by Calculated Risk on 6/03/2010 03:36:00 PM

Here are two graphs from the Atlanta Fed weekly Financial Highlights released today (graph as of June 2nd):

Click on graph for larger image in new window.

From the Atlanta Fed:

Despite the latest announcement of planned austerity measures by Spain, Portugal, and Italy, uncertainty around the adjustment
challenges in peripheral Europe continues to weigh on the region’s bond prices.

Downgrading of Spanish sovereign debt by Fitch and ongoing concerns about the Spanish banking sector further added to investor worries.

Compared with two weeks ago, peripheral Europe's bond spreads to bunds have widened by 30 basis points (bps) on average.

After declining early last week, sovereign debt spreads have begun widening for peripheral euro area countries. As of June 1, the 10-year bond spread stands at 503 basis points (bps) for Greece, 219 bps for Ireland, 195 bps for Portugal, and 162 bps for Spain.

Similarly, CDS spreads have risen after the initial response to the stabilization package.

It should be noted that the German government, through its financial services regulator BaFin, unilaterally and temporarily banned naked short selling of sovereign debt securities, naked credit default swaps on European sovereign
debt in which the buyer has no hedging demand, and naked short sales in 10 prominent German financials.

After declining following the policy response, the bond and CDS spreads have resumed their steady climb - especially for Greece and Portugal.

And from Reuters today: Hungary Warns of Deficit Overshoot; EU Urges Action

Hungary ... government officials reiterated the 2010 fiscal gap may reach almost twice the target agreed with lenders including the EU. ... Public finances were in much worse shape than previously expected and there was only a slim chance of avoiding a Greek-style scenario, news portal napi.hu cited [the vice chairman of the ruling Fidesz party, Lajos Kosa] as saying.

The euro is down to 1.2166 dollars, the lowest level in four years.

by Calculated Risk on 6/03/2010 02:43:00 PM

From Christine Blank at HotelNewsNow.com: Oil-spill update: Hotels report mixed results

Tourism officials and hotel operators in Gulf of Mexico coastal regions say they are struggling with occupancy and reservations, but some areas are suffering more than others.
...
“We have had some cancellations. It is hitting the beachfront properties hard and the casinos have seen some impact ... and the charter boat companies,” said Richard Forester, executive director of the Mississippi Gulf Coast Convention and Visitors Bureau in Biloxi.
...
“Our members are experiencing unprecedented cancellations heading into their peak season, and this advertising campaign is critical to our economic survival,” said Carol Dover, president and CEO of the Florida Restaurant and Lodging Association in Tallahassee ... Many hoteliers in Northwest Florida that are typically at 90 percent occupancy rates heading into the Memorial Day weekend, were reporting a drop in bookings by 30 percent, according to the FRLA.
...
Texas’s coastal hotels also are feeling an impact, but that could be due to the overall U.S. economy more than to the oil spill.

“We have yet to have any cancellations [because of the oil spill],” said Theresa Elliott, GM of Casa del Mar Beachfront Suites, Galveston, Texas. ... Galveston-area hotels are significantly discounting rooms to boost stays, such as 20-percent off Sunday through Thursday stays, according to Elliott.

The economic impact of the oil gusher is unclear, although tourism, fishing and shipping are all being impacted.

by Calculated Risk on 6/03/2010 12:51:00 PM

This is probably a safe prediction: There will be some really bad reporting tomorrow.

Note: The May headline payroll number will be large (consensus is for 540,000 payroll jobs added in May), but this will include around 400,000 temporary Census jobs.

I think this poor reporting will fall into two major categories:

1) Reporters who use the headline payroll number and write that this shows the recovery is picking up steam. We will probably see someone use the headline number and write something like "This is the largest monthly gain since September 1983" - well, were there 400,000+ temporary Census hires in September 1983? If not, why does this comparison matter?

2) Anyone who calls the number of temporary census workers "fake" or subtracts the birth/death adjustment from the seasonally adjusted headline number.

I've spoken with actual Census workers, and I guarantee their jobs are not "fake". Their jobs are real but temporary, and it is appropriate to subtract the Census 2010 workers from the headline payroll number to determine the underlying trend (even though it is obvious, I verified this calculation with the Census Bureau).

