by Calculated Risk on 4/13/2010 08:18:00 AM

From the National Federation of Independent Business: Small Business Optimism Declines in March

The National Federation of Independent Business Index of Small Business Optimism lost 1.2 points in March, falling to 86.8. The persistence of index readings below 90 is unprecedented in survey history.

“The March reading is very low and headed in the wrong direction,” said Bill Dunkelberg, NFIB chief economist. “Something isn’t sitting well with small business owners. Poor sales and uncertainty continue to overwhelm any other good news about the economy.”
...
After a devastating period of employment reductions, employment change per firm hit the “zero line” in March. .... While actual job reductions may have halted, plans to create new jobs remain weak. ... Only nine percent (seasonally adjusted) reported unfilled job openings, down two points and historically low, showing little hope for a lower unemployment rate.

by Calculated Risk on 4/12/2010 11:15:00 PM

Something a little different ...

From the Boston Globe: Travel swells cost of housing

People who move to an outlying Boston suburb to find affordable housing or to get more house for their money often sacrifice the savings to higher transportation costs, according to a study to be released today by a national planning and land-use organization.

The report, by the Urban Land Institute, is the first to quantify by community not only commuting costs, but the price of daily transportation around often-sprawling suburbs.

Here is the report on Boston:

This report analyzes the combined costs of housing and transportation for neighborhoods, cities, and towns throughout a Boston regional study area that extends south to Providence, Rhode Island; west to Worcester, Massachusetts; and northeast to Dover, New Hampshire.

Our analysis finds that the typical household in the study area spends upwards of $22,000 annually on housing, which represents roughly 35 percent of the median household income ($68,036). With transportation costs for the typical household reaching nearly $12,000 annually, the combined costs of housing and transportation account for roughly 54 percent of the typical household’s income.

Similar studies conducted for the San Francisco Bay Area and the Washington, D.C., region have found average housing and transportation cost burdens of 59 percent and 47 percent, respectively.

When gasoline prices rose to over $4 per gallon in 2008, it really crushed some exurban areas that were already hard hit by the housing bust. The old saying "Drive to you qualify" doesn't really make sense if the transportation costs offset the lower house prices.

by Calculated Risk on 4/12/2010 05:50:00 PM

Jim Puzzanghera at the LA Times has a preview: Washington Mutual created 'mortgage time bomb,' Senate panel finds

Before Washington Mutual collapsed ... its executives knowingly created "a mortgage time bomb" by steering borrowers to subprime mortgages and turning the loans into securities the company knew were likely to go bad, one of the most extensive investigations into the causes of the financial crisis has found.
...
"At times, WaMu selected and securitized loans that it had identified as likely to go delinquent" or securitized loans in which the company had discovered fraudulent activity, such as misstated income, without disclosing the information to investors, the committee found. The company's pay practices exacerbated the problem by rewarding loan officers and processors based on how many mortgages they could churn out.

More from the WSJ: Senate Probe Finds Washington Mutual Ignored Warnings

The documents to be disclosed on Tuesday also reflect that employees routinely fabricated lending documents. "One Sales Associate admitted that during that crunch time some of the Associates would 'manufacture' asset statements …and submit them to the" loan processing center, according to one document. "She said the pressure was tremendous ... since the loan had already [been] funded."

The Inspectors General's report on WaMu will be issued on Friday - Sewell Chan at the NY Times reported Saturday: U.S. Faults Regulators Over a Bank

Regulators failed for years to properly supervise the giant savings and loan Washington Mutual, even as the company wobbled ... a federal investigation has concluded.
...
The report, prepared by the inspectors general for the Treasury Department and the Federal Deposit Insurance Corporation, is expected to be released Friday. A draft was obtained by The New York Times.

A huge bank out of control and regulators ignoring the problem ... this is quite a story. And no surprise at all.

by Calculated Risk on 4/12/2010 02:34:00 PM

Scott Simon, Managing Director at PIMCO Discusses a Post-Fed Mortgage-Backed Securities Market. A few excerpts:

We are unlikely to see a significant market disruption in the Agency market stemming from the Fed’s retreat. ... if and when we see mortgages cheapen, we expect to see private institutions stepping in to buy. Even a 15 basis point move could spark a flurry of buying. Therefore, we don’t expect a major widening of mortgage spreads ...

