by Calculated Risk on 7/25/2009 08:25:00 PM

From the San Diego Union: Calif. officials concerned about new budget woes

"It's entirely likely we will ultimately see further declines in revenue, which will almost certainly require further budget action," said Assembly Minority Leader Sam Blakeslee, a Republican from San Luis Obispo.
...
Officials will also be watching monthly revenue reports from the Department of Finance and the controller's office to look for signs of new trouble in the months ahead.

Of course, one of the key elements of the new California budget is to have the state use money that is normally allocated to cities. So I expect layoffs at the local level in addition to the possibility of further state revenue declines.

by Calculated Risk on 7/25/2009 03:46:00 PM

New Home sales for June are scheduled to be released on Monday morning by the Census Bureau. The consensus forecast is for 350 thousand sales on a Seasonally Adjusted Annual Rate (SAAR) basis, up slightly from the 342 thousand SAAR in May.

Since we already have the NAHB Housing Market Index (HMI) through July and single family housing starts through June - and since both series have increased recently - I thought it might be interesting to compare all three series.

Click on graph for larger image in new window.

This graph compares the NAHB HMI (left scale) with new home sales and single family housing starts (right scale).

Both the new home sales and single family starts series are very noisy (month-to-month variability is high), so it is hard to use starts to predict sales on a monthly basis. However this does suggest a possible increase in sales over the next few months.

When comparing the HMI to single family starts, r-squared is 0.60.

For HMI to new home sales, r-squared is 0.42.

For single family starts to new home sales, r-squared is 0.85 (pretty high).

It looks like builder optimism (as measured by the HMI) is a little more related to building than selling. (Just a joke).

NOTE: For purposes of determining if starts are above or below sales, you have to use the quarterly data by intent. You can't compare the monthly total single family starts directly to new home sales, because single family starts include several categories not included in sales (like owner built units and high rise condos).

by Calculated Risk on 7/25/2009 12:49:00 PM

From David Altig at Macroblog: A look at the recovery

Earlier this week my boss, Atlanta Fed President Dennis Lockhart, weighed in with his views about the shape of the economic recovery to come while speaking at a meeting of the Nashville, Tenn., Rotary Club:

"The economy is stabilizing and recovery will begin in the second half. The recovery will be weak compared with historic recoveries from recession. The recovery will be weak because the economy must make structural adjustments before the healthiest possible rate of growth can be achieved."

Dr. Altig then compares current forecasts for the recovery with previous recoveries.

Click on graph for larger image in new window.

The red dots are actual recessions, the blue dots are forecast following the current recession.

The Y-axis on this graph is the four quarter percent change in GDP following the end of a recession. The X-axis is the depth of the recession (measure in change in GDP from peak to trough).

Note that the blue dots don't line up because the forecasters have different views as to the eventual depth of the recession.

From Altig:

The chart plots the four-quarter growth rate of gross domestic product (GDP) from the trough of a recession against the depth of the corresponding contraction, as measured by the cumulative loss of GDP over the course of the downturn. The points within the red circle represent all previous postwar recessions, and they form a nice, neat, easily discernible pattern. That is, the pace of growth in the first year after a recession has, in our history, been reliably related to how bad the recession was. The deeper the recession, the faster the recovery.

The points within the blue circle are based on forecasts of GDP growth from the third quarter of this year through the third quarter of 2010, obtained from the latest issue of Blue Chip Economic Indicators (which reports survey results from "America's leading business economists"). From top left of the circle to bottom right, the points represent the 10 lowest forecasts of the most optimistic members of the 50 Blue Chip forecasting panel, the panel's consensus (or average) forecast, and the 10 highest forecasts of the most pessimistic panel participants.

