by Calculated Risk on 10/26/2008 02:04:00 PM

From the WSJ: IMF to Lend $16.5 Billion to Ukraine (hat tip Lyle)

The International Monetary Fund Sunday announced its second national rescue plan in a matter of days, saying it would lend $16.5 billion to Ukraine.

The announcement follows Friday's a $2.1 billion loan to Iceland ... Pakistan and Hungary are also talking to the IMF.

by Calculated Risk on 10/26/2008 11:42:00 AM

How much will the Fed reduce the Fed Funds rate on Wednesday? And does it matter?

First, here are the latest Fed Fund probabilities from the Cleveland Fed.

Click on graph for larger image in new window.

Market participants expect a 50 bps rate cut to 1.0%, however there is some expectation of a 75 bps cut (to 0.75%).

Earlier this month, I speculated about an intermeeting rate cut: Will there be an Intermeeting Fed Rate Cut?. Sure enough the Fed cut the Fed Funds rate four days later - but market participants were disappointed with what was perceived as a feeble 50 bps effort.

Remember Bernanke wrote in 2004: What Explains the Stock Market’s Reaction to Federal Reserve Policy?

The most direct and immediate effects of monetary policy actions, such as changes in the federal funds rate, are on the financial markets; by affecting asset prices and returns, policymakers try to modify economic behavior in ways that will help to achieve their ultimate objectives.
...
The unexpected 50-basis-point intermeeting rate reductions on 3 January [2001] and 18 April [2001] were both greeted euphorically, with one-day returns of 5.3% and 4.0% respectively. The 50-basis-point rate cut on 20 March [2001] was received less enthusiastically, however. Even though the cut was more or less what the futures market had been anticipating, financial press reported that many equity market participants were “disappointed” the rate cut hadn’t been an even larger 75 basis point action. Consequently, the market lost more than 2%.

Bernanke can probably add the Oct 8th 50 bps rate cut to his list of "disappointing cuts" since the market sold off about 10% over the two days following the Fed action.

Of course the FOMC just sets the target rate. The effective Fed Funds rate has already been at or under 1% for the last couple of weeks. So the Fed will just be making this official.

And does it even matter? Probably not much at this point. But I suspect market observers will be focused on the economic outlook.

Note: Dr. Krugman is updating his book "Return of Depression Economics". I think this 1998 paper from Professor Paul on the Japanese experience might be of interest to some readers: It's BAAACK! Japan's Slump and the Return of the Liquidity Trap.

by Calculated Risk on 10/25/2008 11:03:00 PM

How much will the decline in oil prices cushion the U.S. recession? That seems like a key question.

Here is an excerpt from Time: What's Behind (and Ahead for) the Plunging Price of Oil

If gasoline drops $1.50 the $900 [the average driver] saves would amount to a big stimulus package. According to Ed Leamer, director of the UCLA's Anderson Forecast, the current price slide could drop another $200-to-$250 billion into consumers' pockets, given that as of the second quarter personal spending for gas fuel oil and other energy was about $442 billion on an annualized basis.

The following graph shows the monthly personal consumption expenditures (PCE) at a seasonally adjusted annual rate (SAAR) for gasoline, oil and other energy goods compared to the U.S. spot price for oil (monthly).

Click on graph for larger image in new window.

At current oil prices, it appears oil related PCE will fall to $300-$350 billion SAAR, from close to $500 billion SAAR in July. This is a savings of $12 to $15 billion per month compared to July. And that would be helpful and definitely provide some cushion for consumers. This might show up as more savings, as opposed to other consumption, but rebuilding savings is probably a necessary step towards rebuilding household balance sheets.

Data sources:
PCE from BEA underlying detail tables: Table 2.4.5U. Personal Consumption Expenditures by Type of Product line 117.

Oil prices from EIA U.S. Spot Prices.

by Calculated Risk on 10/25/2008 03:12:00 PM

Christopher Thornberg of Beacon Economics recently estimated the excess housing units in the U.S. at 3 to 4 million.

Click on graph for larger image in new window.

Credit: Dr. Thornberg. See this presentation at the California Self Storage Association (CSSA).

