by Calculated Risk on 5/10/2012 09:05:00 AM

The Department of Commerce reported:

[T]otal March exports of $186.8 billion and imports of $238.6 billion resulted in a goods and services deficit of $51.8 billion, up from $45.4 billion in February, revised. March exports were $5.3 billion more than February exports of $181.5 billion. March imports were $11.7 billion more than February imports of $226.9 billion.

The trade deficit was above the consensus forecast of $49.5 billion.

The first graph shows the monthly U.S. exports and imports in dollars through March 2012.

Click on graph for larger image.

Exports increased in March, and are at record levels. Imports increased even more. Exports are 13% above the pre-recession peak and up 7% compared to March 2011; imports are 3% above the pre-recession peak, and up about 8% compared to March 2011.

The second graph shows the U.S. trade deficit, with and without petroleum, through March.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Oil averaged $107.95 per barrel in March, up from $103.63 in February. Import oil prices were probably a little higher in April too, but will probably decline in May. The increase in imports was a combination of more petroleum imports and more imports from China.

Exports to the euro area were $18.1 billion in March, up from $17.6 billion in March 2011, so the euro area recession is still not a huge drag on US exports.

by Calculated Risk on 5/10/2012 08:30:00 AM

The DOL reports:

In the week ending May 5, the advance figure for seasonally adjusted initial claims was 367,000, a decrease of 1,000 from the previous week's revised figure of 368,000. The 4-week moving average was 379,000, a decrease of 5,250 from the previous week's revised average of 384,250.

The previous week was revised up from 365,000 to 368,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 379,000.

This decline in the 4-week moving average followed for four consecutive increases.

And here is a long term graph of weekly claims:


This was close to the consensus of 366,000. This is two consecutive weeks with initial unemployment claims in the 360s, after averaging close to 390,000 over the previous 3 weeks.

All current Employment Graphs

by Calculated Risk on 5/09/2012 09:59:00 PM

There are two key economic indicators scheduled for release tomorrow.

• The initial weekly unemployment claims report will be released at 8:30 AM ET. The consensus is for a slight increase to 366,000 from 365,000 last week.

• Also at 8:30 AM, the trade balance report for March will be released. The consensus is for the U.S. trade deficit to increase to $49.5 billion in March, up from from $46.0 billion in February. Here are some comments from Merrill Lynch:

"The trade deficit is likely to widen to $51.0bn in March ... Imports plunged ... in February owing to a drop in crude oil imports and ... The Chinese Lunar New Year holiday likely contributed to the decline in imports ... We also think export growth should continue to be held back by the Euro zone recession. This report has a good chance to alter Q1 GDP tracking since the BEA estimate of the March trade balance assumes an even more dramatic widening in the trade deficit than we or the consensus."

Oil import prices will probably be higher too since future prices increased in February and early March (import prices lag futures).

• Import and export prices for March will also be released at 8:30 AM, and Fed Chairman Ben Bernanke is speaking on bank regulation at 9:30 AM (not market moving).

For the monthly economic question contest:

by Calculated Risk on 5/09/2012 08:06:00 PM

The next election in Greece will be on June 17th. The outcome is unpredictable and could determine if Greece will leave the euro. The anti-incumbent vote is very strong, and the new government might reject the entire bailout agreement. However a very large percentage (about 35%) of registered voters didn't participate in the recent election - much higher than normal - and it is possible the turnout will be much higher in June, but no one can predict what a higher turnout would mean.

Here is an excellent review from Marcus Walker at the WSJ: How a Radical Greek Rescue Plan Fell Short

Two years after Europe bailed Greece out to protect the euro, the rescue has become a debacle that threatens to unravel the common currency.

After Greece's May 6 elections left pro-bailout parties too weakened to govern the country, more elections are likely in June, with no guarantee a stable government will emerge. By next month, Athens must identify €11.5 billion, or $15 billion, in fresh spending cuts or face suspension of the international loans it needs to pay pensions and run schools. If it doesn't get the money, it would eventually have to print its own.

Greece's growing turmoil is the culmination of a radical austerity experiment and botched economic overhaul that have pushed the nation to the brink of social and political breakdown. The story of the ill-fated bailout suggests that forcing deep austerity on individual member states won't save the euro and may worsen its crisis.

What Walker doesn't point out is that many economists correctly predicted this approach would fail.

Another excerpt:

Greece's bailout by the EU and International Monetary Fund is the costliest financial rescue of a nation in history, with paid or pledged loans totaling €245 billion. It has already involved the biggest-ever sovereign-debt default, a debt restructuring that wiped out more than €100 billion of Greek bond debt.

Yet the restructuring left Greece with two mountains to climb: curbing a still-rising debt more than 1.5 times the size of its economy, while forcing down wages and prices to make the country competitive.
...
Greece's economy has already shrunk by 14% in the past three years, and IMF officials privately expect a further 6.5% contraction this year. Something has to give, and it could be the boundaries of the euro.

