by Calculated Risk on 12/23/2008 09:14:00 AM

IN addition to more part time workers, freezing wages is becoming a common theme (hat tip Brian):

From Reuters: U.S. manufacturers cut jobs and pay amid downturn

According to the employment consulting firm Watson Wyatt, 11 percent of all the companies it recently surveyed either already had cut wages or planned to do so over the next 12 months, and 10 percent either have reduced their employer 401(k) match or planned to do so.

"Companies are trying to do things that are much more thoughtful as opposed to just, let's take 10 percent of the work force off," Jeffrey Joerres, chief executive of Manpower Inc, the world's No. 2 staffing company, said in a phone interview.

From Cincinnati.com: No pay raise for salaried Duke workers

Between 1,500 and 1,700 employees of Duke Energy in Cincinnati and Northern Kentucky are included in a salaried employee wage freeze announced by the utility last week to help cope with the recession.

About half of the Charlotte, N.C.-based company's 18,000 employees are included.

Duke said it was freezing 2009 wages for managers, supervisors and salaried workers in finance, human resources, information technology and other technical areas.

From the San Francisco Chronicle: Wage freeze proposed for S.F. unions

San Francisco's unionized city workers, including police officers, firefighters and nurses, should decide whether to forgo $35 million in cost-of-living raises in the coming months or face massive layoffs that would save the same amount, under a proposal announced Friday by Board of Supervisors President Aaron Peskin.

From the Beaufort Ggazette: Education committee proposes wage freeze for state's teachers

A state-appointed education committee recommended last week that teacher pay in South Carolina be frozen for the next fiscal year because of declining sales-tax revenue.

From FreshPlaza.com: US: Weyerhaeuser cuts dividend by 58%

With revenues expected to be significantly lower in the near future, the company is doing all it can to keep margins intact. Executives implemented a white-collar wage freeze ...

From the WSJ: Trucking Firm YRC, Union Set Tentative 10% Wage Cut

YRC Worldwide Inc., one of the nation's largest trucking companies, will cut wages for 40,000 union workers by 10% if the workers approve a deal recommended by representatives of the International Brotherhood of Teamsters.

From the WSJ: Unisys to Cut 1,300 Jobs, Suspend Raises

Unisys Corp. said it would cut 1,300 jobs, or 4.3% of its worldwide work force; consolidate plants; suspend its 401(k) matching program; and not offer raises to most employees next year.

From the Huffington Post: FedEx Pay Cuts, 401k Freeze Coming

FedEx Corp. on Thursday announced more broad cost cuts _ including salary reductions _ as deteriorating economic conditions continue to drag down demand, warning the outlook for 2009 remains murky.
...
The package delivery company said it will cut pay for senior executives and freeze 401(k) contributions for a year. On Jan. 1, CEO Smith will take a 20 percent pay cut, and the pay of other top brass will fall by 7.5 percent to 10 percent.

FedEx will also implement a 5 percent pay cut for all remaining U.S. "salaried exempt" personnel, which excludes hourly workers such as couriers and package handlers.

Update: To be clear, here is how FedEx described the pay / benefit freeze:

Base salary decreases, effective January 1, 2009:

20% reduction for FedEx Corp. CEO Frederick W. Smith

7.5%-10.0% reduction for other senior FedEx executives

5.0% reduction for remaining U.S. salaried exempt personnel

Elimination of calendar 2009 merit-based salary increases for U.S. salaried exempt personnel

Suspension of 401(k) company matching contributions for a minimum of one year, effective February 1, 2009

by Calculated Risk on 12/23/2008 12:19:00 AM

Click on cartoon for larger image in new window. Cartoon from Eric G. Lewis www.EricGLewis.com (site coming soon)

by Calculated Risk on 12/22/2008 08:14:00 PM

From the WSJ: OTS Let IndyMac Backdate Infusion

The Treasury Department's inspector general is probing the Office of Thrift Supervision for permitting a backdated capital infusion into IndyMac Bancorp a few months before its collapse in July.

The infusion allowed the bank to be classified as "well capitalized," instead of "adequately capitalized," at the end of the first quarter. That let IndyMac avoid having to take certain steps with the Federal Deposit Insurance Corp.

