by Calculated Risk on 9/13/2010 07:15:00 PM

From William Alden at HuffPo: Home Prices Set To Fall Further: Richard Fairbank, Capital One CEO

"I think we feel very cautious about the housing market," [Capital One CEO Richard Fairbank] said. "I think that even despite some of the recent months where home prices have gone up, I think it's a very plausible case for home prices to go back down again."
...
"We are managing to a view that home prices are more likely to be headed down rather than up."

I think house prices started falling again in July, but it might take some time before we see prices falling in the repeat sales index. CoreLogic will probably release their July HPI this week, and that might show declining prices - but that is a weighted average of May, June and July.

by Calculated Risk on 9/13/2010 03:14:00 PM

By request, the following graph is an update to: The Investment Slump in Q2 2009

The following graph shows the rolling 4 quarter contribution to GDP from residential investment, equipment and software, and nonresidential structures. This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. The usual pattern - both into and out of recessions is - red, green, blue.

Click on graph for larger image in new window.

Residential Investment (RI) made a positive contribution to GDP in the Q2 2010, but RI will be a drag on GDP again in Q3.

RI was positively impacted in Q2 by the housing tax credit in two ways: first, builders rushed to complete homes by the end of June, and, second, real estate agent commissions were boosted in Q2 and will decline sharply in Q3 (just look at existing home sales in July).

The rolling four quarter change for RI just turned positive, but will turn negative again in Q3.

Equipment and software investment has made a significant positive contribution to GDP for four straight quarters (it is coincident).

The contribution from nonresidential investment in structures was flat in Q2 - only because of a surge of investment for petroleum and natural gas - while investment in hotels, malls and office buildings continued to decline. As usual nonresidential investment in structures is the last sector to recover.

The key leading sector - residential investment - has lagged the recovery because of the huge overhang of existing inventory. Usually RI is a strong contributor to GDP growth and employment in the early stages of a recovery, but not this time - and this is a key reason why the recovery has been sluggish so far.

by Calculated Risk on 9/13/2010 01:04:00 PM

October is the first month for seasonal retail hiring - and most hiring happens in November. So it is probably time to start looking ahead.

According to a survey released last week, most retailers plan on hiring about the same number of seasonal workers as last year (a weak year), however about one-fifth expect to hire more.

Here was an article from the WSJ: Holiday Job Outlook Stays Flat

Most major American retailers plan to hire the same number of temporary holiday workers as last year, according to a survey by a top industry consultant, underscoring that store chains continue to view the coming season with caution.

Still, the annual Hay Group survey ... found that more than one-fifth of respondents expected to hire more seasonal help than in 2009 ...

Click on graph for larger image.

The first graph shows that seasonally adjusted (blue) and not seasonally adjusted (red) retail employment. There is a clear seasonal pattern (no surprise).

Not only is overall retail employment down, but seasonal hiring was very low in 2008, and still weak in 2009.

The second graph shows the seasonal hiring by the three key months (October, November and December).

Although seasonal hiring bounced back last year, it was still the second weakest year since 1989 (only 2008 was worse). From this early survey, it sounds like there should be some increase in seasonal hiring - but it will still be a very weak year.

by Calculated Risk on 9/13/2010 08:48:00 AM

Nick Timiraos has an excellent article on house prices and foreclosures at the WSJ: Banks' Plans for Foreclosed Homes Will Drive Market

The speed at which house prices fall over the next few months could depend ... on how banks decide to manage the huge number of foreclosed homes they own or may take from delinquent borrowers in the near future.

Unlike home owners, banks often are much quicker to slash prices to unload properties quickly.
...
"We see the perfect storm brewing with rising supply and falling demand," said Ivy Zelman ... She estimated that distressed sales could account for half of the market by year-end if traditional sales didn't rebound.

Usually house prices are sticky downwards and decline over several years, but the flood of foreclosures in late 2008 pushed down prices significantly in lower priced areas (Tom Lawler called this "destickification").

Something similar could happen again, especially in some mid-to-high end areas where prices are still too high, although it won't be the flood of foreclosures we saw at the end of 2008. But prices will fall.

There is much more in the article ...

by Calculated Risk on 9/12/2010 11:45:00 PM

From the WSJ: China Has Done ‘Very Little’ on Exchange Rate: Geithner

“China took the very important step in June of signaling that they’re going to let the exchange rate start to reflect market forces. But they’ve done very, very little, they’ve let it move very, very little in the interim."

