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March 2014
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March 6th, 2014
Economists Say Weather But Do They Act On Weather?
Comment If economists are to be believed, winter weather has been the driving force of the economy over the last few months. With that in mind, let's take a look at this winter's payroll reports versus estimates with an eye on the weather. December Payrolls On January 10, 2014 the December non-farm payroll report showed growth of 74,000 jobs. Estimates according to Bloomberg's survey of economists ranged from a low of 100,000 jobs to a high of 250,000 jobs, while the median estimate was 197,000 jobs. In other words, the median estimate was too high by 123,000 jobs. Even the lowest estimate was too optimistic by 26,000 jobs. As the maps below show, the survey week for the December payroll report (the week of December 13) was colder than normal (blue on top) and dry, except for the southeast (green on bottom).
January Payroll Report On February 7, 2014 the January non-farm payroll report showed growth of 113,000 jobs. Estimates according to Bloomberg's survey of economists ranged from a low of 105,000 jobs to a high of 270,000 jobs, while the median estimate was 181,000 jobs. In other words, the median estimate was too high by 68,000 jobs. The actual number was much more in line with
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As the maps below show, the survey week for the January payroll report (the week of January 13) was warmer than normal (red and orange on top) and dry throughout most of the country (purple on bottom).
February Payroll Report On March 7, 2014 the Bureau of Labor Statistics will release the February non-farm payroll report. Estimates according to Bloomberg's survey of 92 economists range from a low of 10,000 jobs to a high of 220,000 jobs, while the median estimate is 149,000 jobs. The weather during the February payroll survey, taken February 13, is shown below.
Bianco Research, L.L.C. Conclusion
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Of the three winter months shown above, we would argue the worst winter weather occurred in February. The brutal cold extended to the dense population center of the Midwest around Chicago (dark blue first chart above). As the second chart above shows, there was also a lot of snow and ice (especially in the Southeast around Atlanta). So, if the December payroll report only added 74,000 jobs (which has subsequently been revised to 75,000 jobs), why is the median guess for tomorrow's payroll number 149,000 jobs? Even the lowest guess of 100,000 jobs is still well above last month's number. As obsessed as economists are with the weather lately, we would have expected weather-driven estimates for tomorrow's release to be closer to 70,000, 50,000 or even 30,000. We are hard-pressed to find anyone lowering their guesses substantially due to the brutal weather on survey week. Frankly, if the report is 149,000 or higher, it would suggest the brutal weather isnotimpacting the economy to the degree that many suspect. Furthermore, a strong payroll number would put a serious dent in the theory that recent economic weakness, as shown in the chart below, can be completely written off because of the weather.
<Click on chart for larger image>
Will The Participation Rate And The Unemployment Rate Collapse Tomorrow?
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<Click on chart for larger image> Comment On January 1st, 1.2 million peoples emergency benefits expired under the current budget agreement. By law, anyone currently receiving these benefits must be actively searching for employment. That means these people are counted among the roughly 11 million unemployed as part of the labor force. Some argued when these benefits expired, these people no longer had as much incentive to remain part of the labor force by looking for a job. The January report did not support this theory, but that may have been due to rumors that Congress was going to extend these benefits. This uncertainly could have given people an incentive to continue looking for a job in case benefits were reinstated. That did not happen. By the week of the February survey (Feb 13), 1.2 million people were without benefits fopr five weeks and knew they were not returning anytime soon. So, will the February job report show a big decline in the participation rate as some of these former beneficiaries stopped looking for work and fell out of the labor force? North Carolina On February 2, The Wall Street Journal made this observation: The federal program's expiration may take time to show up in jobs data, especially if job seekers are betting that Congress will restore the benefits, said BNP Paribas economist Bricklin Dwyer. He said it took three to four months to see movement in North Carolina after extended benefits were cut off in the state in July because its unemployment insurance program failed to meet federal guidelines. The Tar Heel state's unemployment rate plummeted from 8.9% in July to 6.9% in December, the steepest drop of any state in that period and faster than the national rate. Some people found work: Employment in the state increased 1.28% since July, compared with just 0.21% nationally. But plenty of others stopped looking, sending the state's labor force participation ratethe share of adults holding or seeking jobsdown 0.8 percentage point to 61.2% in December, from 62% in July. The national participation rate fell 0.6 percentage point in that period to 62.8%.
