by Calculated Risk on 12/06/2012 08:26:00 PM

A couple of employment report preview articles, first from Patti Domm at CNBC: Short-Term Jobs Hit Expected From Sandy

The markets are ... likely to take the number in stride because the impact from the hurricane should be temporary and ultimately turn into a positive by adding jobs in construction and other areas. "If there was ever a number that people could look past, it would be this one," said Deutsche Bank chief U.S. economist Joseph LaVorgna.

LaVorgna's forecast is at the low end. He expects just 25,000 jobs in total were created in November ...

And from Neil Irwin at the WaPo: The jobs report Friday is going to be a giant mess

[W]ith all [the] layers of uncertainty, it’s hard to imagine any number that would count as a total surprise. BNP Paribas, for example, expects payroll gains of only 25,000 positions, which would be the weakest in more than two years. Economist Julia Coronado notes that her week forecast is “entirely attributable to disruptions associated with Hurricane Sandy,” which could bode well for the longer-term, as the impacts of the storm on the job market seem to be reversing quickly.

It will be possible to filter out the effects of the storm and glean what happened in the economy more broadly last month, but not until December 21. That is when the Labor Department releases state jobs numbers; a data set that is often overlooked, it will be parsed to filter out the effect of job losses in New Jersey, New York, and other affected places.

Irwin makes a good point; the state level data will be especially useful this month.

Friday economic releases:
• At 8:30 AM ET, the BLS will release the Employment Report for November. The consensus is for an increase of 80,000 non-farm payroll jobs in November; there were 171,000 jobs added in October. The impact from Hurricane Sandy will show up in the November report. The consensus is for the unemployment rate to increase to 8.0% in November, up from 7.9% in October.

• At 9:55 AM, the Reuter's/University of Michigan's Consumer sentiment index (preliminary for December) will be released. The consensus is for sentiment to increase slightly to 83.0.

• At 3:00 PM, the Consumer Credit for October will be released. The consensus is for credit to increase $10.0 billion.

by Calculated Risk on 12/06/2012 03:09:00 PM

On Friday, at 8:30 AM ET, the BLS will release the employment report for November. The consensus is for an increase of 80,000 non-farm payroll jobs in November, down sharply from the 171,000 jobs added in October. The decline is probably due to Hurricane Sandy. The consensus is for the unemployment rate to increase to 8.0%.

There are some interesting timing issues, from Phil Izzo at the WSJ: Jobs Report Likely to Tell Two Different Tales

In most months, the survey of households, which is used to calculate the unemployment rate, and the survey of businesses, which determines the number of jobs added or lost for the month, are both based on data from the week of the 12th of the month. But because the survey of households requires phone calls to thousands of homes, the government moved it up a week in November to avoid conflicting with Thanksgiving. The business survey stayed in its usual week. So in tomorrow’s report, the payroll survey will show how many people were working the week of Nov. 12, while the unemployment rate will be based on who was working the week of Nov. 5.

Since Hurricane Sandy made landfall on October 29th, the household survey (conducted earlier) might be impacted more by the storm than the establishment survey.

Here is a summary of recent data:

• The ADP employment report showed an increase of 118,000 private sector payroll jobs in November. This was slightly below expectations. The ADP report hasn't been very useful in predicting the BLS report for any one month, although the methodology changed last month. In general this suggests employment growth in line with expectations.

• The ISM manufacturing employment index declined in November to 48.4%, down from 52.1%. A historical correlation between the ISM manufacturing employment index and the BLS employment report for manufacturing, suggests that private sector BLS reported payroll jobs for manufacturing decreased about 26,000 in November.

The ISM non-manufacturing (service) employment index decreased in November to 50.3%, down from 54.9% in October. A historical correlation between the ISM non-manufacturing employment index and the BLS employment report for services, suggests that private sector BLS reported payroll jobs for services increased about 69,000 in November.

Added together, the ISM reports suggests about 40,000 jobs added in November. Ouch.

• Initial weekly unemployment claims averaged about 400,000 in November. This was up sharply due to Hurricane Sandy.

For the BLS reference week (includes the 12th of the month), initial claims were at 416,000; the highest for a reference week this year.

• The final November Reuters / University of Michigan consumer sentiment index increased to 82.7, up slightly from the October reading of 82.6. This is frequently coincident with changes in the labor market and stock market, but also strongly related to gasoline prices and other factors. This might suggest some increase in employment, but the level still suggests a weak labor market.

• The small business index from Intuit showed 30,000 payroll jobs added, up from 5,000 in October.  That is some improvement.

• And on the unemployment rate from Gallup: U.S. Unadjusted Unemployment Shoots Back Up

U.S. unemployment, as measured by Gallup without seasonal adjustment, was 7.8% for the month of November, up significantly from 7.0% for October. Gallup's seasonally adjusted unemployment rate is 8.3%, nearly a one-point increase over October's rate.

Note: Gallup only recently has been providing a seasonally adjusted estimate for the unemployment rate, so use with caution (Gallup provides some caveats). So far the Gallup numbers haven't been very useful in predicting the BLS unemployment rate, but this does suggest an increase in November.

• Conclusion: The employment related data was pretty weak in November, and I expect the unemployment rate to increase and hiring to be weak; I think less than 80,000 jobs were added in November.

by Calculated Risk on 12/06/2012 12:32:00 PM

The Federal Reserve released the Q3 2012 Flow of Funds report today: Flow of Funds.

