by Calculated Risk on 6/18/2008 10:45:00 AM

FedEx, and shipping in general, are considered bellwethers for the economy. And the news isn't good according to FedEx.

From the WSJ: FedEx Issues Weak Outlook, Hit by Fuel Costs, Economy

"The operating environment for fiscal 2009 is expected to be very difficult due to the weak U.S. economy and extremely high fuel prices," said Chief Financial Officer Alan B. Graf

And Chrysler is seeing sales in June "20% below expectations". From the Detriot Free Press: U.S. sales plummeting, Chrysler's chief says (hat tip John)

[I]n November ... executives were assuming Americans would buy ... only about 15.5 million [vehicles in 2008]. ... [S]o far in June ... J.D. Power and Associates and Citigroup are seeing a sales pace that is almost 20% lower -- only 12.5 million vehicles per year.

"This is the lowest sales level in 16 years and indicates a significant and continued softening of the U.S. automotive market," Nardelli wrote.
...
If J.D. Power's forecast for June -- an annualized rate of 12.5 million sales -- continues for long, Erich Merkle of IRN Inc. said, it would be "Armageddon. Doomsday."

Meanwhile from Bloomberg: Paulson & Co. Says Writedowns May Reach $1.3 Trillion

John Paulson, founder of hedge fund Paulson & Co., said global writedowns and losses from the credit crisis may reach $1.3 trillion ... ``We're only about a third of the way through the writedowns,'' Paulson, 52, told the GAIM International hedge fund conference in Monaco today.

Of course Paulson could be just talking his book, but it appears the 2nd half of 2008 will be very weak.

by Calculated Risk on 6/18/2008 10:06:00 AM

"[W]e’ve seen a dramatic contraction in design activity in recent months. ... This weakness in design activity can be expected to produce a contraction in [commercial and multifamily] construction sectors later this year and into 2009.”
AIA Chief Economist Kermit Baker, June 18, 2008

From the American Institute of Architects: Architecture Billings Index Drops Two Points

Click on graph for larger image in new window.

Following a slight rise in April, the Architecture Billings Index (ABI) fell two points in May, prolonging the downturn in design activity at architecture firms. As a leading economic indicator of construction activity, the ABI shows an approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the May ABI rating was 43.4, down from the 45.5 mark in April (any score above 50 indicates an increase in billings). The inquiries for new projects score was 46.5.

“With the exception of the institutional sector – projects like government buildings, schools and hospitals – we’ve seen a dramatic contraction in design activity in recent months,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “Right now things are especially hard in the West and in the commercial and multifamily residential sectors. This weakness in design activity can be expected to produce a contraction in these construction sectors later this year and into 2009.”

The key here is that the index fell off a cliff in early 2008, and that there is "an approximate nine to twelve month lag time between architecture billings and construction spending". We should expect weaker non-residential structure investment throughout 2008 and 2009.

by Tanta on 6/18/2008 09:24:00 AM

Bloomberg reports:

June 18 (Bloomberg) -- Wachovia Corp., which ousted its top executive after estimating it may lose more than $4.5 billion on adjustable-rate home loans, will start calling would-be borrowers to explain the risks of such mortgages.

Wachovia is contacting applicants through independent mortgage brokers to ensure ``the customer understands the key features of the Pick-A-Payment loan product,'' according to a June 11 memo from Tim Wilson, head of loan origination at the Charlotte, North Carolina-based company. The loans let borrowers defer part of their monthly bills.

Unfortunately, we do not find out what Wachovia is going to do if it establishes that, in fact, the customer does not understand the key features of the product. Refuse to make the loan? Fire the broker? Keep explaining the difference between scheduled recast and balance cap, or uncapped rate with capped payment, until the borrower finally claims to understand you just to get you off the phone? How will success here be documented in the loan file? Does the borrower have to get at least 6 out of 10 on a Pick-A-Payment Quiz? Or will Wachovia grade on a curve?

