by Calculated Risk on 5/01/2009 11:03:00 AM

The WSJ, Bloomberg and others are reporting the results of the stress tests will be released Thursday May 7th (apparently in the afternoon).

The release will include capital needs for each individual bank, plus estimated losses by loan categories.

According to the Fed white paper, the data is being collected for 12 loan categories, so hopefully they will release projected losses by each category.

From Bloomberg: Regulators Said to Plan Stress-Test Disclosures on May 7
(no link yet)

The Federal Reserve and U.S. banking regulators will reveal the results of the tests on the country’s 19 largest banks on May 7 after financial markets close, according to a government official.

The government will unveil both aggregate information and firm-specific details about the capital buffer required to absorb losses if the recession worsens ...

From CNBC: Results of Bank 'Stress Tests' To Be Released on Thursday

by Calculated Risk on 5/01/2009 09:59:00 AM

From the Institute for Supply Management: April 2009 Non-Manufacturing ISM Report On Business®

Economic activity in the manufacturing sector failed to grow in April for the 15th consecutive month, and the overall economy contracted for the seventh consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.
...
Manufacturing contracted in April as the PMI registered 40.1 percent, which is 3.8 percentage points higher than the 36.3 percent reported in March. This is the 15th consecutive month of contraction in the manufacturing sector. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
...
"The decline in the manufacturing sector continues to moderate. After six consecutive months below the 40-percent mark, the PMI, driven by the New Orders Index at 47.2 percent, shows a significant improvement. While this is a big step forward, there is still a large gap that must be closed before manufacturing begins to grow once again. The Customers' Inventories Index indicates that channels are paring inventories to acceptable levels after reporting inventories as 'too high' for eight consecutive months. The prices manufacturers pay for their goods and services continue to decline; however, copper prices have bottomed and are now starting to rise. This is definitely a good start for the second quarter."
emphasis added

As noted, any reading below 50 shows contraction, although the pace of contraction has slowed.

In other news, new manufacturer orders were down, from the Census Bureau:

New orders for manufactured goods in March, down seven of the last eight months, decreased $3.2 billion or 0.9 percent to $345.3 billion, the U.S. Census Bureau reported today.

by Calculated Risk on 5/01/2009 09:23:00 AM

Note: Any reading below 50 indicates conditions are worsening; above 50 improving. So the increase in the index to 16 means the apartment conditions are worsening, but at a slower pace.

"Worse conditions" implies higher vacancy rates and lower rents - so it is good for renters.

From the National Multi Housing Council (NMHC): Apartment Market Still Suffering Downturn, Though Pace Is Decelerating, According To National Multi Housing Council Survey

Apartment market conditions continue to worsen, though the pace is decelerating, according to the National Multi Housing Council's (NMHC) latest Quarterly Survey of Apartment Market Conditions.

While all four market indexes remained below 50 (index numbers below 50 indicate conditions are worsening; numbers above 50 indicate conditions are improving), they all rose from three months ago. In particular, about half of respondents thought conditions were unchanged in the sales volume, equity finance, and debt finance markets.

“This global downturn has led to the most challenging economic conditions in at least five decades, and the apartment industry is suffering like other industries," noted Mark Obrinsky, NMHC's Chief Economist. "Capital remains difficult to obtain, and the sharp and continuing drop in employment, in particular, is sapping demand for apartments in markets throughout the country."

“Interestingly,” he continued, “despite considerable media focus on the “shadow rental” market, only a slim majority of respondents noted greater competition from condos and single-family rentals than in previous years.”

The Market Tightness Index, which measures changes in occupancy rates and/or rents, rose to 16 from 11 last quarter. Nevertheless, 73 percent of respondents said markets were looser (meaning higher vacancy and/or lower rents). While this was the seventh straight quarter in which the index has been below 50, the low reading may partially represent normal seasonal weakness.

Click on graph for larger image in new window.

This graph shows the quarterly Apartment Tightness Index.

It is common in a recession for apartment vacancies to rise, as households double up by moving in with a friend or family member. However an added factor in this recession is all the single family homes being offered as rentals. This is possible additional competition for apartments:

In a special fifth question to NMHC’s Quarterly Survey, one-third (33 percent) said such competition [from condos and single-family rentals] was unchanged. Another four percent thought there was less competition, and 11 percent don’t consider condos and single-family rentals to be significant competition for apartments in their markets. A slightly majority, 52 percent, did report more competition from condos and single-family rentals than in previous years.

