by Calculated Risk on 9/15/2009 07:42:00 PM

From Bloomberg: U.S. Credit-Card Defaults Resume Ascent as Unemployment Worsens (ht Bob_in_MA)

Bank of America said write-offs rose to 14.54 percent ... That compares with 13.81 percent in July ...

Citigroup’s soured loans rose to 12.14 percent last month, from 10.03 percent, while JPMorgan said write-offs advanced to 8.73 percent from 7.92 percent in July ...

Discover Financial Services ... said charge-offs rose to 9.16 percent from 8.43 percent in July. ...

Capital One Financial Corp. ... said charge-offs improved to 9.32 percent in August, from 9.83 percent.
...
Moody’s Investors Service has said it expects average U.S. charge-offs to peak at 12 percent to 13 percent in 2010.

As a reminder, the bank stress tests assumed a cumulative two year credit card loss rate of 18% to 20% for the more adverse scenario (only 12% to 17% for the baseline scenario). Right now losses are running worse than the more adverse scenario.

Also credit card loss rates tend to the track unemployment - so, as the unemployment rate rises into 2010, the credit card charge-offs will probably increase some more.

by Calculated Risk on 9/15/2009 05:15:00 PM

Note: this is not seasonally adjusted. There is a very distinct seasonal pattern for imports, but not for exports.

Sometimes port traffic gives us an early hint of changes in the trade deficit. The following graph shows the loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported.

Click on graph for larger image in new window.

Inbound traffic was 14.5% below August 2008.

Outbound traffic was 16.2% below August 2008.

There has been a clear recovery in U.S. exports (the year-over-year comparison was off 30% from December through February). And export traffic, at the LA area ports, is at the August 2007 level.

However, for imports, traffic is at the August 2003 level, and 2009 will probably be the weakest year for import traffic since 2002.

Note: Imports usually peak in the August through October period (as retailers import goods for the holidays) and then decline in November.

by Calculated Risk on 9/15/2009 02:32:00 PM

First, a nice mention in Newsweek (thank you): The Financial Meltdown in Words (see slide 4 for a quote from Feb 2005, ht Matthew, Eric)

On the end of the recession, from Bloomberg: Bernanke Says U.S. Recession ‘Very Likely’ Has Ended

“Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time,” Bernanke said today at the Brookings Institution in Washington, responding to questions after a speech.

Although I think the official recession has probably ended, it is worth remembering that one or two quarters of GDP growth doesn't necessarily mean the recession is over. Right in the middle of the '81/'82 recession, there was one quarter when GDP increase 4.9% (annualized).

On recession dating: ¹The National Bureau of Economic Research (NBER) Business Cycle Dating Committee is the recognized group for calling dating recessions in the U.S. It is always difficult to tell when a recession has ended, especially with a jobless recovery (something I expect again). As an example, it took NBER over a year and half after the 2001 recession ended to call the trough of the cycle. And it took 21 months after the 1990-1991 recession ended for NBER to date the end of the recession.

From the 2003 announcement of the end of the 2001 recession:

The committee waited to make the determination of the trough date until it was confident that any future downturn in the economy would be considered a new recession and not a continuation of the recession that began in March 2001.

The economy was still struggling in 2003 - especially employment - but the NBER committee members felt that any subsequent downturn would be considered a separate recession:

The committee noted that the most recent data indicate that the broadest measure of economic activity-gross domestic product in constant dollars-has risen 4.0 percent from its low in the third quarter of 2001, and is 3.3 percent above its pre-recession peak in the fourth quarter of 2000. Two other indicators of economic activity that play an important role in the committee's decisions-personal income excluding transfer payments and the volume of sales of the manufacturing and wholesale-retail sectors, both in real terms-have also surpassed their pre-recession peaks. Two other indicators the committee focuses on-payroll employment and industrial production-remain well below their pre-recession peaks. Indeed, the most recent data indicate that employment has not begun to recover at all. The committee determined, however, that the fact that the broadest, most comprehensive measure of economic activity is well above its pre-recession levels implied that any subsequent downturn in the economy would be a separate recession.

