by Calculated Risk on 3/22/2010 11:56:00 PM

"A sampler of versusplus.com musical econoparodies!" (I've posted most of these over the last couple of years):

by Calculated Risk on 3/22/2010 08:45:00 PM

There will be hearing tomorrow about Fannie and Freddie, but the Obama administration will only "outline broad principles".

From Jim Puzzanghera at the LA Times: Pressure rises to overhaul Fannie Mae, Freddie Mac

[I]n a hearing Tuesday, lawmakers will start pressing the Obama administration for an exit strategy [for Fannie Mae and Freddie Mac] ...

"It's clear that Fannie and Freddie, as they currently exist, should be put out of existence, which means the important question is what combination of entities public and private will replace them," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee.

He has called Treasury Secretary Timothy F. Geithner to testify at the hearing before his committee about how to do that.

And from Nick Timiraos and Michale Crittenden at the WSJ: New Plan to Reshape Mortgage Market

The administration will outline broad principles for the future of the mortgage market at the hearing, including stronger consumer protections and explicit guarantees for any government backstop of mortgages.

"The housing-finance system cannot continue to operate as it has in the past," Mr. Geithner says in prepared testimony. The administration won't issue a detailed overhaul proposal until later this year.

Clearly we can't go back to a structure that privatizes profits and socializes losses.

by Calculated Risk on 3/22/2010 05:32:00 PM

From Atlanta Fed President Dennis Lockhart: The U.S. Economy and Emerging Risks. Lockhart reviews his general forecast for a modest U.S. recovery and then discusses risks from Greece (sovereign debt) and fiscal uncertainty - especially for U.S. states and local government:

There are other plausible emerging scenarios that are not factored into my formal outlook. I monitor these for evidence that they're materializing—becoming real—and need to be more formally considered. One such concern is what might be called "fiscal uncertainty."

You've all been reading about Greece and the European Union's handling of the Greek fiscal crisis. At the moment a nexus of fiscal uncertainty is the situation playing out in Greece.

Last October, the government of Greece revised its 2009 fiscal deficit sharply higher to more than 12 percent of GDP. Consequently, the ratio of public debt to GDP was revised up by 17 percentage points this year to 125 percent of GDP.

Investors around the world are concerned about Greece's deficit and rising debt. Market pressures, along with European Monetary Union mandates, have forced the government to present a credible plan to tame its deficit. As of today, how this will play out is not clear.

It's worth considering whether this is just a distant development or one with relevance to us here in the United States. What do fiscal problems in Greece have to do with my economic outlook for the United States?

I see three ways the Greek crisis might directly affect the U.S. economy. First, adjustment across the EU to fiscal problems could dampen euro area growth and constrain U.S. exports to that region. The European Union as a whole is this nation's largest export market. Second, related to this, safe haven currency flows from the euro into dollar assets could cause appreciation of the dollar and hurt U.S. export competitiveness. Third is the possibility that the Greek fiscal crisis could lead to a broad shock to financial markets. This could play out in the banking system or in the form of a general retreat from sovereign debt.

At this point, these possibilities are not factored into my outlook in any way. But developments around the Greek situation deserve rapt attention.

We have our own set of fiscal uncertainties in this country—at all levels of government. The National League of Cities projects that municipal governments will face a shortfall of $56 billion to $83 billion from 2010 to 2012. Local governments in this country are pressured by lower sales tax revenues and shrinking property tax digests along with other demands.

On average, state-level governments began fiscal year 2010 with a revenue-expenditure gap of 17 percent. Three states had expected budget gaps in excess of 40 percent. ...

Across the country, state governments have responded to these strains by drawing down rainy day funds, raising taxes, cutting budgets, and furloughing employees.

To date, some amount of spending cuts and tax increases at the state level have been avoided thanks to the federal stimulus package, but that infusion of money is temporary. It appears state budgets next year will need to shrink considerably to get to balance.

I'm sure you're familiar generally with the situation at the federal level. According to the Congressional Budget Office, under current law federal budget deficits rose from an average of about 2.4 percent of GDP in the period from 1970 to 2008 to 10 percent in 2009. No budget path currently under consideration would keep the public debt from growing relative to gross domestic product. Clearly, an ever-rising debt-to-GDP ratio is unsustainable and a matter of great concern.