And some Q&A:

Q: Could you elaborate more on who will fill the purchasing gap left by the Fed’s exit?

Simon: Money managers and other institutions have been sitting on the sidelines for quite a while, but cash yields are essentially zero, making it very tempting to move out the risk and duration spectrum. This is exactly what the Fed has meant to do with a fed funds rate near zero – make it so that investors can’t stand to be in cash any more. For banks, it makes the spread between cash and Agency mortgages look more attractive, and for investors, it makes risk-adjusted yields on Agencies look competitive.
...
Q: Do you think it’s at all likely the Federal Reserve will reboot its MBS purchase program later this year or in 2011?

Simon: Probably not. Barring a major double dip in the economy or housing, private balance sheets have plenty of room to add Agency MBS (unlike in late 2008, when the Fed program began).

And finally on housing:

Q: Finally, let’s discuss housing more directly. When might we see a recovery?

Simon: We continue to believe that lower-priced homes bottomed last year. Higher-priced homes should bottom later this year. If one labels recovery as prices rising dramatically, we do not foresee that anytime soon.

Q: Do you think the government is done tinkering with housing sales and foreclosures?

Simon: The three issues that need addressing are: 1) negative equity, 2) unemployment and 3) second liens hindering loan modifications. Obama’s plan addresses these issues, but the devil is in the details. ...

My comments: In the low price / high foreclosure bubble areas, I think house prices bottomed over a year ago because of the flood of foreclosure sales (Tom Lawler's "destickification"), however I think there will be further price declines in the mid-to-high end bubbles areas. This is where many of the next wave of distressed sales will be concentrated. My guess is this will push the national price indexes (Case-Shiller, LoanPerformance) to new lows later this year and probably into 2011. And then any recovery in prices will be very slow because distressed sales will remain elevated for some time.

And 2nd liens remain a huge stumbling block. Dakin Campbell and David Henry at Bloomberg had a story on 2nd liens and banks this morning: Bank Profits Dimmed by Prospect of Home-Equity Losses (ht Brian, Mike in Long Island, Clip)

Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. may have to set aside an additional $30 billion to cover possible losses on home-equity loans, an amount almost equal to analysts’ estimates of profit at the three banks this year.

The cost of these reserves was calculated by CreditSights Inc., a New York-based research firm whose prediction almost four years ago proved prescient after banks reported unprecedented mortgage-related writedowns. Recognizing the home- equity loan losses is unfinished business from the housing bubble ...

The four biggest U.S. banks by assets -- Bank of America, JPMorgan, Citigroup Inc. and Wells Fargo -- hold about 42 percent, or $442 billion of the $1.1 trillion in second-lien mortgage loans, according to Amherst Securities Group LP, an Austin, Texas-based firm that analyzes home-loan assets.

Although the article is focused on write-downs for the banks, this also has implications for the housing market.

by Calculated Risk on 4/12/2010 11:59:00 AM

Calling the beginning or end of a recession takes time. The National Bureau of Economic Research (NBER) waits until the data is revised, and if the recovery is sluggish, this process can take from 18 months to two years or longer.

In addition, if the economy slides into recession again, the committee will only consider it a new recession if most major indicators were close to or above their previous highs. Otherwise it will just be considered a continuation of the previous recession.

A good example of the NBER calling two separate recessions was in the early '80s, from the NBER memo:

"The period following July 1980 will appear in the NBER chronology as an expansion. An important factor influencing that decision is that most major indicators, including real GNP, are already close to or above their previous highs."
emphasis added

It will take some time for most major indicators to be above their previous high after the "great recession" because of the severe contraction as the graphs below show.

GDP is the key measure, as the NBER committee notes in their business cycle dating procedure:

The committee views real GDP as the single best measure of aggregate economic activity.

