by Calculated Risk on 11/16/2009 08:30:00 AM

On a monthly basis, retail sales increased 1.4% from September to October (seasonally adjusted), and sales are off 1.7% from October 2008. Excluding auto sales and parts, retail sales rose 0.2% in October.

The increase in October was mostly a rebound from the decline in September.

Click on graph for larger image in new window.

This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline).

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

The red line shows retail sales ex-gasoline and shows there has been little increase in final demand.

The second graph shows the year-over-year change in retail sales since 1993.

Real retail sales declined by 1.7% on a YoY basis. The year-over-year comparisons are much easier now since retail sales collapsed in October 2008. Retail sales bottomed in December 2008.

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 October, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $347.5 billion, an increase of 1.4 percent (±0.5%) from the previous month, but 1.7 percent (±0.5%) below October 2008. Total sales for the August through October 2009 period were up 1.5 percent (±0.3%) from the same period a year ago. The August to September 2009 percent change was revised from -1.5 percent (±0.5%) to -2.3 percent (±0.3%).

It appears retail sales have bottomed, but there has been little pickup in final demand.

by Calculated Risk on 11/16/2009 12:13:00 AM

From Reuters: Stronger Yuan Needed for Global Rebalancing: IMF Chief

IMF Managing Director Dominique Strauss-Kahn said ... [China needs to increase emphasis on domestic demand], especially private consumption ...

"A stronger currency is part of the package of necessary reforms," he said. "Allowing the renminbi (yuan) and other Asian currencies to rise would help increase the purchasing power of households, raise the labour share of income, and provide the right incentives to reorient investment."

And from Paul Krugman: World Out of Balance

... Looking forward, we can expect to see both China’s trade surplus and America’s trade deficit surge.

That, at any rate, is the argument made in a new paper by Richard Baldwin and Daria Taglioni of the Graduate Institute, Geneva. As they note, trade imbalances, both China’s surplus and America’s deficit, have recently been much smaller than they were a few years ago. But, they argue, “these global imbalance improvements are mostly illusory — the transitory side effect of the greatest trade collapse the world has ever seen.”
...
But with the financial crisis abating, this process is going into reverse. Last week’s U.S. trade report showed a sharp increase in the trade deficit between August and September. And there will be many more reports along those lines.

So picture this: month after month of headlines juxtaposing soaring U.S. trade deficits and Chinese trade surpluses with the suffering of unemployed American workers. If I were the Chinese government, I’d be really worried about that prospect.

This is something I need to think about. The U.S. trade deficit has been closely correlated to Mortgage Equity Withdrawal (MEW, aka "Home ATM"), and I doubt MEW is coming back soon, so I'm not sure we will see a huge increase in the deficit this time (excluding China and oil exporting companies). So this might impact other countries (like Europe) more than the U.S.

by Calculated Risk on 11/15/2009 07:31:00 PM

On Friday I posted a graph showing the historical relationship between housing starts and the unemployment rate (repeated as the 2nd graph below). The graph shows that housing leads the economy both into and out of recessions, and the unemployment rate lags housing by about 12 to 18 months.

It appears that housing starts bottomed earlier this year, however I don't think we will see a sharp recovery in housing this time - and I also think unemployment will remain high throughout 2010. As I noted in the earlier post, there is still a large overhang of vacant housing in the United States, and a sharp bounce back in housing starts is unlikely.

The following graph shows total housing starts and the percent vacant housing units (owner and rental) in the U.S. Note: this is a combined vacancy rate based on the Census Bureau vacancy rates for owner occupied and rental housing.

Click on graph for larger image in new window.

It is very unlikely that there will be a strong rebound in housing starts with a record number of vacant housing units.

The vacancy rate has continued to climb even after housing starts fell off a cliff. Initially this was because of a significant number of completions. Also some hidden inventory (like some 2nd homes) have become available for sale or for rent, and lately some households have probably doubled up because of tough economic times.

Note: the increase in the vacancy rate in the '80s was due to several factors including demographics (baby boomers moving from renting to owning), and overbuilding of apartment units (part of S&L crisis).

