by Calculated Risk on 5/05/2010 08:15:00 AM

ADP reports:

Nonfarm private employment increased 32,000 from March to April 2010 on a seasonally adjusted basis, according to the ADP National Employment Report. The estimated change in employment from February to March 2010 was revised up, from a decline of 23,000 to an increase of 19,000.

In addition, the revised estimate of the monthly change in employment from January to February 2010 shows a modest increase of 3,000. Thus, employment has increased for three straight months, albeit only modestly. The slow pace of improvement from February through April is consistent with the pause in the decline of initial unemployment claims that occurred during the winter months.
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April’s ADP Report estimates nonfarm private employment in the service-providing sector rose by 50,000, the third consecutive monthly increase. Employment in the goods-producing sector declined 18,000 during April. However, while construction employment dropped 49,000, manufacturing employment, in an encouraging sign, rose 29,000, the third consecutive monthly increase.

Note: ADP is private nonfarm employment only (no government jobs).

This is close to the consensus forecast of an increase of 28,000 private sector jobs in April.

The BLS reports on Friday, and the consensus is for an increase of 200,000 payroll jobs in April, on a seasonally adjusted (SA) basis, with about 100,000 temporary Census 2010 jobs.

by Calculated Risk on 5/05/2010 07:00:00 AM

The MBA reports: Purchase Applications Continue to Increase, Refinance Activity Declines in Latest MBA Weekly Survey

The Market Composite Index, a measure of mortgage loan application volume, increased 4.0 percent on a seasonally adjusted basis from one week earlier. ...

The Refinance Index decreased 2.1 percent from the previous week and the seasonally adjusted Purchase Index increased 13.0 percent from one week earlier. This is the third consecutive weekly increase in purchase applications and the highest Purchase Index recorded in the survey since the week ending October 2, 2009. ...

"Purchase application activity continued to increase in the last week of the homebuyer tax credit program," said Michael Fratantoni, MBA's Vice President of Research and Economics. "Purchase applications were up 13 percent over the previous week and almost 24 percent over the last month, driven by significant increases in both conventional and government purchase applications. We also saw the Government share of applications for purchasing a home increase to over 50 percent of all purchase applications last week, which is the highest in two decades."

... The average contract interest rate for 30-year fixed-rate mortgages decreased to 5.02 percent from 5.08 percent, with points increasing to 0.92 from 0.91 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in new window.

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

This is the highest level for the purchase index since last October. The index will probably turn down in the next week or two since the tax credit expired last Friday (buyers need to close by June 30th).

by Calculated Risk on 5/04/2010 07:47:00 PM

Martin Wolf writes in the Financial Times: A bail-out for Greece is just the beginning

Wolf reviews the bailout of Greece, and points out that Greece will probably be in prolonged slump. He wonders if the Greeks will "bear that burden year after weary year?"

And on the other members of the eurozone:

[T]he programme prevents an immediate shock to fragile financial systems: it is overtly a rescue of Greece, but covertly a bail-out of banks. But it is far from clear that it will help other members now in the firing line. ... Other eurozone members might well end up on their own. None is in as bad a condition as Greece ... But several have unsustainable fiscal deficits and rapidly rising debt ratios.
excerpts with permission

Wolf is not optimistic and has "huge doubts".

by Calculated Risk on 5/04/2010 04:50:00 PM

There are several analysts forecasting GDP growth to pick up in the 2nd half of this year, with annual GDP growth of over 4% for 2010 (the advance Q1 GDP estimate was 3.2%, so over 4% for 2010 would require a nice pick up in the 2nd half). This is not a "v-shaped" recovery - that didn't happen - but these forecasts are still above trend growth.

Unfortunately I think we will see a slowdown in the 2nd half of the year, but still positive growth. Last year I argued for a 2nd half recovery ... and that was more fun!

Here are a few reasons I think the U.S. economy will slow:
1) The stimulus spending peaks in Q2, and then declines in the 2nd half of 2010. This will be a drag on GDP growth in the 2nd half of this year.

2) The inventory correction that added 3.8% to GDP in Q4, and 1.6% to GDP in Q1, has mostly run its course.

3) The growth in Personal Consumption Expenditures (PCE) in Q1 came mostly from less saving and transfer payments, as opposed to income growth. That is not sustainable, and future growth in PCE requires jobs and income growth. Although I expect employment to increase, I think the job market will recover slowly (excluding temporary Census hiring) because the key engine for job growth in a recovery is residential investment (RI) - and RI has stalled (until the excess housing inventory is reduced).