A top OTS official, West Region Director Darrel Dochow, was removed from his current duties in connection with the inquiry, according to letters released Monday by the office of Sen. Charles Grassley (R., Iowa). An OTS spokesman said Mr. Dochow wasn't available for comment.

In a letter to Sen. Grassley, Treasury Inspector General Eric M. Thorson said the probe would examine why Mr. Dochow allowed IndyMac to record $18 million in capital as received from its holding company before March 31, 2008, even though the injection occurred after that date.

This was the culture at the OTS - anything to help the "customers". The OTS competed with other regulators for "customers" (aka banks), and the OTS offered more "flexible" supervision - perhaps even backdating capital infusions!

For a great article on the OTS, see the WaPo: Banking Regulator Played Advocate Over Enforcer

When Countrywide Financial felt pressured by federal agencies charged with overseeing it, executives at the giant mortgage lender simply switched regulators in the spring of 2007.

The benefits were clear: Countrywide's new regulator, the Office of Thrift Supervision, promised more flexible oversight of issues related to the bank's mortgage lending. For OTS, which depends on fees paid by banks it regulates and competes with other regulators to land the largest financial firms, Countrywide was a lucrative catch.

But OTS was not an effective regulator.

What a weird regulatory structure. And finally, here is the head of OTS taking a chainsaw to regulations in 2003.

This photo from 2003 shows two regulators: John Reich (then Vice Chairman of the FDIC and later at the OTS) and James Gilleran of the Office of Thrift Supervision (with the chainsaw) and representatives of three banker trade associations: James McLaughlin of the American Bankers Association, Harry Doherty of America's Community Bankers, and Ken Guenther of the Independent Community Bankers of America.

by Calculated Risk on 12/22/2008 07:30:00 PM

From the WSJ: U.S. State-to-State Migration Slowed, Census Reports

The great migration south and west in the U.S. is slowing, thanks to a housing crisis that is making it hard for many to move.
...
Most southern and western states are not growing nearly as fast as they were at the start of the decade, pausing a long-term trend fueled by the desire for open spaces and warmer climates, according to population estimates released Monday by the Census Bureau.
...
"People want to go to where it's warm and where there are a lot of amenities, that's a long- term trend in this country," said William Frey, a demographer at the Brookings Institution in Washington.

"But people have stopped moving," he said. "It's a big risk when you move to a new place. You need to know that moving and getting a new mortgage is going to pay off for you."

As I noted early this year, approximately 1 in 8 households (the same proportion as with negative equity) will probably not accept a job transfer now because of depressed home values - and that is about 200,000 fewer households per year that will probably not move for better job opportunities.

One of the strengths of the U.S. labor market has been the flexibility associated with labor mobility - households could easily move from one region to another for better employment. The housing bust is now limiting this flexibility.

by Calculated Risk on 12/22/2008 04:24:00 PM

Never mind that many people saw this coming - obviously the White House wasn't listening.

From the White House: Statement by the Press Secretary on Irresponsible Reporting by New York Times

Most people can accept that a news story recounting recent events will be reliant on '20-20 hindsight'. Today's front-page New York Times story relies on hindsight with blinders on and one eye closed.

The Times' 'reporting' in this story amounted to finding selected quotes to support a story the reporters fully intended to write from the onset, while disregarding anything that didn't fit their point of view. To prove the point, when they filed their story, NYT reporters were completely unfamiliar with the President's prime time address to the nation where he laid out in detail all of the causes of the housing and financial crises. For example, the President highlighted a factor that economists agree on: that the most significant factor leading to the housing crisis was cheap money flowing into the U.S. from the rest of the world, so that there was no natural restraint on flush lenders to push loans on Americans in risky ways. This flow of funds into the U.S. was unprecedented. And because it was unprecedented, the conditions it created presented unprecedented questions for policymakers.

In his address the President also explained in detail the failure of financial institutions to perform normal and necessary due diligence in creating, buying and selling new financial products -- a problem that almost no one saw as it was happening.

The "most significant factor" was "cheap money flowing into the U.S."? Uh, no.

The most significant causes of the credit crisis were innovation in mortgage securitization coupled with almost no regulatory oversight (because of ideologues who opposed oversight and regulation). This led to lax lending standards (liar loans, DAPs, widespread use of Option ARMs as affordability products, etc.) and excessive speculation.