Here is a repeat of the earlier graph:

This graph shows single family housing starts and unemployment (inverted). (The first graph shows total housing starts)

You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold.

This suggests unemployment might peak in Spring or Summer 2010. However, since I expect the housing recovery to be sluggish, I also expect unemployment to remain high throughout 2010.

by Calculated Risk on 11/15/2009 03:32:00 PM

"There’s no hard and fast number, but ... I have in mind something like $300 Billion, you could do quite a lot that’s actually targeted on jobs."
Professor Paul Krugman, Nov 12, 2009

In the following interview, with Alison van Diggelen of Fresh Dialogues, Paul Krugman offers some suggestions for addressing the high unemployment rate (transcript here):



And two pieces - the first from the NY Times, and the second from Krugman's blog.

From Krugman in the NY Times: Free to Lose

[T]hese aren’t normal times. Right now, workers who lose their jobs aren’t moving to the jobs of the future; they’re entering the ranks of the unemployed and staying there. Long-term unemployment is already at its highest levels since the 1930s, and it’s still on the rise.

And long-term unemployment inflicts long-term damage. Workers who have been out of a job for too long often find it hard to get back into the labor market even when conditions improve. And there are hidden costs, too — not least for children, who suffer physically and emotionally when their parents spend months or years unemployed.

So it’s time to try something different.

Just to be clear, I believe that a large enough conventional stimulus would do the trick. But since that doesn’t seem to be in the cards, we need to talk about cheaper alternatives that address the job problem directly. Should we introduce an employment tax credit, like the one proposed by the Economic Policy Institute? Should we introduce the German-style job-sharing subsidy proposed by the Center for Economic Policy Research? Both are worthy of consideration.

The point is that we need to start doing something more than, and different from, what we’re already doing.

And from his blog: It’s the stupidity economy

[S]ome readers have asked why I’m not making the same arguments for America now that I was making for Japan a decade ago. The answer is that I don’t think I’ll get anywhere, at least not until or unless the slump goes on for a long time.

OK, so what’s next? The second-best answer would be a really big fiscal expansion, sufficient to mostly close the output gap. The economic case for doing that is really clear. But Washington is caught up in deficit phobia, and there doesn’t seem to be any chance of getting a big enough push.

That’s why, at this point, I’m turning to what I understand perfectly well to be a third-best solution: subsidizing jobs and promoting work-sharing.

by Calculated Risk on 11/15/2009 11:29:00 AM

This will be a busy week for key economic news starting with October Retail sales on Monday, Industrial Production and Capacity Utilization on Tuesday, and Housing Starts and CPI on Wednesday.

Also on Monday, at noon ET, Fed Chairman Ben Bernanke will speak at the Economic Club of New York.

Last week started with several key Fed speeches:

From Atlanta Fed President Dennis Lockhart: Economic Recovery, Small Business, and the Challenge of Commercial Real Estate

I am concerned about the potential impact of CRE on the broader economy. ... there could be an impact resulting from small banks' impaired ability to support the small business sector—a sector I expect will be critically important to job creation.

... A lot of the CRE exposure is concentrated at smaller institutions (banks with total assets under $10 billion). These smaller banks account for only 20 percent of total commercial banking assets in the United States but carry almost half of total CRE loans (based on Bank Call Report data).

Many small businesses rely on these smaller banks for credit. ... Moreover, small firms' reliance on banks with heavy CRE exposure is substantial. Banks with the highest CRE exposure (CRE loan books that are more than three times their tier 1 capital) account for almost 40 percent of all small business loans.

Later in the week, Atlanta Fed Vice President and Senior Economist John Robertson added some more thoughts: Small businesses, small banks, big problems?

Today, the number one challenge for small businesses remains poor sales rather than access to credit. But tomorrow, it will be important that small businesses also have access to funding if they are going to play their traditional role as an engine of growth.

