Saturday, August 8, 2009

Hooray, The Decreasing Rate of Decline! CREFA Commentary 8.8.09

We still remain very bearish and cannot, in good faith, share in the end of the recession celebration which was declared this week, particularly as this so called recovery will continue to adversely affect trailing CRE.

Consumers cut debt for the fifth straight month in June at an annual rate of 5% or $2.5 trillion. We believe that further "adjustments" are on the way and in the meantime the stock market is soaring euphorically and many investors may be missing out or have jumped in late on what is most likely a nice prolonged bear rally. The bet is that the momentum of soaring consumer confidence will outweigh downstream economic shocks.

We checked the government's press release on today's unemployment numbers. Although 250,000 non-farm jobs were lost (but unemployment still decreased from 9.5% to 9.4%), it looks like they estimated that about 100,000 farm jobs were created. It turns out 270,000 previously unemployed people left the workforce and are no longer counted as unemployed. Magic, that's how unemployment falls from 9.5% to 9.4% even though 250,000 non-farm jobs were lost.

Also we note the fact that the persons working part time because they cannot find a full time job is 8.8M or 5.7% of the work force and that the number of people who are discouraged and given up looking are 2.3M or 1.5%. Thus, the total unemployed and underemployed are 16.6% or 1 in every 6 Americans. It's no wonder retail trade unemployment is accelerating (44,000 losses in July vs 27,000 average over prior 3 months). It remains to be seen how many more retailers end up going BK in the next year or two. With consumer spending contributing 70% of GDP this unemployment / consumer deleveraging spiral (not to mention increased consumer and mortgage defaults) could very well be the next very large shoe to drop.

After reading more of the BLS press release with our morning coffee, following are a couple of observations to note:

1. The sampling error at the 90% confidence interval on one of the two surveys used is a whopping 430,000 jobs (approx 0.3% swing factor) and the "Technical Note" section describing the surveys does not say exactly how the two surveys are reconciled to come up with final numbers (supposedly the other survey is 107,000 jobs). Thus, given this month's 250,000 job decrease, you would be 90% confident the true number is between negative 680,000 and a positive 180,000 (total swing of 0.6%).

2. Seasonal adjustments are also made based on historical trends which sounds reasonable in theory. However, this adjustment resulted in an "increase" of 28,000 jobs in the motor vehicles and parts industry. Something looks out of whack there, it seems to me that number could be estimated much better based on current info without trending??

3. BLS estimates new business "births" (employment increases) based on the last five years historical results. Although the last year should give a good estimate, We don't think the previous four years are very representative.

4. Lastly, how does BLS reconcile the fact that there has been about a 4% decrease in employment (in about the last year) and relatively small decreases in incomes with the fact that individual income tax receipts are down approximately 22% for the year? This seems to us to be the biggest disconnects of all.

Be careful. The data is not yet definitive enough to justify uncorking the champagne yet.