And from Paul Krugman at the NY Times: China, Japan, America

Back in June, Timothy Geithner, the Treasury secretary, praised China’s announcement that it would move to a more flexible exchange rate. Since then, the renminbi has risen a grand total of 1, that’s right, 1 percent against the dollar — with much of the rise taking place in just the past few days, ahead of planned Congressional hearings on the currency issue.

Obviously China is a "currency manipulator" ... now what?

by Calculated Risk on 9/12/2010 07:59:00 PM

A few excerpts from a WSJ interview with Treasury Secretary Timothy Geithner: Geithner Urges Action on Economy

"[The] typical error most countries make coming out of a financial crisis is they shift too quickly to premature restraint. ... It is very important for us to avoid that mistake. If the government does nothing going forward, then the impact of policy in Washington will shift from supporting economic growth to hurting economic growth."

And on tax cuts for high income earners:

"We just don't think it would be responsible for this country, given the size of our future deficits, and given the substantial burden the middle class has been bearing over the past decade in particular, to go out and borrow $700 billion from our children so we can sustain those Bush tax cuts that only go to the wealthiest 2% of Americans."

I agree with Geithner on both points.

by Calculated Risk on 9/12/2010 03:40:00 PM

The key releases this week will be retail sales (on Tues for August), Industrial Production (Weds for August) and the Empire state and Philly Fed surveys (Weds and Thurs for Sept).

----- Likely, but not scheduled -----
Possibly on Monday (update: I've been told Tuesday): Ceridian-UCLA Pulse of Commerce Index™ This is the diesel fuel index for August (a measure of transportation).

CoreLogic House Price Index for July. This release could show the first signs of price declines in July, although the index is a weighted 3 month average for May, June and July.

----- Monday Sept 13th -----
No releases scheduled.

----- Tuesday Sept 14th -----
8:30 AM: Retail Sales for August. The consensus is for a 0.3% increase from July.

Early: NFIB Small Business Survey for August. This survey has been showing declining optimism in the small business sector.

10:00 AM: Manufacturing and Trade: Inventories and Sales for July. Consensus is for a 0.6% increase in inventories in July.

----- Wednesday Sept 15th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. This index declined sharply following the expiration of the tax credit, and the index has only recovered slightly over the last few weeks - suggesting reported home sales in August and September will be weak.

8:30 AM: Empire Manufacturing Survey for Sept. The consensus is for a reading of 5.0, down from 7.1 in August. These regional surveys have been showing a slowdown in manufacturing and are being closely watched right now.

9:15 AM: Industrial Production and Capacity Utilization for August. The consensus is for a 0.2% increase in August.

----- Thursday Sept 16th -----
8:30 AM: The initial weekly unemployment claims report will be released. Consensus is for a slight increase to 455K from 451K last week. Claims for nine states were estimated last week because of the holiday.

8:30 AM: Producer Price Index for August. The consensus is for a 0.3% increase in prices.

10:00 AM: Philly Fed Survey for September. This survey declined sharply over the last few months, and showed contraction last month for the first time since July 2009. The consensus is for an increase to 3.8 (slow expansion) from minus 7.7 in August.

----- Friday Sept 17th -----
8:30 AM: Consumer Price Index for August. The consensus is for a 0.3% increase in prices. This is being closely watched for further disinflation, and also because Q3 is the quarter the annual annual cost-of-living adjustment (COLA) is calculated for Social Security (probably no change in 2011).

9:55 AM: Reuters/University of Mich Consumer Sentiment preliminary for September. The consensus is for a slight increase to 70.0 from 68.9 in August.

12:00 PM: Q2 Flow of Funds Report from the Federal Reserve.

After 4:00 PM: The FDIC has only closed one bank over the last 3 weeks. The pace will probably pickup soon ...

by Calculated Risk on 9/12/2010 12:18:00 PM

The details will be released later today, but here is an overview from the Financial Times: Regulators agree to reforms on bank capital

Basel III ... is expected to include a new minimum core tier one ratio for banks worldwide. ... The current minimum is 2 per cent.

[The] proposal [was] for a new minimum of 4½ per cent [with] an additional buffer of 2½ per cent ... Banks within the buffer zone would face restrictions on their ability to pay dividends and discretionary bonuses.
excerpt with permission

Here is an article from the WSJ: Bank Regulators Reach Deal on New Capital Rules

The details will be released later, and the agreement is expected to be approved in November. This will probably lead to more banks raising capital.

by Calculated Risk on 9/12/2010 09:00:00 AM

It was a light week for economic news ...

