RSS Feed by Calculated Risk on 10/11/2010 06:06:00 PM
Monday, October 11, 2010
Rail Intermodal Traffic at 2008 levels, Carload Traffic Lags
From the Association of American Railroads: Rail Time Indicators. The AAR reports carload traffic in September 2010 was up 7.7% compared to September 2009 - and carload traffic was 7.5% lower than in September 2008. Intermodal traffic (using intermodal or shipping containers) is up up 17.3% over September 2009 and up 0.2% over September 2008.
Click on graph for larger image in new window.
This graph shows U.S. average weekly rail carloads (NSA). Traffic increased in 16 of 19 major commodity categories year-over-year.
From AAR:
• U.S. freight railroads originated 1,487,511 carloads in September 2010, an average of 297,502 carloads per week. That’s up 7.7% from September 2009 and down 7.5% from September 2008 on a non-seasonally adjusted basis. It’s also the highest weekly average for any month since October 2008.As the graph above shows, rail carload traffic collapsed in November 2008, and now, a year into the recovery, carload traffic has only recovered half way. However ...
• Average unadjusted weekly carloads are typically lower in September than in August because of the Labor Day holiday. This year, though, September’s weekly unadjusted average (297,502) was higher than August’s (294,862). Why? The week with Labor Day was, as usual, one of the lowest-volume weeks of the year, but the other four weeks in September 2010 were all among the six highest-volume weeks of the year. The top two weeks so far in 2010 were in September.
• That explains why seasonally adjusted U.S. rail carloads were up 1.9% in September 2010 over August 2010, reaching their highest level since November 2008.
• U.S. railroads originated 1,165,288 intermodal trailers and containers in September 2010, an average of 233,058 per week on an unadjusted basis. That’s down slightly from August 2010, but that’s just due to Labor Day. The four non-Labor Day weeks in September were four of the top five intermodal weeks so far in 2010. September 2010 intermodal traffic was up 17.3% over September 2009 and up 0.2% over September 2008.The increase in intermodal traffic, along with the increase in West Coast port import traffic, are two of the indicators that suggest retailers might have over-ordered for the holidays. Stephanie Clifford and Catherine Rampell mentioned this possibility in the NY Times article last week: Dim Outlook for Holiday Jobs
• On an unadjusted basis, September is traditionally the second (sometimes third) highest-volume month of the year for intermodal, behind October. Intermodal peaks in the fall as retailers stock up for the holidays.
excerpts with permission
While retailers are just now making plans for Christmas hiring, they had to make plans for Christmas merchandise months ago, and that lag might create some inventory problems.
In the first part of the year, the economic picture looked much brighter. ... That was at about the same time that retailers had to order holiday merchandise because of the time it takes to produce and ship the inventory.
And recent traffic at the nation’s ports suggests that retailers made optimistic bets.
Economic Nobel Prize: Matching "the honored work with the moment"
by Calculated Risk on 10/11/2010 03:22:00 PM
A couple of reviews and explanations of the work of Peter Diamond, Dale Mortensen and Christopher Pissarides ...
From Edward Glaeser at Economix: The Work Behind the Nobel Prize
This year’s Nobel Memorial Prize in Economic Science ... was awarded today to Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides for their research on “markets with search frictions,” which means any setting where buyers and sellers don’t automatically find each other. Search models are relevant in many settings, including dating, used cars and housing, but above all, these models help us make sense of unemployment.And more from Paul Krugman: What We Learn From Search Models
...
Professor Diamond’s ... work was distinguished both by elegant modeling — building the theoretical tools needed to make sense of labor turnover—and important insights. Perhaps the key idea is the “search externality,” the idea that each “additional worker makes it easier for vacancies to find workers and harder for other workers to find jobs.” ... Whenever one worker passes up a job, that worker makes finding a job easier for other workers. This insight led to Professor Diamond’s conclusion that higher levels of unemployment insurance could improve the workings of the labor market by making some workers pass up marginal jobs.
...
The work of these economists does not tell us how to fix our current high unemployment levels, but it does help us to make some sense of our current distress. Their models tell us that common wisdom — like the belief that higher unemployment benefits always increase unemployment — may be wrong and that policies that improve matching may have great value. Rarely has the prize committee been better able to match the honored work with the moment.
With regard to current concerns, probably the most relevant paper is Blanchard and Diamond on the Beveridge Curve — the relationship between job vacancies and unemployment. ... It shows that structural unemployment is a real issue, and that the volume of structural unemployment shifts over time. It also shows, however, that short-term movements in unemployment are overwhelmingly the result of overall shocks to demand ...And from Catherine Rampell at the NY Times: 3 Share Nobel Economics Prize for Labor Analysis
In a telephone interview with reporters at the Nobel news conference in Sweden, Professor Pissarides said he thought the work being honored had one lesson in particular for today’s policy makers: “What we should really be doing is make sure the unemployed do not stay unemployed for too long, to try to give them direct work experience,” so that they “don’t lose their attachment to the labor force.”