According to the Fed, household net worth increased in Q3 compared to Q2 2011. Net worth peaked at $67.3 trillion in Q3 2007, and then net worth fell to $51.2 trillion in Q1 2009 (a loss of $16.1 trillion). Household net worth was at $64.8 trillion in Q3 2012 (up $13.6 trillion from the trough, but still down $2.5 trillion from the peak).

The Fed estimated that the value of household real estate increased $301 billion to $17.2 trillion in Q3 2012. The value of household real estate is still $5.5 trillion below the peak.

Click on graph for larger image.

This is the Households and Nonprofit net worth as a percent of GDP.

This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.

This ratio was relatively stable for almost 50 years, and then we saw the stock market and housing bubbles. The ratio has been trending up and increased in Q3.

This graph shows homeowner percent equity since 1952.

Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008.

In Q3 2012, household percent equity (of household real estate) was at 44.8% - up from Q2, and the highest since Q1 2008. This was because of both an increase in house prices in Q3 (the Fed uses CoreLogic) and a reduction in mortgage debt.

Note: about 30.3% of owner occupied households had no mortgage debt as of April 2010. So the approximately 52+ million households with mortgages have far less than 44.8% equity - and over 10 million have negative equity.

The third graph shows household real estate assets and mortgage debt as a percent of GDP.

Mortgage debt declined by $86 billion in Q3. Mortgage debt has now declined by $1.15 trillion from the peak. Studies suggest most of the decline in debt has been because of foreclosures (or short sales), but some of the decline is from homeowners paying down debt (sometimes so they can refinance at better rates).

The value of real estate, as a percent of GDP, was up slightly in Q3 (as house prices increased), but is still near the lows of the last 30 years. However household mortgage debt, as a percent of GDP, is still historically very high, suggesting still more deleveraging ahead for households.

by Calculated Risk on 12/06/2012 10:15:00 AM

The Mortgage Debt Relief Act of 2007 is set to expire at the end of 2012 and this could have a significant impact on short sales. Usually cancelled debt is considered income, but a provision of the Debt Relief Act allowed borrowers "to exclude certain cancelled debt on [a] principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief." (excerpt from IRS).

If this act isn't extended, short sales could decline sharply. From Paul Reid, a Redfin real estate agent, writes:

"In an area like Orange County, where I work, the REO inventory is [minuscule]. As of this morning, there are 104 ‘Active’ REOs on the MLS in the entire county. In comparison, there is a total ‘Active’ inventory of 3,504 homes and condos. The short sale ‘Active’ inventory is 335. Where the numbers really stick out is in the ‘Pending’ sales category. As of right now, there are 6,059 homes in Orange County in escrow. Of those, only 267 homes are REOs. More than half, 3,216 homes, are short sales. The remainder are standard sales. If you remove the relief act from the equation you would likely see a significant drop in the number of short sales, but because of how slow the REO process is, you wouldn’t likely see a proportionate increase in the number of REO listings."

Right now there are a large number of pending short sales in many distressed areas. They all will not close before the end of the year.

There is a bipartisan push to have Congress extend the mortgage debt relief act. Here is a recent letter from several state attorneys general urging Congress to act.

As signatories to the National Mortgage Settlement, we the undersigned state attorneys general write to urge you to pass legislation extending tax relief for citizens who have mortgage debt canceled or forgiven because of financial hardship or a decline in housing values. Such legislation is currently included in Section 112 of the Family and Business Tax Cut Certainty Act of 2012 (S. 3521), which was recently passed out of the Senate Finance Committee with bipartisan support. We strongly urge Congress to extend this critical tax exclusion, which expires on December 31, 2012, so that distressed homeowners are not stuck with an unexpected tax bill or deterred from participating in this historic settlement.
...
Under the federal Mortgage Debt Relief Act, in effect since 2007, mortgage debt that is forgiven after a foreclosure or short sale or through a loan modification provided to a homeowner in financial hardship may be excluded from a taxpayer’s calculation of taxable income. This exclusion only applies to mortgage debt forgiven on primary residences, not second homes. Unfortunately, this tax exclusion expires on December 31, 2012. Therefore, unless Congress acts, all of the remaining debt relief to be provided in 2013 under the National Mortgage Settlement, as well as other mortgage debt relief programs, will likely be considered taxable income. According to the Congressional Budget Office, failure to extend this tax exclusion will result in $1.3 billion in tax increases on the very families who can least afford it.

I expect this act to be extended, but you never know.

by Calculated Risk on 12/06/2012 08:30:00 AM

The DOL reports:

In the week ending December 1, the advance figure for seasonally adjusted initial claims was 370,000, a decrease of 25,000 from the previous week's revised figure of 395,000. The 4-week moving average was 408,000, an increase of 2,250 from the previous week's revised average of 405,750.

The previous week was revised up from 393,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.


Click on graph for larger image.


The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 408,000.

This sharp increase in the 4 week average is due to Hurricane Sandy as claims increased significantly in NY, NJ and other impacted areas over the 4-week period (some of those areas saw another decline this week). Note the spike in 2005 was related to hurricane Katrina - we are seeing a similar impact, although on a smaller scale.

Weekly claims were lower than the consensus forecast.


And here is a long term graph of weekly claims:

We use the 4-week average to smooth out noise, but following an event like Hurricane Sandy,  the 4-week average lags the event. It looks like the average should decline next week to around 390,000 and should continue to decline over the next few weeks.


All current Employment Graphs