by Calculated Risk on 9/08/2011 07:55:00 PM

From economist Tom Lawler: While normally I don’t put out an “early read” on existing home sales this early – mainly because not enough realtor associations/boards/MLS have released their stats to get a “good” national read – the reports that have come in so far suggest to me that existing home sales in August rebounded from July on a seasonally adjusted basis.

Last August the NAR estimated that existing home sales ran at a SAAR of 4.24 million. This August, of course, there was one more business day than last August, and this month’s seasonal factor will probably be 1.5%-2.0% higher than last August’s. The NAR estimated that July existing home sales – which came in south of “consensus,” and below what past pending home sales indices would have suggested (though it was right on top of my regional tracking) – ran at a SAAR of 4.67 million. A “flat” reading for seasonally adjusted existing home sales for August, then, would imply a YOY gain in NSA sales in the 11.8% to 12.3% range.

Incoming data, in my view, suggest a national YOY gain well above that – probably in the 16.8% range or so, which would imply that the NAR’s existing home sales estimate for August will probably come in at a seasonally adjusted annual rate of around 4.87 million, a gain from July of about 4.3%, and I think there may be more upside than downside risk to that forecast.

Click on graph for larger image in graph gallery.

Such an increase, by the way, is not broadly inconsistent with the latest pending home sales index, which showed a mild decline in July. After all, the gains in previous months didn’t show up in similar gains in closed sales, suggesting either (a) increased cancellations; (b) increased delays from contract to closing; or (c) a combination of both. Right now, the correct answer appears to be “c.” (August reflects Lawler forecast).

by Calculated Risk on 9/08/2011 06:40:00 PM

Here are some excerpts (via the WSJ):

I am sending this Congress a plan that you should pass right away. It’s called the American Jobs Act. There should be nothing controversial about this piece of legislation. Everything in here is the kind of proposal that’s been supported by both Democrats and Republicans – including many who sit here tonight. And everything in this bill will be paid for. Everything.

The purpose of the American Jobs Act is simple: to put more people back to work and more money in the pockets of those who are working. It will create more jobs for construction workers, more jobs for teachers, more jobs for veterans, and more jobs for the long-term unemployed. It will provide a tax break for companies who hire new workers, and it will cut payroll taxes in half for every working American and every small business. It will provide a jolt to an economy that has stalled, and give companies confidence that if they invest and hire, there will be customers for their products and services. You should pass this jobs plan right away.

Cut payroll taxes in half? I'll be looking for details.

by Calculated Risk on 9/08/2011 04:48:00 PM

The Greek 2 year yield is at 55%!

From the WSJ: Greece's Recession Deepens

Greece's economy sank deeper into recession in the second quarter than previously forecast, with gross domestic product contracting by 7.3% on the year. ...

Plunging domestic consumption was mostly responsible for the steep contraction rate ... With consumers bracing for the implementation of further austerity measures, promised in exchange for a fresh bailout to Greece ... Data showed Thursday that Greece's unemployment fell to 16% in June from 16.6% in May, but remained sharply above the rate of 11.6% a year earlier.

Perhaps the headline should read "Greece's Depression Deepens".

And there is more austerity to come, from the WSJ: Greek Officials Scramble to Find More Cuts

Greece's Socialist government is scrambling to cut public spending after receiving stark ultimatums from euro-zone governments that further rescue money will be withheld if Athens doesn't deliver on promises to reduce its budget deficit.

The government now is looking at unprecedented public-sector layoffs and cuts in civil-service perks ...

Without the aid, Greece is expected to run out of money within weeks, say senior Greek government officials.

The beatings will continue until morale improves.

by Calculated Risk on 9/08/2011 01:30:00 PM

Note: Bernanke did not discuss monetary policy options.

From Fed Chairman Ben Bernanke: The U.S. Economic Outlook. Excerpts on inflation:

The Outlook for Inflation
Let me turn now from the outlook for growth to the outlook for inflation. Prices of many commodities, notably oil, increased sharply earlier this year. Higher gasoline and food prices translated directly into increased inflation for consumers, and in some cases producers of other goods and services were able to pass through their higher costs to their customers as well. In addition, the global supply disruptions associated with the disaster in Japan put upward pressure on motor vehicle prices. As a result of these influences, inflation picked up significantly; over the first half of this year, the price index for personal consumption expenditures rose at an annual rate of about 3-1/2 percent, compared with an average of less than 1-1/2 percent over the preceding two years.

