by Calculated Risk on 1/14/2011 02:31:00 PM

From Boston Fed President Eric Rosengren: Two Key Questions about the Economic Recovery

The first question is, what role will housing play in the recovery? ... housing has traditionally been an important sector of the economy for generating recovery. ... I expect housing will not provide as much support to this recovery as it has in previous ones. My sense is that residential investment, consumer durables, and services related to housing will be less robust than is usual in many recoveries, thus playing a role in what I think will be only a gradual improvement in the economy and employment.

To put it plainly, these housing-related headwinds are part of why I do not expect growth greater than 4 percent this year. And while 4 percent is not terrible, at that rate it will still take a very long time to get back to full employment.
...
The real laggard in this recovery has been housing. While housing is a relatively small component of GDP, it can be quite volatile – and often grows rapidly during an economic recovery. In addition, purchases of appliances, home furnishings, and housing-related services are impacted by slowed housing activity. Given the problems that flow from the bursting of the housing bubble, Figure 5 [below] shows that residential fixed investment is roughly where it was at the trough of the recession – and thus not providing its more usual contribution to growth in the early stages of a recovery.

The above graph is from Rosengren (PDF version here).

This shows the lack of contribution from residential investment in the current recovery. If Rosengren had included earlier recessions, many would like the 1982 recovery!

And on inflation:

A second key question involves the concerns about Fed actions stoking inflation. ... Some observers and analysts have voiced great concern that the nascent economic recovery, combined with the actions of the Federal Reserve that have expanded its balance sheet, will lead to significant inflation. However, Figure 11 [see previous post for similar graph] provides a variety of different measures of core inflation; core CPI, core PCE, trimmed core CPI and trimmed core PCE. It is striking how much all four series have declined. In fact many of these series are at their historical lows.
...
While we have been experiencing disinflation generally, it is not the case for all prices. ... some prices have risen rapidly. Energy prices in particular have been rising, in response to robust growth in emerging markets. But outside of energy prices, most prices have shown little increase, and in fact a number of the major categories in the CPI index have experienced declines in prices. ... my primary concern about rising energy prices is not so much that they will lead to higher inflation, but that they will subtract from household income and thus weaken the economy.

I've highlighted this many times: residential investment is usually a strong engine of recovery, but not this time because of the large excess inventory of vacant housing units. I think residential investment will finally add to GDP and employment growth this year, but the increase will not be robust.

by Calculated Risk on 1/14/2011 12:43:00 PM

The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.1% (1.7% annualized rate) in December. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.6% annualized rate) during the month. ...

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.5% (6.2% annualized rate) in December. The CPI less food and energy increased 0.1% (1.1% annualized rate) on a seasonally adjusted basis.

Over the last 12 months, the median CPI rose 0.6%, the trimmed-mean CPI rose 0.8%, the CPI rose 1.5%, and the CPI less food and energy rose 0.8%

So these three measures: core CPI, median CPI and trimmed-mean CPI, all increased less than 1% over the last 12 months.

However, all three increased in December at an annualized rate - although still below the Fed's target of around 2%. The headline CPI number reflects the surge in oil prices.

Click on graph for larger image in graph gallery.

This graph shows these three measure of inflation on a year-over-year basis.

They all show that inflation has been falling, and that measured inflation is up less than 1% year-over-year.

Note: The Cleveland Fed has a discussion of a number of measures of inflation: Measuring Inflation

The indexes for rent and owners' equivalent rent both increased in December.

By these measures rents have bottomed and are starting to increase again (this fits with earlier reports of falling vacancy rates and rising rents). I don't expect rents to push up inflation very much (I think core inflation will stay low for some time with all the slack in the system), but rising rents suggests that the excess rental housing units are being absorbed - a necessary step for an eventual recovery in residential investment.

by Calculated Risk on 1/14/2011 10:09:00 AM

The preliminary Reuters / University of Michigan consumer sentiment index declined to 72.7 in January from 75.2 in December.

Click on graph for larger image in graphics gallery.

This was below the consensus forecast of 75.5.

Sentiment is still at levels usually associated with a recession - and sentiment is well below the pre-recession levels.

In general consumer sentiment is a coincident indicator, and this suggests the recovery is still relatively sluggish.

by Calculated Risk on 1/14/2011 09:15:00 AM

From the Fed: Industrial production and Capacity Utilization

Industrial production increased 0.8 percent in December after having risen 0.3 percent in November. ... At 94.9 percent of its 2007 average, total industrial production in December was 5.9 percent above its level of a year earlier. The capacity utilization rate for total industry rose to 76.0 percent, a rate 4.6 percentage points below its average from 1972 to 2009.

Click on graph for larger image in new window.

This graph shows Capacity Utilization. This series is up 11.5% from the record low set in June 2009 (the series starts in 1967).

Capacity utilization at 76.0% is still far below normal - and well below the pre-recession levels of 81.2% in November 2007.

Note: y-axis doesn't start at zero to better show the change.

The second graph shows industrial production since 1967.

Industrial production increased in December, but production is still 5.8% below the pre-recession levels at the end of 2007.

This was above consensus expectations of a 0.5% increase in Industrial Production, and an increase to 75.6% for Capacity Utilization.

by Calculated Risk on 1/14/2011 08:30:00 AM

On a monthly basis, retail sales increased 0.6% from November to December(seasonally adjusted, after revisions), and sales were up 7.9% from December 2009.

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).

Retail sales are up 13.5% from the bottom, and now 0.2% above the pre-recession peak.


The second graph shows the year-over-year change in retail sales (ex-gasoline) since 1993.

Retail sales ex-gasoline increased by 7.4% on a YoY basis (7.9% for all retail sales).