This is relevant to today. It is very likely that any recovery will be very sluggish, and if the economy turns down within the next 6 to 12 months, the NBER would probably consider that a continuation of the Great Recession.

Yesterday San Francisco Fed President Janet Yellen argued the recovery would be "tepid". She pointed out that there will probably be a boost from an inventory correction in the 2nd half of 2009, but that that boost will be transitory:

I expect the biggest source of expansion in the second half of this year to come from a diminished pace of inventory liquidation by manufacturers, wholesalers, and retailers. Such a pattern is typical of business cycles. Inventory investment often is the catalyst for economic recoveries. True, the boost is usually fairly short-lived, but it can be quite important in getting things going. ...

But then what happens in a couple of quarters? Where are the engines of growth? As Yellen noted:

The chances are slim for a robust rebound in consumer spending, which represents around 70 percent of economic activity. Of course, consumers are getting a boost from the fiscal stimulus package. But this program is temporary. Over the long term, consumers face daunting issues of their own.

As I noted in March (see Business Cycle: Temporal Order), the usual engines for growth coming out of a recession are Personal Consumption expenditures (PCE), and Residential Investment (RI). If PCE is weak, we are left with residential investment. Although it appears RI has bottomed, I doubt we will see much of a rebound until the overhang of existing home inventory is reduced. That is one of the reason the DataQuick SoCal report this morning was so important - it might signal another downturn for sales in the existing home market (and possibly new home market).

Although I started the year looking for the sun, I remain concerned about the possibilities of a double dip recession - or at least a prolonged period of sluggish growth. And this means the unemployment rate will continue to rise well into 2010; I expect the unemployment rate to hit 10% in November (or so). See: When Will the Unemployment Rate hit 10%? .

There is an old saying: "A recession is when your neighbor loses his job, a depression is when you lose your job." Unfortunately 2010 will probably feel like a depression to a large number workers.

More on NBER and double dip recessions:

Here is the NBER dating procedure.

Note that the trough of the 1980 recession was only 12 months before the beginning of the 1981 recession, but the short recovery was fairly robust with real GDP up 4.4%. Those two recessions are frequently called a "double dip" recession, but the NBER considers them as two separate recessions.

¹ Some of this post was excerpted from a previous post.

by Calculated Risk on 9/15/2009 12:44:00 PM

From DataQuick: Southland home sales fall; median price edges up again

Home sales dipped in Southern California last month, the result of a thinning inventory of foreclosure properties and financial uncertainty among potential home buyers. ...

A total of 21,502 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in August. That was down 10.8 percent from 24,104 in July, and up 11.0 percent from 19,366 in August 2008, according to MDA DataQuick of San Diego.

Last month was the 14th in a row with a year-over-year sales increase. The decline from July to August was unusual, given an increase is normal for the season. August sales in DataQuick’s statistics, which go back to 1988, range from a low of 16,379 in 1992 to a high of 39,562 in 2003. The average is 27,458.

“There’s still a lot of uncertainty out there about prices, interest rates and the availability of mortgage money. Additionally, we don’t know if this drop in foreclosure resales is temporary. We’re hearing from public agencies and the banking industry that there’s still a lot of financial distress in the pipeline,” said John Walsh, MDA DataQuick president.

Foreclosure resales accounted for 38.8 percent of August’s resales activity, down from 40.7 percent in July and down from 45.5 percent in August 2008. In February this year it peaked at 56.7 percent. Most of the relative decline is due to an increase in non-foreclosure resales.
...
Changes in the median do not necessarily correspond to changes in home values in the current, atypical sales environment. Adjusting for shifts in market mix, it now appears that over the past two years homes in older, more costly neighborhoods have come down in value by about half as much as homes in newer, more affordable neighborhoods. Prices also fell sharply in some lower-cost, older communities where the use of risky subprime loans was high, triggering relatively high foreclosure rates.

... a common form of financing used by first-time home buyers in more affordable neighborhoods remains near record levels. Government-insured, FHA mortgages made up 37.4 percent of all purchase loans in August, up from 37.0 percent in July and 27.1 percent in August last year.

... Foreclosure activity remains near record levels. Financing with multiple mortgages is low, down payment sizes are stable, and non-owner occupied buying is above-average in some markets

Here are a few key points:

Foreclosure inventory has declined, leading to fewer sales at the low end.

FHA buying is at record levels. And investor buying is above normal levels in many areas.

The decline in sales was "unusual" and suggests that the first time buyer frenzy might be starting to fade.

by Calculated Risk on 9/15/2009 10:26:00 AM

From Bloomberg: Ghost Towns May Haunt Ireland in Property Loan Gamble (ht Mike In Long Island)

Finance Minister Brian Lenihan will detail tomorrow how much Ireland will pay for about 90 billion euros ($131 billion) of real estate loans now crippling what as recently as 2006 was one of Europe’s most dynamic economies.
...
The National Asset Management Agency, known as NAMA, will buy 18,000 loans at a discount from lenders led by Allied Irish Banks Plc and Bank of Ireland Plc. The agency will manage the loans, which amount to about half of Ireland’s gross domestic product. ... Most of the property-related loans of the biggest Irish banks are being taken over by the agency, excluding residential mortgages.
...
The office vacancy rate at the end of the second quarter was 21 percent in Dublin, compared with 8 percent in London and 10 percent in Berlin, according to CB Richard Ellis Group Inc. As many as 35,000 new homes are now vacant, estimates Davy, the country’s largest securities firm, up from 20,000 18 months ago.
emphasis added

The government is taking over most of the non-residential property loans in Ireland. It is amazing that these loans total about half of Ireland's GDP (not including residential).

by Calculated Risk on 9/15/2009 10:02:00 AM

Fed Chairman Ben Bernanke speaking on the financial crisis of 2008.

A live feed from C-SPAN.

From the Fed: Reflections on a Year of Crisis

NOTE: This is the same speech he gave last month. A history review ...

by Calculated Risk on 9/15/2009 08:30:00 AM

On a monthly basis, retail sales increased 2.7% from July to August (seasonally adjusted), and sales are off 5.3% from August 2008 (retail ex food services decreased 6.3%).

Excluding motor vehicles, retail sales were up 1.1%.

The following graph shows the year-over-year change in nominal and real retail sales since 1993.

Click on graph for larger image in new window.

To calculate the real change, the core PCI price index from the BLS was used (August prices were estimated as the average increase over the previous 3 months).

Real retail sales (ex food services) declined by 6.3% on a YoY basis.

The second graph shows real retail sales (adjusted with PCE) since 1992. This is monthly retail sales, seasonally adjusted.

NOTE: The graph doesn't start at zero to better show the change.

This shows that retail sales fell off a cliff in late 2008, and appear to have bottomed, but at a much lower level.

Here is the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for August, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $351.4 billion, an increase of 2.7 percent (±0.5%) from the previous month, but 5.3 percent (±0.7%) below August 2008. Total sales for the June through August 2009 period were down 7.6 percent (±0.3%) from the same period a year ago. The June to July 2009 percent change was revised from -0.1 percent (±0.5%)* to -0.2 percent (±0.2%)*.

It appears the cliff diving is over and the official recession probably ended in July. But retail sales are still far below the pre-recession level, and the recovery will probably be sluggish.

by Calculated Risk on 9/14/2009 11:04:00 PM

From the WSJ: Citigroup Explores Bid to Pare U.S. Stake

The tentative aim is for a joint stock sale. Under this scenario, Citigroup would issue as much as $5 billion in new shares, while the government would simultaneously sell an undetermined amount of the stock it is holding ... Citigroup could use proceeds from a stock sale to redeem some of the preferred stock the Treasury is holding ...

The government converted its preferred shares into common stock at $3.25 a share. Citigroup's shares closed Monday at $4.52. That means the government's 7.7 billion shares have gained about $9.8 billion.

If I have the numbers correct, the total U.S. bailout of Citi was $45 billion (not including guarantees). Then $25 billion of preferred stock was converted to common at $3.25 per share in February - and that is the 7.69 billion common shares we all own (through the Treasury).

So the U.S. still holds $20 billion in preferred stock. This would be a start, although it might be premature considering all the toxic assets Citi probably still holds.

by Calculated Risk on 9/14/2009 07:35:00 PM

From Bloomberg: U.S. Said to Explore Selling Stock Acquired in Citigroup Rescue (ht jb)

Bloomberg is reporting that the Treasury and Citigroup are discussing how the U.S. can sell the 34 percent stake (7.7 billion shares) that the U.S. acquired as part of the bailout. At $4.50 per share, the U.S. stake is worth almost $35 billion.

In the February bailout, the U.S. increased it's common stake in Citi by converting $25 billion in preferred shares into common. And the U.S. is still also guaranteeing about $306 billion in assets (per the bailout agreement last November).

But selling some common would be a good first step ...

by Calculated Risk on 9/14/2009 05:28:00 PM

This is a long excerpt, but worth reading ...

From San Francisco Fed President Janet Yellen: The Outlook for Recovery in the U.S. Economy

I am hugely relieved that our financial system appears to have survived this near-death experience. And, as painful as this recession has been, I believe that we succeeded in avoiding the second Great Depression that seemed to be a real possibility. Much of the recent economic data suggest that the economy has bottomed out and that the worst risks are behind us. The economy seems to be brushing itself off and beginning its climb out of the deep hole it’s been in.

That’s the good news. But I regret to say that I expect the recovery to be tepid. What’s more, the gradual expansion gathering steam will remain vulnerable to shocks. The financial system has improved but is not yet back to normal. It still holds hazards that could derail a fragile recovery. Even if the economy grows as I expect, things won’t feel very good for some time to come. In particular, the unemployment rate will remain elevated for a few more years, meaning hardship for millions of workers. Moreover, the slack in the economy, demonstrated by high unemployment and low utilization of industrial capacity, threatens to push inflation lower at a time when it is already below the level that, in the view of most members of the Federal Open Market Committee (FOMC) best promotes the Fed’s dual mandate for full employment and price stability. ...

I’m happy to report that the downturn has probably now run its course. This summer likely marked the end of the recession and the economy should expand in the second half of this year. A wide array of data supports this view. However, payrolls are still shrinking at a rapid pace, even though the momentum of job losses has slowed in the past few months. The housing sector finally seems to be improving. Home sales and starts are once again rising from very low levels, and home prices appear to be stabilizing, even rising in recent months according to some national measures. Meanwhile, manufacturing is also beginning to show signs of life, helped particularly by a rebound in motor vehicle production. Importantly, consumer spending finally is bottoming out.

A particularly hopeful sign is that inventories, which have been shrinking rapidly, now seem to be in better alignment with sales. That’s occurred because firms slashed production rapidly and dramatically in the face of slumping sales. Recent data suggest that this correction may be near an end and firms are now poised to step up production to match sales. In fact, I expect the biggest source of expansion in the second half of this year to come from a diminished pace of inventory liquidation by manufacturers, wholesalers, and retailers. Such a pattern is typical of business cycles. Inventory investment often is the catalyst for economic recoveries. True, the boost is usually fairly short-lived, but it can be quite important in getting things going. ...

The normal dynamics of the business cycle have also turned more favorable. Some economic sectors are growing again simply because they sank so low. The inventory adjustment I just discussed is one factor, although the biggest part of those benefits usually is only felt for a few quarters. But other business cycle patterns can be longer lasting. Demand for houses, durable goods such as autos, and business equipment is beginning to revive as households and firms replace or upgrade needed equipment and structures.
...
This time though rapid growth does not seem to be in store. My own forecast envisions a far less robust recovery, one that would look more like the letter U than V. ... A large body of evidence supports this guarded outlook. It is consistent with experiences around the world following recessions caused by financial crises. That seems to be because it takes quite a while for financial systems to heal to the point that normal credit flows are restored. That is what I expect this time. ...

