An alternate "more adverse" scenario

So far, the unemployment rate has been higher than the "more adverse" scenario used in the stress test. Calculated Risk has an updated chart using just two month's of data:

The "more adverse" scenario seems to be a plausible forecast for the economy.  In fact, the Unemployment rate looks like it will reach 10.3% this year which is the "more adverse" scenario for the average unemployment rate for 2010.    Per the Federal Reserve, "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."  If the "more adverse" scenario is the new baseline forecast, then I wonder how the banks would fare in a worse case scenario. 

Seeking Alpha has a great spreadsheet that let's you plug in different unemployment rate forecasts and loss rate assumptions.  In the Stress Test, the economists had forecast that the average unemployment rate for 2010 would be 8.8% with a 10% chance of being 1.5% higher at 10.3%.  In spreadsheet to the right, I am using an unemployment rate of 11.8% as the more adverse scenario (if you change the baseline forecast to 10.3%, then it seemed logical that there would be a 10% chance that the unemployment rate would reach 11.8%).

There is a big disparity between the healthy banks and the banks that would be stressed under a more adverse scenario than the Fed used. 

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Unemployment Rate rises to 8.9%

According to "The Employment Situation" for April 2009, released today by the U.S. Department of Labor, seasonally adjusted, the unemployment rate was 8.9%, up from 8.5% in March and 5.0% a year ago. The unemployment rate is now up 3.5 percentage points in the last twelve months and is up 4.1 percentage points from its recent low of 4.4%. Nonfarm payrolls decreased by 539,000 in April down from a revised 699,000 in March.  This month they revised the previous two months of March and February downward by 66,000 jobs. Last month, the total jobs lost from December 2007 to March 2009 was reported to be 5,133,000. This month, with the revisions, the total jobs lost from December 2007 to April 2009 has reached 5,738,000 jobs. The average recession since World War II has had a loss of 1,917,000 job.  The biggest loss before this recession came in 1982 with 2,838,000 jobs lost. In terms of job loss, we are in the biggest recession since the Great Depression.

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance yesterday. Initial claims were at 601,000 for the week ending May 2. This is down from the previous week's number of 635,000. The four week average of initial claims, which is not as volatile, was at 623,500. This is down from the previous week's figure of 638,250. Continued claims for unemployment insurance increased to 6,351,000 for the week ending April 25th up from the previous week's number of 6,295,000. The four week average for continued claims was also up to 6,207,000 from 6,082,000. This is the highest continued claims has ever been. The previous high was in 1982. Initial claims is faster to move up and signals increases in the unemployment rate. Continued claims take longer to go down than the initial claims once the unemployment rate is elevated. The Unemployment rate doesn't drop until continued claims start to come down.

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Retail Sales for February show signs of life

Retail Sales, seasonally adjusted, were down by 0.11% in February compared to January.  However, they are up 1.71% from the lows reached in December 2008.  Year over year, Retail Sales are down 8.04% compared to a year ago.  This is an improvement from being down 10.58% in December 2008. 

Excluding auto sales, retail sales increased in February by 0.75% compared to January.  Year over year, retail sales are down 4.25% compared to being down 6.98% in December 2008.

Retail Sales are still at historical lows in terms of year over year growth, but the last two months have bounced off the lows reached in December.

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Unemployment Rate at 8.1%; Jobs lost reach 4.38 million

The U.S. Government is putting the largest 19 banks in the U.S. under a stress test to assess how much capital they may need to survive this recession.  They have 2 scenarios:  one, a baseline scenario, based on consensus forecasts and a second "more adverse" scenario.  The baseline forecast has GDP declining by 2.0% in 2009 and rising by 2.1% in 2010 and has the Unemployment Rate reaching 8.4% in 2009 and 8.8% in 2010.  The more adverse scenario has GPD declining by 3.3% in 2009 and rising by 0.5% in 2010 and has the Unemployment Rate at 8.9% in 2009 and 10.3% in 2010.