This is actually two measures: 1) real GDP, and 2) real Gross Domestic Income (GDI). For a discussion on GDI, see from Fed economist Jeremy Nalewaik, “Income and Product Side Estimates of US Output Growth,” Brookings Papers on Economic Activity. An excerpt:

The U.S. produces two conceptually identical official measures of its economic output, currently called Gross Domestic Product (GDP) and Gross Domestic Income (GDI). These two measures have shown markedly different business cycle fluctuations over the past twenty five years, with GDI showing a more-pronounced cycle than GDP. These differences have become particularly glaring over the latest cyclical downturn, which appears considerably worse along several dimensions when looking at GDI. ...

In discussing the information content of these two sets of estimates, the confusion often starts with the nomenclature. GDP can mean either the true output variable of interest, or an estimate of that output variable based on the expenditure approach. Since these are two very different things, using “GDP” for both is confusing. Furthermore, since GDI has a different name than GDP, it may not be initially clear that GDI measures the same concept as GDP, using the equally valid income approach.

The NBER uses both real GDP and real GDI.

Note: The following graphs are all constructed as a percent of the peak in each indicator. This shows when the indicator has bottomed - and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%. On all graphs the recent recession is marked as ending in July 2009 or Q3 2009 - this is preliminary and NOT an NBER determination. GDP is quarterly, the other data is monthly.

The first graph is for GDP and GDI:

Click on graph for larger image in new window.

It appears that GDP bottomed in Q2 2009 and GDI in Q3 2009. This is the key measure, and the NBER will probably use GDP and GDI to determine the trough of the recession. Real GDP is only 2.0% below the pre-recession peak - and real GDP 2.7% below the previous peak - so both could be at new highs later this year or early in 2011, even with a sluggish recovery.

The second graph is for monthly industrial production based on data from the Federal Reserve.

Industrial production bottomed in June 2009. The NBER will consider this measure when trying to identify the month the recession ended. Note that industrial production is still substantially below the pre-recession levels - so it might be some time before this measure is at or above earlier levels.

Now for some less optimistic measures the NBER uses ...

The third graph is for employment. It appears the employment recession might have bottomed in February, but it will take a long time before this measure is at pre-recession levels.

Historically employment was a coincident indicator for the end of recessions, but that hasn't been true for the previous two recessions (1990-1991 and 2001) and also will not be true for the "great recession" if the NBER determines an end date in July 2009.

If the NBER waits for employment to return to pre-recession levels, we might be waiting for an annoucement for a long time.

And the last graph is for real personal income excluding transfer payments. This bottomed in Sept 2009, but has moved sideways since then. This shows the effect of the stimulus programs that boosted GDP and income - but not income less transfer payments.

This will be a key measure of a sustainable recovery, and once again it will take a long time to return to pre-recession levels.

These graphs are useful in trying to identify peaks and troughs in economic activity. My guess is the economy bottomed by most measure in Q3 2009 (probably July), but I don't expect an announcement from the NBER until the end of 2010 at the earliest - and perhaps well into 2011 or beyond.

by Calculated Risk on 4/12/2010 08:59:00 AM

Business Cycle Dating Committee statement:

The Business Cycle Dating Committee of the National Bureau of Economic Research met at the organization’s headquarters in Cambridge, Massachusetts, on April 8, 2010. The committee reviewed the most recent data for all indicators relevant to the determination of a possible date of the trough in economic activity marking the end of the recession that began in December 2007. The trough date would identify the end of contraction and the beginning of expansion. Although most indicators have turned up, the committee decided that the determination of the trough date on the basis of current data would be premature. Many indicators are quite preliminary at this time and will be revised in coming months. The committee acts only on the basis of actual indicators and does not rely on forecasts in making its determination of the dates of peaks and troughs in economic activity. The committee did review data relating to the date of the peak, previously determined to have occurred in December 2007, marking the onset of the recent recession. The committee reaffirmed that peak date.

NBER always waits some time before declaring a recession over.

Click on cartoon for larger image in new window. Repeat of cartoon from Eric G. Lewis

It took the National Bureau of Economic Research (NBER) Business Cycle Dating Committee 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.

The previous NBER announcements make it clear that NBER will not date the trough of the recession until certain economic indicators - like real GDP - are above the pre-recession levels. Any downturn before economic activity reaches pre-recession levels will probably be considered a continuation of the recession that started in December 2007.

