by Calculated Risk on 1/03/2012 07:13:00 PM

From Bloomberg: MBIA Wins Judgment Ruling Against Countrywide

MBIA, which says it was duped into guaranteeing payment on Countrywide mortgage bonds, need only show the lender made misrepresentations about the loans backing the bonds, instead of having to prove they caused the losses the insurer is seeking to recover, New York state Judge Eileen Bransten said in a decision.

“No basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy,” she wrote.

More from the WSJ: MBIA Wins Key Ruling in Mortgage Suit vs. Countrywide

Earlier:
• ISM Manufacturing index indicates faster expansion in December
• Construction Spending increased in November
• FOMC Minutes: Agreement to provide "projections of appropriate monetary policy" in January
• Question #7 for 2012: State and Local Governments

by Calculated Risk on 1/03/2012 04:14:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2012. I'm trying to add some thoughts, and a few predictions for each question.

Many of the questions are interrelated. The question on monetary policy depends on inflation (question #9), the unemployment rate (question #6) and what happens in Europe (question #8). And the unemployment rate is related to GDP growth (question #4), and on and on ...

Question #7: State and Local Governments: It is starting to look like there will be less drag in 2012 than in 2011. How much of a drag will state and local budget problems have on economic growth and employment?

How about this headline from Bloomberg this morning: Michigan Fiscal Agency Anticipates $735 Million Budget Surplus for 2011-12? This doesn't mean the cuts are over because the budget assumes further cuts, especially for education. But it suggests progress.

There was a similar article about California a couple of weeks ago in the San Francisco Chronicle: California leaders say time for cuts may be ending. Once again there are more cuts coming, but the end may be in sight.

The National Conference of State Legislatures (NCSL) recently released a report "State Budget Update: Fall 2011,":

State fiscal conditions continue to improve, but at a very slow pace. A fall 2011 survey of state legislative fiscal officers found that the deterioration that dominated state finances in recent years has eased. Revenue performance has improved, expenditures in most states are stable and, in a significant departure from past years, few states are reporting budget gaps in the early months of fiscal year (FY) 2012. However, despite these positive developments, the effects of the Great Recession continue to linger. State tax collections still remain well below pre-recession levels.

With the enactment of their FY 2012 budgets, lawmakers successfully closed a cumulative budget gap of $91 billion. This is on top of shortfalls that states began
addressing in FY 2008. In total, lawmakers have resolved an aggregate gap of more than $500 billion over four consecutive years. But the tide may be turning. Halfway into the second quarter of FY 2012, new gaps are practically non-existent.

Note: "Fiscal years for all but four states—Alabama, Michigan, New York, and Texas—begin on July 1.", Source. So the FY 2012 budgets (and associated cuts) will end on June 30, 2012.

Here is a table of the annual change in state and local GDP and payroll employment for the last several years. State and local governments have been a significant drag on both GDP and payroll employment.

State and Local Government
	Change, Employment (000s)	Change in Real GDP
2008	160	0.0%
2009	-132	-0.9%
2010	-249	-1.8%
2011e	-246	-2.2%
2012f	-100	-1.0%

Note: estimate for 2011, forecast for 2012 (aka guess).

It is looking like there will be less drag from state and local governments in 2012, and that most of the drag will be over by the end of Q2 (end of FY 2012). This doesn't mean state and local government will add to GDP in the 2nd half of 2012, just that the drag on GDP and employment will probably end. Just getting rid of the drag will help.

This is a significant improvement from last year!

A final comment: there was a debate last year if there would be a large number of muni defaults in 2011. One analyst predicted "hundreds of billions of dollars' worth of defaults". I disagreed strongly with that prediction, and the total defaults was only a small fraction of that number. With improving finances, the threat of a huge number of muni defaults is even less likely in 2012.

Earlier:
• Question #8 for 2012: Europe and the Euro
• Question #10 for 2012: Monetary Policy
• Question #9 for 2012: Inflation

by Calculated Risk on 1/03/2012 02:00:00 PM

From the Fed: Minutes of the Federal Open Market Committee, December 13, 2011 and conference call on November 28th. Excerpts:

In their discussion of the economic situation and outlook, meeting participants agreed that the information received since their previous meeting indicated that economic activity was expanding at a moderate rate, notwithstanding some apparent slowing in global economic growth.
...
Regarding the economic outlook, participants continued to anticipate that economic activity would expand at a moderate rate in the coming quarters and that, consequently, the unemployment rate would decline only gradually. The factors that participants cited as likely to restrain the pace of the economic expansion included an expectation that financial markets would remain unsettled until the fiscal and banking issues in the euro area were more fully addressed. Other factors that were expected to weigh on the pace of economic activity were the slowdown of economic activity abroad, fiscal tightening in the United States, high levels of uncertainty among households and businesses, the weak housing market, and household deleveraging. In assessing the economic outlook, participants judged
that strains in global financial markets continued to pose significant downside risks. With the rate of increase in economic activity anticipated to remain moderate, most participants expected that inflation would settle over coming quarters at or below levels consistent with their estimates of its longer-run mandate consistent rate.