Oh well ... I agree the White House missed the story, but the idea that "no one saw" the problem coming is nonsense.

by Calculated Risk on 12/22/2008 02:29:00 PM

The sharp decline in treasury yields had continued across the board.

Click on graph for larger image in new window.

The 10-year yield is at 2.11% today, slightly above the record low of 2.07% set last Thursday.

This graph shows the 10 year yield since 1962. The smaller graph shows the ten year yield for this year - talk about cliff diving!

The yield on 3 month treasuries is 0.00% (bad). Right at ZERO when I checked!

Here are a few other indicators of credit stress:

The three month LIBOR has decreased to 1.47%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. (improved) Imagine all those adjusted rate mortgage loans tied to treasuries or even the 3 month LIBOR? The rates are looking pretty good!

The TED spread is at 1.48, sharply lower. (improved) The TED spread was stuck above 2.0 for some time. The peak was 4.63 on Oct 10th. I'd like to see the spread move back down to 1.0 or lower. A normal spread is around 0.5.

The A2P2 spread as at 4.93, lower than a record (for this cycle) 5.86 after Thanksgiving, but still way too high. (Bad).

This is the spread between high and low quality 30 day nonfinancial commercial paper. Right now quality 30 day nonfinancial paper is yielding close to zero. If the credit crisis eases, I'd expect a significant decline in this spread - and the graph makes it clear this indicator is still in crisis.

The two year swap spread from Bloomberg: 77.00. (Improved). This spread peaked at near 165 in early October, so there has been significant progress, and the swap is finally well below100.

It appears the Fed is finally getting some rates down - but clearly the 3-month treasury yield at zero is not a sign of a healthy economy.

by Calculated Risk on 12/22/2008 11:43:00 AM

From Bloomberg: Commercial Loan Defaults May Triple as Rental Income Declines

U.S. commercial properties at risk of default could triple if rental income from office, retail and apartment buildings drops by even 5 percent, a likely possibility given the recession, according to research by New York-based real estate analysts at Reis Inc.

Lenders that used optimistic rent estimates to grant mortgages beginning in 2005 stand to lose as much as $23.1 billion, or 7.02 percent, of total unpaid balances if landlords lose 5 percent of net operating income, according to Reis. ...

[O]ffice vacancies are forecast to rise to 15.6 percent next year from an estimated 14.6 percent at the end of 2008. ...

At the end of Q3, REIS reported office vacancy rates hit 13.6% (see WSJ: Office Space Is Emptying Out). Clearly REIS expects a significant increase in the vacancy rate in Q4 2008 (to 14.6%), and then a further increase in 2009 to 15.6%. Although that 2009 projection might be low ...

Click on graph for larger image in new window.

This graph shows the office vacancy rate vs. the quarterly unemployment rate and recessions (hat tip Will)

Changes in the unemployment rate and the office vacancy rate are highly correlated. As the unemployment rate continues to rise over the next year or more, I'd expect the office vacancy rate to rise sharply - possible to 17% or more by the end of 2009 (significantly higher than the REIS forecast).

REIS believes the rise in defaults will primarily because of the overly optimistic projections used when properties were purchased in recent years:

“A large decline in net operating income isn’t necessary to shift a lot of properties underlying CMBS loans into debt- service coverage ratios that would be worrisome,” [Victor Calanog, REIS director of research] said in an interview.
...
Over the last three years, lenders raised income projections for commercial properties by as much as 15 percent more than those properties’ historical performance, he said.

“That optimism might not be warranted,” Calanog said. “There’s a big pool of loans underwritten in 2005 and 2006 coming due in 2010 and 2011 that I believe will experience a rise in delinquencies and defaults.”

Loans from those years assumed strong growth in rents, a scenario that seems unlikely as the recession deepens, Calanog said.

As I've noted several times, many existing properties were recently purchased at prices that were based on overly optimistic pro forma income projections. These loans typically included reserves to pay interest until rents increased (like a negatively amortizing option ARM), and it is likely that many of these deals will blow up when the interest reserve is depleted - probably in the 2009-2010 period.

by Calculated Risk on 12/22/2008 10:43:00 AM

From the WSJ: Developers Ask U.S. for Bailout as Massive Debt Looms

With a record amount of commercial real-estate debt coming due, some of the country's biggest property developers have become the latest to go hat-in-hand to the government for assistance.