Here is the NBER dating procedure.

by Calculated Risk on 4/11/2010 11:49:00 PM

From Sewell Chan at the NY Times: U.S. Faults Regulators Over a Bank

Regulators failed for years to properly supervise the giant savings and loan Washington Mutual, even as the company wobbled ... a federal investigation has concluded.
...
The report, prepared by the inspectors general for the Treasury Department and the Federal Deposit Insurance Corporation, is expected to be released Friday. A draft was obtained by The New York Times.

... WaMu was the largest institution regulated by the Office of Thrift Supervision ... Although regulators found problems ... the office consistently deemed WaMu “fundamentally sound,” giving it a rating of 2, the second-highest on a five-point scale ... The office did not lower the rating to 3 ... until February 2008, and to 4 ... until September 2008, days before WaMu collapsed. “It is difficult to understand how O.T.S. continued to assign WaMu a composite 2 rating year after year,” the report found.

The FDIC rating system is called CAMELS and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest. Banks with ratings of 4 or 5 are included on the FDIC's official problem bank list (ratings are not made public). So WaMu wasn't considered a "problem bank" until days before it collapsed.

The report will apparently be released on Friday. Earlier reports for other bank failures showed that the field examiners identified the problems early - and then for some unexplained reason, no action was taken. The regulatory system failed.

by Calculated Risk on 4/11/2010 05:49:00 PM

Note: The previous post is the weekly summary and a look ahead to a pretty busy week. Best wishes to all!

For those who missed the news, from the NY Times: Euro-Zone Nations Offer $40 Billion to Greece

A financial rescue of the debt-laden Greek economy moved into focus Sunday when the 16 nations that use the euro offered to lend Athens up to $40 billion, or €30 billion, at rates far below what the debt-laden country is paying now.
...
Greece has so far not formally requested aid from the European Union ... The I.M.F. will also make financing available to Greece, though the amount was yet to be determined. Olli Rehn, the European Union’s monetary affairs commissioner, suggested that euro-zone nations might end up providing two-thirds of the final package, with one-third coming from the I.M.F.

And a proposal from Matthew Richardson and Nouriel Roubini in the WaPo: How to reduce risk on Wall Street? Make the banks pay.

To create a truly safe financial system, we have to focus on two goals. First, we have to drive a stake through the heart of the "too big to fail" mantra that only fattens our financial beasts. Second, we should stop focusing on the problems of individual banks and look at the broader risk that the largest and most complex financial institutions pose.

We can accomplish both goals by charging such institutions an annual fee, or tax, or surcharge, or levy, or whatever the politicians need to call it.

I'm sure we will hear many more ideas this week at the Hyman P. Minsky Conference. The topic is After the Crisis: Planning a New Financial Structure.

by Calculated Risk on 4/11/2010 01:01:00 PM

There will be two key housing reports released this week: Housing Starts to be released on Friday, and the NAHB homebuilder index on Thursday. Most of the focus will be on March retail sales to be released on Wednesday.

The 19th Annual Hyman P. Minsky Conference will be held in New York this week. The topic is After the Crisis: Planning a New Financial Structure. Several Fed Presidents will be speaking; other speakers include Paul Krugman, Jan Hatzius, and Paul Volcker.

Early in the week, the March National Federation of Independent Business (NFIB) small business survey will be released and also the March rail traffic report from the Association of American Railroads (AAR). Other reports that will probably be released this week include the HAMP March report, the LoanPerformance house price index (for February) and LA port traffic for March.

On Tuesday the February Trade Balance report will be released at 8:30 AM by the Census Bureau. The consensus is for a further increase in the U.S. trade deficit to around $39 billion (from $37.3 billion).

On Wednesday March retail sales will be released at 8:30 AM. The consensus is for an increase of 1.2% from the February rate. The consumer price index (CPI) will also be released on Wednesday (the consensus is for a 0.1% increase in prices), and business inventories will be released at 10 AM. Also on Wednesday the Fed Beige Book will be released at 2 PM. The New York Fed’s Brian Sack will be speaking at 7 PM on the financial crisis.

