by Calculated Risk on 10/30/2008 03:12:00 PM

Just a quick note: Real Personal Consumption Expenditures (PCE) declined 3.1% (annualized) in Q3 according to the BEA Q3 Advance GDP report. This was the first decline since 1992, and real PCE was less in Q3 2008 than in Q3 2007!

This also suggests that spending declined sharply in September (or that earlier months were revised down).

My "two month" estimate for PCE in Q3 was -2.4%, and two Fed researchers proposed another method that forecast PCE of -2.3%.

Either way, the quarterly decline of -3.1% suggests that the decline in consumer spending was even worse in September than for July and August, and assuming no downward revision for the previous months, this indicates a decline of -4.4% (annual rate) for September compared to June.

Note: when comparing months, the headline number will be to the previous month (August in this case), but the better comparison - for comparing to the quarterly data - is to compare to the monthly data of the same month of the previous quarter (third month in Q2 or June).

The BEA will release the numbers for September tomorrow morning, and they will probably be ugly.

by Calculated Risk on 10/30/2008 02:07:00 PM

From MarketWatch: Hartford Financial loses over half its market value

The company reported a big third-quarter loss late Wednesday and said that it couldn't gauge the amount of extra capital it has because of market volatility.

Harford is off 51%

Assurant Inc is off 25%

Prudential Financial is off 22%

CIGNA Corp is off 22%

by Calculated Risk on 10/30/2008 12:27:00 PM

One of the key components of non-residential structure investment is construction of new offices. When the supplemental data is released for Q3 GDP, I expect it will show that office investment started to decline in the most recent quarter - and I expect office investment will decline significantly over the next year.

The following graphs show office vacancy rate vs. unemployment (hat tip Will).

Click on graph for larger image in new window.

The first graph shows the office vacancy rate vs. the quarterly unemployment rate and recessions.

Changes in the unemployment rate and the office vacancy rate are highly correlated. As the unemployment rate continues to rise over the next year or more, we'd expect the office vacancy rate to rise too. And this will discourage investment in new office structures - and put significant pressure on office rents and prices.

The second graph shows the relationship between the office vacancy rate and the unemployment rate using data starting in Q1 1991. The unemployment rate is from the BLS and the office vacancy rate is from REIS.

I've added the polynomial trend line (with R^2 of 0.88). The two most recent quarters are marked in red.

This suggests that office vacancy rates are currently below the expected level, and vacancy rates will probably increase sharply over the next year.

by Calculated Risk on 10/30/2008 10:56:00 AM

LIBOR declined today from the WSJ:

According to data from the British Bankers' Association, three-month U.S. dollar Libor fell to 3.1925% from Wednesday's fixing of 3.42%. The rate peaked at 4.81875% on Oct. 10.

The yield on 3 month treasuries declined sharply to 0.48% from 0.60%. (Worse)

The 3 month yield was close to zero for a few days, so this is still some improvement from the worst of the credit crisis. Usually the 3 month trades below the target Fed Funds rate by around 25 bps, so this is too low with the Fed funds rate at 1.0%. Update: however, the effective Fed Funds rate is even lower (0.67% yesterday), so a 3 month yield of 0.48% is in the right range.

The TED spread: 2.70, down from 2.82 (Slightly better) This is way too high, but significantly below the peak of 4.63 on Oct 10th.

I'd like to see the spread move back down to 1.0 or lower - at least below 2.0.

The two year swap spread from Bloomberg: 114.62 down from 115.88 (slightly better). This spread peaked at near 165 in early October, so there has been significant progress, but I'd like to see this under 100.

Activity in the Treasury's Supplementary Financing Program (SFP). This is the Treasury program to raise cash for the Fed's liquidity initiatives. If this program slows down borrowing, I think that would be a good sign.

Here is a list of SFP sales. No announcement today. no progress.

The A2P2 spread is at a record 4.69 up from 4.55. Worse.

During a recession, this spread usually increases because the risk of default for lower quality paper increases. However the recent values (over 400 bps) are far in excess of normal. If the credit crisis eases, I'd expect a significant decline in this spread. The high for the A2P2 spread was 4.66, and there has been no progress here.

The LIBOR is down and the TED spread is off a little, but the A2P2 spread is at a record high - so there is some progress in some areas, and none by other measures.

by Calculated Risk on 10/30/2008 09:09:00 AM

The following graph shows residential investment compared to investment in non-residential structures as a percent of GDP since 1960. All data from the BEA.

