by Calculated Risk on 4/07/2010 03:08:00 PM

The Federal Reserve reports:

Consumer credit decreased at an annual rate of 5-1/2 percent in February 2010. Revolving credit decreased at an annual rate of
13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent.

Click on graph for larger image in new window.

This graph shows the year-over-year (YoY) change in consumer credit. Consumer credit is off 4.0% over the last 12 months.

Consumer credit has declined for 12 of the last 13 months - and declined for 13 of the last 14 months and is now 5.2% below the peak in July 2008.

Note: The Fed reports a simple annual rate (multiplies change in month by 12) as opposed to a compounded annual rate. Consumer credit does not include real estate debt.

by Calculated Risk on 4/07/2010 02:10:00 PM

From Kansas City Fed President Thomas Hoenig: What about Zero?

Under [an alternative] policy course, the FOMC would initiate sometime soon the process of raising the federal funds rate target toward 1 percent. I would view a move to 1 percent as simply a continuation of our strategy to remove measure that were originally implemented in response to the intensification of the financial crisis that erupted in the fall of 2008. In addition, a federal funds rate of 1 percent would still represent highly accommodative policy. From this point, further adjustments of the federal funds rate would depend on how economic and financial conditions develop.

Hoenig has dissented at the last two FOMC meetings urging the removal of the "extended period" language from the FOMC statement. For some reason, market participants keep thinking the Fed will raise rates soon (last summer it was by the end of 2009, this year it was by summer). Based on history, it is unlikely the FOMC will raise rates this year.

by Calculated Risk on 4/07/2010 12:15:00 PM

The Fed's previous view was bubbles were hard to identify and the Fed's role was to clean up after a collapse. Now that view is changing ...

From NY Fed President William Dudley: Asset Bubbles and the Implications for Central Bank Policy

... Today I want to tackle a difficult subject: How should central bankers deal with potential asset price bubbles. ...

As I see it, we need to reexamine how central banks should respond to potential asset bubbles. After all, recent experience has underscored the fact that poorly regulated financial systems are prone to such bubbles and that the costs of waiting to respond to an asset bubble until after it has burst can be very high.

Today, I will try to define some of the important characteristics of asset price bubbles. I will argue that bubbles do exist and that bubbles typically occur after an innovation that has created uncertainty about fundamental valuations. This has two important implications. First, a bubble is difficult to discern and, second, each bubble has unique characteristics. This implies that a rules-based approach to bubbles is likely to be ineffective and that tackling bubbles to diminish their potential to destabilize the financial system requires judgment.

Despite the fact that it is hard to discern bubbles, especially in their early stages, I conclude that uncertainty is not grounds for inaction.

Dudley discusses the stock market and housing bubbles and the various tool available to the Fed to lean again the bubbles, and then concludes:

In my view, a proactive approach is appropriate when three conditions are satisfied: First, circumstances should suggest that there is a meaningful risk of a future asset price crash that could threaten financial stability. Second, we have identified tools that might have a reasonable chance of success in averting such an outcome. Third, we are reasonably confident that the costs of using the tools are likely to be outweighed by the benefits from averting the prospective crash. When these three conditions are satisfied, we should be willing to act.

by Calculated Risk on 4/07/2010 08:52:00 AM

The MBA reports: Mortgage Refinance Applications Decrease in Latest MBA Weekly Survey

The Market Composite Index, a measure of mortgage loan application volume, decreased 11.0 percent on a seasonally adjusted basis from one week earlier. ...

The Refinance Index decreased 16.9 percent from the previous week and the seasonally adjusted Purchase Index increased 0.2 percent from one week earlier. ...

The refinance share of mortgage activity decreased to 58.7 percent of total applications from 63.2 percent the previous week, marking the lowest share observed in the survey since the week ending August 28, 2009. ...

The average contract interest rate for 30-year fixed-rate mortgages increased to 5.31 percent from 5.04 percent, with points decreasing to 0.64 from 1.07 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. This is the highest 30-year rate recorded in the survey since the first week of August 2009.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 1990.

Although purchase activity was flat week-to-week, the four week average is moving up due to buyers trying to beat the expiration of the tax credit. I expect any increase in activity this year to be less than the increase last year when buyers rushed to beat the expiration of the initial tax credit.

by Calculated Risk on 4/06/2010 11:59:00 PM

Click on graph for larger image in new window.

From the WSJ: Shopping-Center Malaise

Vacancies at shopping centers in the top 77 U.S. markets increased to 10.8% in the first quarter ... according to Reis.

It is the highest vacancy rate since 1991, when vacancies reached 11%.

This is up from 10.6% in Q4 2009 and 9.5% in Q1 2009.

