by Calculated Risk on 1/09/2009 01:52:00 PM

From Bloomberg: Boeing Cuts 4,500 Commercial Jobs as Economy Weakens

Boeing Co., the world’s second-largest commercial-plane maker, plans to cut about 4,500 jobs this year to reduce costs as the global economy weakens, hurting demand for new aircraft.
...
The company yesterday said it had net orders for 662 planes in 2008, down from 1,413 one year earlier.

The bad employment news just keeps coming.

by Calculated Risk on 1/09/2009 09:01:00 AM

From the BLS report:

In December, the number of persons who worked part time for economic reasons (some-times referred to as involuntary part-time workers) continued to increase, reaching 8.0 million. The number of such workers rose by 3.4 million over the past 12 months. This category includes persons who would like to work full time but were working part time because their hours had been cut back or because they were unable to find full-time jobs.

Click on graph for larger image.

Not only has the unemployment rate risen sharply to 7.2%, but the number of workers only able to find part time jobs (or have had their hours cut for economic reasons) is now over 8 million.

Of course the U.S. population is significantly larger today (about 305 million) than in the early '80s (about 228 million) when the number of part time workers almost reached 7 million, but the rapid increase in part time workers is pretty stunning.

by Calculated Risk on 1/09/2009 08:30:00 AM

From the BLS:

Nonfarm payroll employment declined sharply in December, and the unemployment rate rose from 6.8 to 7.2 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment fell by 524,000 over the month and by 1.9 million over the last 4 months of 2008. In December, job losses were large and widespread across most major industry sectors.

Click on graph for larger image.

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 524,00 in December, and November payrolls were revised down to a loss of 584,000 jobs. The economy has lost over 1.5 million jobs over the last 3 months alone!

The unemployment rate rose to 7.2 percent; the highest level since January 1993.

Year over year employment is now strongly negative (there were 2.6 million fewer Americans employed in Dec 2008 than in Dec 2007). This is another extremely weak employment report ...

by Calculated Risk on 1/09/2009 12:17:00 AM

First, a few articles:

From the Seattle Times: Downtown office markets may soon see vacancy rates in the teens

Vacancy rates in the two downtowns will climb well into the teens this year as companies downsize and new office buildings — some still lacking even a single signed tenant — come on line, according to new reports from brokerages Cushman & Wakefield and Grubb & Ellis.

From the IndyStar.com: Indy office vacancy rate is highest since '04

The office vacancy rate in the Indianapolis area hit 19.5 percent at year end, a fraction of a percent higher than in the third quarter.

The vacancy rate is the highest since at least 2004, says CB Richard Ellis commercial realty in its year-end report.

Six multi-tenant office buildings opened in the metro area last year, which helped boost the overall vacancy rate.

From the Austin Business Journal: Austin office vacancy hits 19%

Austin’s overall office vacancy rose to 19 percent in 2008, compared with a 14 percent overall vacancy rate in 2007, according to a report released today by Oxford Commercial. ...

An increase in inventory--Austin now has a total of more than 42 million square feet of office space as of the end of 2008, 3.6 million of that delivered in the past 12 months--contributed to the increase in vacancy rates, said Vic Russo, a senior vice president in the Austin brokerage firm’s office division.

Supply is increasing as more office space is being delivered, more companies are subleasing space, and companies are downsizing. Demand is falling (actually negative) as the economy weakens. The following graph is from CoStar Commercial Real Esate The State of the Commercial Real Estate Industry: 2008 Review/2009 Outlook (no link)


Click on graph for larger image in new window.

For the next two years, CoStar is projecting about 110 million square feet of new office space will be delivered per year (over 150 million in 2009!), and they are also projecting negative absorption of about 230 million square feet per year.

This suggests rents will fall sharply for the next couple of years, delinquencies will rise, and new office construction will come to a halt. Although deliveries will be strong in 2009 (with all the projects currently under construction), CoStar projects new office deliveries in 2010 will the lowest since 1996, and deliveries in 2011 will be the lowest in over 50 years.

Definition of Negative Absorption: The absorption rate is the net amount of square feet leased each year. A negative absorption rate means that more companies are downsizing or subleasing space than companies expanding and adding space.

"Negative absorption" are two words no developer ever wants to hear.

by Calculated Risk on 1/08/2009 08:04:00 PM

The Federal Reserve released the Factors Affecting Reserve Balances today. Total assets declined $125 billion to $2.14 trillion. This is a little improvement ...


