Tuesday, July 31, 2012

Wednesday: FOMC announcement, ISM Mfg, Auto Sales and much more

by Calculated Risk on 7/31/2012 09:38:00 PM

Wednesday will be a busy day with most of the focus on the FOMC announcement, auto sales and the ISM manufacturing index:
• At 7:00 AM ET, The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. Expect more refinancing activity and record low mortgage rates.

• At 8:15 AM, the ADP Employment Report for June will be released. This report is for private payrolls only (no government). The consensus is for 120,000 payroll jobs added in June, down from the 176,000 reported last month.

• At 10:00 AM, the ISM Manufacturing Index for July will be released. The consensus is for an increase to 50.1, up from 49.7 in June. (below 50 is contraction).

• Also at 10:00 AM, construction spending for June will be released. The consensus is for a 0.5% increase in construction spending.

• At 2:15 PM, the FOMC announcement will be released. Expectations range from doing nothing, to extending the period that the FOMC expects "exceptionally low levels for the federal funds rate" through 2015, to launching QE3. The FOMC is under pressure with unemployment forecast to remain very high for years, and inflation below the target rate - and projected to remain below the target rate for several years.

• At around 4:00 PM, the SAAR rate for auto sales will be released. The automakers will report sales during the day, and light vehicle sales are expected to decrease to 14.0 million from 14.1 million in June SAAR.


Prediction Contest: July Winners, August Questions

by Calculated Risk on 7/31/2012 07:49:00 PM

For the economic question contest in July, the leaders were (Congratulations all!):

1st: Alexander Petrov (2nd month in a row!)
2nd: Mayson Lancaster
3rd: Bob Dellar
4th tie: Vad Yazvinski, Richard Plaster, Bill Dawers, James White

Questions this week for August contest:



Fannie Mae and Freddie Mac Serious Delinquency rates declined in June

by Calculated Risk on 7/31/2012 05:58:00 PM

Fannie Mae reported that the Single-Family Serious Delinquency rate declined in June to 3.53% from 3.57% May. The serious delinquency rate is down from 4.08% in June last year, and this is the lowest level since April 2009.

The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.

Freddie Mac reported that the Single-Family serious delinquency rate declined in June to 3.45%, from 3.50% in May. Freddie's rate is only down from 3.50% in June 2011. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.

These are loans that are "three monthly payments or more past due or in foreclosure".

Fannie Freddie Seriously Delinquent RateClick on graph for larger image

I don't know why Fannie's delinquency rate is falling faster than for Freddie.

Although this indicates some progress, the "normal" serious delinquency rate is under 1%, so there is a long way to go. At the current rate of decline, Fannie will be back to "normal" in 2015, and Freddie in 2020.

Fannie, Freddie will not Participate in Principal Reduction Program

by Calculated Risk on 7/31/2012 04:01:00 PM

From Nick Timiraos at the WSJ: Fannie, Freddie Won't Cut Loan Balances

The federal regulator for Fannie Mae and Freddie Mac FMCC -2.10%will not permit the taxpayer-supported mortgage giants to participate in an Obama administration program that reduces mortgage balances for certain troubled homeowners, the agency said on Tuesday.
...
"The potential benefit was too small and uncertain relative to known and unknown costs and risks," said Edward DeMarco, the FHFA's acting director, in a briefing on Tuesday.
Based on DeMarco's concerns about "strategic modifiers" (borrowers who default to get a principal reduction), I'm not surprised.

Earlier on house prices:
Case Shiller: House Prices increased 2.2% in May
House Price Comments, Real House Prices, Price-to-Rent Ratio
All Current House Price Graphs

Misc: Chicago PMI increases slightly, Consumer Confidence up, CoreLogic 60,000 Foreclosures in June

by Calculated Risk on 7/31/2012 01:14:00 PM

Some earlier news ...

• From Chicago ISM: Chicago Business Barometer gained incrementally

The PMI increased to 53.7 from 52.9. Expectations were for a decrease to 52.5.

The employment index decreased to 53.5 from 60.4, and new orders increased to 52.9 from 51.9.

• From Reuters: Consumer confidence rises in July

The Conference Board, an industry group, said its index of consumer attitudes climbed to 65.9 from a upwardly revised 62.7 in June, topping economists' expectations for a decline to 61.5.
This is still very low.

• From CoreLogic: CoreLogic Reports 60,000 Completed Foreclosures in June
According to the report, there were 60,000 completed foreclosures in the U.S. in June 2012 compared to 80,000 in June 2011 and 60,000 in May 2012.

Approximately 1.4 million homes, or 3.4 percent of all homes with a mortgage, were in the national foreclosure inventory as of June 2012 compared to 1.5 million, or 3.5 percent, in June 2011. Month-over-month, the national foreclosure inventory was unchanged from May 2012 to June 2012. The foreclosure inventory is the share of all mortgaged homes in some stage of the foreclosure process.
Earlier on house prices:
Case Shiller: House Prices increased 2.2% in May
House Price Comments, Real House Prices, Price-to-Rent Ratio
All Current House Price Graphs

House Price Comments, Real House Prices, Price-to-Rent Ratio

by Calculated Risk on 7/31/2012 11:14:00 AM

Reporting on the Case-Shiller house price indexes can be confusing. On a month-over-month basis, prices were up. On a year-over-year basis, prices were down. Sometimes reporting focuses on the Seasonally Adjusted (SA) numbers; sometimes on the Not Seasonally Adjusted (NSA) numbers.

I look at all of these numbers.

Unfortunately, the seasonal adjustment is being impacted by distressed sales and is not as useful as in earlier periods. This is because the level of distressed sales remains fairly constant all year - and the level of conventional sales follows a normal seasonal pattern (high in the spring and summer, low in the winter). This has distorted the seasonal factor.

However, if we just look at the month-over-month change NSA, we have to remember there is a seasonal pattern for prices (strong in the spring and summer). So the 2.2% month-to-month NSA increase in May is partially seasonal.

If we just look at the year-over-year change (down 1.0% year-over-year in May), we have to remember that year-over-year changes lag turning points in prices.

However we look at the numbers, it appears house prices increased in May from April, and that the year-over-year change will probably turn positive in the June or July report.

Here is another update to a few graphs: Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio. Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices, and the price-to-rent ratio, are back to late 1998 to 2001 levels depending on the index.

Nominal House Prices

Nominal House PricesClick on graph for larger image.

The first graph shows the quarterly Case-Shiller National Index SA (through Q1 2012), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through May) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to Q4 2002 levels, and the Case-Shiller Composite 20 Index (SA) is back to August 2003 levels, and the CoreLogic index (NSA) is also back to August 2003.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to Q4 1998 levels, the Composite 20 index is back to March 2001, and the CoreLogic index back to May 2000.

As we've discussed before, in real terms, all of the appreciation early in the last decade is gone.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to Q4 1998 levels, the Composite 20 index is back to May 2000 levels, and the CoreLogic index is back to June 2000.

In real terms - and as a price-to-rent ratio - prices are mostly back to late 1990s or early 2000 levels.

All Current House Price Graphs

Case Shiller: House Prices increased 2.2% in May

by Calculated Risk on 7/31/2012 09:00:00 AM

S&P/Case-Shiller released the monthly Home Price Indices for May (a 3 month average of March, April and May).

