by Calculated Risk on 8/09/2010 02:24:00 PM

A few articles of interest ...

From the BEA: Personal Income for Metropolitan Areas, 2009

Personal income declined in 2009 in most of the nation’s metropolitan statistical areas (MSAs), according to estimates released today by the U.S. Bureau of Economic Analysis.

The per capita income in my MSA fell 3.8% last year.

From Travis Berge and Oscar Jorda at the San Franscisco Fed: Future Recession Risks

An unstable economic environment has rekindled talk of a double-dip recession. The Conference Board’s Leading Economic Index provides data for predicting the probability of a recession but is limited by the weight assigned to its indicators and the varying efficacy of those indicators over different time horizons. Statistical experiments with LEI data can mitigate these limitations and suggest that a recessionary relapse is a significant possibility sometime in the next two years.

The authors make some adjustment to the LEI, including removing the yield curve:

However, the term structure may not presently be an accurate signal. Monetary policy has been operating near the zero lower bound to provide maximum monetary stimulus. In addition, the Greek fiscal crisis has generated a considerable flight to quality that has pushed down yields on U.S. Treasury securities. Indeed, ... omitting the rate-spread indicator generates far more pessimistic forecasts. For the period 18 to 24 months in the future, the probability of recession goes above 0.5, putting the odds of recession slightly above the odds of expansion.

From Ben Bernanke (1999): Japanese Monetary Policy: A Case of Self-Induced Paralysis?* (via Paul Krugman: Self-induced Paralysis)

There is quite a bit about deflaton and monetary policy in this 1999 paper from Ben Bernanke, including arguing for a higher inflation target of 3% to 4%. Bernanke even made some "helicopter drop" comments before his well known speech in 2002: Deflation: Making Sure "It" Doesn't Happen Here

From the 1999 paper:

An alternative strategy, which does not rely at all on trade diversion, is money-financed transfers to domestic households—-the real-life equivalent of that hoary thought experiment, the “helicopter drop” of newly printed money. I think most economists would agree that a large enough helicopter drop must raise the price level.

And relevant to the FOMC meeting tomorrow:

A nonstandard open-market operation ... is the purchase of some asset by the central bank (long-term government bonds, for example) at fair market value. The object of such purchases would be to raise asset prices, which in turn would stimulate spending (for example, by raising collateral values). I think there is little doubt that such operations, if aggressively pursued, would indeed have the desired effect ...

From Professor Tim Duy on the FOMC meeting tomorrow: Waiting for Nothing?

Incoming data give the Fed a green light to ease further. There is frequent chatter from unnamed sources that the Fed can do more and will consider more at this Tuesday's FOMC meeting. The public stance of Fed officials is recent weeks has tended to downplay the necessity for action at this juncture. This combination leaves the outcome of this week's FOMC meeting in doubt. My baseline expectation is that the FOMC statement acknowledges the weakness in recent data, but leaves the current policy stance intact. There is a nontrivial possibility that the Fed either implicitly or explicitly ends the policy of passive balance sheet contraction. I believe it very unlikely that the Fed sets in motion an expansion of the balance sheet.

There is much more in Duy's piece.

by Calculated Risk on 8/09/2010 11:25:00 AM

The combined REO (Real Estate Owned) inventory for Fannie, Freddie and the FHA increased by 13% in Q2 2010 from Q1 2010. The REO inventory (lender Real Estate Owned) increased 74% compared to Q2 2009 (year-over-year comparison).

Click on graph for larger image in new window.

This graph shows the REO inventory for Fannie, Freddie and FHA through Q2 2010.

The REO inventory for the "Fs" has increased sharply over the last year, from 135,868 at the end of Q2 2009 to 236,338 at the end of Q2 2010.

This is a new record for Fannie and Freddie; the FHA's REO inventory decreased slightly in Q2 2010.