However, inflation is expected to moderate in the coming quarters as these transitory influences wane. In particular, the prices of oil and many other commodities have either leveled off or have come down from their highs. Meanwhile, the step-up in automobile production should reduce pressure on car prices. Importantly, we see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy. Longer-term inflation expectations have remained stable according to the indicators we monitor, such as the measure of households' longer-term expectations from the Thompson Reuters/University of Michigan survey, the 10-year inflation projections of professional forecasters, and the five-year-forward measure of inflation compensation derived from yields of inflation-protected Treasury securities. In addition to the stability of longer-term inflation expectations, the substantial amount of resource slack that exists in U.S. labor and product markets should continue to have a moderating influence on inflationary pressures. Notably, because of ongoing weakness in labor demand over the course of the recovery, nominal wage increases have been roughly offset by productivity gains, leaving the level of unit labor costs close to where it had stood at the onset of the recession. Given the large share of labor costs in the production costs of most firms, subdued unit labor costs should be an important restraining influence on inflation.

Bernanke is arguing inflation is not currently a problem - and that suggests the Fed will take action at the September meeting.

by Calculated Risk on 9/08/2011 12:11:00 PM

From Freddie Mac: Mortgage Rates Attain New All-Time Record Lows Again

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing mortgage rates, fixed and adjustable, hitting all-time record lows amid market and employment concerns and economic uncertainty. The previous record lows for fixed mortgage rates, and the 1-year ARM, were set the week of August 18, 2011. The 5-Year ARM matched its all-time low set last week at 2.96 percent.

30-year fixed-rate mortgage (FRM) averaged 4.12 percent with an average 0.7 point for the week ending September 8, 2011, down from last week when it averaged 4.22 percent. Last year at this time, the 30-year FRM averaged 4.35 percent.

Here is a long term graph of 30 year mortgage rate in the Freddie Mac survey:

Click on graph for larger image in graph gallery.

The Freddie Mac survey started in 1971. Mortgage rates are currently at a record low for the last 40 years (mortgage rates were close to this range in the '50s).

The second graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®.

Refinance activity declined a little last week, but activity was up significantly in August compared to July.

With 30 year mortgage rates now at record lows, mortgage refinance activity will probably pick up some more in September - but so far activity is lower than in '09 - and much lower than in 2003.

by Calculated Risk on 9/08/2011 09:03:00 AM

The Department of Commerce reports:

[T]otal July exports of $178.0 billion and imports of $222.8 billion resulted in a goods and services deficit of $44.8 billion, down from $51.6 billion in June, revised. July exports were $6.2 billion more than June exports of $171.8 billion. July imports were $0.5 billion less than June imports of $223.4 billion.

The trade deficit was well below the consensus forecast of $51 billion.

The first graph shows the monthly U.S. exports and imports in dollars through July 2011.

Click on graph for larger image.

Exports increased and imports decreased in July (seasonally adjusted). Exports are well above the pre-recession peak and up 15% compared to July 2010; imports are up about 13% compared to July 2010.

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.

Oil averaged $104.27 per barrel in July, down slightly from $106.00 per barrel in June. The trade deficit with China increased slightly to $26.95 billion; trade with China remains a significant issue.

The decline in the trade deficit was due to an increase in exports. Also the trade deficit for the first six months of the year was revised down - especially in Q2.

by Calculated Risk on 9/08/2011 08:30:00 AM

The DOL reports:

In the week ending September 3, the advance figure for seasonally adjusted initial claims was 414,000, an increase of 2,000 from the previous week's revised figure of 412,000. The 4-week moving average was 414,750, an increase of 3,750 from the previous week's revised average of 411,000.

The following graph shows the 4-week moving average of weekly claims since January 2000 (longer term graph in graph gallery).

Click on graph for larger image in graph gallery.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased this week to 414,750.

