QE3, the census on income, poverty & health insurance, the state of working america, July consumer credit & LPS Mortgage Monitor, et al

by now you all probably know that the Fed initiated a third round of quantitative easing this week, which distinguishes itself from the first two rounds of QE by having no planned end date; rather, as per the Thursday statement from the FOMC meeting, “the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability”…furthermore, “the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens“…it seems fairly clear from just those phrases that the Fed is in this for the long haul, and that “exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015“…basically, their intention is to keep short term interest rates near zero for another 3 years, also to buy $40 billion of agency mortgage debt each month for the foreseeable future, continue their ongoing “operation twist”, whereby they sell short term treasuries and buy long term in order to lower long term interest rates, and re-invest proceeds from their current holdings back into additional long term agency mortgage debt, which will together increase the Fed’s net long term bond position by $85 billion monthlythis is still smaller in terms of new money creation monthly than QE1, which added $1.25 trillion to the Fed’s balance sheet in the opening 8 months of the crisis, or QE2, which bought $600 billion of long term treasuries over 8 months starting Nov 2010…the $40 billion of new agency MBS they’ll be buying each month has been variously estimated to be 40% to more than 50% of all new agency mortgage debt issued monthly…so if you want to bet that the Fed doesnt intend to take a loss, this might be a good time to buy a house..  

QE Timeline as is obvious by from the chart to the left, the market has historically performed well while QE was in effect, and retreated when it terminated; which is only rational given that the Fed is taking a large amount of assets out of circulation, and that money moves elsewhere…and commodities have similarly gone up in price; after the Fed announcement the price of oil hit $100 for the first time since May…those on fixed incomes who are dependent on a return on their bonds or CDs for day to day expenses and pension funds, most which are still funded with the expectation of a 7.5% return, will be the worst hurt by an extend period of low rates…ostensibly, the reason given by the Fed and it’s defenders for taking this action is consistent with their mandate to create jobs, but as you can see by the above chart from the Economist, easy money since mid 2008 from the Fed (red), the Bank of England (green), & the ECB (blue) has had no discernible impact of the corresponding countries unemployment rates (similar colors, elevated lines)…clearly, by buying around half of the new mortgage bonds they will continue to keep mortgage interest rates near of at their current record lows, which as we have shown, allows homeowners to commit to a nearly 13% greater home purchase price than a year ago, so they’re quite directly going to be re-inflating the housing price bubble, so if that spills into more home building it would have a minor effect on employment, as will other trickle down effects…but we’ve seen the banks and agencies have been sitting on a large inventory of foreclosed homes which has yet to reach the market, so mortgage bond buying certainly looks from here like no more than another stealth bank bailout (we showed how QE1 & low interest rates were initiated to bail out the banking system here)…during that first year of QE there were a considerable number of posts on potential exit policies, discussing methods the Fed would use to unwind QE and shrink their balance sheet back to prerecession levels below $800 billion…we dont see any of those discussions anymore…

there were two major reports on our collective condition loaded with charts & statistics released this week; the one that received heavy & widespread media coverage was “Income, Poverty and Health Insurance Coverage in the US“, an annual report based on information collected by the current population surveys of the Census Bureau…starting with income, this report found that the median household income, adjusted for inflation, fell 1.5% between 2010 and 2011, to $50,054…and it’s now 8.1% lower than 2007 and 8.9% lower than in 1999, the year the high water mark for real US household incomes was set….the median family household income was lower by 1.7% at $62,273, and the median for non-family household’s was essentially unchanged…households in cities fared worse; central city median incomes declined by 3.7%, while the overall metropolitan median incomes fell by 2.2%…generally, this report breaks out household medians by quintiles, or 20% segments of the population; with a separate category for the top 5%; on page 8 of the pdf we see that adjusted income for the middle quintile fell 1.9% in 2011, while the adjusted income for the top five percent rose 5.3% over the year…the median earnings of women who worked full time the entire year was $37,118, while men working full time, year-round earned $48,202; both lost 2.5% in real terms between 2010 and 2011, but the median for women has increased from the $28,699 figure of 1973, while full time men saw their median income decrease from $50,622 over that period; over the decade, the median real income for black households took the biggest hit, losing $6,518, or 16.8% of their $38,747 median income in 2000, to show a median of $32,229 in 2011…a sharp increase in our inequality was the major tale of this years report; our Gini index, a commonly used measure of inequality, rose 1.6% in 2011 to read .477, which makes us now more unequal than Argentina or Bangladesh & on a par with Kenya; (a country with equal incomes would have a zero Gini ratio; a country where one individual had all the income would have a reading of one; although the gini index is figured by a complex calculation, a reading near .50 suggests half get all of the income while the other half get nothing…how we’ve changed over the period that our inequality was measured by this report is illustrated in the adjacent bar graph from the Center on Budget and Policy Priorities; the top 20% now receive 51.1% of our national income,, with 22.3% going to the top 5%, while the middle 20% now receive only 14.3 of the national income…census notes that all of the percentage gains by the top 20% in 2011 came from the 3rd and 4th quintiles, while “changes in the shares of aggregate income for the lowest two quintiles were not statistically significant