Note: the entire presentation is interesting!

The underlying data is available from the Census Bureau.

It makes sense that there are more housing units than households due to the normal frictions of households moving, normal vacancy rates, and second homes. As an example, according to the Census Bureau, there were 1.145 million housing units rented or sold in Q2 but not yet occupied. This is normal as households move.

Some of the recent increase in the ratio of housing units to households is due to excess housing units (overbuilding), and apparently Dr. Thornberg believes this ratio should decline from about 1.17 to 1.14 or so. With approximately 111 million households in the U.S., and a ratio of 1.14, the U.S. only needs 127 million housing units compared to the almost 130 million housing units currently in the U.S.. That gives 3 million excess housing units.

However I think Thornberg's estimate is too high. In an earlier post, Q2: Homeownership and Vacancy Rates, I estimated the excess rental units, vacant homes, and new home inventory, and calculated that there were "about 1.75 million excess housing units in the U.S." at the end of Q2. I think this is a better estimate.

The Q3 numbers will be released this week.

by Calculated Risk on 10/25/2008 12:30:00 PM

Initially I posted a story about a significant plunge in truck sales for Volvo. However the details were misleading because of cancellations.

Here is a story from Bloomberg: European Heavy-Truck Sales Drop 4.8% as Economic Growth Wanes

European heavy-truck sales fell 4.8 percent last month as the credit crisis and concern that a recession is coming deterred companies from expanding fleets.

Manufacturers sold 28,947 trucks weighing 16 metric tons or more in September compared with 30,403 a year earlier, the Brussels-based European Automobile Manufacturers Association said in a statement today. Nine-month deliveries rose 3.5 percent to 250,580 vehicles.

by Calculated Risk on 10/25/2008 09:08:00 AM

Click on cartoon for larger image in new window. Used with permission from cartoonist John Ambrosavage at Ambrotoons.com email for ambrotoons

by Calculated Risk on 10/24/2008 11:47:00 PM

Life Imitates Art (hat tip John) ... only 20 seconds.

Update: Greenspan and Casablanca "Shocked" 19 seconds

by Calculated Risk on 10/24/2008 09:25:00 PM

Tom Petruno at the LA Times Money & Co. breaks it down: Many world stock markets now off 50% or more from peaks

Here's a club no country wants to join, yet its ranks are swelling: The 50%-Off (Or Worse) Stock Market Club.
...
Here’s a sampling (not meant to be all-inclusive):

Markets down more than 70%: Vietnam (-70.5%), Peru (-73.2%), Ireland (-73.4%), Russia (-73.9%), Iceland (-88.7%).

Markets down between 60% and 70%: Hong Kong (-60.1%), Poland (-62.6%), China (-69.8%).

Petruno has more. By comparison, the U.S. is holding up OK - so far. I guess we could call this global synchronized cliff diving!

by Calculated Risk on 10/24/2008 07:37:00 PM

This is from yesterday (Oct 23rd). 36 minutes 15 seconds.

If the player doesn't work, here is the link.

by Calculated Risk on 10/24/2008 06:29:00 PM

I've been using a two month method to predict PCE. This estimate suggests real PCE will decline by 2.4% in Q3.

Fed economists Riccardo DiCecio and Charles S. Gascon have used real time data to estimate PCE and check the reliability of this approach: Predicting Consumption: A Lesson in Real-Time Data (November 2008)

Whereas I used revised data for historical comparisons, the Fed economists only used data that was available for analysts at the time of the estimate (a much better test of the approach). The economists found that using the change in the second-month of each quarter (over the second-month of the previous quarter) was very reliable.

Click on graph for larger image in new window.

The chart plots the approximated (second-month) and actual growth rates of PCE since 1991 using real-time data: That is, the growth rates at each point on the chart are computed using only the data that would have been available to a researcher at the time of the estimate. The approximated measure for 2008:Q3 is –2.3 percent, suggesting the first decline in PCE since the fourth quarter of 1991.

Since PCE accounts for almost 71% of GDP, this also suggests the change in real GDP in Q3 might be negative. This depends on exports, changes in inventories and government spending (investment will certainly be negative in Q3).