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Conclusion Many think the story of expiring benefits affecting the participation rate came and went in December/January. This story is still very much alive and could be an issue with tomorrow's report.
How Does One Become An Expert Economist? Say Weather
MarketWatch - 'Weather' gets 119 mentions in Beige Book There were 119 mentions of the word "weather" in the Beige Book published by the Federal Reserve on Wednesday. The Beige Book is a collection of anecdotes about the economy, gathered ahead of an interest-rate meeting. Economists are hotly debating the extent of the bad weather's impact on deteriorating economic data. To put the usage of the word "weather" into perspective, there were 80 mentions of the word "growth," seven mentions of the word "economy" and four mentions of the "Super Bowl." The Wall Street Journal - Winter's Impact Blunts Modest Growth Across U.S. Fed's 'Beige Book' Finds Improving Activity but Some Trouble From Weather Economic activity improved in most parts of the country in January and February, but unusually cold weather hampered stronger growth, according to a Federal Reserve survey released Wednesday. The Fed's "beige book," which describes economic conditions across the central bank's 12 districts, said eight regions reported improved levels of activity. But in most cases, those increases were "modest to moderate." Reuters - Fed says economy slowed in some regions due to severe weather Severe weather across much of the United States took a toll on shopping and consumer spending in recent weeks, leading to slower economic growth or outright contraction in some areas of the country, the Federal Reserve said on Wednesday. In its Beige Book report of anecdotal information on business activity collected from contacts nationwide, the Fed said economic activity shrank slightly in two of its 12 districts, New York and Philadelphia, mostly due to "unusually severe weather." Growth slowed in Chicago and activity was stable in Kansas City. While the other eight districts reported growth, The Fed said it was characterized as "modest to moderate" in most cases, an overall downgrade from January's report, which showed "moderate" growth in nine regions. Retail sales growth softened in most districts, partly due to weather, but winter storms also had a positive effect on demand for weather-related goods in Richmond, Chicago and Minneapolis, the Fed said.
Bianco Research, L.L.C. Comment
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The chart below shows the Citi Surprise Index in blue and the Bloomberg Surprise Index in red. They measure the trend of economic releases versus expectations. Both are below zero and in a sharp downtrend, meaning the economy is doing worse than expected.
<Click in chart for larger image> So how much of this downtrend is weather-related? All of it? Some of it? We believe economists are dismissing all economic data that is weaker than expected. See the 119 references to weather in the beige book noted above and Deutsche Bank's Joe LaVorgna's recent tweets below. Our fear is that economy is slowing and economists are too busy screaming "weather" to do any further analysis.
