by Calculated Risk on 6/03/2009 09:53:00 AM

Prepared testimony will follow below the video links ...

Here is the CNBC feed.

And a live feed from C-SPAN.

Prepared Testimony: Current economic and financial conditions and the federal budget

The U.S. economy has contracted sharply since last fall, with real gross domestic product (GDP) having dropped at an average annual rate of about 6 percent during the fourth quarter of 2008 and the first quarter of this year. Among the enormous costs of the downturn is the loss of nearly 6 million jobs since the beginning of 2008. The most recent information on the labor market--the number of new and continuing claims for unemployment insurance through late May--suggests that sizable job losses and further increases in unemployment are likely over the next few months.

However, the recent data also suggest that the pace of economic contraction may be slowing. Notably, consumer spending, which dropped sharply in the second half of last year, has been roughly flat since the turn of the year, and consumer sentiment has improved. In coming months, households' spending power will be boosted by the fiscal stimulus program. Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions.

Activity in the housing market, after a long period of decline, has also shown some signs of bottoming. Sales of existing homes have been fairly stable since late last year, and sales of new homes seem to have flattened out in the past couple of monthly readings, though both remain at depressed levels. Meanwhile, construction of new homes has been sufficiently restrained to allow the backlog of unsold new homes to decline--a precondition for any recovery in homebuilding.

Businesses remain very cautious and continue to reduce their workforces and capital investments. On a more positive note, firms are making progress in shedding the unwanted inventories that they accumulated following last fall's sharp downturn in sales. The Commerce Department estimates that the pace of inventory liquidation quickened in the first quarter, accounting for a sizable portion of the reported decline in real GDP in that period. As inventory stocks move into better alignment with sales, firms should become more willing to increase production.

We continue to expect overall economic activity to bottom out, and then to turn up later this year. Our assessments that consumer spending and housing demand will stabilize and that the pace of inventory liquidation will slow are key building blocks of that forecast.
...
Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes.

by Calculated Risk on 6/03/2009 09:00:00 AM

The MBA reports:

The Market Composite Index, a measure of mortgage loan application volume, was 658.7, a decrease of 16.2 percent on a seasonally adjusted basis from 786.0 one week earlier.
...
The Refinance Index decreased 24.1 percent to 2953.6 from 3890.4 the previous week and the seasonally adjusted Purchase Index increased 4.3 percent to 267.7 from 256.6 one week earlier.
...
The average contract interest rate for 30-year fixed-rate mortgages increased to 5.25 percent from 4.81 percent ...
emphasis added

The Purchase Index is now at the level of the late '90s.

Note: the refinance index declined as mortgage rates increased, but the index is still very high.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 2002.

Although we can't compare directly to earlier periods because of the changes in the index, this shows no pick up in overall sales activity.

by Calculated Risk on 6/03/2009 08:38:00 AM

From ADP:

Nonfarm private employment decreased 532,000 from April to May 2009 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from March to April was revised by 54,000, from a decline of 491,000 to a decline of 545,000.
...
May’s ADP Report estimates nonfarm private employment in the service-providing sector fell by 265,000. Employment in the goods-producing sector declined 267,000, with employment in the manufacturing sector dropping 149,000, its thirty-ninth consecutive monthly decline.
...
In May, construction employment dropped 108,000. This was its twenty-eighth consecutive monthly decline, and brings the total decline in construction jobs since the peak in January 2007 to 1,345,000. Employment in the financial services sector dropped 32,000, the eighteenth consecutive monthly decline.