And there was discussion about communication:

After the Committee’s vote, participants turned to a further consideration of ways in which the Committee might enhance the clarity and transparency of its public communications. The subcommittee on communications recommended an approach for incorporating information about participants’ projections of appropriate future monetary policy into the Summary of Economic Projections (SEP), which the FOMC releases four times each year. In the SEP, participants’ projections for economic growth, unemployment, and inflation are conditioned on their individual assessments of the path of monetary policy that is most likely to be consistent with the Federal Reserve’s statutory mandate to promote maximum employment and price stability, but information about those assessments has not been included in the SEP.
...
At the conclusion of their discussion, participants decided to incorporate information about their projections of appropriate monetary policy into the SEP beginning in January. Specifically, the SEP will include information about participants’ projections of the appropriate level of the target federal funds rate in the fourth quarter of the current year and the next few calendar years, and over the longer run; the SEP also will report participants’ current projections of the likely timing of the first increase in the target rate given their projections of future economic conditions. An accompanying narrative will describe the key factors underlying those assessments as well as qualitative information regarding participants’ expectations for the Federal Reserve’s balance sheet.

by Calculated Risk on 1/03/2012 11:39:00 AM

Catching up ... This morning the Census Bureau reported that overall construction spending increased in November:

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during November 2011 was estimated at a seasonally adjusted annual rate of $807.1 billion, 1.2 percent (±1.6%)* above the revised October estimate of $797.4 billion. The November figure is 0.5 percent (±1.9%)* above the November 2010 estimate of $803.0 billion.

Private construction spending increased in November:

Spending on private construction was at a seasonally adjusted annual rate of $522.3 billion, 1.0 percent (±1.0%)* above the revised October estimate of $517.3 billion. Residential construction was at a seasonally adjusted annual rate of $243.7 billion in November, 2.0 percent (±1.3%) above the revised October estimate of $238.9 billion. Nonresidential construction was at a seasonally adjusted annual rate of $278.6 billion in November, nearly the same as (±1.0%)* the revised October estimate of $278.5 billion.

Click on graph for larger image.

This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted.

Private residential spending is 64% below the peak in early 2006, and non-residential spending is 33% below the peak in January 2008.

Public construction spending is now 12% below the peak in March 2009.

The second graph shows the year-over-year change in construction spending.

On a year-over-year basis, both private residential and non-residential construction spending have turned positive, but public spending is now falling on a year-over-year basis as the stimulus spending ends. The year-over-year improvements in private non-residential are mostly due to energy spending (power and electric).

Earlier:
• ISM Manufacturing index indicates faster expansion in December

by Calculated Risk on 1/03/2012 10:00:00 AM

PMI was at 53.9% in December, up from 52.7% in November. The employment index was at 55.1%, up from 51.8%, and new orders index was at 57.6%, up from 56.7%.

From the Institute for Supply Management: December 2011 Manufacturing ISM Report On Business®

Economic activity in the manufacturing sector expanded in December for the 29th consecutive month, and the overall economy grew for the 31st consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The PMI registered 53.9 percent, an increase of 1.2 percentage points from November's reading of 52.7 percent, indicating expansion in the manufacturing sector for the 29th consecutive month. The New Orders Index increased 0.9 percentage point from November to 57.6 percent, reflecting the third consecutive month of growth after three months of contraction. Prices of raw materials continued to decrease for the third consecutive month, with the Prices Index registering 47.5 percent, which is 2.5 percentage points higher than the November reading of 45 percent. Manufacturing is finishing out the year on a positive note, with new orders, production and employment all growing in December at faster rates than in November, and with an optimistic view toward the beginning of 2012 as reflected by the panel in this month's survey."

Click on graph for larger image.

Here is a long term graph of the ISM manufacturing index.

This was above expectations of 53.2%, and suggests manufacturing expanded at a faster rate in December than in November. It appears manufacturing employment expanded in December with the employment index at 55.1%. New orders were up, and prices declined.

by Calculated Risk on 1/03/2012 08:51:00 AM

Via Bloomberg (ht Mike_in_Long Island)

Jan 6th: Euro-region November unemployment from Eurostat.
Jan 9th: German Chancellor Angela Merkel and French President Nicolas Sarkozy meet in Berlin.
Jan 24th: EU finance ministers meet in Brussels.
Jan 30th: European Union leaders meet in Brussels on debt crisis.

