by Calculated Risk on 8/26/2011 10:04:00 AM

From Fed Chairman Ben Bernanke: The Near- and Longer-Term Prospects for the U.S. Economy

Monetary policy must be responsive to changes in the economy and, in particular, to the outlook for growth and inflation. As I mentioned earlier, the recent data have indicated that economic growth during the first half of this year was considerably slower than the Federal Open Market Committee had been expecting, and that temporary factors can account for only a portion of the economic weakness that we have observed. Consequently, although we expect a moderate recovery to continue and indeed to strengthen over time, the Committee has marked down its outlook for the likely pace of growth over coming quarters. With commodity prices and other import prices moderating and with longer-term inflation expectations remaining stable, we expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate.

In light of its current outlook, the Committee recently decided to provide more specific forward guidance about its expectations for the future path of the federal funds rate. In particular, in the statement following our meeting earlier this month, we indicated that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That is, in what the Committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years.

In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.

by Calculated Risk on 8/26/2011 09:55:00 AM

The final August Reuters / University of Michigan consumer sentiment index increased slightly to 55.7 from the preliminary reading of 54.9. This is down sharply from 63.7 in July.


Click on graph for larger image in graphic gallery.

In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices. I think consumer sentiment declined sharply in August because of the heavy coverage of the debt ceiling debate.

This was slightly below the consensus forecast of 56.0.

by Calculated Risk on 8/26/2011 08:30:00 AM

From the BEA: Gross Domestic Product, Second Quarter 2011 (second estimate

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.0 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis.

This was revised down from 1.3% and slightly below the consensus of 1.1%.

Exports subtracted more from GDP - as did changes in private inventories. Consumption of services and fixed investment were revised up slightly.

The following graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The current quarter is in blue.

Click on graph for larger image in graph gallery.

The dashed line is the current growth rate. Growth in Q2 at 1.0% annualized was below trend growth (around 3%) - and very weak for a recovery, especially with all the slack in the system.

Here is a table of the changes (contribution to GDP):

Contributions to Percent Change in Q2 Real Gross Domestic Product
	2nd Estimate	Advance	Change
Percent change at annual rate:
Gross domestic product	1.0	1.3	-0.3
Percentage points at annual rates:
Personal consumption expenditures	0.3	0.07	0.23
Goods	-0.34	-0.33	-0.01
Durable goods	-0.4	-0.35	-0.05
Nondurable goods	0.07	0.02	0.05
Services	0.64	0.4	0.24
Gross private domestic investment	0.78	0.87	-0.09
Fixed investment	1.01	0.69	0.32
Nonresidential	0.94	0.61	0.33
Structures	0.38	0.2	0.18
Equipment and software	0.55	0.41	0.14
Residential	0.08	0.08	0
Change in private inventories	-0.23	0.18	-0.41
Net exports of goods and services	0.09	0.58	-0.49
Exports	0.41	0.81	-0.4
Imports	-0.33	-0.23	-0.1
Government consumption expenditures	-0.18	-0.23	0.05
Federal	0.16	0.18	-0.02
National defense	0.38	0.39	-0.01
Nondefense	-0.21	-0.21	0
State and local	-0.34	-0.41	0.07

by Calculated Risk on 8/25/2011 09:25:00 PM

The focus tomorrow is on Fed Chairman Bernanke's speech at Jackson Hole, but there will be some economic data too:

8:30 AM: Q2 GDP (second estimate). The first estimate was for 1.3% annualized real growth in Q2. The consensus is for a downward revision to 1.1% GDP growth.

9:55 AM: Reuters/University of Mich Consumer Sentiment final for August. The consensus is for a slight increase to 56.0 from the preliminary August reading of 54.9.

10:00 AM: Fed Chairman Ben Bernanke speaks at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, "Near- and Long-Term Prospects for the U.S. Economy"

And on Europe:
From the WSJ: Bailout for Greece Falters Over Demand for Collateral. The Greek 2 year bond yield is almost to 46%.

From the Telegraph: Greece forced to tap emergency fund

In a move described as the "last stand for Greek banks", the embattled country's central bank activated Emergency Liquidity Assistance (ELA) for the first time on Wednesday night.

And from Bloomberg: France, Spain, Italy Extend Bans on Short-Selling

by Calculated Risk on 8/25/2011 04:40:00 PM

With the release of the Q2 FDIC Quarterly Banking Profile, we can estimate the number of REOs held by FDIC insured banks and thrifts. From economist Tom Lawler:

"On the residential REO front, FDIC-insured institutions’ 1-4 family property REO holdings (in $’s of carrying value) declined to $12.0895 billion on June 30th, 2011 from $13.2795 billion on March 31st, 2011 and $13.7221 billion last June. The drop reflected the continued slow pace of REO acquisitions related to foreclosure delays, as well as a likely pick-up in REO dispositions last quarter.

While the FDIC does not collect data on the NUMBER of properties held by FDIC-insured institutions, a reasonable “guess” is that their average carrying value is about 50% higher than the GSEs, or in recent years around $150,000."

This gives an estimate of 80.6 thousand REO at FDIC insured institutions at the end of Q2, down from 88.5 thousand in Q1.

This graph shows REO inventory for Fannie, Freddie, FHA, Private Label Securities (PLS), and FDIC insured institutions. (economist Tom Lawler has provided some of this data).

Total REO decreased to 493,000 in Q2 from almost 550,000 in Q1.

As Tom Lawler noted: "This is NOT an estimate of total residential REO, as it excludes non-FHA government REO (VA, USDA, etc.), credit unions, finance companies, non-FDIC-insured banks and thrifts, and a few other lender categories." However this is the bulk of the REO - probably 90% or more. Rounding up the estimate (using 90%) suggests total REO is around 548,000 in Q2.

Important: REO inventories have declined over the last couple of quarters. This is a combination of more sales and fewer acquisitions due to the slowdown in the foreclosure process. There are many more foreclosures coming - see my earlier post on Mortgage Delinquencies and REOs.

Tom Lawler wrote today: "[I]f in fact REO inventories have declined in line with the Fannie, Freddie, FHA, and bank/thrift data, one shouldn’t view that as a “bullish” signal – after all, the main reason for the drop has been the artificially low pace of REO acquisitions associated with increasing foreclosure timelines/delays.

[I]n quite a few markets the lower REO inventories have reduce the REO shares of overall sales as well as the number of REO properties for sale, which has temporarily improved various measures of home prices. Many markets in Florida are prime examples, as judicial foreclosure delays have reduced substantially the pace of REO acquisitions as well as the inventory of REO properties for sale, even as the number of properties in the foreclosure process has remained at nosebleed levels."