by Calculated Risk on 9/08/2014 01:47:00 PM

From Tim Duy at Economist's View: Forward Guidance Heading for a Change

The lackluster August employment report clearly defied expectations (including my own) for a strong number to round out the generally positive pattern of recent data. That said, one number does not make a trend, and the monthly change in nonfarm payrolls is notoriously volatile. The underlying pattern of improvement remains in tact, and thus the employment report did not alleviate the need to adjust the Fed's forward guidance, allow there is a less pressing need to do so at the next meeting. In any event, the days of the "considerable time" language are numbered.
...
Arguably the only trend that is markedly different is the more rapid decline in long-term unemployment, a positive cyclical indicator. Labor force participation remains subdued, although the Fed increasing views that as a structural issue. Average wage growth remained flat while wages for production workers accelerated slightly to 2.53% over the past year. A postive development to be sure, but too early to declare a sustained trend.

The notable absence of any bad news in the labor report leaves the door open to changing the forward guidance at the next FOMC meeting. ...
...
The trick is to change the language without suggesting the timing of the first rate hike is necessarily moving forward. The benefit of the next meeting is that it includes updated projections and a press conference. Stable policy expectations in those projections would create a nice opportunity to change the language. Moreover, Yellen would be able to to further explain any changes at that time. This also helps set the stage for the end of asset purchases in October. A shift in the guidance next week has a lot to offer.

Bottom Line: The US economy is moving to a point in the cycle in which monetary policymakers have less certainty about the path of rates. Perhaps they need to be pulled forward, perhaps pushed back. Policymakers will need to be increasingly pragmatic, to use Yellen's term, when assessing the data. The "considerable time" language is inconsistent with such a pragmatic approach. It is hard to see that such language survives more than another FOMC statement. Seems to be data and policy objections are not the impediments preventing a change in the guidance, but instead the roadblock is the ability to reach agreement on new language in the next ten days.
emphasis added

CR Note: The next FOMC meeting is on Sept 16th and 17th. Duy is referring to these sentences in the FOMC statement:

"In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored."

by Calculated Risk on 9/08/2014 11:02:00 AM

By request, here is an update on an earlier post through the August employment report.

Important: There are many differences between these periods. Overall employment was smaller in the '80s, so a different comparison might be to look at the percentage change.   Of course the participation rate was increasing in the '80s (younger population and women joining the labor force), and the participation rate is generally declining now.  But these graphs give an overview of employment changes.

First, here is a table for private sector jobs. The top two private sector terms were both under President Clinton.  Reagan's 2nd term saw about the same job growth as during Carter's term. Note: There was a severe recession at the beginning of Reagan's first term (when Volcker raised rates to slow inflation) and a recession near the end of Carter's term (gas prices increased sharply and there was an oil embargo).

Term	Private Sector Jobs Added (000s)
Carter	9,041
Reagan 1	5,360
Reagan 2	9,357
GHW Bush	1,510
Clinton 1	10,885
Clinton 2	10,070
GW Bush 1	-841
GW Bush 2	379
Obama 1	1,998
Obama 21	3,826
119 months into 2nd term

The first graph shows the change in private sector payroll jobs from when each president took office until the end of their term(s). President George H.W. Bush only served one term, and President Obama is in the second year of his second term.

Mr. G.W. Bush (red) took office following the bursting of the stock market bubble, and left during the bursting of the housing bubble. Mr. Obama (blue) took office during the financial crisis and great recession. There was also a significant recession in the early '80s right after Mr. Reagan (yellow) took office.

There was a recession towards the end of President G.H.W. Bush (purple) term, and Mr Clinton (light blue) served for eight years without a recession.

Click on graph for larger image.

The first graph is for private employment only.

The employment recovery during Mr. G.W. Bush's (red) first term was sluggish, and private employment was down 841,000 jobs at the end of his first term.   At the end of Mr. Bush's second term, private employment was collapsing, and there were net 462,000 private sector jobs lost during Mr. Bush's two terms. 

