by Calculated Risk on 1/22/2006 10:24:00 PM

In Monday's WaPo: As U.S. Economy Has Thrived, So Has Debt

"The jury is out on his legacy in large part because of the debt" and the trade deficit, said Stephen S. Roach, chief economist at Morgan Stanley. "You will not be able to truly judge his accomplishments until we see how this plays out in the post-Greenspan era."

The article offers these examples:

· U.S. household debt hit a record $11.4 trillion in last year's third quarter, which ended Sept. 30, after shooting up at the fastest rate since 1985, according to Fed data.

· U.S. households spent a record 13.75 percent of their after-tax, or disposable, income on servicing their debts in the third quarter, the Fed reported.

· The trade deficit for last year is estimated to have swollen to another record high, above $700 billion, increasing America's indebtedness to foreigners.

The debt binge has definitely contributed significantly to the current recovery. The big question is what happens next?

by Calculated Risk on 1/22/2006 06:00:00 PM

The Ports of Long Beach and Los Angeles reported a seasonal decrease in import traffic for December.

Import traffic at the Port of Long Beach decreased 12.7% compared to November and was 1.2% less than December 2004. A total of 266 thousand loaded cargo containers came into the Port of Long Beach, compared to 305 thousand in November. The record is 313 thousand set in August 2005.

The Port of Los Angeles import traffic decreased 1.2% in December compared to November, but imports were up 16% from December 2004. Imports were 321 thousand containers. The record for the Port of Los Angeles was set in October with 368.5 thousand import containers.

For Long Beach, outbound traffic was down 3% to 104 thousand containers. At Los Angeles, outbound traffic was steady at 98 thousand containers.

The quantity of containers says nothing about the content value, but provides a rough guide on imports from China and the rest of Asia. Given these numbers, I expect imports from Asia to be lower in December than in November.

by Calculated Risk on 1/22/2006 01:03:00 AM

First, it is fairly clear, as pgl notes, that Iran is not currently an imminent threat to the US. But what about the economic issues with the "Iranian Oil Bourse"?

Dr. Hamilton has a nice post addressing that issue: Strange ideas about the Iranian oil bourse

I agree with Dr. Hamilton, but I'm afraid the actual economic impact (or lack of economic impact) doesn't really matter. What matters is what Bush / Cheney think. Although the Bourse is inconsequential, an attack on Iran could have significant economic implications.

In my economic predictions for 2006, I included this caveat:

So, without trying to predict natural disasters, a pandemic or human stupidity (terrorism, bombing Iran, etc.), ...

And for some reason I'm reminded of the fictional character Forrest Gump's quip: "Stupid is as stupid does." Lets hope the US is not stupid this time, otherwise $68/barrel WTI oil might look cheap, and my 2006 economic predictions wildly wrong.

by Calculated Risk on 1/20/2006 11:42:00 PM

Morgan Stanley's Chief Economist Stephen Roach writes: The Irony of Complacency

So far, so good, for an unbalanced world -- the sky has yet to fall.

... suffice it to say, were it not for another year of solid support from US consumer demand -- our latest estimates put real consumption growth at an impressive 3.5% in 2005 -- the rest of a largely externally dependent world would have been in big trouble.

What did it take for the American consumer to deliver yet again? ... With America’s internal income-generating capacity continuing to lag, US consumers once again tapped the home equity till to draw support from the Asset Economy. According to Federal Reserve estimates, equity extraction by US households topped $600 billion in 2005 -- more than enough to compensate for the shortfall of earned labor income. Comforted by this asset-based injection of purchasing power, consumers had little compunction in stretching traditional income-based constraints to the max. The personal saving rate fell deeper into negative territory that at any point since 1933, and outstanding household sector indebtedness -- as well as debt service burdens -- hit new record highs.

So much for what happened in 2005. The big question for the outlook -- and quite possibly the most important macro issue for world financial markets in 2006 -- is whether the American consumer can keep on delivering. My answer is an unequivocal “no.”

Roach is always interesting reading.

by Calculated Risk on 1/20/2006 10:44:00 AM

More on MEW, IBD reports:

As of the third quarter ... the home equity-piggy bank still looked bright and shiny.

Estimated gross equity extractions rose 10% from the previous quarter to a seasonally adjusted $990.6 billion, according to an update provided to Investor's Business Daily of a September Federal Reserve study on mortgage originations.

Extractions include money left over after a homeowner sells his home and pays off his mortgage, cash-out refinancings and home equity loans. It takes into account equity gains used for the down payment of a subsequent home purchase by excluding the buyer's estimated down payment.

Consumers had also dug more wealth out of their homes in the second quarter, with equity withdrawals rising 27% to an estimated $904.4 billion after falling for two prior quarters, said the Fed.

For the first nine months of last year, equity extraction totaled $2.6 trillion vs. $2.4 trillion for the same period of 2004 and over double withdrawals during all of 2000.

NOTE: This estimate of equity extraction is lower than my estimate of $289.5 Billion ($1.16 Trillion annual rate) for Q3. See GDP Growth: With and Without Mortgage Extraction). The difference is the FED's approach excludes buyer's estimated down payment for a subsequent home.

Goldman Sachs is concerned going forward:

... with sales and prices slipping at the end of 2005 and refinancing less attractive, economists have started to place bets on when the country's favorite piggy bank will finally start to crack. If and when that happens, consumers may have to cut back, slowing overall economic growth.

"We expect mortgage-equity withdrawals to decline and therefore not just stop supporting growth in spending and but actually act as a drag on spending," said Goldman Sachs economist Ed McKelvey.

That drag could happen mid-year, he said.