Optimistic Unemployment and Housing Forecasts Looking Downright Silly

Economics may be the "dismal science" but economists as a group sure seem to be an optimistic lot. Yes, there are a handful of "doomers" like Nouriel Roubini but most economists did not see the recession coming until it was already 10 months old.

Please consider unemployment forecasts. The Fed forecast unemployment at 8.4% in 2009 and the "adverse forecast" was at 10.3% in 2010.

Hello Ben, in case you did not notice, Jobs Contract 17th Straight Month; Unemployment Rate Soars to 9.4% and Bankruptcy Filings Reach 6,000 A Day.

Adverse Assumptions

Let's take a look at all the Fed's adverse assumptions for the recently conducted "stress-free test" as laid out in the Fed's Stress Test White Paper.



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1 Percent change in annual average.
2 Baseline forecasts for real GDP and the unemployment rate equal the average of projections released by Consensus Forecasts, Blue Chip, and Survey of Professional Forecasters in February.
3 Annual average.
4 Case‐Shiller 10‐City Composite, percent change, fourth quarter of the previous year to fourth quarter of the year indicated.

Case Shiller Housing Index

Please consider the latest Case Shiller Housing Index.

The S&P/Case-Shiller Home Price Index ― which covers 20 metropolitan areas ― showed a price decline of 18.7% in March, suggesting a greater fall in prices than expected. Analysts were looking for an -18.40% reading, following the -18.67% reading for February. The 10-city measure fell a similar 18.6%.

The numbers were even worse on a quarterly basis. The Q1 report ― which covers all nine U.S. census divisions, rather than just 20 metropolitan areas ― recorded a 19.1% decline compared to the first quarter of 2008, marking the steepest fall ever in the 21-year history of the index.

“All 20 metro areas are still showing negative annual rates of change in average home prices with nine of the metro areas having record annual declines,” said David Blitzer, Chairman of the Index Committee at Standard & Poor’s. “Seventeen metro areas recorded a monthly decline in March, with Minneapolis, Detroit and New York posting record monthly declines.”

Note that the baseline scenario for housing for 2009 is -14%. Home prices are already down 19.1% and the adverse scenario will be under attack next month.

Unemployment Projections



The consensus forecast of unemployment for 2009 was 8.4%. The Blue Chip Forecast, a survey of America's leading business economists that costs $875 annually. Blue Chip had the unemployment rate at 8.3% for 2009 and 8.7% for 2010.

Check out this footnote in the WhitePaper.

The “more adverse” scenario was constructed from the historical track record of private forecasters as well as their current assessments of uncertainty. In particular, based on the historical accuracy of Blue Chip forecasts made since the late 1970s, the likelihood that the average unemployment rate in 2010 could be at least as high as in the alternative more adverse scenario is roughly 10 percent.

As noted, the Fed had a mere 10% chance the unemployment numbers get as high as the adverse scenario. The adverse scenario for 2009 has already been exceeded unless you think unemployment has peaked and is going lower over the next several months.

Meanwhile the Survey of Professional Forecasters pegged the unemployment rate at 8.4% for 2009 and 8.8% for 2010 (now revised much higher as is always the case).

Across the board, the Fed's adverse scenarios were a cakewalk, especially the unemployment forecasts.

Flashback February 11, 2008

White House: Unemployment to stay near 5%

The Bush administration's top economists see annual unemployment remaining just below 5% through 2013, meaning an extended period when the jobless rate would top the full-year average in six of the last 10 years.

The annual outlook of the president's Council of Economic Advisors, released Monday, also projects that the economy will keep growing this year and avoid a recession. In fact, real gross domestic product is forecast to rise by a healthy 2.7% when comparing the fourth quarter of this year to a year earlier.

But the report projects the full-year unemployment rate will rise to 4.9% in 2007, up from 4.6% each of the last two years. And it expects the unemployment rate will stay at the 4.9% rate in 2009 before starting to retreating slightly to 4.8% in each of the following four years.

