Rate Watch #787 Rates Down. Rick Davis on GDP.
August 5, 2011
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com
Fundamentals
Jobs
The BLS Employment Situation Report shows 117,000 more jobs in July. Normally this would be regarded as mediocre but at present this is above expectations. That says as much about expectation as it does about jobs.
Private jobs gained 154,000. The large gains were in health care (36,700) and Retail (25,900). Manufacturing gained 24,000.
Average Weekly Hours were flat at 33.6 and Average Hourly Earnings were up 8 cents to $19.52.
The Civilian Labor Force shrunk by 193,000. The Unemployment Rates fell to 9.1% while the labor participation rate fell by 0.2%. These last bits of data show that we should be paying attention to the Labor Participation Rate rather than the Unemployment Rate. It is an increase in the Labor Participation Rate which will grow the economy. Thinking that things are good because people left the labor force and the unemployment rate fell makes no sense.
The fact that anyone thinks that this report is a sign of economic strength indicate just how weak the economy is. This is not about a double-dip recession. This is about the fact that we may have already entered a prolonged (greater than 10 years) period of very low GDP growth. We are by no means past the point where the effects of the liquidity crisis have ended.
Initial Jobless Claims for last week were 400,000
4-week Moving Average is 407,750
ADP private jobs for July +114,000. It is hard to get an accurate estimate for BLS from this. Last month BLS private jobs was 100,000 less than ADP. Also, it is likely that there will be a continuing loss of public jobs at the state and local level.
ADP shows a large concentration of jobs growth (48,000) in health care and education.
Challenger Job-Cut Report
This is a report of announced jobs cuts by large companies.
Announced Layoffs (July) - 66,414. Previous month was 41,432.
Here is a graph of the trend.
Consumer Metrics Daily Growth Index
This is hot of the press from Rick Davis of the Consumer Metrics Institute.
"On August 3, 2011 our Daily Growth Index went into growth territory for the first time in 566 days -- ending the longest consecutive string of contraction-days that we have ever experienced. Furthermore, the rise off of the record lows set as recently as May 30, 2011 has been nothing short of spectacular."
MBA Mortgage Applications
Purchase Index - Week/Week Change 5.1 %
Refinance Index - Week/Week Change 7.8 %
Composite Index - Week/Week Change 7.1 %
All of these are reversals from l
ast week's downward changes. Refis picked up because rates are down.
Factory Orders (June data)
Factory Orders - Month/Month -0.8 %. Previous was +0.8%.
This is the continued effect of the supply side having gotten ahead of the consumer. There is also a story here about how bad data from BEA about GDP gives poor guidance to everyone.
A graph of Factory Orders is here.
Personal Income and Expenses (June)
Personal Income - Month/Month change +0.1 %
Personal Income - Year/Year change 5.0 %
Consumer Spending - Month/Month change -0.2 %
Consumer Spending - Year/Year change 4.4 %
Core PCE price index - Month/Month change 0.1 %
Core PCE price index - Year/Year change 1.3 %
"PCE" is Personal Consumption Index - a measure of inflation on consumer spending.
With income +0.1% and spending -0.2% for the month this report indicates economic stagnation.
Retail Sales - Chain Store
ICSC-Goldman
Store Sales - Week/Week change -0.3 %
Store Sales - Year/Year 4.0 %
Redbook
Store Sales Year/Year +4.5 %
Technicals
Tech commentary this week is by Jim Grauer. Jim will be writing an extended commentary on bond techs each week. Keep in mind that when Jim talks about Treasury prices (as in 135^05) he is talking about 30 years Treasury bond furures. The cash market for bonds tracks that and, by inference, the 10-year Treasury yield tracks the 30-year yields and the mortgages track the 10-year.
Prior to 7/29/11, the Daily, Weekly and Monthly techs were all positioned at levels which normally would be bearishly inclined (lower prices, higher yields and mortgage rates), so that the equivocation over the preceding few weeks for the better part of July in all of them was somewhat of an anomaly. But while that equivocation was occurring, the Daily Sto was sneakily completing a very bullish pattern called a reverse H&S (Head and Shoulders) formation which it had initiated two months earlier (see the Daily chart at www.stomaster.com/stopdfdc.pdf). At that time StoMaster stated that "should prices break out of this tech to the upside, it would set up the possibility for a 5 point move in the long bond, or about a 30-40 basis point decline in the 10-year note yield. That breakout happened on 07/29/11, wherein both the Daily and Weekly Sto's executed powerful and stunning upcrosses on weak GDP headlines. What is more, the Monthly Sto upcrossed on 08/01/11, defying what should have been an ongoing downcycle.
