by Calculated Risk on 3/15/2011 10:00:00 AM

The National Association of Home Builders (NAHB) reports the housing market index (HMI) increased slightly to 17 in March. This was at expectations of an increase to 17. Confidence remains very low ... any number under 50 indicates that more builders view sales conditions as poor than good.

Click on graph for larger image in new window.

This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the March release for the HMI and the January data for starts (February housing starts will be released tomorrow).

Both confidence and housing starts have been moving sideways at a very depressed level for over two years.

Press release from the NAHB: Builder Confidence Edges Up One Point in March

After four consecutive months hovering at the same low level, builder confidence in the market for newly built, single-family homes improved by a single point in March, rising to 17 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the highest level the HMI has reached since May 2010, when the survey period corresponded with the final days of the federal home buyer tax credit program.
...
"While many home buyers are still holding off on making a purchase, builders did indicate slightly increased optimism about the future with a two-point gain in the HMI component gauging sales expectations for the next six months," added NAHB Chief Economist David Crowe. "In fact, prevailing indicators portend some improvement in the overall economy, which should generate modest housing market gains later this year."
...
Two out of three of the HMI's component indexes held unchanged in March, including the component gauging current sales conditions (holding at 17) and the component gauging traffic of prospective buyers (holding at 12). Meanwhile, the component gauging sales expectations in the next six months rose two points in March to 27, its highest level since May 2010.

Builders are still depressed, and the HMI has been below 25 for forty-five consecutive months - almost 4 years.

by Calculated Risk on 3/15/2011 08:30:00 AM

from the NY Fed: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to improve in March. The general business conditions index inched up 2 points, to 17.5. The new orders and shipments indexes fell but remained above zero, while the unfilled orders index rose above zero for the first time in a year. Price indexes continued to climb, suggesting that price increases had accelerated.
...
In addition, employment indexes also gained in March, suggesting an expansion in employment levels and in hours worked. The index for number of
employees rose 5 points to 9.1, and the average workweek index rose 10 points to 15.6.

This was slightly above expectations for an increase to 16.0.

Note: On Japan, from the WSJ: Japan Makes Progress at Troubled Nuclear Plant

Japanese officials appeared to have regained some control of northeast Japan's troubled nuclear power plant Tuesday afternoon ...

While radiation levels at the plant remain elevated, they have dropped significantly from earlier in the day, ruling out the continuation of unstoppable large-scale leaks.

Radiation levels in downtown Tokyo—which had also risen earlier Tuesday, though they remained well below levels that could damage human health—also fell sharply later in the day.

by Calculated Risk on 3/14/2011 10:31:00 PM

WSJ reports: Japan's Prime Minister said there is a high risk of elevated levels of radiation from a reactor at the Fukushima nuclear power plant that exploded earlier, and urged people within 30 kilometers to stay indoors

CNBC: Japan Reactor Operator: TEPCO Unable to Cool Reactor and Fuel Pool of Daiichi No. 4 Reactor

From the NY Times: Crucial Containment Structure Damaged

by Calculated Risk on 3/14/2011 07:28:00 PM

By request ...

From the NY Times: Japanese Officials Say Another Explosion Was Heard at Nuclear Plant

From the WSJ (before explosion at #2): Japan Nuclear Plant Troubles Deepen

Japanese officials said late Monday there is a high possibility that all three of the stricken reactors at the Fukushima Daiichi nuclear complex in northeastern Japan are now experiencing some degree of melting of their reactor cores that contain fuels—a condition that, if it worsens, could lead to dangerous radiation leaks. This suggests that despite various attempts to cool the reactors since Friday's massive earthquake and tsunami, the temperatures inside them remained precariously high.

NHK English

by Calculated Risk on 3/14/2011 05:00:00 PM

From Landon Thomas at the NY Times: E.U.'s Latest Rescue Package Seen Falling Short-Again

Europe’s leaders cobbled together a new structure over the weekend that will allow its rescue fund, the European Financial Stability Facility, to disburse its entire €440 billion, or $615 billion, allotment if needed, and to buy bonds at government auctions. They also eased the conditions on Greece’s rescue loans by reducing interest rates and extending repayment terms.

But the EFSF can only buy bonds for countries that have taken bailout funds (Greece and Ireland). This leave Portugal out ... unless they ask for a bailout.

And this is just buying time. Landon concludes:

In 2013, for example, Greece’s debt will have increased to almost 160 percent of G.D.P. ... by 2014 it must begin paying interest equivalent to about 8 percent of its G.D.P. — a huge amount by any measure.