So far GDP and the Unemployment Rate are far worse than their "more adverse" scenario.  GDP for 4th Quarter 2008 was at -6.2%.  According to "The Employment Situation" for February 2009, released today by the U.S. Department of Labor, seasonally adjusted, the Unemployment Rate for February hit 8.1% and without seasonal adjustments it was 8.9%.  At the current pace, the unemployment rate would hit 10.3% by August 2009.  Since 1948, the unemployment rate has never risen by more than .5% in a 12 month span without entering into a recession. The unemployment rate is now up 3.3 percentage points in the last twelve months and is up 3.7 percentage points from its recent low of 4.4%.

Nonfarm payrolls decreased by 651,000 in February, 655,000 in January and 681,000 in December. This month they revised the previous two months of January and December downward by 265,000 jobs.  In January they revised downward the amount of jobs lost in the previous two months by 66,000 jobs. In December they made a downward revision of 154,000. In November, they made a downward revision of 199,000.  Last month, the total jobs lost from December 2007 to January 2009 was reported to be 3,572,000 jobs.  This month, with the revisions, the total jobs lost from December 2007 to February 2009 has reached 4,384,000 jobs. The average recession since World War II has had a loss of 1,917,000 jobs on average. The biggest loss before this recession came in 1982 with 2,838,000 jobs lost. In terms of job loss, we are in the biggest recession since the Great Depression. And the end is not in sight yet.

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance yesterday. Initial claims were at 639,000 for the week ending February 28th. This is down from the previous week's number of 670,000. The four week average of initial claims, which is not as volatile, was at 641,750. This is up from the previous week's figure of 639,750.

Continued claims for unemployment insurance increased to 5,106,000 for the week ending February 21st down from the previous week's number of 5,120,000. The four week average for continued claims was also up to 5,011,000 from 4,934,000. This is the highest continued claims has ever been. The previous high was in 1982. Initial claims is faster to move up and signals increases in the unemployment rate. Continued claims take longer to go down than the initial claims once the unemployment rate is elevated. The Unemployment rate doesn't drop until continued claims start to come down.

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Retail Sales Down by 9.3%

The U.S. Census Bureau released the Retail Sales figures for January 2009 today. Adjusted for inflation and for seasonal variation, Retail Sales were up in January compared to December 2008 by 1.0% and down by 9.3% compared to a year ago. Economists were expecting a 0.8% drop compared to December.  A large part of the gain in January from the previous month was due to downward revisions of previously reported figures.  Retail Sales for December were revised downward this month by 0.6%. 

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Unemployment rate continues to rise; will hit 8.5% in 2009

Some economists are predicting that the unemployment rate will hit 8.5% in 2009. Today, we already hit 8.5% unemployment rate when not seasonally adjusted, up from 7.1% in December and 5.4% a year ago. January is typically the highest month for the unemployment rate. According to "The Employment Situation" for January 2009, released today by the U.S. Department of Labor, seasonally adjusted, the unemployment rate was 7.6%, up from 7.2% in December and 4.9% a year ago. Since 1948, the unemployment rate has never risen by more than .5% in a 12 month span without entering into a recession. The unemployment rate is now up 2.7 percentage points in the last twelve months and is up 3.2 percentage points from its recent low of 4.4%.

Nonfarm payrolls decreased by 598,000 in January, 577,000 in December, and 597,000 in November. This month they revised the previous two months of December and November downward by 66,000 jobs. In December they revised downward the amount of jobs lost in the previous two months by 154,000. In November, they made a downward revision of 199,000. They also made huge revisions for last year and revised as far back to 2004. Last month, the total jobs lost from December 2007 to December 2008 was reported to be 2,589,000. This month, with the revisions, the total jobs lost from December 2007 to January 2009 has reached 3,572,000 jobs. The average recession since World War II has had a loss of 1,917,000 jobs on average. The biggest loss before this recession came in 1982 with 2,838,000 jobs lost. In terms of job loss, we are in the biggest recession since the Great Depression. And the end is not in sight yet.

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance yesterday. Initial claims were at 626,000 for the week ending January 31st. This is up from the previous week's number of 591,000. The four week average of initial claims, which is not as volatile, was at 582,250. This is up from the previous week's figure of 543,250. Continued claims for unemployment insurance increased to 4,788,000 for the week ending January 24th up from the previous week's number of 4,768,000. The four week average for continued claims was also up to 4,672,000 from 4,628,000. This is the highest continued claims has ever been. The previous high was in 1982. Initial claims is faster to move up and signals increases in the unemployment rate. Continued claims take longer to go down than the initial claims once the unemployment rate is elevated. The Unemployment rate doesn't drop until continued claims start to come down.

