Mish's Global Economic Trend Analysis

Economic Bust in Australia:Near-Record Corporate Bankruptcies, Employment Drops Unexpectedly; Rise in Bad Home Loans;Record Low Property Transactions

Posted: 12 May 2011 08:13 AM PDT

Those looking for bad news can find plenty of it in Australia, which in my opinion is soon headed for recession and rate cuts.

Near-Record Corporate Bankruptcies

Please consider Rising rents, cautious consumers behind rise in insolvencies

The number of companies entering insolvency in March reached a near-record high of just under 1,500, according to the corporate regulator, with cautious consumers and rising rents believed to be behind the worrying result.

Figures from the Australian Securities and Investments Commission show the number of company collapses reached 1,491 in March, versus 1,299 in February and 640 in January.

The 1,491 figure is one of the highest ever figures released by ASIC since the late 1990s, and a significant rise on March 2010's figure of 1,313.

Small Business Council of Australia chief Peter Strong warns we might not have seen the worst yet, with the impact of the flooding and Cyclone Yasi in summer not yet reflected in the numbers.

Record Low Property Transactions

The Sunday Times reports WA suffers record low property transactions

THE State Government has confirmed that WA's declining property market has hit rock bottom, with property activity last month falling to 16-year lows.

"The low April figure came on the back of March which was the worst for 14 years, and January and February which saw the lowest activity for nearly two decades," he said.

Rock Bottom?

What makes anyone think this is the bottom?

Employment Unexpectedly Falls Most Since 2009

Bloomberg reports Australian Employment Unexpectedly Falls Most Since 2009, Currency Weakens

Australian employers unexpectedly cut workers in April by the most since 2009 as hiring weakens in states less affected by the nation's mining boom, sending the local currency tumbling and stocks lower.

The number of full-time jobs declined by 49,100 in April, the most since February 2009, and part-time employment rose by 26,900, today's report showed. Australia's participation rate, which measures the labor force as a percentage of the population over 15 years old, fell to 65.6 percent in April from 65.8 percent a month earlier, it showed.

Last month's decline in jobs brings to 26,300 the number of net new positions created in the first four months of the year, the weakest January-through-April period of employment growth number since 1999.

Economists in a Bloomberg News survey forecast a 17,000 increase in April, according to the median of 21 estimates. The jobless rate held at 4.9 percent.

The RBA said in its May 6 quarterly policy statement that "most leading indicators point to further growth in employment over the months ahead, although at a slower pace than in 2010." It also predicted the jobless rate would fall to 4.25 percent by December 2013.

RBA Calls For Unemployment Rate to Drop

What the hell is it that the RBA sees that I don't? The property bust is underway and going to accelerate, retailers are going under, and consumers are tapped out.

How exactly does that translate to lower unemployment rate?'

I certainly have to laugh at the economists in that Bloomberg survey because the employment report came out after the reported rise in corporate bankruptcies.

Here is one more piece of the puzzle to consider.

Rise in Bad Home Loans

The Age reports a Rise in CBA bad home loans

Commonwealth Bank's decision to aggressively grow its mortgage market share at the height of the financial crisis is starting to cause indigestion after it revealed an increase in the number of housing loans starting to turn bad.

Further stress in the housing market could emerge with CBA chief executive Ralph Norris predicting the Reserve Bank could issue as many as two interest rate increases by October.

''We're obviously expecting the Reserve Bank to increase rates and there's possibly one or two rises to come in the next six months,'' Mr Norris told an investor briefing.

Mr Norris was speaking as CBA confirmed it was on track for a record profit result after it reported third-quarter earnings of $1.7 billion.

Even with demand for credit expected to remain subdued until after next month, the latest performance so far should see the bank deliver cash earnings of $6.8 billion.

This will comfortably beat last year's profit result of $6.04 billion.

But CBA's experience with an 11 per cent jump in the number of missed payments on housing loans in the March quarter follows a similar run-up in arrears by ANZ and Westpac.

Usually such a sudden increase in lending arrears would be a cause for concern in the banking sector given their large exposure to mortgages. But Mr Norris pointed to natural disasters such as Queensland's floods causing stress among some homeowners.