And no matter what anyone thinks of the birth / death model, the adjustment is added to the NSA numbers - and can't be subtracted from the SA numbers. Note: I think the birth / death model is useful although we have to aware of the weaknesses (it misses turning points - something I wrote about in 2006).

The employment report has many useful numbers. But the key payroll number is U-3 minus the number of Census 2010 temporary workers. The Census Bureau is tasked with reporting an estimate of the number of payroll jobs each month - so they include the Census 2010 jobs - but they also provide the information on the number of Census hires (the report will be released here).

It is the responsibility of anyone reporting on the numbers to do the heavy math and subtract the Census workers from the headline number. I will report both numbers.

Starting in June, the impact of the Census 2010 on the payroll report will be negative - see: Impact of Census 2010 on Payroll Report. That will require adding the temporary Census 2010 workers back to determine the underlying trend.

For some reason, print reports tend to contain the first mistake, and online reports the second error. Both are poor reporting, although the second is far more egregious (because the statements are blatantly false).

Oh well ... sorry for the rant, but I'm already seeing some really bad "analysis".

by Calculated Risk on 6/03/2010 10:00:00 AM

The May ISM Non-Manufacturing index was at 55.4%, unchanged from April (slightly below expectations). The employment index showed some growth after 28 consecutive months of contraction.

From the Institute for Supply Management: May 2010 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in May for the fifth consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee; and senior vice president — supply management for Hilton Worldwide. "The NMI (Non-Manufacturing Index) registered 55.4 percent in May, the same percentage as registered in both April and March, indicating continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased 0.8 percentage point to 61.1 percent, reflecting growth for the sixth consecutive month. The New Orders Index decreased 1.1 percentage points to 57.1 percent, and the Employment Index increased 0.9 percentage point to 50.4 percent, reflecting growth for the first time after 28 consecutive months of contraction. The Prices Index decreased 4.1 percentage points to 60.6 percent in May, indicating that prices are still increasing but at a slower rate than in April. According to the NMI, 16 non-manufacturing industries reported growth in May. Respondents' comments remain mostly positive about current business conditions and the general direction of the economy."
emphasis added

by Calculated Risk on 6/03/2010 08:30:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending May 29, the advance figure for seasonally adjusted initial claims was 453,000, a decrease of 10,000 from the previous week's revised figure of 463,000. The 4-week moving average was 459,000, an increase of 1,750 from the previous week's revised average of 457,250.
...
The advance number for seasonally adjusted insured unemployment during the week ending May 22 was 4,666,000, an increase of 31,000 from the preceding week's revised level of 4,635,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims increased this week by 1,750 to 459,000.

The dashed line on the graph is the current 4-week average. The current level of 453,000 (and 4-week average of 459,000) is still high, and suggests ongoing weakness in the labor market.

David Greenlaw at Morgan Stanley offered some possible reasons that claims have stayed elevated such as more ineligible filers and that "construction workers tend to file more frequently", although I'm not convinced. This is still disappointing ... the 4-week average has been moving sideways since December.

by Calculated Risk on 6/03/2010 08:15:00 AM

ADP reports:

Nonfarm private employment increased 55,000 from April to May 2010 on a seasonally adjusted basis, according to the ADP National Employment Report. The estimated change in employment from March to April 2010 was revised, from an increase of 32,000 to an increase of 65,000.

May’s rise in private employment was the fourth consecutive monthly gain. However, over these four months the increases have averaged a modest 39,000. The slow pace of improvement from February through May is consistent with the pause in the decline of initial unemployment claims that occurred during the winter months.

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

This is close to the consensus forecast of ADP showing an increase of 60,000 private sector jobs in May.

The BLS reports tomorrow, and the consensus is for an increase of 540,000 payroll jobs in May, on a seasonally adjusted (SA) basis, with over 400,000 temporary Census 2010 jobs.

by Calculated Risk on 6/02/2010 11:54:00 PM

BofA executive Jack Schakett made some interesting comments earlier today:

"There is a huge incentive for customers to walk away because getting free rent and waiting out foreclosure can be very appealing to customers."

Schakett noted that the foreclosure process is currently taking 13 to 14 months ...

For many the timeframe is apparently much longer. On Monday David Streitfeld wrote in the NY Times: Owners Stop Paying Mortgages, and Stop Fretting

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.
...
More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property ...

These long foreclosure time lines can have a significant adverse impact on housing.

