by Calculated Risk on 1/26/2014 08:38:00 PM

From the WSJ: States Weigh New Plans for Revenue Windfalls

Wisconsin Gov. Scott Walker and New York Gov. Andrew Cuomo are pushing for tax cuts as collections rise, while putting money into job-training and prekindergarten programs, respectively. In Georgia, Gov. Nathan Deal is proposing the largest increase in K-12 school funding since the recession to mark what he called the end of the "deep freeze," while Missouri Gov. Jay Nixon is calling for a boost in K-12 spending and holding tuition steady at state colleges.

The improving fiscal picture is coming in an election year in many places, which is further animating debates over whether to restore recession-era budget cuts, fund new programs or reduce taxes. Some governors or legislators want to use the money as a cushion against likely swings in income-tax collections or to address mounting pension and health-care costs.

The states are just starting to see surpluses, so the correct initial policy is to pay down debt and restore some funding to severely cut programs. 

Monday:
• At 10:00 AM ET, the New Home Sales report for December from the Census Bureau. The consensus is for a decrease in sales to 450 thousand Seasonally Adjusted Annual Rate (SAAR) in December from 464 thousand in November.

• At 10:00 AM, the Dallas Fed Manufacturing Survey for January. The consensus is a reading of 5.0, up from 3.1 in December (above zero is expansion).

Weekend:
• Schedule for Week of January 26th

• FOMC Preview: More Tapering

The Nikkei is down about 2.5%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P futures are down 2 and DOW futures are down 20 (fair value).

Oil prices have declined with WTI futures at $97.12 per barrel and Brent at $107.87 per barrel.

Below is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are around $3.27 per gallon (about the same as a year ago).  If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent; gasoline prices in most of the U.S. are impacted more by Brent prices.

Orange County Historical Gas Price Charts Provided by GasBuddy.com

by Calculated Risk on 1/26/2014 07:15:00 PM

Unfortunately "debt ceiling" sounds virtuous, but it isn't - it is actually a question of "paying the bills".   And Congress will "pay the bills".

As I pointed last January, a poker analogy is that the GOP is bluffing into the best possible hand - and everyone knows it.  They will have to fold, and everything they say is just political posturing.

Senator McConnell said today that he intends to fold and not go "all in" with his bluff:

"[W]e’re never going to default. [House Speaker John Boehner] and I have made that clear.”

Note: There are certain politicians who think it is OK to not pay the bills as long as the U.S. makes interest and principal payments on the debt.  That is crazy talk.  There is a name for people who don't pay their bills: deadbeats.  If politicians don't pay their personal bills, they are deadbeats.  But if they stop the government from paying the bills, we are all deadbeats.  And there will be serious economic consequences for not paying the bills on time.  The consequences will build over time, but in a few months, not "paying the bills" will ripple through the entire economy.

Last year I pointed out that the election impact of a partial government shutdown would probably be minimal.  BUT if Congress stopped paying the bills, people would remember.  It was Republican Senator Mitch McConnell who said in 2011, if the debt ceiling isn't raised the "Republican brand" would become toxic and synonymous with fiscal irresponsibility.

 So it won't happen; Congress will pay the bills.  No worries.

by Calculated Risk on 1/26/2014 10:48:00 AM

In my FOMC preview post yesterday, I wrote:

If Q4 GDP comes in at a the consensus (3.0% annualized real growth in Q4), then on a Q4-over-Q4 basis, real GDP will have increased about 2.7%.

Note: This is Q4-over-Q4 (what the Fed projects), not real GDP growth for 2013 over 2012 that is probably closer to 2.0%.

A few notes:

• The Bureau of Economic Analysis (BEA) reports real GDP growth on a seasonally adjusted annual rate (SAAR) basis. So this is adjusted for inflation (real), seasonally adjusted, and annualized.  Other countries report GDP differently - as an example China reports GDP growth on a year-over-year basis, and the UK reports GDP growth for each quarter, but not annualized.  A 3.0% annualized real growth rate in the US would be reported at 0.74% quarterly in the UK (not annualized).

• The FOMC GDP projections are for Q4-over-Q4.  Most analysts also project the annual GDP growth rate when looking ahead to the next year.

•  Calculating the Q4 GDP forecast: Using the consensus forecast of 3.0% real GDP growth in Q4, real GDP (2009 dollars) would be $15,956.8 billion (SAAR) in Q4.  To calculate this, use Table 1.1.6. Real Gross Domestic Product, Chained Dollars at the BEA.  The BEA reported Q3 GDP was $15,839.3 billion (SAAR).  Multiply this by (1.03 ^ .25) to calculate Q4 real GDP (2009 dollars, SAAR).

