; Daily Report June 15 2010
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Daily Report June 15 2010


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RELEASED TODAY: U.S. import prices declined 0.6 percent in May, the U.S. Bureau of
Labor Statistics reported today, after rising 1.1 percent in April and 0.4 percent in March. The
decrease was led by falling fuel prices, which more than offset a rise in nonfuel prices. In
contrast, the price index for U.S. exports increased 0.7 percent in May following increases of 1.2
percent and 0.7 percent in April and March, respectively

Workers with college experience have held up better during the current downturn, and new
research suggests that demand for more educated employees may outstrip supply over the next
decade (Emmeline Zhao, Wall Street Journal, ―Demand for Educated Workers May Outstrip
Supply by 2018‖ , http://blogs.wsj.com/economics/2010/06/15/demand-for-educated-workers-
may-outstrip-supply-by-2018/?mod=rss_WSJBlog&mod=marketbeat). By 2018, the United
States will see 46.8 million job openings, 63% — 29.5 million — of which will require some
college education. One-third, or 16 million positions, will require a bachelor’s degree or higher,
according to a report by the Georgetown University Center on Education and the Workforce.
Companies will seek 22 million new postsecondary degree-holders, but just 19 million or so will
have earned an associate’s degree or higher by then, according to the report. The difference
averages to a 300,000 annual deficit of college graduates between 2008 and 2018. The shift
toward a ―college economy‖ stems from a greater reliance on technology, which has recently
replaced many blue collar jobs: a change from 25 million jobs for degree-holders in 1973 —
28% of the work force — to 91 million in 2007 — 42% of the workforce. Report authors
Anthony P. Carnevale, Nicole Smith and Jeff Strohl estimate that 45% of the expected 166
million work force in 2018 is expected to hold an associate’s degree or higher. ―The implications
of this shift represent a sea change in American society,‖ the report states. ―Essentially,
postsecondary education or training has become the threshold requirement for access to middle-
class status and earnings in good times and in bad. It is no longer the preferred pathway to
middle-class jobs — it is, increasingly, the only pathway.‖ In the years between 1970 and 2007,
the proportion of people with less than a college degree in the middle class — defined as those
with incomes $30,000-$79,000 — declined from about 75% to about 40%. More people with a
college education are moving to the upper class: In 1970, less than half of the upper class had
some college education and training, compared to more than 80% in 2007. The report notes that
replacement job growth will continue to expand, and projects 46.8 million job openings between
2008 and 2018, largely from service industries. ―Governments will need to be selective about
how they approach industries and where they deploy scarce development resources… Education
and training must be made available to individuals outside the usual college-age population to
serve workers whose old-economy jobs have disappeared,‖ the report concludes.

Some 9 percent of executives said they planned to hire more workers in professional occupations
during the third quarter, while 6 percent said they planned to decrease the number of those
workers, according to survey results released in early June by Robert Half International, a
staffing firm (Daily Labor Report, ―Fewer Executives Expect to Hire Professionals In Third
Quarter, Robert Half Survey Finds‖, Pg A-2,
&fn=17295337&jd=a0c3j4m4r6&split=0). While the survey found that a net 3 percent of
employers were planning to increase employment of professionals in the third quarter, a larger
proportion of respondents—a net 4 percent—said they had planned to hire more professional
workers in the second quarter, with 10 percent planning an increase and 6 percent anticipating a
decline. The net percentages reported as part of the survey are equal to the projected increase in
hiring minus the anticipated decrease. The survey is based on telephone interviews with 4,000
senior executives at U.S. companies. Meanwhile, Robert Half also reported that a net 31 percent
of employers in the legal field expected to increase staffing in the third quarter, up from 26
percent who anticipated an increase in the second quarter. That portion of the survey reflects
interviews with 100 lawyers at law firms with 20 or more employees, as well as 100 corporate
attorneys at companies with more than 1,000 workers. The respondents all had hiring authority at
their organizations, the agency said. The legal staffing survey also found that 83 percent of
respondents reported that they were confident that their firms would grow during the third
quarter. ―In particular, law firms specializing in bankruptcy, foreclosure, and litigation are
adding staff to meet increased demand for their services,‖ Charles Volkert, executive director of
Robert Half's legal division, said in a statement. ―Successive waves of bankruptcies and
restructurings, along with a surge in labor relations and employment-related litigation, are
fueling hiring.‖

Excess capacity will weigh on the commercial real estate industry ―for many years to come,‖ in
large part because of the severity of the recession and the prospect of only modest economic
growth over the next three years, the quarterly UCLA Anderson Forecast predicted June 15
(Daily Labor Report, ―UCLA Forecast Says Job Loss Created Excess Capacity in Commercial
Real Estate‖, Pg A-5,
&fn=17295319&jd=a0c3j4a1m3&split=0. The job losses in sectors like financial services and
law firms—sectors that traditionally have driven office demand—were so severe and remain so
far below peak employment figures, that even with a slowdown in new construction, anything
approximating a supply/demand balance is years away, David Shulman, a UCLA Anderson
senior economist wrote in a report on commercial real estate. ―In terms of office demand, I am
hard pressed to come up with a scenario where demand recovers quickly and because the
employment declines have been so severe it is reasonable to assume that many office-using firms
are carrying excess space relative to their needs,‖ Shulman wrote. ―Thus, as leases roll over,
tenants will just as likely reduce their space demands as increase them,‖ he predicted.

