by Calculated Risk on 6/14/2010 11:59:00 PM

I thought these comments by St Louis Fed President James Bullard today were a little odd: The Global Recovery and Monetary Policy

"As of the first quarter of 2010, real GDP stands just shy of the 2008 second quarter level, so that growth of about 1.25 percent would be sufficient to allow real GDP to surpass the previous peak. At that point, the U.S. economy would be fully "recovered" from the very sharp downturn of late 2008 and early 2009."

Fully recovered? Tell that to the millions of unemployed workers.

"To be clear, the 1.25 percent is a quarterly number, and would be 5.0 percent at an annual rate."

Uh, I don't think that is clear. The 1.25% is the level real GDP is currently below the pre-recession peak.

What he meant is it would take an annualized quarterly growth rate of about 5% in Q2 to raise real GDP the 1.25% needed to reach the previous peak.

Although I think that 5.0 percent at an annual rate is too much to expect for current quarter real GDP growth, it seems like a reasonable possibility over the next two quarters combined.

What he means is he thinks there is "a reasonable possibility" that the economy will grow at an annualized rate of 2.5% over the six months period including Q2 and Q3. That is possible, but I'll take the under.

Given these conditions, I expect the U.S. recovery in GDP to be complete in the third quarter of this year.

This is overlooking the weakness in Gross Domestic Income. There are really two measures of GDP: 1) real GDP, and 2) real Gross Domestic Income (GDI). The two measures are conceptually identical, but yield slightly different results.

Recent research suggests that GDI is often more accurate than GDP, especially when the economy is weak. From Fed economist Jeremy Nalewaik, “Income and Product Side Estimates of US Output Growth,” Brookings Papers on Economic Activity.:

Considerable evidence suggests that the growth rates of GDP(I) better represent the business cycle fluctuations in true output growth than do the growth rates of GDP(E). ... These results strongly suggest that economists and statisticians interested in business cycle fluctuations in U.S. output should pay attention to the income-side estimates, and consider using some sort of weighted average of the income- and expenditure-side estimates in their analyses. The evidence in this paper clearly suggests that the weights should be skewed towards GDP(I) ...

Real GDI is still 2.3% below the previous peak, and if the economy grows at 3% all year, real GDI will not surpass the previous peak until Q1 2011.

by Calculated Risk on 6/14/2010 07:51:00 PM

From Kathy Jumper at the Mobile Press-Register: As oil washes ashore, property managers sharply cut condo rents (ht DaveinSV)

Property managers are offering 30 percent to 50 percent cuts at condominium units and beach houses, hoping to fill rooms and prevent cancellations in the wake of the BP oil spill.

"June has been gutted, as far as rental occupancies," said David Bodenhamer, a partner in Young's Suncoast Vacation Rentals in Gulf Shores ... "We've had $220,000 in cancellations in the last three days." ... "The problem is that even at those lower rates, we're not getting near enough takers. Reservation calls have gone to a fraction of what they would normally be on a daily basis."

I'm not sure the lower prices will make much difference. Who wants to vacation at a beach and not be able to swim in the water? Or to see (and probably smell) the oil?

The article mentions that Alabama beach resorts generate about 75% of their annual revenue in June, July and August. So this entire season is lost.

On the bright side, other resort areas are probably doing better.

When I went backpacking in the Sierra in the summer of 2008, I asked the ranger how the economy was impacting traffic. He said it was their busiest year ever! People were still going on vacation, just to less expensive destinations. With the Gulf disaster, I expect the inland mountain resorts will have a banner year.

by Calculated Risk on 6/14/2010 03:54:00 PM

Over the last year a number of analysts have predicted the Fed would raise the Fed Funds rate "soon". They have all been wrong.

The Fed's mission is to conduct "monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates". Historically the Fed has not raised the Fed Funds rate until unemployment drops significantly. Based on the the Fed's own forecasts of the unemployment rate and inflation, the Fed will probably not raise the Fed Funds rate until late 2011 at the earliest.

San Francisco Fed senior vice president and associate director of research Glenn Rudebusch writes: The Fed's Exit Strategy for Monetary Policy

Rudebusch's economic letter suggests that the Fed might not raise rates until 2012 ...

Click on graph for larger image in new window.