this report also covered the demographics of poverty in the US, and for 2011 there was a slight numeric improvement over 2010, as just 46,200,000 of us were statistically in poverty in 2011, or earning below $22,811 for a family of four with 2 children, which is a measure which varies by size of household; that’s 15% of the population, a decline from the 15.1% figure of last year…sadly, 16,100,000 of those in poverty are children under 18, which means 21.9% of all american kids, or more than one in five, are living below the poverty line … moreover, of those in poverty, 44% are considered in “deep poverty” which means their annual income is less than half the poverty threshold…figures would be much worse were it not for the safety net programs; an additional 21,400,000 senior citizens would be in poverty were it not for Social Security, and census estimates that 2.3 million were kept out of poverty by unemployment rations; on the other hand; the earned income tax credit is not included in income, which might have been cause to count 5.7 million less in the total…census admits there are a number of problems with they way they’ve measured poverty since 1969; for instance, non-cash benefits such as food stamps are also not included, and they intend to have a revised measure of these poverty numbers out in November

Source: The State of Working America, 12th edition, Economic Policy Institute (http://stateofworkingamerica.org/chart/swa-jobs-figure-5f-good-jobs-share-total/)

the last part of this census report, the percentage of us covered by health insurance, showed some decent gains, which the commentariat largely attributed to obamacare….47.9 million of us were without health care coverage in 2011, down from the 49.2 million who were uninsured in 2010; employer sponsored health care plans cover 14.2 million less of us, while government health care plans like Medicare & Medicaid covered 25 million more than the previous year..most of the gains were in coverage were by young people aged 19-25, who by provisions of the ACA were now covered under their parent’s employer sponsored plans…and while we’re on the topic, Romney now says he likes parts of ‘obamacare’ and wont support a wholesale repeal, which shouldnt be a surprise since much of obama’s original program was modeled on the state health care plan then in effect in Massachusetts… 

the other major report out this week was the 12th editon of The State of Working America, an ongoing analysis published since 1988 by the Economic Policy Institute, a widely respected liberal think tank, which includes a wide variety of data and charts on family incomes, wages, jobs, unemployment, wealth, and poverty….the chart from that report that we’ll include here shows the decline in good jobs despite a rising output per worker, where EPI defines a good job as one paying over $18.50 hour, having a retirement plan, and providing health care coverage…showing selected years since 1979, the bars represent the percentage of men, women and all workers with a good job, and the elevated dots are the output per worker…only 28% of men now hold good jobs, compared to the 37% who had good jobs in 1979 (light blue bars)…while the percentage of women holding good jobs improved from 12% in 1979, the number of new good jobs for women has stagnated since 2000….the chart links to a larger view on the page describing it

there were also several monthly economic releases out this week; we’ll start with the July report on Consumer Credit from the Fed, which showed that consumer credit shrunk by a seasonally adjusted $3.28 billion to $2.705 trillion this July, a 1.45% decline, & the first overall decline in consumer borrowing since a 3.95% decrease in August of 2011…as has been the norm with this report, the nonrevolving credit portion of the total, which we’ve characterized as longer term loans for cars, yachts, and education (but not mortgages) continued to increase, rising by a seasonally adjusted $1.55 billion to $1.854 trillion, a 1.0% increase in July over June; it was the volatile revolving credit segment of this report that dragged the total down, as credit card borrowing in July again fell by $4.82 billion to $850.73 billion, a 6.8% month over month declinegovernment issued student loans, which we’ve been following because of their exponential growth (see Fed chart right), only rose $1.1 billion in July to $471.8 billion...

the next release we’ll look at is the August retail sales report from the Census (pdf); they estimated. that the seasonally adjusted retail and food services sales for August were at $406.7 billion, an increase of 0.9% (±0.5%)  from July and 4.7 percent (±0.7%) above the sales of August 2011…the June to July retail sales gain was also revised downward, from 0.8% to 0.6%; totals ex autos and parts were at $332.5 billion in August, up from $329,9 billion in July, and gasoline sales rose from $43.4 billion to $45.8 billion, a 5.5% increase reflecting higher fuel prices; without the gains in the auto and gas categories, retail sales would have only been up 0.1% in August

both the consumer price index and the producer price index for August were also released by the BLS this week…on a seasonally adjusted basis, prices for all urban consumers (CPI-U) increased 0.6& in August, the largest gain since June 2009, mostly due to higher gas prices..year over year price increases were still subdued; doug short computes (and graphs) the price indexes to two decimal places and has the year over year headline CPI at !.69%, while the year over year core CPI (ex food & energy) came in at 1.91%…rising gas prices also drove up wholesale prices in August; the producer price index jumped 1.7% over its level of july, which was also its largest jump since June of 2009…the energy component of this index was up 6.4% for the month..