This release includes prices for 20 individual cities and two composite indices (for 10 cities and 20 cities).

Note: Case-Shiller reports NSA, I use the SA data.

From S&P: Home Prices Continue to Rise in May 2012 According to the S&P/Case-Shiller Home Price Indices

Data through May 2012, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed that average home prices increased by 2.2% in May over April for both the 10- and 20-City Composites.

With May’s data, we found that home prices fell annually by 1.0% for the 10-City Composite and by 0.7% for the 20-City Composite versus May 2011. Both Composites and 17 of the 20 MSAs saw increases in annual returns in May compared to April. ... All 20 cities and both Composites posted positive monthly returns.
...
“With May’s data, we saw a continuing trend of rising home prices for the spring,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “On a monthly basis, all 20 cities and both Composites posted positive returns and 17 of those cities saw those rates of change increase compared to what was observed for April. Seventeen of the 20 cities and both Composites also saw improved annual rates of return. We have observed two consecutive months of increasing home prices and overall improvements in monthly and annual returns; however, we need to remember that spring and early summer are seasonally strong buying months so this trend must continue throughout the summer and into the fall.

“The 10- and 20-City Composites were each up 2.2% for the month and recorded respective annual rates of decline of 1.0% and 0.7%, compared to May 2011. While still negative, these annual changes are the best we’ve since in at least 18 months."
Case-Shiller House Prices Indices Click on graph for larger image.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 32.6% from the peak, and up 0.9% in May (SA). The Composite 10 is up from the post bubble low set in March, Not Seasonally Adjusted (NSA).

The Composite 20 index is off 32.3% from the peak, and up 0.9% (SA) in May. The Composite 20 is also up from the post-bubble low set in March (NSA).

Case-Shiller House Prices Indices The second graph shows the Year over year change in both indices.

The Composite 10 SA is down 1.0% compared to May 2011.

The Composite 20 SA is down 0.7% compared to May 2011. This was a smaller year-over-year decline for both indexes than in April, and the smallest year-over-year decline since 2010 (when the tax credit boosted prices temporarily).

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Case-Shiller Price Declines Prices increased (SA) in 18 of the 20 Case-Shiller cities in April seasonally adjusted (all 20 cities increased NSA). Prices in Las Vegas are off 60.4% from the peak, and prices in Dallas only off 5.8% from the peak. Note that the red column (cumulative decline through May 2012) is above previous declines for most cities.

This was better than the consensus forecast and it is now possible that prices will turn positive year-over-year in June. I'll have more on prices later.

Personal Income increased 0.5% in June, Spending decreased slightly

by Calculated Risk on 7/31/2012 08:30:00 AM

The BEA released the Personal Income and Outlays report for June:

Personal income increased $61.8 billion, or 0.5 percent ... in June, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $1.3 billion, or less than 0.1 percent.
...
Real PCE -- PCE adjusted to remove price changes -- decreased 0.1 percent in June, in contrast to an increase of 0.1 percent in May. ... PCE price index -- The price index for PCE increased 0.1 percent in June, in contrast to a decrease of 0.2 percent in May. The PCE price index, excluding food and energy, increased 0.2 percent, compared with an increase of 0.1 percent.
...
Personal saving -- DPI less personal outlays -- was $529.5 billion in June, compared with $472.4 billion in May. The personal saving rate -- personal saving as a percentage of DPI -- was 4.4 percent in June, compared with 4.0 percent in May.
The following graph shows real Personal Consumption Expenditures (PCE) through June (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

Personal Consumption Expenditures Click on graph for larger image.

This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE.

A key point is the PCE price index has only increased 1.5% over the last year, and core PCE is up 1.8%.

Monday, July 30, 2012

FHFA Nears Decision on Debt Forgiveness, and Tuesday: Case-Shiller House Prices

by Calculated Risk on 7/30/2012 09:29:00 PM

From Nick Timiraos at the WSJ: Data Show Fannie, Freddie Savings From Debt Forgiveness

As the regulator for Fannie Mae and Freddie Mac nears its decision on whether to approve debt forgiveness for troubled borrowers, a new analysis by the regulator suggests that taxpayers could actually benefit from the move...

In April, the agency said that loan forgiveness would save about $1.7 billion for the companies, relative to other types of relief. At the time, the agency said that because the Treasury was paying to subsidize those write-downs, the relief would still cost taxpayers $2.1 billion, offsetting any savings to the companies.

But the latest analysis done by the agency found that such write-downs would generate $3.6 billion in savings for the companies, under certain assumptions, according to people familiar with the analysis. Even after subtracting the cost of the Treasury subsidies, the program would save $1 billion, these people said. As many as 500,000 borrowers could be eligible, these people said.
...
The FHFA has raised other concerns beyond the cost of such write-downs. Chief among them is the fear that more borrowers, upon hearing that Fannie and Freddie are instituting a debt-forgiveness program, might default to seek more generous terms.
FHFA acting director Edward DeMarco focused on this last point in his speech in April:
One factor that needs to be considered is the borrower incentive effects. That means, will some percentage of borrowers who are current on their loans, be encouraged to either claim a hardship or actually go delinquent to capture the benefits of principal forgiveness?
...
It is difficult to model these borrower incentive effects with any precision. What we can do is give a sense of how many current borrowers would have to become “strategic modifiers” for the NPV economic benefit provided by the HAMP triple PRA incentives to be eliminated. In this context, a “strategic modifier” would be a borrower that either claims a financial hardship or misses two consecutive mortgage payments in order to attempt to qualify for HAMP and a principal forgiveness modification.
The FHFA might decide that the risk from "strategic modifiers" outweighs the possible savings.

Also from Nick Timiraos at the WSJ Are Home Prices Rising? A Price-Index Primer

On Tuesday:
• At 8:30 AM ET, the Personal Income and Outlays report for June will be released by the BEA. The consensus is for a 0.2% increase in personal income in June, and for 0.1% increase in personal spending, and for the Core PCE price index to increase 0.2%.

• At 9:00 AM, S&P/Case-Shiller House Price Index for May is scheduled to be released. The consensus is for a 1.4% decrease year-over-year in Composite 20 prices (NSA) in May. The Zillow forecast is for the Composite 20 to decline 1.0% year-over-year, and for prices to increase 0.8% month-to-month seasonally adjusted.

• At 9:45 AM: Chicago Purchasing Managers Index for July will be released. The consensus is for a decrease to 52.5, down from 52.9 in June.

• Also at 10:00 AM, the Conference Board's consumer confidence index for July. The consensus is for a decrease to 61.5 from 62.0 last month.