Government finances are severely strained at all levels. All of these fiscal pressures represent another downside risk for the broad economy.
emphasis added

Earlier in his speech, Lockhart notes that "stabilization of the housing sector—especially house prices—is likely a precondition for sustained economic recovery". Housing is probably the major risk to Lockhart's view of a modest recovery.

by Calculated Risk on 3/22/2010 02:06:00 PM

Hang Nguyen at the O.C. Register has an interesting post from the Bank of America Merrill Lynch 2010 consumer conference:

Pat Connolly, executive vice president [Williams-Sonoma Inc., which also owns Pottery Barn]: "We are committed to restoring our retail channel profitability to historical levels ... We are working diligently to restructure our portfolio of stores and optimize our sales and costs per square foot. This will be accomplished by selective store closings and lease negotiations ... Over the next three fiscal years, 25 percent of our store leases will reach maturity ... E-commerce is 30 percent of our corporate revenue and it’s very profitable ... even in this environment. The Internet and e-commerce have become the focus on our capital investment."

Sharon McCollam, chief operating officer and chief financial officer: "Every quarter last year, we increased the number of stores that we plan to close ... If we could get the deals (with landlords) done, we would not necessarily want to close stores if you could get to the profitability levels you were historically. ... However, we don’t believe that that is a strategy that can be executed. So there will be additional store closings ...

As the leases expire, Williams-Sonoma will be looking to cut the lease rates substantially, or close the stores. This is especially true in multi-store markets.

Other retailers probably have similar plans, and that means that malls will be facing rising vacancies and lower rents for some time.

For Q4 2009, real estate research firm Reis reported that the mall (and strip mall) vacancy rates were the highest since Reis began tracking the data. At the time, Reis economist Ryan Severino said:

"Our outlook for retail properties as a whole is bleak ... we do not foresee a recovery in the retail sector until late 2012 at the earliest."

The comments from Williams-Sonoma executives fit with Severino's forecast.

Note: The Q1 mall vacancy rate be released in early April, and I expect more records.

by Calculated Risk on 3/22/2010 12:55:00 PM

From Bloomberg: U.S. Property Index Rises for Third Straight Month

The Moody’s/REAL Commercial Property Price Index climbed 1 percent from December, Moody’s said today in a report. Values are 40 percent lower than the peak in October 2007. The index fell 24 percent from a year earlier.
...
The number of transactions fell 8 percent to 376 in January from a year earlier and was lower than December, when buyers and sellers tried to complete deals before the year’s end, according to the report.

“A few months of price gains does not necessarily indicate a sustainable trend, particularly in these difficult times,” Moody’s said.

Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index.

Notes: Beware of the "Real" in the title - this index is not inflation adjusted. Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices.

Click on graph for larger image in new window.

CRE prices only go back to December 2000.

The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).

CRE prices peaked in late 2007 and are now 40% below the peak in October 2007. Prices are at about the same level as early 2003.

by Calculated Risk on 3/22/2010 09:45:00 AM

Yesterday we discussed the impact of high oil prices on vehicle miles driven.

And today the Department of Transportation (DOT) reported that vehicle miles driven in January were down from January 2009:

Travel on all roads and streets changed by -1.6% (-3.7 billion vehicle miles) for January 2010 as compared with January 2009. Travel for the month is estimated to be 222.8 billion vehicle miles.

Click on graph for larger image in new window.

This graph shows the percent change from the same month of the previous year as reported by the DOT.

As the DOT noted, miles driven in January 2010 were down -1.6% compared to January 2009, and miles driven have declined 2.9% compared to January 2008, and are down 4.7% compared to January 2007. This is a multi-year decline, and miles driven appear to be falling again.

by Calculated Risk on 3/22/2010 08:30:00 AM

Note: This is a composite index based on a number of economic releases.

From the Chicago Fed: Index shows economic activity slowed in February

Led by declines in production-related indicators, the Chicago Fed National Activity Index decreased to –0.64 in February, down from –0.04 in January. Three of the four broad categories of indicators that make up the index deteriorated, and only the sales, orders, and inventories category made a positive contribution.

The index’s three-month moving average, CFNAI-MA3, decreased to –0.39 in February from –0.13 in January, but for the second consecutive month, it was higher than at any point since December 2007. February’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend.
...
Most of the weakness in the index continued to stem from the consumption and housing category. ... Employment-related indicators also made a negative contribution to the index, contributing –0.16 to the index in February compared with –0.02 in January.

Click on table for larger image in new window.

