by Calculated Risk on 10/05/2007 03:18:00 PM

From MarketWatch: U.S. consumer credit rises in August

Outstanding U.S. consumer debt rose at an annual rate of 5.9% in August, pushed higher mostly by a hefty gain in credit-card debt, the Federal Reserve reported Friday.
...
Revolving debt such as credit cards was the biggest driver behind the overall rise in August, the data show. That debt climbed by 8.1% in August, or by $6.1 billion. In July, credit-card debt rose by a revised 7.4%

by Calculated Risk on 10/05/2007 01:29:00 PM

From Fed Vice Chairman Donald L. Kohn: Economic Outlook. A few excerpts (video of speech at bottom of post).

... Our policy action will not be able to avert all of the weakness in the economy that may be in train for the next several months. Monetary policy works with a lag, and the effects of our easing action will have their maximum effect only after several quarters. In particular, housing markets are likely to remain depressed in coming months as housing demand is restrained by the difficulty in obtaining mortgages and perhaps also by spreading expectations on the part of buyers that house prices will fall, as they already have in a number of markets. And, although builders have reduced housing starts sharply, they have made very little progress in reducing the number of unsold new homes on the market. As a result, even absent a further deterioration in sales, residential construction would probably decline further in the months ahead, imparting a significant drag on overall growth in real gross domestic product.

Beyond housing, it is too early to tell what effect financial market turmoil is having on household and business spending, though very preliminary and partial information suggest that thus far the effects seem to be limited. Moreover, the available data indicate that the economy entered this period still expanding at a moderate pace. For example, consumption held up well this summer supported by solid growth in real incomes. And, the recent data on orders and shipments of capital goods and on nonresidential construction indicated further growth in capital outlays in August. That said, credit availability is likely to be tighter than before, consumer confidence is down, and businesses will probably be a little more cautious for a while, suggesting that these components of aggregate demand could become more subdued in coming months.

... To be sure, households are likely to start to save more out of their current incomes as they come to realize that they cannot count on a rise in the value of their real estate to build their retirement nest eggs. However, households have been surprisingly resilient to recent economic shocks, and any rise in the saving rate probably would be gradual. More generally, consumer spending should continue to be supported by ongoing growth in employment and income. In the business sector, balance sheets are in good shape, and most firms are not likely to face an appreciable tightening of credit availability. As a result, I anticipate that they will expand their investment spending to keep pace with rising household demands and with strength in export markets. In sum, once we get through the near-term weakness caused by the extra downleg from the housing contraction and any spillover from tighter credit conditions, I am looking for moderate growth with high levels of employment.

But you should view these forecasts even more skeptically than usual. The FOMC emphasized the considerable uncertainty in the outlook.

... Of course, we would not have eased policy if the outlook for inflation had not been favorable. The recent data on consumer price inflation have been encouraging. ... And, it will be critical for inflation expectations to remain well contained.

That said, I do not want to minimize the upside risks to inflation either. Rates of resource utilization are still relatively high, and the slower rates of productivity growth over the past two years, coupled with a pickup in compensation growth, have led to a noticeable acceleration in unit labor costs. Moreover, the decline in the exchange value of the dollar has put upward pressure on prices of imported goods, which have both direct and indirect effects on overall consumer prices.

Click image for video.

Kohn Says Fed Must Be `Nimble' in Setting Interest Rates: Video October 5 (Bloomberg) -- Federal Reserve Board Vice Chairman Donald Kohn speaks at the Greater Philadelphia Chamber of Commerce Annual Meeting in Philadelphia about the Fed's half-point reduction in the benchmark lending rate to 4.75 percent last month, the outlook for the U.S. economy and the need for policy makers to be "nimble" in setting interest rates. (Source: Bloomberg)

by Calculated Risk on 10/05/2007 12:37:00 PM

From Bloomberg: Homebuilders Liquidate Assets as Threat to Survival Spurs Sales (hat tip Jim)

``It's desperation time and some companies may not make it,'' said Alex Barron, an industry analyst at Agency Trading Group Inc. in Wayzata, Minnesota. ``At this point in the housing cycle, if you have too much debt, it's hard to get out from under it.''
...
``They are all losing money,'' [John Burns, president of John Burns Real Estate Consulting] said.
...
The 15 largest homebuilders are saddled with $7.75 billion in debt due to be repaid through 2009 and the companies' bonds trade as if they were junk ...

