by Calculated Risk on 10/15/2011 08:15:00 AM

The European financial crisis is nearing a critical point. The enhanced EFSF has been approved, and it appears Greece will receive the next loan installment in early November. Now the discussion is focused on recapitalizing European banks and on how to leverage the EFSF (probably some sort of insurance plan). A couple of articles this morning:

From the WSJ: Germany, France Close In on Crisis Plan

The plan taking shape is built on three central elements: the new bailout for Greece, an effort to shore up the banks affected by Greek losses (and fearful of Italian and Spanish losses) and additional firepower for the bailout fund to provide a reassuring backstop.

And from the Financial Times: Investor threat to second Greek bail-out

The lead negotiator for private holders of Greek debt has said that investors are unwilling to accept greater losses on their bonds than the 21 per cent agreed in July, jeopardising eurozone plans to finalise a second Greek bail-out by the end of next week.
excerpt with permission

The next key date is Sunday October 23rd when European Union leaders will hold a summit meeting. Germany and France have promised a comprehensive plan by November 4th.

Also there is a summit of G20 finance ministers in Paris today, and the ministers are expected to show support for European leaders.

There was little U.S. economic data released last week. Retail sales were strong in September, and the trade deficit was unchanged in August from July. Both better than expected. Consumer sentiment was still very low, as was small business confidence.

Next week will be a little busier!

Here is a summary in graphs:

• Retail Sales increased 1.1% in September

Click on graph for larger image in graph gallery.

On a monthly basis, retail sales were up 1.1% from August to September (seasonally adjusted, after revisions), and sales were up 7.9% from September 2010. Retail sales excluding autos increased 0.6% in September. Sales for August were revised up to a 0.3% increase.

This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).

Retail sales are up 18.9% from the bottom, and now 4.5% above the pre-recession peak.

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

Retail sales ex-gasoline increased by 6.4% on a YoY basis (7.9% for all retail sales). The consensus was for retail sales to increase 0.8% in September, and for a 0.4% increase ex-auto. This was a strong report, especially with the upward revisions to both July and August.

• Trade Deficit unchanged at $45.6 billion in August

"[T]otal August exports of $177.6 billion and imports of $223.2 billion resulted in a goods and services deficit of $45.6 billion, virtually unchanged from July, revised." This was slightly below the consensus forecast of $46 billion.

This graph shows the monthly U.S. exports and imports in dollars through August 2011. Exports and imports were mostly unchanged in August (seasonally adjusted). Exports are well above the pre-recession peak and up 15% compared to August 2010; imports have stalled recently and are up about 11% compared to August 2010.

The second graph shows the U.S. trade deficit, with and without petroleum, through August. 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 $102.62 per barrel in August, down slightly from $104.27 per barrel in July. The trade deficit with China increased to a record $29 billion; trade with China remains a significant issue.

Imports have been moving sideways for the last several months - partially due to slightly lower oil prices. However the trade deficit with China continues to increase. Exports are still generally trending up.

• NFIB: Small Business Optimism Index increases slightly in September

From the National Federation of Independent Business (NFIB): Small-Business Confidence Sees Modest Gain: The Start of a Trend, or a Blip?

This graph shows the small business optimism index since 1986. The index increased to 88.9 in September from 88.1 in August.

Optimism had declined for six consecutive months and this is just a small increase. Note: Small businesses have a larger percentage of real estate and retail related companies than the overall economy.

This graph shows the net hiring plans for the next three months.

Hiring plans were still low in September, but still positive and the trend is up.

According to NFIB: “Over the next three months, 11 percent plan to increase employment (unchanged), and 12 percent plan to reduce their workforce (unchanged), yielding a seasonally adjusted 4 percent of owners planning to create new jobs, also down 1 point from August."

This index has been slow to recover - probably due to a combination of the recent economic weakness, and also the high concentration of real estate related companies in the index.

• BLS: Job Openings "little changed" in August

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

Notice that hires (dark blue) and total separations (red and blue columns stacked) are pretty close each month. When the blue 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 are up about 7% year-over-year compared to August 2010. Layoffs and discharges are down about 10% year-over-year.

Quits increased in August, and have been trending up - and quits are now up about 10% year-over-year. These are voluntary separations and more quits might indicate some improvement in the labor market. (see light blue columns at bottom of graph for trend for "quits").

• Weekly Initial Unemployment Claims at 404,000

This graph shows the 4-week moving average of weekly claims since January 2000 (there is a longer term graph in graph gallery).

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims declined this week to 408,000.

This is the lowest level for the 4-week average of weekly claims since August. This is still elevated, but the decline in the 4-week average is a positive.

• Consumer Sentiment declines in October

The preliminary October Reuters / University of Michigan consumer sentiment index declined to 57.5 from 59.4 in September.

In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices. In August, sentiment was probably negatively impacted by the debt ceiling debate. History suggests it usually takes 2 to 4 months to bounce back from an event (If we can call the threat of default an "event"). So sentiment might increase over the next couple of months.

