by Calculated Risk on 3/13/2008 11:02:00 AM

From the Duke Global CFO Survey: Recession in 2008, no relief until 2009

•54 percent of CFOs say the U.S. is now in recession, and 24 percent of the remaining CFOs say there is a high likelihood of a recession this year. CFOs do not expect the economy to recover until late 2009.

•Optimism reached its lowest point since the optimism index launched six years ago. Pessimists outnumber optimists by a nine-to-one margin, with 72 percent of CFOs more pessimistic and only 8 percent more optimistic about the U.S. economy than they were last quarter.

•Weak consumer demand and turmoil in the credit and housing markets are the top macro-concerns of CFOs. The high cost of labor ranked as the top internal concern.

•Credit conditions have directly hurt 35 percent of companies, through decreased availability of credit and higher interest rates (up 118 basis points on average). Sixty percent of firms have postponed expansion plans in response to credit market unrest.

•Capital spending is expected to increase only 3.3 percent. Price inflation is expected to rise 3 percent over the next 12 months.

NO ECONOMIC RECOVERY UNTIL 2009

The outlook for the U.S. economy is dismal. Only 13 percent of CFOs think the U.S. economy will turn the corner and begin to rebound in 2008. Another 40 percent say the rebound will occur in the first half of 2009, while 47 percent say recovery will occur more than 15 months from now.

“Our survey started showing evidence of an economic slowdown a year ago,” said John R. Graham, director of the survey and a finance professor at Duke’s Fuqua School of Business. “Today, not only do the CFOs say we are already in recession, they predict a prolonged economic downturn. The news from CFOs is pretty grim.”

CFOs sure are bearish!

by Anonymous on 3/13/2008 10:41:00 AM

I was challenged the other day to defend my claim that the Feldstein Plan (stay above water by repaying your loans faster!) was "teh dumbest" plan I'd seen so far. I should have known that the rhetorical mobilization of hyperbole is an act with karmic consequences.

Via Mish, I bring you Complete CRAP (the Congressional Realtors Appropriation Proposal):

As a longtime realtor in Cobb County, Sen. Johnny Isakson has seen housing downturns before. "We had recessions in 1968, 1974, 1982, and 1991, by every measurement, this is going to be a deeper and bigger recession in residential housing. It's a significant event."

Isakson is pitching an idea to his colleagues in Congress: a $15,000 tax rebate check to anyone who agrees to buy a home. Congressional budget analysts project the program would cost $14 billion over the next few years. But Isakson said the rebate checks are well worth the hefty price tag. "If we can convince buyers to come back to the marketplace and buy these houses, then the houses aren't vacant. It's replaced by an owner-occupant, who is there making payments on a loan and helping all of the other houses around."

I suggest, as an alternative, that members of Congress donate their evenings and weekends, from now until November, appearing gratis at open houses throughout their districts. What better way to convince people to buy homes than to offer them the chance to meet a lawmaker in person, right in the proposed kitchen? Senator Iskason could demonstrate the correct use of granite countertops, while extolling the virtues of free-market capitalism and owner-occupied housing.

Plus it would keep them off the teevee.

by Calculated Risk on 3/13/2008 10:17:00 AM

From Bloomberg: Carlyle Capital Nears Collapse as Rescue Talks Fail

Carlyle Group's mortgage-bond fund moved a step closer to collapse, saying creditors plan to seize the fund's assets after it failed to meet more than $400 million of margin calls.
...
The fund said in a statement that it defaulted on about $16.6 billion of debt as of yesterday. Lenders will ``promptly'' take over all of its remaining assets after it failed to reach an agreement with lenders, Carlyle Capital said. Any remaining debt is expected to go into default ``soon'', the fund added.

This will lead to forced sales of mortgage assets and further write-downs for several banks including Citigroup and Deutsche Bank.

by Calculated Risk on 3/13/2008 10:04:00 AM

From the Census Bureau:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for February, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $380.2 billion, a decrease of 0.6 percent from the previous month, but 2.6 percent above February 2007. Total sales for the December 2007 through February 2008 period were up 3.3 percent from the same period a year ago. The December 2007 to January 2008 percent change was revised from +0.3 percent to +0.4 percent.

Retail trade sales were down 0.6 percent from January 2008, but were 2.4 percent above last year. Gasoline station sales were up 20.2 percent from February 2007 and sales of sporting goods, hobby, book, and music stores were up 6.3 percent from last year.

Not only were sales down in February, but adjusted for inflation, retail sales are down year-over-year - a pretty strong indicator that the economy is in recession.

by Calculated Risk on 3/12/2008 08:47:00 PM

From the WSJ: S&P Cuts CIFG Credit Ratings

S&P lowered its ratings four notches to A+ on CIFG Guaranty, CIFG Europe and CIFG Assurance North America Inc. Less than a month ago, S&P had affirmed CIFG's AAA rating with a negative outlook, meaning a downgrade was possible.

The agency said the company's "scaled-back underwriting activity, turnover of senior staff and recent other rating downgrades ... will impinge on CIFG's ability to carry out its business plans and broaden its market acceptance."

And from MarketWatch: Moody's, S&P confirm Ambac's AAA ratings

Moody's affirmed Ambac Assurance Corp.'s Aaa rating, while S&P took Ambac Assurance's AAA off CreditWatch Negative.