Professor Diamond, in a news conference at M.I.T., echoed his colleague’s advice about getting people back to work as quickly as possible, but said fears about permanently higher unemployment rates and structural displacement of workers were overblown.
“I think the economy is very adaptive,” he said. “Workers and employers will adapt to what will make the economy function. I see no reason why, once we get fully over this, we won’t go back to normal times,” with more “normal” unemployment rates.
Real GDP Growth and the Unemployment Rate
by Calculated Risk on 10/11/2010 12:33:00 PM
At the November FOMC meeting, the Fed will update their economic forecasts.
In June, the Fed forecast was for GDP growth of between 3.5% and 4.2% in 2011, with the unemployment rate falling to 8.3% to 8.7%. However since their forecasts were too optimistic for 2010, the unemployment rate would even be higher next year with the same growth forecast in 2011 (because the FOMC had expected the unemployment rate to fall further in 2010).
Click on graph for larger image.
Here is an update on a version of Okun's Law. This graph shows the annual change in real GDP (x-axis) vs. the annual change in the unemployment rate (y-axis).
Note: For this graph I used a rolling four quarter change - so all the data points are not independent. However - remember - this "law" is really just a guide.
Using this graph and the previous Fed forecasts for 2011 (3.5% to 4.2% GDP growth), we can estimate that the unemployment rate will be in the 9.0% to 9.4% range in a year (although the spread is pretty wide).
The following table summarizes several scenarios over the next year (starting from the current 9.6% unemployment rate):
| Real GDP Growth | Unemployment Rate in One Year |
|---|---|
| 0.0% | 11.0% |
| 1.0% | 10.5% |
| 2.0% | 10.0% |
| 3.0% | 9.6% |
| 4.0% | 9.1% |
| 5.0% | 8.7% |
I expected a sluggish recovery in 2010, so I thought the unemployment rate would stay elevated throughout 2010 (that was correct).
Going forward, I think the recovery will stay sluggish and choppy for some time and I'd guess the unemployment rate will tick up in the short term and still be above 9% later next year. You can see why those expecting 1% to 2% growth next year (like Goldman Sachs) are expecting the unemployment rate to be close to 10%.
Obviously higher growth rates would mean an even quicker decline in the unemployment rate, and a decline in real GDP would mean much higher unemployment rates.
CNBC Survey: Fed Certain to act in November
by Calculated Risk on 10/11/2010 09:23:00 AM
Market participants now expects QE2 to be announced at 2:15 PM ET on November 3rd (when the FOMC statement is released at the conclusion of the two day meeting).
From Steve Liesman at CNBC: Fed Certain to Act in November In a Big Way: Survey
[M]arket participants are now virtually certain that the Federal Reserve will announce [QE2] at the conclusion of its November meeting and do so in a sizeable way, according to an exclusive CNBC Fed Survey. ... participants forecast that the Fed will announce plans to purchase $500 billion in assets ...The FOMC might announce a large amount - or they might announce a monthly pace of purchases like the $100 billion we've discussed before, with the intention of reviewing the purchase pace at each subsequent FOMC meeting.
Note: This coming Friday, at 8:15 AM ET, Fed Chairman Ben Bernanke will address the tools and goals of QE2 at the Federal Reserve Bank of Boston Conference. His speech is titled: "Monetary Policy Objectives and Tools in a Low-Inflation Environment".
Sunday, October 10, 2010
Fed's Dudley: Costs of higher capital requirements under Basel III are "exaggerated"
by Calculated Risk on 10/10/2010 09:53:00 PM
Earlier:
The following speech focuses on Basel III capital and liquidity standards.
From NY Fed President William Dudley: Basel and the Wider Financial Stability Agenda
[T]he new standards will require banking organizations to significantly increase the amount of high-quality, loss-absorbing capital that they hold; significantly improve risk capture in trading, counterparty credit, securitization and other activities that the prior regulatory capital requirements did not adequately capture; make it more expensive for banks to provide liquidity guarantees to shadow banks; constrain the leverage that banking companies can take by introducing a credible, non-risk-based backstop; and increase the capacity of banks to absorb shocks that might temporarily impede their ability to access short-term funding markets. While these changes apply directly only to large internationally active banks, they will have wider ramifications for the financial system as a whole, including nonbanks and the capital markets.Note that the word "intended" is highlighted in the speech. The requirement are intended to encourage banks to change thier business models and reduce risk.
...