And, of course, any bounce back from the debt ceiling debate would be to an already weak reading. This was a very weak reading.

• Other Economic Stories ...
• From the NY Times: Recession Officially Over, U.S. Incomes Kept Falling
• From Reuters: EU leaders delay summit to agree crisis plan
• EC, IMF, ECB says aid likely for Greece
• Ceridian-UCLA: Diesel Fuel index declined in September
• FOMC Minutes: "Considerable uncertainty surrounding the outlook for a gradual pickup in economic growth"

by Calculated Risk on 10/14/2011 09:10:00 PM

This isn't a comedy routine - except about the hot water heater. Instead Bauman talks about the housing market in Beijing. (ht Merle Hazard)

For more discussion, see Paul Solman on PBS NewsHour: Chinese Housing Bubble: A Troubling Update from Beijing

In this video post, Bauman also includes one piece of what we like to call anecdata. Practicing his Mandarin Chinese (fun to watch) with Han Jing, a Beijing realtor, Bauman learns that she bought her own apartment for the equivalent of $80,000 five years ago. It's now worth $400,000, she says. Yet she can only rent it for the equivalent of $600 a month. ... Bauman's conclusion? Beijing prices and its glut of vacant apartment buildings seem as fishy as the mechanics of the hot water heater in his apartment. Wait til you see how it's hooked up.

What Bauman doesn't mention is that most of these properties are bought with large downpayments (little leverage).

by Calculated Risk on 10/14/2011 07:14:00 PM

Get to da' choppah's
Country Bank is mown over
Blackhawk taking down.
by Soylent Green is People
From the FDIC: Blackhawk Bank & Trust, Milan, Illinois, Assumes All of the Deposits of Country Bank, Aledo, Illinois

As of June 30, 2011, Country Bank had approximately $190.6 million in total assets and $167.5 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $66.3 million. ... Country Bank is the 80th FDIC-insured institution to fail in the nation this year, and the eighth in Illinois.

That makes four today.

by Calculated Risk on 10/14/2011 05:33:00 PM

Be vewey quiet
It's banker hunting season
Throughout the states South
by Soylent Green is People
From the FDIC: State Bank and Trust Company, Macon, Georgia, Assumes All of the Deposits of Piedmont Community Bank, Gray, Georgia

As of June 30, 2011, Piedmont Community Bank had approximately $201.7 million in total assets and $181.4 million in total deposits
...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $71.6 million. ... Piedmont Community Bank is the 77th FDIC-insured institution to fail in the nation this year, and the twentieth in Georgia.

From the FDIC: Bank of North Carolina, Thomasville, North Carolina, Assumes All of the Deposits of Blue Ridge Savings Bank, Inc., Asheville, North Carolina

As of June 30, 2011, Blue Ridge Savings Bank, Inc. had approximately $161.0 million in total assets and $158.7 million in total deposits.
...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $38.0 million. ... Blue Ridge Savings Bank, Inc. is the 78th FDIC-insured institution to fail in the nation this year, and the second in North Carolina.

From the FDIC: Northfield Bank, Staten Island, New York, Assumes All of the Deposits of First State Bank, Cranford, New Jersey

As of June 30, 2011, First State Bank had approximately $204.4 million in total assets and $201.2 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $45.8 million. ... First State Bank is the 79th FDIC-insured institution to fail in the nation this year, and the first in New Jersey.

Another bank in Georgia - and a pretty large percentage loss too!

by Calculated Risk on 10/14/2011 04:11:00 PM

This graph (click on graph for larger image) from Doug Short shows the recent market increase.

I'm at a foreclosure auction in California. The auction is ongoing ... 50+ properties were postponed. The first several properties went to the beneficiary.

We just saw a bidding war starting at $356,000 and the property was bought at $520,100. Pretty wild.

by Calculated Risk on 10/14/2011 01:25:00 PM

Kelly Evans at the WSJ makes an interesting observation: Economy in Full Swing (Watch Your Head)

So far, incoming September economic reports have been surprisingly firm. Auto sales rebounded to their highest level since April. Chain-store sales posted year-on-year growth of 5.5%. The economy added 103,000 jobs, and manufacturing sentiment improved a bit. [Retail sales increased 1.1% in September]

...
If this feels like a 180-degree turn from August, that's because it basically is. It would be one thing if this were a special case, or a broad turning point in the economy. But, in fact, this kind of volatility, these jerky swings in growth, have become the norm. Consider what has happened so far this year: Real gross domestic product shrank in January and February, according to tracking firm Macroeconomic Advisers. Then it surged by more than 1% in March. It contracted again in May and June—only to jump by more than 1% again in July.

This isn't typical. Since 1992, monthly GDP has fallen about a third of the time when the economy hasn't been in recession. This year, even assuming a small gain in August, monthly GDP has fallen about half the time.

Monthly GDP isn't released by the Bureau of Economic Analysis (BEA). Evans is using an estimate from Macroeconomic Advisers.