Furthermore, how, exactly, does Wachovia intend to run a profitable wholesale mortgage business by duplicating more and more of the broker's functions? Will borrowers end up paying more fees to cover the broker's "counseling" labor and then the wholesaler's "counseling" labor on top of that? Is there some incentive for brokers to fully explain this product, or will they simply start relying on the wholesaler to cover the "mechanics of the loan" part? And who are these folks in Wachovia's back room who are talking to these borrowers? The sacred cow myth in the business is that only professional salespeople with Professional Sales People Skills can work with customers at the point of sale, which is what justifies their big commissions. You can't let back-room weenies (like me) talk to the marks prospects, because we lack "people skills." How can any wholesaler afford to have Highly Skilled People re-doing the work of other Highly Skilled People without creeping into Highly Redundant Origination Fees?

Let me guess. Wachovia is going to find out eventually that the Option ARM is valid only as a boutique product for a very highly selected group of financial sophisticates and private banking clients, all of whom are going to be found in your retail channel, not your broker channel, and that its "natural" volume is probably around 1.00% or less of your mortgage business. Funny, isn't it, that six or seven years ago we already knew that?

by Calculated Risk on 6/17/2008 07:36:00 PM

From Dennis Berman at the WSJ: Tisch Hews to the Prudent Approach

"No. 1, don't bet the company," [Loews CEO James Tisch] says. "First and foremost, everything we have is fully protected. Second, watch out for the downside. The businesses we like are ones with long-term assets, that are going to be here for a long time and aren't dependent on management. Our day will come."

That means avoiding financials, which, a year into the credit crisis, are still "like catching a falling knife," he says.

And on oil:

"Overpriced," he says. "It's a demand issue, not a supply issue." He cites a decline in the amount of driving by U.S. motorists in March. "We're seeing fast adjustment, and we're going to see that world-wide."

by Calculated Risk on 6/17/2008 06:21:00 PM

From Bloomberg: Yuan Extends Gains to 20% Since End of Peg Before Paulson Talks

The yuan extended gains to 20 percent since China ended a fixed exchange rate to the dollar in July 2005 ... The currency climbed for a fifth day, reaching 6.8909 per dollar. The yuan's advance since the peg was scrapped compares with a 29 percent gain for the euro against the dollar, 13.2 percent for the British pound and 4.7 percent for the Japanese yen.

From Professor Krugman: The world gets bigger

Many people have noticed that higher fuel prices are putting the brakes on globalization: if it costs more to ship stuff, there will be less shipping.

How big is this effect? ...

[A] very back-of-the envelope calculation using CIBC estimates of the fuel cost effect gives me a 17 percent contraction in trade if oil prices stay at current levels for a long time.

And from the NY Times: Labor Costs Rise, and Manufacturers Look Beyond China

China remains the most popular destination for foreign industrial investment in the world, attracting almost $83 billion last year. But ... [there are a] long list of concerns about China ... inflation, shortages of workers and energy, a strengthening currency, changing government policies, even the possibility of civil unrest someday. But most important, wages in China are rising close to 25 percent a year in many industries, in dollar terms, and China is no longer such a bargain.

Just some food for thought ...

by Calculated Risk on 6/17/2008 01:36:00 PM

Last week the Associated Press (AP) sent out a notice to a blogger demanding that all AP excerpts be removed from his blog. Needless to say this created quite a fire storm in the blogger world. The AP has backed down and is now working with some bloggers to create some guidelines for excerpts. Atrios has been following this story.

Here is the AP version of the story via the NY Times: AP to meet with blogging group to form guidelines

I think the AP is going about this all wrong. It seems to me the problem isn't bloggers violating "fair use". The real problem is the AP business model no longer works. The AP currently operates as a not-for-profit cooperative, owned by its membership (daily newspapers). It appears the AP charges members and subscribers for content to pay their expenses.

Compare this to most online newspapers that are based on an advertising model. They provide content that draws readers, and then they sell advertising on their websites. With this model, the newspapers encourage bloggers and other online sites to link to their content (with small excerpts).

In fact I frequently receive emails from journalists thanking me for linking to their stories - and I suppose helping to boost their traffic a little. This is a model that works, and they see blogging as a complementary product.

But this doesn't work for the AP. When the bloggers link to an AP story, it might be in Podunk Press, and yes - that would drive traffic to Podunk - but the AP doesn't receive any more revenue, and the other newspapers with the same AP story complain that they are getting scooped by the bloggers.