4) There is a slowdown in China and Europe has some problems (if no one noticed) ... and that will probably impact export growth, and also negatively impact one of the strongest U.S. sectors - manufacturing (when was the last time manufacturing was one of the strongest sectors?)

Of course monetary policy is still supportive and it is unlikely the Fed will sell assets or raise the Fed Funds rate this year. Maybe some commodities like oil will be cheaper and give a boost to the U.S. economy ... maybe the saving rate will fall further and consumption will continue to grow faster than income ... maybe residential investment will pick up sooner than I expect ... maybe. But this suggests a 2nd half slowdown to me.

by Calculated Risk on 5/04/2010 02:57:00 PM

More from the Q1 2010 GDP underlying detail tables ...

Note: Residential investment (RI), according to the Bureau of Economic Analysis (BEA), includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

Back in Q4 2008 - for the first time ever - investment in home improvements exceeded investment in new single family structures. This has continued through Q1 2010.

Click on graph for larger image in new window.

This graph shows the various components of RI as a percent of GDP for the last 50 years. The most important components are investment in single family structures followed by home improvement.

Investment in home improvement was at a $152.9 billion Seasonally Adjusted Annual Rate (SAAR) in Q1, significantly above the level of investment in single family structures of $115.2 billion (SAAR).

Home improvement spending, as a percent of GDP, is close to the long term median - although still declining. Brokers' commissions declined after the initial expiration of the tax credit - but will probably be boosted in Q2 by the extension of the homebuyer tax credit - and then will decline again in Q3.

Investment in single family structures is above the record low set in Q2 2009, and far below the normal level. And investment in multifamily structures is still collapsing. These two categories will not increase significantly until the number of excess housing units is reduced.

by Calculated Risk on 5/04/2010 11:24:00 AM

A couple of comments from German officials via the Guardian: Greece's €110bn bailout gets lukewarm reception from financial markets (ht Jonathan)

German economy minister Rainer Brüderle added to the uncertainty by telling Reuters that the €110bn package was not intended to cover Greece's entire financial requirements for the next three years. Instead, Brüderle suggested, Greece will need to return to the financial markets in perhaps 18 months to satisfy its borrowing needs.
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Finance minister Wolfgang Schäuble said that Greece would be plunged into insolvency if it failed to meet its promises to raise taxes across the economy, increase the retirement age to 65, and cut the size of its public sector.

"If there are any violations, payments will be stopped. Then Athens will once again be threatened with bankruptcy," Schäuble told the Rheinische Post newspaper.

The yield on the two year Greek government debt was up 4.2% to 14.5% this morning. Investors still have no confidence ...

And there are still worries of contagion, from Bloomberg:

Spanish Prime Minister Jose Luis Rodriguez Zapatero said speculation of a bailout for Spain is “complete madness” and the nation has “strong solvency.” His remarks came as Greece’s 110 billion-euro ($146 billion) rescue package fails to ease concern that swelling European sovereign debt will derail the economic recovery.

by Calculated Risk on 5/04/2010 10:00:00 AM

From the NAR: Pending Home Sales on an Upswing

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in March, rose 5.3 percent to 102.9 from 97.7 in February, and is 21.1 percent above March 2009 when it was 85.0; this follows an 8.3 percent increase in February. The data reflects contracts and not closings, which usually occur with a lag time of one or two months.
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"In the months immediately following the expiration of the tax credit, we expect measurably lower sales,” [Lawrence Yun, NAR chief economist] said.

This is no surprise - the tax credit has pulled demand forward, and existing home sales will decline after June (existing home sales are counted when the contract closes).

by Calculated Risk on 5/04/2010 08:34:00 AM

From Bloomberg:

Filings totaled almost 146,000 in April, according to data compiled by Automated Access to Court Electronic Records, a service of Oklahoma City-based Jupiter ESources LLC. March filings were about 158,000.

The April filing total represented a 15 percent increase from April 2009 total. This is the 2nd highest month since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was enacted.

Click on graph for larger image in new window.

This graph shows the non-business bankruptcy filings by quarter using monthly data from the ABI and previous quarterly data from USCourts.gov.