Remember this is just a portion of the total REO inventory. Private label securities and banks and thrifts also hold a substantial number of REOs.

by Calculated Risk on 8/09/2010 09:40:00 AM

Freddie Mac reported: "a net loss of $4.7 billion for the quarter ended June 30, 2010, compared to a net loss of $6.7 billion for the quarter ended March 31, 2010." and the FHFA requested another $1.8 billion from Treasury. (ht jb)

"We recognize that high unemployment and other factors still pose very real challenges for the housing market" said Freddie Mac Chief Executive Officer Charles E. Haldeman, Jr.

Click on graph for larger image in new window.

Freddie Mac reported that their REO inventory increased 79% year over year, from 34,699 in Q2 2009 to 62,178 in Q2 2010.

REO: Real Estate Owned.

See page 16 of the Second Quarter 2010 Financial Results Supplement

This graph shows the rapid increase in REO.

Note: last week I posted a graph of the Fannie Mae REO.

by Calculated Risk on 8/09/2010 08:49:00 AM

Alana Semuels at the LA Times describes the impact of the housing / credit bust on the communities east of San Francisco: Northeast of Silicon Valley, recession's effects are magnified. A few excerpts:

[B]uilding has all but stopped. Home prices in San Joaquin County have fallen 63% since the peak median price of $451,500 in November 2005, according to MDA DataQuick. [Note: these are median prices]. Prices in Contra Costa County are down 53% from their peak of $600,000 in April 2007. One in every 135 houses in Contra Costa County received a foreclosure filing in June 2010. In San Joaquin County, that figure is 1 in 104 — nearly double the California average.

Signs of a slowdown are everywhere. At Bethel Island, a Contra Costa County summer vacation area normally busy with tourists and fishermen, boats sit rotting in the Sacramento River. Nearby, a planned residential waterfront development has stalled. The builder completed boat docks before pulling out; an eerie remnant of the luxury once planned there. In Livermore, an Alameda County town, whole shopping developments are empty and foreclosure notices dot homes.
...
The unemployment rate in Stockton, the county seat of San Joaquin County, is 19.8%. It's 29% in the nearby hamlet of Garden Acres, higher than any city of its size in Southern California's Inland Empire.

During the boom, a large percentage of the people in these communities worked in construction or other real estate related fields - and for obvious reasons, the more an area was dependent on housing, the larger the negative impact of the housing bust.

by Calculated Risk on 8/08/2010 08:34:00 PM

I mentioned the FOMC in the Weekly Summary and Schedule post, and here is some more ...

From the Financial Times: Fed set to downgrade outlook for US

The Federal Reserve is set to downgrade its assessment of US economic prospects when it meets on Tuesday to discuss ways to reboot the flagging recovery. ...

[The Fed might make] ... a decision to reinvest proceeds from maturing mortgage-backed securities held by the US central bank ... most economists believe that it would take several more months of poor data for the Fed to actually begin a new round of [large scale] asset purchases
excerpt with permission

That is a good summary. The Fed will obviously acknowledge the weaker data since the last meeting in June, but they might view the last two months as a "pause" as opposed to a slowdown. In his recent testimony and his speech last week, Bernanke clearly felt the economy would continue to recover. Bernanke said:

While the support to economic activity from stimulative fiscal policies and firms' restocking of their inventories will diminish over time, rising demand from households and businesses should help sustain growth. In particular, in the household sector, growth in real consumer spending seems likely to pick up in coming quarters from its recent modest pace, supported by gains in income and improving credit conditions.

A change in outlook in just a week would be significant.

It is possible that the Fed could announce they will reinvest the proceeds from maturing MBS (some people put this at $200 billion through 2011, but other analysts expect it might be closer to $400 billion with lower mortgage rates and more refinance activity).

It was just a couple of months ago that some Fed Presidents were arguing that the Fed should sell MBS in addition to the maturing MBS. Selling additional MBS is clearly off the table for now.

by Calculated Risk on 8/08/2010 05:15:00 PM

Professor Hamilton reviews the data last week: Current economic conditions. Unfortunately he is even more "discouraged":

Last week's new economics data were a mixed bag. But on balance I'd have to say I'm more discouraged than when the week began.
...
The Aruoba-Diebold-Scotti Business Conditions Index, which does not use hours, and does not adjust the monthly employment changes for the effects of temporary Census hiring, is certainly discouraged. In fact, the combined effect of last week's increase in new claims for unemployment insurance plus the weak employment report pushed the ADS dangerously close to the -0.8 value that historically would often mean that a new recession could be starting. The most recent inference of that series, however, can be heavily influenced by the latest data, and it would be a mistake to make too much out of the most very recent values.