Vacancy rates at malls in the top 77 U.S. markets rose to 8.9% in the January-to-March period ...

The 8.9% is the highest since Reis began tracking regional malls in 2000. Lease rates fell for the seventh consecutive quarter.

"The stress might be lessening and rent declines might be moderating," said Reis director of research Victor Calanog. "But we don't see positive rent growth resuming until the middle of next year at the earliest, just because of the typical lag."

by Calculated Risk on 4/06/2010 07:31:00 PM

I want to highlight the housing comments in the FOMC minutes for the March 16, 2010 meeting:

Participants were also concerned that activity in the housing sector appeared to be leveling off in most regions despite various forms of government support, and they noted that commercial and industrial real estate markets continued to weaken. Indeed, housing sales and starts had flattened out at depressed levels, suggesting that previous improvements in those indicators may have largely reflected transitory effects from the first-time homebuyer tax credit rather than a fundamental strengthening of housing activity. Participants indicated that the pace of foreclosures was likely to remain quite high; indeed, recent data on the incidence of seriously delinquent mortgages pointed to the possibility that the foreclosure rate could move higher over coming quarters. Moreover, the prospect of further additions to the already very large inventory of vacant homes posed downside risks to home prices.

And from the staff:

The staff did make modest downward adjustments to its projections for real GDP growth in response to unfavorable news on housing activity, unexpectedly weak spending by state and local governments, and a substantial reduction in the estimated level of household income in the second half of 2009. The staff's forecast for the unemployment rate at the end of 2011 was about the same as in its previous projection.

This fits with my comments in response to Minneapolis Fed President Narayana Kocherlakota's speech today: It isn't the size of the sector, but the contribution during the recovery that matters - and housing is usually the largest contributor to economic growth early in a recovery. And as the FOMC notes, there isn't much contribution from residential investment right now (in fact the contribution from RI will probably be negative in Q1 2010).

And on employment, residential investment probably contibuted significantly to employment growth following previous recessions - especially for residential construction employment - although the BLS didn't break out residential construction for the earlier periods.

by Calculated Risk on 4/06/2010 03:38:00 PM

From Diana Olick at CNBC: Foreclosures Are Rising

Yes, banks are ramping up loan modifications and ramping up short sales and ramping up deeds in lieu of foreclosure, but the plain fact is that as the systems are oiled, the loans are moving through faster, and the pig in the python is showing its face.

We won't get the [foreclosure] numbers until next week, but sources tell me they will likely be a new monthly record.

The foreclosures are coming! The foreclosures are coming!

I don't think there is any question that foreclosures will pick up. And now is a good time to get properties on the market. As an example, Freddie Mac just announced an auction of homes: Freddie Mac, New Vista to Auction Hundreds of Homes on April 24 in Las Vegas, April 25 in California's Inland Empire Before Federal Homebuyer Tax Credit Expires

Freddie Mac (NYSE:FRE) and New Vista today announced plans to auction hundreds of HomeSteps® REO homes to individual homebuyers in Las Vegas on April 24, 2010 and in California’s Inland Empire on April 25, 2010 in support of the federal Neighborhood Stabilization Program (NSP) and to help more first time homebuyers and owner occupants purchase these homes. HomeSteps is the real estate sales unit of Freddie Mac and markets a nationwide selection of Freddie Mac-owned homes.
...
By scheduling these two auctions on April 24 and 25, bidders may still be able to qualify for the federal home purchase tax credit, which is set to expire on April 30, 2010. The tax credit offers eligible first time homebuyers up to $8,000 on qualifying homes.

by Calculated Risk on 4/06/2010 01:04:00 PM

Minneapolis Fed President Narayana Kocherlakota spoke today: Economic Recovery and Balance Sheet Normalization

The headline is Kocherlakota thinks the Fed should start selling a non-trivial amount of MBS each month to normalize the Fed's balance sheet.

[T]he passive approach is a slow approach that will leave the Federal Reserve holding significant amounts of MBSs for many years to come. If the Federal Reserve wants to normalize its balance sheet in the next five, 10, or even 20 years, it needs to supplement the passive approach with an active one. In plain English, it will have to sell mortgage-backed securities.
...
To pick one of many possible plans, suppose we were to commit to the public to sell 15 billion to 25 billion dollars worth per month of MBSs. This path of sales, combined with prepayments, would get the Federal Reserve out of MBSs within five years after the start of selling. The plan would also return the Federal Reserve’s balance sheet to a normal size, so that excess reserves would be normalized at their 2007 levels well before the end of the five-year period. Just as important, I feel confident that this pace of sales would be sufficiently slow that it would have little or no impact on MBS prices and long-term interest rates.