Are economists paid to say what people want to hear? If not, can someone please tell me why economists are perennially such an optimistic lot, seldom collectively in the ballpark and constantly revising forecasts lower?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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How To Balance The California Budget - You Decide

The Los Angeles Times has an interesting Interactive On Balancing The California Budget.

Try your hand at closing California’s budget shortfall, estimated at $24 billion. It’s not easy, but it can be done. Cut spending, raise taxes and/or borrow to get the state out of the red. For each choice -- drawn from proposals from across the political spectrum -- we’ve tried to give some sense of the effects. As you craft your proposal, the Deficit Meter will show your progress.

The Times says "It’s not easy" but I think it is trivial. In fact I ended up with a $4.469 billion surplus as shown below.



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To achieve that I did not vote for any "One Time Fixes" but I did vote to increase taxes on Cigarettes and Alcohol. The latter was in case some of the "it may be illegal" things (that need to happen) I voted for get discarded. Certainly if any taxes have to be raised I would look at sin taxes first.

The big problem I have with the exercise is that it does not include some of the things that desperately need to be done like privatizing all prison guards, legalizing marijuana, scrapping state defined benefit pension plans and eliminating countless programs not mentioned.

Balancing California's budget is trivial.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bankruptcy Filings Reach 6,000 A Day

The USA Today is reporting Bankruptcy filings rise to 6,000 a day as job losses take toll.

Consumer and commercial bankruptcy filings are on pace to reach a stunning 1.5 million this year, according to a report from Automated Access to Court Electronic Records.

While well below the record 2 million filings in 2005, the number of filings is up sharply from last year's 1.1 million, says Robert Lawless, professor of law at the University of Illinois.

Bankruptcy filings took a dramatic nose dive after a 2005 bankruptcy reform measure was signed into law to curb bankruptcy abuse and make it harder to erase debts.

"People are coming to us in much worse shape than they used to be," says David Jones, president of the non-profit Association of Independent Consumer Credit Counseling Agencies. "We used to be able to help 20% to 25% of people who came to us, and now we can only help 7% to 8%."

Last month, commercial filings hit 376 a day, up from 255 in May 2008. Hartmarx, which manufactures and markets apparel, and Silicon Graphics, a manufacturer of computer workstations and storage products, were among the filers.

The wave of corporate bankruptcies will cause a secondary wave in consumer filings, says John Pottow, University of Michigan bankruptcy law professor.

Bankruptcy filings are apt to exceed the 2005 number eventually, given data like Jobs Contract 17th Straight Month; Unemployment Rate Soars to 9.4%.

What set 2005 apart was Hurricane Katrina filers rushing to beat the deadline of Bush's Debt Slave Act officially known as the Bankruptcy Reform Act of 2005. One of the consequences of that act was banks lent with impunity to the worst credit risks thinking that debts could not easily be discharged in bankruptcy.

Those banks and other institutions that lent recklessly are now about to find out otherwise. Moreover, I expect walking away to start picking up steam as well.

Please see Walking Away Revisited for the Moral Dilemma that many are facing.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Housing Math: Bottom Seekers + Neglect = Repetitive Foreclosures

The bottom will come. I guarantee it. When it does, few will want to buy. In the meantime knife catching is fraught with danger as flippers get washed out one by one.

Wash, Rinse, Repeat

Please consider the following from "MG" who writes:

Mish,

I am familiar with the house at 755 Eames Way in zipcode 02050 because it is just up the road from me. It's currently in its 3rd foreclosure since January of 2007. The family that purchased it in June of 2005 ($635k 95%LTV) bailed in December of 2006.

A group of realtors came in and bought the home from $544,500 with the intent for a quick flip. That failed and they went into foreclosure.

