by Calculated Risk on 9/07/2011 04:25:00 PM

Today San Francisco Fed President John Williams outlined some of the downside risks and temporary factors for the economic outlook: The Outlook for the U.S. Economy and Role for Monetary Policy. Here are some excerpts:

Temporary factors:

The recent slowdown was due in part to temporary factors. The weather was unusually bad in many parts of the country this past winter, the Japanese earthquake disrupted global supply chains, and, perhaps most importantly for U.S. economic growth, oil and other commodity prices surged. Higher prices at the pump staggered Americans and took a sizable bite out of consumer spending at a particularly sensitive moment for the economy.

The effects of these temporary brakes on growth have largely faded.
...
[W]e are vulnerable to negative shocks that could put the recovery at risk. That’s why events in Europe are such a cause for concern. Fears that some nations in the euro zone will not be able to make payments on their debts have spread from smaller countries, such as Greece and Ireland, to larger economies, such as Spain and Italy. This is not something we can dismiss as somebody else’s problem. A full-blown financial meltdown in Europe would hit U.S. exports, which have been one of the economy’s few bright spots. Perhaps more importantly, it could slam U.S. financial markets and deal a further blow to already fragile confidence. In other words, a downturn in Europe could knock the props out from under the U.S. recovery.

We’ve had our own shock right here at home in the form of the contentious debate over a long-term fix for the federal budget deficit. It’s essential that we bring the budget under control. But, how this is accomplished is extremely important, both for our country’s short- and long-run economic health. ... In the near term, efforts at deficit reduction may reduce demand and further slow the already precarious recovery. In addition, the deficit controversy has added one more ingredient to the currents of economic anxiety that are roiling households and businesses.

And on downside risks:

[S]everal more persistent trends are also impeding recovery. The news from the housing market has been particularly dismal. Past recoveries typically got a kick start from a rebound in home construction and spending on furniture, appliances, and other big-ticket items people needed for their new houses and apartments. This time, though, construction is stuck at post-World War II low levels. A huge supply of homes is available for sale, which keeps prices down. Add to that what might be called a shadow inventory of some 4 million homes whose owners are seriously delinquent on their mortgages or in foreclosure. Despite great loan terms and low prices, buyers who qualify for credit are understandably nervous about jumping back into the housing market. And, of course, millions of other potential buyers are underwater on their current mortgages, making it hard for them to sell or refinance.

Meanwhile, the bounce in consumer spending often seen in the wake of recessions has been unusually tepid this time around. The combination of huge amounts of household debt, losses in the housing and stock markets, and high unemployment has clearly taken a toll on both the ability and willingness of households to spend. People are on edge waiting for the other shoe to drop. Consumer sentiment plunged last month, which was partly a reaction to the unnerving news about the federal debt ceiling debate in Washington, D.C., and the European debt crisis. In fact, the latest consumer sentiment readings are near the all-time lows recorded in late 2008 during the most terrifying moments of the financial crisis. Here is a telling statistic: Sixty-two percent of households expect their income to stay the same or decline over the next year, the worst reading in the over 30 years that this question has been asked. With consumer spending making up 70 percent of the economy, it’s hard to have a robust recovery when Americans are so dispirited.

Right now I'd put the European crisis and premature austerity as the two biggest downside risks. High gasoline prices are still a drag, as is the ongoing housing crisis.

John Williams concludes:

Right now, though, the real threat is an economy that is at risk of stalling and the prospect of many years of very high unemployment, with potentially long-run negative consequences for our economy.

by Calculated Risk on 9/07/2011 02:00:00 PM

Fed's Beige Book:

Reports from the twelve Federal Reserve Districts indicated that economic activity continued to expand at a modest pace, though some Districts noted mixed or weakening activity. The St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco Districts all reported either modest or slight expansion. Atlanta said activity continued to expand at a very subdued pace, while Cleveland reported slow growth and New York indicated growth remained sluggish. Economic activity expanded more slowly in the Chicago District and slowed in the Richmond District. Business activity in the Boston and Philadelphia Districts was characterized as mixed, with Philadelphia adding that activity was somewhat weaker overall. Several Districts also indicated that recent stock market volatility and increased economic uncertainty had led many contacts to downgrade or become more cautious about their near-term outlooks.
...
Consumer spending increased slightly in most Districts since the last survey, but non-auto retail sales were flat or down in several Districts.
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Manufacturing conditions were mixed across the country, but the pace of activity slowed in many Districts. The New York, Philadelphia, and Richmond Districts reported declining activity overall, and contacts in the Boston and Dallas Districts noted slowing demand from European customers. Cleveland said factory production was stable, and manufacturing activity in the Atlanta and Chicago Districts grew at a slower pace. Minneapolis, Kansas City, and San Francisco reported slight expansions, and St. Louis said activity continued to increase and that several manufacturers planned to open plants and expand operations in the near future. Most manufacturing contacts were less optimistic than in the previous survey; however, future capital spending plans were solid in a few Districts.
...
Labor markets were generally steady, although some Districts reported modest employment growth.