The American Bankruptcy Institute (ABI) is forecasting over 1.5 million filings in 2010. This is an increase from the just over 1.4 million filings in 2004. I think the ABI forecast is low ...

by Calculated Risk on 5/03/2010 11:24:00 PM

Just an overview ...

Light Vehicle Sales in April were at a 11.2 Million Seasonally Adjusted Annual Rate (SAAR). This was up 21.8% from April 2009 (when sales were at the lowest level in 30 years), and down 4.6% from the March 2010 sales rate.

Personal Income was up 0.3% in March, but spending increased 0.6%. The increases in spending are coming from less saving and transfer payments instead of income growth. This is a solid increase in personal consumption expenditures (PCE), but PCE growth is not sustainable without jobs and income growth.

The ISM Manufacturing Index showed solid growth in April. The employment index increased to 58.5 percent in April (suggesting growth in manufacturing employment).

Private construction spending declined in March for both residential and non-residential. Public construction spending increased. Perhaps the good news is investment in offices, malls and hotels is at or near record lows, and is probably nearing the bottom (although spending will probably decline most of this year). This suggests the job losses related to construction employment will slow.

The Federal Reserve released the April Senior Loan Officer survey. The survey showed that banks are keeping lending standards unchanged (no longer tightening), but the survey also showed that loan demand weakened further.

And some more excerpts from Fed transcripts in 2004 (just released). These transcripts show that Fed researchers were aware that the increase in house prices (by early 2004) could not be explained by fundamentals, and that a Fed President was concerned about rampant speculation and loose lending standards.

by Calculated Risk on 5/03/2010 08:12:00 PM

There has been widespread discussion of the March 2004 Fed comments and chart I posted on Saturday. To review: in March 2004, Fed associate research director Stephen Oliner presented a chart of rents-to-house prices and commented that "even after you account for the fundamentals, there’s a part of the increase [in house prices] that is hard to explain".

This should have set off alarms. Is there widespread speculation? Are lending standards too loose?

Here are some comments from Minneapolis Fed President Gary Stern at the November 10, 2004 FOMC meeting that answers those questions:

Stern: A little over a week ago, we hosted at the Bank a meeting on housing and residential construction activity. There were several reasons for this. One, of course, was the fact that we hear periodic discussions of a potential bubble in house prices. But second, I’ve been struck, as I’ve watched developments in the Twin Cities and as I’ve traveled around other cities in the last several years, by the absolutely high level of construction activity that seems to be occurring. It’s not only new building, but conversions of all sorts of warehouses, schools, and former office buildings to residential property. A change in mix seems to be occurring as well, with more of the construction and renovation yielding townhouses and condominiums rather than the standard single-family home.
...
Let me just note three specific issues that came up because I, at least, found them of interest. The first, which it won’t surprise this group to hear, is that they attributed a good deal of the strength in housing to very favorable financial conditions. In this regard they talked not only about low interest rates but also lower down-payment requirements. I might add that a couple of the lenders did say that they thought the credit pendulum had swung too far. They felt that credit conditions had become too easy, and they were anticipating some potential difficulties going forward—presumably in somebody else’s shop! [Laughter] Second, they reported that at least in some markets a significant percentage of the purchases of new units were by investors, where the term “investors” means people who don’t intend to occupy the property, at least not immediately. As best they could judge, in some markets investors were buying up to 30 percent of the new additions to supply. And finally, they noted that there seemed to be some acceleration of purchases by first-time homebuyers who were concerned that they were going to be priced out of the market if they waited longer. The implications of that, of course, are that at some point such sales will slow because people will have acted if they could.

CHAIRMAN GREENSPAN. Shall we take a coffee break and return in fifteen minutes, please.

Loose lending standards, widespread speculation, conversion of all kinds of buildings to residential - and this in flat land!

So in March 2004 a Fed researcher was expressing concern about house prices being out of line with fundamentals, and in November 2004 a Fed President is talking about widespread speculation ... and then there was no further discussion. The 2005 transcripts will be very interesting (to be released next year).

For more see:

Paul Krugman: Bubble Denial

Matthew Yglesias: Is Our Fed Governors Learning?

Annie Lowrey: The Fed Discussing and Dismissing the Housing Bubble in 2004

Ryan Grim at HuffingtonPost: Greenspan Wanted Housing-Bubble Dissent Kept Secret