As the nation struggles to shrug off the worst housing crash since the Great Depression, it may
be hard to believe a housing shortage could be on its way (Les Christie, CNNMoney, ―Is a
housing shortage coming?‖,
http://money.cnn.com/2010/06/15/real_estate/new_housing_bubble/index.htm. The nation is
simply not building enough homes to keep up with potential demand. Just 672,000 new homes
were started in April, less than half the long-term run rate needed to meet the nation's natural
population growth. "It is ironic, but there is a growing consensus that there may be a new
housing shortage coming," said James Gaines, a real estate economist with Texas A&M. So far,
the shortfall has been masked by a weak economy that has put a damper on homebuying. Once
the job market rebounds, however, people will look to have their own homes again. This pent-up
demand could get unleashed on unprepared markets, causing shortages and rising local prices.
Household formation -- the technical term for people moving in together -- has been on hold
during the past few years as young people, especially, have been unable to find jobs. In the past,
an average of more than 1.3 million households were formed each year, causing demand for 1.5
million new homes. (More homes than households are needed to replace those destroyed by fires,
floods, teardowns and neglect.) In 2009, only 398,000 new households were formed, according
to the Census Bureau. That is much lower than average and a quarter of the number formed just
two years earlier. "The decline in household formation is artificial," said Gaines. "The young are
moving in with their parents. There's even doubling up among working class people. There's a
pent-up demand coming if and when the economy recovers." Those doubting a new bubble is
near point to a large inventory overhang. As many as 7 million homes are vacant but not for sale,
according to the Census Bureau, which should provide cushion to offset increased demand.

Federal Reserve officials are beginning to debate quietly what steps they might take if the
recovery surprisingly falters or if the inflation rate falls much more (Jon Hilsenrath, Wall Street
Journal, ―Fed Weighs Growth Risks‖,
WSJ_business_EconomyNewsBucket&mg=com-wsj). Fed officials, who meet next week to
survey the state of the economy, believe a durable recovery is on track and their next move—
though a ways off—will be to tighten credit, not ease it further. Fed Chairman Ben Bernanke has
played down the risk of a double-dip recession and signaled guarded confidence in the recovery.
But fiscal woes in Europe, stock-market declines at home and stubbornly high U.S.
unemployment have alerted some officials to risks that the economy could lose momentum and
that inflation, already running below the Fed's informal target of 1.5% to 2%, could fall further,
raising a risk of price deflation. The Fed's official posture is unlikely to change when
policymakers meet June 22 and 23: The U.S. central bank is expected to leave short-term interest
rates near zero and signal no inclination to change that for a long time. But behind-the-scenes
discussions at the meeting could include precautionary talk about what happens if the economy
doesn't perform as well as expected. "If events in Europe evolve so that they have a more severe
and broad impact on financial markets, then the scope of the problems for the U.S. could be
magnified," Charles Evans, president of the Federal Reserve Bank of Chicago, said in a speech
last week. Brian Sack, the head of the New York Fed's powerful markets group, has talked about
"two-sided" risks to the economy—in other words, the risk that growth and inflation could turn
out to be lower than expected, as well as higher. Some so-called hawks at the Fed—those
officials who worry most about an increase in inflation—also have acknowledged risks on the
economic horizon. "The European sovereign-debt situation is serious, and there are many
unanswered questions about how events will unfold," James Bullard, St. Louis Fed president,
said in Tokyo on Monday. Mr. Bullard said he expected the recovery to remain on track and to
be only slightly dented by the problems in Europe, echoing cautiously reassuring comments by
Mr. Bernanke last week. By September, Mr. Bullard noted, the nation's output of goods and
services is likely to have recovered to prerecession levels. But high unemployment is another
widespread concern. "I would be surprised if the national unemployment rate were to fall below
9% before the end of 2010 or below 8% by the end of 2011," Narayana Kocherlakota,
Minneapolis Fed president, said Friday.

Two pieces of data about the American consumer came out this morning that seem to conflict
with each other. But a look behind the headlines can help resolve the confusion (Frank Ahern,
Washington Post, ―Retail sales drop but consumer confidence rises. What gives?‖,
http://voices.washingtonpost.com/economy-watch/?nid=roll_business). At 8:30, the Commerce
Department told us that May retail sales dropped by a surprising 1.2 percent compared with
April. Forecasters were expecting sales would ease back a little from April but not drop like they
did. Less than two hours later, the Reuters/University of Michigan consumer sentiment survey
for early June reported that the U.S. consumer is a lot more optimistic than forecasters expected.
So, what's going on? First, let's take a look at the survey. That's just what it is: a survey. Reuters
and Michigan survey 500 households (a small but statistically legitimate sample) across the
country and ask them what they think of their current conditions and what they think conditions
will be like in six months. Both the current and future conditions' index numbers rose in May,
which surprised me, given that last month was the worst stock market May in 40 years. But
consumers on Main Street evidently feel better than traders on Wall Street. I'm no class warrior,
but that's a nice change. The truth is, the markets aside, the economic news -- employment (at
least government), auto sales and so forth -- have been steadily, if weakly, improving.