Competition from condos and single-family rentals probably depends on location.

by Calculated Risk on 4/30/2009 11:46:00 PM

For those interested in the legal issues surrounding the Chrysler bankruptcy, here are a couple of posts from attorney Steven Jakubowski.

First, an overview of situation and Chrysler balance sheet:

Part I: Assessing The Financial Carnage

Second, a discussion of some of the legal issues:

Part II: Testing The Limits Of Section 363 Sales

Jakubowski concludes:

So, who will win? Really, only the true speculator and/or holder of Chrysler credit default swaps will (and perhaps Fiat if they--unlike their predecessors--can make it work), as my first post on the financial carnage at Chrysler demonstrates. My guess is that after much briefing, discovery, and expedited litigation over the next 60 days, Judge Gonzalez will show enough angst to worry both sides that they stand to lose, thus resulting in a compromise that settles the matter and allows the transaction to go forward. But with all Chrysler plants and operations now idled pending a final sale, the pressure to get the deal consummated and return people to work will be so overwhelming that it's hard to imagine Judge Gonzalez not approving the transaction in some form that's acceptable to everyone (except perhaps the dissenting lenders).

by Calculated Risk on 4/30/2009 08:49:00 PM

Hat tip to several - thanks! Note: Victorville is east of Los Angeles at the southern edge of the Mojave desert.

by Calculated Risk on 4/30/2009 08:34:00 PM

From Bloomberg: U.S. Stress Test Results Delayed as Early Conclusions Debated

The Federal Reserve will postpone the release of stress tests on the biggest U.S. banks while executives debate preliminary findings with examiners ... The results, originally scheduled for publication on May 4, now may not be revealed until toward the end of next week ... A new release date may be announced as soon as tomorrow, they said.

Note that President Obama announced today that GMAC would be receiving government aide (as part of Chrysler deal, GMAC will takeover all financing of Chrysler vehicles). GMAC is one of the 19 banks undergoing stress tests.

by Calculated Risk on 4/30/2009 05:54:00 PM

From CNBC: US May Release Stress Test Results for Specific Banks

U.S. officials are leaning toward announcing the "stress test" results of individual banks next week instead of just summary results ...

The plan on exactly how to release the results "is not very far along," the source said, adding that regulators are looking to disclose a lot of supervisory information about banks that is usually kept confidential.

Transparency is important. It seems the basic principle should be: Banks that require public support should disclose the details of the stress tests to the public.

If a bank does not want to disclose details of the stress test - no problem, they are a private enterprise. But shouldn't they immediately return any TARP money and stop using any special Fed/FDIC/Treasury liquidity programs?

by Calculated Risk on 4/30/2009 04:00:00 PM

Here is a collection of real estate and economic graphs for data released in April ...

Click on graphs for larger image in new window.
********************
New Home Sales in March

The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

Note the Red columns for 2009. This is the lowest sales for March since the Census Bureau started tracking sales in 1963. (NSA, 34 thousand new homes were sold in March 2009; the previous low was 36 thousand in March 1982).

From: New Home Sales: 356 Thousand SAAR in March

********************
Housing Starts in March

Total housing starts were at 510 thousand (SAAR) in March, just above the revised record low of 488 thousand in January (the lowest level since the Census Bureau began tracking housing starts in 1959).

Single-family starts were at 358 thousand in March; just above the revised record low in January (356 thousand).

From: Housing Starts: Near Record Low

********************
Construction Spending in February

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

"Residential construction was at a seasonally adjusted annual rate of $275.1 billion in February, 4.3 percent below the revised January estimate of $287.4 billion. Nonresidential construction was at a seasonally adjusted annual rate of $390.7 billion in February, 0.3 percent above the revised January estimate of $389.5 billion."

From: Construction Spending Declines in February

********************
March Employment Report

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 663,000 in March. January job losses were revised to
741,000. The economy has lost almost 3.3 million jobs over the last 5 months, and over 5 million jobs during the 15 consecutive months of job losses.