Weekly claims increased slightly, and the 4-week average is still elevated - and remains above the 400,000 level.

by Calculated Risk on 9/07/2011 08:33:00 PM

From Jon Hilsenrath at the WSJ: Fed Prepares to Act

Federal Reserve officials are considering three unconventional steps to revive the economic recovery and seem increasingly inclined to take at least one as they prepare to meet this month.
...
One step getting considerable attention inside and outside the Fed would shift the central bank's portfolio of government bonds so that it holds more long-term securities and fewer short-term securities.
...
A second step under consideration at the Fed, one getting mixed reviews internally, would reduce or eliminate a 0.25% interest rate the Fed currently is paying banks that keep cash on reserve with the central bank.
...
A third step Fed officials are debating would involve using their words to make their economic objectives and plans for interest rates more clear.

"QE3" remains an option, but it appears the first step would be to extend the maturity of the Fed's portfolio. We might get more hints tomorrow when Fed Chairman Ben Bernanke speaks on the economic outlook at 1:30 PM ET.

by Calculated Risk on 9/07/2011 06:33:00 PM

Some economists have proposed a large scale mortgage refinancing program for homeowners with loans owned or guaranteed by Fannie, Freddie or the FHA, and who are current on their mortgages but who can't refinance - usually because of Loan-to-values (LTV) much greater than 100%. Some economists have suggested this program could be used by 30 million borrowers and deliver $70 billion in annual savings - at essentially no cost.

Tom Lawler and I have pointed out that these economists (who missed the housing bubble) seem to be overlooking current programs - and also the offsetting losses for investors.

The CBO has analyzed a proposal for a large scale refinancing program: An Evaluation of Large-Scale Mortgage Refinancing Programs (ht mort-fin). Some key findings:

We analyze a stylized large-scale mortgage refinancing program that would relax current income and loan-to-value restrictions for borrowers who wish to refinance and whose mortgages are currently insured by Fannie Mae, Freddie Mac, or the Federal Housing Administration. The analysis relies on an estimate of the volume of incremental refinancing that would occur and an estimate of how future default and prepayment behavior would be affected by such refinancing. Relative to the status quo, the specific program analyzed here is estimated to cause an additional 2.9 million mortgages to be refinanced, resulting in 111,000 fewer defaults on those loans and estimated savings for the GSEs and FHA of $3.9 billion on their credit guarantee exposure, measured on a fair-value basis. Offsetting those savings, federal investors in MBSs, including the Federal Reserve, the GSEs, and the Treasury, would experience an estimated fair-value loss of $4.5 billion. Therefore, on a fair-value basis, the specific program analyzed here would have an estimated cost to the federal government of $0.6 billion.
...
We also discuss the impact of this program on various stakeholders, including homeowners, non-federal mortgage investors, mortgage lenders, mortgage service providers, private mortgage insurers, and subordinated mortgage holders. For example, non-federal investors would experience an estimated fair-value loss of $13 to $15 billion; most of that wealth would be transferred to borrowers.
...
From the borrowers’ perspective, savings from lower mortgage payments is projected to total $7.4 billion in the first year of the program; the associated effect on consumption would decline significantly over time as borrowers pay off those loans.
...
The program has the potential to provide economic stimulus by increasing the resources households have available to spend because of the reduction in the size of their mortgage payments. However, those effects would be partially offset by a reduction in spending by investors as a result of their losses from the program. In aggregate, the fair-value loss to both federal and non-federal investors is equivalent to the gain experienced by borrowers from the decline in their interest payments (less transaction costs for both parties). Nevertheless, because a significant share of investors is composed of foreigners and the U.S. government, and because private investors would be expected to reduce spending in response their losses by less than the increase in spending by borrowers in response to their lower interest payments as well as their lower mortgage principal payments, the net effect would be an economic stimulus. ... We have not quantified the potential stimulus in our analysis, but it is likely to be small relative to GDP while large relative to the net federal cost of the program.

With respect to the housing market, the overall impact of the program is also small; the 111,000 homeowners saved from foreclosure by virtue of lower monthly mortgage payments will have a minor impact on the path of future home prices. Because this program is directed toward current homeowners, it would do little to alleviate the tighter underwriting standards and increased credit pricing for purchase loans. In addition, it would not create much demand for homes, because all of its participants would already have at least one property.

After a quick read, this analysis seems reasonable.

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.