Here is the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for December, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $380.9 billion, an increase of 0.6 percent (±0.5%) from the previous month, and 7.9 percent (±0.7%) above December 2009. Total sales for the 12 months of 2010 were up 6.6 percent (±0.4%) from 2009. Total sales for the October through December 2010 period were up 7.8 percent(±0.5%) from the same period a year ago. The October to November 2010 percent change was unrevised from +0.8 percent (±0.2%).

This was below expectations for a 0.8% increase. Retail sales ex-autos were up 0.5%; also below expectations of a 0.7% increase.

Although slightly lower than expected, retail sales are now above the pre-recession peak in November 2007.

by Calculated Risk on 1/13/2011 09:13:00 PM

From Shahien Nasiripour at the HuffPo: Citigroup Was On The Verge Of Failure, New Report Finds; Rescue Was Based On 'Gut Instinct'

"We were on the verge of having to close this institution [Citigroup] because it can't meet its liquidity Monday morning," said Sheila Bair, chairman of the Federal Deposit Insurance Corporation, during a meeting the previous Sunday night, according to the report by the Special Inspector General for the Troubled Asset Relief Program.

"Without substantial government intervention," said another FDIC official, bank regulators and Citigroup "project that Citibank will be unable to pay obligations or meet expected deposit outflows next week," according to the report.

We all knew it was close ...

by Calculated Risk on 1/13/2011 05:32:00 PM

From Mary Ellen Podmolik at the Chicago Tribune: More banks walking away from homes, adding to housing crisis (ht, Mark, Walt, Bob)

Abandoned foreclosures are increasing as mortgage investors determine that, at sale, they can't recoup the costs of foreclosing, securing, maintaining and marketing a home, and they sometimes aren't completing foreclosure actions. The property, by then usually vacant, becomes another eyesore ...

Research ... identifies 1,896 "red flag" homes in Chicago ... that appear to have been abandoned by mortgage servicers during the foreclosure process, the Woodstock Institute found.

We've seen this before in areas with declining populations like Detroit. These are always low end homes that are worth less than the cost of foreclosing - and it leaves behind a mess for the community and the city.

by Calculated Risk on 1/13/2011 02:39:00 PM

A few more "successful" auctions. Time will tell. Also Jean-Claude Trichet made some cautious statements about inflation in Europe ... and a history and analysis of the euro from Paul Krugman.

• From the WSJ: Strong Demand at European Debt Auctions

Both Spain and Italy sold the maximum intended amounts they had planned, with Spain selling €3 billion ($3.94 billion) of a five-year bond and Italy selling €6 billion in five- and 11-year bonds.
...
Spain's Treasury sold the bonds at an average yield of 4.542%, up from 3.576% at the previous auction Nov. 4 ... Italy sold its five-year bond at a yield of 3.67%, up from 3.24% on Nov. 12, while the yield on the longer bond rose to 5.06% from 4.81%.

• From the Financial Times: Hawkish Trichet comments boost euro

“Overall, we see evidence of short-term upward pressure on overall inflation, stemming largely from global commodity prices. While this has not so far affected our assessment that price developments will remain in line with price stability over the policy-relevant horizon, very close monitoring of price developments is warranted,” [Jean-Claude Trichet, chairman of the European Central Bank] said.
excerpt with permission

• And some history from Paul Krugman in the NY Times Magazine: Can Europe Be Saved?. Krugman explains the history and the problems with the euro - and there is an interesting discussion comparing and contrasting U.S. state issues with the government issues in Europe.

by Calculated Risk on 1/13/2011 01:45:00 PM

Panel discussion on CNBC (link here)

Update: Economy to Grow 3-4% in 2011 But Hiring Still Lags: Bernanke

"We see the economy strengthening," Bernanke said during Small Business forum co-sponsored by the FDIC and CNBC. "It has looked better in the last few months. We think a 3 to 4 percent-type of growth number for 2011 seems reasonable."

"Now that's not going to reduce unemployment at the pace we'd like it to, but certainly it would be good to see the economy growing and that means more sales, more business," he added.

The Fed chairman also said the housing recovery is "a slow process."

by Calculated Risk on 1/13/2011 11:59:00 AM

From RealtyTrac: 2010 Year-End Foreclosure Report

RealtyTrac® ... today released its Year-End 2010 U.S. Foreclosure Market Report™, which shows a total of 3,825,637 foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on a record 2,871,891 U.S. properties in 2010, an increase of nearly 2 percent from 2009 and an increase of 23 percent from 2008. ...

Foreclosure filings were reported on 257,747 U.S. properties in December, a decrease of nearly 2 percent from the previous month and down 26 percent from December 2009 — the biggest annual drop in foreclosure activity since RealtyTrac began publishing its foreclosure report in January 2005 and giving December the lowest monthly total since June 2008.
...
“Total properties receiving foreclosure filings would have easily exceeded 3 million in 2010 had it not been for the fourth quarter drop in foreclosure activity — triggered primarily by the continuing controversy surrounding foreclosure documentation and procedures that prompted many major lenders to temporarily halt some foreclosure proceedings,” said James J. Saccacio, chief executive officer of RealtyTrac. “Even so, 2010 foreclosure activity still hit a record high for our report, and many of the foreclosure proceedings that were stopped in late 2010 — which we estimate may be as high as a quarter million — will likely be re-started and add to the numbers in early 2011.”

And from Jon Prior at HousingWire:

Daren Blomquist, who edits the RealtyTrac monthly reports, said the record set in 2010 will not last for long.

"We don’t think we’ve peaked yet nationwide," Blomquist told HousingWire. "We’re expecting the 2011 numbers to be slightly higher than 2010, and then start the downward trend toward 'normalcy' in 2012."

Activity slowed down in Q4, but will probably pick up again in Q1.