This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. According to the Chicago Fed:

A CFNAI-MA3 value below –0.70 following a period of economic expansion indicates an increasing likelihood that a recession has begun. A CFNAI-MA3 value above –0.70 following a period of economic contraction indicates an increasing likelihood that a recession has ended. A CFNAI-MA3 value above +0.20 following a period of economic contraction indicates a significant likelihood that a recession has ended.

According to Chicago Fed, it is still too early to call the official recession over - but with the three month average CFNAI-MA3 above -0.70, the likelihood that a recession has ended is increasing.

by Calculated Risk on 3/21/2010 09:21:00 PM

From the Financial Times: China to lose ally against US trade hawks

Myron Brilliant, senior vice-president for international affairs, who has previously helped to protect Beijing from hawkish trade policies, told the Financial Times: “I don’t think the Chinese government can count on the American business community to be able to push back and block action [on Capitol Hill].”
...
Mr Brilliant said corporate America’s attitude had changed in response to a range of “industrial policies” pursued by Beijing, including the undervaluation of the renminbi, which made it harder for US companies to do business and compete with China.
excerpted with permission

Mr Brilliant has long supported China, including lobbying for China to join the WTO.

And China keeps pushing back - from the WaPo: China's commerce minister: U.S. has the most to lose in a trade war

China's commerce minister warned the United States on Sunday that if it launches a "trade war" against China by levying punitive tariffs on Chinese imports, the United States will suffer the most.
...
"You're not going to get 1.3 billion Chinese to change by insulting them," [Commerce Minister Chen Deming] said. "Could it be related to upcoming elections? I don't know. Because economically, it makes no sense."
...
"[Obama] wants exports to double in five years, but I don't know whom he is going to sell them to."

This is heating up prior to April 15th release of the Treasury report on worldwide currencies that might name China a "currency manipulator".

by Calculated Risk on 3/21/2010 05:03:00 PM

Something for a Sunday - in the weekly look ahead post I forgot to mention that the Department of Transportation (DOT) will release the vehicle miles driven report for January this week.

In early 2008 there was sharp drop in U.S. vehicle miles driven and that was one of the key signs of demand destruction for oil that led me to predict oil prices would decline sharply in the 2nd half of 2008.

First a look at oil prices ...

Click on graph for larger image in new window.

This graph shows the daily Cushing, OK WTI Spot Price FOB from the Energy Information Administration (EIA).

With oil prices hoovering around $80 per barrel, I've started looking for possible signs of demand destruction again (see: Oil Prices Push Above $81 per Barrel). Of course there are other factors - like China - but vehicle miles is something to watch in the U.S.

The second graph shows monthly oil prices and vehicle miles (month over the same month of the previous year with a 3 month centered average).

Although vehicle miles driven are noisy month to month, it appear that miles driven responds to spikes in oil prices.

For December 2009 - the last month of data - the DOT reported that miles driven were unchanged compared to December 2008 after increasing in 5 of the 6 pervious months. This slow down in miles driven could be because of the sluggish recovery, or it could be because oil prices are starting to impact miles driven.

by Calculated Risk on 3/21/2010 12:30:00 PM

There will be two key housing reports released this week (existing home sales on Tuesday and new home sales on Wednesday) and plenty of Fed speeches ...

On Monday, the Chicago Fed will release the February Chicago Fed National Activity Index at 8:30 AM ET. Activity in February was probably sluggish. Also on Monday, Treasury Secretary Tim Geithner will speak at the American Enterprise Institute (4:30 PM ET), and Atlanta Fed President Dennis Lockhart will speak in the evening in Florida.

Probably early this week, the Moody's/REAL Commercial Property Price Indices (CPPI) for January will be released. This is a repeat sales price index for Commercial Real Estate (CRE).

On Tuesday, Existing Home sales for February will be released by the National Association of Realtors (NAR) at 10 AM ET. Expectations are for a slight decrease in sales to a 5 million Seasonally Adjusted Annual Rate (SAAR). I’ll take the under. The Census Bureau will also release the Mass Layoffs report for February on Tuesday.

Also on Tuesday the FHFA House Price Index for January will be released (this has been ignored recently), the Richmond Fed Survey (March) at 10 AM ET, and San Francisco Fed President Janet Yellen will speak at 3:35 PM ET. It is widely reported that Yellen will be nominated to be the next Fed Vice Chairman.

On Wednesday the American Institute of Architects’ February Architecture Billings Index will be released - a leading indicator for Commercial Real Estate (CRE). This has been showing significant weakness for some time.