As the chief economist of the Federal Housing Finance Agency, Patrick Lawler is usually
confined in his public remarks to discussing such matters as the seasonal adjustment of home-
price indexes (James R. Hagerty, Wall Street Journal, ―Radical Ideas From a Federal Housing
Bureaucrat‖, http://blogs.wsj.com/developments/2010/06/14/radical-ideas-from-a-federal-
housing-bureaucrat/). So I wasn’t expecting much excitement when Mr. Lawler rose to speak last
week during a panel discussion at a housing-policy conference hosted by the Federal Reserve
Bank of Cleveland. It turns out, however, that Mr. Lawler has been quietly pondering some
radical notions about how the U.S. might reorder its housing policies–insights acquired during
more than 20 years as a regulator and Senate banking committee staff economist. Allotted only
about 10 minutes to share his vision, Mr. Lawler–who is no relation to Tom Lawler, another
provocative housing economist we often quote–first made the obligatory statement that he was
expressing his own views and not those of his federal agency. Yeah, right, I thought, and reached
for my triple espresso. But then Mr. Lawler launched a frontal assault on the most sacred element
in U.S. housing-policy dogma: the 30-year fixed-rate mortgage loan, providing the right to
refinance at any time, with no prepayment penalty. If more members of the audience had been
fully awake at this moment, I feel sure that their gasps would have been audible. Now,
Americans are very attached to their 30-year fixed-rate freely prepayable mortgages. They like
not having to fuss about the possibility of 28% interest rates in 2032, even though most of us will
move or die long before then. They love to refinance every time rates drop and then brag to their
neighbors about how much they are saving per month. What they don’t stop to realize often
enough is that they are paying a very large price for that privilege– twice. In the first place,
mortgage rates are higher than they otherwise would be. That’s because lenders and mortgage
investors must build in protection for the risk that we will prepay and stick them with a lower
yield than they were anticipating. Mr. Lawler estimates that Americans pay at least an extra 0.25
to 0.50 percentage point in rates because of this option to prepay without penalty. They also pay
another premium-–sometimes a percentage point or two–for having a long-term fixed rate. Over
30 years, that translates into some real money, but no one ever mentions that when bragging to
the neighbor. In the second place, our nation has created the likes of Fannie, Freddie and the
FHA to facilitate these oddball 30-year fixed-rate loans, which aren’t normally provided by the
private market.
When the U.S. government overhauled welfare programs in the 1990s the primary goal was to
promote work, but a new study suggests reform brought another unexpected benefit: reduced
drug use (Phil Izzo, Wall Street Journal, ―Welfare Reform Reduced Drug Use‖,
use/?mod=rss_WSJBlog&mod=marketbeat). We find robust and compelling evidence that
welfare reform led to declines in illicit drug use and increases in drug treatment among women at
risk for relying on welfare, and some evidence that the effects operate, at least in part, through
both [Temporary Assistance for Needy Families] drug sanctions and work incentives,‖ write
authors Hope Corman of Rider University, Dhaval M. Dave of Bentley University, and Robert
Wood Johnson Medical School’s Nancy E. Reichman and Dhiman Das in their paper ―Effects of
Welfare on Illicit Drug Use of Adult Women‖ circulated by the National Bureau of Economic
Research. The authors note that existing studies indicate that the majority of women on welfare
don’t use drugs and that drug use doesn’t necessarily cause welfare participation. But on the
other side of the coin, the results suggest a properly designed welfare system can reduce the
incidence of illegal drug use. The authors looked at self-reported illicit drug use, drug-related
prison admissions, drug-related arrests, drug-related treatment admissions and drug-related
emergency room episodes from 1992-2002 for unmarried women ages 21-49 years with a high
school education or below who have a child under the age of 18 — those considered most at risk
for welfare. Those data were compared to unmarried women in the same age range and
educational group who have no children. The results for the two groups were similar before
welfare overhaul was passed and began to diverge in the wake of the legislation. ―The patterns
across the different datasets, measures of drug use, characterizations of welfare reform, model
specifications, and comparison groups paint a remarkably consistent picture: Welfare reform
reduced illicit drug use,‖ the authors state. ―The results from this study lend support to the
argument that limiting cash assistance and encouraging work lead women to refrain from
socially unfavorable behaviors.‖ But the researchers note an important caveat, especially
considering the current economic environment. ―We have estimated average effects that
coincided, for the most part, with a strong economy,‖ they said. ―The overall effects could mask
considerable heterogeneity within the target population and might look very different during
periods of economic recession.‖

DUE OUT TOMORROW: Producer Price Index - May 2010.

Editor's Note: The BLS Daily Report is a compendium of excerpts from media reports intended
to provide BLS employees with a current look at how economic statistics are covered by
reporters. BLS does not verify the accuracy of the excerpted information. The Daily Report is
intended for internal distribution only.

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