The answer is for the AP to innovate. Perhaps the AP could measure the traffic to each newspaper, and when Podunk is getting extra hits, Podunk would pay more for the story. Or perhaps the AP could have a specific AP news site for bloggers to link to. The AP could sell advertising on this site, and that would offset some of their expenses and reduce the costs for their members.

The answer is to change the model. Adapt. Innovate.

by Calculated Risk on 6/17/2008 12:30:00 PM

This graph is an update to the construction employment conundrum: completions have declined about 50% from the peak in 2006, and yet residential construction employment has declined about 500,000 jobs or about 15%.

Click on graph for larger image in new window.

Note that starts are shifted 6 months into the future since it takes a little over 6 months to complete a typical residential unit.

Many observers believe the difference in the percentage declines is because of uncounted illegal immigrants in the construction work force.

The uncounted illegal immigrant argument is important for the impact on the economy, but it doesn't seem to explain why the BLS employment numbers haven't fallen more. Although the BLS is missing the job losses for illegal workers on the way down, they also didn't count them on the way up either.

Here are two other possible explanations for the different percentage declines:

Some construction employees have moved from residential to commercial work, but they are still being reported as residential construction employees to the BLS.

Many workers are still employed, but they are working far fewer hours.

We will know more are CRE construction slumps in the 2nd half of 2008.

by Calculated Risk on 6/17/2008 10:07:00 AM

The Federal Reserve reported this morning that industrial production declined 0.2% in May.

Industrial production declined 0.2 percent in May after having fallen 0.7 percent in April. ... The rate of capacity utilization for total industry declined 0.2 percentage point, to 79.4 percent, a level 1.6 percentage points below its average for 1972-2007.

A decline in industrial production is one of the indicators of a recession (see quote at bottom). The following graph shows capacity utilization and recessions for the last 40 years.

Click on graph for larger image in new window.

The decline in capacity utilization suggests that the economy could be in recession.

Even more important is that industrial production is a key to the depth of the economic slowdown. So far exports have been strong, and the decline in industrial production has been mild. If the global economy slows significantly ("recoupling"), then industrial production and capacity utilization could fall sharply leading to a deeper recession.

Also, with capacity utilization below average, this probably means less investment in non-residential structures in the near future.

"[A] recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."
National Bureau of Economic Research (NBER)

by Tanta on 6/17/2008 08:31:00 AM

The LA Times has a good piece out this morning on California community banks and their RE/mortgage problems, particularly with construction loans. Among others, there is this:

Security Pacific Bancorp of West L.A. -- which resembles in name only the former L.A.-based banking giant acquired in 1992 by what is now Bank of America Corp. -- has written off millions in dud Inland Empire housing loans. In a recent order, the Federal Deposit Insurance Corp. and state regulators required Security Pacific, with $585 million in assets, to diversify its operations, cut off deadbeat clients and "determine that the lending staff has the expertise necessary to properly supervise construction loans."

Hoocoodanode that you needed expertise to supervise construction loans?

If you are interested, the Security Pacific C&D is here.

by Calculated Risk on 6/17/2008 08:29:00 AM

Click on graph for larger image in new window.

The graph shows total housing starts vs. single family housing starts.

Both total starts and single family starts are at the lowest level since 1991.

Note that the current recession on the graph is not official.

Here is the Census Bureau reports on housing Permits, Starts and Completions.

Building permits decreased:

Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 969,000.
This is 1.3 percent below the revised April rate of 982,000 and is 36.3 percent below the revised May 2007 estimate
of 1,522,000.

Single-family authorizations in May were at a rate of 623,000; this is 4.0 percent below the April figure of 649,000.

The declines in permits suggest further declines in starts next month.

On housing starts:

Privately-owned housing starts in May were at a seasonally adjusted annual rate of 975,000. This is 3.3 percent below the
revised April estimate of 1,008,000 and is 32.1 percent below the revised May 2007 rate of 1,436,000.

Single-family housing starts in May were at a rate of 674,000; this is 1.0 percent (±9.9%)* below the April figure of 681,000.

And on completions:

Privately-owned housing completions in May were at a seasonally adjusted annual rate of 1,132,000. This is 11.6 percent above the revised April estimate of 1,014,000, but is 26.9 percent below the revised May 2007 rate of 1,549,000.

Single-family housing completions in May were at a rate of 869,000; this is 8.9 percent above the April figure of 798,000.

More on starts and completions later.