And the final question for the July economic contest:

More FOMC Preview

by Calculated Risk on 7/30/2012 08:09:00 PM

Most of this article is about the ECB and there isn't anything new on the Fed, from Jon Hilsenrath and Brian Blackstone at the WSJ: Heat Rises on Central Banks

The two-day Federal Open Market Committee meeting convenes Tuesday, following signs that Fed officials have become more willing to act to address disappointingly slow U.S. economic growth.
...
The Fed could unveil a new program for buying mortgage or government securities to bring down long-term interest rates, or take other actions to spur growth, or simply promise to do more later if necessary. Officials might wait until September, when they will formally update their economic forecasts, before deciding anything significant.
From Goldman Sachs analysts today:
Although a new Fed asset purchase program is a possibility in the near term if the data continue to disappoint, our central expectation is for a return to QE in December or early 2013.
...
We expect an extension of the current “exceptionally low…at least through late 2014” interest rate guidance to "mid 2015." Such a shift would roughly restore the forward guidance to the same three-year horizon as at the January FOMC meeting, when the "late 2014" formulation was first adopted. We would, however, regard this rate extension as a relatively modest step.

NMHC Apartment Survey: Market Conditions Tighten in Q2 2012

by Calculated Risk on 7/30/2012 04:51:00 PM

From the National Multi Housing Council (NMHC): Apartment Market Hot Streak Continues

For the sixth quarter in a row, the apartment industry improved across all indexes in the National Multi Housing Council’s (NMHC) Quarterly Survey of Apartment Market Conditions. The survey’s indexes measuring Market Tightness (76), Sales Volume (54), Equity Financing (58) and Debt Financing (77) all measured at 50 or higher, indicating growth from the previous quarter.

“The apartment sector’s strength continues unabated,” said NMHC Chief Economist Mark Obrinsky. “Even as new construction ramps up, higher demand for apartment residences still outstrips new supply with no letup in sight. Despite the need for new apartments, acquisition and construction finance remains constrained in all but the best properties in the top markets.”
...
Majority report increased market tightness. The Market Tightness Index edged up to 76 from 74. For the first time in a year, more than half (55 percent) of respondents said that markets were tighter. By contrast, only 2 percent reported the markets as loosening and 43 percent reported no change over the past three months.
Apartment Tightness Index
Click on graph for larger image.

This graph shows the quarterly Apartment Tightness Index. Any reading above 50 indicates tightening from the previous quarter. The index has indicated tighter market conditions for the last ten quarters and suggests falling vacancy rates and or rising rents.

This fits with the recent Reis data showing apartment vacancy rates fell in Q2 2012 to 4.7%, down from 4.9% in Q1 2012, and down from 9.0% at the end of 2009. This was the lowest vacancy rate in the Reis survey in over 10 years.

This survey indicates demand for apartments is still strong. And even though multifamily starts have been increasing, completions lag starts by about a year - so the builders are still trying to catch up. There will be more completions in 2012 than in 2011, but it looks like another strong year for the apartment industry.

As I've mentioned before, this index helped me call the bottom for effective rents (and the top for the vacancy rate) early in 2010 - and will probably be useful in indicating when the vacancy rate will stop falling.

Lawler on Manufactured Housing

by Calculated Risk on 7/30/2012 01:47:00 PM

From Tom Lawler:

The Commerce Department estimated that manufactured housing shipments ran at a seasonally adjusted annual rate of 54,000 in June, down from 56,000 in May. In the first five months of 2012 manufactured housing shipments ran at a SAAR of 57,000, up from 51,600 in 2011 but just a fraction of the pace prior to last decade’s collapse.

The Commerce Department also estimated that manufactured housing placements ran at a SAAR of 47,000 in May, down from 51,000 in April. In the first five months of 2012 manufactured housing shipments ran at a SAAR of 52,200, up from 47,000 in 2011.

Manufactured Housing Shipments (Annual Average, 000's)
1961-1970255.6
1971-1980348.5
1981-1990243.7
1991-2000296.8
2001-2006154
2006-201078.9
201151.6
2012YTD57


Manufactured Housing Click on graph for larger image.

Here is a graph from Lawler showing the annual manufactured housing shipments since 1959. The column for 2012 is the annual sales rate for the first six months of the year.

Although sales are running at about a 10% increase over last year, shipments in 2012 will still be the fourth lowest on record behind only 2009, 2010, and 2011.

Dallas Fed: "Slower Growth" in July Regional Manufacturing Activity

by Calculated Risk on 7/30/2012 10:30:00 AM

From the Dallas Fed: Texas Manufacturing Activity Posts Slower Growth Amid Weaker View of General Business Activity

Texas factory activity continued to increase in July, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, fell from 15.5 to 12, suggesting slightly slower output growth.

The new orders index was positive for the second month in a row, although it moved down from 7.9 to 1.4. Similarly, the shipments index posted its second consecutive positive reading but edged down from 9.6 to 7.4. ... The general business activity plummeted to -13.2 after climbing into positive territory in June. Nearly 30 percent of manufacturers noted a worsening in the level of business activity in July, pushing the index to its lowest reading in 10 months.
...
Labor market indicators reflected stronger labor demand. Employment growth continued in July, although the index edged down from 13.7 to 11.8. ... The hours worked index was 4.1, up slightly from its June reading.
This was below expectations of a 2.5 reading for the general business activity index.

The regional manufacturing surveys were mostly weak in July. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Fed Manufacturing Surveys and ISM PMI Click on graph for larger image.

The New York and Philly Fed surveys are averaged together (dashed green, through July), and five Fed surveys are averaged (blue, through July) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through June (right axis).

The ISM index for July will be released Wednesday, August 1st, and these surveys suggest another weak reading. The consensus is for an increase to 50.1, up from 49.7 in June. (below 50 is contraction).

Europe Update

by Calculated Risk on 7/30/2012 09:10:00 AM

Spanish 10 year bond yields are down to 6.61% this morning. Italian yields are at 6.03%.

A few articles and comments on Europe, first from Tim Duy: Fed Watch: The Euromess Continues

Excitement is almost guaranteed this week, with both the Federal Reserve and the European Central Bank pondering their next moves. At the moment, I am more fascinated with the latter, as it represents the more fast moving policy failure for the moment. In response to that disaster to date, it is now widely expected that the ECB will deliver a significant policy expansion, possibly accepting its responsibility of lender of last resort for sovereign debt in the Eurozone. I think it is widely believed that this will be the turning point in Europe. In some ways, yes, as it would keep the threat of imminent dissolution at bay. But the Eurozone will still be fundamentally hobbled by a devotion to re-balancing via austerity-driven internal devaluation. This does not offer a promising long-run outcome.
From Paul Krugman: Crash of the Bumblebee
First of all, Europe’s single currency is a deeply flawed construction. And Mr. Draghi, to his credit, actually acknowledged that. “The euro is like a bumblebee,” he declared. “This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years.” But now it has stopped flying. What can be done? The answer, he suggested, is “to graduate to a real bee.”

Never mind the dubious biology, we get the point. In the long run, the euro will be workable only if the European Union becomes much more like a unified country.
...
But the creation of a United States of Europe won’t happen soon, if ever, while the crisis of the euro is now. So what can be done to save the currency?
From Reuters: Euro zone crisis heads for September crunch
Over the past couple of years, Europe has muddled through a long series of crunch moments in its debt crisis, but this September is shaping up as a "make-or-break" month as policymakers run desperately short of options to save the common currency.

