by Calculated Risk on 6/07/2012 10:04:00 AM

Federal Reserve Chairman Ben Bernanke testimony "Economic Outlook and Policy" before the Joint Economic Committee, U.S. Senate:

Concerns about sovereign debt and the health of banks in a number of euro-area countries continue to create strains in global financial markets. The crisis in Europe has affected the U.S. economy by acting as a drag on our exports, weighing on business and consumer confidence, and pressuring U.S. financial markets and institutions. European policymakers have taken a number of actions to address the crisis, but more will likely be needed to stabilize euro-area banks, calm market fears about sovereign finances, achieve a workable fiscal framework for the euro area, and lay the foundations for long-term economic growth. U.S. banks have greatly improved their financial strength in recent years, as I noted earlier. Nevertheless, the situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely. As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.

Here is the CNBC feed.

Here is the C-Span Link

by Calculated Risk on 6/07/2012 08:30:00 AM

The DOL reports:

In the week ending June 2, the advance figure for seasonally adjusted initial claims was 377,000, a decrease of 12,000 from the previous week's revised figure of 389,000. The 4-week moving average was 377,750, an increase of 1,750 from the previous week's revised average of 376,000.

The previous week was revised up from 383,000 to 389,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 377,750.

The average has been between 363,000 and 384,000 all year, and this is the highest level since early May.

And here is a long term graph of weekly claims:

Initial weekly claims remain elevated.

This was close to the consensus forecast of 379,000.

All current Employment Graphs

by Calculated Risk on 6/06/2012 09:53:00 PM

The focus on Thursday will be on the comments from Fed Chairman Ben Bernanke during his Senate testimony. Here is the schedule:

• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decline to 379 thousand from 383 thousand last week.

• At 10:00 AM, Fed Chairman Ben Bernanke will testify before the Joint Economic Committee, U.S. Senate, "Economic Outlook and Policy"

• At noon, the Fed will release the Q1 Flow of Funds report.

• And at 3:00 PM, the Fed will release Consumer Credit for April. The consensus is for a $12.0 billion increase in consumer credit.

by Calculated Risk on 6/06/2012 08:00:00 PM

From Vice Chair Janet Yellen: Perspectives on Monetary Policy. Excerpt:

Recent labor market reports and financial developments serve as a reminder that the economy remains vulnerable to setbacks. Indeed, the simulations I described above did not take into account this new information. In our policy deliberations at the upcoming FOMC meeting we will assess the effects of these developments on the economic forecast. If the Committee were to judge that the recovery is unlikely to proceed at a satisfactory pace (for example, that the forecast entails little or no improvement in the labor market over the next few years), or that the downside risks to the outlook had become sufficiently great, or that inflation appeared to be in danger of declining notably below its 2 percent objective, I am convinced that scope remains for the FOMC to provide further policy accommodation either through its forward guidance or through additional balance-sheet actions.

Clearly Yellen is considering QE3.

by Calculated Risk on 6/06/2012 03:30:00 PM

Yesterday I asked "Dude, Where's my inventory?"

In the comments, 'TJ and The Bear' wrote: "My take is that when there's an expectation of rising prices buyers are motivated but sellers are not."

Exactly! This is something I mentioned earlier this year. And it doesn't even take rising prices to change the dynamics.

When the expectation is that prices will fall further, marginal sellers will try to sell their homes immediately. And marginal buyers will decide to wait for a lower price. This leads to more inventory on the market.

But when the expectation is that prices are stabilizing (the current situation), sellers will wait until it is convenient to sell. And buyers will start feeling a little more confident. Also, as prices stabilize, private lenders will start thinking about entering the mortgage market (something we are starting to see).

So expectations matter. And so do price fundamentals. Since we are close to normal prices, based on real prices (inflation adjusted) and the price-to-rent ratio, I think expectations of price stabilization have now taken over, and buyers, sellers and lenders are acting accordingly - and that is a key reason inventory has fallen sharply.