Three trading days after the Daily broke the neckline of its reverse H&S formation, the long bond had rocketed higher to achieve its objective of the 5 points predicted. What is more, on 08/04/11 it added another 1 ½ point to this extraordinary rally. What did that mean for the 10 year treasury note? Since the 07/29/11 breakout of the long bond, the 10 year treasury note has declined from a yield of 2.797% to 2.41%, a whopping 38.7bps and now weighs in at a 2.41% yield, down from 2.797%.
What can we expect from here? It would be sheer folly not to expect even a modest retrenchment at the very least from these levels. However, the technicals as indicated by the Stochastics show nothing but higher prices (lower yields) in the immediate future after a short period of consolidation at these lower yields. Ultimately, it appears likely that we will test the all time low yield of 2.04% on the 10 year treasury note touched during the Lehman crisis in 12/2008. That test will occur most likely at some intermediary yield between the low and 2.30%.
In the meantime, today's report of a modest 117K increase in the nonfarm payroll number vis a vis the 84K metric that was expected, along with an upward revision of 28K in the headline number from last month, has set into motion the aforementioned correction in bond prices. We may expect a 50% retracement of the distance from the high touched last night in the bond (135^05) to the breakout from the H&S neckline (127^00), or about 4 points from the high (i.e. back down to 131^00). Recognizing that we plummeted all the way down to 132^17 just one hour after the report, only another 1^17 points are necessary to fulfill the customary and usual 50% pullback objective. In terms of the 10 year treasury note, this would suggest a pullback from its low yield attained in last night's action of 2.34 back up to 2.57, or about .23 bps. As of 7:30 PST, it is trading at 2.49.
Reinforcing these techs is the implicit logic of the fundamental case made in my analysis at www.stomaster.com/TheEndofQEII.com
Analysis
Economic angst causes flight-to-quality Treasury buying which induces lower mortgage rates. Most everyone may want to think about refinancing to a lower rate.
The Debt Deal
I have said little about the default possibility simply because I estimated the possibility at near-zero. From my point-of-view what happened was an enormous and bogus media campaign getting people worked up about something an then an illusion that something had been done. This deal does absolutely nothing to address the enormous obligations under Social Security, Medicare and Medicaid. In fact the debt deal contrived precisely NOT to address these. This deal was 98% politics and 2% economics.
It is clear to me that politicians are not able to address the issue of fiscal sustainability.
Last week's GDP report was striking. We are not having a jobless recovery. We are having a jobless non-recovery. I will leave the discussion (see below) to Rick Davis of Consumer Metrics.
The high value conforming limits are scheduled to be rolled back on 10/1. Loans at the temporary high-value conforming limits must fund by 9/30. There is discussion in Congress about delaying this rollback.
This should be a topic of interest to folks in places where homes are expensive. Since I live in San Francisco, this means everyone nearby.
On October 1 the "temporary high balance"conforming loan limit (for single family) which, at present, goes up to $729,750 will no longer be available. FNMA and FHLMC will then stop at the "permanent high balance" conforming loan limit which has a maximum of $625,500.
This means that anyone in a California county where the temporary high-balance conforming is between $625,500 and $729,750 should seriously start looking at refinancing if you have an ARM or a fixed rate above the "High-Balance conforming" rate in Section I above. .
If you have enough equity then a FNMA loan is the likely product. If you lack equity for FNMA you can still refinance to FHA with a LTV of up to 97.75% with the added burden of the FHA premium for "mortgage insurance."
The fact is this: for some of you this is a "last call" for refinancing. If you are thinking that values will recover soon and life will be OK then I can probably sell you a piece of the Golden Gate Bridge.
Self serving commercial message: I want to thank everyone who has recently sent me e-mail telling me how much this newsletter is appreciated. Please tell others about this and encourage them to add their e-mail, to the distribution. They can do this at http://www.loanmine.com/ratewatch
Rick Davis of Consumer Metrics Institute on GDP
Just over a year ago I discovered the Consumer Metrics Institute web site http://www.consumerindexes.com. What I liked about is was that it provided another way of measuring the economic health of the nation. Consumer Metrics recognizes that many "leading indicators" are simply useless. It focuses on the consumer and measures what the consumer is doing virtually in real time. It looks at the narrow subset of on-line discretionary consumer spending. The notion is that discretionary consumer spending is the most volatile part of the economy and that by looking at this data one can see contractions and expansions before any other leading indicators sees them.
The guy behind Consumer Metrics Institute is Rick Davis. The following is Rick's take on last Friday's GDP report from BEA (Bureau of Economic Analysis.) This is reproduced here with his permission.