Crisis or no crisis, many European policymakers will take their summer holidays in August. When they return, a number of crucial events, decisions and deadlines will be waiting.
From the WSJ: Greece Seen Facing €30 Billion Shortfall
Greece's chronic recession and the receding hope of an economic recovery in the next two years have blown a hole of at least 30 billion euros ($36.85 billion) in its financial rescue plan, officials familiar with the situation said.

The officials argued that the findings indicate a need for official creditors to write down their claims by at least that amount if they want to keep Greece in the euro zone, as well as finding new money to fund the country for longer. The officials represented two of four parties to the talks: the Greek government and the "troika" of the European Union, European Central Bank and International Monetary Fund.
...
"The haircut on private holders has proved not to be enough," said one official involved in the next round of talks.

Sunday, July 29, 2012

Monday: Dallas Fed Manufacturing Survey

by Calculated Risk on 7/29/2012 09:51:00 PM

This will be a busy week with the two day FOMC meeting ending on Wednesday, the ECB meeting in Europe on Thursday, and several key economic releases including the July employment report on Friday.

First from Reuters: Juncker: Euro zone leaders, ECB to act on euro - paper

[Eurogroup head Jean-Claude] Juncker told Germany's Sueddeutsche Zeitung and France's Le Figaro in reports made available on Sunday that leaders would decide in the next few days what measures to take to tackle Spanish bond yields which last week touched euro-era highs. They had "no time to lose," he said.
• On Monday, at 10:30 AM ET, the Dallas Fed Manufacturing Survey for July will be released. This is the last of regional surveys for July. The consensus is for 2.5 for the general business activity index, down from 5.8 in June.

The Asian markets are green tonight, with the Nikkei up 0.8% and the Shanghai Composite up 0.1%. Check out the chart for the Shanghai composite - the index has been drifting down for 2+ years and is at the levels of early 2009.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P future are down about 5, and the DOW futures down about 30.

Oil: WTI futures are at $90.04(this is down from $109.77 in February, but up last week) and Brent is at $106.51 per barrel.


Yesterday:
Summary for Week Ending July 27th
Schedule for Week of July 29th

And the final question for the July economic contest:

FOMC Preview: QE3 now or later?

by Calculated Risk on 7/29/2012 06:19:00 PM

There is a chance that the FOMC will announce QE3 this week although some analysts expect QE3 in September and others after the election in November.

As an example, from Merrill Lynch last week:

There is quite a bit of uncertainty about the exact timing and shape of forthcoming Fed easing. Although there is a good chance of some QE3 at next week’s FOMC meeting, we still think it is an extension of the forward guidance language through “at least late 2015” is (slightly) more likely This would resemble the policy pattern last year, and would keep the Fed’s options open. It also would allow the Fed to make a compelling case that bad data, not politics, are driving QE3.
The "politics" argument cuts both ways - delaying action when projections show unemployment too high for years, and inflation too low - is also giving in to "politics".

Some arguments for waiting until September 13th are:
1) There will be more data available (two more employment reports for July and August, and the 2nd estimate of Q2 GDP on August 29th). Of course "waiting" always allows for "more data" - so people can always use this argument.
2) Housing data has been improving, and residential investment is usually the best leading indicator for the economy.
3) The FOMC members will update projections in September, and Fed Chairman Ben Bernanke will hold a news conference to explain the reasons for any action. There is no news conference scheduled following the meeting this week.
4) There are also some arguments that seasonal factors are distorting the recent data.

Probably the most compelling reason for waiting is the housing argument, but even though housing is recovering, the housing market is still very weak.

And the most recent projections are already becoming "untenable" (as Atlanta Fed President Lockhart recently noted). Here were the projections for GDP:

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1201220132014
June 2012 Projections1.9 to 2.42.2 to 2.83.0 to 3.5
1 Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

Based on the Q2 advance GDP report released on Friday, GDP would have to increase at a 2.1% to 3.1% in the 2nd half of 2012 to meet the FOMC projections for 2012. That suggests a further downward revision in FOMC projections in September.

And the June projections were already very low - "shocking" as Tim Duy wrote) The FOMC members see unemployment in the 7% to 7.7% range at the end of 2014, and inflation also below target through 2014.

The data supports QE3 this week, but the data also supported QE3 in June. One of the reasons I thought QE3 was unlikely in June was the lack of foreshadowing from the Fed. There have been plenty of hints since then, so QE3 is very possible this week - but still uncertain.

Yesterday:
Summary for Week Ending July 27th
Schedule for Week of July 29th

When will the Case-Shiller house price index turn positive Year-over-year?

by Calculated Risk on 7/29/2012 10:14:00 AM

The CoreLogic index turned positive year-over-year in March: CoreLogic® Home Price Index Shows Year-Over-Year Increase of Just Over One Percent

Home prices nationwide, including distressed sales, increased on a year-over-year basis by 1.1 percent in April 2012 compared to April 2011. This was the second consecutive year-over-year increase this year ...
And the FHFA index turned positive year-over-year in February: FHFA House Price Index Up 0.3 Percent in February
For the 12 months ending in February, U.S. prices rose 0.4 percent, the first 12-month increase since the July 2006 - July 2007 interval.
However we are still waiting on Case-Shiller.

On Friday I posted Zillow's forecasts for the May Case-Shiller indexes to be released this coming Tuesday. The year-over-year (YoY) decline in Case-Shiller prices has been getting smaller all year, and the Zillow forecast suggests the YoY decline will be even smaller in the May report - and be the smallest YoY decline since the expiration of the housing tax credit.

I looked at the recent improvement in prices (comparing the month-to-month changes for the NSA index to last year). If the Zillow forecast is close, at the current pace of improvement, it looks like the YoY change will turn positive in the July report - it could even happen in the June report (to be released next month).

Case-Shiller House Prices Indices Click on graph for larger image.

Here is a graph of the YoY change in the Case-Shiller Composite 10 and 20 indexes. In April, the indexes were down 2.2% and 1.9%, respectively.

Zillow is forecasting the Composite 10 index will be down 1.3% YoY in the May report, and the Composite 20 index will be down 1.0%.

Earlier this year, when I argued prices were near the bottom for the Not Seasonally Adjusted (NSA) repeat sales indexes, I thought the year-over-year change would turn positive late this year or early in 2013. Right now it looks like the July report.

Saturday, July 28, 2012

Unofficial Problem Bank list declines to 900 Institutions

by Calculated Risk on 7/28/2012 08:57:00 PM

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for July 27, 2012. (table is sortable by assets, state, etc.)

Changes and comments from surferdude808:

As anticipated, the FDIC released its enforcement actions through June 2012, which led to many change to the Unofficial Problem Bank List. For the week, there were seven removals and two additions leaving the list at 900 institutions with assets of $349.5 billion. A year ago, the list held 995 institutions with $415.4 billion in assets. For the month of July 2012, there were 12 additions and 29 removals, with 20 from action termination, six from failure, two from unassisted mergers, and one from voluntary liquidation.

The seven removals this week came from action termination including Community Commerce Bank, Claremont, CA ($299 million); Traverse City State Bank, Traverse City, MI ($188 million); Security Bank, S.B., Springfield, IL ($160 million); Professional Bank, Coral Gables, FL ($152 million); Progrowth Bank, Nicollet, MN ($133 million); Capital Community Bank, Provo, UT ($122 million); and Colonial American Bank, Horsham, PA ($60 million). Professional Bank is only the 5th bank from Florida to be removed from the list because of action termination. Oregon and Georgia have only seen one bank and two banks, respectively, removed from the list. For the second week in a row, there was a failure in Georgia -- Jasper Banking Company, Jasper, GA -- that failed without being under an formal enforcement action.