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March 2014
January Payrolls
The Financial Times - US feels the chill of more weak jobs data Fears are rising of another weak payrolls report this Friday as the long, cold winter in parts of the country puts a freeze on the US economy. Data from payrolls processor ADP showed the creation of just 139,000 private sector jobs in February, and there was a nasty surprise from the services industry, where employment activity plunged to its lowest level in nearly four years. Most economists still think the weak data reflect an unusually cold and snowy winter, with strong growth set to resume in the spring, but as the soft patch enters its third month their jitters are growing. I think to blame the weather for 100 per cent of the slowdown is an overstatement, said Steve Blitz, chief economist at ITG Investment Research in New York. The market consensus is for official jobs numbers due on Friday to show an increase of 150,000 with the unemployment rate holding steady at 6.6 per cent. Analysts expect a modest rebound after jobs growth of just 75,000 and 113,000 in December and January. MoneyBeat (WSJ Blog) - Excuses, Excuses, Excuses You might as well toss out Fridays jobs report before its even released, as weather-related excuses are already flying left and right. Economists for weeks have blamed unusually cold weather and snowstorms for disappointing manufacturing, retail sales and housing data...That means investors and economists will likely blame any distortions in Fridays employment report on the winter conditions, which may make the market more likely to give a weak report a pass. Economists polled by the Wall Street Journal estimate the economy added 152,000 jobs last month, with the unemployment rate falling to 6.5%. We continue to wait for clean data before we can more clearly decipher the underlying trend of the economy versus temporary weather effects, Lindsey Piegza, chief economist at Sterne Agee, wrote to clients Wednesday after the Feds beige book was released. Eric Green, global head of rates, FX and commodity research at TD Securities, said the beige book reinforced the Feds mindset that any slowdown in economic activity will be short-lived. It also shouldnt impact the central banks plan to keep dialing back its accommodative policies at a measured pace throughout the year. The
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risks going into the Friday number feel asymmetric, he said. A weak number may be more readily faded on weather related issues, but a strong number despite the weather may be viewed as a sign of an impending bounce in the growth profile. Zero Hedge - If You Thought January's Payrolls Were Bad, February's Should Be A Disaster Assuming that the dismal non-farm-payrolls print in January was "due to the weather," we suspect economists, strategists, and weather-forecasters everywhere are holding their breaths over the February print given the following 2 charts... The weather looked like this during the January week when the NFP survey was taken...
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One Final Q1 2014 Earnings Season Update
[Link] - Earnings Season in Final Stretch Our overall verdict on the Q4 earnings season is that it was no better or worse than what we have been seeing in the last few quarters. In some respects, the Q4 earnings season was an improvement over the recent past. Specifically, total earnings for the S&P 500 reached a new all-time quarterly record and even earnings growth for the quarter was the highest of the year (even after accounting for easy comparisons). Positive surprises started off on the weak side, but even those were running at the best pace of the year. Where Q4 was no different from other recent reporting cycles was in terms of top-line growth and company guidance. Revenue growth has been a challenge for companies for quite some time and we didnt see any improvement on that front in Q4 either. Guidance didnt improve either it has been weak for more than a year now and Q4 was no different. Part of the guidance weakness is likely a function of managements need for expectations management. The need for conservatism aside, one has to be extremely cynical to believe that management teams would guide lower while knowing that their business outlook was stable, if not improving. Comment Now that 489 of the S&P 500 companies have reported earnings, we know that roughly 67% beat their earnings estimates. This can be seen in the chart below. The second chart shows the growth rate of earnings. Analysts will now begin to focus their attention on next quarter's earnings season, both offering and revising their estimates. Q1 results should start in earnest in the second week of April.
<Click on chart for larger image>
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<Click on chart for larger image> We have covered the gamed nature of earnings estimates many times in the past. In a nutshell, analysts often offer more optimistic earnings estimates early in a quarter only to be guided lower by company guidance as the actual quarterly release draws closer. Knowing this tendency, we ran the following study in an attempt to analyze the accuracy of earnings estimates at various periods throughout the earnings season. The results of the study can be seen in the next two charts. The first chart highlights the most recent earnings seasons. The X-axis shows the number of days prior to a company's earnings release. T-120 denotes the period of time 120 days prior to an earnings release while T-1 denotes the day prior to an earnings release. The Y-axis shows what percentage of companies beat the earnings estimates from that given period of time. In other words, of the 500 S&P companies in the index, roughly 65% beat their earnings estimates given by analysts the day before actual release. This fact has been covered by the media for quite some time. However, only 42% beat the earnings estimates offered by analysts 120 days prior to release The trend in these series is another way of showing the gamed nature of earnings. While analysts undoubtedly gather more information as a quarterly release draws near, allowing them to offer a more accurate estimate, perhaps earnings estimates are more honest 120 days prior to an actual earnings release since the percentage of companies that beat estimates vacillate around 50%. Presumably this would be the time that analysts would be able to offer their opinion without much influence from company guidance. As of 90 days before an earnings release, however, companies have a chance to offer guidance in the previous quarter's conference call. Regardless of which quarter is being examined, the trend shows a big jump in the percentage of companies that beat estimates as of 90 days prior to the actual release. Once companies are done offering this guidance, these percentages stabilize until roughly 20 days prior to an earnings release. The final uptick in these series could possibly be due to companies making one last push to guide analysts' expectations lower.