I chose the third quarter as the reference point because nearly two-thirds of the Blue Chip respondents indicate that, in their view, the recession will indeed end in the third quarter of this year. Assuming this occurs, this recovery would appear to be a big outlier. Either we are about to continue making history—and not in a good way—or current guesses about the medium-term economy are way too pessimistic.
emphasis added

I think this recession (and sluggish recovery) will continue to make history, and that most of these forecasts are actually too optimistic (the bottom 10 blue chip is about my view).

by Calculated Risk on 7/25/2009 09:11:00 AM

From Bloomberg: Taylor Says Fed Gets Rule Right, Goldman Doesn’t

Economists from Goldman Sachs Group Inc., Macroeconomic Advisers LLC, Deutsche Bank Securities Inc. and even the San Francisco Federal Reserve Bank argue the Taylor Rule, a pointer for finding the correct level for interest rates, suggests the Fed should be doing a lot more to stimulate the economy.

Taylor said his measure shows just the opposite: that Fed policy is appropriate, that central bankers are right to be considering how to withdraw their unprecedented monetary stimulus and that critics who say otherwise are misinterpreting his rule. The formula is designed to show the best rate for spurring growth without stoking inflation.

“They say they’re using the Taylor Rule, but they’re not,” Taylor, an economist at Stanford University in Stanford, California, said in an interview. “My rule does suggest a long time before we raise rates. But it also does suggest an earlier rate increase than you would think.”

And from Goldman's Hatzius (June 2nd, no link):

[S]everal highly respected voices have weighed in on this debate, with arguments that imply a smaller need for Fed balance sheet expansion than suggested by our calculations. The first challenge came from Professor John Taylor—father of the eponymous rule—at an Atlanta Fed conference (see “Systemic Risk and the Role of Government,” May 12, 2009). Taylor argued that his rule implies a fed funds rate of +0.5%. He specifically attacked a reported Fed staff estimate of an “optimal” Taylor rate of -5% as having "... both the sign and the decimal point wrong.”

What’s going on? The answer can be seen in a note published by Glenn Rudebusch of the San Francisco Fed [in May]; it justifies the Fed’s -5% figure and reads like a direct reaction to Taylor’s criticism, even though it does not reference his speech (see “The Fed’s Monetary Policy Response to the Current Crisis,” FRBSF Economic Letter 2009-17, May 22, 2009). The difference is fully explained by two choices. First, Taylor uses his “original” rule with an assumed (but not econometrically estimated) coefficient of 0.5 on both the output gap and the inflation gap, while the Fed uses an estimated rule with a bigger coefficient on the output gap. Second, Taylor uses current values for both gaps, while the Fed’s estimate of a -5% rate refers to a projection for the end of 2009, assuming a further rise in the output gap and a decline in core inflation.

Back in May, using then current data, Professor Taylor argued his rule implied a fed funds rate of plus 0.5 percent. Now Dr. Taylor argues current data suggest a rate of negative 0.955 percent.

Rudebusch uses a much larger coefficient for the output gap, and his method - with 9.5% unemployment - would suggest a -5.0% Fed Funds Rate currently. Since his method is also forward looking and assumes a higher unemployment rate later this year (very likely) Rudebusch approach suggests an even lower Fed Funds rate.

For the Fed Funds rate, with a zero bound, this debate doesn't matter right now - but it will matter in the future. But the debate does matter now for the Fed's other policies, as noted in the Bloomberg article:

Since the Fed can’t lower rates to less than zero, the Taylor rule means the central bank has to pump money into the economy through other methods, such as purchases of Treasuries, mortgage securities and agency bonds.

Taylor argues the Fed doesn't need to use these other methods - at least not much - Rudebusch would argue these other methods are needed.

Note: Here is a spreadsheet for Rudebusch's Taylor rule method.

by Calculated Risk on 7/25/2009 12:45:00 AM

From the LA Times: 'Cash for clunkers' rules are released, sparking a rush

The law creating the $1-billion program went into effect July 1, but many dealers were reluctant to participate until they got a look at the rules. The arrival of the 100-plus-page document Friday morning sparked a registration rush that overwhelmed the government's computers, resulting in waits of two hours or more, the National Automobile Dealers Assn. reported.

The program is also exciting a fair amount of interest among consumers. Online auto information provider Edmunds.com said its traffic has been at record levels in recent weeks. Part of that comes from what may be the beginnings of a rebound in car sales, but the clunkers program is helping.

The article mentions several rules to avoid fraud, and a requirement that the "clunker" be crushed. This should give a some boost to auto sales over the next few months.