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PMI posts small gain; indicator shows manufacturing and economy still contracting

The Institute for Supply Management released their monthly Manufacturing ISM Report on Business today. The Purchasing Manager's Index (PMI) came in at 35.6% for January which is up from 32.9% for December which was the lowest PMI had reached since May 1980.  Economist's had expected PMI to drop to 32.5%. A PMI reading of 35.6% suggests that the manufacturing economy and the overall economy are both contracting. Per ISM:

"A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting...if the PMI for November (36.2 percent) is annualized, it corresponds to a 1.5 percent decrease in real GDP annually....A PMI in excess of 41.1 percent, over a period of time, generally indicates an expansion of the overall economy."

Here is what some of the respondents to the ISM survey are saying:

• "The only positive thing of late is that the U.S. dollar has strengthened significantly against other currencies. We import the majority of our materials so this will have the effect of lowering our COGS." (Transportation Equipment)
• "Steel industry is our main customer, and they have had a real slowdown." (Computer & Electronic Products)
• "Criteria for projects is significantly higher with very short ROI periods." (Food, Beverage & Tobacco Products)
• "We have revised downward our top-line sales estimates for CY2009 by 8 percent due to the continued softness we see in the housing sector." (Machinery)
• "Suppliers are trying to hold onto pricing, but petrochemical and commodity prices are dropping like a rock." (Plastics & Rubber Products)

In the past, when PMI has dropped below 40, the recovery is swift, averaging a 14.7% point rise in three months.  The current 2.7% point rise is minor in comparison. 

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Retail Sales Post Depressing Drop

The American consumer is in a state of depression. I am not just talking about their mood after opening their quarterly brokerage account. The U.S. Census Bureau released the Retail Sales figures for December 2008 today. Adjusted for inflation, Retail Sales plunged in December by 2.7% compared to November and by 10.2% compared to a year ago. Economists were expecting a 1.2% drop compared to November. This is the largest annual drop since July 1951 (which was an aberration due to a very high increase in July 1950). While the NBER has declared the American economy to be in a state of recession, we are a long way off towards being a depression. Some economists define a depression as real GDP declining by 10% over a year. Retail Sales, however, have now entered into depression levels.

This current decline in Retail Sales is a result of a change in dynamics. For years, America has maintained a trade deficit, importing more goods than exports. This deficit has been funded by increases in personal income. The net result has been a positive increase in lifestyle that was sustainable. After the 2001 recession the dynamics changed. The trade deficit took off while personal income was slow in recovering. Consumer spending was no longer sustainable.

Consumer spending was being supported by changes in household net worth. The Federal Reserve publishes a plethora of information including the Balance Sheet of Households and Nonprofit Organizations in their quarterly Flow of Funds Report. From 1970 to 1994, U.S. Households averaged a gain of $2.0 trillion (in 2008 dollars) in household net worth each year. From 1995 to 1999 that increased to an average of $4.6 trillion in gains a year. During 2000 to 2002, net worth dropped by an average of $609 billion a year. But from 2003 to 2006, stock prices recovered and the housing boom took off. Household net worth went up an average of $5.9 trillion a year. Consumers, propped up with enormous paper gains continued spending even though it wasn't supported by gains in personal income.

In 2007, the financial crisis erupted. From the fourth quarter in 2007 to the third quarter of 2008, the net worth of U.S. households declined by a horrific $7.15 trillion. The S&P 500 declined by 22.5% in the fourth quarter. Housing also started declining faster last quarter. When the Fed reports the latest Flow of Funds report in March, the total loss in net worth through the fourth quarter will likely be over $10 trillion. Obama's $800 billion stimulus and the remaining $350 billion in TARP money pale in comparison to the losses sustained. Fears of rising unemployment are also affecting the consumer. We have entered into a new era; U.S. consumer spending will continue to face pressure to come down to a sustainable level.