The unemployment rate rose to 8.5 percent; the highest level since 1983.

From: Employment Report: 663K Jobs Lost, 8.5% Unemployment Rate

********************
March Retail Sales

This graph shows the year-over-year change in nominal and real retail sales since 1993.

On a monthly basis, retail sales decreased 1.1% from February to March (seasonally adjusted), but sales are off 10.7% from March 2008 (retail and food services decreased 9.4%). Automobile and parts sales declined 2.3% in March (compared to February), but excluding autos, all other sales declined -0.9%.

From: Retail Sales Decline in March

********************
LA Port Traffic in March

This graph shows the loaded inbound and outbound traffic at the port of Los Angeles in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported.

Inbound traffic was 6% below last March and 35% above last month.

Outbound traffic was 9.8% below March 2008, and 25% above February.

From: LA Port Import Traffic Rebounds

********************
U.S. Imports and Exports Through February

The first graph shows the monthly U.S. exports and imports in dollars through February 2009. The recent rapid decline in foreign trade continued in February. Note that a large portion of the recent decline in imports was related to the fall in oil prices, however the decline in February was mostly non-oil related.

From: U.S. Trade Deficit: Lowest Since 1999

********************
March Capacity Utilization

This is some serious cliff diving. Also - since capacity utilization is at a record low (the series starts in 1967), there is little reason for investment in new production facitilies.

The Federal Reserve reported that "industrial production fell 1.5 percent in March after a similar decrease in February. For the first quarter as a whole, output dropped at an annual rate of 20.0 percent, the largest quarterly decrease of the current contraction. At 97.4 percent of its 2002 average, output in March fell to its lowest level since December 1998 and was nearly 13 percent below its year-earlier level.

From: Industrial Production Declines Sharply in March

********************
NAHB Builder Confidence Index in April

This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

The housing market index (HMI) increased to 14 in April from 9 in March. The record low was 8 set in January.

The increase in April follows five consecutive months at either 8 or 9.

From: NAHB: Builder Confidence Increases in April

********************
Architecture Billings Index for March

"After a series of historic lows, the Architecture Billings Index (ABI) was up more than eight points in March. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the March ABI rating was 43.7, up from the 35.3 mark in February. This was the first time since September 2008 that the index was above 40..."

From: Architecture Billings Index Increases in March

********************
Vehicle Miles driven in February

This graph shows the annual change in the rolling 12 month average of U.S. vehicles miles driven. Note: the rolling 12 month average is used to remove noise and seasonality.

By this measure, vehicle miles driven are off 3.6% Year-over-year (YoY); the decline in miles driven is worse than during the early '70s and 1979-1980 oil crisis.

From: DOT: U.S. Vehicle Miles Off 0.9% in February

********************
Existing Home Sales in March

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in March 2009 (4.57 million SAAR) were 3.0% lower than last month, and were 7.1% lower than March 2008 (4.92 million SAAR).

It's important to note that about 45% of these sales were foreclosure resales or short sales. Although these are real transactions, this means activity (ex-distressed sales) is under 3 million units SAAR.

From: Existing Home Sales Decline in March

********************
Existing Home Inventory March

This graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.74 million in March. The all time record was 4.57 million homes for sale in July 2008. This is not seasonally adjusted.

Typically inventory increases slightly in March, and then really increases over the next few months of the year until peaking in the summer. This decrease in inventory was small, and the next few months will be key for inventory.

Also, most REOs (bank owned properties) are included in the inventory because they are listed - but not all. Recently there have been stories about a substantial number of unlisted REOs - this is possible, but not confirmed.

From: Existing Home Sales Decline in March

********************
Case Shiller House Prices for February

This graph shows the nominal Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 31.6% from the peak, and off 2.1% in February.

The Composite 20 index is off 30.7% from the peak, and off 2.2% in February.

From: Case-Shiller: House Prices Fall Sharply in February

********************
Homeownership Rate for Q1

The homeownership rate decreased to 67.3% and is now back to the levels of Q2 2000.

Note: graph starts at 60% to better show the change.

The homeownership rate increased because of demographics and changes in mortgage lending. The increase due to demographics (older population) will probably stick, so I expect the rate to decline to the 66% to 67% range - and not all the way back to 64% to 65%.