Private sector employment increased slightly under President G.H.W. Bush (purple), with 1,510,000 private sector jobs added.

Private sector employment increased by 20,955,000 under President Clinton (light blue), by 14,717,000 under President Reagan (yellow), and 9,041,000 under President Carter (dashed green).

There were only 1,998,000 more private sector jobs at the end of Mr. Obama's first term.  Eighteen months into Mr. Obama's second term, there are now 5,824,000 more private sector jobs than when he initially took office.

 A big difference between the presidencies has been public sector employment.  Note the bumps in public sector employment due to the decennial Census in 1980, 1990, 2000, and 2010. 

The public sector grew during Mr. Carter's term (up 1,304,000), during Mr. Reagan's terms (up 1,414,000), during Mr. G.H.W. Bush's term (up 1,127,000), during Mr. Clinton's terms (up 1,934,000), and during Mr. G.W. Bush's terms (up 1,744,000 jobs).

However the public sector has declined significantly since Mr. Obama took office (down 682,000 jobs). These job losses have mostly been at the state and local level, but more recently at the Federal level.  This has been a significant drag on overall employment.

And a table for public sector jobs. Public sector jobs declined the most during Obama's first term, and increased the most during Reagan's 2nd term.

Term	Public Sector Jobs Added (000s)
Carter	1,304
Reagan 1	-24
Reagan 2	1,438
GHW Bush	1,127
Clinton 1	692
Clinton 2	1,242
GW Bush 1	900
GW Bush 2	844
Obama 1	-713
Obama 21	56
119 months into 2nd term

Looking forward, I expect the economy to continue to expand for the next few years, so I don't expect a sharp decline in private employment as happened at the end of Mr. Bush's 2nd term (In 2005 and 2006 I was warning of a coming recession due to the bursting of the housing bubble).

A big question is when the public sector layoffs will end.  The cutbacks are clearly over at the state and local levels in the aggregate, and it appears cutbacks at the Federal level have slowed.  Right now I'm expecting some increase in public employment in 2014, but nothing like what happened during Reagan's second term.

by Calculated Risk on 9/08/2014 08:11:00 AM

This is a key distressed market to follow since Phoenix saw a large bubble / bust followed by strong investor buying.

The Arizona Regional Multiple Listing Service (ARMLS) reports (table below):

1) Overall sales in August were down 8.8% year-over-year and at the lowest for August since 2008.  Note: This is the smallest year-over-year sales decline this year.

2) Cash Sales (frequently investors) were down about 33% to 25% of total sales. Non-cash sales were up 3.5% year-over-year.  So the decline in sales is probably mostly due to less investor buying.

3) Active inventory is now up 22% year-over-year - and at the highest level for August since 2011 (when prices bottomed in Phoenix).  Note: This is the smallest year-over-year inventory increase this year, so the inventory build may be slowing.

Inventory has clearly bottomed in Phoenix (A major theme for housing in 2013).   And more inventory (a theme this year) - and less investor buying - suggests price increases should slow sharply in 2014.

According to Case-Shiller, Phoenix house prices bottomed in August 2011 (mostly flat for all of 2011), and then increased 23% in 2012, and another 15% in 2013.  Those large increases were probably due to investor buying, low inventory and some bounce back from the steep price declines in 2007 through 2010.  Now, with more inventory, price increases should flatten out in 2014.

As an example, the Phoenix Case-Shiller index through June shows prices up less than 1% in 2014, and the Zillow index shows Phoenix prices up only 0.1% over the last year!

August Residential Sales and Inventory, Greater Phoenix Area, ARMLS
	Sales	YoY Change Sales	Cash Sales	Percent Cash	Active Inventory	YoY Change Inventory
Aug-08	5,660	---	1,004	17.7%	53,5691	---
Aug-09	8,008	41.5%	2,849	35.6%	38,085	-28.9%
Aug-10	7,358	-8.1%	3,129	42.5%	44,307	16.3%
Aug-11	8,712	18.4%	3,953	45.4%	26,983	-39.1%
Aug-12	7,574	-13.1%	3,382	44.7%	20,934	-22.4%
Aug-13	7,055	-6.9%	2,409	34.1%	21,444	2.4%
Aug-14	6,431	-8.8%	1,621	25.2%	26,138	21.9%
1 August 2008 probably includes pending listings

by Calculated Risk on 9/07/2014 07:51:00 PM

From Ben Leubsdorf at the WSJ: Services-Spending Report Gains Wider Attention

A quarterly reading from the Commerce Department has quietly emerged as one of the most consequential government reports, with the power to roil estimates for U.S. economic growth and the impact of the Affordable Care Act.

