a 28 percent advance at Nissan North America. Toyota Motor Corp. was the only company to record a decline, down 6 percent.

Overall, U.S. light vehicle sales rose 11 percent to 11.59 million units last year from 10.43 million in 2009--when demand fell to the lowest point in 27 years. It was the industry’s first annual U.S. sales gain since 2005.

Industry sales last year remained almost a third fewer than the 16.8 million annual average from 2000 to 2007, according to Autodata Corp.

Auto makers and analysts predict more growth in 2011 as the U.S. economy slowly recovers.

Ford Motor Co. anticipates U.S. sales of 12.5 million this year. GM is expecting U.S. industry sales to rise more than 10 percent from 2010.

"The U.S. economy will be stronger and grow more in 2011," said Don Johnson, GM's vice president of U.S. sales operations. "The jobs story remains mixed. The weakest link continues to be the housing market."

A Closer Look At Financial Institutions; $300 million to $1 billion

Let's continue out look at the nation's banks with a look at institutions


Net loan losses as a percentage of total loans appear to have peaked, but are still very high.

Commercial loan charge-offs are also high.


As a result of higher losses, banks are having to set aside near record amounts of funds for their loan loss reserves.


Finally, non-performing loans are near 25 year highs.



First, note return on average assets is low by historical norms, as is


Return on equity. In addition,


The net interest margin is also near low levels by historical standard.

So, like the smaller banks, the larger banks are getting hit by higher loan losses which is forcing them to set aside more funds for loan loss reserves. As for their money making side, we're seeing a low return on assets and equity and a low interest rate spread.

Housing: the Great Recession vs. the Great Depression

- by New Deal democrat

Several commentators, notably Calculated Risk, believe that residential investment will probably increase - finally - late in 2011, thus going from a drag on the economy to a contributor to GDP growth. Since the housing bubble of the first part of last decade helped lead the economy into the "Great Recession", there has been consternation as to whether it could lead the economy out of the recession -- or at least finally contribute.

Several years ago, Prof. David Leamer helpfully noted that there was a housing bubble in the 1920s as well - that burst several years before the actual nonset of the Great Depression, and bottomed in 1933. Following up on that, I was able to find the data for "non farm housing starts" in the Statistical Abstract of the United States. I posted the results a year and a half ago in Housing during the Roaring Twenties and Great Depression. Included then was a chart that converted the equivalent housing starts to our time, by multiplying the data proportionate to the population for each year compared with our modern population of 300 million.

Adjusting for population makes a significant difference in how one looks at the data. Building 2 million new houses a year means something quite different in 2005 with a 300 million population, than in 1960 with a 160 million population. So adjusted, the 2000's housing bubble does not look so extreme:



Adjusting for population alone doesn't tell the whole story. There remain the issues of demographics and immigation -- in other words, one must consider the factors behind household formation. I discussed this more thoroughly here, but to summarize for this post, young people begin to move out of their parents' homes at about age 20. Those who marry very young form their own household, while young singles live with roommates. By age 25, new household formation rapidly accelerates, and continues through age 35, by which time close to the maximum percentage of people are living in their own or spouse's household.

Thus Boomer household formation coincided with the 1970's-1980's peaks, and the smaller cohort of Gen X coincides with 1990's lower numbers of housing starts. Gen Y, or the "Millenials" have already begun to form households, just as the housing bust hit.

With another year's passage of time and additional data, I am republishing the chart from my original post about housing during the Roaring Twenties and Great Depression, but I have expanded it. Not only does it adjust the 1920's figures to the current era by population, but also I am comparing the equivalent year from the Roaring Twenties and Great Depression with the last decade of housing starts, normed to the peak year, which are averaged on an annual basis to make an apples to apples comparison. All data is in 1000's:

Year	1920's-1930's Nonfarm housing starts (actual)	1920's-1930's adjusted for population	2000's housing starts adjusted for population
1920/2000	247	699	1689
1921/2001	449	1236	1701
1922/2002	716	1953	1799
1923/2003	371	994	1932
1924/2004	893	2350	2014
1925/2005	937	2423 (high)	2121 (high)
1926/2006	849	2177	1837
1927/2007	810	2042	1347
1928/2008	753	1867	895
1929/2009	509	1252	546
1930/2010	330	805	592
1931	254	615	---
1932	134	322	---
1933	93	221	---
1934	126	300	---
1935	221	522	---
1936	319	748	---
1937	336	781	---
1938	406	937	---
1939	515	1179	---
1940	602	1368	---

In reviewing this chart, keep in mind that in 1930, 25% of the US population lived on farms, compared with only 2% today. Also be mindful that back then, the typical mortgage was a 5 year note that frequently included a balloon payment at the end.

The data shows that if anything, the 1920s boom was much more of a bubble than the recent one, and the ensuing eight year decline from 1925-1933 was more gradual but also sank to a lower level before bottoming.

At this point, according to recent Case-Shiller data, some housing markets are at near quarter century lows in prices. For example, here are Charlotte (green), Las Vegas (red), and Cleveland (purple) (CPI inflation in blue):



In all three of these cases, prices are actually lower now in real terms than they were 23 years ago or at any time since.

All of the above doesn't tell us that housing starts *will* increase this year, but it certainly suggests that if not this year, then either next year or the year after will see a significant increase. Further, the odds appear favorable that in at least some metropolitan areas, we will see an increase in building at some point this year.

Yesterday's Market

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