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The unemployment rate spikes to 7.2%

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance yesterday. Initial claims were at 467,000 for the week ending January 3rd. This is down from the previous week's number of 491,000. The four week average of initial claims, which is not as volatile, was at 525,000. This is down from the recent total of 558,000 reached a couple of weeks ago. 

Continued claims for unemployment insurance increased to 4,611,000 for the week ending December 27th up from the previous week's number of 4,510,000. The four week average for continued claims was also up to 4,470,000 from 4,425,000. This is the highest it has been since December 1982.

Initial claims is faster to move up and signals increases in the unemployment rate. Continued claims take longer to go down than the initial claims once the unemployment rate is elevated. The Unemployment rate doesn't drop until continued claims start to come down.

Unemployment is on the rise. According to "The Employment Situation" for December 2008, released today by the U.S. Department of Labor, the unemployment rate was at 7.2% in December compared to an upwardly revised rate of 6.8% in November. Since 1948, the unemployment rate has never risen by more than .5% in a 12 month span without entering into a recession. The unemployment rate is now up 2.4% in the last twelve months and is up 2.8% from its recent low of 4.4%.

Nonfarm payrolls decreased by 524,000 in December, 584,000 in November, 423,000 in October, and by 403,000 in September.  Last month they revised downward the amount of jobs lost in the previous two months by 199,000. This month, they made a downward revision of 154,000. If you add the payrolls lost in December to the revisions for November and October, jobs were worse off by 678,000 more than was previously reported. This is a significant amount of jobs lost. The average recession since World War II has had a loss of 1,917,000 jobs on average. The biggest loss came in 1982 with 2,838,000 jobs lost. Nonfarm payrolls have declined for 12 straight months with a net loss of 2,589,000. It looks like next month, this recession will develop into the biggest recession in terms of jobs lost since the Great Depression.

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Unemployment Rate Rises; Most Jobs Lost in Month Since 1974

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance yesterday. Initial claims were at 509,000 for the week ending November 29th. This is down from the previous week's number of 530,000.  The four week average of initial claims, which is not as volatile, was at 524,500.  This is the highest initial claims has been since 1982 surpassing the recessions of 1991 and 2001. 

Continued claims for unemployment insurance increased to 4,087,000 for the week ending November 22nd up from the previous week's number of 3,998,000. The four week average for continued claims was also up to 4,001,750 from 3,938,000. This is the highest it has been since January 1983. 

Initial claims is faster to move up and signals increases in the unemployment rate. Continued claims take longer to go down than the initial claims once the unemployment rate is elevated. The Unemployment rate doesn't drop until continued claims start to come down.

Unemployment is on the rise. According to "The Employment Situation" for November 2008 released today by the U.S. Department of Labor, the unemployment rate was at 6.7% in November compared to 6.5% in October.  Since 1948, the unemployment rate has never risen by more than .5% in a 12 month span without entering into a recession. The unemployment rate is now up 2.0% in the last twelve months and is up 2.3% from its recent low of 4.4%.

Nonfarm payrolls decreased by 533,000 in November, 320,000 in October, and by 403,000 in September. This was the most amount of jobs lost in one month since 1974.  Last month they revised downward the amount of jobs lost in the previous two months by 179,000.  This month, they made a downward revision of 199,000.  If you add the payrolls lost in November to the revisions for October and September, jobs were worse off by 732,000 more than was previously reported.  This is a significant amount of jobs lost.  The average recession since World War II has had a loss of 1,917,000 jobs on average.  The biggest loss came in 1982 with 2,838,000 jobs lost.  Nonfarm payrolls have declined for 11 straight months with a net loss of 1,911,000. This recession looks like it will develop into the biggest recession in terms of jobs lost since the Great Depression.  

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Manufacturing continues to slow

The Institute for Supply Management released their monthly Manufacturing ISM Report on Business today. The Purchasing Manager's Index (PMI) came in at 36.2% for November which is down from 38.9% for October. This is a dramatic drop from a few months ago where PMI for August 2008 was at 49.9%. Economist's had expected PMI to drop to 37%. PMI is now at the lowest level since May 1982. A PMI reading of 36.2% suggests that the manufacturing economy and the overall economy are both contracting. Per ISM:

"A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting...if the PMI for November (36.2 percent) is annualized, it corresponds to a 1.5 percent decrease in real GDP annually....A PMI in excess of 41.1 percent, over a period of time, generally indicates an expansion of the overall economy."