The Quarterly Services Survey, or QSS, measures revenue at service-providing companies including hospitals, day-care centers and law offices. ... Federal Reserve policy makers and private economists are taking a much closer look at the gauge. ...

Consumer spending accounts for more than two-thirds of U.S. economic output, but measuring spending on services is tricky. The government often relies on indirect clues, like payroll growth in certain industries. The QSS offers the best—that is, only—source of timely hard data. It is the basis for roughly one-fifth of the Commerce Department's quarterly calculation of gross domestic product.

June's report led to a steep downgrade for first-quarter GDP.

The Q2 Quarterly Services Report will be released on Thursday, September 11, 2014 at 10AM ET.

Weekend:
• Schedule for Week of September 7th
• Update: Prime Working-Age Population Growing Again
• Research: Much of Recent Decline in Labor Force Participation Rate due to "ongoing structural influences"

From CNBC: Pre-Market Data and Bloomberg futures: the S&P futures are down 2 and DOW futures are down 14 (fair value).

Oil prices were down slightly over the last week with WTI futures at $93.48 per barrel and Brent at $100.80 per barrel.  A year ago, WTI was at $109, and Brent was at $116 - so prices are down solidly year-over-year.

Below is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are around $3.44 per gallon (down almost 15 cents from a year ago).  If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent; gasoline prices in most of the U.S. are impacted more by Brent prices.

Orange County Historical Gas Price Charts Provided by GasBuddy.com

by Calculated Risk on 9/07/2014 12:23:00 PM

For several years, I've been arguing that "most of the recent decline in the participation rate" was due to demographics and other long term structural trends (like more education). This is an important issue because if most of the decline had been due to cyclical weakness, then we'd expect a significant increase in participation as the economy improved. If the decline was due to demographics and other long term trends, then the participation rate might keep falling (or flatten out) as the economy improves.

 Note: So far this year, the participation rate has moved sideways at 62.8% - probably because demographics and other long term factors are being offset by people returning to the labor force this year.  However, looking forward, the participation rate should continue to decline for the next couple of decades.

From Federal Reserve researchers Stephanie Aaronson, Tomaz Cajner, Bruce Fallick, Felix Galbis-Reig, Christopher L. Smith, and William Wascher: Labor Force Participation: Recent Developments and Future Prospects

The evidence we present in this paper suggests that much of the steep decline in the labor force participation rate since 2007 owes to ongoing structural influences that are pushing down the participation rate rather than a pronounced cyclical weakness related to potential jobseekers’ discouragement about the weak state of the labor market – in many ways a similar message as was conveyed in the 2006 Brookings Paper. Most prominently, the ongoing aging of the babyboom generation into ages with traditionally lower attachment to the labor force can, by itself, account for nearly half of the decline. In addition, estimates from our model, as well as the supplementary evidence on which we report, show persistent declines in participation rates for some specific age/sex categories that appear to have their roots in longer-run changes in the labor market that pre-date the financial crisis by a decade or more.

In particular, participation rates among youths have been declining since the mid-1990s, in part reflecting the higher returns to education documented extensively by other researchers, but also, we believe, some crowding out of job opportunities for young workers associated with the decline in middle-skill jobs and thus greater competition for the low-skilled jobs traditionally held by teenagers and young adults. Such “polarization” effects also appear to have weighed on the participation of less-educated prime-age men and, more recently, prime-age women. In contrast, increasing longevity and better health status, coupled with changes in social security rules and increased educational attainment, have contributed to an ongoing rise in the participation rates of older individuals, but these increases have not been large enough to provide much offset to the various downward influences on the aggregate participation rate.

