by Calculated Risk on 1/17/2012 12:05:00 PM

As we've discussed, there are several possible channels of contagion from the European financial crisis. The most obvious is the trade channel. The recession in Europe appears to already be negatively impacting U.S. exports. The most recent trade report showed exports to eurozone countries declined 6.9% in November. Although Europe is a major U.S. trading partner, exports only make up a small portion of U.S. GDP, and the drag from lower exports will be minimal.

A more significant channel would be tightening of U.S. credit conditions in response to the European crisis. I will look closely at the Fed’s January Senior Loan Officer Opinion Survey on Bank Lending Practices that will be released at the end of the month. The October survey showed “considerable” tightening on lending to European banks, and some tightening to European firms, but the survey showed no significant additional tightening in the U.S.

Since the most significant channel will probably be credit stress, here are a few indicators of credit stress:

• The three month LIBOR has decreased:

Data from the British Bankers' Association showed the three-month dollar London Interbank Offered Rate, or Libor, was fixed at 0.56230%, down from 0.56490% Monday. ... The spread between the three-month dollar Libor and overnight index swaps, a barometer of market stress, was unchanged at 48 basis points.

The three-month LIBOR rate peaked during the crisis at 4.81875% on Oct 10, 2008. This increased last year, but has mostly been sideways since then.

• The TED spread is at 0.537. The TED spread is the difference between the three month T-bill and the LIBOR interest rate. This peaked in December at 0.581 and has declined slightly since then. The 5 year graph shows that recent increase in comparison to the U.S. financial crisis in 2008.

Here is a screen shot of the TED spread from Bloomberg.

Click on graph for larger image.

The peak was 4.63 on Oct 10, 2008. A normal spread is around 0.5.

• The A2P2 spread as at 0.39. This spread is mostly moving sideways, and is far below the peak of the financial crisis of 5.86.

This is the spread between high and low quality 30 day nonfinancial commercial paper. Right now high quality 30 day nonfinancial paper is yielding close to zero.

• The two year swap spread screen shot from Bloomberg. This spread has declined to 34.3.

This spread peaked at near 165 in early October 2008.

So far there hasn't been much spillover to the U.S.

by Calculated Risk on 1/17/2012 08:39:00 AM

From the NY Fed: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that manufacturing activity expanded in New York State in January. The general business conditions index climbed five points to 13.5. The new orders index rose eight points to 13.7 and the shipments index inched up to 21.7. ... Future indexes conveyed a high degree of optimism about the six-month outlook, with the future general business conditions index rising nine points to 54.9, its highest level since January 2011.

On employment:

Employment indexes were positive and higher, pointing to higher employment levels [12.1 up from 2.3] and a longer average workweek [6.6 up from -2.3]. ... On a series of supplementary survey questions, 51 percent of respondents indicated that they expect their workforces to increase over the next six to twelve months, while just 9 percent predicted declines in the total number of workers—results noticeably more positive than in the June 2011 survey.

This was slightly above the consensus forecast of a reading of 10.5 (above 0 is expansion). The future indexes and employment readings were especially encouraging.

Weekend:
• Summary for Week Ending January 13th
• Schedule for Week of Jan 15th

by Calculated Risk on 1/16/2012 10:03:00 PM

From the MarketWatch: China fourth-quarter GDP up 8.9%

The country's GDP in the October to December period rose 8.9% from the year-ago quarter, weaker than the 9.1% expansion recorded in the three months to Sept. 30, but faster than the 8.6% growth tipped in a Dow Jones Newswires poll of economists. Other monthly economic indicators also beat expectations, with December retail sales climbing 18.1% from a year-earlier, while industrial output during the month rose 12.8%.

The Asian markets are green tonight. The Nikkei is up about 0.6%, and the Hang Seng is up 1.5%. The Seoul Composite is up 1.3%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P 500 futures are up about 4 and Dow futures are up 40.

Oil: WTI futures are up to $99.90 and Brent is up to $111.80 per barrel.

Yesterday:
• Summary for Week Ending January 13th
• Schedule for Week of Jan 15th

by Calculated Risk on 1/16/2012 05:05:00 PM

Earlier I posted some housing forecasts for 2012. A frequently asked question is how do new home sales compare to single family housing starts (both series are from the Census Bureau). This graph below shows the two series - although they track each other, the two series cannot be directly compared.

For starts of single family structures, the Census Bureau includes owner built units and units built for rent that are not included in the new home sales report. From the Census Bureau: Comparing New Home Sales and New Residential Construction

Click on graph for larger image.

We are often asked why the numbers of new single-family housing units started and completed each month are larger than the number of new homes sold. This is because all new single-family houses are measured as part of the New Residential Construction series (starts and completions), but only those that are built for sale are included in the New Residential Sales series. We categorize new residential construction into four intents, or purposes:

Built for sale (or speculatively built): the builder is offering the house and the developed lot for sale as one transaction this includes houses where ownership of the entire property including the land is acquired ("fee simple") as well as houses sold for cooperative or condominium ownership. These are the units measured in the New Residential Sales series.

Contractor-built (or custom-built): the house is built for the landowner by a general contractor, or the land and the house are purchased in separate transactions.

Owner-built: the house is built entirely by the landowner or by the landowner acting as his/her own general contractor.

Built for rent: the house is built with the intent that it be placed on the rental market when it is completed.

However it is possible to compare "Single Family Starts, Built for Sale" to New Home sales on a quarterly basis. The Q3 2011 quarterly report showed that there were 79,000 single family starts, built for sale, in Q3 2011, and that was about the same as the 77,000 new homes sold for the same quarter. This data is Not Seasonally Adjusted (NSA).

Note: new home sales are reported when contracts are signed, so it is appropriate to compare sales to starts (as opposed to completions). This is not perfect because of the handling of cancellations.

This graph provides a quarterly comparison of housing starts and new home sales. In 2005, and most of 2006, starts (blue) were higher than sales (red), and inventories of new homes increased.

Sales and starts have been running at about the same level for the last 2 years. In 2008 and 2009, the home builders started far fewer homes than they sold as they worked off the excess inventory they built up in 2005 and 2006.

by Calculated Risk on 1/16/2012 01:14:00 PM

Earlier I posted some housing forecasts from analysts at Wells Fargo, Goldman Sachs, and added two more forecasts from Merrill Lynch and John Burns.

David Crowe, chief economist at the National Association of Home Builders has put out his forecasts (excel) calling for new home sales to increase to 360 thousand in 2012 (from 304 thousand in 2011), and for housing starts to increase 17% to 709 thousand. He forecasts single family starts will also increase 17% to 501 thousand. Crowe expects a significant increase in new home sales in 2013.

But here is the most optimistic forecast I've seen from Moody's via Julie Schmit at USA Today: Housing outlook is more upbeat

Existing home sales will rise 12% this year after a 2% increase last year, and new home sales, coming off a horrid year, will jump 74% this year, Moody's Analytics predicts.

Single-family housing starts will rise 37% this year, Moody's predicts, after falling 9% last year.

That would put single family starts (not total starts) at 687 thousand in 2012, and new home sales at 530 thousand.

Here is a table of some recent forecasts. I expect some increase in 2012 for both starts and new home sales, but I think the Wells Fargo / John Burns / NAHB forecasts are probably the upper range for 2012.

Some Housing Forecasts for 2012 (000s)
	New Home Sales	Single Family Starts	Total Starts
Merrill Lynch1	304	427
Fannie Mae	336	473	704
Wells Fargo	350	457	690
John Burns	359		717
NAHB	360	501	709
Moody's	530	687
1 Merrill forecast is "sideways" in 2012