The new capital rules are intended to provide strong incentives for banks to change their business models in ways that make the system more stable and reduce the negative impact their actions have on others—for instance, by providing incentives to standardize OTC derivatives contracts and clear such standardized trades through central counterparties. To understand what these new requirements mean for the amount of capital banks will ultimately have to hold, it is important to note that one of the intended consequences of these changes is for banks to adjust their business models in ways that reduce the risks their activities generate.
And on the costs:
[S]ome argue that the new [Basel] standards are too severe. They argue that, in the short run, the higher standards could lead to a significant constraint in credit that could hurt the nascent economic expansion. And, they argue, in the long run, that the higher capital standards will inevitably drive up lending costs and that this will hurt economic performance. Although I believe the new standards do impose some real costs on the financial system in order to achieve real benefits, I believe that concerns over the costs are exaggerated.The new standards will be phased in over several years.
Summary for Week ending Oct 9th
by Calculated Risk on 10/10/2010 03:55:00 PM
A summary of last week - mostly in graphs.
The weak employment report all but guaranteed QE2 will be announced on November 3rd. The "whisper" number is for an announcement of an initial $500 billion in purchases of long term Treasury securities over the following six months.
Click on graph for larger image.This graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost).
The dotted line is ex-Census hiring. The two lines have joined since the decennial Census is almost over.
The BLS reported:
1) Nonfarm payroll employment decreased by -95,000 in September
2) the Unemployment Rate was unchanged at 9.6%
3) Private employment increased by 64,000.
4) Government employment declined by 159,000 (mostly Census and local government).
5) Census 2010 employment decreased 77,000 in September.
6) so there were 18,000 payroll jobs lost ex-Census.
Note: This will be the last "ex-Census" report until the 2020 Census!
The second graph shows the unemployment rate vs. recessions.The unemployment rate has mostly moved sideways since falling to 9.7% in January 2010.
The economy has gained 334,000 jobs over the last year, and lost 7.75 million jobs since the recession started in December 2007. However the preliminary benchmark revision (to be announced with the January 2011 report) is for a downward revision of 366,000 jobs as of March 2010 - and that suggests over 8.1 million jobs have been lost since the start of the employment recession.
The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) was at 9.472 million in September, up sharply from August. This is a new record high, and is obviously bad news.
These workers are included in the alternate measure of labor underutilization (U-6) that increased to 17.1% in September from 16.7% in August. The high for U-6 was 17.4% in October 2009.
This graph shows the employment-population ratio; this is the ratio of employed Americans to the adult population.The Employment-Population ratio was steady at 58.5% in September (the same low level as in August).
Note: the graph doesn't start at zero to better show the change.
The Labor Force Participation Rate was also steady at 64.7% in September. This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years.
The blue line is the number of workers unemployed for 27 weeks or more. The red line is the same data as a percent of the civilian workforce.According to the BLS, there are 6.123 million workers who have been unemployed for more than 26 weeks and still want a job. This is 4.0% of the civilian workforce. It appears the number of long term unemployed has peaked ... Although this may be because people are giving up.
Employment Report Summary
The number of private sector jobs increased modestly by 64,000, otherwise the underlying details of the employment report were grim.
The negatives include the loss of 18,000 jobs ex-Census, the sharp increase in part time workers for economic reasons (and jump in U-6 unemployment rate), hours worked were flat (down for manufacturing workers), the employment-population ratio and labor force participation were flat at very low levels, and the unemployment rate was flat at a very high level.
This was another weak employment report.
This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.The September ISM Non-manufacturing index was at 53.2%, up from 51.5% in August - and above expectations of 52.0%. The employment index showed slight expansion in September at 50.2%, up from 48.2% in August. Note: Above 50 indicates expansion, below 50 contraction.
This graph shows the office vacancy rate starting in 1991.Reis is reporting the vacancy rate rose to 17.5% in Q3 2010, up from 17.4% in Q2 2010, and up from 16.6% in Q3 2009. The peak following the previous recession was 16.9%.
From the WSJ Signs of Recovery For Office Market
It appears the rate of increase in the vacancy rate has slowed - and rents may be stabilizing.
Reis reported that the vacancy rate for large regional malls fell to 8.8% in Q3 from 9.0% in Q2. The vacancy rate at strip malls fell to 10.9%.At regional malls, the record vacancy rate was 9.0% in Q2 2010 (Reis started tracking regional malls in 2000). The record vacancy rate for strip malls was in 1990 at 11.1%.
From Reuters: U.S. mall vacancy rate dips for first time in 3 years
And on apartment vacancies: From Ilaina Jonas at Reuters: US apartment vacancy rate drops sharply in 3rd qtr.
The national vacancy rate fell to 7.2 percent from 7.8 percent in the second quarter as renters soaked up 84,382 more units than were vacated ...This is for large apartment building in major cities, and it shows a significant drop in the vacancy rate.
Best wishes to all.
