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IRF News Flashes 07/28/2009 - Houston’s Economy Continues to Shed Jobs At An Alarming Rate The most recent Texas Workforce Commission data shows that the local economy continues to see job losses reminiscent of the mid 1980s. On a seasonally adjusted basis regional employment has declined by 85,000 jobs since its November, 2008 peak. This now represents an average monthly lost of 12,000 jobs, greater than the pace during either the first phase of Houston’s energy bust during 1982-83 or the second phase in 1986. June, 2009 employment was 2.7% lower than in June, 2008. Houston’s upstream energy sector is experiencing the greatest losses at -5.7%, but virtually all sectors are struggling. Downstream energy is down 3.7%; the energy independent base is down 3.1%; and the region’s large secondary sectors have contracted by 2.1%. Part of the problem right now is that Houston is finally going through the type of economic correction that the nation went through last year. Equally important is that Houston has weakness in both energy and non-energy. While there are some glimmers of hope (the regional Purchasing Managers Index has risen now three months in a row), it is virtually certain that Houston will experience further jobs losses throughout the rest of the year. As the national economy stabilizes so will the energy independent part of Houston’s economic base. But stabilization in energy is going to require a strengthening of the natural gas market, which is a ways off. Furthermore, even after the economic base stabilizes, losses in the secondary sectors will linger. Houston’s recovery may not begin until the second half of 2010. 06/10/20009 - Oil Prices Penetrate a Key Threshold of $70 per Barrel Analysts struggling for an explanation see the rise as a function of inflationary fears and the weakness in the dollar. This may be true in an indirect sense, but it certainly isn’t an explanation of the current situation. The dollars decline is not even remotely comparable to the increase in the price of oil. Rather, it appears that the speculators are back and are betting on the future, not on current fundamentals of the market. They are feeding on the fear that the huge deficits being created in the U.S. and much of the rest of the world will eventually lead to inflationary pressures and further weakening of the dollar. Thus, expectations for the future are driving the speculative demand for commodities again, but such expectations seem to have failed to consider an alternative scenario; namely that high deficits will drive interest rates up sharply, instead of inflation, making speculation in the commodity market much less attractive. This could be particularly devastating to oil. In the meanwhile, signs of a global economic recovery are sketchy at best, with many indicators showing that the overall global economy continues to weaken. This too will put downward pressure on oil prices, causing the speculators to head for cover. Furthermore, there are indications that some members of the Organization of Petroleum Exporting Countries may raise output with oil prices at current levels. That’s another scary prospect for oil. So what does this mean for Houston? Will Houston’s current economic collapse soon end? Not likely. For that to occur, oil prices must continue to remain this high during the second half of this summer when industry typically reevaluates their inventories of gasoline for the remainder of the year. Second, high oil prices must finally spill over to natural gas prices, which has not yet occurred. So don’t count on some quick stabilization of the Houston economy quite yet. The story is far from over. 03/26/2009 - IRF Releases First Quarter Houston Forecast Update. The University of Houston’s Institute for Regional Forecasting (IRF) has just released its first quarter Houston forecast update. The new forecast now portrays a more pessimistic view of the region’s economy for the next two years, forecasting job losses in 2009 and 2010 accumulating to 56,000 jobs, most of which will come this year. The forecast update was delayed this year to incorporate the revised regional employment numbers produced by the Texas Workforce Commission and the Bureau of Labor Statistics. These new numbers show that Houston has already begun to slow down dramatically. Seasonally adjusted employment growth over the past 6 months was only an annualized rate .4% or about 5,000 jobs for the six month period. Some sectors are already shedding jobs such as downstream energy (refining/petrochemicals), construction, retail and wholesale trade, transportation and utilities, finance, and informational services. Upstream energy employment, the region’s primary source of growth, is also slowing down, with job growth essentially flat since the end of last summer. Details of the new forecast broken down by employment sector and including per capita income and retail sales are now available in IRF publications and will be discussed at the IRF’s annual real estate symposium on May 5th which is open to the public. Despite this pessimistic view of the regional economy’s short-run prospects, Dr. Smith will explain why buying a home now for the well-qualified buyer may be the right thing to do in 2009. 