Friday, December 07, 2007
Pretty Good Employment
This employment report shows a marked difference between the household survey, which showed 696,000 more persons working, and the establishment survey, which showed 94,000 more jobs. You could claim that the difference in dates caused the discrepancy, but I am going with ADP's very positive report and claiming that employment is picking up some other places in the economy. So sue me if I'm wrong.
The reason I believe so is that the county sample started showing improvements in some manufacturing heavy counties in the summer, the ADP number, a pickup in carload rail freight in November, reasonably good clearing of the continuing claims number, and the fact that there was a turn around in primary and fabricated metals for November. The weaker dollar is starting to show up in my opinion - and in Dryfly's (see comments). The likely difference between the ADP number and the establishment number is that different establishments are sampled!
No, this doesn't change my belief that there is a recession in progress or beginning, but it does provide a helpful hint that the shift of capital from consumption to production is beginning to bear fruit. Building houses does provide jobs, but building houses no one can buy when there's an oversupply in many areas isn't good for the economy. Capital shifting to production will eventually produce a much healthier economy. This shift is not good news for many European countries or for most Asian countries.
The central banks of Canada and the UK have cut their rates by a quarter. The Eurozone is still sitting on the fence screaming about the weak dollar. It's not destined to get much stronger!
November retail sales were lackluster at the larger chain stores except for Costco, which posted a blistering 9% rise. Walmart and Target didn't do well at all. So the same factors that were controlling the economy still are - declining real wages for the bottom half at least. We have a long way to go to climb out of this hole.
See Tanta's post at CR for a fair assessment of the subprime bailout plan. All I can say about it is that it won't make much difference. Those loans basically split between people who are only marginally subprime and can get refinancing, in which case the plan doesn't affect their futures, and those who have loans they can't carry, in which case a freeze won't do much. The intermediate group is relatively small, to be honest, and most of the subprime loans which have defaulted did so before reset.
The MBA report on delinquencies and foreclosures shows the ever-increasing trend, and unfortunately it will be quite a while before this trend has a chance of improving. They provide helpful chart showing the percent of prime and subprime fixed and ARM loans as a percent of population and as a percent of foreclosures. Both subprime and prime ARM loans are defaulting at much higher rates than their fixed counterparts. Prime ARMs, for example, are 14.5% of the total loans and have produced 18.7% of foreclosures.
I think many have jumped to the idea that the ARM resets are producing the foreclosures, but in the actual pools I've seen, that's not true. These loans are largely defaulting before reset, and the reason why they are defaulting is that borrowers who choose ARM loans needed the lower rate because they were stretching to buy or refi. The primary problem seems to be borrowers who have high DTIs (debt to income ratios). Since these borrowers have available credit, they tend to go for several years racking up the CC bills to meet their mortgage, and then they inevitably tip over into default unless they can cashout refi and pay off their other debts, or sell. Prime ARM foreclosure starts were 1.02% compared to subprime fixed foreclosure starts at 1.38%. Those numbers tell the story - it is not the subprime/prime (FICO) difference that is significant in driving the trend. It is debt-to-income ratios. The prime ARM foreclosure start rate more than tripled over the course of the year - the worst relative performance of all categories.
As current conditions wear on, we will see this penetrate more and more into the prime universe of recent borrowers. The traditional exit for prime loans has been into subprime loans, and that door is closing rapidly. Falling home values and weak economic conditions cause a much higher rate of delinquencies and foreclosures.
The delinquency rate for prime loans (delinquency rates don't include foreclosures) is now a staggering 3.12%. True, this is better than the 16.31% for subprime loans, or the 12.92% for FHA loans, or the 6.58% for VA loans. But prime loans are a much higher percentage of all loans (over 77%), and as these loans go bad in higher numbers, the overall portion of delinquencies and foreclosures is doomed to keep rising. 5.59% of all loans are delinquent. 1.69% of all loans are in foreclosure. .78% (approximately 3/4 of 1 percent) of all loans are entering foreclosure, which is up .13% from the second quarter. Consider that last a quarterly rate, and the picture is bleak. How bleak? THESE ARE ALREADY THE HIGHEST FORECLOSURE RATES EVER RECORDED, and all traditional metrics suggest that foreclosure rates will climb for several more years.
For the economy as a whole, the situation is that consumer consumption will continue to drop for some time. And by the way, it's quite impossible for the American economy to avoid a recession while having a housing depression and a consumer recession. I do not believe that overall MEW will drop that much, but the difference is that far more of it will come from older folks who are mortgaging their homes to pay for basic necessities. That's the reality of the faked CPI inflation numbers - older people are losing the economic race at an ever-increasing rate. So relatively little of the new breed of MEW will go into retail (except for groceries and pharmaceuticals).
As for this blog, posts are destined to be sporadic because of my personal situation. The Chief is ill and time is taken up with medical stuff. It's serious. I'm freaking. It's been a terrible year for me personally. I console myself with the undoubted reality that my entire adult life has been an objective disaster which has subjectively worked out well, but this is a test of character I will probably fail.
I'm sorry to hear about your family illness, and that this has been such a tough year. My prayers go out to you as well, and again, thank you for sharing your thoughts with us on this blog.
Sorry to hear about the travails on the home front. We will all hope and pray for the best. No apologies necessary, even if somewhat sporadic, your insights are tremendously valuable. We'll keep coming back.
Best of luck with everything
"Sometimes doing your best is not enough. You have to do what is required."
Dig deep. Plenty of time to have a breakdown after everything is sorted out.
Links to this post: