by Calculated Risk on 11/04/2009 10:00:00 AM

From the Institute for Supply Management: October 2009 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector expanded in October for the second consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

... "The NMI (Non-Manufacturing Index) registered 50.6 percent in October, 0.3 percentage point lower than the 50.9 percent registered in September, indicating growth in the non-manufacturing sector for the second consecutive month, but at a slightly slower rate.
...
Employment activity in the non-manufacturing sector contracted in October for the 21st time in the last 22 months. ISM's Non-Manufacturing Employment Index for October registered 41.1 percent. This reflects a decrease of 3.2 percentage points when compared to the 44.3 percent registered in September.
emphasis added

According to this survey, the service sector expanded in October, but at a slower rate than in September. Employment contracted at as faster rate than in September - the opposite of the manufacturing sector.

by Calculated Risk on 11/04/2009 08:17:00 AM

ADP reports:

Nonfarm private employment decreased 203,000 from September to October 2009 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from August to September was revised by 27,000, from a decline of 254,000 to a decline of 227,000.

Note: ADP is private nonfarm employment only (no government jobs).
The BLS reported a 210,000 decrease in nonfarm private employment in September (-263,000 total nonfarm), so once again ADP was only marginally useful in predicting the BLS number.


On the Challenger job-cut report from MarketWatch: Planned layoffs down 3 months in a row

Planned job reductions at major U.S. corporations declined for the third month in a row in October, falling to the lowest level since March 2008, according to a monthly tally compiled by outplacement firm Challenger Gray & Christmas.

Planned layoffs fell to 55,679 last month, down 16% compared with September and down 51% compared with October 2008.

The BLS reports Friday, and the consensus is for 175,000 net job losses, and a 9.9% unemployment rate, for October.

by Calculated Risk on 11/03/2009 11:56:00 PM

From the NY Times: Congress Agrees to Keep Homebuyers’ Tax Credit

The Senate and House are poised to agree on a compromise measure to extend unemployment benefits that also would expand a [un]popular $8,000 tax credit for homebuyers ...

The bill also extends the net-operating-loss carryback period for firms from two years to five years (to help homebuilders).

The Senate might pass its version as early as Wednesday, and aides to Congressional leaders say the House could accept it this week, sending the bill to President Obama to sign into law.

Oh well ...

by Calculated Risk on 11/03/2009 09:43:00 PM

David Leonhardt at the NY Times gives "equal time" to a more optimistic outlook: Through a Glass Less Darkly

In the fall of 1982, with a long recession ending but the unemployment rate heading toward 10 percent, The New York Times ran an article titled “The Recovery That Won’t Start.”

It quoted prominent economists who worried that “the recovery may amount to nothing more than a few quarters of paltry growth — and possibly not even that.” The economists, the article noted, had “growing doubts about whether the mechanisms of economic recovery will — or can — operate as they have in other postwar business cycles.”

Over the next two years, the American economy grew at a blistering annual rate of more than 6 percent.
...
People tend to become overly pessimistic at the end of a recession, partly because they can see that the forces behind the last boom — housing and mortgage lending, in this case — won’t be around for the next one. If anything, the excesses from the last boom seem likely to hold back the economy for years to come. People are left to wonder where future growth will come from.

I want to take a stab at that question today. To be clear, I am not predicting a boom over the next two years. I’m just trying to give equal time to the side of the economic ledger that often doesn’t get discussed until after the fact.

Leonhardt goes on to discuss a few reasons the economy might grow quicker than many expect: consumption in China, pent-up demand in the U.S., more stimulus spending, and some surprising unknown innovation.

My comment: Usually the deeper the recession, the more robust the recovery. So why is it different this time?

First, this recession was preceded by the bursting of the credit bubble (especially housing) leading to a financial crisis. And there is research showing recoveries following financial crisis are typically more sluggish than following other recessions. See Carmen Reinhart and Kenneth Rogoff: Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison

Second, most recessions have followed interest rate increases from the Fed to fight inflation, and after the recession starts, the Fed lowers interest rates. There is research suggesting the Fed would have to push the Fed funds rate negative to achieve the same monetary stimulus as following previous recessions (see San Francisco Fed Letter by Glenn Rudebusch The Fed's Monetary Policy Response to the Current Crisis). Welcome to ZIRP! (Note: Professor Taylor disagrees on the size of the negative Fed funds rate).

Third, usually the engines of recovery are investment in housing (not existing home sales) and consumer spending. Both are still under severe pressure with the large overhang of housing inventory (record vacancies rates!), and the need for households to repair their balance sheet (the saving rate will probably rise - slowing consumption growth).

We are a long way from normal.

by Calculated Risk on 11/03/2009 07:04:00 PM

Just one more post on auto sales ...

The following table is from the GM restructuring plan, presented to Treasury in mid-February (no longer available online).

This data is for all vehicles (the charts in the previous post excluded heavy trucks). All information in Red is added.

Click on graph for larger image in new window.

GM overestimated sales in Q2. Of course they weren't planning on going bankrupt! And GM underestimated sales in Q3 because of cash-for-clunkers.

Overall their forecast has been pretty close for 2009.

And I wouldn't be surprised to see sales increase to 12 million plus in 2010, even with a sluggish recovery. That is about the replacement level for auto sales.

The real question mark is what happens in the later years. Although total sales in the U.S. were above 17 million for several years, some of those sales were probably the result of incentives and loose lending (buying cars using home equity, and many subprime auto loans). I doubt we will see a return to those practices any time soon.

I'd like to emphasize that the 10.5 million (SAAR) for light vehicles in October is a very low number, and is close to the average sales rate during the early '80s recession.

If sales increase to 12 million in 2010 that would still be worse than the depths of the '91 recession.

by Calculated Risk on 11/03/2009 04:00:00 PM

Click on graph for larger image in new window.

This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for October (red, light vehicle sales of 10.46 million SAAR from AutoData Corp).

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Obviously sales were boosted significantly by the "Cash-for-clunkers" program in August and some in July.

This was the first month over a 10 million sales rate (SAAR) - excluding July and August - since December 2008. Still very low ...

by Calculated Risk on 11/03/2009 02:14:00 PM

The different price indexes can be confusing ...

From MIT: MIT commercial property price index posts first increase in over a year

The 4.4 percent increase in the transactions-based index (TBI) for the third quarter is the first positive price change in the index in over a year, and the largest increase since before the market downturn began in mid-2007. While the price index is now 36.5 percent below its 2007 peak, it is not as low as the 39 percent deficit seen last quarter — suggesting that the U.S. commercial property market may have finally found a price bottom.

But this isn't the Moody’s/REAL Commercial Property Price Index (CPPI) that is reported every month. The CPPI showed commercial real estate prices fell 3 percent in August, and are down almost 41 percent since the peak in October 2007.

The transactions-based index (TBI) is a quarterly index for commercial properties sold by major institutional investors. According to MIT professor David Geltner, the TBI probably includes fewer distressed properties:

The types of properties and owners tracked by the TBI would generally be less subject to distress than those tracked by the CPPI.

A couple of points:

Typically prices fall much faster for commercial real estate than for residential real estate (prices for residential RE tend to be sticky and decline for several years, however CRE owners have far less emotional attachment to their properties).

It is very possible that CRE prices are near the bottom for non-distressed properties. It depends on if buyers are adequately discounting future increases in the vacancy rate and lower rents. It is a different story for distressed properties.

by Calculated Risk on 11/03/2009 12:02:00 PM

From MarketWatch: U.S. Oct. sales rise 2.6% to 132,483 vehicles

This is a comparison to Oct 2008.

Update: From MarketWatch: Chrysler U.S. Oct sales drop 30.4%

Toyota U.S. Oct. sales near flat

GM U.S. Oct. sales rises 4.1%

Once all the reports are released, I'll post a graph of the estimated total October sales (SAAR: seasonally adjusted annual rate) - usually around 4 PM ET.

by Calculated Risk on 11/03/2009 10:23:00 AM

From Bloomberg: Real Estate Price Plunge Makes U.S. Homeownership Perilous Path

Kajal and Vishal Dharod paid $559,000 in 2006 for a new four-bedroom house built in Rancho Cucamonga, California. Today, it’s worth about $360,000.

“We don’t know how we can come back from a loss like that,” said Kajal Dharod, 29, a first-time homeowner with a $4,200-a-month mortgage. “Buying the house was a mistake.”

American homeownership, once considered a path to wealth, is now leading to disillusionment.

I know people who lost money in the early '80s housing bust in California, and they refused to buy again for many years. The same thing will happen this time.

Of course many homeowners are still stuck in their upside down homes, see: More walk away from homes, mortgages (ht Keith, Tim)

"It's increasingly a more important factor driving the foreclosure crisis," says Mark Zandi, of Moody's Economy.com. "As we move forward, the job market will stabilize, and the big thing will be strategic defaults. People are going to determine it doesn't make financial sense to hold on to their homes. That's going to be a significant problem. Strategic defaults mean foreclosures could be high for a long time."

Enticing people to buy before they are ready leads to a nightmare, not a dream.

by Calculated Risk on 11/03/2009 08:38:00 AM

From Bloomberg: RBS, Lloyds Get $51 Billion in Second Bank Bailout

The Treasury will inject 25.5 billion pounds of capital into RBS, for a total of 45.5 billion pounds, making it the costliest bailout of any bank worldwide. The government will fund about a quarter of Lloyds’s 21 billion-pound fundraising.

And from The Times: Banks defer bonuses in return for extra £40 billion

In return for receiving billions of pounds more of taxpayers' money, the Treasury said, both banks will not pay cash bonuses for 2009 to any staff earning more than £39,000 a year while the board of each lender will defer bonuses due for this year until 2012.

Stephen Hester, the chief executive of RBS, who took over the role from his disgraced predecessor, Sir Fred Goodwin, said today: “That does mean we will be making extensive use of deferred payments and payments in shares."