by Calculated Risk on 12/24/2010 06:15:00 PM

Last weekend I posted some questions for next year: Ten Economic Questions for 2011. I'll try to add some predictions, or at least some thoughts for each question - working backwards - before the end of year.

8) Europe and the Euro: What will happen in Europe? When will the next blowup happen? How much of a drag will the problems in Europe have on U.S. growth?

The situation in Europe is fluid. Just look at the bond yields - Greece, Ireland, Portugal, Spain - all near record highs. It seems the question is when, not if, another "blowup" will happen. By blowup, I mean another set of emergency weekend meetings, and another Sunday "bailout" announced.

The European Financial Stability Facility (EFSF) is large enough to handle Portugal, but that is about it. So I guess that means Portugal is next.

Michael Pettis offered some thoughts on 2011, and he focused on Europe: In 2011, the euro zone will hang together or hang separately

DURING 2011 Europe should confront and decide the issue of fiscal union. If it chooses union, the euro will survive. If not, the euro will almost certainly break up. 2011 is important because in most European countries the leaders of all the major political parties tend to be emotionally and ideologically committed to the euro project.

However over the next two to three years as the debate over how to apportion the costs of the necessary adjustments intensifies—should workers pay in the form of wage deflation and rising unemployment? should countries abandon the euro and default, and so force the adjustment costs onto creditors? should taxes be raised or expenditures slashed, and which ones?—the political consensus will break apart and domestic politics will become increasingly unstable. In that case there will be almost no way to avert defaults and currency break up.

So Pettis thinks 2011 is the make or break year for the euro. Either way some countries will probably eventually default (haircuts for the bond holders).

Note: Some Investor Guy wrote a great Sovereign Debt Series earlier this year covering a history of defaults and reviewing some possible scenarios.

Although my crystal ball is real cloudy on Europe, I think:
• The euro will somehow survive another year without losing any countries.
• The next blowup will be in the first couple of months. There is another round of stress tests scheduled for February, although there is still no agreement on criteria.
• There are two main channels that could impact the U.S. economy: trade, and financial spillover / credit tightening. The impact on trade will probably be minimal, even if the euro falls sharply against the dollar (a small percentage of U.S. GDP is from exports to Europe (edit)). The financial channel is much more of an unknown, and there is significant downside risk.

Ten Questions:
• Question #1 for 2011: House Prices
• Question #2 for 2011: Residential Investment
• Question #3 for 2011: Delinquencies and Distressed house sales
• Question #4 for 2011: U.S. Economic Growth
• Question #5 for 2011: Employment
• Question #6 for 2011: Unemployment Rate
• Question #7 for 2011: State and Local Governments
• Question #8 for 2011: Europe and the Euro
• Question #9 for 2011: Inflation
• Question #10 for 2011: Monetary Policy

by Calculated Risk on 12/24/2010 02:51:00 PM

A weekly update on hotels from HotelNewsNow.com: STR: US performance for week ending 18 Dec.

In year-over-year measurements, the industry’s occupancy rose 9.4 percent to 46.5 percent, average daily rate increased 4.1 percent to US$91.66, and revenue per available room went up 14.0 percent to US$42.61.

The following graph shows the four week moving average for the occupancy rate by week for 2008, 2009 and 2010 (and a median for 2000 through 2007).

Click on graph for larger image in new window.

Notes: the scale doesn't start at zero to better show the change. The graph shows the 4-week average, not the weekly occupancy rate.

On a 4-week basis, occupancy is up 7.3% compared to last year and 3.3% below the median for 2000 through 2007. RevPAR (revenue per available room) was up 7.7% compared to the same week two years ago (in 2008).

This is the slow season for hotels, and the key will be if business travel picks up early next year.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 12/24/2010 11:38:00 AM

According to the BEA, the personal saving rate declined in November to 5.3%:

Personal saving -- DPI less personal outlays -- was $614.8 billion in November, compared with $622.8 billion in October. Personal saving as a percentage of disposable personal income was 5.3 percent in November, compared with 5.4 percent in October.

Click on graph for larger image in graph gallery.

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

When the recession began, I expected the saving rate to rise to 8% or more. With a rising saving rate, consumption growth would be below income growth. But that 8% rate was just a guess.

It is possible the saving rate has peaked, or it might rise a little further, but either way most of the adjustment has already happened and consumption will probably mostly keep pace with income growth next year.

by Calculated Risk on 12/24/2010 08:45:00 AM

Thanks to everyone for reading and providing me feedback!

Here is an update to a graph I've been posting for several years. This graph shows existing home sales (left axis) and new home sales (right axis) through November. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble and bust, and the "distressing gap" appeared (due mostly to distressed sales).

Click on graph for larger image in new window.

Initially the gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties.

The two spikes in existing home sales were due primarily to the homebuyer tax credits (the initial credit in 2009, followed by the 2nd credit in 2010). There were also two smaller bumps for new home sales related to the tax credits.

Note: it is important to note that existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

In a few years - when the excess housing inventory is absorbed and the number of distressed sales has declined significantly - I expect existing home-to-new home sales to return to this historical relationship.

I've guessed before at the eventual levels: The median turnover for existing homes is just over 6% of all owner occupied homes per year, and with about 75 million owner occupied homes that would suggest close to 5 million sales per year (no one should expect existing home sales to be over 7 million units per year any time soon!). And that would suggest new home sales at just over 800 thousand per year when the market eventually recovers (not 1.2 or 1.3 million per year).

Best to all!

by Calculated Risk on 12/23/2010 11:13:00 PM

A little music. This is a repeat from last year, but the debate goes on ...

Earlier:
• Comments on November Personal Income and Outlays Report
• New Home Sales weak in November

by Calculated Risk on 12/23/2010 06:09:00 PM

Note: I'll be posting some tomorrow, and will be on a normal schedule next week.

• A couple of European stories ...
From Reuters: Fitch cuts Portugal rating one notch on debt levels
From Bloomberg: Hungary's Credit Rating Cut by Fitch on Budget; Debt Grade Nears `Abyss'

• From John Carney at CNBC: Bank of America Loses Key Battle In Mortgage Fraud Fight(ht Erik)

A New York court ruled yesterday that a bond insurer claiming Bank of America’s Countrywide unit fraudulently induced it to insure $21 billion of mortgage-backed securities can use statistical sampling to prove its case.

• Earlier, the final Reuters / University of Michigan consumer sentiment index was released. The index increased to 74.5 in December from 71.6 in November (preliminary was 74.2).

Click on graph for larger image in graphics gallery.

This is the highest level since June 2010, but sentiment is still at levels usually associated with a recession - and sentiment is well below the pre-recession levels.

In general consumer sentiment is a coincident indicator.

Earlier:
• Comments on November Personal Income and Outlays Report
• New Home Sales weak in November