The two additions were South Valley Bank & Trust, Klamath Falls, OR ($854 million) and First Security Bank of Helena, Helena, MT ($42 million).

The FDIC [issued] Prompt Corrective Action orders against Sevier County Bank, Sevierville, TN ($323 million) and Westside Community Bank, University Place, WA ($113 million).
Earlier:
Summary for Week Ending July 27th
Schedule for Week of July 29th

Lawler: Expect "significant" upward revisions for Q2 New Home Sales

by Calculated Risk on 7/28/2012 04:37:00 PM

From economist Tom Lawler:

D.R. Horton, the largest US home builder in 2011, reported that net home orders in the quarter ended June 30th, 2012 totaled 6,079, up 24.7% from the comparable quarter of 2011. The company’s sales cancellation rate, expressed as a % of gross orders, was 23% last quarter, down from 27% a year ago. Home deliveries last quarter totaled 4,957, up 8.8% from the comparable quarter of 2011, at an average sales price of $224,975, up 5.2% from a year ago. The company’s order backlog at the end of June was 7,311, up 30.6% from last June.

Standard Pacific Corp., the 13th largest US home builder in 2011, reported that net home orders in the quarter ended June 30th, 2012 (ex JVs) totaled 1,108, up 45.0% from the comparable quarter of 2011. The company’s sales cancellation rate, expressed as a % of gross orders, was 11% last quarter, down from 14% a year ago. Home deliveries totaled 815, up 33.6% from the comparable quarter of 2011, at an average sales price of $337,000, up 0.6% from a year ago. The company’s order backlog at the end of June was 1,266, up 62.1% from last June.

Here are some summary stats of orders, deliveries, and backlog for builders who have reported results for last year.

SettlementsNet OrdersBacklog
6/126/116/106/126/116/106/126/116/10
D.R. Horton4,9574,5556,8056,0794,8744,9217,3115,6004,430
PulteGroup3,8163,6335,0305,5784,2224,2187,5605,7775,644
NVR2,4752,2073,3542,6142,4682,5595,0483,9463,766
The Ryland Group1,1498851,5051,4151,0659592,2891,6461,368
Meritage Homes1,0428561,2071,3539109001,6119941,044
Standard Pacific8156108911,1087647191,266781649
M/I Homes6255907908266356021,168833748
Total14,87913,33619,58218,97314,93814,87826,25319,57717,649
YoY % Change11.6%-31.9%27.0%0.4%34.1%10.9%

Obviously, the net orders of the above builders showed considerably stronger YOY growth than 19.5% (not seasonally adjusted) YOY growth rate for Q2/12 reported in the preliminary Census Bureau’s new SF home sales reports. While Census’ treatment of cancellations differs from the builders’ net orders, and while historical data suggest there may be a timing difference between when a builder records a sale vs. when Census counts a home as sold, these results in my view suggest (based on past relationships) that Census new SF home sales numbers for the second quarter of 2012 will be revised upward significantly — and by about the same about as Q1 sales were revised upward from the March new SF sales report.

CR Note: Back in April, based on public builder reports, Tom Lawler estimated that the Census Bureau would revise up Q1 New Home sales from the then reported 337 thousand SAAR (seasonally adjusted annual rate) to around 350 thousand. In the most recent report, Census has revised up Q1 to 352 thousand.

For Q2, in the most recent new home sales report, the Census Bureau estimated sales at 363 thousand SAAR.  Based on builder reports, Lawler estimates that this will be revised up to around 380 thousand.

Schedule for Week of July 29th

by Calculated Risk on 7/28/2012 01:01:00 PM

Earlier:
Summary for Week Ending July 27th

The key report for this week will be the July employment report to be released on Friday, Aug 3rd. Other key reports include the May Case-Shiller house price indexes on Tuesday, the ISM manufacturing index on Wednesday, vehicle sales on Wednesday, and the ISM non-manufacturing (service) index on Friday.

On Wednesday, the FOMC concludes a two day meeting, and there is the possibility of additional policy accommodation. The European Central Bank (ECB) holds a meeting on Thursday, and there will be a focus on ECB President Mario Draghi's comments following the meeting.

----- Monday, July 30th -----

10:30 AM: Dallas Fed Manufacturing Survey for July. This is the last of regional surveys for July. The consensus is for 2.5 for the general business activity index, down from 5.8 in June.

----- Tuesday, July 31st -----

8:30 AM ET: Personal Income and Outlays for June. The consensus is for a 0.2% increase in personal income in June, and for 0.1% increase in personal spending. And for the Core PCE price index to increase 0.2%.

Case-Shiller House Prices Indices 9:00 AM: S&P/Case-Shiller House Price Index for May. Although this is the May report, it is really a 3 month average of March, April and May.

This graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indexes through April 2012 (the Composite 20 was started in January 2000).

The consensus is for a 1.4% decrease year-over-year in Composite 20 prices (NSA) in May. The Zillow forecast is for the Composite 20 to decline 1.0% year-over-year, and for prices to increase 0.8% month-to-month seasonally adjusted. The CoreLogic index increased 1.8% in May (NSA).

9:45 AM: Chicago Purchasing Managers Index for July. The consensus is for a decrease to 52.5, down from 52.9 in June.

10:00 AM: Conference Board's consumer confidence index for July. The consensus is for a decrease to 61.5 from 62.0 last month.

----- Wednesday, Aug 1st -----

7:00 AM: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index.

All day: Light vehicle sales for July. Light vehicle sales are expected to decrease to 14.0 million from 14.1 million in June (Seasonally Adjusted Annual Rate).

Vehicle SalesThis graph shows light vehicle sales since the BEA started keeping data in 1967. The dashed line is the June sales rate.

TrueCar is forecasting:
The July 2012 forecast translates into a Seasonally Adjusted Annualized Rate (“SAAR”) of 14.1 million new car sales, up from 12.2 million in July 2011 and down from 14.1 million in June 2012
Edmunds.com is forecasting:
An estimated 1,166,665 new cars will be sold in July for a Seasonally Adjusted Annual Rate (SAAR) of 14.0 million light vehicles, according to the latest auto sales forecast by Edmunds.com.
8:15 AM: The ADP Employment Report for June. This report is for private payrolls only (no government). The consensus is for 120,000 payroll jobs added in June, down from the 176,000 reported last month.

ISM PMI10:00 AM ET: ISM Manufacturing Index for July.

Here is a long term graph of the ISM manufacturing index. Last month saw the first contraction in the ISM index since the recession ended in 2009. The consensus is for an increase to 50.1, up from 49.7 in June. (below 50 is contraction).

10:00 AM: Construction Spending for June. The consensus is for a 0.5% increase in construction spending.

2:15 PM: FOMC Meeting Announcement. No changes are expected to interest rates, however additional policy accommodation is possible.