That is not to say that all of the decline in labor force participation reflects structural influences. Our cohort-based model suggests that cyclical weakness was depressing the participation rate by about ¼ percentage point in 2014:Q2, while evidence from cross-state regressions suggests that the contribution of cyclical weakness could be as much as 1 percentage point. The greater cyclicality evidenced in the cross-state regressions could be capturing some of the features of the current labor market we discussed outside the context of the model, such as the unusually high level of those out of the labor force who want a job, or any unusual cyclicality in youth participation or retirement.

Looking ahead, demographics will likely continue to play a prominent role in determining the future path of the aggregate labor force participation rate. The youngest members of the baby-boom generation are still in their early fifties, and thus the effects of population aging will continue to put downward pressure on the participation rate for some time. Indeed, on our estimates, the continued aging of the population alone will subtract 2½ percentage points from the aggregate participation rate over the next ten years. And the overall downtrend could be even larger if some of the negative trends evident for particular age-sex groups persist.

by Calculated Risk on 9/06/2014 06:06:00 PM

This is an update to a previous post through August.

Earlier this year, I posted some demographic data for the U.S., see: Census Bureau: Largest 5-year Population Cohort is now the "20 to 24" Age Group and The Future is still Bright!

I pointed out that "even without the financial crisis we would have expected some slowdown in growth this decade (just based on demographics). The good news is that will change soon."

Changes in demographics are an important determinant of economic growth, and although most people focus on the aging of the "baby boomer" generation, the movement of younger cohorts into the prime working age is another key story in coming years. Here is a graph of the prime working age population (this is population, not the labor force) from 1948 through August 2014.

Click on graph for larger image.

There was a huge surge in the prime working age population in the '70s, '80s and '90s - and the prime age population has been mostly flat recently (even declined a little).

The prime working age labor force grew even quicker than the population in the '70s and '80s due the increase in participation of women. In fact, the prime working age labor force was increasing 3%+ per year in the '80s!

So when we compare economic growth to the '70s, '80, or 90's we have to remember this difference in demographics (the '60s saw solid economic growth as near-prime age groups increased sharply).

The prime working age population peaked in 2007, and appears to have bottomed at the end of 2012.  The good news is the prime working age group has started to grow again, and should be growing solidly by 2020 - and this should boost economic activity in the years ahead.

by Calculated Risk on 9/06/2014 01:12:00 PM

The key report this week is August retail sales on Friday.

----- Monday, September 8th -----
3:00 PM: Consumer Credit for July from the Federal Reserve.  The consensus is for credit to increase $17.4 billion.

----- Tuesday, September 9th -----
7:30 AM ET: NFIB Small Business Optimism Index for August.

10:00 AM: Job Openings and Labor Turnover Survey for July from the BLS.

This graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Jobs openings increased in June to 4.671 million from 4.577 million in May.   This was the highest level since February 2001.

The number of job openings (yellow) were up 18% year-over-year compared to June 2013. Quits were up 15% year-over-year.

----- Wednesday, September 10th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

10:00 AM: Monthly Wholesale Trade: Sales and Inventories for July. The consensus is for a 0.5% increase in inventories.

----- Thursday, September 11th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 300 thousand from 302 thousand.

10:00 AM: The Q2 Quarterly Services Report from the Census Bureau.

2:00 PM ET: The Monthly Treasury Budget Statement for August.

----- Friday, September 12th -----
8:30 AM ET: Retail sales for August will be released.

This graph shows retail sales since 1992 through July 2014. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). On a monthly basis, retail sales were unchanged from June to July (seasonally adjusted), and sales were up 3.7% from July 2013.

The consensus is for retail sales to increase 0.4% in August, and to increase 0.3% ex-autos.

9:55 AM: Reuter's/University of Michigan's Consumer sentiment index (preliminary for September). The consensus is for a reading of 83.1, up from 82.5 in August.

