by Calculated Risk on 3/03/2010 01:02:00 PM

From Altanta Fed President Dennis Lockhart: Recovery and Reform Excerpts:

My current forecast—and that of my staff at the Federal Reserve Bank of Atlanta—lines up with ... the modest recovery scenario.

The incoming data through last week have not made me alter my basic forecast, but I consider it still too early to make a definitive call on which scenario will play out. The January numbers, as you may know, have been mixed. Consumer spending was strong for the month, while business spending on capital goods was weak, and job growth was flat. Upside surprises in inventories, capital spending, and consumption could tip the scales in favor of a stronger growth forecast. I will be particularly attentive, watching for evidence of these developments as the recovery proceeds.

Because I hold to this forecast of modest recovery and believe inflation is likely to remain subdued, I fully support the message of the most recent FOMC statement to the effect that the fed funds target rate will remain exceptionally low for an extended period.

This is a follow-up to Lockhart's The Economic Outlook: A Tale of Two Narratives.

I still expect the recovery to be sluggish and choppy in 2010, but for the economy to avoid a "double dip" recession.

by Calculated Risk on 3/03/2010 10:00:00 AM

This report shows improvement in the service sector, although employment declined for the 26th consecutive month.

From the Institute for Supply Management: February 2010 Non-Manufacturing ISM Report On Business®

"The NMI (Non-Manufacturing Index) registered 53 percent in February, 2.5 percentage points higher than the seasonally adjusted 50.5 percent registered in January, indicating growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased 2.6 percentage points to 54.8 percent, reflecting growth for the third consecutive month. The New Orders Index increased 0.3 percentage point to 55 percent, and the Employment Index increased 4 percentage points to 48.6 percent. The Prices Index decreased 0.8 percentage point to 60.4 percent in February, indicating an increase in prices paid from January. According to the NMI, nine non-manufacturing industries reported growth in February. Respondents' comments vary by industry and company about business conditions."
...
Employment activity in the non-manufacturing sector contracted in February for the 26th consecutive month. ISM's Non-Manufacturing Employment Index for February registered 48.6 percent. This reflects an increase of 4 percentage points when compared to the seasonally adjusted 44.6 percent registered in January.
emphasis added

by Calculated Risk on 3/03/2010 08:29:00 AM

ADP reports:

Nonfarm private employment decreased 20,000 from January to February 2010 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from December 2009 to January 2010 was revised down, from a decline of 22,000 to a decline of 60,000. The February employment decline was the smallest since employment began falling in February of 2008.

Two large blizzards smothered parts of the east coast during the reference period for the BLS establishment survey. The adverse weather had only a very small effect on today’s ADP Report due to the methodology used to construct it. However, the adverse weather is widely expected to depress the BLS estimate of the monthly change in employment for February, but boost it for March. Therefore, it would not be unreasonable to expect the BLS estimate for February (due out this Friday) to be less than today’s ADP Report even though the BLS estimate will include the hiring of temporary Census workers not captured in the ADP Report.

Note: ADP is private nonfarm employment only (no government jobs).

On the Challenger job-cut report from MarketWatch: Planned layoffs drop to lowest level since 2006

February's total of 42,090 planned layoffs was 41% below January's 71,482 and 77% lower than the 186,350 job cuts tracked in February 2009, at the depth of the recession. It was the lowest monthly total since July 2006.

The BLS reports on Friday, and the consensus is for a loss of 50,000 to 80,000 payroll jobs in February, on a seasonally adjusted (SA) basis, and the unemployment rate to increase slightly to 9.8%.

by Calculated Risk on 3/03/2010 07:21:00 AM

The MBA reports: Mortgage Refinance Applications Increase in Latest MBA Weekly Survey

The Market Composite Index ... increased 14.6 percent on a seasonally adjusted basis from one week earlier. ...

“Mortgage applications rebounded last week, particularly refis, as rates dropped back below 5 percent,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “Purchase activity remains subdued, with application volumes remaining within the narrow range seen in the last few months.”

The Refinance Index increased 17.2 percent from the previous week and the seasonally adjusted Purchase Index increased 9.0 percent from one week earlier. ...

The refinance share of mortgage activity increased to 69.1 percent of total applications from 68.1 percent the previous week. ...

The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.95 percent from 5.03 percent, with points decreasing to 0.99 from 1.34 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 1990.

Even with the increase in purchase applications this week, the level is back to the levels of 1997.

Also, with mortgage rates back below 5% again, refinance activity increased last week.

by Calculated Risk on 3/02/2010 09:30:00 PM

With all the talk about the impact of the February snow storms on employment, it is worth remembering that the temporary hiring for Census 2010 will also distort the payroll employment numbers.

Luckily the Census Bureau provides a monthly report on net hiring for the decennial census: Census 2010 temporary and intermittent workers

Click on graph for larger image in new window.

This graph shows the monthly change in Federal government employment during the 2010 census (January in red) and the last two decennial census periods (1990 and 2000).

During the previous two census years, there was a sharp increase in payroll employment in March and April, and a surge in May. And then almost all of the jobs were lost in the June through September period. We should expect a similar pattern this year.

Note: there are reports that the Census Bureau will hire up to 1.4 million people, however that represents some contingency planning, and includes a number of people already hired temporarily in 2009. We can probably expect a couple hundred thousand people added between January through April, and another 500 thousand or so in May. This could push the unemployment rate down slightly, but probably in the 0.1% to 0.2% range.