Click on graph for larger image in new window.

The Federal Reserve assets decreased to $2.14 trillion this week from a high of $2.31 trillion the week of Dec 18th.

Note: the graph shows Total Factors Supplying Federal Reserve Funds and is an available series that is close to assets.

Just highlighting something a little positive among all the grim news.

I suspect doom and gloom returns tomorrow morning with the jobs report!

by Calculated Risk on 1/08/2009 04:30:00 PM

From Rex Nutting at MarketWatch: Roubini forecasts recession will last 2 years

The U.S. recession will last two full years, with gross domestic product falling a cumulative 5%, said Nouriel Roubini, ... For 2009, Roubini predicts GDP will fall 3.4%, with declines in every quarter of the year. The unemployment rate should peak at about 9% in early 2010 ...

Roubini is forecasting a pretty serious recession, but far short of a "depression" which is usually defined as a 10% decline in real GDP.

The concensus (and the Fed forecast) is that the economy will bottom in Q2 2009 with a sluggish recovery in the 2nd half of this year.

by Calculated Risk on 1/08/2009 03:51:00 PM

From CNBC: Citi Supports Plan to Adjust Mortgages in Bankruptcy

Citigroup has agreed to a plan that would let bankruptcy judges alter mortgages in an effort to prevent more housing foreclosures.

Until now, the banking industry has been ardently opposed to the proposal, which key Democratic lawmakers aim to attach to President-elect Barack Obama's economic stimulus legislation.
...
The National Association of Home Builders has dropped its opposition to the plan and the National Association of Realtors is debating whether to end its opposition.

Cram-downs makes sense. For a discussion of the cram-down issue, see Tanta's: Just Say Yes To Cram Downs Oct, 2007

by Calculated Risk on 1/08/2009 03:02:00 PM

From the National Retail Federation (NRF): 2008 Retail Container Traffic Marks Lowest Level in Four Years (note: December is estimated)

Click on image for larger graph in new window.

Year-over-year cargo volume at the nation’s major retail container ports fell for the 17th straight month in December, completing the slowest year since 2004 as the U.S. economic downturn continued, according to the monthly Port Tracker report released today by the National Retail Federation and IHS Global Insight.

Volume for the year was estimated at 15.3 million Twenty-Foot-Equivalent Units, compared with 16.5 million TEU in 2007. That would be a decline of 7.1 percent and the lowest total since 2004, when 14 million TEU moved through the ports. One TEU is one 20-foot container or its equivalent.

“2008 was a slow year for the ports for the simple reason that it was a slow year for retail sales,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said. “We don’t expect a significant increase in traffic at the ports until retail sales return to normal levels, and even then retailers will be careful not to over-stock.”

U.S. ports surveyed handled 1.23 million TEU in November, the last month for which actual numbers are available. That was down 10.3 percent from the 2008 peak of 1.37 million TEU set in October and down 11.8 percent from November 2007.

December was estimated at 1.2 million TEU, down 6.4 percent from December 2007. ...

“Between the economy and the customary winter impact of the slow season, port traffic is very weak,” IHS Global Insight Economist Paul Bingham said. “Port traffic is projected to continue to be very slow due to the underlying weakness in demand.”

All U.S. ports covered by Port Tracker – Los Angeles/Long Beach, Oakland, Seattle and Tacoma on the West Coast; New York/New Jersey, Hampton Roads, Charleston and Savannah on the East Coast, and Houston on the Gulf Coast – are rated “low” for congestion, the same as last month.

by Calculated Risk on 1/08/2009 02:07:00 PM

With investors buying low priced homes to rent (see previous post) and the economy in recession, guess what happens? More rental supply, less demand and falling rents ...

From the LA Times: Housing downturn hits L.A.-area rents (hat tip Charlie)

After rising for several years, rents in the Los Angeles area are declining because of the economic recession and depressed home prices, researchers, real estate agents and property managers say.

The lower local rents match a national trend, according to a report released Wednesday showing apartment rents fell in 54 out of 79 U.S. metropolitan areas in the fourth quarter of 2008. Softening rents add another obstacle to a housing market recovery, economists say, because tenants with low rent payments feel less urgency to buy a home.