the Fed reported on Industrial production and Capacity Utilization for August; industrial production fell 1.2% for the month, which the Fed attributed to the disruptive effects of hurricane Issac on production in the gulf coast region…nonetheless, this was still the biggest drop in industrial production since March of 2009; although the hurricane contributed to a drop of 1.8% in the output of “mines” as oil & gas rigs were shut down, manufacturing output also decreased 0.7% in August after having risen 0.4% in both June and July…and capacity utilization for total industry was off a full percentage point to 78.2%, so we still had a lot of plant & equipment idle…

the department of commerce also reported on our balance of trade in goods and services for July (pdf)…exports of $183.3 billion and imports of $225.3 billion resulted in a trade deficit of $42.0 billion, up slightly from $41.9 billion in June…even though our oil imports declined during july, as oil averaged $93.83, down from $100.13 per barrel average in June, our exports to europe, brazil and india were off by a comparable amount…our trade deficit with the euro area increased to $10.2 billion (compared to the $7.7 billion of a year ago) and our trade deficit with China remained elevated at $29.4 billion…bill mcbride has the charts for retail sales, industrial production and the trade deficit in his weekly summary

FHA Vintageone report we try to look at in depth when it’s released each month is the Mortgage Monitor from LPS, this for July (pdf); the data summary, on slide 2 of the pdf, shows that 4.08% of mortgages were in the foreclosure process in July, nearly unchanged from the 4.09% in foreclosure in June, and only down slightly from 4.11% of July last year; they also show a slight improvement in the percentage of home loans that were delinquent for the first time in four months; according to LPS, 7.03% of mortgages were delinquent in July, which was down from the 7.14% reported delinquent in June, and down even more from the year ago delinquency rate of 7.80%…the breakdown on the homeowners not paying on their mortgages in July include 1,960,000 loans that were less than 90 days delinquent, 1,560,000 loans that were more than 90 days delinquent, and 2,042,000 loans that were in the foreclosure processthe total of ?5,562,000 loans that are delinquent or in foreclosure represent 11.12% of all mortgage loans, which means that one in nine homeowners did not make a current house payment in July…looking at the delinquencies and foreclosures by state on page 4 of the pdf, we continue to see florida, the hotbed of the robosigning scandal, leading the country with the most mortgages in trouble; fully 13.4% of mortgaged homes in florida remain mired in the foreclosure process, while another 7.7% of mortgages are delinquent, meaning a total of 21.1% of homeowners are not making payments on their loans; mississippi has the worst delinquency-only problem; with 13.1% of the loans in that state in delinquency but not yet foreclosed on…that LPS state table also marks the judicial states, where court proof is required to seize a house, with a red asterisk; you can see they lead the rest with loans stuck in the foreclosure process, other than florida, the worst include new jersey, where 7.6% of home loans are in foreclosure, illinois, where 6.6% are stuck in the process, new york, where there’s 6.3% in foreclosure, a 69 year backlog at current court processing rates, and maryland, where 5.1% or loans remained mired in the process…maps separating the judicial states from the non-judicial, with changes in foreclosure rates for each, are on page 5 of the pdf…much of this month’s report, as well as the audio presentation (mp3), focuses on the effect negative equity has on homeowners, drawing a relationship between negative equity and the tendency on homeowners to quit paying on their mortgage; the adjacent map, taken from page 8 of the pdf, shows negative equity by state, about which LPS notes “in Nevada and Florida, two of the states with the highest percentage of underwater borrowers, more than three percent of borrowers who were up to date on their payments are 60 or more days delinquent six months later“, which seems all the more reason for the Fed to keep a floor under home prices…

one caveat we should add to that LPS report is that CoreLogic also reported on homes with negative equity for the 2nd quarter of 2012; they showed that 10.8 million homes, or 22.3% of all residential properties with a mortgage were in negative equity at the end of the second quarter of 2012…the differences in these private reports has been observed before; for instance, the quarterly reports from the mortgage bankers association typically show a fractional percent more homeowners delinquent than does LPS...

(the above is my weekly commentary that accompanied my sunday morning links mailing, which in turn was mostly selected from my weekly blog post on the global glass onion, and also includes other links of interest…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me…)



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