by Anonymous on 5/09/2008 06:39:00 AM

Thinking about trading in that Tahoe for a Civic? Sit down.

High fuel prices are causing the value of used SUVs to plummet, often below what's listed in the buying guides many shoppers use to negotiate with dealers.

As a result, some new-car buyers think they're getting cheated by dealers who are offering them little for their SUV trade-ins.

"The dealer is going to offer a price, and the customer is going to be ticked off," says Tom Webb, chief economist for Manheim, operators of auctions where car dealers buy their used-vehicle inventories. "The guidebooks have not caught up to the market," he says.

I'm waiting for Gretchen Morgenson to get all over this anti-consumer behavior. Meanwhile,

Webb's figures show wholesale prices on big SUVs such as Chevrolet Tahoes, Ford Expeditions and Toyota Sequoias are down 17% from a year ago. Full-size pickups have fallen as much as 15%, Webb says.

"It's a challenge," says Adam Lee, president of the Lee Auto Malls dealerships in Maine. "How do you tell a good customer, 'You paid $32,000 and now it's only worth $17,000?' "

Why, you should just hire some newly-under-employed Realtors®. They've had some practice at that kind of thing lately.

AutoNation's Jackson says he thinks affluent buyers may be hanging on to their SUVs even after they buy newer, more fuel-efficient vehicles, banking on gasoline prices falling so they can sell their big SUVs later for a better price.

Better hope you can hang on to that house with the three-car garage, then, because your HOA won't let you put it up on blocks in the yard, I'm afraid.

by Calculated Risk on 5/08/2008 11:00:00 PM

Peter Viles at LA Times brings us another gallery of foreclosed properties in LA.

Peter features one on his blog L.A. Land: A foreclosure bargain: The tires are free!. Check it out.

Here is another example - yeah, bars on the windows is a "family neighborhood"! Someone paid $485,000 for this home?

734 Aragon Ave., Los Angeles 90065

Agent's description: "Bank owned. This is a charming little home in a famly neighborhood. Garage was converted. SUBMIT ALL REASONABLE OFFERS."

• Sales history (from Redfin.com): Sold for $485,000 in February 2007.

• Current listing price: $294,900

• Discount from sales price: 39.2%

by Calculated Risk on 5/08/2008 08:15:00 PM

Asha Bangalore at Northern Trust presented a great chart today on continuing unemployment claims.

Click on graph for larger image.

This morning I noted that continuing claims had reached the 3 million level for the first time in four years.

This graph shows the increase in both initial claims and continuing claims.

Bangalore also presents a graph on the relationship between the Fed's Senior Loan Survey and GDP. This is similar to the research paper I excerpted from yesterday (see: The Impact of Tighter Credit Standards on Lending and Output), and suggests that the economy will slow over the next few quarters.

by Calculated Risk on 5/08/2008 06:30:00 PM

From CNN: House OKs controversial housing plan

In a 266-154 vote ... lawmakers approved a proposal ... to let the Federal Housing Administration (FHA) insure up to $300 billion in new loans over four years if lenders agree to reduce the mortgage principal.

To qualify, the lender would have to cut the debt to no more than 85% of a home's current appraised value. If the FHA-refinanced loans went into default, the FHA would pay the lender the remaining principal owed.

While 1.4 million loans are likely to be eligible for such a program, the Congressional Budget Office estimates such a measure would end up insuring 500,000 borrowers. The CBO estimates the FHA expansion program would cost taxpayers $1.7 billion.

This is a voluntary program on the part of lenders, and the 85% LTV is of the current appraised value.

by Calculated Risk on 5/08/2008 04:36:00 PM

More details from the WSJ: AIG to Raise Capital After Big Loss

American International Group Inc. announced plans to raise $12.5 billion in capital as it posted its second straight big quarterly loss. The insurance giant took $9.11 billion in charges on its credit-default swaps and recorded $6.09 billion of investment losses.

by Calculated Risk on 5/08/2008 01:21:00 PM

From The Chattanoogan.com: State Cutting Over 2,000 Jobs Due To Tax Shortfall (hat tip JKB)

Gov. Phil Bredesen said Wednesday that state tax collections have been "deteriorating dramatically" in recent months...

... he said April tax collections showed the largest drop since records began to be kept in 1961.

He said the first quarter was the third worst on record, and the second quarter "is certainly shaping up to be worse than that."

This is more evidence that the economic slowdown is spreading beyond the 'bubble' states (like California and Florida) and impacting state and local government tax revenue in other states too.

The article mentions that Tennessee is cutting 5% of their state workforce. This is the typical negative feedback loop at the beginning of a recession: a weak economy leads to less tax revenue leads to state and local job cuts that further weakens the economy.

by Calculated Risk on 5/08/2008 10:53:00 AM

Professor Tim Duy writes at Economist's View: Misunderstanding the CPI. This is an excellent discussion of CPI, and review of David Loenhardt's article yesterday in the NY Times: Seeing Inflation Only in the Prices That Go Up.

Also, here is a great graphic showing the relative size of all of the components of CPI: All of Inflation’s Little Parts (hat tip Eyal). Notice the size of "owner's equivalent rent" (OER).