Nationwide, apartment rents eased 0.1% in the fourth quarter, the first drop since 2002, according to the analysis by research firm Reis Inc.

by Calculated Risk on 1/08/2009 11:14:00 AM

From Bloomberg: No Recovery for Real Estate as Speculators Dominate Sales (hat tip James)

As the U.S. housing recession enters its fourth year, there’s no sign of a recovery because speculators account for most of the rise in sales.
...
While the purchases are trimming the inventory of unsold properties, most of those bought by speculators will likely return to the market when prices rise again, hampering any recovery, said Nobel laureate economist Joseph Stiglitz and Yale University Professor Robert Shiller in interviews.

“We’re creating a shadow inventory of homes that will be right back on the market as soon as the economy and the housing market begin to improve,” said Stiglitz, a Columbia University professor of economics. “We could see a double-dip in the housing recession if that happens.”
...
“You don’t have it in strong hands, you have flippers,” said Shiller, who helped create the S&P/Case Shiller real estate price indexes. “These speculators are preventing the market from crashing now, and when they get out it could fall again.”

Uh, no. In this case I believe Shiller is wrong.

First, we have to distinguish between speculators and investors. My view is speculators buy with the intention of flipping or re-selling as soon as possible. Investors buy for cash flow. The Bloomberg article offers this example:

Robert Arnold, a real estate investor who rents out a dozen homes near Orlando, Florida ... bought an Orlando foreclosure in June for $60,000, about a third of its appraised value, and spent $20,000 repairing it. Four months ago he rented it for $950 a month....

“Most of the houses I buy are junkers, but with a little work they become cash cows,” Arnold said.

Arnold is not a flipper, and according to the real estate agents I've spoken with recently, most of the recent non-owner occupied buyers are buying for cash flow just like Arnold.

Yes, these investors will probably keep price appreciation down in the future, but I'd argue a cash flow investor is a "strong hand" and I think they will hold the property longer than Shiller expects.

by Calculated Risk on 1/08/2009 09:25:00 AM

From the WSJ: U.S. Retailers Post Weak Same-Store Sales

Wal-Mart reported its U.S. same-store-sales, excluding gasoline, grew 1.7% amid a 1.9% increase at its namesake chain and 0.1% rise at Sam's Club.

Vice Chairman Eduardo Castro-Wright said the company, which last month projected growth at the higher end of the quarter's predicted 1% to 3% advance, said Thursday the holidays were more challenging than expected for retailers because of the economy and "severe winter weather" in some parts of the country."

Wal-Mart sales had held up pretty well as consumers switched to inferior goods, but now it appears December was especially weak. This is more evidence of a sharp slow down last month.

by Calculated Risk on 1/07/2009 09:51:00 PM

From the WSJ: Commercial Property Loses Shelter

Delinquencies on mortgages for hotels, shopping malls and office buildings were sharply higher in the fourth quarter ... New data from Deutsche Bank show that delinquencies on commercial mortgages packaged and sold as bonds, which represent nearly a third of the commercial real-estate debt market, nearly doubled during the past three months, to about 1.2%. ...

The delinquency rate will likely hit 3% by the end of 2009, its highest point in more than a decade, says Richard Parkus Deutsche Bank's head of research on such bonds, known as commercial-mortgage-backed securities, or CMBS.

This is not only a problem for CMBS, but many banks and thrifts have excessive exposure to CRE loans:

According to research firm Foresight Analytics, soured commercial mortgages on banks' books jumped to 2.2% as of the third quarter of last year, from 1.5% at the end of 2007. The research firm estimates that the rate could rise to 2.6% in the fourth quarter of 2008.
...
Banks and thrifts would suffer in a commercial-real-estate downturn because they own nearly 50% of all commercial mortgages outstanding. ... According to Foresight Analytics, as of Sept. 30, 2008, some 1,400 commercial banks and savings institutions had more than 300% of their Tier 1 capital in commercial mortgages.

Here are some comments from Fed Vice Chairman Donald L. Kohn back in April 2008:

Setting aside the 100 largest banks, the share of commercial real estate loans in bank loan portfolios nearly doubled over the past 10 years and is approaching 50 percent. The portfolio share at these banks of residential mortgage and other consumer loans, which are more readily securitized, fell by 20 percentage points over the same period.

This is a key point that we've been discussing for a few years - most small to mid-sized institutions were not overexposed to the housing bubble because those loans were mostly securitized. Therefore the housing bust led directly to relatively few bank failures over the last couple of years (although some larger banks like WaMu, Wachovia and National City were heavily exposed to residential loans).