• Calculating Q4-over-Q4 GDP growth: The BEA reported real GDP in Q4 2012 was $15,539.6 billion (SAAR). So the Q4-over-Q4 growth rate would be $15,956.8 (Q4 2013 forecast) divided by $15,539.6 (Q4 2012). This would be 2.7%.

• Calculating 2013 GDP growth: To calculated GDP growth for 2013, first we calculate the annual real GDP for 2013 (this is an average of GDP for the four quarters).  Using the forecast GDP for Q4, the 2013 annual GDP would be $15,764.9 billion.   The annual real GDP (2009 dollars) for 2012 was $15,470.7 billion.  So the 2013 annual growth rate would be $15,764.9 (four quarter average using Q4 forecast) divided by $15,470.7 (2012 real GDP). This would be 1.9%.

So it might be a little confusing when GDP is reported this week.  Some articles might report the Q4-over-Q4 growth rate that the FOMC is looking at - other articles might report 2013 over 2012.

by Calculated Risk on 1/25/2014 04:24:00 PM

Fed Chairman Ben Bernanke will chair his last FOMC meeting this week on Tuesday and Wednesday. It appears the FOMC will reduce monthly asset purchases by another $10 billion per month, from $75 billion to $65 billion. The weaker than expected December employment report will probably not derail another round of tapering.

Tim Duy at Economist's View has a warp-up of the recent Fed talk: Fed Watch: The Week That Was. An excerpt:

Bottom Line: The US economy is grinding forward. Policymakers are generally comfortable with the pace of tapering at $10 billion per meeting. That could be reconsidered if we see sustained weakness in future data, but I don't think that should be the base case. Not everyone is happy at the Fed, however, and arguably the center has shifted toward the hawks as the doves are clearly not pleased that both asset purchases are ending and the Evans rule does not have an heir apparent. I think it is reasonable to believe the primary conflict at the next FOMC meeting is not over asset purchases, but on the communications strategy. The direction and nature of "enhanced forward guidance" is becoming a contentious issue now that the unemployment rate is just a breath away from the 6.5% threshold.
emphasis added

And from Jon Hilsenrath at the WSJ: Next Cut in Fed Bond Buys Looms

The Federal Reserve is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank's expectations for solid U.S. economic growth this year, according to interviews with officials and their public comments.

Here is a look at the most recent projections.  GDP is above projections, the unemployment rate below, and inflation close to projections.  So the data supports additional tapering.

If Q4 GDP comes in at a the consensus (3.0% annualized real growth in Q4), then on a Q4-over-Q4 basis, real GDP will have increased about 2.7% (above the December FOMC projections as shown in the table below).

Note: This is Q4-over-Q4 (what the Fed projects), not real GDP growth for 2013 over 2012 that is probably closer to 2.0%.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2013	2014	2015	2016
Dec 2013 Meeting Projections	2.2 to 2.3	2.8 to 3.2	3.0 to 3.4	2.5 to 3.2
Sept 2013 Meeting Projections	2.0 to 2.3	2.9 to 3.1	3.0 to 3.5	2.5 to 3.3

¹ Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 6.7% in December.  Although the drop in the labor force participation is a concern, the unemployment rate is below the most recent projections.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2013	2014	2015	2016
Dec 2013 Meeting Projections	7.0 to 7.1	6.3 to 6.6	5.8 to 6.1	5.3 to 5.8
Sept 2013 Meeting Projections	7.1 to 7.3	6.4 to 6.8	5.9 to 6.2	5.4 to 5.9

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

It is too early to tell if inflation will start moving back toward the FOMC's 2% target.  As of November, PCE inflation was up 0.9% from November 2012, and core inflation was up 1.1% (both at the FOMC projections). 

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2013	2014	2015	2016
Dec 2013 Meeting Projections	0.9 to 1.0	1.4 to 1.6	1.5 to 2.0	1.7 to 2.0
Sept 2013 Meeting Projections	1.1 to 1.2	1.3 to 1.8	1.6 to 2.0	1.7 to 2.0

Here are the FOMC's recent core inflation projections:

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2013	2014	2015	2016
Dec 2013 Meeting Projections	1.1 to 1.2	1.4 to 1.6	1.6 to 2.0	1.8 to 2.0
Sept 2013 Meeting Projections	1.2 to 1.3	1.5 to 1.7	1.7 to 2.0	1.9 to 2.0

by Calculated Risk on 1/25/2014 11:27:00 AM

The key reports this week are the advance report for Q4 GDP on Thursday, December New Home sales on Monday, and November Case-Shiller house prices on Tuesday.