02/06/2009 - U.S. Labor Market Continues Its Collapse The Labor Department reported on Friday that employment fell by nearly 600,000 jobs (598,000), leaving the total decline in jobs since December of over 3 million. January’s decline was the largest one month decline since the Great Depression, though in percentage terms it was less than peaks during 3 of the past recessions. What is startling is the pace at which the job losses appear to be accelerating. On Thursday, the Department of Labor reported initial claims for unemployment insurance during the previous week rose to 636,000. That’s getting mighty close to a Depression level pace and suggests that the job losses for February may be even worse than for January. So far the U.S. economy has shed 2.6% of its workers. While this is still below the total percentage loss in many of our past recessions, the trend right now suggests that this might double before it is over, making this the worst recession in terms of job losses since the 1930s. (See related charts.) 02/07/2009 - Texas Job Market Deteriorates The Dallas Federal Reserve Bank just released their own re-benchmarked estimates of job growth for the State of Texas for 2008. The new numbers were revised downward significantly, and suggest that the State of Texas actually shed jobs during the 3rd quarter as opposed to preliminary job gain estimates reported by the Texas Workforce Commission. The FED now estimates that there is a good chance that the state as a whole will end 2008 with a small job loss instead of the significant job gains that had been previously assumed. These numbers are not official, however, and we will have to wait until March to get the official TWC/BLS revisions for 2008. In either case, the Texas employment picture is deteriorating. The only question remaining is how badly. 01/21/2009 - Local Jobs Losses in 2009 May Be Greater than Anticipated With oil prices hovering around $40/barrel and natural gas prices now below $5/mcf, Houston’s upstream energy sectors are likely in for a more significant correction that anticipated this fall. University of Houston’s Dr. Barton Smith sees the possibility of job losses twice as large as the IRF forecast in November because of low energy prices, but most particularly in light of weak natural gas prices. It appears, he says, that the energy markets anticipate protracted weakness as reflected in the futures market for these two commodities. Market conditions have been weakened further by a buildup of oil and natural gas inventories that are straining storage capacity. The unlikelihood of a quick turnaround in these markets quickly will almost assuredly result in energy job losses beginning with firms in the manufacture of oil field equipment and then spilling over later this year to the white collar workers in the high-tech divisions of the major oil and gas companies. Without energy, Houston’s economy, which is already shedding some of its non-energy jobs, will see overall losses that could exceed 1% or almost 25,000 jobs. The IRF will release it’s new forecast for regional employment in its early March edition of DATABook Houston, a monthly publication. 01/14/2009 - Retail Sales Fall Dramatically - Good News or Bad? However, there are two ways to view this data. First, the sales totals are in nominal or market dollars. In other words, they are not adjusted for inflation (or in this case deflation). Because prices have been falling and retailers were sharply discounting almost everything on the shelf, it means that the consumer probably didn’t buy less, they just bought at lower prices. A case in point is gasoline. Half the decline in retail sales stemmed from lower gasoline prices. Is that bad news or good news? Much of the rest of the decline came as Christmas shoppers this season were able to buy goods at exceptionally low prices. Thus, in real dollar terms sales may not have declined significantly at all. To be certain weak prices are as bad for retailers as weak sales, but this has different implications for the macro economy. Just 6 months ago we were worried about the crunch facing consumers because of high energy prices. Stronger than expected retail sales in the first half of 2008 reflected, in part, rising prices for food and gasoline. Now we are worrying about falling prices? Well, prolonged declines in prices are a worry, putting the nation at risk of a deflationary recession which is quite difficult to pull out of because it greatly hampers business investment and it increases the real dollar extent of both business and consumer debt. Still, don’t interpret these recent statistics as a signal that the consumer has totally gone to sleep. They are just enjoying the benefits of lower prices than they’ve seen in several years. 01/09/2009 - More Bad News The headline attention getter today was the jump in the unemployment rate to 7.2% and further job losses of 524,000. As dismal as this news was, it was for the most part within analysts’ expectations, driving home the point that this recession may surpass in severity the double dip recession of the early 80s as the worst recession since the Great Depression. However, what the media did not pick up is the equally important news regarding monetary policy. On the surface the numbers look encouraging. Both key measures of the money supply (M1 and M2) are soaring, growing at an annualized rate of 32.2% and 13.7% respectfully. Equally encouraging is that finally, non-borrowed bank reserves are well out of negative territory. In fact, they are over 4 times higher than required reserves. The IRF has been arguing for months now that one could not say that the FED was pursuing aggressive monetary policy until non-borrowed reserves got out of negative territory. Unfortunately, so far this belated monetary action by the FED has not opened the spigots to lending. Bank credit is still contracting, down $39.8 billion in December. Overall bank loans last month were down $46.5 billion. Hardest hit were commercial/industrial loans, down $26.2 billion; and real estate loans, down $23 billion. On the other hand, bank cash is up $130.4 billion. In other words, the FED has now finally provided the necessary liquidity to the banking system, but both banks and households are simply hoarding the money, symptomatic of the fear prevalent in today’s national economy. Thus, despite all of the efforts by the FED and Treasury, the log jam in the nation’s credit markets has not yet been broken. 