However, many small to mid-sized banks have a heavy concentration in commercial real estate (CRE) loans, and also in construction & development (C&D) loans. Now that CRE is weakening - and the C&D loans are coming due - there will probably be a sharp increase in bank failures over the next couple of years.

Concentration risk is another familiar risk that is appearing in a new form. Banks have always had to worry about lending too much to one borrower, one industry, or one geographic region. But as smaller banks hold more of their balance sheet in types of loans that are difficult to securitize, concentration risks can develop. Concentrations of commercial real estate exposures are currently quite high at some smaller banks. This has the potential to make the banking sector much more sensitive to a downturn in the commercial real estate market.

I expect 100s of small bank failures over the next couple of years due to excessive CRE loan concentrations. I predict Bank Failure Fridays will be even busier in 2009 than 2008.

by Calculated Risk on 1/07/2009 06:03:00 PM

From the Guardian: M&S chief pleads for government help after sales slump

Marks & Spencer chief Sir Stuart Rose today called on the government to do all it could to restore consumer confidence as the high street giant unveiled dire Christmas trading, the closure of 27 stores and confirmed more than 1,200 staff were to be axed in a bid to cut costs.
...
The 125-year-old retailer, which has 600 outlets, said like-for-like sales were down 7.1% in the 13 weeks to 27 December, despite holding two one-day pre-Christmas sales, when 20% was slashed off the price of all goods. Like-for-like sales of general merchandise – clothing and homewares – were down nearly 9% and food sales declined 5.2% from 2007 levels.
...
Rose said the looming recession was "the sharpest downturn in the shortest time" he had witnessed in 38 years in the retail business, and the outlook remained challenging.

I suspect December retail sales will be very ugly (worse than October and November).

by Calculated Risk on 1/07/2009 02:17:00 PM

From the National Restaurant Association (NRA): Restaurant Performance Index Fell to a Record Low in November as Economy Continued to Worsen

The outlook for the restaurant industry worsened in November, as the National Restaurant Association’s comprehensive index of restaurant activity fell to a record-low level. The Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 96.7 in November, down 0.4 percent from October and its 13th consecutive month below 100.

“The November decline in the Restaurant Performance Index was the result of broad-based declines across the index components, with the Current Situation index falling to a new record low,” said Hudson Riehle, senior vice president of Research and Information Services for the Association. “A solid majority of restaurant operators reported negative same-store sales and traffic levels in November, while nearly one-half expect their sales in six months to be lower than the same period in the previous year.”

“The continued deterioration in economic conditions is reflected in operator sentiment, with a record 47 percent of restaurant operators saying the economy is currently the number-one challenge facing their business,” Riehle added. “Looking forward, restaurant operators aren’t particularly optimistic about an improvement either, with 49 percent expecting economic conditions to worsen in six months.”

Click on graph for larger image in new window.

Unfortunately the data for this index only goes back to 2002.

The index values above 100 indicate a period of expansion; index values below 100 indicate a period of contraction.

Based on this indicator, the restaurant industry has been contracting since November 2007.

by Calculated Risk on 1/07/2009 09:49:00 AM

Intel provides another example of the rapidly deteriorating business environment.

On Oct 14th, Intel projected revenue for Q4 2008:

Revenue: Between $10.1 billion and $10.9 billion.

Then Intel warned on November 12th and lowered their revenue projection to $8.7 billion to $9.3 billion:

Intel Corporation today announced that fourth-quarter business will be below the company's previous outlook. The company now expects fourth-quarter revenue to be $9 billion, plus or minus $300 million, lower than the previous expectation of between $10.1 billion and $10.9 billion. Revenue is being affected by significantly weaker than expected demand in all geographies and market segments. In addition, the PC supply chain is aggressively reducing component inventories.

And now today Intel reported a significant miss: Intel Announces Preliminary Fourth-Quarter Financial Information

Intel Corporation today announced preliminary fourth-quarter financial information with revenue of approximately $8.2 billion, down 20 percent sequentially and down 23 percent year over year. Revenue will be lower than the company's previous expectation, provided on Nov. 12, 2008, as a result of further weakness in end demand and inventory reductions by its customers in the global PC supply chain.

This is a pretty significant decline in revenues and suggests much lower business investment in equipment and software in Q4 2008.

by Calculated Risk on 1/07/2009 09:16:00 AM

From Bloomberg: U.S. Shopping Mall Vacancies Reach 10-Year High as Stores Fail

Vacancies at U.S. malls and shopping centers approached 10-year highs in the fourth quarter, and are set to rise further as declining retail sales put more stores out of business, research firm Reis Inc. said.