They're warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics LCC, $530 billion of commercial mortgages will be coming due for refinancing in the next three years -- with about $160 billion maturing in the next year.

Although the headline says "developers" this is really about property investors who bought commercial buildings at the price peak and are now underwater. But say the owners default and the properties are transferred to the bondholders - what is the risk to the economy? None.

With the automakers there was a concern that a large number of jobs would be lost without a bailout. How many jobs will be lost if the ownership of an office building or mall changes? Very few.

The article suggests there is a concern that some owners will not be able to refinance because of the credit crisis, even though their properties have strong positive cash flow. But that seems like a liquidity issue for the Fed and the banks, and doesn't seem to require a bailout from the Treasury.

I don't see the argument for a bailout.

by Calculated Risk on 12/21/2008 11:20:00 PM

From the NY Times: More Firms Cut Labor Costs Without Layoffs

A growing number of employers, hoping to avoid or limit layoffs, are introducing four-day workweeks, unpaid vacations and voluntary or enforced furloughs, along with wage freezes, pension cuts and flexible work schedules. These employers are still cutting labor costs, but hanging onto the labor.
...
Several employees at Hot Studio said they did not mind the policy, particularly as they have heard of layoffs elsewhere in the economy. “People feel they’d much rather have a job in six months than get a bonus right now,” said Jon Littell, a Web designer.

The magnanimous feeling will probably pass, said Truman Bewley, an economics professor at Yale University who has studied what happens to wages during a recession. If the sacrifices look as though they are going to continue for many months, he said, some workers will grow frustrated, want their full compensation back and may well prefer a layoff that creates a new permanence.

“These are feel-good, temporary measures,” he said.

Click on graph for larger image in new window.

This graph shows the number of employees working part time for economic reasons for the last 50 years. IMPORTANT: The BLS made a change in Jan 1994, and prior to that change more workers fell into this category.

From the BLS:

Reasons for working part time. Persons who work part time do so either for noneconomic reasons (that is, because of personal constraints or preferences) or for economic reasons (that is, because of business-related constraints such as slack work or the lack of full-time opportunities). Because respondents typically are not familiar with this distinction, the question was reworded to provide examples of the two types of reasons. More importantly, the measurement of working part time involuntarily (or for economic reasons) was modified to better reflect the concept. Starting in 1994, workers who usually work part time and are working part time involuntarily must want and be available for full-time work.

Although the chart is not population adjusted, this suggests that there is a larger move to part time employment in the current downturn than in previous downturns. I tend to focus on the unemployment rate, but employees working part time (for economic reasons) is an important part of the weak employment picture.

by Calculated Risk on 12/21/2008 09:01:00 PM

From Bloomberg: Japan Exports Plunge Record 27% as Recession Deepens

Japan’s exports plunged the most on record in November as global demand for cars and electronics collapsed ... Exports fell 26.7 percent from a year earlier ...

And this isn't just because of exports to the U.S. or Europe:

Exports to Asia fell 27 percent, the most since 1986, after the first decline in six years in October. Shipments to China, Japan’s largest trading partner, fell 25 percent, the steepest drop in 13 years.

This looks like a worldwide recession including China (see: Forecaster: Negative Q4 GDP in China)

by Calculated Risk on 12/21/2008 07:20:00 PM

From Bloomberg: U.S. Retail Gasoline Falls to $1.66 a Gallon, Lundberg Says

The average price of regular gasoline at U.S. filling stations fell to $1.66 a gallon as the nation’s recession sapped demand.

Gasoline slipped 9 cents, or 5.1 percent, in the two weeks ended Dec. 19, according to oil analyst Trilby Lundberg’s survey of 7,000 filling stations nationwide.

Click on graph for larger image in new window.

This graph shows the nominal weekly U.S. gasoline prices since 1993 (source: EIA)

Gasoline prices are close to the 2000 through 2003 price range, when the median prices was just over $1.50 per gallon.

by Calculated Risk on 12/21/2008 12:19:00 PM

From The Times: High street braced for Christmas sales carnage

UP to 15 national retail chains are predicted to go bust before the middle of January, forcing thousands more shopworkers onto the dole.