Dr. Duy discusses OER and then concludes:

[T]he debate over the use of OER in the CPI is something of a false debate. In my opinion, it misses the point entirely. The debate is not whether housing costs are miscalculated in the CPI – the BLS’s basic methodology is appropriate to achieve their objective. The debate is whether or not the Fed should include assets prices, such as home prices, in their policy objective of price stability. Just because there is a valid argument that the Fed should be using a measure other than (or in addition to) consumer prices does not imply that the CPI is flawed. It implies that the construction of monetary policy is flawed. In effect, the BLS is unfairly criticized for the Fed’s policy error.

by Calculated Risk on 5/08/2008 09:47:00 AM

Here is our monthly look at unemployment claims. Note that continuing claims has now reached a four-year high of 3 million.

From the Department of Labor:

In the week ending May 3, the advance figure for seasonally adjusted initial claims was 365,000, a decrease of 18,000 from the previous week's revised figure of 383,000. The 4-week moving average was 367,000, an increase of 2,500 from the previous week's revised average of 364,500.
...
The advance number for seasonally adjusted insured unemployment during the week ending April 26 was 3,020,000, a decrease of 10,000 from the preceding week's revised level of 3,030,000. The 4-week moving average was 2,998,750, an increase of 16,750 from the preceding week's revised average of 2,982,000.

Click on graph for larger image.

This graph shows the weekly claims and the four week moving average of weekly unemployment claims since 1989. The four week moving average has been trending upwards for the last few months, and the level is now solidly above the possible recession level (approximately 350K).

Labor related gauges are at best coincident indicators, and this indicator suggests the economy is in recession. Notice that following the previous two recessions, weekly unemployment claims stayed elevated for a couple of years after the official recession ended - suggesting the weakness in the labor market lingered. The same will probably be true for the current recession (probable).

Note: There is nothing magical about the 350K level. We don't need to adjust for population growth because this indicator is just suggestive and not precise.

by Calculated Risk on 5/08/2008 01:30:00 AM

Martin Feldstein writes in the Financial Times: Misleading growth statistics give false comfort

Prepositions matter. The recent government report that US gross domestic product increased 0.6 per cent in the first quarter was very misleading. It implied that economic activity was rising in January, February and March. But the increase actually refers to the rise from the average level in the fourth quarter of 2007 to the average level in the first quarter. Monthly data since January indicate that economic activity and GDP have been declining since the start of this year.
...
Although the government does not provide monthly estimates of GDP, Macroeconomic Advisers, a private forecaster, constructs them ... Although GDP declined during the first quarter, the average of the monthly figures in the first quarter ($11,711bn) is higher than the average of the monthly figures for the final quarter of 2007 ($11,675bn).

This is the same point I made when using the Two Month Method to estimate PCE for each quarter. Feldstein is correct on the math and the economy is probably in a recession.

by Calculated Risk on 5/07/2008 06:59:00 PM

The Fed's Senior Loan Officer Opinion Survey is qualitative, not quantitative, and there has been some discussion on the predictive ability of the survey.

Luckily there was a paper written in 2000 that examined 'the value of the Senior Loan Officer Opinion Survey in predicting both lending and output'. See: Listening to Loan Officers: The Impact of Commercial Credit Standards on Lending and Output by New York Fed researchers Cara S. Lown, Donald P. Morgan, and Sonali Rohatgi.

From their conclusion:

Off and on since 1967, the Federal Reserve has surveyed loan officers at a small sample of large banks about their commercial credit standards. The idea behind the survey is that the availability of bank credit depends not just on interest rates, but on credit standards as well. Notwithstanding the small and changing sample, the checkered pattern of questions, and the sometimes curious responses of lenders, the reports are informative. The changes in standards that they report help to predict both commercial bank lending and GDP, even after controlling for past economic conditions and interest rates. Standards matter even in the 1990s, when capital markets were supposed to have eclipsed the role of banks in the economy. Changes in standards also help to predict narrower measures of business activity, where commercial credit availability from banks seems most crucial. The connection between bank standards and inventories is especially promising, because inventory investment is notoriously unpredictable and heavily bank dependent.

A shock to credit standards and its aftermath very much resemble a “credit crunch.” Loan officers tighten standards very sharply for a few quarters, but ease up only gradually: two to three years pass before standards are back to their initial level. Commercial loans at banks plummet immediately after the tightening in standards and continue to fall until lenders ease up. Output falls as well, and the federal funds rate, which we identify with the stance of monetary policy, is lowered. All in all, listening to loan officers tells us quite a lot.
emphasis added

Click on graph for larger image.

The authors provide these graphs that show the response of GDP, and in the amount of commercial and industrial loans, following a credit tightening shock. The impact on GDP is mostly within the first year, and peaks about 3 quarters after the shock.

The impact on lending lasts for a few years, and peaks about 2 years after the shock.

In the most recent tightening cycle (see graph here), there have been two tightening shocks: the first started in late 2006, and the 2nd was at the end of 2007. If the current cycle follows the normal pattern, the impact from the significant tightening at the end of 2007 should hit GDP later this year, and impact commercial loans for the next 2 to 3 years.