12/19/2008 - The Fed Finally Gets to Work Earlier this week the FED lowered the federal funds rate to .25%. Finally they have gotten serious about stimulative monetary policy. The low funds rate was not the best news this week, however. Even more important were the recently released monetary aggregates which show that M2 is now growing at double digit rates (12%) and that for the first time this year non-borrowed bank reserves have turned positive. These are very good signs, though we’ll now have to wait to see how effective they’ll be, since it often takes 3 to 6 months for this type of monetary stimulus to affect the real economy. 12/16/2008 - FED Finally Moves in the Right Direction 12/4/2008 - Money Supply Growth Misleading The Federal Reserve Bank released data late Thursday indicating that growth in the nation’s money supply is accelerating. This appears the only bright news during a week of numerous bleak government data releases. The measure of M1 over the past 13 weeks is now up over 20% and M2 is rising at 9.2%. On the surface, that would seem extremely stimulative. However, the IRF believes that this jump in money growth is more a reflection of fear than of direct FED stimulus. Right now households and businesses are hoarding cash, not spending it. Banks, while flush with reserves, still find themselves in the most unusual circumstances in which all of their reserves are borrowed, stemming from a variety of FED emergency loans to the nation’s financial institutions. As a result, bank credit, as revealed by the latest statistics, still remains stuck in neutral. Banks are hoarding too. The IRF still maintains that stimulative monetary policy requires a return to normal positive non-borrowed reserves for the banking system as a whole, something the FED could do immediately without Congressional approval. Some improvement has been made with respect to reserves. Non-borrowed reserves have increased from a low of - $363 billion to the current level of - $32 billion. This stems largely from the Federal Reserve Bank’s purchase of commercial paper and other non-traditional securities which in effect is equivalent to the stimulative nature of their traditional purchases of U.S. treasuries, though at greater risk to the FED’s bottom line. Still, we can’t say the FED has done all that it can do until those negative non-borrowed reserves return to positive territory at levels equal to about + $50 billion, their 2007 average. 11/ 19/2008 - Consumer Prices Plunge Consumer prices fell 1 percent last month. This was one of the largest one-month declines in history. Perhaps even more impressive, core consumer prices, which exclude food and energy, fell by 0.1 percent. This is good news and bad news. The good news is that this might finally persuade the Federal Reserve Bank to pull out all stops on monetary policy, increasing non-borrowed banking system reserves and lowering short-term interest to record low levels. This is also good news in that it enhances consumer real incomes, despite a struggling economy. However, an economy can have too much of a good thing. Were this type of a deflationary environment to continue, it would virtually eliminate monetary policy as a viable tool to stimulate the economy. With prices falling, businesses will have no incentive to invest even were interest rates to fall to zero, and consumers would simply hold back longer, anticipating lower prices in the future. A deflationary recession is the hardest economic environment to reverse. The only deflationary recession in the U.S. during the past 100 years was the Depression of the 1930s. Once again one wonders what economy paradigm the FED was using just 3 months ago when it insisted the inflation was the number one enemy. Of course, part of the decline in prices was due to the tremendous drop in energy prices. This, as we pointed out at the IRF’s fall symposium, is not good news for Houston. Were the global economy to get caught up in a deflationary recession, oil prices could easily fall below $30/barrel, natural gas prices could fall below $4/mcf, and Houston could be in for a much worse downturn than currently projected. 10/ 29/2008 Fed cut is not enough! The Federal Reserve Bank (the fed) reduced interest rate on federal funds by half a percentage point. This was broadly expected by the market, though the hope was they would cut rates even further. The disappointment was enhanced by their rather weak statement regarding the state of the economy. In their typically brief post-decision statement, they indicated that the worsening of financial market turmoil is likely to restrained spending because of the difficulty households and business are having obtaining credit. They further argued that they had room to lower rates because the spreading economic weakness was lowering the risks that inflation would get out of control. This is a further illustration of the Fed’s inconsistency in policy, direction and rhetoric over the past 18 months. In speaking to Congress, Bernanke sought to frighten the legislators into believing the U.S. was