The Census Bureau is gearing up: Census Takers Begin Hand Delivering 2010 Census Questionnaires to 12 Million U.S. Addresses

About 56,000 census workers today began hand delivering 2010 Census questionnaires to roughly 12 million addresses across the nation, mostly in rural areas where people do not receive mail at the same location as their residence. Most of nation’s 120 million households, about 90 percent of the U.S. population, should look for their 10-question forms to arrive by mail mid-March.
...
In 2000, 72 percent of households that received a form mailed it back. The mail participation rate is a new measure designed to give a better picture of actual participation by factoring out census forms that the U.S. Postal Service was unable to deliver as addressed. It should be particularly useful in areas with seasonal populations or a large number of vacancies or foreclosures.

“It costs us just 42 cents in a postage paid envelope when households mail back their 2010 Census forms,” Groves said. “The Census Bureau will spend about $25 per person if we have to go out and knock on the doors of households that don’t mail them back.”

A few key points:

The 2010 Census will probably add about 30,000 payroll jobs in February.

Starting in February, I'll post the headline net payroll numbers, and ex-Census.

If you want to reduce the deficit, mail it back!

by Calculated Risk on 3/02/2010 06:10:00 PM

From the American Bankruptcy Institute: February Consumer Bankruptcy Filings up 14 Percent over Last Year

The 111,693 consumer bankruptcies filed in February represented a 14 percent increase nationwide over the 98,344 filings recorded in February 2009, according to the American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center (NBKRC). NBKRC’s data also showed that the February 2010 consumer filings represented a 9 percent increase over the 102,254 consumer filings recorded in January 2010. ...

“While Congress and the Obama administration continue to consider measures to reduce high unemployment and mortgage burdens, families with increasing debt loads have little choice but to continue to turn to bankruptcy for financial relief,” said ABI Executive Director Samuel J. Gerdano. “Consumer filings this year will likely surpass 1.5 million filings, or the same number of annual filings averaged in the years leading up to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.”
emphasis added

Click on graph for larger image in new window.

This graph shows the non-business bankruptcy filings by quarter (Q1 2010 is estimated based on January and February data).

The ABI's forecast for over 1.5 million filings is at about the same level as prior to when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) took effect.

by Calculated Risk on 3/02/2010 03:39:00 PM

Click on graph for larger image in new window.

This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for February (red, light vehicle sales of 10.4 million SAAR from AutoData Corp).

This is a 3.5% decline from the January sales rate.

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

This is the lowest level since September - when sales fell sharply after the "Cash-for-clunkers" program ended in August. The current level of sales are very low, and are still below the lowest point for the '90/'91 recession (even with a larger population).

Right now it looks like both seasonally adjusted auto sales and residential investment will be lower in Q1 than in Q4 2009.

by Calculated Risk on 3/02/2010 02:49:00 PM

From Zach Fox at SNL Financial: Credit Suisse: $1 trillion worth of ARMs still face resets

Most of the resets are expected to occur through 2012. Between 2010 and 2012, the chart indicates that $253.25 billion of option ARMs will adjust, while Alt-A loans totaling $163.71 billion will reset over that time. Altogether, $1.010 trillion worth of ARMs will reset or recast during the three-year period.
...
"Option ARM resets are still pending. … Nothing much has happened yet because rates were so low that resets were pushed back," Chandrajit Bhattacharya, head of non-agency RMBS and ABS strategy at Credit Suisse, told SNL.
...
[Greg McBride, senior financial analyst at Bankrate.com] was cool to the idea that option ARMs could flood the foreclosure rolls. Option ARMs are less concerning, he said, because so many have defaulted already. Indeed, the September 2009 Fitch Ratings report showed that 30-day delinquencies on option ARMs sat at 46% even though just 12% had recast. Further, option ARM foreclosure rates already match the sky-high subprime foreclosure rates.

Instead, McBride is worried about the prime ARMs posted in the Credit Suisse chart [if interest rates rise - see article for discussion].
excerpts with permission

Click on graph for larger image in new window.

Source: SNL Financial.

This graph shows the amount of ARMs resetting and recasting over the next few year. Resets are not a huge worry right now - because interest rates are so low - but if interest rates rise, this could lead to more defaults in the future.

Recasts - when the loans reamortize - are a concern, although it is unclear how large the payment shock will be. For borrowers with negative equity, any payment shock might be lead to default. As I wrote last year in A comment on Option ARMs

It is a little confusing. You can't just look at a chart of coming recasts and know when borrowers will default. The real problem for Option ARMs is negative equity, and the surge in defaults is happening before the loans recast.

But the recasts will matter too, since many of these borrowers used these mortgages as "affordability products", and bought the most expensive homes they could "afford" (based on monthly payments only). When the recasts arrive, these borrowers will have few options.

by Calculated Risk on 3/02/2010 12:58:00 PM

The National Bureau of Economic Research (NBER) uses several measures to determine if the economy is in recession. From the most recent NBER memo:

Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.

The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment. ...

The committee believes that the two most reliable comprehensive estimates of aggregate domestic production are normally the quarterly estimate of real Gross Domestic Product and the quarterly estimate of real Gross Domestic Income, both produced by the Bureau of Economic Analysis. ...

Read more »

by Calculated Risk on 3/02/2010 10:36:00 AM

From CNBC: GM's US Auto Sales Rise 11.5 Percent in February

General Motors says its February sales rose 11.5 percent compared with the same month last year ...

This is based on a very easy comparison; in February 2009 U.S. light vehicle sales fell sharply to 9.143 million (SAAR) following the financial crisis and reports of the then impending bankruptcy of GM and Chrysler. February 2009 was the bottom for auto sales.

I'll add reports from the other major auto companies as updates to this post. Toyota will be especially interesting because of the quality issues.

Read more »