From: Q1 2009: Homeownership Rate at 2000 Levels

********************
Homeownership Vacancy Rate Q1

The homeowner vacancy rate was 2.7% in Q1 2009.

A normal rate for recent years appears to be about 1.7%. There is some noise in the series, quarter to quarter, so perhaps the vacancy rate has stabilized in the 2.7% to 2.9% range.

This leaves the homeowner vacancy rate about 1.0% above normal ...

From: Q1 2009: Homeownership Rate at 2000 Levels

********************
Rental Vacancy Rate for Q1

The rental vacancy rate was steady at 10.1% in Q1 2009.

It's hard to define a "normal" rental vacancy rate based on the historical series, but we can probably expect the rate to trend back towards 8%.

From: Q1 2009: Homeownership Rate at 2000 Levels

********************
Unemployment Claims

This graph shows weekly claims and continued claims since 1971.

The four week moving average is at 637,250, off 21,500 from the peak 3 weeks ago.

Continued claims are now at 6.27 million - the all time record.

From: Unemployment Claims: Record Continued Claims

********************
Restaurant Performance Index for March

"The outlook for the restaurant industry improved in March, as the National Restaurant Association’s comprehensive index of restaurant activity rose for the third consecutive month. The Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 97.7 in March, up 0.2 percent from February and 1.3 percent during the last three months."

From: Restaurant Performance Index Increases Slightly

********************
New Home Sales: March

This graph shows New Home Sales vs. recessions for the last 45 years. New Home sales have fallen off a cliff.

Sales of new one-family houses in March 2009 were at a seasonally adjusted annual rate of 356,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.

This is 0.6 percent (±19.0%)* below the revised February rate of 358,000 and is 30.6 percent (±10.7%) below the March 2008 estimate of 513,000.

From: New Home Sales: 356 Thousand SAAR in March

********************
New Home Months of Supply: March

There were 10.7 months of supply in March - significantly below the all time record of 12.5 months of supply set in January.

"The seasonally adjusted estimate of new houses for sale at the end of March was 311,000. This represents a supply of 10.7 months at the current sales rate."

From: New Home Sales: 356 Thousand SAAR in March

********************

by Calculated Risk on 4/30/2009 02:05:00 PM

From HotelNewsNow.com: STR reports U.S. data for week ending 25 April

In year-over-year measurements, the industry’s occupancy fell 8.4 percent to end the week at 59.4 percent. Average daily rate dropped 6.1 percent to finish the week at US$100.44. Revenue per available room [RevPAR] for the week decreased 14.1 percent to finish at US$59.67.

Click on graph for larger image in new window.

This graph shows the YoY change in the occupancy rate (3 week trailing average).

The three week average is off 9.6% from the same period in 2008.

The average daily rate is down 6.1%, so RevPAR is off 14.1% from the same week last year.

The Q1 advance GDP report showed a 44.2% annualized in decline in non-residential structure investment, and I expect lodging investment to decline even more over the next 18 to 24 months. Why build more hotels with RevPAR off 14% YoY?

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 4/30/2009 11:40:00 AM

From CNBC: Chrysler To File for Bankruptcy, Sources Tell CNBC

Chrysler will file for bankruptcy ... two administration officials said Thursday.
...
A statement from President Barack Obama and members of his autos task force on Chrysler's situation and the auto industry is scheduled for 12 Noon EST.
...
The stance will likely set the tone for similar discussions with bondholders of General Motors which is now on the clock to restructure its operations by the end of May.

Here is the CNBC feed.

by Calculated Risk on 4/30/2009 11:06:00 AM

Note: Any reading below 100 shows contraction. So the improvement in the index to 97.7 means the business is still contracting, but contracting at a slower pace.

From the National Restaurant Association (NRA): Restaurant Industry Outlook Improved as the Restaurant Performance Index Rose for the Third Consecutive Month

The outlook for the restaurant industry improved in March, as the National Restaurant Association’s comprehensive index of restaurant activity rose for the third consecutive month. The Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 97.7 in March, up 0.2 percent from February and 1.3 percent during the last three months.