HSBC sold the home to a local investor for $440K. The investor was able to secure a $417K loan (conforming limit) from First Horizon. Shortly thereafter in early Spring of 2008 the same investor obtained a 2nd loan from Bank of America for $125K and apparently took the money and ran.

The home has been empty since December of 2006. Offers now are sub $200k.

755 Eames Way, Marshfield MA



Judging from the picture, the house does not look too bad. However, inquiring minds are investigating the listing details.

Property in need of work. Owner planning on repairing water damage to floors & ceilings prior to sale. This is a short sale and offers are subject to third party approval. Lots of potential to be restored to a beautiful, spacious home with great amenities. Circular drive and mature plantings. Pool in back yard in need of repair. Bring all offers!

Well the offers are in. They are under $200K according to"MG".

Here's the deal ....

Banks selling to unqualified and undercapitalized flippers is still not such a hot idea. In case banks have not noticed, home prices are still falling.

The math is rather simple: Bottom Seekers + Neglect = Repetitive Foreclosures.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Minnesota Governor To Begin "Unallotments"

Three cheers for the few willing to make a step in the right direction. Minnesota's governor is one of the few. Please consider Pawlenty gets official go-ahead to begin making budget cuts.

Let the cutting begin.

Minnesota's top state finance official on Thursday formally notified Gov. Tim Pawlenty that the state will not take in enough money to pay its bills over the next two years, setting the stage for the governor to start using his executive power to unilaterally cut spending.

In a letter to Pawlenty, Management and Budget Commissioner Tom Hanson wrote that, as expected, the spending he and the Legislature approved for 2010-11 would exceed the state's revenue collections by $2.7 billion.

"Therefore, at the beginning of the next fiscal year (July 1), it will be necessary to reduce allotments of appropriations or transfers," Hanson wrote.

Under state law, Pawlenty can't start to cut spending until the commissioner notifies him that the state faces a budget shortfall. Hanson's letter satisfies that requirement.

Pawlenty has said he will start making spending reductions, officially known as "unallotments," as soon as possible after July 1 to protect the state's credit rating and give him the most possible options.

Let The Cutting Begin

Cutting services rather than raising taxes is the right thing to do.

Pawlenty is looking to cut health and welfare spending, college and university appropriations and state agency budgets. That's a good start, with start being the operative word. Eliminate would be a better word for many state agency departments.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Jobs Contract 17th Straight Month; Unemployment Rate Soars to 9.4%

This morning, the Bureau of Labor Statistics (BLS) released the April Employment Report.

Nonfarm payroll employment fell by 345,000 in May, about half the average monthly decline for the prior 6 months, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The unemployment rate continued to rise, increasing from 8.9 to 9.4 percent. Steep job losses continued in manufacturing, while declines moderated in construction and several service providing industries.




Establishment Data



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Highlights

• 345,000 jobs were lost in total vs. 539,000 jobs last month.
  
• 59,000 construction jobs were lost vs. 110,000 last month.
  
• 156,000 manufacturing jobs were lost vs. 149,000 last month.
  
• 120,000 service providing jobs were lost vs. 269,000 last month.
  
• 18,000 retail trade jobs were lost vs. 47,000 last month.
  
• 51,000 professional and business services jobs were lost vs. 122,000 last month.
  
• 44,000 education and health services jobs were added vs. 15,000 added last month.
  
• 3,000 leisure and hospitality jobs were gained vs. 44,000 lost last month.
  
• 7,000 government jobs were lost vs. 72,000 added.
  

A total of 225,000 goods producing jobs were lost (higher paying jobs), and the service sector was hit again but less than half compared to last month. Indeed most of the improvement vs. last month was a 149,000 relative improvement in the service sector.

It was nearly a clean sweep again this month with education and health services jobs the only real winner for the month.

Note: some of the above categories overlap as shown in the preceding chart, so do not attempt to total them up.

Index of Aggregate Weekly Hours

New this month I added hours of work to the above table. Those hours are now down to 33.1 in aggregate. This is contributing to household problems.

