by Calculated Risk on 6/10/2009 10:46:00 PM

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Daily Summary:

Long rates are rising.

From CNBC: Treasury Holds 'Awful' Auction: 10-Year Yield Hits 3.95%

From the WSJ: Rate Rise Clouds Recovery

On Wednesday, rates on 30-year fixed-rate mortgages climbed to 5.79%, up from 5% two weeks ago, according to HSH Associates. That jump will cut roughly in half the number of borrowers with an incentive to refinance, according to FTN Financial.

From the MBA: Mortgage Rates Increase, Refinance Applications Decline

Here is a cool tool from Political Calculations: Predicting Mortgage Rates and Treasury Yields

Trade Deficit Increases Slightly in April

From the Fed: Beige Book: Economic conditions remained weak or deteriorated further

Economic Calender for Thursday

Retail Sales 8:30 AM ET

Weekly Jobless Claims 8:30 AM ET

Business Inventories 10 AM ET

Fed: Flow of Funds Report 12 PM ET

Hotel Occupancy Report (morning)

Atlanta Federal Reserve Bank President Dennis Lockhart 1:05 PM ET

Futures are up slightly: barchart.com

Bloomberg Futures.

And the Asian markets are mixed.

by Calculated Risk on 6/10/2009 08:50:00 PM

In early March it seemed like the "D" word was everywhere. That raised a question: What is a depression?

This is an update to that earlier post. Although there is no formal definition, most economists agree a depression is a prolonged slump with a 10% or more decline in real GDP.

In March I heard an analyst say that a 10% unemployment rate is a depression. But the unemployment rate peaked at 10.8% in 1982, and that period is not considered a depression.

Some people argue the duration of the economic slump defines a depression - and the current recession is already 18 months old (through May). That is longer than the recessions of '90/'91 and '01. The '73-'75 recession lasted 16 months peak to trough, and the early '80s recession (a double dip) was classified as a 6 month recession followed by a 16 month recession (22 months total). Those earlier periods weren't "depressions", so if duration is the key measure, the current recession probably still has a ways to go.

Here is a graph comparing the decline in real GDP for the current recession with other recessions since 1947. Depression is marked on the graph as -10%.

Click on graph for larger image in new window.
Q2 2009 is estimated at a -4.0% decline in real GDP (seasonally adjusted annual rate). This will push the cumulative decline (peak to trough) to about 4.2% from the peak of real GDP.

Note: Northern Trust is forecasting -3.6% real GDP (SAAR) in Q2, and Goldman Sachs is forecasting -3.0%. For the stress tests, the baseline scenario assumed -1.2% in Q2, and the "more adverse" scenarios assumed -4.3%.

Even though the current recession is already one of the worst since 1947, it is only about 42% of the way to a depression (assuming a weak Q2).

To reach a depression - assuming -4.0% in Q2 - the economy would have to decline at about a 5.8% annual rate each quarter for the next year.

by Calculated Risk on 6/10/2009 05:43:00 PM

California State Controller John Chiang wrote to Governor Schwarzenegger today. The following graph shows California's Cash Outlook starting in July 2009.

Click on graph for larger image in new window.

And here is the letter to Governor Schwarzenegger (note that May was worse than projections just a few weeks ago):

On May 29, 2009, I informed you of the precarious nature of the State’s cash condition and alerted you to impending risks which threaten the State’s ability to meet its payment obligations.

The situation has not improved. Based on actual revenues received during the month of May, and finalized May Revision data provided by the Department of Finance on June 1, I have the following updates to the State’s 2009-10 cash outlook:

• In the absence of legislative action, the State will not have sufficient cash to meet all of its payment obligations on July 28. By July 31, the cash deficit will increase to a negative $2.78 billion.

• In April, the State’s cash balance will fall to a negative $25.3 billion – the lowest point projected for Fiscal Year 2009-10. To put this shortfall into proper perspective, it is five times the $5.1 billion cash deficit we faced this past spring.

In the letter I sent you on May 29, I indicated we would have a negative cash balance of $1.02 billion at the end of July, and a low point for 2009-10 of $22 billion. The additional deterioration is a result of two factors: (a) May revenues coming in $827 million less than projected by the Governor’s May Revision, and (b) adjustments made by the Department of Finance to its revenue and expenditure projections. Attached is a chart detailing the projected cash low point for each month for the fiscal year starting July 1.

While the severity of the shortfall has worsened since my last letter, the time available to correct our budget and cash deficits has not materially changed. The State will run out of cash in less than 50 days without corrective action by the Legislature and Governor. ...

by Calculated Risk on 6/10/2009 04:02:00 PM

From the NY Post: AIG BLDG. FETCHES UNDER $140M (ht bill)

LOCAL owner/developer Youngwoo & Associates has teamed up with South Korea's Kumho Investment Bank to win the bidding for AIG's downtown headquarters complex that consists of the Art Deco 70 Pine St. and the more modern 72 Wall St.

Sources said the pricing for the buildings, which have a combined 1.4 million square feet of space, will be just under $100 a foot, bringing the total to less than $140 million.

Put that in your CMBS rating formulas ...

by Calculated Risk on 6/10/2009 02:00:00 PM

From the Fed: Beige Book

Reports from the twelve Federal Reserve District Banks indicate that economic conditions remained weak or deteriorated further during the period from mid-April through May. However, five of the Districts noted that the downward trend is showing signs of moderating. Further, contacts from several Districts said that their expectations have improved, though they do not see a substantial increase in economic activity through the end of the year.

On Real Estate and construction:

Although the residential real estate market remains weak, agents in the New York, Philadelphia, Cleveland, Richmond, Chicago, Kansas City, Dallas, and San Francisco Districts reported an uptick in home sales. The reasons cited include seasonal factors, low interest rates, declining house prices, and tax credits for first-time buyers. Much of the sales increase was found in the lower-priced end of the market. New home construction appeared to have stabilized at very low levels in Philadelphia, Cleveland, Atlanta, Chicago, Minneapolis, Dallas, and San Francisco, although Kansas City reported an uptick in construction. Home inventories were trending down in Philadelphia, Richmond, Atlanta, Kansas City, and Dallas. However, Chicago reported that inventories remain elevated.

Commercial real estate markets continued to weaken across all Districts. Vacancy rates for commercial properties were rising in many regions of the Boston, New York, Philadelphia, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, and San Francisco Districts putting downward pressure on rents. Atlanta, Chicago, and St. Louis reported new construction projects being postponed or cancelled, and new construction in the New York, Philadelphia, and Minneapolis Districts dropped substantially. Eight Districts cited difficulty in obtaining financing as one of the primary reasons for delaying or stopping construction of new developments and for limiting sales of existing properties.
emphasis added

Commercial real estate (CRE) is following residential off the cliff (this is the typical pattern - CRE follows residential). CRE will be crushed this year and into 2010.

Beige Shoots (ht kilroy was here)