----- Thursday, Aug 2nd -----

8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to increase to 370 thousand from 353 thousand last week.

10:00 AM: Manufacturers' Shipments, Inventories and Orders (Factory Orders) for May. The consensus is for a 0.7% increase in orders.

----- Friday, Aug 3rd -----

Payroll Forecast8:30 AM: Employment Report for July. The consensus is for an increase of 100,000 non-farm payroll jobs in July, up from the 80,000 jobs added in June.

The consensus is for the unemployment rate to remain unchanged at 8.2%.

This second employment graph shows the percentage of payroll jobs lost during post WWII recessions through June.

Percent Job Losses During Recessions The economy has added 3.84 million jobs since employment bottomed in February 2010 (4.37 million private sector jobs added, and 0.53 million public sector jobs lost).

There are still 4.5 million fewer private sector jobs now than when the recession started in 2007. (4.9 million fewer total nonfarm jobs).

10:00 AM: ISM non-Manufacturing Index for July. The consensus is for a decrease to 52.0 from 52.1 in June. Note: Above 50 indicates expansion, below 50 contraction.

Summary for Week ending July 27th

by Calculated Risk on 7/28/2012 08:02:00 AM

This was one of those weeks were Europe stole the headlines, especially comments from ECB President Mario Draghi. Of course Draghi has said before that the ECB would do “whatever it takes”, so this wasn’t really new news.

Here was Lou Barnes reaction:

Sentiment turned yesterday on ECB President Mario Draghi's "...The ECB is ready to do whatever it takes to preserve the euro. Believe me, it will be enough." He went on to announce his plans to date Jennifer Lopez tonight, Kim Bassinger tomorrow, and win the decathlon gold next week.

If a central bank has to promise to preserve something, odds are high that it is already dead. This is the talk of 0-10 football coaches. Imagine if an American Fed Chair said he would "preserve the dollar." Not defend its value versus other currencies; not prevent inflation or deflation, but preserve its existence? Elbow the women and children out of the lifeboats.
Once again the economic data was weak. Real GDP for Q2 was reported at a 1.5% annualized rate. And even new home sales were below expectations, although with upward revisions to previous months – and an expected upward revision to the June sales rate – the report was actually fairly solid.

Manufacturing data was weak again, with the Richmond survey falling off a cliff, and the MarkIt Flash PMI declining in July. However the Kansas City manufacturing survey showed modest growth.

In other data, consumer sentiment was up slightly, weekly initial unemployment claims were down, and the trucking index increased. All of this data suggests more sluggish growth.

Here is a summary of last week in graphs:

Real GDP increased 1.5% annual rate in Q2

The Q2 GDP report was weak, but slightly better than expected. Final demand weakened in Q2 as personal consumption expenditures increased at only a 1.5% annual rate, and residential investment increased at a 9.7% annual rate.

Investment ContributionsClick on graph for larger image.

This graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter centered average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

For this graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue.

The dashed gray line is the contribution from the change in private inventories.

Residential Investment (RI) made a positive contribution to GDP in Q2 for the fifth consecutive quarter. Usually residential investment leads the economy, but that didn't happen this time because of the huge overhang of existing inventory, but now RI is contributing. The good news: Residential investment has clearly bottomed.

Residential InvestmentResidential Investment as a percent of GDP is still near record lows, but it is increasing. Usually RI bounces back quickly following a recession, but this time there is a wide bottom because of the excess supply of existing vacant housing units.

Last year the increase in RI was mostly from multifamily and home improvement investment. Now the increase is from most categories including single family. I'll break down Residential Investment (RI) into components after the GDP details are released this coming week. Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

GDP RevisionOverall the revisions to the last three years were pretty minor.

This graph shows GDP per quarter as a percent change annualized.

There were some downward revisions in Q1 and Q2 2010, and some upward revisions in 2011.

This was slightly above expectations.

New Home Sales declined in June to 350,000 Annual Rate

New Home Sales The Census Bureau reports New Home Sales in June were at a seasonally adjusted annual rate (SAAR) of 350 thousand. This was down from a revised 382 thousand SAAR in May (revised up from 369 thousand). Sales in March and April were revised up too.

This graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.

Even though sales are still very low, new home sales have clearly bottomed. New home sales have averaged 358 thousand SAAR over the first 6 months of 2012, after averaging under 300 thousand for the previous 18 months. All of the recent revisions have been up too.

So even though sales in June were below the consensus forecast of 370,000, this was still a fairly solid report given the upward revisions to previous months. Based on recent revisions, sales in June will probably be revised up too.
New Home Sales graphs

Weekly Initial Unemployment Claims decline to 353,000

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims declined to 367,250.

The sharp swings over the last few weeks are apparently related to difficulty adjusting for auto plant shutdowns.

This was well below the consensus forecast of 380,000 and is the lowest level for the four week average since March.
All current Employment Graphs

Final July Consumer Sentiment at 72.3

Consumer SentimentThe final Reuters / University of Michigan consumer sentiment index for July increased to 72.3 from the preliminary reading of 72.0, and was down from the June reading of 73.2.

This was slightly above the consensus forecast of 72.0 and the lowest level this year. Overall sentiment is still weak - probably due to a combination of the high unemployment rate and the sluggish economy.

ATA Trucking index increased in June

ATA TruckingFrom ATA: ATA Truck Tonnage Jumped 1.2% in June

Here is a long term graph that shows ATA's For-Hire Truck Tonnage index.

The dashed line is the current level of the index. The index is above the pre-recession level and still up 3.7% year-over-year - but has been moving mostly sideways in 2012.

Other Economic Stories ...
DataQuick: California Foreclosure Activity Lowest in Five Years
Markit Flash PMI falls to 51.8
NAR: Pending home sales index decreased 1.4% in June
Kansas City Fed: "Modest" Growth in Regional Manufacturing Activity in July
• From the Richmond Fed: Manufacturing Activity Contracted in July; Manufacturers' Optimism Waned

Friday, July 27, 2012

Zillow forecasts 1% Year-over-year decline for May Case-Shiller House Price index

by Calculated Risk on 7/27/2012 08:17:00 PM

Note: The Case-Shiller report is for May (really an average of prices in March, April and May). This data is released with a significant lag, see: House Prices and Lagged Data

I think it is too early to look for a year-over-year increase in Case-Shiller prices, although some analysts think it is possible in the May report. We are definitely getting close - and it will make headlines when it happens.

Zillow Forecast: Zillow Forecast: May Case-Shiller Composite-20 Expected to Show 1% Decline from One Year Ago

On Tuesday, July 31st, the Case-Shiller Composite Home Price Indices for May will be released. Zillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) will decline by 1 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will decline by 1.3 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from April to May will be 0.8 percent for the 20-City Composite and 0.9 percent for the 10-City Composite Home Price Index (SA). All forecasts are shown in the table below and are based on a model incorporating the previous data points of the Case-Shiller series and the May Zillow Home Value Index data, and national foreclosure re-sales.

May is the fourth consecutive month with monthly appreciation for the Case-Shiller indices, with May projected to be a bit stronger than the previous two months.
Zillow's forecasts for Case-Shiller have been pretty close.