From San Francisco Fed President Dr. Yellen: The Outlook for the Economy and Real Estate

When the weakness of the commercial property market is combined with the muted outlook for housing and consumer spending, you can see why I believe that the overall economic recovery is likely to be gradual and remain vulnerable to shocks. ... it would look something like an “L” with a gradual upward tilt of the base. With such a slow rebound, unemployment could well stay high for several years to come.

From Dallas Fed President Richard Fisher: The Current State of the Economy and a Look to the Future

[L]ooking into 2010 and perhaps to 2011, the most likely outcome is for growth to be suboptimal, unemployment to remain a vexing problem and inflation to remain subdued.

And economic data:

Fed: Lending Standards Tighten, Loan Demand Weakens

The U.S. trade deficit increased in September.

Click on graph for larger image.

This graph shows the monthly U.S. exports and imports in dollars through September 2009.

Imports and exports increased in September. On a year-over-year basis, exports are off 13% and imports are off 21%.

The major contributors to the increase in the trade deficit were the increase in oil prices, and more imports from China. Also - the deficit is higher than expected, suggesting a downward revision to Q3 GDP.

And there were three more bank failures on Friday taking the total to 123 in 2009:

For the second week in a row, the TARP lost money on a bank failure.

An amazing story: Orion Bank CEO Had a Plan ...

Unofficial Problem Bank List increases to 507

And some other stories of interest:

Counterparty Risk: The Mortgage Insurers

From David Streitfeld at the NY Times: Housing Agency Says Cash Reserves Are Down Sharply

FHA on DAPs: "Too many homeowners not equipped for home ownership"

And a couple of comments from your humble blogger:

Loan Modifications: Key Numbers not Released

Economic Outlook: Possible Upside Surprises, Downside Risks

Best wishes to all.

by Calculated Risk on 11/15/2009 09:20:00 AM

From Bloomberg: China’s Liu Says U.S. Rates Cause Dollar Speculation

“The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” [Liu Mingkang, chairman of the China Banking Regulatory Commission said] ...

Liu said this has “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies.”

President Obama will be in China today, and there will probably be some dicussion of China's exchange rate policy.

by Calculated Risk on 11/14/2009 10:55:00 PM

In his comments with the Unofficial Problem Bank list, surferdude808 noted that the Federal Reserve issued a Prompt Corrective Action order against Orion Bank on Thursday. Orion was seized the following day by the FDIC.

The PCA order makes for interesting reading (Note: Stephen at FUMU Finance wrote to me about this - here is Stephen's post with some background details: Orion Bank - Management's master plan!). From the PCA:

In order to improve its management, the Bank must dismiss Jerry Williams (“Williams”), its current chief executive officer, president, and chairman of its board of directors, from office and as a member of the board of directors, based on the following:

(a) Prior to June 2009, the Bank reached its legal lending limit under Florida law with respect to the aggregate loans outstanding to a borrower and his related interests. In June 2009, Williams permitted the Bank to make loans of an additional approximately $60 million to straw borrowers who were related interests of the borrower referred to above in continuing violation of the Florida legal lending limit statute (the “June 2009 loans”);

(b) the June 2009 loans referred to above, which were made to enable the borrowers to purchase certain low quality assets from the Bank, were underwritten in an unsafe and unsound manner. The loans were made without adequate analysis of the borrowers’ creditworthiness, capacity for repayment, and valuation of collateral offered in support of the loans. Further, the loans were structured in a manner to make it appear that the Bank was reducing its level of classified assets;

(c) the Bank needed additional capital as of June 30, 2009, to avoid being less than well-capitalized. Williams had knowledge that $15 million of loan proceeds from the June 2009 loans referred to above were to be used to purchase common and preferred stock issued by Orion Bancorp, Inc., Naples, Florida (“Bancorp”), the parent holding company for the Bank, and Williams took steps to ensure that the $15 million was promptly used to purchase the holding company stock;

(d) in early July 2009, in response to inquiries from the Federal Reserve Bank of Atlanta (the “Reserve Bank”), Williams stated orally and in writing that the $15 million in capital referred to above was raised “without any financing” provided by the Bank. This statement was false because Williams had information available to him to demonstrate that the Bank intended that the loan proceeds be used as the source of the stock purchase;