He also made some interesting comments on housing:

Let me start my outlook with the most troubling information first. Housing starts and sales remain at near historically low levels. These data are disturbing to many observers. And that’s understandable. After many past recessions, residential investment has played a significant role in the subsequent recovery. Arguing by analogy, some are concerned that we cannot have a sustainable economic recovery unless housing starts pick up dramatically from their current low levels.

CR: I think a sustainable recovery is possible, but I think it will be sluggish and choppy. I've argued it is difficult to have a robust (V-Shaped) recovery without housing.

I have to say that I’m somewhat skeptical of this thinking. Yes, the housing sector is important, but residential investment makes up just 2.8 percent of the country’s gross domestic product.

CR: This is an error in analysis. Back in 2005, several analysts argued I was wrong that a housing bust would eventually take the economy into recession - they said residential investment was only 6% of the U.S. economy! They were wrong because they didn't consider all the add on effects - and the impact of financial distress. Now residential investment is only 2.5 percent of GDP, and Kocherlakota is making the inverse faulty argument. During previous recoveries, housing played a critical role in job creation and consumer spending. It isn't the size of the sector, but the contribution during the recovery that matters - and housing is usually the largest contributor to economic growth early in a recovery.

The U.S. economy is a wonderfully diverse one, and has many possible sources of growth. We can—and I believe that we will—have significant growth in output without seeing a major turnaround in the housing market.
...
Housing starts are ... strongly affected by the general health of the economy (job growth or loss) and the stock of housing relative to demand. As I see it, the problems in the housing sector right now are largely driven by this second factor. For a number of reasons, the nation has built a lot more houses than it now needs or wants. As a result, my own prediction is that housing starts are going to remain low—possibly for several years.

What does the large supply of housing mean for the general economy? It means that resources formerly dedicated to building and outfitting homes are gradually shifting to other uses. This points out another remarkable feature of the U.S. economy: its flexibility.

I generally agree with this last section. The problem with "flexibility" is there are two key labor mismatches (as discussed last week by Atlanta Fed President Lockhart); The first is lower geographical mobility because of the inability to sell a home. Usually people can move freely in the U.S. to pursue employment, but many people are tied to an anchor (an underwater mortgage).

The second is a skills mismatch. This is because so many people went into the construction industry because it was the highest paying job. These workers may be highly skilled in their trade, but their skills are probably not transferable to the new jobs being created. It will take some time for these people to learn a new trade.

Both of these mismatches lower the "flexibility" of the economy.

by Calculated Risk on 4/06/2010 10:00:00 AM

From the BLS: Job Openings and Labor Turnover Summary

There were 2.7 million job openings on the last business day of February 2010, the U.S. Bureau of Labor Statistics reported today. The job openings rate was little changed over the month at 2.1 percent. The hires rate (3.1 percent) and the separations rate (3.1 percent) were also little changed in February.

Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. The CES (Current Employment Statistics, payroll survey) is for positions, the CPS (Current Population Survey, commonly called the household survey) is for people.

The following graph shows job openings (purple), hires (blue), Total separations (include layoffs, discharges and quits) (red) and Layoff, Discharges and other (yellow) from the JOLTS.

Unfortunately this is a new series and only started in December 2000.

Click on graph for larger image in new window.

Notice that hires (blue) and separations (red) are pretty close each month. This is the level of turnover each month. When the blue line is above total separations, the economy is adding net jobs, when the blue line is below total separations, the economy is losing net jobs.

According to the JOLTS report, there were 4.96 3.961 million hires in February (SA), and 3.957 million total separations, or 4 thousand net jobs gained. The comparable CES report showed a loss of 14 thousand jobs in February (after revision).

Layoffs and discharges have declined sharply from early 2009 - and that is a good sign.

However, hiring has not picked up - and even though total separations were at a series low, there were few jobs added in February (according to JOLTS). This low turnover rate is another indicator of a weak labor market.

by Calculated Risk on 4/06/2010 09:01:00 AM

Just an update ...

Market News International reported that Greece may want to cut the International Monetary Fund out of the rescue package. However an unnamed Greece official denied the report, from the WSJ Greece to Pitch Dollar Bond to U.S. Investors

"Don't expect at this point any major push by Athens to get the IMF out of the picture," the official said. "There is unhappiness with the support package because it's vague. And, yes, the involvement of the IMF is something that we could do without," the official said. "But it was us who first raised the IMF card and I don't think the Greek government will or can renegotiate the package. It will show inconsistency."

This official said Greece would like more clarity on any aid package involving the IMF, but the government doesn't plan to demand the agreement be renegotiated to exclude the IMF.

Update: Jason sent me an update from the Street on Greek bonds: "Wider by 50 on the day in the 10 years and 120 in 2 year, it is clear panic has now set in ..."