Feb 9th: ECB holds rate meeting.
Feb 19th: Proposed date for Greek general election.
Feb 20th: Euro-area finance ministers meet in Brussels.
Feb 29th to March 1st: Italy redeems 46.5 billion euros of bonds.

March 1st and 2nd: EU leaders meet in Brussels.
March 8th: ECB holds rate meeting
March 12th: Euro-area finance ministers meet in Brussels
March 20th: Greece redeems 14.4 billion euros of bonds.
March 30th: Euro-area finance ministers meet in Copenhagen.

April 22nd: France holds a presidential election.

by Calculated Risk on 1/02/2012 09:40:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2012. I'll try to add some thoughts, and maybe some predictions for each question.

I've been stuck on #8, probably because I'm suffering from European crisis fatigue. It is very disturbing when a key policymaker like German Finance Minister Wolfgang Schaeuble says "This is not a euro crisis, it is a debt crisis in some euro states". Not only is that incorrect, but it is a reminder that the current policy is all stick and no carrot. Where is the growth agenda? The current path of endless austerity, slow wage deflation, and high unemployment in several countries seems politically unsustainable. Much of Europe is probably already in recession, and it could get much worse.

It seems only a serious event, what many analysts are calling a "Lehman moment", will shock policymakers into more effective action. But maybe that is too pessimistic. There has been some discussion of a "roadmap" for the issuance of eurobonds (this will probably be discussed on January 9th). And apparently a growth agenda will be discussed at the next summit meeting on January 30th. That sounds like small carrots. A little more inflation would help with adjustments too, but no policymaker will say that openly.

A key short term issue is the haircuts for private creditors of Greek debt. This is expected to be resolved very soon. No agreement probably means default, and possibly an exit from the euro. So I expect an agreement to be reached at the last minute.

And all year there will be significant bond auctions for Italy, Spain, Belgium and France. More market stress is guaranteed.

Here is what I wrote a year ago:

I think:
• The euro will somehow survive another year without losing any countries.
• The next blowup will be in the first couple of months. ...
• There are two main channels that could impact the U.S. economy: trade, and financial spillover / credit tightening. The impact on trade will probably be minimal, even if the euro falls sharply against the dollar (a small percentage of U.S. GDP is from exports to Europe). The financial channel is much more of an unknown, and there is significant downside risk.

If the Greek debt deal is reached, and some sort of carrot (growth agenda, eurobond roadmap) is offered to the suffering countries, maybe Europe and the euro will make it through 2012. So once again my guess is the euro will survive another year without losing any countries (Assuming a Greek debt deal). There will be plenty of blowups along the way, but I think the impact on the US economy will be fairly minimal.

There is a strong commitment by policymakers to the euro, but at some point, without some perceived carrots, the political consensus will eventually disintegrate, and Europe will come apart. Then the impact on the US would be significant.

Earlier:
• Question #10 for 2012: Monetary Policy
• Question #9 for 2012: Inflation

by Calculated Risk on 1/02/2012 03:58:00 PM

Two unrelated stories:

• From an LA Times story on commercial real estate:

One of Riverside's oldest law firms ... has agreed to rent 35,000 square feet in the Citrus Tower office building being built there.

The domed, six-story tower at 3390 University Ave. is the only office building under construction in Riverside and San Bernardino counties, according to Lee & Associates. ... Citrus Tower is expected to be complete by April.

So I guess, as of April, there will be no office buildings under construction in the Inland Empire. The good news is office construction can't fall much further than zero!

• During the recession, Las Vegas visitor traffic declined, and convention attendance declined sharply. Here is an update ...

Click on graph for larger image.

According to data from the Las Vegas Convention and Visitors Authority, visitor traffic is almost at the pre-recession peak of just over 39 million, but convention attendance is still very low (estimated using traffic through October). Convention attendance really collapsed (off 24%) in 2009, declined slightly in 2010, and only increased about 6% in 2011.

Weekend:
• Summary for Week Ending December 30th
• Schedule for Week of Jan 1, 2012

by Calculated Risk on 1/02/2012 12:15:00 PM

This morning Dean Baker wrote about the Housing Vacancies and Homeownership Survey: Robert Samuelson Oversells the Case for Economic Optimism (ht Joe)

[W]e are still far from making up for the overbuilding of the bubble years as indicated by the fact that the vacancy rate remains at near record levels.