There are other reasons for the decline in inventory, but price expectations are probably a key factor.

by Calculated Risk on 6/06/2012 02:00:00 PM

Fed's Beige Book:

Reports from the twelve Federal Reserve Districts suggest overall economic activity expanded at a moderate pace during the reporting period from early April to late May.

This is a slight upgrade from the previous beige book that reported "modest to moderate" growth.

And on real estate:

Activity in residential real estate markets improved in most Districts since the previous report. Several Districts noted consistent indications of recovery in the single-family housing market, although the recovery was characterized as fragile. The apartment market continued to improve, and multifamily construction increased in several Districts.

Home sales were above year-ago levels in most areas of the country and several Districts noted sales had improved since the previous report, although some noted that the pace was well below the historical average. In particular, the New York, Cleveland, and Richmond Districts noted a pickup in the pace of distressed sales. Residential brokers and some builders in the Philadelphia, Atlanta, and Dallas Districts said home sales were exceeding expectations. Contacts in the Richmond District said homes were being snapped up as investors become more confident in the housing recovery, and the Atlanta report noted stronger sales to cash buyers and investors in Florida. Chicago said more sales had multiple offers. Apartment rental markets improved in the New York, Atlanta, and Dallas Districts. One contact from the New York District noted rising apartment rents have made buying more attractive, contributing to a slight uptick in sales.

Most Districts reported that home inventories decreased. Overall, home prices remained unchanged in many Districts, although reports were mixed. There were a few reports that sellers were lowering asking prices, leading to downward pressure on housing prices.

New home construction increased in a number of Districts, including Cleveland, Atlanta, Chicago, St. Louis, Minneapolis, and San Francisco. Contacts in the Philadelphia District said demand for new home construction eased slightly. Builders in Kansas City noted housing starts were down, but they expected an increase in the next three months. The Boston, Atlanta, and Chicago Districts reported an increase in multifamily construction, and the Minneapolis District noted numerous multifamily projects were in the pipeline.

Commercial real estate conditions improved in most Districts, and there were some reports that commercial construction picked up.

Prepared at the Federal Reserve Bank of Dallas and based on information collected on or before May 25, 2012.

More sluggish growth - but not a slow down. And a few positive comments on residential real estate ...

by Calculated Risk on 6/06/2012 10:58:00 AM

From the WSJ: Draghi Sees Increased Risks to Economy

European Central Bank President Mario Draghi said the euro-zone economy faces "increased downside risks" and that inflation will fall below 2% early next year.
...
"Growth remains weak with heightened risks," the ECB chief said in his opening statement to the monthly news conference following the governing council's meeting.
...
Mr. Draghi noted that growth was flat in the first three months of the year and that so far indicators point to it weakening in the second quarter. However, he said the bank was sticking to its view that the economy would recover gradually in the course of the year.

"Heightened risks"? Hoocoodanode? I doubt that the Eurozone economy will gradually recover in the 2nd half ... more likely the recession will get worse.

Meanwhile in Greece: Greece Warns of Going Broke as Tax Proceeds Dry Up

Government coffers could be empty as soon as July, shortly after this month’s pivotal elections. ...

Officials, scrambling for solutions, have considered dipping into funds that are supposed to be for Greece’s troubled banks. Some are even suggesting doling out i.o.u.’s.

Greek leaders said that despite their latest bailout of 130 billion euros, or $161.7 billion, they face a shortfall of 1.7 billion euros because tax revenue and other sources of potential income are drying up. A wrenching recession and harsh budget cuts have left businesses and individuals with less and less to give for taxes — and growing incentive to avoid paying what they owe.

by Calculated Risk on 6/06/2012 07:00:00 AM

From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey

The Refinance Index increased 2 percent from the previous week to its highest level since February 10, 2012. The seasonally adjusted Purchase Index decreased slightly from one week earlier to its lowest level since April 13, 2012.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.87 percent, the lowest rate in the history of the survey, from 3.91 percent, with points remaining unchanged at 0.46 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Click on graph for larger image.