For manufacturing, the January Dallas and Richmond Fed surveys will be released.

Also there will be an FOMC meeting on Tuesday and Wednesday (Chairman Bernanke's final FOMC meeting), and the FOMC is expected to continue to "taper" QE3 asset purchases.

----- Monday, January 27th -----
10:00 AM: New Home Sales for December from the Census Bureau.

This graph shows New Home Sales since 1963. The dashed line is the November sales rate.

The consensus is for a decrease in sales to 450 thousand Seasonally Adjusted Annual Rate (SAAR) in December from 464 thousand in November. 

10:30 AM: Dallas Fed Manufacturing Survey for January. The consensus is a reading of 5.0, up from 3.1 in December (above zero is expansion).

----- Tuesday, January 28th -----
8:30 AM: Durable Goods Orders for December from the Census Bureau. The consensus is for a 1.6% increase in durable goods orders.

9:00 AM: S&P/Case-Shiller House Price Index for November. Although this is the November report, it is really a 3 month average of September, October and November.

This graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indexes through July 2012 (the Composite 20 was started in January 2000).

The consensus is for a 13.7% year-over-year increase in the Composite 20 index (NSA) for August. The Zillow forecast is for the Composite 20 to increase 13.7% year-over-year, and for prices to increase 0.6% month-to-month seasonally adjusted.

9:00 AM: Chemical Activity Barometer (CAB) for January from the American Chemistry Council. This appears to be a leading economic indicator.

10:00 AM: Conference Board's consumer confidence index for January. The consensus is for the index to increase to 79.0 from 78.1.

10:00 AM: Richmond Fed Survey of Manufacturing Activity for January. This is the last of the regional Fed surveys for January. The consensus is a reading of 10, down from 13 in December (above zero is expansion).

10:00 AM: Regional and State Employment and Unemployment (Monthly) for December 2013.

----- Wednesday, January 29th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

2:00 PM: FOMC Meeting Announcement.  No change in interest rates is expected (for a long time).  However the FOMC is expected to reduce QE3 asset purchases by $10 billion per month at this meeting.

----- Thursday, January 30th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to increase to 327 thousand from 326 thousand.

8:30 AM: Q4 GDP (advance estimate). This is the advance estimate of Q4 GDP from the BEA. The consensus is that real GDP increased 3.0% annualized in Q4.

10:00 AM ET: Pending Home Sales Index for December. The consensus is for a 0.5% decrease in the index.

----- Friday, January 31st -----
8:30 AM ET: Personal Income and Outlays for December. The consensus is for a 0.2% increase in personal income, and for a 0.2% increase in personal spending. And for the Core PCE price index to increase 0.1%.

9:45 AM: Chicago Purchasing Managers Index for January. The consensus is for an increase to 59.5, up from 59.1 in December.

9:55 AM: Reuter's/University of Michigan's Consumer sentiment index (final for January). The consensus is for a reading of 81.0, up from the preliminary reading of 80.4, and down from the December reading of 82.5.

10:00 AM: Q4 Housing Vacancies and Homeownership report from the Census Bureau. This report is frequently mentioned by analysts and the media to report on the homeownership rate, and the homeowner and rental vacancy rates. However, this report doesn't track with other measures (like the decennial Census and the ACS).

by Calculated Risk on 1/25/2014 12:06:00 AM

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for January 24, 2014.

Changes and comments from surferdude808:

A bank failure, several action terminations, and a merger reduced the institutions count on the Unofficial Problem Bank List to an even 600. The removals caused a $1.9 billion decline in assets to $197.9 billion. A year ago, the list held 825 institutions with assets of $309 billion.

Actions were terminated against United Bank & Trust Company, Versailles, KY ($537 million Ticker: FFKT); CFBank, Fairlawn, OH ($245 million); and Mid America Bank, Janesville, WI ($100 million). Mountain 1st Bank & Trust Company, Hendersonville, NC ($675 million Ticker: FFIS) found its way off the list through an unassisted merger. For the second consecutive week there was an exit through failure as The Bank of Union, El Reno, OK ($331 million). It has been since August 2013 when failures occurred on consecutive weeks.