The prediction came from insolvency expert Begbies Traynor as well-known retail chains clamour to sell enough goods to meet their quarterly rent payments on Christmas Day. Nick Hood, partner at Begbies Traynor ... refused to name specific store groups, but this weekend it emerged that The Officers Club, a 150-strong national menswear chain, had been put up for distressed sale through KPMG, while the specialist tea retailer, Whittards, and music store Zavvi remained on the critical list.
...
Rupert Eastell, head of retail at BDO Stoy Hayward, said: “From tomorrow until mid-January, it’s going to be the worst three weeks for retailers in 20 years.”

The pattern will probably be similar in the U.S. with a number of retailers filing for bankruptcy in January (usually the worst month of the year for retail BKs), with more retail layoffs, and even more empty retail stores (see: Retail Space to be Vacated from some retail numbers from reader wc)

by Calculated Risk on 12/21/2008 05:56:00 AM

Click on cartoon for larger image in new window. Cartoon from Eric G. Lewis

This works for mini-me too.

by Calculated Risk on 12/20/2008 11:24:00 PM

How come so many people write about real estate as a tax advantaged investment, and they never mention the tax disadvantage?

Take this article in the NY Times: Tax Break May Have Helped Cause Housing Bubble

Luckily the title contained the word "may" because it is pretty easy to demonstrate that the '97 tax change was a minor factor (at most) in the real estate bubble. But I have a question about this section:

Together with the other housing subsidies that had already been in the tax code — the mortgage-interest deduction chief among them — the law gave people a motive to buy more and more real estate.
...
Referring to the special treatment for capital gains on homes, Charles O. Rossotti, the Internal Revenue Service commissioner from 1997 to 2002, said: “Why insist in effect that they put it in housing to get that benefit? Why not let them invest in other things that might be more productive, like stocks and bonds?”

Yes, there is a mortgage interest deduction, and a capital gains exclusion for a primary residence - but there is also a property tax for real estate. This is a tax disadvantage compared to stocks and bonds.

If you own a $500 thousand home, you probably pay $5 to $10 thousand per year in property taxes. If you own $500 thousand in stocks and bonds, how much do you pay per year in property taxes (just for owning them - not selling them)?

I'm not arguing for or against any particular tax treatment here, I just think when comparing the tax treatment of various assets, maybe we should consider all taxes.

by Calculated Risk on 12/20/2008 06:23:00 PM

From the NY Times: White House Philosophy Stoked Mortgage Bonfire

The global financial system was teetering on the edge of collapse when President Bush and his economics team huddled in the Roosevelt Room of the White House for a briefing that, in the words of one participant, “scared the hell out of everybody.”
...
Mr. Bush, according to several people in the room, paused for a single, stunned moment to take it all in.

“How,” he wondered aloud, “did we get here?”

This article makes some interesting points, but misses some of the key causes of the crisis. As an example then Fed Chairman Alan Greenspan isn't even mentioned in the article, and he was counseling Mr. Bush on reducing regulations.

The article incorrectly focuses on minority ownership and Fannie and Freddie (a small role in the crisis) and barely touches on Wall Street - and completely ignores the securitization process (a major enabler to the crisis). But there are some interesting quotes:

"There is no question we did not recognize the severity of the problems,” said Al Hubbard, Mr. Bush’s former chief economics adviser, who left the White House in December 2007. “Had we, we would have attacked them.”

Looking back, Keith B. Hennessey, Mr. Bush’s current chief economics adviser, says he and his colleagues did the best they could “with the information we had at the time.” But Mr. Hennessey did say he regretted that the administration did not pay more heed to the dangers of easy lending practices. And both Mr. Paulson and his predecessor, John W. Snow, say the housing push went too far.

“The Bush administration took a lot of pride that homeownership had reached historic highs,” Mr. Snow said in an interview. “But what we forgot in the process was that it has to be done in the context of people being able to afford their house. We now realize there was a high cost.”

I'd like to see a mea culpa from Greg Mankiw and few others too.

Even this story is from early 2007 when the crisis should have been obvious to everyone:

Jason Thomas had a nagging feeling.

The New Century Financial Corporation, a huge subprime lender whose mortgages were bundled into securities sold around the world, was headed for bankruptcy in March 2007. Mr. Thomas, an economic analyst for President Bush, was responsible for determining whether it was a hint of things to come.