Regional mall vacancies rose to 7.1 percent last quarter from 6.6 percent in the third quarter. It was the highest vacancy rate since Reis began tracking regional malls in 2000, as well as the largest quarter-to-quarter jump in vacancies, according to New York-based 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.

At neighborhood and community shopping centers, the vacancy rate rose to 8.9 percent from 8.4 percent in the third quarter, the highest since Reis began publishing quarterly data in 1999.

Strip mall vacancy rates are headed for double digits next this year.

by Calculated Risk on 1/07/2009 01:01:00 AM

Dr. Hamilton points out that the sales decline in recent months was very different from earlier in 2008:

Overall, in the fall of 2008 we saw a big decline in all categories-- cars and SUVs, imports and domestics. That is very different from the problems last spring and summer, when SUVs were clobbered, but domestic cars were not hit too badly and sales of imported cars were actually up slightly.

... In early 2008, the primary problem for U.S. auto manufacturers was the sharp hike in gasoline prices, which explains the collapse of sales of SUVs at the same time that imports of smaller cars were on the way up.

... By contrast, the current problems for the auto sector resulted from the broad collapse in overall consumer spending.

Here is the graph for auto sales - see Professor Hamilton's post to compare autos and light trucks (including SUVs):

Source: Econbrowser / Wardsauto.com

by Calculated Risk on 1/06/2009 05:51:00 PM

From the WSJ: Alcoa to Eliminate 15,000 Positions

Acknowledging that earlier cost-cutting moves are insufficient due to the sustained economic downturn, aluminum maker Alcoa Inc. announced deeper work-force cuts, more plant closures and a 50% reduction in capital expenditures.

By the end of this year, there will be 15,000 fewer positions at the company, or roughly 14.5% of its current employees and contractors, Alcoa said Tuesday.

Also Bloomberg is reporting: IBM May Cut Thousands of Jobs, Employee Group Says

International Business Machines Corp., the biggest technology employer, may cut thousands of jobs this month amid the global economic slowdown, according to the employee group Alliance for IBM.
...
A post on the Alliance’s Web site said the company may cut 16,000 jobs ...

Obviously earlier cost cutting efforts were insufficient. And the beat goes on ...

by Calculated Risk on 1/06/2009 02:17:00 PM

The Fed projects GDP to decline in 2009 "as a whole", and unemployment to "rise significantly into 2010". The Fed also expects disinflationary pressures to continue into 2010.

From the FOMC Minutes:

In the forecast prepared for the meeting, the staff revised down sharply its outlook for economic activity in 2009 but continued to project a moderate recovery in 2010. Real GDP appeared likely to decline substantially in the fourth quarter of 2008 as conditions in the labor market deteriorated more steeply than previously anticipated; the decline in industrial production intensified; consumer and business spending appeared to weaken; and financial conditions, on balance, continued to tighten. Rising unemployment, the declines in stock market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to continue to hinder household spending over the near term. Homebuilding was expected
to contract further. Business expenditures were also likely to be held back by a weaker sales outlook and tighter credit conditions. Oil prices, which dropped significantly during the intermeeting period, were assumed to rise over the next two years in line with the path indicated by futures market prices, but to remain below the levels of October 2008. All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede. Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010. Amid the weaker outlook for economic activity over the next year, the unemployment rate was likely to rise significantly into 2010, to a level higher than projected at the time of the October 28-29 FOMC meeting. The disinflationary effects of increased slack in resource utilization, diminished pressures from energy and materials prices, declines in import prices, and further moderate reductions in inflation expectations caused the staff to reduce its forecast for both core and overall PCE inflation. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010.
emphasis added

by Calculated Risk on 1/06/2009 01:56:00 PM

United Community Banks, Inc. warned today:

The estimate for the fourth quarter loan loss provision is $85 million, with an expected $74 million in charge-offs ...

In Q3, the loan loss provision was $76 million with $56 million in net charge-offs. So Q4 was worse.

But this is funny (hat tip Brian): Back on their Oct 23rd conference call, UCBI told investors:

Charge-offs will continue to be elevated as we work through our problem credit, but we certainly don't see a recurrence of the third quarter charge-off level in the immediate future.
emphasis added

Oops. I guess the next quarter was not the "immediate future".