by Calculated Risk on 4/18/2010 09:28:00 AM

From Reuters: UK's Brown wants investigation into Goldman Sachs (ht jb)

Prime Minister Gordon Brown said on Sunday he wanted Britain's financial watchdog to investigate U.S. bank Goldman Sachs ...

"I want a special investigation done into the entanglement of Goldman Sachs and the companies there with other banks and what happened," Brown told BBC television.

"There are hundreds of millions of pounds have been traded here and it looks as if people were misled about what happened. I want the Financial Services Authority (FSA) to investigate it immediately," he said.

"I know that the banks themselves will be considering legal action," Brown said, apparently referring to European banks that lost money ...

From Bloomberg: Germany to Review Possible Legal Steps Against Goldman: Wilhelm

Germany may take legal action against Goldman Sachs Group Inc., German government spokesman Ulrich Wilhelm said today by phone.

Piling on begins ...

by Calculated Risk on 4/17/2010 07:54:00 PM

If we look at a long term graph of housing starts, we notice that there were more starts at the peak in the '70s than during the recent housing bubble. If we plotted housing starts per capita, or per total households, the surge in housing starts during the last decade would not look extraordinary at all (ht Dave).

But it was extraordinary ...

Click on graph for larger image in new window.

First, here is the long term graph of both total housing starts and single unit starts. Obviously there were many more multi-unit housing starts in the '70s - and that is a clue.

The key is household formation.

Household formation is a function of changes in population, and also of changes in household size. During the '70s, the baby boomers started moving out of their parents' homes, and there was a dramatic decrease in the number of persons per household. And that lead to a huge demand for apartments (the surge in total starts).

The second graph shows the persons per household since 1947. Persons per household has been declining for over a century, but there was a fairly sharp decline starting in the late '60s and all through the '70s.

More recently persons per household had been fairly flat. And there has been some recent research that suggests the household formation was lower, and therefore persons per household might even be higher, than the Census Bureau estimates. See from Amy Hoak at MarketWatch: Number of U.S. households falls by 1.2 million

Caveat: All of this data is rough, and it is difficult to get an accurate count of the housing stock.

Using the Census Bureau data we can calculate the impact the number of households needed because of 1) population growth, and 2) changes in household size:

Households Added due to Population Growth and Changes in Household Size
Decade	Due to Population Growth (millions)	Due to Change in Household Size (millions)	Persons per household, ending
50s	8.4	1.0	3.34
60s	8.0	2.5	3.19
70s	8.0	9.4	2.78
80s	8.5	4.9	2.62
90s	12.2	0.4	2.61
00s	11.0	1.7	2.57
Source: Persons per Household, Census Bureau XLS file

Because of the changes in household size, the U.S. needed far more additional housing units in the '70s and '80s than in the '90s and '00s. If we could normalize the housing start chart by household formation, we would see that the last decade was indeed extraordinary!

by Calculated Risk on 4/17/2010 03:12:00 PM

From Christina Romer, Chairman Council of Economic Advisers: Back to a Better Normal: Unemployment and Growth in the Wake of the Great Recession

My first and most fundamental point is that when it comes to the economy we are very far from normal. The unemployment rate is currently 9.7 percent. I find it distressing that some observers talk about unemployment remaining high for an extended period with resignation, rather than with a sense of urgency to find ways to address the problem. Behind this fatalism, there seems to be a view that perhaps the high unemployment reflects structural changes or other factors not easily amenable to correction. High unemployment in this view is simply “the new normal.” I disagree.

The high unemployment that the United States is experiencing reflects a severe shortfall of aggregate demand. Despite three quarters of growth, real GDP is approximately 6 percent below its trend path. Unemployment is high fundamentally because the economy is producing dramatically below its capacity. That is, far from being "the new normal," it is “the old cyclical."

In this regard, I am reminded of a frustration I have felt many times when people write books and organize conferences about the unemployment problem in the Great Depression -- as if the high unemployment were somehow separate or distinct from the rest of the Depression. Then, as now, the economy had been through a wrenching crisis that had caused demand and production to plummet. Unemployment was a consequence of the collapse of demand, not a separate, coincident problem.

Now, to be fair, the unemployment rate has risen somewhat more during this recession than conventional estimates of the relationship between GDP and unemployment would lead one to expect. In this year’s Economic Report of the President, we presented estimates that suggest that the unemployment rate in the fourth quarter of 2009 was perhaps 1.7 percentage points higher than the behavior of GDP would lead one to expect. Some of that unexpected rise goes away when one takes a more sophisticated view of GDP behavior. The Bureau of Economic Analysis estimates GDP in two ways -- one by adding up everything that is produced in the economy and the other by adding up all of the income received. These two measures should be identical. But in this recession, the income-side estimates have fallen substantially more than the product-side ones. Therefore some, but not all, of the anomalous rise in unemployment may be due to the fact that the true decline in GDP may have been deeper than the conventional estimates suggest.

The reason that I have been emphasizing that the high unemployment we are experiencing is cyclical rather than structural is not to somehow minimize or downplay it. In fact, just the opposite. It is to shake people out of the complacency that says, "That’s just the way life is." It may be the way life is right now -- but it doesn’t have to be. We have the tools and the knowledge to counteract a shortfall in aggregate demand. We should be continuing to use them aggressively.

by Calculated Risk on 4/17/2010 11:30:00 AM

I've started an archive of large images for most of the graphs posted on this blog. You can access the archive when you click on a graph (the larger image is part of the archive), or by clicking on "Graph Archive" in the menu bar.

A few examples - here are the most recent graphs for: housing starts, percent job losses during recessions, and New Home sales (NSA).

Note: The graphs are free to use on websites or for presentations. All I ask is that online sites link to my site, http://www.calculatedriskblog.com/, and printed presentations credit www.calculatedriskblog.com.

There are several methods to search for images.
1) There are tags at the bottom (like employment or housing starts)
2) There is an image archive at the bottom.
3) You can scroll through the images with the "Next" or "Back" buttons.

Suggestions? Enjoy!

by Calculated Risk on 4/17/2010 08:48:00 AM

First from Reuters yesterday: Consumer mood unexpectedly worse in early April

U.S. consumer sentiment took a surprise negative turn in early April due to a persistently grim outlook on income and jobs, a private survey released on Friday showed.
...
The surveys' overall index on consumer sentiments slipped to 69.5 in early April -- the lowest in five months. This was below the 73.6 reading seen at the end of March and the 75.0 median forecast of analysts polled by Reuters.

The article says "consumer sentiment is seen as a proxy for consumer spending", but I'm not sure. In 2005, Dr. Dean Croushore of University of Richmond argued consumer confidence is "essentially useless for forecasting Americans' spending patterns. ... consumer confidence just reflects the past. You lose your job, your confidence falls. There's not really anything new there."

Every time I see "consumer confidence", I think employment and gasoline prices ... and here are a couple of graphs to show the relationship:

NOTE: On the following graphs, the unemployment rate and gasoline prices are inverted since they are inversely correlated to confidence.

Click on graph for larger image in new window.

The first graph shows consumer confidence and the unemployment rate (inverted).

There is a strong correlation, although it appears confidence leads the unemployment rate (probably because layoffs stop before the unemployment rate starts falling). Maybe a better graph would be monthly changes in employment vs. confidence (I'll look at that later).

The second graph shows consumer confidence and real gasoline prices (CPI adjusted).

Although there are periods when confidence doesn't track gasoline prices, it does appear there is a relationship.

So my guess is the weak confidence reading tells us what we already know - unemployment is high and gasoline prices are rising.