At 29, Mr. Thomas had followed a fast-track career path that took him from a Buffalo meatpacking plant, where he worked as a statistician, to the White House. He was seen as a whiz kid, “a brilliant guy,” his former boss, Mr. Hubbard, says.

As Mr. Thomas began digging into New Century’s failure that spring, he became fixated on a particular statistic, the rent-to-own ratio.

Typically, as home prices increase, rental costs rise proportionally. But Mr. Thomas sent charts to top White House and Treasury officials showing that the monthly cost of owning far outpaced the cost to rent. To Mr. Thomas, it was a sign that housing prices were wildly inflated and bound to plunge, a condition that could set off a foreclosure crisis as conventional and subprime borrowers with little equity found they owed more than their houses were worth.

It was not the Bush team’s first warning. The previous year, Mr. Lindsay, the former chief economics adviser, returned to the White House to tell his old colleagues that housing prices were headed for a crash. But housing values are hard to evaluate, and Mr. Lindsay had a reputation as a market pessimist, said Mr. Hubbard, adding, “I thought, ‘He’s always a bear.’ ”

In retrospect, Mr. Hubbard said, Mr. Lindsay was “absolutely right,” and Mr. Thomas’s charts “should have been a signal.”

Geesh - early 2007 - and one guy had a "nagging feeling"? Oh my ...

Thread music ...

by Calculated Risk on 12/20/2008 10:16:00 AM

From the St. Petersburg Times: BayWalk owner proposes deal to surrender deed, walk away (hat tip Terry)

Hoping to avoid drawn-out foreclosure proceedings, BayWalk owner Fred Bullard said Friday he is negotiating a deal to simply surrender the deed to the downtown entertainment complex and walk away.

Under the proposal, a bank would take control of the retail and restaurant portion of BayWalk and appoint a trustee to run the complex until a suitable buyer is found.

And good luck pursuing him for any penalities:

The technical owner of BayWalk, STP Redevelopment, has no other assets and was created solely to own BayWalk.

As I've noted before, CRE owners are much more willing to just walk away than residential owners.

by Calculated Risk on 12/19/2008 09:27:00 PM

Back in October, the WSJ reported that mall vacancy rates increase sharply in Q3:

For strip centers and other open-air shopping venues, the vacancy rate climbed to 8.4% in the third quarter from 8.1% in the second quarter. That marks the highest rate since 1994, according to Reis. Meanwhile, retailers' closures outpaced new leases by 2.8 million square feet in U.S. strip centers in the third quarter, the third consecutive quarterly net decline. It is the first nine-month period of so-called negative net absorption since Reis started tracking the data in 1980.
...
The vacancy rate at malls in the top 76 U.S. markets rose to 6.6% in the third quarter, up from 6.3% in the previous quarter, to its highest level since late 2001, according to Reis.

Click on image for larger graph in new window.

This graph shows the strip mall vacancy rate since Q2 2007. Note that the graph doesn't start at zero to better show the change.

But clearly it is about to get much worse.

Hat tip wc for the following!

Pre black Friday closing & liquidation announcements have come from Shoe Pavilion, Steve & Barry's, Gordman's, Radio Shack, JoAnn Fabric, Boscov's, Bennigan's, Winn Dixie, Office Max, Comp USA, Pier 1, and Sigrid Olsen. Of the 2 billion square feet of community/neighborhood retail space in the largest 76 metropolitan areas, vacancy has increased by 0.75% so far in 2008 (source: REIS).

This list isn't exhaustive - we could add other retailers closing stores, filing bankruptcy or going out of business such as Sharper Image, Starbucks, The Disney Store, Wilson's Leather, Talbots, Ann Taylor, Bombay Co. and more.

In the last 2 months the number and severity of announcements from retailers has gotten worse. Based on press releases, and an estimate of average store size, I believe these 9 retailers [alone] will be leaving about 47 million square feet of space:

From the WSJ: Linens 'n Things to Be Liquidated 10/14/2008

From MarketWatch: Mervyns Closing all Stores After 60 Years in Business 10/30/2008

From the Consumerist: Santa's Not Coming: All KB Toys Stores To Be Liquidated And Closed KB Toys 12/11/2008

From the Tribune-Democrat: Value City closes 11/25/2008

From the WSJ: Circuit City Seeks Haven In Bankruptcy Protection 11/11/2008

From Costar: Bally Total Fitness Files Bankruptcy, Again 12/5/2008

From the Press Telegram: Shoe Pavilion shutting down all 64 stores 10/20/2008

From the WSJ: U.S. court OKs Tweeter Chapter 7 liquidation 12/5/2008

From the Times Dispatch: Judge allows RoomStore purchase of Mattress Discounters 12/4/2008

The percent of total retail space is estimate based on 2 billion square foot number; this is only the 76 markets covered by REIS (2007 Q3 = 1,965,651,000. 2010 forecast = 2,026,266,000).