One of the keys this year is to watch the year-over-year change in the various house price indexes. The composite 10 and 20 indexes declined 2.2% and 1.9% YoY respectively in April, after declining 2.9% and 2.6% in March. Zillow is forecasting a significantly smaller year-over-year decline in May.


Case Shiller Composite 10Case Shiller Composite 20
NSASANSASA
Case Shiller
(year ago)
May 2011153.33154.58139.88141.03
Case-Shiller
(last month)
April 2012148.40151.28135.80138.55
Zillow May ForecastYoY-1.3%-1.3%-1.0%-1.0%
MoM2.0%0.9%2.0%0.8%
Zillow Forecasts1151.4152.6138.5139.6
Current Post Bubble Low146.51149.21134.08136.49
Date of Post Bubble LowMarch 2012January 2012March 2012January 2012
Above Post Bubble Low3.3%2.3%3.3%2.3%
1Estimate based on Year-over-year and Month-over-month Zillow forecasts

Bank Failure #39 in 2012: Jasper Banking Company, Jasper, Georgia

by Calculated Risk on 7/27/2012 05:51:00 PM


Alchemic Jasper
It’s worth once compared to gold
Morphed to dull lead.

by Soylent Green is People

From the FDIC: Stearns Bank National Association St. Cloud, Minnesota, Assumes All of the Deposits of Jasper Banking Company, Jasper, Georgia
As of March 31, 2012, Jasper Banking Company had approximately $216.7 million in total assets and $213.1 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $58.1 million. ... Jasper Banking Company is the 39th FDIC-insured institution to fail in the nation this year, and the ninth in Georgia.
Another bank in Georgia fails ... what a surprise!

Earlier on GDP:
Real GDP increased 1.5% annual rate in Q2
Q2 GDP: Comments and Investment

HVS: Q2 Homeownership and Vacancy Rates

by Calculated Risk on 7/27/2012 03:31:00 PM

The Census Bureau released the Housing Vacancies and Homeownership report for Q2 2012 this morning.

This report is frequently mentioned by analysts and the media to track the homeownership rate, and the homeowner and rental vacancy rates. However, based on the initial evaluation, it appears the vacancy rates are too high.

It might show the trend, but I wouldn't rely on the absolute numbers. My understanding is the Census Bureau is investigating the differences between the HVS, ACS and decennial Census, and analysts probably shouldn't use the HVS to estimate the excess vacant supply, or rely on the homeownership rate, except as a guide to the trend.

Homeownership Rate Click on graph for larger image.

The Red dots are the decennial Census homeownership rates for April 1st 1990, 2000 and 2010. The HVS homeownership rate increased to 65.5%, up from 65.4% in Q1 2012. Last quarter was the lowest level for this survey since the mid-90s.

I'd put more weight on the decennial Census numbers and that suggests the actual homeownership rate is probably in the 64% to 65% range.

Homeowner Vacancy RateThe HVS homeowner vacancy rate declined to 2.1% from 2.2% in Q1. This is the lowest level since Q1 2006 for this report.

The homeowner vacancy rate has peaked and is now declining, although it isn't really clear what this means. Are these homes becoming rentals? Anyway - once again - this probably shows that the trend is down, but I wouldn't rely on the absolute numbers.

Rental Vacancy RateThe rental vacancy rate declined to 8.6% from 8.8% in Q1.

I think the Reis quarterly survey (large apartment owners only in selected cities) is a much better measure of the overall trend in the rental vacancy rate - and Reis reported that the rental vacancy rate has fallen to the lowest level since 2001.

The quarterly HVS is the most timely survey on households, but there are many questions about the accuracy of this survey. Unfortunately many analysts still use this survey to estimate the excess vacant supply. However this does suggest that the housing vacancy rates are falling.

Earlier on GDP:
Real GDP increased 1.5% annual rate in Q2
Q2 GDP: Comments and Investment

Bloomberg: Draghi to hold talks with Bundesbank on ECB Bond Purchases

by Calculated Risk on 7/27/2012 02:15:00 PM

From Bloomberg: Draghi Said to Hold Talks With Weidmann on ECB Bond Purchases

European Central Bank President Mario Draghi will hold talks with Bundesbank President Jens Weidmann in the coming days in an effort to overcome the biggest stumbling block to a new raft of measures including bond purchases, two central bank officials said.

Having secured the backing of governments in Spain, France and Germany, Draghi is now seeking to win over ECB policy makers for a multi-pronged approach to reduce bond yields in countries such as Spain and Italy, the officials said on condition of anonymity because the talks are private.
Maybe Draghi has found the panic button!

Earlier on GDP:
Real GDP increased 1.5% annual rate in Q2
Q2 GDP: Comments and Investment

Q2 GDP: Comments and Investment

by Calculated Risk on 7/27/2012 12:10:00 PM

The Q2 GDP report was weak, but slightly better than expected. Final demand weakened in Q2 as personal consumption expenditures increased at only a 1.5% annual rate, and residential investment increased at a 9.7% annual rate.

Investment in equipment and software picked up slightly to a 7.2% annual rate in Q2, and investment in non-residential structures was only slightly positive. The details will be released next week, but most of the recent positive increases in non-residential structures has been from investment in energy and power structures. Based on the architecture billing index, I expect the drag from other non-residential categories (offices, malls, hotels) to continue all year.

And there was another negative contribution from government spending at all levels. However, it appears the drag from state and local governments will end soon (after declining for almost 3 years).

Overall this was another weak report indicating sluggish growth.

The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter centered average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue.

The dashed gray line is the contribution from the change in private inventories.

Investment ContributionsClick on graph for larger image.

Residential Investment (RI) made a positive contribution to GDP in Q2 for the fifth consecutive quarter. Usually residential investment leads the economy, but that didn't happen this time because of the huge overhang of existing inventory, but now RI is contributing. The good news: Residential investment has clearly bottomed.

The contribution from RI will probably continue to be sluggish compared to previous recoveries, but the ongoing positive contribution to GDP is a significant story.

Equipment and software investment has made a positive contribution to GDP for twelve straight quarters (it is coincident).

The contribution from nonresidential investment in structures was slightly positive in Q2. Nonresidential investment in structures typically lags the recovery, however investment in energy and power has masked the ongoing weakness in office, mall and hotel investment (the underlying details will be released next week).

Residential InvestmentResidential Investment as a percent of GDP is still near record lows, but it is increasing. Usually RI bounces back quickly following a recession, but this time there is a wide bottom because of the excess supply of existing vacant housing units.

Last year the increase in RI was mostly from multifamily and home improvement investment. Now the increase is from most categories including single family. I'll break down Residential Investment (RI) into components after the GDP details are released this coming week. Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

non-Residential InvestmentThe last graph shows non-residential investment in structures and equipment and software.

I'll add details for investment in offices, malls and hotels next week.

The key story is that residential investment is continuing to increase, and I expect this to continue all year (although the recovery in RI will be sluggish compared to previous recoveries). Since RI is the best leading indicator for the economy, this suggests no recession this year.

Earlier with revision graphs:
Real GDP increased 1.5% annual rate in Q2

Final July Consumer Sentiment at 72.3

by Calculated Risk on 7/27/2012 09:55:00 AM

Note: I'll have more on GDP soon.