Also on Wednesday, the New Home sales report from the Census Bureau will be released at 10 AM ET. The consensus is for some increase from the record low set in January (309 thousand SAAR), but the number will still be very low. Sales have averaged 370 thousand (SAAR) over the last 12 months, and February will be well below that level.

Also on Wednesday, the weekly MBA mortgage purchase applications index will be released (7 AM ET) and the Durable Goods report for February at 10 AM ET.

There will be more Fed speak on Wednesday: the FOMC’s lone dissenter, Kansas Fed President Thomas Hoenig, speaks at 10:45 AM ET, and outgoing Fed Vice Chairman Donald Kohn speaks at 8 PM ET.

On Thursday, the closely watched initial weekly unemployment claims will be released. Also the Census Bureau will released the Regional and State Employment and Unemployment for February at 10 AM ET.
Cleveland Fed President Sandra Pianalto speaks at 9 AM ET, and Fed Chairman Ben Bernanke testifies before the House Financial Services Committee at 10 AM ET.

On Friday the 3rd estimate of Q4 GDP released (any change will be minor), and the Reuter's/University of Michigan's Consumer sentiment index for March will be released at 9:55 AM ET (consensus is for a slight increase to 73 from 72.5).

Also on Friday the FDIC will probably close several more banks. I think this is the week for Puerto Rico!

And a summary of last week ...

Housing Starts decline in February

Click on graph for larger image in new window.

Total housing starts were at 575 thousand (SAAR) in February, down 5.9% from the revised January rate, and up 20% from the all time record low in April 2009 of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Starts had rebounded to 590 thousand in June, and have moved mostly sideways for nine months.

Single-family starts were at 499 thousand (SAAR) in February, down 0.6% from the revised January rate, and 40% above the record low in January and February 2009 (357 thousand). Just like for total starts, single-family starts have been at about this level for nine months.

NAHB Builder Confidence declines in March

Note: any number under 50 indicates that more builders view sales conditions as poor than good.

This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

The housing market index (HMI) was at 15 in March. This is a decrease from 17 in February.

The record low was 8 set in January 2009. This is very low - and this is what I've expected - a long period of builder depression.

Industrial Production, Capacity Utilization increase slightly in February

From the Fed: "Industrial production edged up 0.1 percent in February following a gain of 0.9 percent in January. ... Capacity utilization for total industry moved up 0.2 percentage point to 72.7 percent, a rate 7.9 percentage points below its average from 1972 to 2009."

This graph shows Capacity Utilization. This series is up 6.5% from the record low set in June (the series starts in 1967).

Capacity utilization at 72.7% is still far below normal - and far below the the pre-recession levels of 80.5% in November 2007.

First American CoreLogic: House Prices Decline 1.9% in January

The Fed's favorite house price indicator from First American CoreLogic’s LoanPerformance ...

From LoanPerformance: "On a month-over-month basis, the national average home price index decline accelerated, falling by 1.9 percent in January 2010 compared to 0.8 percent in December 2009, indicating the housing market still remains weak."

This graph shows the national LoanPerformance data since 1976. January 2000 = 100.

The index is off 0.7% over the last year, and off 29% from the peak.

The index has declined for five consecutive months.

Housing: Price-to-Rent Ratio

Here is an update on the price-to-rent ratio using the First Amercican CoreLogic house price index and the Owners' Equivalent Rent (OER) from the BLS.

This graph shows the price to rent ratio (January 2000 = 1.0).

This suggests that house prices are still a little too high on a national basis. But it does appear that prices are much closer to the bottom than the top.

Also, OER declined slightly again in February. The price index has declined 6 of the last 8 months, although most of the declines have been very small. With rents still falling, the OER index will probably continue to decline - pushing up the price-to-rent ratio.

Other Economic Stories ...

From Carolyn Said at the San Francisco Chronicle: Short sale tax shortchanges ex-homeowners

From Diana Olick at CNBC: Loans Going Bad Faster Than the Fixes

Countdown: Fed MBS Purchase Program 99.2% Complete

From Dow Jones: FDIC Seeks Buyers for Three Puerto Rican Banks

From the Fed: FOMC Statement: Economic Activity "Continued to strengthen"

From housing economist Tom Lawler REO: Agencies vs. Private Label

From the Federal Home Loan Bank of San Francisco: Statement Regarding PLRMBS Litigation

Looking Ahead: 2011 Social Security Cost of Living Adjustment

Unofficial Problem Bank List increases to 653

AND a video from Steven Russolillo at Dow Jones (posted at the WSJ): Financial Blogs Grow Up

Best wishes to all.