If 3/4 of the closing stores are in the top 76 metro areas defined by REIS, these 9 retailers alone will increase vacancy by 1.8% (compared with 0.75% during 2008).

CR note: this is just a rough estimate - and many analysts are expecting a number of additional retail bankruptcies in January - but it is pretty clear the mall vacancy rate will rise sharply in 2009.

by Calculated Risk on 12/19/2008 07:26:00 PM

From Bloomberg: Schwarzenegger May Order Unpaid Leave for Employees

California Governor Arnold Schwarzenegger may force all state workers to take two days of unpaid leave each month to conserve money ... The practice would begin in February and would last through June 2010 ...

The executive order also would seek to cut the state’s workforce by 10 percent through firings if necessary and would freeze new hiring ...

The leave would amount to a 10 percent pay cut ...

by Calculated Risk on 12/19/2008 04:39:00 PM

From Bloomberg: New York Oil Falls as Stockpiles at Cushing, Oklahoma, Climb

Crude oil dropped below $33 a barrel in New York as rising stockpiles at Cushing, Oklahoma, leave little room to store supplies for delivery next year.

UPDATE: For those that missed it, the article also mentions:

The more-active February contract rose 69 cents, or 1.7 percent, to $42.36.

But my key points concerning the economic impact are the same.

For the U.S. economy, I think there are two points worth repeating: 1) this decline in oil prices will significantly reduce PCE for gasoline, oil and other energy goods - and provide a stimulus for U.S. household to either save more, or spend more on other items, and 2) the oil price decline will also impact investment in domestic oil production (also foreign oil production, but that doesn't direclty impact the U.S. economy).

The following graph shows the monthly personal consumption expenditures (PCE) at a seasonally adjusted annual rate (SAAR) for gasoline, oil and other energy goods compared to the U.S. spot price for oil (monthly).

Click on graph for larger image in new window.

At current oil prices, it appears oil related PCE could fall to $250 billion or so SAAR, from close to $500 billion SAAR in July. This is a savings of almost $20 billion per month compared to July. And that would be helpful and definitely provide some cushion for consumers. This might show up as more savings, as opposed to other consumption, but rebuilding savings is probably a necessary step towards rebuilding household balance sheets.

Data sources: PCE from BEA underlying detail tables: Table 2.4.5U. Personal Consumption Expenditures by Type of Product line 117. Oil prices from EIA U.S. Spot Prices.

The second graph (repeated from earlier in the week) compares real oil prices (data from the St. Louis Fed, adjusted with CPI) and real investment in petroleum exploration and wells in the U.S. (data from the BEA).

This doesn't include investment in alternative energy sources.

Not surprisingly there is a strong correlation between oil prices and investment. With oil prices now in the $33 per barrel range, this suggests that domestic investment could fall under $20 billion per year or so. This is another area of non-residential investment that will probably see a significant decline in 2009.

by Calculated Risk on 12/19/2008 01:25:00 PM

There is a lot of great data in this report, but be careful how you use it.

From T2 Partners: An Overview of the Housing/Credit Crisis And Why There Is More Pain to Come (hat tip Chad)

Click on graph for larger image in new window.

This is an example of great data, but it could be very misleading. The total for household mortgages (including 2nds and HELOCs) is $10.57 trillion according the the Fed's Q3 Flow of Funds report.

If you start adding up the household mortgages on this chart ($0.7 trillion for subprime, $1.0 trillion for Alt-A, $2.1 trillion for HELOCs, $2.4 trillion for Jumbos, $4.6 trillion for Agency MBS, and $4.7 trillion for Prime) you discover that there is some significant double counting (most Agency MBS is Prime - so that is a huge source of the double counting).

There are similar problems elsewhere in the report, but overall the information is great.