“Although the RPI remained below 100 for the 17th consecutive month, which signals contraction, there are clear signs of improvement,” said Hudson Riehle, senior vice president of Research and Information Services for the Association. “Restaurant operators reported a positive six-month economic outlook for the first time in 18 months, and capital spending plans rose to a 9-month high.”
...
Restaurant operators also reported negative customer traffic levels for the 19th consecutive month in March.
...
Capital spending activity in the restaurant industry held relatively steady in recent months.
emphasis added

Click on graph for larger image in new window.

Unfortunately the data for this index only goes back to 2002.

The index values above 100 indicate a period of expansion; index values below 100 indicate a period of contraction.

Based on this indicator, the restaurant industry has been contracting since November 2007.

by Calculated Risk on 4/30/2009 09:27:00 AM

Here are some graphs of office, mall and lodging investment through Q1 2009 based on the underlying detail data released this morning by the BEA ...

Click on graph for larger image in new window.

This graph shows investment in lodging (based on data from the BEA) as a percent of GDP. The recent boom in lodging investment has been stunning. Lodging investment peaked at 0.33% of GDP in Q3 2008 and is now declining sharply (0.28% in Q1 2009).

I expect lodging investment to continue to decline through at least 2010, to perhaps one-third of the peak.

Note: prior to 1997, the BEA included Lodging in a category with a few other buildings. This earlier data was normalized using 1997 data, and is an approximation.

Investment in multimerchandise shopping structures (malls) peaked in Q4 2007 and is continuing to decline. As projects are completed, mall investment should fall much further.

As David Simon, Chief Executive Officer or Simon Property Group, the largest U.S. shopping mall owner said earlier this year:

"The new development business is dead for a decade. Maybe it’s eight years. Maybe it’s not completely dead. Maybe I’m over-dramatizing it for effect."

The third graph shows office investment as a percent of GDP since 1972. Office investment peaked in Q3 2008, and with the office vacancy rate rising sharply, office investment will probably decline at least through 2010.

Note: In 1997, the Bureau of Economic Analysis changed the office category. In the earlier years, offices included medical offices. After '97, medical offices were not included (The BEA presented the data both ways in '97).

The non-residential structures investment bust is here and will continue for some time.

by Calculated Risk on 4/30/2009 08:45:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending April 25, the advance figure for seasonally adjusted initial claims was 631,000, a decrease of 14,000 from the previous week's revised figure of 645,000. The 4-week moving average was 637,250, a decrease of 10,750 from the previous week's revised average of 648,000.
...
The advance number for seasonally adjusted insured unemployment during the week ending April 18 was 6,271,000, an increase of 133,000 from the preceding week's revised level of 6,138,000. The 4-week moving average was 6,076,000, an increase of 131,500 from the preceding week's revised average of 5,944,500.

Click on graph for larger image in new window.

The first graph shows weekly claims and continued claims since 1971.

The four week moving average is at 637,250, off 21,500 from the peak 3 weeks ago.

Continued claims are now at 6.27 million - the all time record.

Next week I'll add the chart that normalizes the data by covered employment.

This is another very weak report, however the decline in the four-week average of weekly claims suggests there is a reasonable chance that the peak in weekly claims has happened for this cycle.

by Calculated Risk on 4/29/2009 11:57:00 PM

From the NY Times: Chrysler Bankruptcy Looms as Deal on Debt Falters

Last-minute efforts by the Treasury Department to win over recalcitrant Chrysler debtholders failed Wednesday night, setting up a near-certain bankruptcy filing by the American automaker ... Chrysler was expected to seek Chapter 11 protection on Thursday ...

It sounds like the Administration expects a short bankruptcy. It will be interesting to see if the debtholders do better than the $2.25 billion they were offered.

by Calculated Risk on 4/29/2009 10:39:00 PM

A couple of videos from the Milken conference. The first one includes Lewis Ranieri, who is generally given significant credit for creating the private MBS market, and has been warning about the MBS market for several years.

Ranieri makes a number of comments on housing starting at 11:50. I disagree with his assertion about prices being near the bottom - although it is probably true in some areas.