The graph from Rudebusch's shows a modified Taylor rule. According to Rudebusch's estimate, the Fed Funds rate should be around minus 5% right now if we ignore unconventional policy (obviously there is a lower bound):

The resulting simple policy guideline recommends lowering the funds rate by 1.3 percentage points if inflation falls by 1 percentage point and by almost 2 percentage points if the unemployment rate rises by 1 percentage point.
...
Figure 1 also provides a simple perspective on when the Fed should raise the funds rate. The dashed line combines the benchmark rule of thumb with the Federal Open Market Committee’s median economic forecasts (FOMC 2010), which predict slowly falling unemployment and continued low inflation. The dashed line shows that to deliver future monetary stimulus consistent with the past—and ignoring the zero lower bound—the funds rate would be negative until late 2012. In practice, this suggests little need to raise the funds rate target above its zero lower bound anytime soon.

Rudebusch them modifies the rule taking into account unconventional policy.

Even though the funds rate was pushed to its zero lower bound by the end of 2008, considerable scope remained to lower long-term interest rates. To do this, the Fed started buying longer-term Treasury and federal agency debt securities ...

The additional stimulus from the Fed’s unconventional monetary policy implies that the appropriate level of short-term interest rates would be higher than shown in Figure 1. ... If the Fed’s purchases reduced long rates by ½ to ¾ of a percentage point, the resulting stimulus would be very roughly equal to a 1½ to 3 percentage point cut in the funds rate. Assuming unconventional policy stimulus is maintained, then the recommended target funds rate from the simple policy rule could be adjusted up by approximately 2¼ percentage points, as shown in Figure 3, and the recommended period of a near-zero funds rate would end at the beginning of 2012.

Perhaps the unemployment rate will decline faster than expected - or inflation will increase - but right now I wouldn't expect an increase in the Fed Funds rate for a long long time ...

by Calculated Risk on 6/14/2010 01:21:00 PM

From MarketWatch: Moody's slashes Greece to 'Ba1' from 'A3'

Moody's Investors Service on Monday downgraded Greece's government bond ratings by four notches to junk status of Ba1 from A3 ...

No real surprise ...

by Calculated Risk on 6/14/2010 11:03:00 AM

From Bloomberg: Economy in U.S. Slows as States Lose Federal Stimulus Funds (ht Brian)

State and local cutbacks may trim growth by about a quarter percentage point in 2010 and 2011 ... said Mark Zandi, chief economist at Moody’s Analytics Inc. He also sees the governments lopping payrolls by 200,000 during the next year after reducing them by 190,000 in the 12 months through May.

“The budget cutting that is dead ahead will be a significant impediment to economic growth later this year into 2011,” he said in an interview.

I've been forecasting a 2nd half slowdown in GDP growth based on:

1) less Federal stimulus spending in the 2nd half of 2010. The decline in stimulus will probably be a drag of about 0.5% on GDP growth by Q4.

2) the end of the inventory correction. The inventory adjustment contributed 3.8% in Q4 2009 of the 5.6% annualized growth rate, and 1.65% of the 3.0% GDP growth (annualized) in Q1 2010. This will probably fall to zero - or even subtract from growth.

3) more household saving leading to slower growth in personal consumption expenditures,

4) another downturn in housing (lower prices, less residential investment),

5) slowdown in China and Europe and

6) cutbacks at the state and local level. According the Mark Zandi, this will subtract about 0.25% from GDP growth.

David Rosenberg of Gluskin Sheff + Associates wrote this morning:

"A double-dip, admittedly, is not yet a sure thing but I am definitely warming to the view."

I still think we will avoid a double dip, but I expect growth to be sluggish and choppy.

A quarter point here, and half point there ... and pretty soon you have some real drag.

by Calculated Risk on 6/14/2010 09:02:00 AM

The Bank for International Settlements (BIS) put out the BIS Quarterly Review, June 2010 yesterday. As part of the review, the BIS estimated the exposures of banks by nationality to the residents of Greece, Ireland, Portugal and Spain:

As of 31 December 2009, banks headquartered in the euro zone accounted for almost two thirds (62%) of all internationally active banks’ exposures to the residents of the euro area countries facing market pressures (Greece, Ireland, Portugal and Spain). Together, they had $727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece (Graph 3).

French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain. At the end of 2009, they had $958 billion of combined exposures ($493 billion and $465 billion, respectively) to the residents of these countries. This amounted to 61% of all reported euro area banks’ exposures to those economies. French and German banks were most exposed to residents of Spain ($248 billion and $202 billion, respectively), although the sectoral compositions of their claims differed substantially. French banks were particularly exposed to the Spanish non-bank private sector ($97 billion), while more than half of German banks’ foreign claims on the country were on Spanish banks ($109 billion). German banks also had large exposures to residents of Ireland ($177 billion), more than two thirds ($126 billion) of which were to the non-bank private sector.