July 29, 2011 - BEA Reports 1Q-2011 and "Great Recession" Far Worse Than We Were Previously Told:Included in the BEA's first ("Advance") estimate of second quarter 2011 GDP were significant downward revisions to previously published data, some of it dating back to 2003. Astonishingly, the BEA even substantially cut their annualized GDP growth rate for the quarter that they "finalized" just 35 days ago -- from an already disappointing 1.92% to only 0.36%, lopping over 81% off of the month-old published growth rate before the ink had completely dried on the "final" in their headline number. And as bad as the reduced 0.36% total annualized GDP growth was, the "Real Final Sales of Domestic Product" for the first quarter of 2011 was even lower, at a microscopic 0.04%.
And the revisions to the worst quarters of the "Great Recession" were even more depressing, with 4Q-2008 pushed down an additional 2.12% to an annualized "growth" rate of -8.90%. The first quarter of 2009 was similarly downgraded, dropping another 1.78% to a devilishly low -6.66% "growth" rate. And the cumulative decline from 4Q-2007 "peak" to 2Q-2009 "trough" in real GDP was revised downward nearly 50 basis points to -5.14%, now officially over halfway to the technical definition of a full fledged depression.
One of the consequences of the above revisions to history is that the BEA headline "Advance" estimate of second quarter GDP annualized growth rate (1.29%) is magically some 0.93% higher than the freshly re-minted growth rate for the first quarter. From a headline perspective, that makes for a far better report than the 0.63% drop from the previously published 1Q-2011 number -- since otherwise the new 2Q-2011 numbers would be showing an ongoing weakening of the economy.
Unfortunately, meaningful quarter-to-quarter comparisons are nearly impossible in light of the moving target provided by the revisions. But among the notable items are:
-- Aggregate consumer expenditures for goods was
contracting during the second quarter, with annualized demand for durable goods dropping 4.4% during the quarter -- into the ballpark of the numbers we have measured here at the Consumer Metrics Institute. This decline was enough to shave 0.35% off of the overall GDP (with just automotive goods removing 0.65% from the annualized GDP growth rate).
-- The drag on the GDP from governmental cutbacks purportedly moderated by a full percent, improving to a -0.23% drag from a revised -1.23% impact in the first quarter. This reversal may be the result of either the waning effect of expiring stimuli or overly optimistic BEA "place-holders" while more data gets collected. Many state and local public sector employees would be shocked to learn that real-world governmental downsizing has moderated.
-- Net foreign trade added 0.58% to the GDP growth rate after subtracting 0.34% during 1Q-2011 (a 0.92% positive swing) -- all in spite of oil prices reaching recent peaks at the end of April. Anomalies in imports caused by tsunami suppressed trade with Japan may have been the culprit here, since the growth rate in exports (and their contribution to the overall GDP growth) actually dropped quarter-over-quarter. Imports reportedly pulled overall GDP down by only 0.23%, after subtracting 1.35% from the revised figures for the prior quarter.
-- Commercial Fixed Investments contributed 0.69% (over half) of the reported annualized growth, up over 50 basis points from the revised contribution for the first quarter. Inventory building contributed an additional 0.18% to the growth rate, although that number is only about half of the boost provided in the revised 1Q-2011 data. These are the only two really positive signs for the economy contained in the report.
-- Working backwards from the data, the BEA effectively used an aggregate annualized inflation rate of somewhere near 2.39% to "deflate" their top-line total nominal data into the "real" data used for their headline numbers. This was after raising the aggregate deflater effectively used for the first quarter to somewhere near an annualized 2.72% rate -- indicating that the BEA believes that (for the purposes of their headline number) inflation moderated somewhat during the second quarter. They wrote in their July 29 press release that:
"The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.2 percent in the second quarter, compared with an increase of 4.0 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 2.6 percent in the second quarter, compared with an increase of 2.4 percent in the first."We understand that the aggregate "deflater" has to use numbers appropriate to the individual line items being deflated, including producer price inflation data and foreign exchange inflation rates (although 2.39% might be modest for most of those as well). But if the unadjusted trailing 12 month price changes in CPI-U (3.6%) recorded by the Bureau of Labor Statistics (the official source of U.S. Government inflation data) is used to "deflate" the nominal data, the actual "real" growth rate for the second quarter drops to 0.011% (slightly over 1 basis point), which the BEA would normally round to
zero. It is likely that the entire reported growth rate for the second quarter is actually an artifact of under-recognized systemic inflation.
