by Calculated Risk on 5/27/2011 07:27:00 PM

Here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released yesterday (graph as of May 24th).

From the Atlanta Fed:

Since the April FOMC meeting, peripheral European bond spreads over German bonds continue to be elevated, with those of Greece, Ireland, and Portugal setting record highs.

Since the April FOMC meeting, the 10-year Greece-to-German bond spread has widened by 192 basis points (bps), through May 24. The spreads for Ireland and Portugal have soared higher by 91 bps and 68 bps, respectively, over the same period.

Click on graph for larger image in new window.

The spreads for Greece, Ireland and Portugal were all at record highs.

Spreads for Spain and Italy have increased recently, but are still much lower than for Greece, Ireland and Portugal.

The second graph shows the Credit Default Swap (CDS) spreads:

From the Atlanta Fed:

The CDS spread on Greek debt has widened about 47 basis points (bps) since the April FOMC meeting, while those on Portuguese and Irish debt continue to be high.

The WSJ mentioned a new unreleased IMF paper that examines "debt restructurings by countries using a common currency": In Standoff Over Greece, Will ECB Have to Fold?

There aren't many precedents for debt restructurings by countries using a common currency, but there are some. An IMF working paper, as yet unpublished, examines them. According to two people who have read the paper, it shows that orderly debt restructurings—for example by Ivory Coast, which uses the West African CFA franc, and Grenada and Dominica, users of the East Caribbean dollar—haven't affected the viability of their respective currency unions.

Not great examples, but it isn't much of a jump to think this paper was motivated by the situation in Greece.

by Calculated Risk on 5/27/2011 03:27:00 PM

Fannie Mae reported that the serious delinquency rate decreased to 4.27% in March from 4.44% in February. This is down from 5.47% in March 2010. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.

Freddie Mac reported that the serious delinquency rate decreased to 3.57% in April from 3.63% in March. (Note: Fannie reports a month behind Freddie). This is down from 4.06% in March 2010. Freddie's serious delinquency rate also peaked in February 2010 at 4.20%.

These are loans that are "three monthly payments or more past due or in foreclosure".

Click on graph for larger image in graph gallery.

Some of the rapid increase in 2009 was probably because of foreclosure moratoriums, and also because loans in trial mods were considered delinquent until the modifications were made permanent.

Now the serious delinquency rate is falling as Fannie and Freddie work through the backlog of loans and either modify the loan, foreclose, short sale, or the loan cures. The serious delinquency rate is still very high ... but at least it is declining.

by Calculated Risk on 5/27/2011 01:17:00 PM

There are really two measures of GDP: 1) real GDP, and 2) real Gross Domestic Income (GDI). The BEA also released Q1 GDI yesterday as part of the second estimate for Q1 GDP. Recent research suggests that GDI is often more accurate than GDP.

For a discussion on GDI, see from Fed economist Jeremy Nalewaik, “Income and Product Side Estimates of US Output Growth,” Brookings Papers on Economic Activity. An excerpt:

The U.S. produces two conceptually identical official measures of its economic output, currently called Gross Domestic Product (GDP) and Gross Domestic Income (GDI). These two measures have shown markedly different business cycle fluctuations over the past twenty five years, with GDI showing a more-pronounced cycle than GDP. These differences have become particularly glaring over the latest cyclical downturn, which appears considerably worse along several dimensions when looking at GDI. ...

In discussing the information content of these two sets of estimates, the confusion often starts with the nomenclature. GDP can mean either the true output variable of interest, or an estimate of that output variable based on the expenditure approach. Since these are two very different things, using “GDP” for both is confusing. Furthermore, since GDI has a different name than GDP, it may not be initially clear that GDI measures the same concept as GDP, using the equally valid income approach.

The following graph is constructed as a percent of the previous peak in both GDP and GDI. This shows when the indicator has bottomed - and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%.

Click on graph for larger image in graph gallery.

It appears that GDP bottomed in Q2 2009 and GDI in Q3 2009. Real GDP finally reached the pre-recession peak in Q4 2010, but real GDI is still slightly below the previous peak.

Using GDI, the economy will be back to the pre-recession peak in Q2 2011.¹

However, by other measures - like real personal less transfer payments and employment - the economy is still far below the pre-recession peak.

The second graph is based on the April Personal and Outlays report this morning, and shows that real personal income less transfer payments is still 3.4% below the previous peak.

And of course there are still 6.955 million fewer payroll jobs than at the beginning of the 2007 recession.

Finally, recoveries following the bursting of a credit bubble - with a financial crisis - are always sluggish. So this isn't surprising, but it is still very painful.

¹ Last year I disagreed with St Louis Fed President James Bullard - and I argued that real GDI would probably be back to pre-recession levels in Q1 2011 (close, but it now looks like Q2).

by Calculated Risk on 5/27/2011 09:55:00 AM

From NAR: April Pending Home Sales Drop

The Pending Home Sales Index, a forward-looking indicator based on contract signings, dropped 11.6 percent to 81.9 in April from a downwardly revised 92.6 in March. The index is 26.5 percent below a cyclical peak of 111.5 in April 2010 when buyers were rushing to beat the contract deadline for the home buyer tax credit.

The data reflects contracts but not closings, which normally occur with a lag time of one or two months.

This suggests a sharp decline in existing home sales in May or June.

Consumer Sentiment: The final May Reuters / University of Michigan consumer sentiment index increased to 74.3 from the preliminary reading of 72.4, and from 69.8 in April.

Click on graph for larger image in graphic gallery.

This was above expectations for a reading of 72.5.

In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices.

This is still a low reading, but sentiment probably improved a little possible due to the decline in gasoline prices.

by Calculated Risk on 5/27/2011 08:53:00 AM

The BEA released the Personal Income and Outlays report for April:

Personal income increased $46.1 billion, or 0.4 percent ... Personal consumption expenditures (PCE) increased $41.5 billion, or 0.4 percent.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in April, the same increase as in March.

The following graph shows real Personal Consumption Expenditures (PCE) through April (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

Click on graph for larger image in graph gallery.

PCE increased 0.4% in April, but real PCE only increased 0.1% as the price index for PCE increased 0.3 percent in April. The graph shows the recent slowdown in the growth rate in real PCE.

Note: The PCE price index, excluding food and energy, increased 0.2 percent.

The personal saving rate was at 4.9% in April.

Personal saving -- DPI less personal outlays -- was $570.6 billion in April, compared with $576.7 billion in March. Personal saving as a percentage of disposable personal income was 4.9 percent in April, the same as in March.

This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the April Personal Income report.

The saving rate has declined even as growth for real personal consumption expenditures has slowed. Part of this is due to higher overall inflation and higher oil / gasoline prices.