And on real estate:

Residential real estate activity remained weak overall, although a few Districts noted some slight improvements. Contacts in the Boston, Atlanta, Minneapolis, and Dallas Districts reported an increase in home sales over the previous year's weak levels; however, the uptick in the Atlanta District was concentrated mainly in Florida. The remaining Districts all reported stable or slower sales from the previous survey period ...

Commercial real estate conditions remained weak or little changed in most Districts, although some improvements were noted by New York, Minneapolis, and Dallas. Commercial real estate activity was sluggish in the Boston, Cleveland, Richmond, Atlanta, Kansas City, and San Francisco Districts.

This was based on data gathered on or before August 26th. More sluggish growth ...

by Calculated Risk on 9/07/2011 12:20:00 PM

From Chicago Fed President Charles Evans: The Fed's Dual Mandate Responsibilities and Challenges Facing U.S. Monetary Policy

Suppose we faced a very different economic environment: Imagine that inflation was running at 5% against our inflation objective of 2%. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.

In the United States, the Federal Reserve Act charges us with maintaining monetary and financial conditions that support maximum employment and price stability. This is referred to as the Fed’s dual mandate and it has the force of law behind it.

The most reasonable interpretation of our maximum employment objective is an unemployment rate near its natural rate, and a fairly conservative estimate of that natural rate is 6%. So, when unemployment stands at 9%, we’re missing on our employment mandate by 3 full percentage points. That’s just as bad as 5% inflation versus a 2% target. So, if 5% inflation would have our hair on fire, so should 9% unemployment.

The current unemployment rate of 9.1% (16.2% U-6) is a tragedy. Even though the high unemployment rate was a direct result of the bursting of the housing bubble and the financial crisis - Evans argues that we shouldn't just accept a sluggish recovery:

In their book This Time is Different, Carmen Reinhart and Ken Rogoff documented the substantially more detrimental effects that financial crises typically impose on economic recoveries. Recoveries following severe financial crises take many years longer than usual, and the risk of a second recession before the ultimate economic recovery returns to the previous business cycle peak is substantially higher. In a related study of the current U.S. experience, Reinhart and Rogoff show that the current anemic recovery is following the typical post-financial crisis path quite closely, given the size of the financial contraction. It would be nice to point to some features of the recovery that suggest greater progress relative to the Reinhart-Rogoff benchmark. But those are hard to come by.

It bears keeping in mind that the Reinhart-Rogoff predictions of a slow recovery are based on historical averages of macroeconomic performances across many different countries at many different times. They highlight a challenge we face today, but from the standpoint of the underlying economic analysis, there is nothing pre-ordained about these outcomes. They are not theoretical predictions—rather, they are reduced form correlations. The economy can perform better than it did in these past episodes if policy responds better than it did in those situations. In my opinion, maintaining the Fed’s focus on both of our dual-mandate responsibilities is a necessary and critical element of an appropriate response to the financial crisis that can produce better economic outcomes.

by Calculated Risk on 9/07/2011 10:00:00 AM

From the BLS: Job Openings and Labor Turnover Summary

The number of job openings in July was 3.2 million, little changed from June. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the level in July was 1.1 million openings higher than in July 2009 (the most recent trough).

The following graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Unfortunately this is a new series and only started in December 2000.

Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for July, the most recent employment report was for August.

Click on graph for larger image in graph gallery.

Notice that hires (purple) and total separations (red and blue columns stacked) are pretty close each month. When the purple line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

In general job openings (yellow) has been trending up - and job openings increased slightly again in July - and are up about 13% year-over-year compared to July 2010.

Overall turnover is increasing too, but remains low. Quits increased slightly in July, and have been trending up - and quits are now up about 9% year-over-year.

by Calculated Risk on 9/07/2011 07:26:00 AM

The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey

The Refinance Index decreased 6.3 percent from the previous week. The seasonally adjusted Purchase Index increased 0.2 percent from one week earlier.
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"Heading into the Labor Day weekend, the 30-year rate was at its second lowest level in the history of our survey (the low point was reached last October), and the 15-year rate marked a new low in our survey," said Mike Fratantoni, MBA's Vice President of Research and Economics. "Despite these rates however, refinance application volume fell for the third straight week, and is more than 35 percent below levels at this time last year. Purchase application volume remains relatively flat at extremely low levels, close to lows last seen in 1996."
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The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.23 percent from 4.32 percent, with points decreasing to 1.04 from 1.29 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. This is the second lowest 30-year rate recorded in the survey.

The following graph shows the MBA Purchase Index and four week moving average since 1990.

Click on graph for larger image in graph gallery.

The four week average of the purchase index is now at the lowest levels since August 1995.

This doesn't include the large number of cash buyers ... but purchase application activity was especially weak over the previous month, and this suggests weak home sales in September and October.