The Numbers (as Revised)As a quick reminder, the classic definition of the GDP can be summarized with the following equation:
GDP = private consumption + gross private investment + government spending + (exports − imports) or, as it is commonly expressed in algebraic shorthand:
GDP = C + I + G + (X-M) For the first quarter of 2011 the values for that equation (total dollars, percentage of the total GDP, and contribution to the final percentage growth number) are as follows:
GDP Components Table
| Total GDP | = | C | + | I | + | G | + | (X-M) |
| Annual $ (trillions) |
$15.0 |
= |
$10.7 |
+ |
$1.9 |
+ |
$3.0 |
+ |
$-0.6 |
| % of GDP |
100.0% |
= |
71.0% |
+ |
12.7% |
+ |
20.2% |
+ |
-3.9% |
| Contribution to GDP Growth % |
1.29% |
= |
0.07% |
+ |
0.87% |
+ |
-0.23% |
+ |
0.58% |
The quarter-to-quarter changes in the contributions that various components make to the overall GDP can be best understood from the table below, which breaks out the component contributions in more detail and over time. In the table we have split the "C" component into goods and services, split the "I" component into fixed investment and inventories, separated exports from imports, added a line for the BEA's "Real Finals Sales of Domestic Product" and listed the quarters in columns with the most current to the left (please note that nearly all of the numbers below for earlier quarters are changed from our previous commentary tables):
Quarterly Changes in % Contributions to GDP
| | 2Q-2011 | 1Q-2011 | 4Q-2010 | 3Q-2010 | 2Q-2010 | 1Q-2010 | 4Q-2009 | 3Q-2009 | 2Q-2009 | 1Q-2009 |
| Total GDP Growth |
1.29% |
0.36% |
2.36% |
2.50% |
3.79% |
3.94% |
3.81% |
1.69% |
-0.69% |
-6.66% |
| Consumer Goods |
-0.33% |
1.10% |
1.87% |
1.09% |
0.87% |
1.45% |
0.12% |
1.70% |
-0.52% |
0.05% |
| Consumer Services |
0.40% |
0.36% |
0.61% |
0.75% |
1.18% |
0.47% |
0.21% |
-0.04% |
-0.76% |
-1.07% |
| Fixed Investment |
0.69% |
0.15% |
0.88% |
0.28% |
2.12% |
0.15% |
-0.42% |
0.13% |
-2.26% |
-5.09% |
| Inventories |
0.18% |
0.32% |
-1.79% |
0.86% |
0.79% |
3.10% |
3.93% |
0.21% |
-0.58% |
-2.66% |
| Government |
-0.23% |
-1.23% |
-0.58% |
0.20% |
0.77% |
-0.26% |
-0.18% |
0.28% |
1.21% |
-0.33% |
| Exports |
0.81% |
1.01% |
0.98% |
1.21% |
1.19% |
0.86% |
2.51% |
1.49% |
-0.02% |
-3.82% |
| Imports |
-0.23% |
-1.35% |
0.39% |
-1.89% |
-3.13% |
-1.83% |
-2.36% |
-2.08% |
2.24% |
6.26% |
| Real Final Sales |
1.11% |
0.04% |
4.15% |
1.64% |
3.00% |
0.84% |
-0.12% |
1.48% |
-0.11% |
-4.00% |
SummaryFor the most part the "Advance" GDP report for the second quarter is positive only in comparison to newly reworked numbers for the first quarter:
-- The good news is that commercial investment appears to be improving and inventories are no longer growing at the previously unsustainable rate.
-- But the bad news is that consumer spending on durable goods fell substantially during the quarter, dropping quarter-over-quarter by 4.4%.
-- Some of the other favorable data, including foreign trade, are likely the result of one-time anomalies (e.g., tsunami suppressed imports).
-- The "deflater" used to translate the nominal data into "real" data continues to suffer from credibility issues, and it may be the entire source of the reported growth.
The Real ProblemThe greatest problems in the report, however, were the massive revisions to past history -- including the very recent past. For both the first quarter of 2011 and the worst quarters of the "Great Recession" those revisions were substantial enough to raise questions about the reliability of any of the recently reported BEA data:
-- Data published as recently as 35 days prior had growth rates slashed by over 80%.
-- The worst quarter of the "Great Recession" was revised downward by over 2%, with the annualized "growth" rate now reported to be a horrific -8.9%. And the "peak" to "trough" decline in real GDP for the "Great Recession" is now recognized to be over 5%, halfway to the clinical definition of a full depression.
We have been concerned for some time about the timeliness of the BEA's data, particularly given how much the nature and dynamics of the economy have changed since Wesley Mitchell initially developed the data collection methodologies in 1937. These past revisions, however, lead us to believe that the problems run far deeper -- as demonstrated by a quarter that is now over 2 years old being just now revised downward by an additional 2%. This begs two simple questions:
-- At what point in time can we trust any of the data contained in these reports?
-- How can any of the current data be used to create meaningful Federal monetary or fiscal decisions?
We wonder what Mr. Bernanke thought when told that 80% of his "relatively slow recovery" during the first quarter had just vaporized ...
Copyright ©2011 The Consumer Metrics Institute
If you have something to add to this discussion please post a comment on the blog.
Dick Lepre
RPM - SF
1400 Van Ness Avenue
San Francisco, CA 94109
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dicklepre@rpm-mtg.com
Web site: www.loanmine.com
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