The BEA does release monthly Personal Consumption Expenditures (PCE) data, and the following graph shows the monthly change in real PCE back to 1995.

Click on graph for larger image.

Real PCE has declined in three months this year through August (September will be positive based on the retail report). We have seen multiple declines in a year before - outside of a recession - like in 1995 and 2005. Many of the monthly declines were during recessions, but many monthly declines were event driven (like hurricanes Katrina and Rita in 2005). The sharp decline in September 2009 was due to the end of "cash-for-clunkers" (another event).

Although growth is sluggish - due to the significant slack in the system (excess capacity, lack of demand) and also high levels of household debt, I think the volatility this year can be blamed on a series of events including extreme weather (significant snow storms, flooding, hurricane Irene), the oil price increase related to the "Arab Spring", the tsunami in Japan, and the debt ceiling debate in D.C. during late July and early August.

Also the ongoing European financial crisis keeps flaring up and impacting the U.S. economy.

Yes, the economy is very sluggish - 103,000 jobs was a weak report, just better than low expectations - but I think the economic volatility is related to events and hopefully not some new normal.

by Calculated Risk on 10/14/2011 09:55:00 AM

The preliminary October Reuters / University of Michigan consumer sentiment index declined to 57.5 from 59.4 in September.


Click on graph for larger image in graph gallery.

In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices. In August, sentiment was probably negatively impacted by the debt ceiling debate. History suggests it usually takes 2 to 4 months to bounce back from an event (If we can call the threat of default an "event"). So sentiment might increase over the next couple of months.

And, of course, any bounce back from the debt ceiling debate would be to an already weak reading.

This was very weak, and below the consensus forecast of 60.0.

by Calculated Risk on 10/14/2011 08:30:00 AM

On a monthly basis, retail sales were up 1.1% from August to September (seasonally adjusted, after revisions), and sales were up 7.9% from September 2010. From the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for September, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $395.5 billion, an increase of 1.1 percent (±0.5%) from the previous month and 7.9 percent (±0.7%) above September 2010. Total sales for the July through September 2011 period were up 8.0 percent (±0.7%) from the same period a year ago. The July to August 2011 percent change was revised from virtually unchanged (±0.5%)* to +0.3 percent (±0.2%).

Retail sales excluding autos increased 0.6% in September. Sales for August were revised up to a 0.3% increase.

Click on graph for larger image in graph gallery.

This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).

Retail sales are up 18.9% from the bottom, and now 4.5% above the pre-recession peak.

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

Retail sales ex-gasoline increased by 6.4% on a YoY basis (7.9% for all retail sales).

The consensus was for retail sales to increase 0.8% in September, and for a 0.4% increase ex-auto.

This was a strong report, especially with the upward revisions to both July and August.

by Calculated Risk on 10/14/2011 12:02:00 AM

A few articles on Europe ...

From the Financial Times: S&P cuts Spain’s sovereign debt rating

[S&P] knocked Spain’s rating down one notch from double A ... to double A minus. It also kept the ... negative outlook.

S&P’s statement said ...there were “heightened risks to Spain’s growth prospects” due to high unemployment, tighter financial conditions, a high level of debt and a broader eurozone slowdown.
excerpt with permission

From the WSJ: Spain Deficit Raises EU Risks

From the NY Times: European Banks Face Deadline to Raise Capital Levels

Europe’s banks face a deadline of three to six months to strengthen their balance sheets and to compensate for the decline in value of Greek and other south European sovereign debt, European officials said Thursday.

by Calculated Risk on 10/13/2011 07:30:00 PM

Existing home sales for September will be released on Thursday Oct 20th.

From DataQuick: Southland Home Sales Up – Barely – from Year Ago, Median Price Dips Again

A total of 18,149 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in September. That was down 7.7 percent from 19,654 in August and up 0.3 percent from 18,091 in September 2010, according to San Diego-based DataQuick.

It’s normal for home sales to drop between August and September, partly because many home buyers try to close their deals before school starts in late summer.
...
Last month’s sales were 25.3 percent below the September average of 24,310 transactions since 1988.
...
“Last month’s Southland sales weren’t great but, like some other economic indicators of late, they came in a bit higher than some might have expected. Holding steady with a year ago isn’t so bad when you consider the hits the housing market has taken in recent months ...” said John Walsh, DataQuick president.
...
Foreclosure resales – properties foreclosed on in the prior 12 months – made up 32.3 percent of the Southland resale market in September, down from 32.4 percent in August and 33.6 percent a year earlier. Last month’s figure was the lowest since January 2008, when foreclosure resales were 28.6 percent. They peaked at 56.7 percent in February 2009.

Short sales, where the sale price fell short of what was owed on the property, made up an estimated 18.5 percent of Southland resales last month. That was up from 17.5 percent in August and 16.1 percent a year ago. Two years ago the estimate was 15.3 percent.
...
Southland buyers paying cash accounted for 28.5 percent of total September home sales, paying a median $210,000.

So 32.3 percent were foreclosure resales and 18.5 percent were short sales - over 50% were distressed sales in September.