Birth Death Model Revisions 2008



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Birth Death Model Revisions 2009



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Birth/Death Model Revisions

After the typical in January in which the Birth/Death Model revisions bore some semblance of reality, the Birth/Death numbers are back in outer space.

At this point in the cycle birth death numbers should have been massively contracting for months. The BLS is going to keep adding jobs through the entire recession.

This is a complete joke.

BLS Black Box

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth and death of businesses (not individuals). Those assumptions are made according to estimates of where the BLS thinks we are in the economic cycle.

The BLS has admitted however, that their model will be wrong at economic turning points. And there is no doubt we are long past an economic turning point.

Here is the pertinent snip from the BLS on Birth/Death Methodology.

• The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.
• Note that the net birth/death figures are not seasonally adjusted, and are applied to not seasonally adjusted monthly employment links to determine the final estimate.
• The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.

Household Data

The number of unemployed persons increased by 787,000 to 14.5 million in May, and the unemployment rate rose to 9.4 percent. Since the start of the recession in December 2007, the number of unemployed persons has risen by 7.0 million, and the unemployment rate has grown by 4.5 percentage points.

The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in May at 9.1 million. The number of such workers has risen by 4.4 million during the recession.

Persons Not in the Labor Force

About 2.2 million persons (not seasonally adjusted) were marginally attached to the labor force in May, 794,000 more than a year earlier. These individuals wanted and were available for work and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Among the marginally attached, there were 792,000 discouraged workers in May, up by 392,000 from a year earlier.

Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The other 1.4 million persons marginally attached to the labor force in May had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.

Table A-5 Part Time Status



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The chart shows there are 9.1 million people are working part time but want a full time job. A year ago the number was 5.3 million.

Table A-12

Table A-12 is where one can find a better approximation of what the unemployment rate really is. Let's take a look



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Grim Statistics

The official unemployment rate is 9.4% and rising sharply. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

It reflects how unemployment feels to the average Joe on the street. U-6 is 16.4%. Both U-6 and U-3 (the so called "official" unemployment number) are poised to rise further.

Looking ahead, I expect the service sector to continue to weaken. Mall vacancy rates are rising and a huge contraction in commercial real estate is finally started. There is no driver for jobs and states in forced cutback mode are making matters far worse.

Unemployment is likely to continue rising until sometime in 2010.

Depression Level Statistics

I consider these job losses to be depression level totals. Admittedly conditions are not as bad as the great depression, but this is certainly no ordinary recession by any economic measure including lending, housing, bank failures, jobs, the stock market, commodity prices, treasury yields etc. For more on this idea please see Humpty Dumpty On Inflation.

Regardless of whether you think these are depression level statistics, unemployment is high and rising. Moreover, the "adverse scenario" in the Fed's stress test was unemployment at 10.3% at the end of 2010.

I stated many months ago we are going to be close to 10% by August and close to 11% by the end of 2009. It seems I was an optimist. We might hit 10% by June or July.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Walking Away Revisited - Reader Mailbag - Moral Dilemma

Tonight I received a request from "SS" asking to revisit the subject of walking away.

SS Writes:

Mish,

Over a year ago you wrote this article: Walking Away: The Next Mortgage Crisis

A lot has changed since the publication and most - if not all - changed for the worse economically since that time. I was wondering if you would/could write a post to address the topic once again.

I am a condo owner who has done nothing wrong. I put money down, I did not buy over my means, and I did not attempt to use my house as a credit card. As a matter of fact, I am still employed and I still continue to make payments on my mortgage. All that said, I am at a loss of over 100K and the banks are unwilling to work with me because of the loss of equity.

I've actually had one loan officer laugh at me when I called to discuss the refi. So while others simply there are those who get help from the banks/government because of their mismanagement, I am being penalized for "doing the right thing".

To add insult to injury, the city will not lower taxes despite contesting.

