Economic Rebalancing

The global economy is horribly out of balance, with the United States going deeper into debt each year as a result of a huge trade gap. This blog describes the process of global economic rebalancing. If you have any comments or questions about the posts here, please don't hesitate to use the comments section.

Thursday, April 19, 2007

Trends in the Jobless Claims Point Toward a Slowing Economy and More Foreclosures

The housing slowdown has gone through two distinct stages so far. The first was related to the rapid exit of flippers who had been putting down deposits on pre-construction homes and then selling them for a profit before the homes were finished. Speculators created a demand vaccuum when it realized they needed to get out of contracts and inventory early last year. The second stage has been related to the tightening of credit and a shift in market psychology cutting into the number of willing and eligible buyers. Usually speculators and easy credit policies complete their cycles without too much of a an impact on the market, but this time they've been big enough to make for a very noticeable slowdown.

The third stage will likely be due to the more traditional cause of housing slowdowns - job losses and a slowing economy. During the last recession, initial jobless claims climbed up over 400,000 per week, but have hovered around 300,000 much of the time since then. People losing jobs is traditionally the biggest cause of mortgage defaults (rather than reseting ARMs). Looking at the seasonally adjusted Initial Claims data demonstrates a rising trend:


The big spike last May was due to the brief shutdown of the Puerto Rican Government. Other than that, the rising trend seems clear and fits well with the well established slowdown in residential construction.

Looking at unadjusted numbers year-over-year (over-year), the recent rise over 2006 levels is clear, although the numbers are now roughly where they were in 2005:

Unemployment levels are still low historically and there isn't likely to be a big uptick in mortgage defaults based solely on the new claims we're seeing right now. The seasonal December and January layoffs may be adding to the rise in recent delinquencies we've been seeing, but it won't be until July when we get another seasonal spike. In September and October of 2005 we saw spikes from the big Gulf hurricanes.

In Year-Over-Year percentage terms, the uptrend is especially clear:

The rate of change in 2006 was mostly negative, even without the hurricane comparisons. The rate of change began to swing sharply positive in February 2007.

Job losses may be contributing to the rise in foreclosures, although resetting ARMS, stagnating price and tightening credit standards are almost certainly the largest causes for now. It'll be interesting to watch the foreclosure numbers when job losses do pick up. Here are a couple of charts from RealtyTrac's monthly foreclosure press releases:


Realtytrac is not exactly a reputable source when it comes to producing economic reports, and it is clear their data is far from perfect. Nevertheless it generally conforms with what other data sources are saying: The economy is on shaky ground and millions of middle-class Americans are feeling the squeeze.

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