But it would also be a mistake to say that everything is going just fine.

by Calculated Risk on 8/08/2010 10:55:00 AM

The key economic report this week will be July retail sales to be released on Friday. The FOMC statement on Tuesday will also be closely watched.

Sometime this week the July rail traffic report, from the Association of American Railroads (AAR), and the July Ceridian-UCLA Pulse of Commerce Index (based on diesel fuel consumption) will probably both be released. Both showed transportation weakness in June.

On Tuesday, the National Association of Independent Business (NFIB) will release the small business optimism survey for July. Also on Tuesday, the BLS will release the Q2 Productivity and Costs report, and the Census Bureau will release the Monthly Wholesale Trade: Sales and Inventories for June.

The Federal Reserve’s Federal Open Market Committee (FOMC) will meet on Tuesday, and the FOMC statement will be released at around 2:15 PM ET. This will be closely scrutinized for a discussion of the economic slowdown since the last meeting on June 23rd – especially considering the two weak employment reports in the interim – and to see if the FOMC will slightly ease monetary policy. There has been some discussion that the Fed might announce they are reinvesting maturing mortgage backed securities (MBS) into either new MBS or Treasury securities.

Jon Hilsenrath discusses this possibility in the WSJ: Jobs Report Intensifies Fed Debate

A key item on the agenda is likely to be whether the Fed should tweak its strategy for managing its $1.1-trillion portfolio of mortgage backed securities so holdings don't shrink in the months ahead.
...
The divisive question for the Fed is what message they would be sending if they alter their reinvestment strategy. Fed officials are acutely aware that if they start reinvesting proceeds from maturing mortgage bonds -- as they now do for maturing Treasury debt -- many investors will think they are laying the groundwork for a more dramatic move of large scale purchases of new bonds ...

On Wednesday, the MBA will release the mortgage purchase applications index. Also on Wednesday, the June Trade Balance report will be released at 8:30 AM by the Census Bureau. The consensus is for the U.S. trade deficit to increase slightly to $42.5 billion (from $42.3 billion in May). This might lead to further adjustments for Q2 GDP.

Also on Wednesday the Job Openings and Labor Turnover Survey (JOLTS) for June will be released at 10 AM by the BLS. This report has been showing very little turnover in the labor market and few job openings.

On Thursday, the initial weekly unemployment claims will be released. Consensus is for a decline to 460K from 479K last week.

On Friday, the Consumer Price Index for July will be released at 8:30 AM. This is expected to show a 0.2% increase in prices. Also on Friday July retail sales will be released at 8:30 AM. The consensus is for an increase of 0.5% from the June rate, and 0.2% increase ex-autos. Also the preliminary August Reuter's/University of Michigan's Consumer sentiment index will be released at 9:55 AM, and June Business inventories will be released at 10 AM.

And of course the FDIC will probably have another busy Friday afternoon ...

And a summary of last week:

July Employment Report: 12K Jobs ex-Census, 9.5% Unemployment Rate

Total nonfarm payroll declined by 131,000 in July.
The number of temporary decennial Census worker declined by 143,000.
So the total nonfarm ex-Census is -143,000 minus -131,000 = +12,000¹.

¹For an explanation, see: Employment Report: Why the different payroll numbers?

Click on graph for larger image.

This graph shows the job losses from the start of the employment recession, in percentage terms.

The dotted line shows the impact of Census hiring. In July, there were 196,000 temporary 2010 Census workers on the payroll. The number of Census workers will continue to decline - and the gap between the solid and dashed red lines will be gone in a few months.