Consumer Sentiment
Click on graph for larger image.

The final Reuters / University of Michigan consumer sentiment index for July increased to 72.3 from the preliminary reading of 72.0, and was down from the June reading of 73.2.

This was slightly above the consensus forecast of 72.0 and the lowest level this year. Overall sentiment is still weak - probably due to a combination of the high unemployment rate and the sluggish economy.

Real GDP increased 1.5% annual rate in Q2

by Calculated Risk on 7/27/2012 08:30:00 AM

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.5 percent in the second quarter of 2012, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent. [revised up from 1.9 percent]

The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and residential fixed investment that were partly offset by a negative contribution from state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the second quarter primarily reflected a deceleration in PCE, an acceleration in imports, and decelerations in residential fixed investment and in nonresidential fixed investment that were partly offset by an upturn in private inventory investment, a smaller decrease in federal government spending, and an acceleration in exports.
Overall the revisions to the last three years were pretty minor.

GDP Revision Click on graph for larger image.

This graph shows real GDP before (blue) and after (red) the revision. The recession was not quite as deep as previously reported, and the recovery in 2010 was slightly slower - and the recovery in 2011 slightly faster.

Real GDP in Q1 was slightly above the previously reported level indicating the output gap is about the same as previously estimated.

GDP RevisionThe second graph shows the same data but as a percent change annualized.

There were some downward revisions in Q1 and Q2 2010, and some upward revisions in 2011.

A couple of comments:
• Real personal consumption expenditures increased 1.5 percent in the first quarter, compared with an increase of 2.4 percent in the first.

• Government spending continued to be a drag at all levels, but at a slower pace: The Federal government decreased 0.4 percent in Q2 compared to a 4.2 percent decrease in Q1, and state and local government decreased 2.1 percent compared to 2.2 percent in Q1.

This was above expectations. I'll have more on GDP later ...

Thursday, July 26, 2012

Friday: GDP, Consumer Sentiment

by Calculated Risk on 7/26/2012 10:02:00 PM

On Friday ...
• At 8:30 AM ET, the Q2 advance GDP will be released. The consensus is that real GDP increased 1.2% annualized in Q2. The BEA will also release the revised estimates for 2009 through First Quarter 2012. If GDP is revised significantly up or down, this might be part of the FOMC discussion next week.

The BEA put out an excellent note on revisions this week: Revising Economic Indicators: Here’s Why the Numbers Can Change

The public wants accurate data and wants it as soon as possible. To meet that need, BEA publishes early estimates that are based on partial data. Even though these data aren’t complete, they do provide an accurate general picture of economic activity. ...

BEA produces three estimates of gross domestic product (GDP) for a given quarter. Each includes updated, more complete, and more accurate information as it becomes available. The first, called the “advance” estimate, typically receives the most attention and is released roughly 4 weeks after the end of a quarter. ...

When BEA calculates the advance estimate, the Bureau doesn’t yet have complete source data, with the largest gaps in data related to the third month of the quarter. In particular, the advance estimate is lacking complete source data on inventories, trade, and consumer spending on services. Therefore, BEA must make assumptions for these missing pieces based in part on past trends. ...

As new and more complete data become available, that information is incorporated into the second and third GDP estimates. About 45 percent of the advance estimate is based on initial or early estimates from various monthly and quarterly surveys that are subject to revision for various reasons, including late respondents that are eventually incorporated into the survey results. Another roughly 14 percent of the advance estimate is based on historical trends.
• At 9:55 AM, the final Reuter's/University of Michigan's Consumer sentiment index for July will be released. The consensus is for no change from the preliminary reading of 72.0.


For the monthly economic question contest:

• And at 10:00 AM, the Q2 Housing Vacancies and Homeownership report from the Census Bureau will be released. This data might indicate the trend, but there are serious questions about the accuracy of this survey.

Record Low Mortgage Rates and Increasing Refinance Activity

by Calculated Risk on 7/26/2012 06:33:00 PM

Another month, another record ...

Below is a graph comparing mortgage rates from the Freddie Mac Primary Mortgage Market Survey® (PMMS®) and the refinance index from the Mortgage Bankers Association (MBA).

The the MBA reported yesterday that refinance activity was at the highest level since 2009.

And from Freddie Mac today: 30-Year Fixed-Rate Mortgage Averages a Record-Breaking 3.49 Percent

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing fixed mortgages rates continuing their streak of record-breaking lows. The 30-year fixed rate mortgage averaged 3.49 percent, more than a full percentage point lower than a year ago when it averaged 4.55 percent. Meanwhile, the 15-year fixed-rate mortgage, a popular choice for those looking to refinance, also set another record low at 2.80 percent.
Mortgage rates and refinance activity Click on graph for larger image.

This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®.

The Freddie Mac survey started in 1971 and mortgage rates are currently at the record low for the last 40 years.

It usually takes around a 50 bps decline from the previous mortgage rate low to get a significant refinance boom, and rates have fallen about 75 bps from the 4.23% low in October 2010 - and refinance activity is picking up.

There has also been an increase in refinance activity due to HARP.

Freddie Mac Mortgage Rate Survey The second graph shows the 15 and 30 year fixed rates from the Freddie Mac survey. The Primary Mortgage Market Survey® started in 1971 (15 year in 1991). Both rates are at record lows for the Freddie Mac survey. Rates for 15 year fixed loans are now at 2.8%.

Note: The Ten Year treasury yield is just off the record low at 1.43% (the record low was earlier this week at 1.39%), so rates will probably fall a little more next week.

Tim Duy: Draghi finds the panic button. Maybe.

by Calculated Risk on 7/26/2012 03:35:00 PM

From Professor Tim Duy at EconomistView: Draghi Blinks. Maybe.. A few excerpts:

It looks like Draghi finally found that panic button. This is crucial, as the ECB is the only institution that can bring sufficient firepower to the table in a timely fashion. His specific reference to the disruption in policy transmission appears to be a clear signal that the ECB will resume purchases of periphery debt, presumably that of Spain and possibly Italy. The ECB will - rightly, in my opinion - justify the purchases as easing financial conditions not monetizing deficit spending.

So far, so good. But there is enough in these statements to leave me very unsettled. First, the claim that the Euro is "irreversible" should send a shiver down everyone's backs. Sounds just a little too much like "the crisis is contained to subprime" and "Spain will not need a bailout." Second, the bluster that "believe me, it will be enough" is suspect. The ECB always thinks they have done enough, but so far this has not been the case. Moreover, he is setting some pretty high expectations, and had better be prepared to meet them with something more than half-hearted bond purchases.

Also, note that despite Draghi's bluster, the rally in Spanish debt send yields just barely below the 7% mark.
...
More distressing to me was Draghi's clearly defiant tone, reminiscent of comments earlier this week from German Finance Minister Wolfgang Schäuble. The message is that Europe has done all the right things, it is financial market participants that are doing the wrong things.
As Duy noted, Spanish 10 year bond yields have only fallen to 6.93% - not a huge vote of confidence.

Usually - whenever a European policymakers sounds like they have found the "panic button" - Schäuble speaks up and squashes all hope. Luckily Schäuble is going on vacation ...