The second video is on the Credit Markets (ht Bob_in_MA). He suggests the discussion is interesting near the end when Milken draws parallels to the 1970s:

by Calculated Risk on 4/29/2009 07:15:00 PM

From the WSJ: Treasury Sweetens Offer to Lenders In Chrysler Bankruptcy Talks

The U.S. Treasury, in a last-ditch effort to avoid a bankruptcy filing by Chrysler LLC, has sweetened its most recent offer to lenders by $250 million ... Lenders, who had until 6 p.m. to vote on the offer ... were notified at 4:30 via conference call and were sent to a Web site to vote for the deal.

Such a deal can't be approved outside bankruptcy court without 100% consent from lenders....

One reason Chrysler may need to file for bankruptcy is so that Fiat can clear out hundreds of auto dealers from its sales network, which is easier to do in bankruptcy where dealer franchisee agreements can quickly be rejected or amended. The automaker also has asbestos and environmental liabilities which Fiat does not want and are more easily shed in bankruptcy court.
...
Plans were under way for President Barack Obama to deliver a speech about Chrysler on Thursday morning. People who have been briefed on the matter said two versions of the speech were being drafted ...

Down to the last few hours ...

by Calculated Risk on 4/29/2009 05:37:00 PM

From the WaPo: Sources: Chrysler Bankruptcy Plan Would Oust CEO, Install Fiat Management

Chrysler chief executive Robert Nardelli would be replaced by the management of Italian automaker Fiat under a bankruptcy plan that the United States is preparing for the storied automaker...

If the bankruptcy proceeds as expected ... The ownership of the new company would be divided between the union's retiree health fund, which would get a 55 percent stake, Fiat, which would get at least a 35 percent stake, and the United States, which would take an 8 percent stake. The Canadian government would receive two percent.

Chrysler's creditors would get $2 billion in cash and no equity stake. The automaker's current owner Cerberus Capital Management would be wiped out.

The deadline is tomorrow.

by Calculated Risk on 4/29/2009 03:55:00 PM

From Bloomberg: Lewis Ranieri Says Housing Is ‘Shouting Distance’ From Bottom

“I’m actually very enthusiastic about housing, and I haven’t said that in five years,’’ Ranieri said, speaking on a panel at the Milken Institute Global Conference in Beverly Hills, California. “We’re within shouting distance of a bottom.”

The article says Ranieri was talking about prices, but that isn't clear from the quote. He might be talking about residential investment. Prices will fall further ...

And a look at the markets ...

Click on graph for larger image in new window.

The first graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".


Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

The second graph compares four significant bear markets: the Dow during the Great Depression, the NASDAQ, the Nikkei, and the current S&P 500.

See Doug's: "The Mega-Bear Quartet and L-Shaped Recoveries".

by Calculated Risk on 4/29/2009 02:15:00 PM

From the FOMC:

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments.

by Calculated Risk on 4/29/2009 11:41:00 AM

Although Q1 GDP was very negative due to the sharp investment slump (this was expected, see: Q1 GDP will be Ugly), the decline in Q1 was weighted towards lagging sectors.

Click on graph for larger image in new window.

This table shows the contribution to GDP for several sectors in Q1 2009 compared to Q4 2008.

The leading sectors are on the left, the lagging sectors towards the right.

There has been a shift from leading sectors to lagging sectors, although the negative contribution from residential investment was larger in Q1 than in Q4 2008.

However it appears that the slump in residential investment (mostly new home construction and home improvement) is slowing, and I expect the contribution to Q2 2009 to be close to zero - after declining for 13 consecutive quarters.

This doesn't mean the downturn is over, but this does suggest that the worst of the GDP declines is probably over.

For more, see Business Cycle: Temporal Order. Here is a repeat of the table showing a simplified typical temporal order for emerging from a recession:

When Recovery Typically Starts

During Recession	Lags End of Recession	Significantly Lags End of Recession
Residential Investment	Investment, Equipment & Software	Investment, non-residential Structures
PCE	Unemployment(1)

(1) In recent recessions, unemployment significantly lagged the end of the recession. That is very likely this time too.

Note: Any recovery will probably be sluggish, because household balance sheets still need repair (more savings), and any rebound in residential investment will probably be small because of the huge overhang of existing inventory. As I noted in Temporal Order, at least we know what to watch: Residential Investment (RI) and PCE. The increasingly severe slump in CRE / non-residential investment in structures will be interesting, but that is a lagging indicator for the economy.