by Calculated Risk on 9/07/2010 02:51:00 PM

The Obama administration is proposing that businesses be able to expense new investment in plants and equipment, through 2011, instead of writing off the investment over several years.

Catherine Rampell at the NY Times Economix provides a nice summary: Reactions to Obama’s Business Tax Write-Off Proposals

A few excerpts:

From Goldman Sachs on the "small effect":

To the extent it does have an effect, it is likely to pull forward demand into the quarter just before expiration (in this case Q4 2011) so the near-term effect should be even more modest ...

From Professor Greg Mankiw:

"[T]he impact will be relatively modest. Notice that expensing merely accelerates deductions. Thus, the value to the firm depends on interest rates. With interest rates near zero, the impetus to investment is small. Put another way, this policy can be seen as giving firms a zero-interest loan if they invest in equipment. But with interest rates near zero anyway, the value of the loan is not that great.”

This is basically a large sounding proposal ($200 billion) with little impact. With excess capacity in most sectors, why do we want to incentivize companies to invest anyway? And as Goldman notes, most of the modest impact will probably be in Q4 2011.

by Calculated Risk on 9/07/2010 12:04:00 PM

One of the key questions for housing, jobs, and the economy is: When will the excess housing supply be absorbed?

The answers depends on:
1) The current number of excess housing units,

2) how many net units are added to the housing stock, and

3) how many net households are being formed.

There is no timely data for net household formation, and estimates of the excess housing supply vary widely. So the answer involves some guesses (I'll get back to these questions).

The best data is for completions of housing units - although the number of demolitions is unclear. So the limited purpose of this post to to provide an estimate of the net units added to the housing stock in 2010.

Housing units include single family homes (included as 1 to 4 units), apartments (5+ units), and mobile homes. Demolitions are subtracted from the stock.

NOTE: Table is based on Completions. Housing units added to stock:

	2009	20101
1 to 4 units	534.7	480
5+ units	259.8	135
Mobile Homes	52.2	55
Sub-Total	846.7	670.0
Demolitions2	200	200
Total	646.7	470.0

¹ Estimates for 2010 based on completions through July.
² estimated.

Notice for 2010 that the estimate is for 5+ unit completions to collapse. This is already in the works as shown in the following diagram:

Click on graph for larger image in new window.

The blue line is for multifamily starts and the red line is for multifamily completions. Probably all the multifamily units that will be delivered in 2010 have already been started since, according to the Census Bureau, it takes on average over 1 year to complete these projects.

Since multifamily starts collapsed in 2009, completions will collapse in 2010. This finally showed up in the data for July as completions fell to 8.1 thousand from 17.1 thousand in June. Completions averaged over 14 thousand per month during the first 6 months of 2010, and will average close to 8 thousand per month during the 2nd half of 2010.

Note: this decline in completions will impact construction employment in the 2nd half.

Similar logic applies to single family units, although these only take around 7 months to complete. Almost all of the single family units that will be completed this year have already been started. There were 249.2 thousand completions during the first 6 months of the year, and completions will probably slow in the 2nd half.

The manufactured homes data is from the Census Bureau (and demolitions are estimated).

This means a record low number of housing units will be added to the housing stock in 2010. But unfortunately household formation is probably very low too - so the excess inventory might not be reduced substantially (I'll get back to this).

UPDATE: To be clear - the record low completions is bad news in the short term, especially for employment, but overall it is GOOD news for the economy and housing since it helps reduce the excess supply.

Special thanks to housing economist Tom Lawler who shared with me some of his thoughts on completions.

by Calculated Risk on 9/07/2010 09:03:00 AM

After the WSJ story last night on the European stress tests, here is an update on a few European bond spreads:

The 10-year Ireland-to-Germany bond spread has risen to 376 bps. This spread is larger than during the financial crisis in May when the spread peaked at 306 bps.

The 10-year Greece-to-Germany bond spread is now 946 bps, just below the peak level of 963 bps in May.

The 10-year Portugal-to-Germany bond spread is now 351 bps, just above the peak in May of 349 bps.

by Calculated Risk on 9/06/2010 09:30:00 PM

From the WSJ tonight: Europe's Bank Stress Tests Minimized Debt Risk

We've discussed this several times - as an example, in Part 5D of the sovereign debt series, "some investor guy" wrote:

Q1. Was there much sovereign stress in the European bank stress tests?

NO. The most glaring oversight, in the opinion of the author and many other analysts, is assuming there would be no sovereign defaults, and thus not showing any losses on the bank’s long term holdings (in the banking category vs the “trading book”). According to the Committee of European Banking Supervisors, the sovereign stress scenario results in “39 billion euro associated with valuation losses of sovereign exposures in the trading book “.

“The haircuts are applied to the trading book portfolios only, as no default assumption was considered, which would be required to apply haircuts to the held to maturity sovereign debt in the banking book.”

Note: Here are links for the entire sovereign debt series.

Here is the weekly summary for last week (a busy week).

And the Economic Schedule for this week (a light week).

by Calculated Risk on 9/06/2010 04:10:00 PM

Every month the BLS puts out a report that discusses the difference between the household and establishment surveys: Employment from the BLS household and payroll surveys: summary of recent trends

The Unemployment Rate comes from the Current Population Survey (CPS: commonly called the household survey), a monthly survey of about 60,000 households.

The jobs number comes from Current Employment Statistics (CES: payroll survey), a sample of approximately 390,000 business establishments nationwide.

These are very different surveys: the CPS gives the total number of employed (and unemployed including the alternative measures), and the CES gives the total number of positions (excluding some categories like the self-employed, and a person working two jobs counts as two positions).

The linked monthly report from the BLS discusses the differences, and adjusts the household survey to "an employment concept more similar to the payroll survey’s".

Click on graph for larger image in new window.

This graph from the BLS shows the household survey, the payroll survey and the adjusted household survey.

I was inspired to post this graph by Professor Nancy Folbre's post at Economix: Taking the ‘Un’ Out of Unemployment

A focus on employment, rather than unemployment, provides additional perspective. ...

The employment measure is unaffected by assumptions regarding the character, motives or incentives facing the unemployed.

And trends in this measure, as shown above, could discourage even the most optimistic among us, if they would just pay attention to it.

As Steven Hipple, a Bureau of Labor Statistics economist, puts it in a more detailed analysis of trends through the end of 2009, “Economic decision-makers might not understand the depth of the economic hole in the labor market.”

Little employment growth for a decade is quite a "hole".

Note: Over the same decade, according to the Census Bureau, the U.S. population, has increased from around 285 million to 310 million.