Still, Fitch stuck with its AA rating and Moody's noted that it has a negative outlook on Ambac's bond insurance units.

by Calculated Risk on 3/12/2008 06:41:00 PM

From CNNMoney: Wachovia: housing downturn far from over

Speaking to analysts on a Deutsche Bank ... conference call, [chief risk officer] Don Truslow said, 'It feels like we have a ways to go.'

Using a baseball analogy, Truslow said he didn't know if the downturn was in the third, fourth or fifth inning. He added 'we're still before the seventh inning stretch.'

And if the economy gets worse, 'we could find ourselves right now in very early innings of the credit cycle,' Truslow said.

by Calculated Risk on 3/12/2008 03:34:00 PM

Talk about tighter lending standards! From The Canadian Press: Borrowing requirements tightening and changing regularly in U.S.

Tom Kelly, a spokesman for JPMorgan Chase & Co. said within the past eight months, Chase has focused on combined loan-to-value ratio (CLTV), documentation and credit scores to improve loan quality, and raised minimum requirements for each. Chase also no longer offers 100 per cent CLTV loans anywhere, with restrictions as tight as a maximum 65 per cent CLTV in Nevada because of rising delinquencies.

Hmmm. Why not just sell the loans to Freddie and Fannie? Both are still accepting higher CLTV loans.

See Tanta's post this morning: Freddie Mac Jumbo-Conforming Guidelines

by Calculated Risk on 3/12/2008 02:34:00 PM

Several years ago I predicted that the National Debt would reach $10 trillion by the time President Bush left office. For a short period (thanks to the housing bubble), it looked like the deficit would be less than I projected.

Now that the housing bust is hitting government revenues, it looks like the $10 trillion projection will be close.

From MarketWatch: Budget deficit widens to [February] record $175.6 billion

The federal government deficit widened to a record $175.6 billion in February, in part because of the economic slowdown and in part because of the extra day in February this year that allowed the government to send out more tax refunds and more benefit checks, the Treasury Department reported Wednesday.

The current National debt is $9.397 trillion (see TreasuryDirect) as of March 10, 2008. That leaves the debt about $603 billion short of my projection with only 10.5 months to go. It will be close!

It is important to understand that the White House and CBO project the "unified budget deficit", not the General Fund deficit. Bush is responsible for the General Fund, and it's the General Fund deficit with some adjustments that will hit the National Debt. From MarketWatch:

For the entire year, the White House expects a budget deficit of $410 billion. The CBO expects a deficit of $396 billion.

Add about $200 billion to get the Bush General Fund deficit.

by Calculated Risk on 3/12/2008 12:23:00 PM

Here are two rough methods to estimate the impact of declining house prices on personal consumption expenditures (PCE). The first uses Mortgage Equity Withdrawal (MEW) and estimates the portion of the "Home ATM" that is consumed. The second is an estimate based solely on the changes in house prices (See: Carroll, Otsuka, and Slacalek, How Large Is the Housing Wealth Effect? A New Approach October 18, 2006).

The following graph shows MEW (provided by the Fed's Jim Kennedy based on the mortgage system presented in "Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences," Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41.)

Click on graph for larger image.
According to Dr. Kennedy's analysis, MEW in 2006 was $680 billion, and declined to $464 billion in 2007. Greenspan estimated that approximately 50% of MEW is consumed, and it is probably consumed over several quarters. We can estimate that perhaps half of the $216 billion decline in MEW (or $100 billion) is the drag on PCE in 2007 and early 2008 from declining MEW.

With tighter lending standards, and falling house prices, MEW will probably decline sharply in 2008. Imagine if MEW falls to $100 billion; a decline of $364 billion from 2007. That would be a drag of $180 billion or so on PCE.

Carroll, et. al, estimated:

"In U.S. data, we estimate that the immediate (next-quarter) marginal propensity to consume from a $1 change in housing wealth is about 2 cents, with a final longrun effect around 9 cents."

Imagine house price declines of 10% in a given year. With total household real estate assets of approximately $20 Trillion (Fed's Flow of Funds report, Table B.100, line 4), a 10% decline in house prices would reduce household wealth by $2 trillion. Using Carroll's long run estimate of 9 cents per $1 change in the marginal propensity to consume, gives a drag on PCE of about $180 billion.

Let's use the $180 billion as the drag on PCE in 2008. This is a large number, but we have to put that number into perspective. From 2006 to 2007, nominal PCE increased by $508 billion (See BEA GDP report line 2).

So perhaps declining house prices will reduce the increase in PCE from $500 billion to closer to $300 billion in 2008 (in nominal terms), and perhaps PCE will decline in real terms (adjusted for inflation), but the impact probably isn't large enough to reduce nominal PCE.

Although the impact on PCE from declining house prices will probably be significant, the size of the impact is not huge when compared to the overall U.S. economy. This is one of the reasons I think the recession will not be severe (unemployment will not rise to 8%), although I do expect the slowdown to linger, and the recovery to be sluggish (because housing will not be an engine of recovery this time).

by Calculated Risk on 3/12/2008 11:57:00 AM

From Reuters: UPS says Feb volumes down, could hurt earnings

Citing worsening economic conditions package delivery company United Parcel Service ... said on Wednesday its U.S. volumes were down in February ...

Atlanta-based UPS said that while U.S. volumes declined virtually across its "entire customer base" in February, its international volumes, including U.S. export volumes, continued to show strong growth.

A couple of comments: The shippers (like UPS and FedEx) are usually pretty decent coincident indicators of economic activity. That is the bad news. The good news is international shipping and export volumes (because of the weak dollar) are strong.