(There have been some questions raised about the accuracy of the Census Department's data, claiming that it overstates the number of housing units in the country. Those raising the issue fail to note that measures of housing starts do not include housing units that were created by conversion of commercial or industrial property, such as an old warehouse being turned into condos. The rehabilitation of dilapidated units would also not be included in housing start numbers. There were many cases of both ways of adding to the housing stock during the bubble years. Also, it is important to note that the Census data is giving the percentage of units that are vacant. The critics of this measure must show how the Census methodology would lead it to overstate the share of units that are vacant.)

First, the main criticism of the HVS is it doesn't match the decennial Census results. The Census Bureau has acknowledged this and promised to investigate the differences. Here are some recent comments from the Census Bureau:

The most recent research has shown that the CPS/HVS and the 2010 census produced significant differences for vacancy characteristics. The rental vacancy rate from the April 2010 census was 9.2 percent, whereas the CPS/HVS reported the rental vacancy rate of 10.6 percent for the first half of 2010. The April 2010 census had a homeowner vacancy rate of 2.4 percent, while the CPS/HVS had a vacancy rate of approximately 2.6 percent for the first half of 2010. For occupied housing, the April 2010 census produced a homeownership rate of 65.1 percent, while for the first half of 2010, the CPS/HVS produced a rate of 67.0 percent.

It is important to note that the HVS is benchmarked to the decennial Census, so the most recent vintage for housing inventory was benchmarked to the 2010 Census. So clearly the Census Bureau thinks that is a better estimate of the total housing inventory.

Although the HVS is probably useful in showing the trends for the vacancy and homeownership rates, I wouldn't rely on the absolute numbers - and I look forward to the investigation by the Census Bureau on the differences. Unfortunately this report is commonly used by analysts to estimate the excess vacant supply for housing, but - because the vacancy rates do not match the Census data (or the much larger ACS data) - it doesn't appear to be useful for that purpose.

Here are some previous posts about some of the HVS issues by economist Tom Lawler:
• Lawler to Census on Housing Data: "Splainin" Needed Not Just on Vacancy Rate
• Census Bureau on Homeownership Rate: We've got “Some 'Splainin' to Do”
• Be careful with the Housing Vacancies and Homeownership report
• Lawler: Census 2010 and the US Homeownership Rate
• Lawler: Census 2010 Demographic Profile: Highlights, Excess Housing Supply Estimate, and Comparison to HVS
• Lawler: The “Excess Supply of Housing” War
• Lawler: Census Releases Demographic Profile of 12 States and DC: Confirms Bias of HVS
• Lawler: Census 2010 and Excess Vacant Housing Units
• Lawler: On Census Housing Stock/Household Data
• Lawler: Housing Vacancy Survey appears to massively overstate number of vacant housing units
• Lawler: US Households: Why Researchers / Analysts are “Confused”

by Calculated Risk on 1/02/2012 09:01:00 AM

Europe is probably already in a new recession and the next meeting between Merkel and Sarkozy is on Jan 9th.

From the WSJ: Euro-Zone Manufacturing Activity Falls for Fifth Month

Manufacturing activity in the euro zone declined for the fifth straight month in December, although less sharply than earlier in the fourth quarter, according to a survey of purchasing managers released Monday.

The survey is consistent with other indicators of recent activity, and together the numbers suggest the euro-zone economy contracted during the final three months of the year.

Markit Economics said its Purchasing Managers Index for the sector rose to 46.9 from 46.4 in November ...

And from Bloomberg: Germany Says Greek Debt Talks Near End

Germany’s government declined to comment on a report that it may push for creditors to accept bigger losses on Greek debt than previously agreed upon, saying only that talks on lowering Greece’s debt level may end soon.

Germany is studying a proposal to write down 75 percent of Greek government bonds held by private creditors as part of a planned debt swap to ensure greater debt sustainability, Greek news website Euro2day.gr reported today ...

And the next key dates from the NY Times: Austerity Reigns Over Euro Zone as Crisis Deepens

The Continent’s economic outlook will take center stage on Jan. 9, when Mrs. Merkel and President Nicolas Sarkozy of France will discuss a new fiscal treaty intended to impose stringent budget requirements on European Union nations. Then on Jan. 30, European Union leaders will gather in Brussels to discuss ways to spur growth.
...
The first test for the Continent will come this Thursday, when France is expected to raise as much as 8 billion euros. On Jan. 12, Spain plans to auction 3 billion euros worth of euro debt, followed by Italy the next day with 9 billion euros.

Weekend:
• Summary for Week Ending December 30th
• Schedule for Week of Jan 1, 2012