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<Click on chart for larger image> Note that this trend has been fairly consistent over the past several years. While the overall percentages vary, the trend always show more companies beating estimates given the day before an earnings release than those given 120 days prior.
<Click on chart for larger image> The chart below further illustrates the trend in company guidance. The red line shows the number of companies offering downward guidance on a daily basis while the green line shows the number of companies offering upward guidance on a daily basis. The number of companies offering upward guidance has steadily decreased over the past few years. Since January of this year, the number of companies offering downward guidance has spiked up.
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<Click on chart for larger image> The chart below uses the inputs from above to create a Guidance Index. Its construction is shown on the chart.
The next time you find yourself pondering the accuracy of earnings estimates, keep the above charts in mind.
Worry About QE
CNBC - Fed's Plosser 'very worried' about QE consequences Philadelphia Federal Reserve President Charles Plosser is "very worried" about the potential for unintended consequences of the Fed's massive quantitative easing program. Plosser told CNBC that the U.S. was still suffering from "lasting effects" of the recession and "may never return" to its previous growth rates - and warned that policy should not bet on growth returning to previous rates, saying it could be "many, many years". With gross domestic product
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expanding at a 2.4 percent annual rate, according to the Commerce Department last Friday, Plosser said that the country was "pretty close" to its steady state growth and may never get back to where it once thought it could be. "To keep trying to think that we're going to do that, means that we keep trying to overplay our hand in terms of policy," he added. Reuters - Fisher warns Fed's bond buying could be distorting U.S. financial markets A U.S. Federal Reserve policymaker who has long criticized its bond-buying stimulus said on Wednesday the program has lasted too long, and there are signs it is now distorting financial markets and encouraging risk-taking. In a speech in Mexico City, Dallas Fed President Richard Fisher amplified some lingering concerns that the central bank's policy stimulus is stoking asset-price bubbles that "may result in tears" for investors acting on bad incentives. "There are increasing signs quantitative easing has overstayed its welcome: Market distortions and acting on bad incentives are becoming more pervasive," he said of the asset purchases, which are sometimes called QE. "I fear that we are feeding imbalances similar to those that played a role in the run-up to the financial crisis," he said in prepared remarks to the Association of Mexican Banks. Fisher, a voter on U.S. monetary policy this year, also praised Mexico's moves to stimulate growth in the wake of the global recession. As for the United States, he repeated criticisms that the government has failed to take advantage of the five years of easy Fed money, missing its opportunity to restructure debt and to reform entitlements and regulations.
Debating QE In England
The Financial Times - Merits of Bank of Englands QE still spark debate five years on The most extraordinary experiment in the Bank of Englands 300-year history marked its fifth birthday on Wednesday, with British output still languishing 1.4 per cent below its pre-crisis peak. The Bank of England showed it had the ammunition to attack the economic crisis at its worst moment in 2009 when it printed 375bn of new money and pumped it into household and company bank accounts through the purchase of government bonds. Yet five years later the merits of quantitative easing still divide economic opinion and the fierce debates it prompted are far from resolved. As a means of economic stabilisation, QE appears to have worked. Its genesis marked the nadir of the economic crisis; confidence, orders and output all recovered after it was introduced. However, some argue this was a rather modest achievement for such a huge outlay and that 375bn would have been better spent on something more effective than government bonds. QE has destroyed as many reputations as it has made. Critics who warned that printing money would drive the UK down Zimbabwes road to hyperinflation and bankruptcy failed to read the economic runes. But the authorities have been just as damaged by events. In late 2009, the BoE thought it had the solved the immediate crisis and that it could end QE once bond purchases had reached 200bn. But a predicted three-year boom starting in 2010 never materialised. The BoE had to wait until 2013 for any genuine recovery and ended up spending almost the same again.