For now, Greece has time. But with growth expected to shrink again this year, by 3.4 percent, and with unemployment now at about 15 percent, how long the Greek government, or any government for that matter, can continue to expect so much public sacrifice to pay off its bankers remains to be seen.

Just buying time for now.

by Calculated Risk on 3/14/2011 11:53:00 AM

Sometimes it helps to make a list of issues and hopefully start to check them off. Unfortunately the list has been getting longer, and some of the downside risks will be with us for some time.

Here is a list - with a few short comments:

• Risks from the earthquake in Japan.

• Higher oil prices and a possible supply shock.

Although U.S. oil prices have fallen under $100 per barrel this morning, prices are still high and a risk to the economy. As Professor Hamilton noted over the weekend, the recent sharp decline in consumer sentiment is probably tied to the high price of gasoline.

In addition to the events in Libya, Saudi Troops Enter Bahrain to Help Put Down Unrest

• U.S. Housing Crisis.

House prices are at new post-bubble lows and still falling.

And there is probably more distressed supply coming with 11.1 million U.S. residential properties with negative equity and about 4.3 million mortgage loans are delinquent or in the foreclosure process.

Although foreclosure activity has slowed - because of foreclosure processing issues - distressed sales are expected to increase again later this year.

• The European financial crisis.

Although an agreement was reached late Friday night on the loans to Greece - to extend the term and lower the interest rate - and also to allow the EFSF to intervene in the primary bond market, this just buys more time.

The Greek ten year yield is down to 12.3%. The Irish ten year yield is at 9.4% - even with no interest rate cut for Ireland.

There was some speculation last week that Portugal would request a bailout over the weekend. That didn't happen. Here are the Portuguese 2 year, 5 year and 10 year bond yields from Bloomberg. All are lower today after rising sharply last week.

Here are the Ten Year yields for Spain, and Belgium. Both lower too.

• State and local government cutbacks.

• Possible Federal government cutbacks (even shutdown).

Although the "debt ceiling" debate is just political grandstanding, you never know what will happen (I doubt the U.S. will default). It sounds like another short term budget deal will be reached, and it is but it is possible that more cuts will be enacted this year - slowing growth in 2011.

• Inflation (a two sided coin).

Although I think core inflation will remain below the Fed's target all year, it is possible that inflation could pick up more - or that policymakers will overreact. I think it is likely the Fed will remove the "the measures of underlying inflation have been trending downward" sentence in the FOMC statement tomorrow (see FOMC Preview), but I think we are still a long ways from tighter policy.

by Calculated Risk on 3/14/2011 08:45:00 AM

From the NY Times: Second Explosion at Reactor as Technicians Try to Contain Damage

From the NY Times: Radioactive Releases in Japan Could Last Months, Experts Say

From the WSJ: Supplies Run Short for Quake Survivors

From the NY Times: In Tsunami’s Wake, Much Searching but Few Are Rescued

Libya: From McClatchy: Gadhafi's forces roll east, build pressure on U.S. to step in

Weekend on U.S. economy:
• Summary for Week ending March 11th
• Schedule for Week of March 13th
• Preview of Tuesday FOMC Meeting

by Calculated Risk on 3/13/2011 08:31:00 PM

By requests, a few links ...
From the LA Times: Japan quake toll could number in tens of thousands

From the NY Times: Death Toll Estimate in Japan Soars as Relief Efforts Intensify

From the NY Times: Partial Meltdowns Presumed at Crippled Reactors

Before and after satellite photos from the NY Times.

The Nikkei is off 5%. From the WSJ: Japan Stocks Drop 5% Early Monday

Update: From Bloomberg: Japan Adds $86 Billion to Stabilize Markets After Quake

Earlier on U.S. economy:
• Summary for Week ending March 11th
• Schedule for Week of March 13th
• Preview of Tuesday FOMC Meeting

by Calculated Risk on 3/13/2011 01:30:00 PM

My thoughts are with the Japanese ...

There will be a one day meeting of the Federal Open Market Committee (FOMC) this coming Tuesday. The FOMC statement will be released around 2:15 PM ET, and I expect no changes to the Fed Funds rate, or to the program to reinvest principal payments, or to the Large Scale Asset Purchase program (LSAP, aka "QE2").

Some questions are:
1) how will the statement differ from the January statement,
2) will there be any mention of "tapering" off QE2 purchases (as opposed to ending abruptly in June),
3) and will any members dissent?