Also - with the 10 year treasury yield below 2% this week - mortgage rates will probably be at record lows in the survey next week.

by Calculated Risk on 9/06/2011 09:33:00 PM

Some analysis from Kash Mansori: Swiss FAQs. Excerpts:

6. Will the announced exchange rate floor of 1.20 CHF/euro be modified?
It's possible, and in fact, the announcement by the SNB indicated that they would like the CHF to weaken further over time. This is a very sensible strategy by the SNB, and I wouldn't be surprised if they soon make an explicit promise to gradually ratchet up the exchange rate from 1.20. The reason is because only by promising investors that their CHF portfolio will suffer exchange rate losses over time can the SNB really do something to staunch the flow of funds into Switzerland -- a fixed exchange rate of 1.20 won't do it. The SNB will probably give it a little time to see if the flow of funds into Switzerland slows as a result of today's action, but if it doesn't, then look for the SNB to set a gradually rising target exchange rate going forward.

7. How will this affect the eurozone?
That depends in part on what the SNB decides to do with all of those euro it will be accumulating. Some reports suggest that the SNB (typically cautious) had decided to only buy German and French government bonds with those euro, and not bonds from other eurozone countries. That will have the effect of exacerbating the interest rate differentials between the eurozone core and periphery, potentially making things worse. It would be reasonable to interpret this as indicating that the SNB believes that there's a good chance that eurozone is going to lose the periphery countries.

Alternatively, the SNB could decide to place a bet on the survival of the eurozone, or at least on continued Spanish and Italian inclusion. If so, then it could help to make that positive outcome happen by using some of its growing stash of euros to buy Spanish and Italian government bonds. Not only would this directly help to narrow interest rate spreads between the core and periphery, but it would be interpreted by the markets as a major vote of confidence.

by Calculated Risk on 9/06/2011 06:18:00 PM

Since I haven't posted this in some time - from Doug Short: S&P 500 Snapshot: Cliff Dive and Partial Recovery


This graph (click on graph for larger image) from Doug Short shows the wild market swings over the last few weeks.

by Calculated Risk on 9/06/2011 01:35:00 PM

From Jon Lansner at the O.C. Register: Sellers rush to pull homes off O.C. market

The latest Orange County home inventory report from local broker Steve Thomas — data as of September 1 [shows] sellers quit the market in droves.

As more homeowners throw in the towel with the realization that the best time of the year to sell has now passed, the inventory continues to steadily drop. Last year at this time the inventory was still growing, continuing right through September. Not this year. Over the past month, the inventory has shed a total of 349 homes and now totals 10,754, dropping below the 11,000 mark and reaching levels not seen since March. In the last two weeks alone, the inventory dropped by 297 homes, the largest drop so far this year. Last year there were 963 more homes on the market compared to today. In transitioning into the fall market, expect more homeowners to throw the proverbial towel. This will continue through the end of the year.

It is normal for inventory to decline as the summer ends, so this decline is mostly seasonal. However, not mentioned in the article, is that this is an 8.2% decline from the same period in 2010.

I've been using the HousingTracker / DeptofNumbers data that Tom Lawler mentioned back in June to track inventory. Ben at deptofnumbers.com is tracking the aggregate monthly inventory for 54 metro areas.

Click on graph for larger image in graph gallery.

This graph shows the NAR estimate of existing home inventory through July (left axis) and the HousingTracker data for the 54 metro areas through early September. The HousingTracker data shows a steeper decline in inventory over the last few years (the NAR will probably revise down their inventory estimates this fall).

The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker.

HousingTracker reported that the early September listings - for the 54 metro areas - declined 16.5% from last September. Of course there is a large percentage of distressed inventory, and various categories of "shadow inventory" too. But this is a significant year-over-year decline and pretty soon we will be talking about inventory being at the lowest level since 2005 (inventory increased sharply near the end of 2005 signaling the end of the housing bubble).

by Calculated Risk on 9/06/2011 10:00:00 AM

The August ISM Non-manufacturing index was at 53.5%, up from 52.7% in July. The employment index decreased in August to 51.6%, down from 52.5% in July. Note: Above 50 indicates expansion, below 50 contraction.

From the Institute for Supply Management: August 2011 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in August for the 21st consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee. "The NMI registered 53.3 percent in August, 0.6 percentage point higher than the 52.7 percent registered in July, and indicating continued growth at a slightly faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased 0.5 percentage point to 55.6 percent, reflecting growth for the 25th consecutive month, but at a slower rate than in July. The New Orders Index increased by 1.1 percentage points to 52.8 percent. The Employment Index decreased 0.9 percentage point to 51.6 percent, indicating growth in employment for the 12th consecutive month, but at a slower rate than in July. The Prices Index increased 7.6 percentage points to 64.2 percent, indicating that prices increased at a faster rate in August when compared to July. According to the NMI, 10 non-manufacturing industries reported growth in August. Respondents' comments remain mixed. There is a degree of uncertainty concerning business conditions for the balance of the year."
emphasis added

Click on graph for larger image in graph gallery.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

This was above the consensus forecast of 50.5% and indicates slightly faster expansion in August than in July.

by Calculated Risk on 9/06/2011 08:44:00 AM

This is a strongly worded statement from the SNB: Swiss National Bank sets minimum exchange rate at CHF 1.20 per euro

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.

Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.

The FT Alphaville has several posts about this move, including The clairvoyant Jim O’Neill and SNB euroquake, the analyst reaction – part one and SNB euroquake, the analyst reaction – part two.