On Thursday the closely watched initial weekly unemployment claims will be released. The consensus is for a decline to 440K this week from the Easter related increase to 460K last week The Fed will release the Industrial Production and Capacity Utilization report at 9:15 AM. Expectations are for a 0.8% increase in production and an increase in utilization to 73.3% from 72.7%.

The NAHB homebuilder survey for April will be released at 1 PM. This has been mostly moving sideways for months but might show some increase since this is the final month to sign a contract to qualify for the homebuyer tax credit. Also on Thursday, the Empire State manufacturing survey and the Philly Fed survey will both be released.

And on Friday, Housing Starts for March will be released at 8:30 AM. The consensus is for a slight increase to 605K (SAAR) in March from 575K in February. The Reuters/University of Michigan April consumer sentiment survey will be released at 9:55 AM. In addition, the BLS will release the Regional and State Employment and Unemployment report for March at 10 AM.

Also on Friday the FDIC might close several more banks ...

And a summary of last week:

Reis on Office, Mall and Apartment Vacancy Rates

1) Offices: From the Financial Times: Signs that worst is over for commercial property

New figures from Reis ... showed that the vacancy rate in the US office sector climbed to 17.2 per cent during the first three months of the year..
...
"We expect less of a bloodbath in fundamentals in 2010 versus 2009, but rents will still decline and vacancies will still continue to rise," said Victor Calanog, director of research at Reis. ... During the first quarter, asking rents and effective rents, which include special offers and concessions, both fell by just 0.8 per cent.
excerpts with permission

2) Apartments: From Nick Timiraos at the WSJ: Apartment Rents Rise as Sector Stabilizes

Nationally, the apartment vacancy rate stayed flat at 8%, the highest level since Reis Inc., a New York research firm, began its tally in 1980...

3) Malls: 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%.

Distressed Sales Again on the Rise

First American Corelogic released their first distressed sales report this morning: Distressed Sales Again on the Rise, Reaching 29% in January

Click on graph for larger image in new window.

Credit: First American Corelogic.

This graph shows the total percent of distressed sales broken down by REO and Short Sales. Notice that the percent short sales has increased significantly over the last year - that trend will probably continue.

Euro Bonds Spreads: Greece at Record

NOTE: This was before the bailout was announced this weekend.

Here is a graph from the Atlanta Fed weekly Financial Highlights:

From the Atlanta Fed:

European bond spreads (over German bonds) reflect
investors’ worries about Greece’s sovereign credit risk.

On April 6, the spread of the 10-year Greek bond over its German counterpart widened by 72bps to 404.5 bps, the widest since 1998, according to the Wall Street Journal.

According to The Times: Greece on the brink as bond rates surge to record highs the Greek Bond spread increased to an all time record 463 bps today (shown on graph in red).

BLS: Low Labor Turnover, Fewer Job Openings in February

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.

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

According to the JOLTS report, there were 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 - however, hiring has not picked up.

Other Economic Stories ...

From Diana Olick at CNBC: Foreclosures Are Rising

From Adam Davidson, Chana Joffe-Walt and Jacob Goldstein at Planet Money: The Friday Podcast: New York Fed Chief, Bubble Fighter

From Professor Hamilton at Econbrowser: Do rising oil prices threaten the economic recovery?

From ISM: Non-Manufacturing sector expanded in March

Unofficial Problem Bank List at 682

Best wishes to all.

by Calculated Risk on 4/11/2010 11:24:00 AM

From the BBC: Greece is offered 30bn euros loan

Leaders of the 16 eurozone nations have agreed to fund up to 30bn euros in emergency loans for debt-hit Greece, if the country wants the cash.

The price of the loans will be fixed using IMF formulas, and be about 5%.

Luxembourg Prime Minister Jean-Claude Juncker, speaking for eurozone finance ministers, said there were no elements of subsidy in the loan proposal.

"The total amount put up by the eurozone member states for the first year will reach 30bn euros," he said.
...
Mr Juncker added that the financing would be "completed and co-financed" by the International Monetary Fund.