headed for a depression like impact upon the real economy if they didn’t pass the $700 billion Paulson bailout package. Yet, he and fellow members of the Fed’s open market committee continued to fret about inflation. A major recession (especially a global one) and inflation are incompatible. Either the threat is one of recession or one of inflation, not both. Yet, the Fed wants to treat both threats as equally worrisome. This is because the Fed can’t seem to abandon its preoccupation with the past (inflation) and focus on the future (recession). Indeed, in rationalizing open market committee decisions they continue to use such words as “economic weakness” instead of “recession”. This points to the fact that they still don’t understand the economic impact that a 22% decline in home prices (unprecedented) and a 46% decline in stock values (only the collapse of 1929 was worse) will shortly have on the real economy. The fed’s own statistics suggests that at this time of crisis, it is not doing enough. This is the time to abandon the folly of pegging interest rates and focus more on the level of excess and nonborrowed reserves to the banking system. These numbers indicate that the fed’s action have remained tepid and undercertain. The fed frets over the fact that banks are not lending money to one another and to other financial entities as though risk were the primary issue, only to overlook the fact that the reserves banks hold to meet legal requirements are all borrowed. Until the fed gets serious about flooding the systems temporarily with reserves until normal lending activity returns, we’ll never get the economy turned the right direction. 10/28/2008 - Consumer Confidence Hits All Time Low Today, the Conference Board released the results of its monthly consumer confidence survey, reporting that the consumer confidence index fell to 38, the lowest level on record. The decline is mostly attributable to accelerating job losses and the sharp downturn in U.S. and world stock values. This decline was not unexpected by UofH’s Institute for Regional Forecasting which has argued for over a year that the nation could ill afford a collapse in both of its major asset markets, real estate and stocks. The IRF’s director, Dr. Barton Smith, says that a part of the decline in consumer confidence is psychological, stemming from the unknown and the fear generated by the swiftness in which the stock market has plummeted. But part, he says, reflects the reality that American’s have already lost over 6 trillion dollars in these two markets and are having to rapidly adjust their life style, including retirement plans, to compensate for the enormous losses they have suffered. Commentators warn that such weak consumer sentiment bodes poorly for retailers during the holiday shopping season and remind us that this weakness portends worse things to come for the U.S. economy since nearly three quarters of aggregate demand in the U.S. emanates from the consumer. Unfortunately, such a view only leads to further policy mistakes in which we continue to attempt to bail the economy out of a mess created by spending beyond our means by spending even more. As a consequence, these new numbers will likely strengthen the voice of those that wish to push through Congress another tax rebate stimulus package whose positive effects will be very short-lived and whose negative longer term effects will sink the nation even deeper into the mire of debt. 10/17/2008 - Oil Prices Decline Now Surpasses 50% The American family has just been given another stimulus package equivalent to the tax rebate of this spring. This other stimulus package has come thanks to the world’s suppliers of oil. Since peaking just below $150/barrel, oil prices closed today below $70/barrel. Were oil prices to stay at these levels and gasoline prices remain below $3.00 per gallon, it would provide the average American family with the equivalent of a $2,000 check from the U.S. Treasury, and this doesn’t count the money families will save this winter in heating their homes. Of course, OPEC will try to intervene to support oil prices at around the $80/barrel level; but, given the current state of the global economy, the best they can hope for is to keep prices from falling much further. Unfortunately, this boon to American families will likely hurt the Houston economy, pulling the rug out from under the region’s energy sector boom that has cushioned Houston from much of the nation’s most recent pain. 10/7/2008 - Stocks Continue Their Nose-Dive Today, the Federal Reserve indicated it would buy massive amounts of short-term commercial paper to calm the nation’s financial markets. Fed Chairman Ben Bernanke’s outlook for the national economy has finally turned gloomy, something that everyone else seemed to realize months ago. Despite Bernanke’s promises of more unusual central bank intervention, the stock market was unimpressed and dropped dramatically once more, falling by 510 points and closing below 9,500. What is called for is for the FED to do what it has always done during past crises, immediately infuse massive amounts of liquidity into the banking system through open market purchases of treasuries in order to make the nation’s banks flush in reserves. The FED has done that with every other economic crisis including the stock market sell off in 1987, the Asian financial crisis in the 90s, the dot.com bust at the beginning of this decade, and the post-911 economic emergency. Not until the FED does all that it can through its traditional tools should it be experimenting with hybrid operations. It makes the FED look like it too is in a panic, not knowing what to do, and that’s not what the nation’s stock market needs for restoring confidence. Some now estimate that Americans have lost over $1.5 trillion in their retirement accounts and accompanying their loss in wealth from declining home equities. This will almost certainly have negative impacts on consumer spending. At last fall’s IRF symposium we warned that the nation could ill afford a collapse in the stock market along with significant declines in home values. Well, today we can say it has happened. 