1) Possible Statement Changes. I don't expect the key sentence "likely to warrant exceptionally low levels for the federal funds rate for an extended period" to be changed any time soon.

There might be some minor changes to the first paragraph to mention the recent improvement in economic and employment data (and possibly mention additional downside risks from higher oil prices and maybe Japan). Also the FOMC statement will continue to note that "measures of underlying inflation are somewhat low", but they might modify or remove the sentence "the measures of underlying inflation have been trending downward."

2) Tapering off of QE2 Purchases? Back in January I heard speculation that the Fed might taper off the QE2 purchases of treasury securities to "promote a smooth transition in markets". That is what the Fed did with previous purchase programs.

However Jon Hilsenrath recently noted in the WSJ that there will probably be no tapering this time (He usually has excellent sources at the Fed):

"Though the idea of tapering has received some attention on Wall Street of late, officials seem unlikely to want to follow that course this time ..."

Hilsenrath also suggested the Fed will probably take a wait and see approach after June to see "how the economy performs later in the year without [QE2]."

As I noted in When will the Fed raise rates?, this suggests a timeline for the earliest Fed funds rate increase:
• End of QE2 in June.
• End of reinvestment 0 to 2 months later.
• Drop extended period language a couple months later
• Raise rates in early 2012.

That is probably the earliest the Fed would raise rates - and it could be much later.

3) Dissent? There was some discussion last month that one or two Fed presidents might dissent (both Dallas Fed President Richard Fisher and Philly Fed President Charles Plosser have expressed reservations about QE2). However it appears both will now support the completion of the $600 billion Large Scale Asset Purchase program, but probably oppose any further expansion.

Earlier on U.S. economy:
• Summary for Week ending March 11th
• Schedule for Week of March 13th

by Calculated Risk on 3/13/2011 08:15:00 AM

Earlier on the U.S. economy: Summary for Week ending March 11th

The key releases this week will be industrial production and the consumer price index on Thursday. The Federal Reserve FOMC meets on Tuesday. For housing, the NHAB housing market index will be released on Tuesday, and housing starts on Wednesday.

----- Monday, March 14th -----

----- Tuesday, March 15th -----
8:30 AM: NY Fed Empire Manufacturing Survey for March. The consensus is for a reading of 16.0, up from the reading of 15.43 in February. The regional manufacturing surveys have been showing strong growth in activity recently.

10:00 AM: The March NAHB homebuilder survey. The consensus is for a reading of 17, up slightly from 16 in February. Any number below 50 indicates that more builders view sales conditions as poor than good. This index has been below 25 for the last 3 1/2 years.

2:15 PM: FOMC Meeting Announcement. No changes are expected to either the federal funds rate or QE2.

----- Wednesday, March 16th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. This index has been very weak over the last couple months suggesting weak home sales through the first few months of 2011.

8:30 AM: Producer Price Index for February. The consensus is for a 0.6% increase in producer prices, and a 0.2% increase in core PPI.

8:30 AM: Housing Starts for February. After collapsing following the housing bubble, housing starts have mostly moved sideways at a very depressed level for the last two years.

This graph shows total and single unit starts since 1968.

Total housing starts were at 596 thousand (SAAR) in January, up 14.6% from the revised December rate of 520 thousand, however single-family starts decreased 1.0% to 413 thousand in January - the lowest level since early 2009.

The consensus is for a decrease to 560,000 (SAAR) in February.

----- Thursday, March 17th -----
8:30 AM: Consumer Price Index for February. The consensus is for a 0.4% increase for CPI in February - due to a surge in energy prices - but for core CPI to only show an increase of 0.1%.

8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for a decrease to 385,000 from 397,000 last week.

9:15 AM ET: The Fed will release Industrial Production and Capacity Utilization for February.

Capacity utilization at 76.1% is still far below normal - and well below the pre-recession levels of 81.2% in November 2007.

The consensus is for a 0.6% increase in Industrial Production in February, and an increase to 76.5% (from 76.1%) for Capacity Utilization.

10:00 AM: Philly Fed Survey for March. The consensus is for a reading of 32.0, down from the very strong 35.9 in February.

10:00 AM: Conference Board Leading Indicators for February. The consensus is for a 1.0% increase for this index.

----- Friday, March 18th -----
After 4:00 PM: The FDIC might have a busy Friday afternoon ...

Best wishes to All!