by Calculated Risk on 6/17/2008 06:21:00 PM

From Bloomberg: Yuan Extends Gains to 20% Since End of Peg Before Paulson Talks

The yuan extended gains to 20 percent since China ended a fixed exchange rate to the dollar in July 2005 ... The currency climbed for a fifth day, reaching 6.8909 per dollar. The yuan's advance since the peg was scrapped compares with a 29 percent gain for the euro against the dollar, 13.2 percent for the British pound and 4.7 percent for the Japanese yen.

From Professor Krugman: The world gets bigger

Many people have noticed that higher fuel prices are putting the brakes on globalization: if it costs more to ship stuff, there will be less shipping.

How big is this effect? ...

[A] very back-of-the envelope calculation using CIBC estimates of the fuel cost effect gives me a 17 percent contraction in trade if oil prices stay at current levels for a long time.

And from the NY Times: Labor Costs Rise, and Manufacturers Look Beyond China

China remains the most popular destination for foreign industrial investment in the world, attracting almost $83 billion last year. But ... [there are a] long list of concerns about China ... inflation, shortages of workers and energy, a strengthening currency, changing government policies, even the possibility of civil unrest someday. But most important, wages in China are rising close to 25 percent a year in many industries, in dollar terms, and China is no longer such a bargain.

Just some food for thought ...

by Calculated Risk on 6/17/2008 01:36:00 PM

Last week the Associated Press (AP) sent out a notice to a blogger demanding that all AP excerpts be removed from his blog. Needless to say this created quite a fire storm in the blogger world. The AP has backed down and is now working with some bloggers to create some guidelines for excerpts. Atrios has been following this story.

Here is the AP version of the story via the NY Times: AP to meet with blogging group to form guidelines

I think the AP is going about this all wrong. It seems to me the problem isn't bloggers violating "fair use". The real problem is the AP business model no longer works. The AP currently operates as a not-for-profit cooperative, owned by its membership (daily newspapers). It appears the AP charges members and subscribers for content to pay their expenses.

Compare this to most online newspapers that are based on an advertising model. They provide content that draws readers, and then they sell advertising on their websites. With this model, the newspapers encourage bloggers and other online sites to link to their content (with small excerpts).

In fact I frequently receive emails from journalists thanking me for linking to their stories - and I suppose helping to boost their traffic a little. This is a model that works, and they see blogging as a complementary product.

But this doesn't work for the AP. When the bloggers link to an AP story, it might be in Podunk Press, and yes - that would drive traffic to Podunk - but the AP doesn't receive any more revenue, and the other newspapers with the same AP story complain that they are getting scooped by the bloggers.

The answer is for the AP to innovate. Perhaps the AP could measure the traffic to each newspaper, and when Podunk is getting extra hits, Podunk would pay more for the story. Or perhaps the AP could have a specific AP news site for bloggers to link to. The AP could sell advertising on this site, and that would offset some of their expenses and reduce the costs for their members.

The answer is to change the model. Adapt. Innovate.

by Calculated Risk on 6/17/2008 12:30:00 PM

This graph is an update to the construction employment conundrum: completions have declined about 50% from the peak in 2006, and yet residential construction employment has declined about 500,000 jobs or about 15%.

Click on graph for larger image in new window.

Note that starts are shifted 6 months into the future since it takes a little over 6 months to complete a typical residential unit.

Many observers believe the difference in the percentage declines is because of uncounted illegal immigrants in the construction work force.

The uncounted illegal immigrant argument is important for the impact on the economy, but it doesn't seem to explain why the BLS employment numbers haven't fallen more. Although the BLS is missing the job losses for illegal workers on the way down, they also didn't count them on the way up either.

Here are two other possible explanations for the different percentage declines:

Some construction employees have moved from residential to commercial work, but they are still being reported as residential construction employees to the BLS.

Many workers are still employed, but they are working far fewer hours.

We will know more are CRE construction slumps in the 2nd half of 2008.

by Calculated Risk on 6/17/2008 10:07:00 AM

The Federal Reserve reported this morning that industrial production declined 0.2% in May.

Industrial production declined 0.2 percent in May after having fallen 0.7 percent in April. ... The rate of capacity utilization for total industry declined 0.2 percentage point, to 79.4 percent, a level 1.6 percentage points below its average for 1972-2007.

A decline in industrial production is one of the indicators of a recession (see quote at bottom). The following graph shows capacity utilization and recessions for the last 40 years.

Click on graph for larger image in new window.

The decline in capacity utilization suggests that the economy could be in recession.

Even more important is that industrial production is a key to the depth of the economic slowdown. So far exports have been strong, and the decline in industrial production has been mild. If the global economy slows significantly ("recoupling"), then industrial production and capacity utilization could fall sharply leading to a deeper recession.

Also, with capacity utilization below average, this probably means less investment in non-residential structures in the near future.

"[A] recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."
National Bureau of Economic Research (NBER)

by Anonymous on 6/17/2008 08:31:00 AM

The LA Times has a good piece out this morning on California community banks and their RE/mortgage problems, particularly with construction loans. Among others, there is this:

Security Pacific Bancorp of West L.A. -- which resembles in name only the former L.A.-based banking giant acquired in 1992 by what is now Bank of America Corp. -- has written off millions in dud Inland Empire housing loans. In a recent order, the Federal Deposit Insurance Corp. and state regulators required Security Pacific, with $585 million in assets, to diversify its operations, cut off deadbeat clients and "determine that the lending staff has the expertise necessary to properly supervise construction loans."