10:00 AM: Manufacturing and Trade: Inventories and Sales (business inventories) report for July.  The consensus is for a 0.5% increase in inventories.

by Calculated Risk on 9/05/2014 09:40:00 PM

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for Sept 5, 2014.

Changes and comments from surferdude808:

The Federal Reserve terminating two actions were the only changes to the Unofficial Problem Bank List this week. After removal, the list holds 437 institutions with assets of $138.9 billion. A year ago, the list held 704 institutions with assets of $249.8 billion.

The Fed terminated actions against Commercial Bank, Harrogate, TN ($771 million) and American Bank, Bozeman, MT ($313 million). With these terminations, there are only 44 or 5.1 percent of the 858 banks supervised by the Fed operating under a formal enforcement action. In comparison, 6.2 percent of the state non-member banks supervised by the FDIC and 10.5 percent of the national banks supervised by the OCC are operating under a formal agreement.

Next week should be as quiet as the OCC will likely not provide an update on its enforcement action activity until September 19th.

CR Note: The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public. (CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest.)

As a substitute for the CAMELS ratings, surferdude808 is using publicly announced formal enforcement actions, and also media reports and company announcements that suggest to us an enforcement action is likely, to compile a list of possible problem banks in the public interest.

When the list was increasing, the official and "unofficial" counts were about the same. Now with the number of problem banks declining, the unofficial list is lagging the official list. This probably means regulators are changing the CAMELS rating on some banks before terminating the formal enforcement actions.

by Calculated Risk on 9/05/2014 04:35:00 PM

From housing economist Tom Lawler:

This week’s S&P/Case-Shiller Home Price Report for June 2014 contained two data “surprises.” The first was that the SPCS “National” HPI, previously released only quarterly, will now be published on a monthly basis. The second, and much more dramatic, surprise was that the historical data for the SPCS “National” HPI was revised substantially. Here is a table showing growth rates in the previously-published National HPI and the revised National HPI over selected periods, using not seasonally adjusted data.

While the revised HPI shows very similar growth rates to the previous HPI from 1990 to 2000, it shows (1) slower growth rates during the 2000-2006 period; (2) a substantially smaller peak-to-trough decline from mid-2006 to late 2011/early 2012; and (3) a somewhat slower growth rate from early 2012 to early 2014.

Growth Rates, Previous vs. Revised SPCS "National" HPI
	Cumulative Previous	% Change Revised	Annualized Previous	% Change Revised
Q2/1990 - Q2/2000	35.8%	35.3%	3.1%	3.1%
Q2/2000 - Q2/2006	83.0%	76.0%	10.6%	9.9%
Q2/2006 - Q1/2012	-34.6%	-26.3%	-7.1%	-5.2%
Q1/2012 - Q1/2014	21.4%	18.7%	10.2%	8.9%
Peak*	Q2/2006	Q2/2006
Trough*	Q1/2012	Q4/2011
Peak-to-Trough % Change	-34.6%	-26.7%
*For Quarterly HPI

The catalyst for this revision appears to a change in the sources of sales transactions data to sources used by CoreLogic, which “bought” the SPCS HPIs last year. Here is an excerpt from a July 2014 “methodology” report.

“The sources for sale transaction data were changed to sources used by CoreLogic, Inc. beginning with the March 2014 update of the S&P/Case-Shiller indices. Since the repeat sale pair samples collected from CoreLogic sources are not identical to samples collected from prior sources1, divisors are used to prevent any breaks in the index series. The divisors applied to index points estimated for March 2014 and all months afterward are listed below. The divisors are calculated by calculating the index value for February, 2014 with the old data source and the new data source separately. If we assume that the change in the data source increases the index level for February 2014 by 5%. Then the divisor is set to 1.05 and the index based on the new data source is divided by 1.05 for March 2014 and all subsequent months. This prevents a jump in the index and preserves the month-to-month percentage changes.”

While this paragraph appears to be related to the construction of the 20 metro area HPIs, I’m assuming that new CoreLogic data sources were used to construct revised national HPIs.