(e) as a result of the actions set forth in (a) through (d), above, the Bank, with Williams’ active participation, filed materially inaccurate regulatory reports, made false statements to the Federal Reserve, has suffered additional loan losses, and has failed to comply with provisions of an outstanding Written Agreement designed to require that the Bank properly address its asset quality problems. These actions show that the management of the Bank would be improved without Williams’ service as a senior executive officer or director of the Bank.
emphasis added

Pretty amazing.

by Calculated Risk on 11/14/2009 07:18:00 PM

Gretchen Morgenson at the NY Times writes about the tax loss carry-back¹ "gift" for home builders in the recently signed "Worker, Homeownership and Business Assistance Act of 2009": Home Builders (You Heard That Right) Get a Gift

The Center for Responsive Politics reports that through Oct. 26 of this year, home builders paid $6 million to their lobbyists. ... Much of this year’s lobbying expenditures were focused on arguing for the tax loss carry-forward, documents show.

Among individual companies, Lennar spent $240,000 lobbying while companies affiliated with Hovnanian Enterprises spent $222,000. Pulte Homes spent $210,000 this year.

That’s some return on investment. After spending its $210,000, Pulte will receive $450 million in refunds. And Hovnanian, after spending its $222,000, will get as much as $275 million.

That is quite a Return on Lobbying (ROL), although some of the money went to lobbying for the inefficient homebuyer tax credit.

And, oh, this "gift" will create few if any jobs.

¹ UPDATE: This is really a tax loss carry back to the profitable years.

by Calculated Risk on 11/14/2009 04:52:00 PM

From Barron's: Sam Zell: Too Soon for Dancing

Sam Zell ... said ... that the time isn't ripe because owners of office, retail and warehouse properties and their lenders are living in a dream world, believing that property prices will recover and vacancies will drop. ...

"Everybody is waiting for the Grave Dancer to come in, but at this point property owners won't tango," he told a gathering of prominent investors in downtown Chicago .

When Zell does start buying, he said, hotels are where he plans to play first ...

Zell has bought and sold CRE at the right time before.

However last year at the Milken Conference in Los Angeles, Zell thought CRE would be fine - from my notes:

Sam Zell started by saying we need to separate commercial from residential. Commercial will be fine in his view (not my view). ... Zell isn't talking about new construction (CRE), rather he is talking about prices for existing CRE. He feels there is too much global demand ("liquidity") for prices to fall too far - especially for Class-A buildings.

Watch what he does, not what he says!

by Calculated Risk on 11/14/2009 11:58:00 AM

The Pension Benefit Guaranty Corporation (PBGC) is the federal agency that guarantees pensions for 44 million Americans. The PBGC deficit doubled over the last six months to $22 billion ... but this is only just the beginning as the agency's potential exposure to future losses increased sharply.

From the Pension Benefit Guaranty Corporation (PBGC): PBGC Releases Annual Management Report for Fiscal Year 2009

The Pension Benefit Guaranty Corporation (PBGC) ended fiscal year 2009 with an overall deficit of $22 billion, according to the agency's Annual Management Report submitted to Congress today. The result compares with the $11.2 billion deficit recorded at the previous fiscal year-end on September 30, 2008.
...
The Annual Management Report classified 27 large pension plans with total underfunding of $1.64 billion as probable losses on the PBGC balance sheet. The report also shows that the agency's potential exposure to future pension losses from financially weak companies increased to about $168 billion from the $47 billion booked in fiscal year 2008.

"Exposure to possible future terminations means that we could face much higher deficits in the future," said Acting Director Vincent K. Snowbarger. "We won't fail to meet our obligations to retirees, but ultimately we will need a long-term solution to stabilize the pension insurance program."
emphasis added

With companies moving away from defined benefit plans, there will be fewer companies paying for insurance in the future - and the "long-term solution" will probably involve some sort of bailout.