by Calculated Risk on 3/15/2011 02:15:00 PM

• The target range for the federal funds rate remains at 0 to 1/4 percent
• The policy of reinvestment of principal payments remains
• no change to the plan to purchase an additional $600 billion of longer-term Treasury securities by the end of June 2011.
• the key sentence "likely to warrant exceptionally low levels for the federal funds rate for an extended period" remains

From the Federal Reserve:

Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Inflation "subdued" instead of "trending downward".

by Calculated Risk on 3/15/2011 12:11:00 PM

The BuildFax Residential Remodeling Index was at 99.0 in January. This is based on the number of properties pulling residential construction permits in a given month.

From BuildFax:

The Residential BuildFax Remodeling Index rose 22% year-over-year—and for the fifteenth straight month—in January to 99.0, the highest January number in the history of the index, which starts in 2004.
...
All regions posted year-over-year gains, although the Northeast continues to lag behind the other regions.
...
According to Joe Masters Emison, vice president of research and development at BuildFax, "As of today, the BuildFax Remodeling Index gives clear indication that every region and the nation as a whole is seeing increased remodeling activity from the low point of the recent recession. The Midwest, West, and the nation as a whole have recovered to pre-recession levels or better, while the South and Northeast are still recovering."

Click on graph for larger image in graph gallery.

Although down month-to-month (off 5% from December) this is the highest level for a January since BuildFax started tracking permit data.

Note: permits are not adjusted by value, so this doesn't mean there is more money being spent, just more permit activity. Also some smaller remodeling projects are done without permits and the index will miss that activity.

Since there is a strong seasonal pattern for remodeling, the second graph shows the year-over-year change from the same month of the previous year.

The remodeling index is up 22% from January 2010.

Although new home construction is still moving sideways, it appears that two other components of residential investment are increasing in 2011: multi-family construction and home improvement (based on this index).

Data Source: BuildFax, Courtesy of Index.BuildFax.com

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