10/2/2008 Initial claims for unemployment benefits rose to 497,000, a seven-year high. This is the highest since 911 seven years ago. Some of the increase is likely due to the impact of hurricanes Ike and Gustav, but the fact remains that the level of initial claims is clearly consistent with a national recession. Furthermore, the number of workers continuing to receive benefits increased to approximately 3.59 million, that’s a five-year high. Friday’s Labor Department report on total non-agricultural wage and salary employment is likely to look equally bleak. If my estimates are correct, overall job losses for 2008 as a whole should reach 1 million by December. While I, along with most economists, estimated earlier this summer that the unemployment rate would peak at around 6%, the likelihood of a 7% unemployment rate this spring is becoming greater as each week passes. 9/17/2008 While the big news has focused upon the international financial market meltdown and the government’s bailout of the AIG, an equally important news item was the FED’s decision not to lower short-term interest rates and Bernanke’s proclamation that the FED’s action to date will produce “moderate growth” in the near future. Yet, in a panic he helps orchestrate the bail out of AIG, seemingly recognizing that its failure would have had catastrophic consequences for global financial markets. What he doesn’t seem to recognize is that financial market meltdown will clearly have serious implications to the overall global economy far beyond the financial markets and this will only reinforce the current contraction in the U.S. economy. The FED is not the only central bank with its head in the sand. The central banks of Europe and Asia also continue to fret over inflation (which is dropping dramatically), holding back on needed monetary stimuli. The FED should understand their struggle this week to keep the federal funds rate down to their benchmark level indicated that the nation’s banks are in desperate need of liquidity right now. Our guess is that the FED will be forced to lower rates before the next open market committee meeting, reminiscent of their sudden change of heart last summer. If they don’t, then they will be falling into the same mistakes Japan made during the 1990s, the results of which were not good. 8/7/2008 - First-time claims rise First-time claims for state unemployment benefits rose to 455,000 for the week ending August 2nd. This is a clear sign that the labor market is weakening. Were initial claims to continue at this level, an actual recession would be virtually assured. For sometime we’ve argued that levels above 375,000 were indicative of a weak economy and above 400,000 a recession. For most of this year, initial claims have remained below 400,000 and often below 375,000. That trend began to change last month. Now, the four-week average of new claims, which smoothes out the statistical aberrations, is at 419,500. This is not a good sign for those hopeful for an early economic recovery this fall. As all eyes continue to focus upon the housing market, we believe that this statistic from the Department of Labor may be equally important to monitor. Unless these weekly numbers fall back below 400,000 soon, the economy is likely to get worse this fall, not better. 7/15/2008 - Growing Number of FED Decision Makers Want Interest Rates to Rise A few memebers of the FED’s open market committee are reported to have argued at their last meeting that interest rates should quickly be raised, suggesting that downside risks to growth no longer exist. Among the hawks on the FOMC, Dallas Fed Bank President Richard Fisher, voted for a rate hike. Such FED talk about raising interest rates soon is far too premature. There appears to be two rationales for such a move. To stem inflation or support the dollar. Both arguments are misplaced. Inflation is global in nature. Raising interest rates at this point could only help reduce international inflationary pressures if the FED creates a serious enough recession in the U.S. to put an end to all global economic expansion as well. That would be a terrible mistake. If the want to prop up the dollar, then a few hundred basis points in interest rates by itself won’t do the trick. The dollar is currently declining at an annualized rate of about 12%. Thus, the FED would have to raise interest rates above 12% to provide a real rate of return for Europeans. That would be an equally disasterous move. What is the predicament that Bernanke thinks he faces. If the U.S. economy is still struggling significantly, then the economic slowdown will eventually begin to abate inflationary pressures. Bernanke seems to be arguing that we are currently experiencing some very strange version of stagflation. Nonsense. If the U.S. economy continues to slow, then the FED just needs to cool its jets and be patient. Inflation will come down. Of course, it would help immensely if the Federal Government would get serious about its budget deficit. That would do more to take the pressure off the FED than anything. |