Trade Deficit declines in July

The Census Bureau reports:

[T]otal July exports of $153.3 billion and imports of $196.1 billion resulted in a goods and services deficit of $42.8 billion, down from $49.8 billion in June, revised.

Click on graph for larger image.

The first graph shows the monthly U.S. exports and imports in dollars through June 2010.

Although imports declined in July, imports have been increasing much faster than exports.

The second graph shows the U.S. trade deficit, with and without petroleum, through July.

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.

The decrease in the deficit in July was across the board, although the oil deficit only declined slightly. The trade gap with China declined slightly to $25.92 billion from $26.15 billion in June - essentially unchanged.

This is the 2nd largest monthly trade deficit since the 2008 collapse in trade.

Consumer Credit Declines in July

The Federal Reserve reports:

In July, total consumer credit decreased at an annual rate of 1-3/4 percent. Revolving credit decreased at an annual rate of 6-1/4
percent, and nonrevolving credit increased at an annual rate of 1/2 percent.

This graph shows the increase in consumer credit since 1978. The amounts are nominal (not inflation adjusted).

Revolving credit (credit card debt) is off 15.2% from the peak. Non-revolving debt (auto, furniture, and other loans) is off 1.1% from the peak. Note: Consumer credit does not include real estate debt.

Other Economic Stories ...

From the Federal Reserve: Beige book Continued growth, but "widespread signs of a deceleration"

Housing Completions will set new record low in 2010

The MBA reports: Mortgage Purchase Applications Up, Refinance Applications Fall Slightly in Latest MBA Weekly Survey

From the BLS: Job Openings increases in July, Low Labor Turnover

Unofficial Problem Bank List increases to 849 institutions

Best wishes to all.

by Calculated Risk on 9/11/2010 07:52:00 PM

Here is a new paper on EU Sovereign debt exposures. (ht Mark Whitehouse at the WSJ: Number of the Week: Hiding Europe’s Unpleasant Details)

From Blundell-Wignall, A. and P. Slovik (2010), “The EU Stress Test and Sovereign Debt Exposures”

The EU-wide stress test did not include haircuts for sovereign debt held in the banking books of banks on the grounds that over the 2 years considered default is virtually impossible in the presence of the EFSF [European Financial Stability Facility Special Purpose Vehicle], which is certainly large enough to meet funding needs of the main countries of concern over that period.

The haircuts applied to the trading book in the stress test are shown in the first block of Table 1. The trading book exposures (not reported in the stress test paper) are also shown. The EU wide loss from the haircut is around €26. bn. The contribution of the 5 countries where most of the market focus has been (Greece, Portugal, Ireland, Italy and Spain) is only €14.4bn.

Click on table for larger image in new window.

A different picture emerges when we consider the banking book. First it is important to note that the EU banking book sovereign exposures are very much larger than those of the trading book—around 83% of the total. If the same haircuts are applied to these exposures the loss amounts to €139bn, or 12% of the Tier 1 capital of the EU banks at the end of 2009 (and €165bn and over 14% of Tier 1 if trading book losses are added in). The haircuts of the 5 countries of market focus amount to €75.8bn in the banking book, and €90.2bn if the trading book amount is added in. This is around 8% of EU Tier 1 capital of stress tested banks.
...
This study has shown that most of the sovereign debt is held on the banking books of banks, whereas the EU stress test only considered their small trading book exposures. Sovereign debt held in the banking book cannot be ignored however. First, individual bank failures would see latent losses on the trading book realized, a fact that creditors and equity investors need to take into account. Second, and more importantly, the market is not prepared to give a zero probability to debt restructurings beyond the period of the stress test and/or the period after which the role of the EFSF SPV comes to an end. The main reasons for this are: the very large job ahead for fiscal consolidation in a period of weak economic growth; and the apparent difficulty of achieving structural/competitiveness reforms in some countries in a short period of time. The paper also showed that excessively exposed banks in principle can reduce their exposure by not re-financing maturing sovereign debt, with the government funding gap being met instead by the SPV. This would have the effect of transferring sovereign risk from the bank concerned to the public sector.

What happens in less than 2 years when the European Financial Stability Facility Special Purpose Vehicle is no longer providing funding?