A Bloomberg article picked up on these revisions, though Case-Shiller principal economist David Stiff’s “explanation” in that article seemed incomplete. According to article Stiff said that “the index only looks different because it’s been rebuilt with new, higher quality data.” He also said that “CoreLogic’s data allowed Case-Shiller to weed out more bank repossessions,” implying that the major source of the revisions was that Case-Shiller’s HPI previously erroneously included non-arms-length transactions such as bank repossessions.

It seems highly unlikely, however, that this factor was the major reason for revisions in the national HPI. First, there were no similar revisions in pre-2014 data for the HPIs for the 20 metro areas SPCS publishes. Second, the new national HPI grew by seven percentage points less than the previous national HPI from Q2/2000 to Q2/2006, when distressed transactions were de minimis.

A more likely (though not verified) reason is that the new SPCS National HPI, using CoreLogic’s larger database, now covers a much wider geographic area than the old SPCS HPI. The geographic coverage of the old SPCS National HPI was pretty “light.” Here is SPCS’ estimate of its coverage of the housing market in each Census division (based on market value).

	Division Coverage (% Value)	Zero-Coverage States
New England	93.5%	Maine
Middle Atlantic	76.1%
East North Central	63.3%	Indiana, Wisconsin
West North Central	53.0%	North Dakota, South Dakota
South Atlantic	63.0%	South Carolina, West Virginia
East South Central	38.3%	Alabama, Mississippi
West South Central	48.7%
Mountain	70.4%	Idaho, Montana, Wyoming
Pacific	91.6%	Alaska

While SPCS is now apparently using data sources used by CoreLogic, the two HPIs are still significantly different, now mainly reflecting methodological and aggregation differences.



The “new” SPCS “National” HPI now looks much more similar to the FHFA Expanded Dataset HPI, once the latter is adjusted (albeit crudely) to be market-value weighted instead of housing unit weighted (SPCS is value weighted). If one were to construct a FHFA “National” HPI by applying Census 2000 market value weights to each FHFA State HPI, here is what it would look like relative to the previous and revised SPCS National HPI.

by Calculated Risk on 9/05/2014 01:32:00 PM

One of the dumbest comments I saw this morning was from Douglas Holtz-Eakin who wrote "Disaster in August jobs!"

Really? Was this a "disaster"? I'm sure Holtz-Easkin wrote "disaster" in 1984 when payroll employment only increased 128 thousand in one month (on the way to almost 3.9 million for the year). Or "DISASTER" (all caps) in 1983 when payroll jobs plunged 308 thousand one month (on the way to almost 3.5 million for the year).

Or how about in 1997 when the economy lost 39 thousand jobs one month (on the way to 3.4 million jobs added for the year)?

For fun, below is a table of the best years for job growth since 1980 with the worst month of the year.  Obviously there is a significant amount of volatility in the employment report.

If the August report was a "jobs disaster" then there is a "disaster" every year!  It would be important if this is the start of lower employment reports, but I think that is very unlikely.

Note 1: Job growth was stronger in the '80s and '90s when the prime working age population was growing quickly.  This decade the prime working age population has actually declined, so we should expect as much job growth, see: Demographics: Prime Working-Age Population Growing Again

Note 2: I've called out Holtz-Eakin before.  He voted to ban 'the phrases "Wall Street" and "shadow banking" and also the words "interconnection" and "deregulation" from' the Financial Crisis Inquiry Commissiom report!  Oh my ...

Non-Farm Payroll: Best Years, Worst Month
Year	Annual (000s)	Worst Month (000s)
1984	3,880	128
1994	3,851	200
1983	3,458	-308
1997	3,408	-39
1988	3,242	94
1999	3,177	107
1987	3,153	171
1998	3,047	124
1996	2,825	-18
1993	2,817	-49
2014	2,5851	142
2005	2,506	67
1985	2,502	124
2013	2,331	84
2012	2,236	88
1995	2,159	-16
2006	2,085	2
2011	2,083	70
2004	2,033	32
12014 is the hiring pace through August.