The purchase index is still very weak. The purchase index has mostly moved sideways for the last two years.

Refinance activity continues to increase as mortgage rates fell to another record low last week.

by Calculated Risk on 6/05/2012 09:25:00 PM

The most interesting information tomorrow are the ECB meeting in Europe (no rate change expected), and the speech by Fed Vice Chair Janet Yellen. Here is a story on the Fed from Jon Hilsenrath at the WSJ: Fed Considers More Action Amid New Recovery Doubts

Disappointing U.S. economic data, new strains in financial markets and deepening worries about Europe's fiscal crisis have prompted a shift at the Federal Reserve, putting back on the table the possibility of action to spur the recovery.
...
The Fed's next meeting, June 19 and 20, could be too soon for conclusive decisions. Fed policy makers have many unanswered questions and have had trouble forming consensus in the past. Top Fed officials have said that they would support new measures if they became convinced the U.S. wasn't making progress on bringing down unemployment. Recent disappointing employment reports have raised this possibility, but the data might be a temporary blip.
...
Their options include doing nothing and continuing to assess the economic outlook—or more strongly signaling a willingness to act later if the outlook more clearly worsens. Fed policy makers could take a small precautionary measure, like extending for a short period its "Operation Twist" program, in which the Fed is selling short-term securities and using the proceeds to buy long-term securities. Or, policy makers could take bolder action such as launching another large round of bond purchases if they become convinced of a significant slowdown.

And the economic releases on Wednesday:

• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. Expect record low mortgage rates and probably an increase in refinance activity.

• At 8:30 AM, the final Productivity and Costs for Q1 will be released.

• At 2:00 PM the Federal Reserve Beige Book will be released. This is an informal review by the Federal Reserve Banks of current economic conditions in their Districts. This will receive extra attention this month as investors look for signs of a slowdown.

• And at 7:00 PM, Fed Vice Chair Janet Yellen will speak on "The Economic Outlook and Monetary Policy" at the Boston Economic Club Dinner, Boston, Massachusetts.

by Calculated Risk on 6/05/2012 04:38:00 PM

Yesterday I mentioned a post I wrote over four years ago - back when I was a housing grizzly bear - where I discussed housing and recoveries and pointed out that 1) housing is usually "an engine of recovery" and 2) "Given the current [back in early 2008] fundamentals of housing – significant oversupply, falling demand – it is very unlikely that housing will act as an engine of growth any time soon. We need to see a significant reduction in supply before there will be any increase in residential investment."

I've been asked to update the last two graphs in that post comparing the current recovery with previous recoveries.

The first graph is constructed by normalizing new home sales at the end of the previous six recessions. Then the median is plotted as a percent from the recession bottom. Note that month zero is the last month of each recession. Since sales are normalized, this doesn't show the recent historic collapse in sales - rather this is intended to show the relative strength of the recovery in percentage terms.

Click on graph for larger image.

I've made two updates to the graph since four years ago: 1) I added the current recession and recovery, and 2) I extended the period after the end of the recession

Usually housing bottoms a few months before the rest of the economy, and then acts as an engine of growth coming out of the recession. Obviously housing performed terribly following the recent recession - with a small increase due to the tax credit, and then new lows and moving sideways for several years - just as predicted.

The second graph is the data for each of the last 7 recessions (including 2007). Housing didn't boom coming out of the 2001 recession because there was no significant collapse during the recession (an investment led recession). And new home sales faltered following the recession ending in July 1980 (green line) because of the double dip recession of 1980 and '81/'82.

These graphs show exactly what I expected over four years ago - a long period before housing recovers - and even now the recovery is sluggish.

Technical Note: For the median in the first graph, I used the median sales after normalizing to the low for the recession. Then I calculated the percent recovery from the median. This shows an increase of about 52% over 3 years for the median - less than the usual recovery. This is because the recessions bottomed at different points (relative to the end of the recession), so the bottom for the median was higher (and the percent recovery less). If anything, this understates the usual strength of a housing recovery.