Note: Residential investment is primarily single family structures, multi-family structures, commissions, and home improvement.

Click on graph for larger image in new window.

The recent housing boom and bust is very clear (in red).

Residential investment was 3.3% of GDP in Q3 2008, the lowest level since 1982 (just under 3.2%).

Non-residential investment in structures increased to almost 4% of GDP in Q3. This investment is slowing down right now (the Census Bureau has reported declines in non-residential investment for the last two months), and investment in non-residential structures will almost certainly be negative in Q4.

The positive contributions to GDP were exports, government spending, and investment in non-residential structures. Non-residential structures will be negative in Q4, and exports are slowing - so Q4 GDP will probably be much worse than Q3.

Note: I'll have much more on non-residential investment in offices, malls and hotels when the underlying details are released in a few days.

by Calculated Risk on 10/30/2008 08:30:00 AM

From the BEA: GROSS DOMESTIC PRODUCT: THIRD QUARTER 2008 (ADVANCE)

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.3 percent in the third quarter of 2008 ...

The decrease in real GDP in the third quarter primarily reflected negative contributions from personal consumption expenditures (PCE), residential fixed investment, and equipment and software that were largely offset by positive contributions from federal government spending, exports, private inventory investment, nonresidential structures, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

PCE declined -3.1% (annualized). This is the first decline in consumer spending since 1991.

Private investment declined -1.9%. I'll have some graphs on investment shortly.

by Calculated Risk on 10/30/2008 01:00:00 AM

From the WSJ: IMF Creates $100 Billion Fund to Aid Crisis Fight

The International Monetary Fund will offer as much as $100 billion in a new kind of loan to countries that are battered by the financial crisis ... The new three-month loans, aimed at economies the IMF judges to be troubled but basically sound, wouldn't require countries to make the often severe changes in their policies that the IMF has demanded for decades.
...
The IMF's new program, called the Short Term Liquidity Facility, would be used largely to pad a country's reserves, which could help the recipient defend its currency. But the funds could also be used to help recapitalize banks or cover import bills.

The IMF plan is its clearest recognition that its insistence on tough conditions is driving away potential borrowers that might need its help. But the new plan also puts the IMF in the position of deciding who can have money with few strings attached, and who can't.

The IMF has always required painful, some would argue too painful, changes to a country's fiscal policies in exchange for help. This is apparently true for the bailouts of Hungary and the Ukraine. This lending facility would not come with as many strings attached and might be useful for recapitalizing banks - but I'm not sure about the "defending currency" idea since that usually doesn't work.

by Calculated Risk on 10/29/2008 06:20:00 PM

Press Release: Wells Fargo Issues Shares in U.S. Treasury Capital Purchase

Wells Fargo ... announced today it has issued to the U.S. Department of the Treasury 25,000 shares of Wells Fargo’s Fixed Rate Cumulative Perpetual Preferred Stock, Series D without par value. The shares have a liquidation amount per share equal to $1,000,000, for a total price of $25 billion. This issuance is part of the Treasury Department’s Troubled Asset Relief Program (TARP) ...

Now they have the money. Will they lend it?

As an aside, the National Debt has increased $880 billion since the beginning of September - that isn't a typo - almost $1 trillion in less than two months as the Treasury raises cash for the TARP and for the Fed's liquidity initiatives.

The National Debt is now $10.53 trillion. Remember when the debt passed $10 trillion? That was on September 30th ... less than one month ago.

by Calculated Risk on 10/29/2008 05:49:00 PM

Here is an interview with Professor Roubini this morning on Bloomberg:

by Calculated Risk on 10/29/2008 03:49:00 PM

From the WaPo: Treasury, FDIC Crafting Plan to Rework Millions of Mortgages

Officials with the Treasury and the Federal Deposit Insurance Corp. are crafting a plan under which the government would guarantee the mortgages of as many as 3 million homeowners now struggling to avoid foreclosure ...

Under the program being discussed, the lender would agree to reduce borrowers’ monthly payments, for example by lowering the interest rate or principal of a mortgage loan, based on the homeowner’s ability to pay. ... the government would then guarantee to repay the lender for a portion of its loss if the borrower defaulted on the reconfigured loan.