Norris Way to Optimistic

I disagree with the CBA chief executive Ralph Norris on nearly every point.

I highly doubt the RBA hikes twice more.
I expect cuts as the Australian economy slumps into a big recession.
I expect delinquencies to rise further.
I expect profits at CBA have peaked or will soon do so.

Except for my economist friend Steve Keen, I have to ask: Has anyone down under learned anything from the property bust in the US?

The Balance Sheet Is The Future

Let's now review Peter Atwater's post on Bank Earnings 102 also from September 2007.

[Here is] one simple rule for financial services firms: The income statement is the past. The balance sheet is the future.

Let me repeat it again. The income statement is the past and the balance sheet is the future, especially now.

At the top of a credit cycle, the income statement for a financial institution shows "the best of times", but buried in the balance sheet is "the worst of times" to come.

I commented on that many times including Questions Linger Over Lehman's Balance Sheet on March 25, 2008. "Judging from what's happening to its balance sheet, Lehman's future looks bleak."

The more leveraged one is to real estate the bigger the ultimate bust. Commonwealth Bank is likely to be punished severely for its willingness to expand into risky assets at the top of the bubble.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Weekly Unemployment Claims an Elevated 434,000; Moving Average Trending Higher for a Month

Posted: 12 May 2011 07:01 AM PDT

After last week's unexpected, and massive jump to 478,000 new unemployment claims, this week settled in at a high but expected 434,000 initial claims.

Please consider the Department of Labor Unemployment Insurance Weekly Claims Report for the week ending May 7, 2011.

In the week ending May 7, the advance figure for seasonally adjusted initial claims was 434,000, a decrease of 44,000 from the previous week's revised figure of 478,000. The 4-week moving average was 436,750, an increase of 4,500 from the previous week's revised average of 432,250.

Weekly Claims Moving Average Trending Higher for a Month

The report does not say but the 4-week moving average revision was higher by 1,000.

Seasonally Adjusted 4-Week Moving Average of Initial Claims

2011-04-09 .....396,750
2011-04-16 ......399,250
2011-04-23 .....409,000
2011-04-30 .....432,250
2011-05-07 .....436,750

Unless there are downward revisions, next week the moving average will be higher again if the number of weekly claims exceeds 404,000.

4-Week Moving Average of Initial Claims

Note: The St. Louis Fed has not yet updated their data. That above graph does not show the revision last week or this week's number. However, the trend is clearly up for a month and assuming another number around 436,000 next month, the 4-week moving average would jump to approximately 446,000.

Last Week's Explanations Reviewed

Please consider U.S. Jobless Claims Unexpectedly Jump on Auto Shutdowns

The number of claims for U.S. unemployment benefits unexpectedly rose last week, pushed up by auto-plant shutdowns and other unusual events that seasonal variations failed to take into account, the Labor Department said.

A spring break holiday at schools in the state of New York prompted workers to file claims, which the seasonal adjustment factors didn't expect last week, the Labor Department official said. In addition, Oregon began a new emergency benefits program for the long-term unemployed that also pulled in some new claimants, he said. Finally, auto plant shutdowns due to parts shortages caused by the earthquake and tsunami in Japan also contributed to the increase, the official said.

Last Week's Excuse Evaluated

The data is now in to evaluate last week's excuse. From this week's report ...

The largest increases in initial claims for the week ending April 30 were in New York (+24,431), Michigan (+3,948), Wisconsin (+3,746), North Carolina (+2,749), and Ohio (+2,319), while the largest decreases were in New Jersey (-4,004), California (-3,145), Massachusetts (-2,966), Puerto Rico (-2,713), and Florida (-2,156).

Oregon is not on the map so throw that bogus excuse out the window. While Michigan, Ohio, and Wisconsin are up a bit the total of all three states is 10,013. Together with New York, we have a grand total of 34,444, assuming the unlikely event that all of those claims were related to the excuses given.

If so, that would have put last week's number at 443,556 or 50,000 higher than the recent bottoming at the 390,000 level.

440,000 is an elevated number, consistent with a slowing economy and the April jump in unemployment that mainstream media essentially disregarded.

For more on jobs and how the unemployment rate is calculated please see