The five biggest homebuilders by revenue -- Lennar, D.R. Horton, Pulte, Centex and KB Home -- wrote off a combined $3.3 billion in the third quarter on land they own and will not build on or options to buy land they are choosing not to exercise.

We could make fun of the analysts that claimed the homebuilders would have strong cash flow during a downturn (due to less investment in land and improvements) and that the homebuilders were "land banks". Those investment ideas were Dumb and Dumber!

But the more important point is that the homebuilders struggle to survive shows why the builders are still overbuilding. Building homes, and selling at a deep discount, is the only way they can liquidate land to raise cash and pay down their debts in the current environment. This is why housing starts are still too high and will likely fall further over the next few quarters.

by Calculated Risk on 10/05/2007 09:08:00 AM

From Bloomberg: Washington Mutual Says Third-Quarter Profit Fell 75%

Washington Mutual Inc., the biggest U.S. savings and loan, said third-quarter net income fell about 75 percent because of "a weakening housing market and disruptions in the secondary market."

Loan loss provisions total about $975 million and losses and writedowns on mortgage loans and securities amount to $410 million, the Seattle-based company said in a statement today.

Added: Merrill Lynch Says Credit Market Conditions to Adversely Impact Third Quarter 2007 Results

Merrill Lynch & Co., Inc. today announced that challenging credit market conditions will have an adverse impact on its net earnings for the third quarter. The company expects to report a net loss per diluted share ... resulting from significant negative mark-to-market adjustments to its positions in two specific asset classes: collateralized debt obligations (CDOs) and sub-prime mortgages; and leveraged finance commitments.
...
The primary drivers of the FICC net losses in the third quarter were as follows:

* Write-downs of an estimated $4.5 billion, net of hedges, related to incremental third quarter market impact on the value of CDOs and sub-prime mortgages. These valuation adjustments reflect in part significant dislocations in the highest-rated tranches of these securities which were affected by an unprecedented move in credit spreads and a lack of market liquidity in these securities, which intensified during the third quarter. During the quarter, the company significantly reduced its overall exposure to these asset classes.

* Write-downs of an estimated $967 million on a gross basis, and $463 million net of related underwriting fees, related to all corporate and financial sponsor, non-investment grade lending commitments, regardless of the expected timing of funding or closing. These commitments totaled $31 billion at the end of the third quarter of 2007, a net reduction of 42% from $53 billion at the end of the second quarter. The net losses related to these commitments were limited through aggressive and effective risk management, including disciplined and selective underwriting and exposure reductions through syndication, sales and transaction restructurings.

There appears to be a line at the confessional, also from Bloomberg: JPMorgan, Bank of America May Write Down Buyout Loans

JPMorgan Chase & Co. and Bank of America Corp., the biggest arrangers of U.S. leveraged loans, may have combined markdowns of $3 billion in the third quarter ...

These possible writedowns are because of LBO related pier loans.

by Calculated Risk on 10/05/2007 08:46:00 AM

From MarketWatch: Job growth rebounds to 110,000 in September

Nonfarm payrolls rose by 110,000 in September, including 73,000 in the private sector, very close to expectations of 113,000 total payrolls.

Payroll growth in July and August was revised higher by 118,000, the government said. Instead of falling by 4,000 in August, payrolls rose 89,000 after revisions. The unemployment rate ticked up to 4.7%, the highest in a year. ...

The annual benchmark revision will lower the level of employment by an estimated 297,000 as of March 2007. ... The actual revision occurs in February, but a preliminary estimate is given in October.

Here is the BLS report. Note that the decline in employment in August has been revised away. The unemployment rate increased slightly again and is now at 4.7%.

Click on graph for larger image.

This graph shows the year-over-year change in nonfarm employment. This shows the weak - but not recessionary - job growth over the last year.



Residential construction employment declined 20,000 in September, and including downward revisions to previous months, is down 191.5 thousand, or about 5.6%, from the peak in March 2006. (compare to housing starts off 30%+).

Note the scale doesn't start from zero: this is to better show the change in employment.

The initial benchmark revision shows the loss of an additional 8,000 construction jobs, but the initial report doesn't breakout residential construction.

Overall this is a stronger than expected report. Even the projected downward revision (that will be included in the January report) is smaller than expected.