French and German banks were not the only ones with large exposures to residents of euro area countries facing market pressures. Banks headquartered in the United Kingdom had larger exposures to Ireland ($230 billion) than did banks based in any other country. More than half of those ($128 billion) were to the non-bank private sector. UK banks also had sizeable exposures to residents of Spain ($140 billion), mostly to the non-bank private sector ($79 billion). Meanwhile, Spanish banks were the ones with the highest level of exposure to residents of Portugal ($110 billion). Almost two thirds of that exposure ($70 billion) was to the non-bank private sector.

Click on graph for larger image in new window.

This graph shows the exposure of bank by nationality to the risky countries.

The bailout of the risky countries is very much a bailout of the banks - especially the banks of Germany and France.

The BIS puts the numbers in perspective:

The exposures of BIS reporting banks to the public sectors of the euro area countries facing market pressures can be put into perspective by comparing them with these banks’ capital. The combined exposures of German, French and Belgian banks to the public sectors of Spain, Greece and Portugal amounted to 12.1%, 8.3% and 5.0%, respectively, of their joint Tier 1 capital. By comparison, the combined exposures of Italian, Dutch and Swiss banks to the same public sectors were equal to 2.8%, 2.7% and 2.0%, respectively, of their Tier 1 capital. Those ratios stood at 3.4%, 1.2% and 0.7%, respectively, for Japanese banks and 2.0%, 0.8%, and 0.7%, respectively, for UK banks. The exposures of US banks to each of the above public sectors amounted to less than 1% of their Tier 1 capital.

It is the German and French banks that are most at risk.

by Calculated Risk on 6/13/2010 09:15:00 PM

Here is the Weekly Summary and a Look Ahead

From Kim Murphy at the LA Times: As businesses collapse, claimants still waiting for checks from BP

Across the gulf, residents already shellshocked by the tar balls, oil soup and dead sea life washing up on their beaches are now getting hit with a second wave: the sudden collapse of their livelihoods, and the equally intimidating challenge of getting BP to pay for it.
...
Hotels, restaurants, machine shops, bars, tour companies all became collateral damage when the Gulf of Mexico ... became an industrial cleanup site.

One real estate agent said his "phone quit ringing a month ago", but is that because of the oil gusher or other factors? This will takes years to sort out ...

by Calculated Risk on 6/13/2010 05:31:00 PM

From Neal Boudette and Sharon Terlep at the WSJ: Auto-Sales Optimism Fades

According to AutoData, light vehicle sales were up 17.2% over the first five months of 2010 - compared to the same period in 2009. This was an increase from 3.95 million to 4.63 million cars and light trucks.

However - according to Boudette and Terlep - fleet sales were up 32% during the first five months, and sales to individuals were only up 13%.

And without individual buyers it will be hard to maintain sales growth.

George Pipas, the top sales analyst at Ford Motor Co., said he is seeing evidence that consumers are deferring decisions on major purchases, in large part because home values and income growth haven't rebounded.

"These are two things that really have to happen before you will see auto sales move up more significantly," Mr. Pipas said.

It will be sometime before home values increase significantly (I expect further price declines later this year), and income growth in most industries will be muted with high unemployment. So we should probably expect the growth in auto sales to slow significantly.

by Calculated Risk on 6/13/2010 11:59:00 AM

Two housing related reports will be released this week: the NAHB builder confidence survey on Tuesday and housing starts on Wednesday.

On Tuesday, the June Empire State manufacturing survey will be released at 8:30 AM. The consensus is for a slight increase from the May reading. Also on Tuesday, the June NAHB homebuilder survey will be released at 10 AM. The consensus is for about the same level as May.

Also on Tuesday, St. Louis Fed President James Bullard will speak on "Getting Serious About Asset Bubbles and Monetary Policy" in Hong Kong at 6:15 AM ET.

On Wednesday, Housing Starts for May will be released at 8:30 AM. The consensus is for a 3.3% decrease to 650K (SAAR) in May from 672K in April. Based on the sharp decline for permits in April, starts might fall even further in May (I'll take the under this month). Also at 8:30 AM, the BLS will release the Producer Price Index (PPI) for May. The consensus is for a decrease of 0.5%.