The ECB & IMF Face Off Over Greece
[Link] - IMF Said to Demand Greater Say on Greek Banks in ECB Wrangle The International Monetary Fund wants a greater say in the fate of Greek banks because its worried that the European Central Bank is being too lenient on them, three people with knowledge of the matter said. The IMF views an analysis of the countrys banks run in 2013 by BlackRock Inc. (BLK) as being too optimistic, said the people, who declined to be identified as the talks are private. The fund is concerned that the ECB, which will conduct its own stress test later this year, hasnt pushed the Greek central bank hard enough to revise BlackRocks findings, the people said. Those results will be published today. The IMF is refusing to give ground as it seeks to preserve its role in Greek banking policy just as the ECB prepares to take control of
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overseeing euro-area lenders. Annointing the central bank in Frankfurt as the sole supervisor was supposed to eradicate the turf wars that sometimes blighted attempts to police banks on a national level in the run up to the regions debt crisis. The ECBs first major task, already started, is to analyze the books of about 130 of the euro areas largest banks, and assess how much extra money they will need to raise. It is due to report its findings in October.
Fed Confirmations
Real Time Economics (WSJ Blog) - Fed Musical Chairs to Produce Same Old Song The Senate Banking Committees postponement of a confirmation hearing on three Federal Reserve board nominees means the board will very likely have just four voting governors at the central banks policy meeting in two weeks, instead of the customary seven. The shortage, however, is not likely to alter the meeting outcome. Fed officials have indicated in recent speeches and interviews they are on track to approve another $10 billion reduction in their monthly bond purchases, to $55 billion. The Senate committee had planned to hold the confirmation hearing this week but delayed it because of a snowstorm. The hearing has been rescheduled for Thursday, March 13. The panel will consider the nominations of Stanley Fischer to become the boards vice chairman, former Treasury official Lael Brainard to join the board and sitting Fed Gov. Jerome Powell to a new term. The Feds two-day policy meeting starts the following Tuesday, March 18just five days later, including a weekend. That means its very unlikely, though not impossible, the nominees will be confirmed before the meeting. The board members expected to vote at the meeting are Fed Chairwoman Janet Yellen, Daniel Tarullo, Jeremy Stein and Mr. Powell. Gov. Sarah Bloom Raskin is not voting on Fed monetary policy while awaiting Senate confirmation of her nomination to a top Treasury post. Two board seats are vacantthe vice chairs job, which Ms. Yellen left when she took the top slot last month, and a spot left open by the departure of Elizabeth Duke last summer.
The Return Of Subprime
The Wall Street Journal - New Lenders Spring Up to Cater to Subprime Sector A crop of new lenders is jumping into the subprime personal-loan market, wooing consumers with flawed credit who have been neglected since the financial crisis. Many lenders backed away from borrowers with poor credit histories after record defaults on subprime home loans helped trigger the recession in 2008. According to credit-data provider Equifax Inc., issuance of consumer loans and credit cards to people with credit scores below 660subprime by the firm's widely used definitionpeaked at $87 billion in 2006 before dropping to a low of $28 billion in 2010. Subprime consumer lending climbed to $36 billion last year through October, according to the most recent data available from Equifax. As the economic recovery continues, new entrants see an opportunity to lend at interest rates approaching 10% and sometimes much more. That is a premium above prime loansthose made to borrowers with strong credit scoresbut less than what many consumers pay for credit cards and payday loans. Among firms that recently began originating loans for people with subprime credit is Lending Club, a peer-to-peer platform in which investors pool money to make consumer loans. Microsoft co-founder Paul Allen's firm, Vulcan Ventures, invested $125 million in FreedomPlus, a San Mateo, Calif., lender that opened its doors in mid-February. FreedomPlus, an offshoot of firm Freedom Financial Network, is targeting about 80 million people with credit scores between 600 and 700. It offers loans up to $35,000, to be repaid over two to five years. Rates range from 7.49% to 36%, with an average of 18% to 20%.
Cartoons
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