Forcing down wages and prices on a piecemeal basis is very difficult. Nominal wages tend to be sticky downwards, and the adjustment can take years - and the voters will eventually rebel. Another alternative, one that is not currently available to Greece, is to devalue the currency. Matthew Yglesias discussed these two approaches last year:

[L]et's talk about Spain. For a while, a lot of capital was flowing into Spain from abroad. A very large share of that capital went to finance house-building rather than productivity-enhancing factories or infrastructure. But it employed a lot of people in the construction sector and related fields, which pushed tax and spending levels up and also led to rising wages. Then the housing boom ends, the capital flows end, and suddenly Spain has to adjust to a new equilibrium in which most people are a bit poorer than they were before. The most natural way to do this would be through a bit of currency depreciation. Everyone's real wages and pension payouts and local debts to one another are reduced. It's a bummer. But everyone goes on doing the best they can to make a living, and people who are underpaid in the new equilibrium set about to bargain for raises. Depreciation makes vacations in Spain cheap, it makes Spanish exports cheap, and it makes it attractive for rich foreigners to actually go buy up excess Spanish housing stock to use as vacation homes and such. Everyone's taken a hit, but they're back on the path to growth.

The other alternative -- the road we're actually traveling down -- is one in which all of these adjustments need to happen piecemeal. To make the same adjustment happen, every single contract in the country needs to be piecemeal renegotiated. That's every town budget, every cell phone plan, every commercial lease, every salary, etc. It's not "impossible" but it's a logistical and political nightmare. And it takes time. During that time instead of everyone working harder because they're poorer and more indebted than they realized and need to raise their incomes what happens is that 10-20 percent of the population does nothing because they can't find jobs. It's a nightmare and no economy is flexible enough to make it work. You wouldn't just need to repeal the basics of human psychology, you'd need to live in a world where there are no transaction costs and no fixed contracts. Imagine if your boss cut your salary 3 percent and then you set about to try to negotiate a 3 percent discount from your landlord, the electric company, your car insurance, your cable provider, your cell phone carrier, your health insurance plan, and everyone else you owe money to. By contrast, if the trade-weighted value of the dollar were to fall three percent then you have a nice, simple, logistically feasible adjustment that improves the cost structure of U.S.-based exporters and export-competing firms.

Milton Friedman had a similar discussion back in the 1950s, "The case for flexible exchange rates”:

The argument for flexible exchange rates is, strange to say, very nearly identical with the argument for daylight saving time. Isn't it absurd to change the clock in summer when exactly the same result could be achieved by having each individual change his habits?

All that is required is that everyone decide to come to his office an hour earlier, have lunch an hour earlier, etc. But obviously it is much simpler to change the clock that guides all than to have individual separately change his pattern of reaction to the clock, even though all to do so.

The situation is exactly the same in the exchange market. It is far simpler to allow one price to change, than to rely upon changes in the multitude of prices that together constitute the internal price structure.

Obviously - as we've been discussing - austerity (that includes the piecemeal approach to wage and price adjustments) - will eventually fail at the ballot box.

There is another method of allowing nominal wages and prices to remain steady, and for real wages and prices to fall - with inflation. It might be possible for the ECB to target the inflation rate in the peripheral countries, and ignore inflation in German. Right now the ECB targets inflation in the eurozone, and that means close to deflation in the peripheral countries. But that is a broad brush (they can't just raise inflation in Greece), and this is also currently unacceptable to the Germans.

So, with no way to ease the suffering (no exchange rate mechanism, no higher inflation), that only leaves more years of suffering or exiting the euro. The Greeks may decide on June 17th.

by Calculated Risk on 5/09/2012 02:55:00 PM

CR Note: Earlier I posted a graph of REO inventory (lender Real Estate Owned) for the Fs (Fannie, Freddie and the FHA). Economist Tom Lawler has added estimates for PLS (private label securities).

From Tom Lawler:

Below is a chart showing SF REO inventories of Fannie, Freddie, private-label ABS, and FHA. The March FHA number is estimated, as for some reason FHA has not yet released the March report to the FHA commissioner. FHA’s SF REO inventory as shown in this monthly report declined to 30,005 at the end of February from 32,170 at the end of December. Data in the FHA Outlook report, however, suggested that SF property conveyances, which had been running extremely low (relative to the number of SDQ loans), spiked up sharply in March, and probably significantly exceeded sales, As a result, I’m assuming March’s FHA SF REO inventory is about the same as December’s.

Click on graph for larger image in new window.

More from CR: When the FDIC's Q1 quaterly banking profile is released in a couple of weeks, I'm sure Tom will add an estimate for REO at FDIC-insured institutions. This is not all REO: In addition to the FDIC-insured institution REO, this excludes non-FHA government REO (VA, USDA, etc.), credit unions, finance companies, non-FDIC-insured banks and thrifts, and a few other categories.

REO inventories have declined over the last year. This was a combination of more sales and fewer acquisitions due to the slowdown in the foreclosure process.

The FHA is seeing an increase in delinquencies (Fannie and Freddie are seeing a decrease), and this will probably mean more FHA REO. And this is grim, from Bloomberg: FHA New Foreclosures Jump as Modified Loans Default (ht Mike In Long Island, Brian)

The number of Federal Housing Administration-insured home loans entering foreclosure jumped in March after half the mortgages it modified to ease repayment terms were in default again a year or more later.