Hoocoodanode that you needed expertise to supervise construction loans?

If you are interested, the Security Pacific C&D is here.

by Calculated Risk on 6/17/2008 08:29:00 AM

Click on graph for larger image in new window.

The graph shows total housing starts vs. single family housing starts.

Both total starts and single family starts are at the lowest level since 1991.

Note that the current recession on the graph is not official.

Here is the Census Bureau reports on housing Permits, Starts and Completions.

Building permits decreased:

Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 969,000.
This is 1.3 percent below the revised April rate of 982,000 and is 36.3 percent below the revised May 2007 estimate
of 1,522,000.

Single-family authorizations in May were at a rate of 623,000; this is 4.0 percent below the April figure of 649,000.

The declines in permits suggest further declines in starts next month.

On housing starts:

Privately-owned housing starts in May were at a seasonally adjusted annual rate of 975,000. This is 3.3 percent below the
revised April estimate of 1,008,000 and is 32.1 percent below the revised May 2007 rate of 1,436,000.

Single-family housing starts in May were at a rate of 674,000; this is 1.0 percent (±9.9%)* below the April figure of 681,000.

And on completions:

Privately-owned housing completions in May were at a seasonally adjusted annual rate of 1,132,000. This is 11.6 percent above the revised April estimate of 1,014,000, but is 26.9 percent below the revised May 2007 rate of 1,549,000.

Single-family housing completions in May were at a rate of 869,000; this is 8.9 percent above the April figure of 798,000.

More on starts and completions later.

by Calculated Risk on 6/16/2008 09:47:00 PM

From McGraw-Hill via MarketWatch: 2008 Construction Starts Estimated at $558.5 Billion, Down 11%, McGraw-Hill Construction Reports

On Commercial Real Estate (CRE):

[T]he slower economy and tighter lending conditions are now causing [CRE] projects to be deferred, and the loss of momentum will take firmer hold as the year proceeds. For 2008, commercial building will retreat 8% in dollar volume and 16% in square feet. Stores and warehouses are the most vulnerable to decline in the near term, while lesser reductions are anticipated for hotels and office buildings.

This is similar to the recent CRE forecast from Wachovia.

by Calculated Risk on 6/16/2008 07:00:00 PM

Initially, in California, the foreclosure crisis hit mostly lower end areas. But the numbers are starting to grow in the more affluent areas now; like Orange County. Yes, many of these foreclosures are in the poorer areas of Santa Ana, but the problem is spreading (see photos earlier today).

Mathew Padilla at the O.C. Register has the story: O.C. foreclosures hit new record in May, break 1,000 in a month for first time

Click on graph for larger image in new window.

This graph is based on the DataQuick numbers from Matt's article.

The graphs shows the number of Notices of Default filed (NODs) and actually foreclosures per month.

Note: today was all housing for me. My earlier posts included comments from the NAHB conference call, the DataQuick numbers for Southern California, and more on the housing bust and worker mobility.

Also yesterday I posted another analysis of home improvement investment that might be of interest.

Best to all.

by Calculated Risk on 6/16/2008 04:09:00 PM

On Saturday I wrote about how the housing bust is impacting labor mobility. Here is some more ...

L.M. Sixel and Nancy Sarnoff have a terrific article today in the Houston Chronicle on how the housing bust is impacting the job market in Houston: Poor housing market takes many off the job market (hat tip slmortgagebroker)

Carole Hackett has some high-level management jobs to fill. But the vice president of human resources of The Methodist Hospital is having trouble because of the slumping real estate market.

Not in Houston, mind you. Hackett's problems are in Michigan, Illinois and Ohio.

That's because when Hackett identifies promising candidates for the vice president of quality and key nursing director positions, they can't move.
...
"My intuition is that the housing market crisis in the United States is greatly affecting labor mobility," said Barton Smith, director of the Institute for Regional Forecasting at the University of Houston.

As I noted on Saturday, from 2005 to 2006 (the most recent data), approximately 1.7 million owner-occupied households, moved to a different county or state in the United States. If approximately 1 in 8 households (the same proportion as with negative equity) will not accept a transfer now because of depressed home values that would be about 200,000 households per year that will be reluctant to accept job transfers.

One of the strengths of the U.S. labor market has been the flexibility associated with geographical mobility - households can move easily from one region to another for better employment. The housing bust will limit this flexibility.

by Calculated Risk on 6/16/2008 02:41:00 PM

O.C. Register photographer Eugene Garcia takes us on a tour of foreclosed homes in the O.C.: The real foreclosures of Orange County

Here are a couple of samples (photos used with permission):

My first stop is at 512 W. Camile St. in Santa Ana. This foreclosed 2 bedroom home sold for $585,000 in March of 2006. ... the starting bid is just $99,000. Hopefully they'll throw in some buckets of paint. But - hey- what's that passage down below? (see Eugene's photos for the answer)

This house sold for $585,000 in 2006?

NO AREA IMMUNE: Quite a change in environment here. This 4 bedroom, 2.5 bath foreclosure at 4 Langford Lane in Ladera Ranch sold at the peak in 2006 for $1,000,000. Neighbors said the last buyer owned a mortgage company that went under. Starting bid is $299,000.