Unfortunately, more credit losses are in store even as the economy improves and overall financial conditions ease. Certainly, households remain stressed. In the face of high and rising unemployment, delinquencies and foreclosures are showing no sign of turning around. The delinquency rate on adjustable-rate mortgages is now up to about 18 percent, and, on fixed-rate loans, it’s about 6 percent. Delinquencies on both types of loans have increased sharply over the past year and are still rising. ...

The chances are slim for a robust rebound in consumer spending, which represents around 70 percent of economic activity. Of course, consumers are getting a boost from the fiscal stimulus package. But this program is temporary. Over the long term, consumers face daunting issues of their own. In fact, it’s easy to draw a comparison between the financial state of households and that of financial institutions. For years prior to the recession, households went on a spending spree. This occurred during a period that economists call the “Great Moderation,” about two decades when recessions were infrequent and mild, and inflation was low and stable. Credit became ever easier to get and consumers took advantage of this to borrow and buy. Stock and home prices rose year after year, giving households additional wherewithal to keep spending. In this culture of consumption, the personal saving rate fell from around 10 percent in the mid-1980s to 1½ percent or lower in recent years. At the same time, households took on larger proportions of debt. From 1960 to the mid-1980s, debt represented a manageable 65 percent of disposable income. Since then, it has risen steadily, with a notable acceleration in the last economic expansion. By 2008, it had doubled to about 130 percent of income.

It may well be that we are witnessing the start of a new era for consumers following the traumatic financial blows they have endured. The destruction of their nest eggs caused by falling house and stock prices is prompting them to rebuild savings. The personal saving rate is finally on the rise, averaging almost 4½ percent so far this year. While certainly sensible from the standpoint of individual households, this retreat from debt-fueled consumption could reduce the growth rate of consumer spending for years. An increase in saving should ultimately support the economy’s capacity to produce and grow by channeling resources from consumption to investment. And higher investment is the key to greater productivity and faster growth in living standards. But the transition could be painful if subpar growth in consumer spending holds back the pace of economic recovery.

Weakness in the labor market is another factor that may keep the recovery in low gear for a while. ... While the August employment report offered more evidence that the pace of the decline has slowed, unemployment now stands at its highest level since 1983. My business contacts indicate that they will be very reluctant to hire again until they see clear evidence of a sustained recovery, and that suggests we could see another so-called jobless recovery in which employment growth lags the improvement in overall output. What’s more, wage growth has slowed sharply. Over the first half of this year, the employment cost index for private-industry workers has risen by a meager three-quarters of one percent. Unemployment, job insecurity, and low growth in incomes will undoubtedly take a toll on consumption. When the array of problems facing consumers is considered, it is hard to see how we can avoid sluggish spending growth.

Putting the whole puzzle together, the main impetus to growth in the second half of this year will be inventory investment. The boost it provides will be a big help for a while, but we will need to look to other sectors to sustain growth. The fact that the largest sector of the economy—consumer spending—is likely to be lackluster implies a less-than-robust expansion. Even the gradual recovery we expect will be vulnerable to shocks, especially from the financial sector. As I said, financial conditions are better, but not back to normal. And the likelihood of continuing losses by financial institutions will add new fuel to the credit crunch. In particular, small and medium-size banks could experience damaging losses on commercial real estate loans. Thus far, the largest losses have been on loans for construction and land development. Going forward, however, rising loan losses on other commercial real estate lending is likely because property values are falling, office vacancy rates are rising, and credit remains tight or nonexistent for those many property owners that will need to refinance mortgages over the next few years. Financial contagion from this sector is one of the most important threats to recovery.

The slow recovery I expect means that it could still take several years to return to full employment. The same is true for capacity utilization in manufacturing. It will take a long time before these human and capital resources are put to full use.