Also on Wednesday, the MBA will release the mortgage purchase applications index. This has been falling sharply suggesting a sharp decline in home sales after the expiration of the tax credit. And the Federal reserve will release the May Industrial Production and Capacity Utilization report at 9:15 AM. Expectations are for production to increase 1% and capacity utilization to increase to 74.5% (the highest levels since late 2008).

On Thursday, the May Consumer Price Index (CPI) will be released at 8:30 AM. The consensus is for a 0.2% decrease in prices. Also on Thursday, the closely watched initial weekly unemployment claims will be released. Consensus is for a decline to 450K from 456K last week. Also on Thursday, the Philly Fed survey and the Conference Board's index of leading indicators will both be released at 10 AM.

And on Friday, the BLS will release the Regional and State Employment and Unemployment report for May at 10 AM. And of course the FDIC will probably have another busy Friday afternoon ...

And a summary of last week:

Retail Sales decline in May

On a monthly basis, retail sales decreased 1.2% from April to May (seasonally adjusted, after revisions), and sales were up 6.9% from May 2009 (easy comparison).

Click on graph for larger image in new window.

This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline).

The red line shows retail sales ex-gasoline and shows the increase in final demand ex-gasoline has been sluggish.

Retail sales are up 8% from the bottom, but still off 4.6% from the pre-recession peak.

Mortgage Purchase Applications decline 35% over last four weeks

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

The purchase index has collapsed following the expiration of the tax credit suggesting home sales will fall sharply too. This is the lowest level for the purchase index since February 1997. From the MBA:

“Purchase and refinance applications dropped this week, even after an adjustment for the Memorial Day holiday. Purchase applications are now 35 percent below their level of four weeks ago, as homebuyers have not yet returned to the market following the expiration of the homebuyer tax credit at the end of April,” said Michael Fratantoni, MBA’s Vice President of Research and Economics.

Rail Traffic Softens in May

The Association of American Railroads reported traffic in May 2010 was up 15.8% compared to May 2009 - and traffic was still 11.8% lower than in May 2008.

This graph shows U.S. average weekly rail carloads. Traffic increased in 18 of 19 major commodity categories YoY.

From AAR:

U.S. railroads averaged 294,758 carloads per week in April 2010 and 288,793 in March 2010. Thus, May 2010’s average was actually down slightly from those months ... One month does not a trend make, but it would obviously be worrisome if the decline continued.

Trade Deficit increases slightly in April

The Census Bureau reports:

[T]otal April exports of $148.8 billion and imports of $189.1 billion resulted in a goods and services deficit of $40.3 billion, up from $40.0 billion in March, revised. April exports were $1.0 billion less than March exports of $149.8 billion. April imports were $0.8 billion less than March imports of $189.9 billion.

This graph shows the U.S. trade deficit, with and without petroleum, through April.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Although both imports and exports were off slightly in April, both have been increasing sharply - but are still below the pre-crisis levels. Once again China and oil are the major contributors to the trade deficit.

Other Economic Stories ...

From NFIB: Small Business Optimism Increases But Not Enough to Spur Hiring, Capital Spending

BLS: Low Labor Turnover, Job Openings Increase in April

Fed Chairman Bernanke's testimony before the House Budget Committee: Economic and financial conditions and the federal budget

From the Federal Reserve: Beige book "modest" economic growth, "Shadow" inventory of Foreclosed Homes

UCLA Anderson Forecast and Ceridian Corporation index using real-time diesel fuel consumption data: PCI Strikes Optimistic Note For U.S. Economy with 3.1 Percent Gain in May

From the Financial Times: FBI to target mortgage fraud

Manufacturing and Trade Inventory-to-Sales Ratio: Inventory Adjustment Over

Unofficial Problem Bank List: 760 Institutions

Best wishes to all.

by Calculated Risk on 6/13/2010 08:13:00 AM

From Jackie Calmes and Sheryl Gay Stolberg at the NY Times: Obama Presses for Aid to Cities and States

President Obama on Saturday implored Congress to provide more aid to states and cities to blunt “the devastating economic impact of budget cuts” by local governments that imperil the jobs of teachers, the police, firefighters and other public employees.

In a letter to Democratic and Republican Congressional leaders, Mr. Obama said the “mounting employment crisis” in the states “could set back the pace of our economic recovery.” ... education secretary, Arne Duncan, has said that without federal aid, up to 300,000 fewer teachers would be in classrooms this fall ...

The WaPo quotes Obama as writing there will be "massive layoffs of teachers, police and firefighters" without the additional funds.