In my building there are 43 units, of which 34 are occupied, and no units have sold in the last year and a half. In the last two months we've witnessed two foreclosures in the building and I believe things will only continue as layoffs in the area have begun to take effect and the general economy of the area is starting to really take a hit.

If one were to make the assumption that the economy was going to turn around tomorrow morning, and real estate began to pick up, it would take almost 8 years for the value to come close to a breakeven point - not even make a profit.

I simply - simply - cannot see a good business reason to continue paying on my mortgage. I try to rationalize the situation, but there is *NO* good business reason. Please understand I say this as a person who has NEVER missed a bill in my life. My credit rating is 780 (averaged between all three agencies). I've always taken pride in paying and making my own way... but I've reached my breaking point.

I am not asking for guidance, nor and I asking for legal advice, I simply think this is a topic that has not really been discussed in the press and really should be.

Please understand that I know I am not the only one facing this question or situation. A number of people are worse off, and I am not trying to say "poor me" but no one is really talking about the obvious. The "dream" of home ownership is a myth and a prison sentence for a large group of American that played by the rules, and as I have a great amount of respect for your writing, I figured you would be a good place to provide updated thoughts to everyone.

Thank you for the time, and if this is not a topic you wish to once again address I can understand.

Best,

SS

SS, admittedly your situation is in contrast to what Karl Denninger described in Ok, I'm Done With Being Nice.

The woman Karl wrote about bought a two-bedroom home in 1997 for $77,500 then used it as an ATM machine to live extravagantly, running the mortgage balance up to a clean double to $143,000. The woman was complaining Countrywide Financial, now part of Bank of America would not offer to alter her mortgage.

Had the woman taken out a 15 year mortgage an made one extra payment a year, instead of owing $143,000, she would now be a proud homeowner with zero mortgage! The woman believes she did nothing wrong.

Karl ripped her to shreds, and deservingly so.

While you did not make the serious error Karl lambasted, the first thing you must realize is that you are in a dilemma of your own making. You claim you did nothing wrong, but actually you did. You made one critical mistake: You bought a piece of property at a very poor price. That is your fault, not the man in the moon's.

People are seldom willing to point the finger where it needs to be pointed, at themselves. You need to point the finger at yourself. That said, the lender also made a mistake: giving you a loan. I am not sure what your down payment was, but the smaller the down payment the bigger the lender's mistake.

I believe you are correct when you state "It would take almost 8 years for the value to come close to a break even point - not even make a profit" and that is assuming the economy quickly turns around. Heck, it could take more than that on a condo. 20 years is not out of the question depending on the bubbliness of the area you invested in.

The question is what to do about it. The law provides a penalty for walking away. That penalty is ruined credit for five years. That is it. Lest people get all bent up over how easy you can get off, the lender knew those risks in advance and took them anyway.

There are no debtors prisons anymore, and the stigma (if any) of bankruptcy or walking away decreases every day. Although some people will resent you walking away, still others will be envious if you can shed that debt and they can't because of second mortgages or because their conscious will not allow them to walk away.

As you say, "there is no good business reason" to keep paying your mortgage.

Should you decide to walk away, I would advise you to consult an attorney specializing in these matters, such as the ones at YouWalkAway.Com. For the record, I get nothing for this referral.

And although I am not a lawyer, given that you can easily afford the payments, I would strongly advise not buying a new house before you walk away. That may constitute fraud.

The moral hazard here is that if you walk away, the property may be dumped on a bank and taxpayers may end up footing the bill. Alternatively, the quicker all this malinvestment debt is wiped out, the quicker housing will bottom and the economy will recover. It's easy to rationalize any position you want to take.

The fact that you wrote indicates you are in a moral dilemma. And as stated above, you need to put the blame on yourself even if other parties aided and abetted. Having done that, please review Walking Away: The Next Mortgage Crisis the Moral Obligations Of Walking Away and Businesses Advised To Walk Away to see if you can resolve your conflict.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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