Read more »

by Calculated Risk on 8/08/2010 07:15:00 AM

From Theo Francis at footnoted.com: Jingle mail in Jersey from Hyatt Hotels ... (ht NorkaWest)

If you’re in Princeton, New Jersey, anytime soon, swing by the Hyatt Regency Princeton. With the Hyatt Hotels (H) quarterly report filed yesterday, it has become a symbol of the financial crisis ... one of Hyatt’s subsidiaries “did not have sufficient cash flow to meet interest payment requirements under its mortgage loan” on the property, in this case a 347-room hotel with a restaurant, bar and comedy club, just a mile from the famous university.
...
“When hotel cash flow became insufficient to service the loan,” the company said in the filing, “HHC notified the lender that it would not provide assistance.” In other words, Hyatt decided to walk away — the equivalent of “jingle mail,” ... In Hyatt’s case, the company “and the lender agreed in principal to effect a deed in lieu of foreclosure transaction.”

Some people are still mailing in the keys!

by Calculated Risk on 8/07/2010 07:35:00 PM

An update by request ...

Click on graph for larger image.

This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more.

Note: The BLS reports 15+ weeks, so the 15 to 26 weeks number was calculated.

In July 2010, the number of unemployed for 27 weeks or more declined slightly to 6.572 million (seasonally adjusted) from 6.751 million in June. It is possible that the number of long term unemployed has peaked, but it is still very difficult for these people to find a job - and this is a very serious employment issue.

The less than 5 weeks category increased in July and is now at the highest level since January - and that is concerning.

Note: Even though these numbers are all seasonally adjusted, they can't be added together to calculate the unemployment rate.

Employment posts yesterday (with many graphs):

July Employment Report: 12K Jobs ex-Census, 9.5% Unemployment Rate for graphs of unemployment rate and a comparison to previous recessions.

Employment-Population Ratio, Part Time Workers, Unemployed over 26 Weeks

Employment Report: Temporary Help and Diffusion Index

by Calculated Risk on 8/07/2010 03:24:00 PM

Note: this is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for August 6, 2010.

Changes and comments from surferdude808:

The Federal Reserve was active this week issuing several Written Agreements and two Prompt Corrective Action Orders. Five state member banks were added to the Unofficial Problem Bank List this week. The additions are New Peoples Bank, Inc., Honaker, VA ($868 million); CapitalBank, Greenwood, SC ($745 million Ticker: CPBK); Premier Bank, Dubuque, IA ($292 million); Oregon Pacific Bank, Florence, OR ($164 million Ticker: ORPB); and Progress Bank of Florida, Tampa, FL ($119 million). Progress Bank of Florida has the dubious distinction of receiving a simultaneous Prompt Corrective Action Order with an enforcement action, which is a first during this crisis.

The Federal Reserve also issued a Prompt Corrective Action Order against Community First Bank - Chicago ($60 million). The OTS converted the Supervisory Agreement against Home Federal Bank of Hollywood to a Cease & Desist Order this week. The other changes are two removals -- the failed Ravenswood Bank ($301 million) and Charter West National Bank, which had its Supervisory Agreement terminated by the OCC.

The Unofficial Problem Bank List had a net change of three additions and finishes the week at 811 institutions with aggregate assets of $416.5 billion.

Click on graph for larger image in new window.

This graph shows the number of banks on the unofficial list. The number of institutions has more than doubled since we started the list in early August 2009 - even with all the bank failures (failures are removed from the list). The number of assets is up 50 percent over the last year.

On August 7, 2009, we listed 389 institutions with $276 billion in assets, and now the list has 811 institutions and $416.5 billion in assets.

The four red dots are the number of banks on the official problem bank list as announced in the FDIC quarterly banking profile for Q2 2009 through Q1 2010. The dots are lagged one month because of the delay in announcing formal actions. The FDIC Q2 2010 Quarterly Banking Profile will be released in a two weeks.

The unofficial count is close, but is slightly lower than the official count - probably mostly due to timing issues - so I expect the FDIC to list around 840 to 870 institutions at the end of Q2.