Next week, we anticipate the FDIC will release its enforcement action activity through year-end 2013.

by Calculated Risk on 1/24/2014 04:21:00 PM

From the FDIC: BancFirst, Oklahoma City, Oklahoma, Assumes All of the Deposits of The Bank of Union, El Reno, Oklahoma

As of September 30, 2013, The Bank of Union had approximately $331.4 million in total assets and $328.8 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $70.0 million. ... The Bank of Union is the second FDIC-insured institution to fail in the nation this year, and the first in Oklahoma.

This is a fairly large loss for the DIF.

by Calculated Risk on 1/24/2014 04:17:00 PM

The BLS will release December unemployment rates for all states next Tuesday. Here are a few "bubble" states rates that were released today by the states:

From the Orlando Sentinel: Florida unemployment dips to 6.2 percent for December

Florida's unemployment rate fell to 6.2 percent in December ... The state unemployment rate has been dropping steadily for three years and now stands at its lowest level since June 2008.

At the height of the recession in early 2010, Florida's jobless rate peaked at 11.4 percent.

From the Arizona Daily Sun: Arizona unemployment rate drops to 7.6 percent

The state’s seasonally adjusted jobless rate dropped two-tenths of a point last month, to 7.6 percent, the lowest it’s been since November of 2008.

But it’s still more than double the historic low of 3.5 percent recorded in July 2007.

The Arizona unemployment rate peaked at 10.7%, and this is the lowest since November 2008.

From the California EDD: Labor Force and Industry Employment Data for December 2013

California's seasonally adjusted unemployment rate was 8.3 percent in December, down 0.2 percentage point in November, and down 1.5 percentage points from 1 year ago.

California's unemployment rate peaked at 12.8%, and this is the lowest level since October 2008.

Rhode Island (not "sand" state) is recovering slower.  In November, Rhode Island was one of two states with an unemployment rate at or above 9.0%  (Nevada was also at 9% in November, but they haven't reported for December yet). The unemployment rate in Rhode Island peaked at 11.9%.

From the Providence Journal: Rhode Island unemployment rate ticks up to 9.1 percent for December

The unemployment rate ticked up in December to 9.1 percent, from 9.0 percent ...

Some of the so-called "sand" or "bubble" states (with the largest housing bubbles) are seeing improvement as housing recovers.

by Calculated Risk on 1/24/2014 11:49:00 AM

From Freddie Mac yesterday: Fixed Mortgage Rates Move Lower for Second Consecutive Week

Freddie Mac ... released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates drifting slightly lower for the second consecutive week amid recent reports that inflation remains subdued.
...
30-year fixed-rate mortgage (FRM) averaged 4.39 percent with an average 0.7 point for the week ending January 23, 2014, down from last week when it averaged 4.41 percent. A year ago at this time, the 30-year FRM averaged 3.42 percent.

15-year FRM this week averaged 3.44 percent with an average 0.7 point, down from last week when it averaged 3.45 percent. A year ago at this time, the 15-year FRM averaged 2.71 percent.

Click on graph for larger image.

This graph shows the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey® compared to the MBA refinance index. 

The refinance index dropped sharply last year when mortgage rates increased (activity down 67% from last May).

The second graph shows the relationship between the monthly 10 year Treasury Yield and 30 year mortgage rates from the Freddie Mac survey.

Currently the 10 year Treasury yield is at 2.72% and 30 year mortgage rates are at 4.39% (according to Freddie Mac). Based on the relationship from the graph, the 30 year mortgage rate (Freddie Mac survey) would be around 5% when 10-year Treasury yields are around 3.33% (unlikely any time soon).

Note: The yellow marker is the current (last week) relationship.

by Calculated Risk on 1/24/2014 09:09:00 AM

Next week will be busy with another FOMC meeting (more tapering) and plenty of data releases.

From Merill Lynch on Q4 GDP:

We look for the first estimate of 4Q GDP to show solid growth of 3.8%. Of course, there is greater room for forecast error with the first release since a number of inputs are estimates (particularly trade and inventory data). That said, we forecast a strong gain in consumer spending, reflecting the healthy retail sales data and holiday shopping season. We also look for equipment and software investment to strengthen, as suggested by the pop higher in core capital goods orders. The trade deficit should narrow due to strong global growth but also a continued decline in US imports of petroleum. Inventory should remain little changed at very high levels, which we believe is unintentional. We think businesses will look to reduce inventories to more sustainable levels in the next few quarters. Overall, the report should show a healthy end to 2013 and momentum heading into 2014.
emphasis added

That would put 2013 real GDP growth at about 2.0% (over 2012).