Here is what some of the respondents to the ISM survey are saying:

"The only positive thing of late is that the U.S. dollar has strengthened significantly against other currencies. We import the majority of our materials so this will have the effect of lowering our COGS." (Transportation Equipment)

"Steel industry is our main customer, and they have had a real slowdown." (Computer & Electronic Products)

"Criteria for projects is significantly higher with very short ROI periods." (Food, Beverage & Tobacco Products)

"We have revised downward our top-line sales estimates for CY2009 by 8 percent due to the continued softness we see in the housing sector." (Machinery)

"Suppliers are trying to hold onto pricing, but petrochemical and commodity prices are dropping like a rock." (Plastics & Rubber Products)

 

Manufacturing has fallen off a cliff after holding up well in this financial downturn. Just today, the NBER declared that we are in a recession that began in December 2007.  This recession is already lasting longer than the average recession.  It has turned nasty in the last few months and looks like it has a ways to go.  In the previous recessions, PMI has rebounded quickly right after the recession has ended.

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Retail sales plunge in October; retail employers are cutting back

The U.S. Census Bureau announced on Friday that retail and food services sales for October 2008 with seasonal adjustments was down 2.77% from September and down 3.48% compared to a year ago. Economists had expected a decline of 2.1%. Retail sales without including autos (excluding autos makes the data less volatile) was down 2.20% compared to the previous month and up 1.38% compared to the previous year. Retail sales adjusted for inflation declined by 7.69% in October compared to the previous year. This is the worst annual decline since June 1980.

This graph on the right looks at retail employment versus regular employment year over year change. From 1968 - 1987, retail employment was stronger than regular employment. From 1987 retail employment has declined more at the lows and has had drops where regular employment was flatter. Currently more jobs are being lost on the retail side than in the general economy. The retail sector seems to be bracing for a rough recession.

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The unemployment rate spikes to 6.5%; over 1 million jobs lost so far this year

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance yesterday. Initial claims were at 481,000 for the week ending November 1st. This is up from the previous week's number of 479,000 but down from the recent high of 499,000 reached for the week ending September 27.   The four week average of initial claims, which is not as volatile, was at 475,250 the same as the previous week. 

Continued claims for unemployment insurance increased to 3,843,000 for the week ending October 25th up from the previous week's number of 3,721,000. This is the highest it has been since February 1983. The four week average for continued claims was also up to 3,754,000 from 3,711,000.

Initial claims is faster to move up and signals increases in the unemployment rate.  Continued claims take longer to go down than the initial claims once the unemployment rate is elevated.  The Unemployment rate doesn't drop until continued claims start to come down.

Unemployment is on the rise. According to "The Employment Situation" for October 2008 released today by the U.S. Department of Labor, the unemployment rate was 6.5% in October up from 6.1% in September.  Since 1948, the unemployment rate has never risen by more than .5% in a 12 month span without entering into a recession. The unemployment rate is now up 1.7% in the last twelve months and is up 1.8% from its recent low. Nonfarm payrolls decreased by 240,000 in October, by 127,000 in August and 284,000 in September.  They also revised up the number of jobs lost in August and September significantly.  The previously reported jobs lost were 73,000 in August and 159,000 in September.  Not only did the economy lose 240,000 jobs this month, but 179,000 more jobs were lost in the previous month than was reported earlier. 

Nonfarm payrolls have declined for 10 straight months with a net loss of 1,179,000.  Last month the reported number was 760,000 jobs over 9 months.  That is a huge increase.  Over the last ten years, nonfarm payrolls have increased by an average of 107,000 jobs a month to keep up with the increasing population. Nonfarm payrolls rarely decrease outside of recession periods and it is even more rare for consecutive declines. Excluding periods right before, during and after recessions, nonfarm payrolls have declined consecutively only two times: 3 consecutive times in 1951 and 2 consecutive times in 1952. At least in regards to employment, the U.S. is in a state of recession. Some sectors, like manufacturing, are just now starting to slow down. The unemployment rate will most likely continue to rise at a fast pace in the coming months.

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