Housing economist Tom Lawler alerted me to a 2008 research paper by Freddie Mac economists Amy Crews Cutts and William A. Merrill: Interventions in Mortgage Default: Policies and Practices to Prevent Home Loss and Lower Costs. They studied the foreclosure time lines and costs in several states and found that 270 days is sufficient time to allow the borrower to cure, and any more time actually incentivizes the borrower to strategically default:

There are many challenges that policy makers, investors, servicers and borrowers face in minimizing the incidence of home loss through foreclosure. Among them is the tension between too little time in the foreclosure process, such that some borrowers are unable to recover from relatively mild setbacks before they lose the home but investors minimize pre-foreclosure time related costs, and too much time in the foreclosure process, such that the borrower is incented to let the home go to foreclosure sale during which no mortgage payments are made (in essence, free rent for a significant time) and investor costs rise rapidly.
...
A sweet spot for the optimal time in foreclosure likely exists around a statutory timeline of 120 days (the current national median, and equivalent to 270 days after adding in 150 days for pre-referral loss mitigation activities by servicers through workouts) in which the borrower’s incentives are aligned with both a high probability of curing out of the foreclosure and keeping the pre-foreclosure costs to the investor contained.

One of unintended consequences of the government foreclosure delaying strategy (probably aimed at limiting supply and supporting house prices), is that strategic defaults have gained fairly widespread acceptance. And that means the eventual cost to the taxpayer will be higher than if the lenders had either modified the loans, or foreclosed, or approved a short sale, within about 270 days.

by Calculated Risk on 6/02/2010 08:47:00 PM

Here is a theme we've been discussing for a few years - when a homeowner is underwater, it is difficult to make a career move ...

From Rana Cash at the Atlanta Journal-Constitution: Real estate market stalls recruiting, promotions (ht Ann)

When executive Wade Ledbetter leaped at the opportunity to move up in his company, the shackles of relocation snatched him back down to earth.

That fabulous promotion came with a price: The $30,000 he’d invested in home improvements, the 20 percent he’d put down on his house and the extra payment every year for 7 1/2 years would be a wash, along with settling on a selling price well below what he’d paid for the home and just about all its contents. Add living away from his family in a one-bedroom apartment for eight months while his home languished on the market and his frustration accrued.

“It was horrible,” said Ledbetter, who relied in part on relocation assistance from his company. “It was constant, horrid stress. There were a number of times I said to myself, ‘What have I done?’ ”

Negative equity is impacting one of the historic strengths of the U.S. labor market - the ability of households to easily move from one region to another for a better employment opportunity.

by Calculated Risk on 6/02/2010 05:48:00 PM

From the American Bankruptcy Institute: May Consumer Bankruptcy Filings up 9 Percent from Last Year

The 136,142 consumer bankruptcies filed in May represented a 9 percent increase nationwide over the 124,838 filings recorded in May 2009, according to the American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center (NBKRC). NBKRC’s data also showed that the May consumer filings represented a 6 percent decrease from the 144,490 consumer filings recorded in April 2010. ...

“While consumer filings dipped slightly from last month, housing debt and other financial burdens weighing on consumers are still a cause for concern,” said ABI Executive Director Samuel J. Gerdano. “Consumer filings this year remain on track to top 1.6 million filings.”

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.

Based on the comment from Gerdano, it appears the ABI has increased their forecast to over 1.6 million filings this year from their earlier forecast of just over 1.5 million filings this year.

Excluding 2005, when the so-called "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" was enacted (really a pro-lender act), the record was in 2003 when 1.62 million personal bankruptcies were filed. This year will be close to that level.

I wonder how many of these bankruptcy filings are by homeowners who lost their homes in foreclosure and are now trying to extinguish any related recourse debt (1st or 2nd)?

by Calculated Risk on 6/02/2010 03:54:00 PM

Based on an estimate from Autodata Corp, light vehicle sales were at a 11.63 million SAAR in May. This is up 18.1% from May 2009 (when sales were very low), and up 3.9% from the April sales rate.

Click on graph for larger image in new window.

This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for May (red, light vehicle sales of 11.63 million SAAR from Autodata Corp).

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Note: dashed line is current month sales rate.

Auto sales have recovered from the low levels of early 2009, but are still at the lowest point of the '90/'91 recession (even with a larger number of registered drivers).

This was slightly above most forecasts of around 11.2 million SAAR.