Note this is private employment only (not government). ADP tracks the BLS report over time, but is not a good predictor of the BLS numbers on a monthly basis.

by Calculated Risk on 6/02/2009 10:51:00 PM

"Credit is so loose today that I can buy the groceries I need on a credit card, eat the food tonight, discard the food by tomorrow at noon and finance my debt on a 30-year, amortized loan. How stupid is that? But people do it all the time - and then they wonder why they're in foreclosure."
Mortgage Broker quoted in Denver Post, March 30, 2005 (link no longer works)

And today from Peter Goodman at the NY Times: Promised Help Is Elusive for Some Homeowners. This article is about homeowners struggling to get loan modifications, but this section reminded me of that Denver Post article:

Ms. Ulery, 63, is the face of the latest wave of troubled American homeowners, a surge of people in financial danger not because of reckless gambling on real estate, but because of lost income.

Far from being one of those who used easy-money loans to speculate on homes proliferating across the desert soil of greater Phoenix, she has lived in the same modest, stucco-sided condo in suburban Mesa for a dozen years. She bought the two-bedroom home in 1997 for $77,500.

So far so good ... but:

Like tens of millions of other American homeowners, she added to her mortgage balance as the value of her condo swelled, at one point exceeding $200,000. She refinanced to pay off some credit cards and settle into a 30-year, fixed-rate loan. Later, she took out a home equity line of credit to buy a new Hyundai. She refinanced again in 2007, borrowing $20,000, mostly for a new roof.

Money is fungible, but a general guideline is to match the term of the debt with the useful life of the asset. A 30 year loan for a house. A 5 to 7 year loan for a car. Pay cash for lunch.

Then - if the useful life and debt term match - when it comes time to replace the asset, the debt will have been retired. But this article provides an example of buying lunch on your credit card, paying off the credit card with a larger mortgage and essentially financing lunch for 30 years!

And I'm sorry, but I'd call excessive use of the Home ATM as gambling.

by Calculated Risk on 6/02/2009 07:39:00 PM

From Bloomberg: Fed Said to Raise Standards for Banks’ TARP Repayment

Federal Reserve officials surprised bankers in the past week by demanding they raise specific amounts of new capital before repaying taxpayer funds, applying a more stringent assessment than the stress tests in May.

JPMorgan Chase & Co. and American Express Co. were told they need to boost common equity ... Morgan Stanley was directed to raise more funds after already selling stock to cover its stress-test shortfall. One firm was told only yesterday ...

From the WSJ: Banks' Telethon Is Nearly Over

J.P. Morgan Chase & Co., Morgan Stanley, American Express Co. and regional bank KeyCorp said Tuesday they sold a combined $8.7 billion in common stock. That pushed the total ... to at least $65 billion since the [stress test] results were announced May 7.

This will be interesting next week. I don't expect to see BofA, Wells Fargo, Citi or GMAC on the list. Heck, GMAC was queued up at the FDIC lending facility today.

by Calculated Risk on 6/02/2009 06:26:00 PM

"Our contract cancellation rate of 24% for the second quarter is at a more normalized level, the likes of which we have not reported since the third quarter of 2005,"
Ara K. Hovnanian, President and CEO Hovnanian Enterprises, June 2, 2000

The surge in cancellation rates was an important story after the bubble burst. Now it appears cancellation rates might be returning to more normal levels.

The following graph shows the average cancellation rates for some selected homebuilders that I've been tracking.

Click on graph for larger image in new window.

There appears to be a seasonal pattern (fewer cancellations in Q1), but most of the builders are reporting the lowest cancellation rates since the bubble burst.

The cancellation rate could rise again if mortgage rates move higher, but this is a little bit of good news for the builders. Here are a couple of comments I posted last month:

Pulte: The cancellation rate improved to 21% for the first quarter of 2009 compared with 47% for the fourth quarter of 2008 and 28% for the first quarter of 2008.

D.R. Horton: The Company’s cancellation rate (cancelled sales orders divided by gross sales orders) for the second quarter of fiscal 2009 was 30%.

These cancellation rates are still above normal (Note: "Normal" for Horton is in the 16% to 20% range, so 30% is still high.), but these are the lowest cancellation rates for most builders since late 2005 or early 2006.

by Calculated Risk on 6/02/2009 04:01:00 PM

Click on graph for larger image in new window.

This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for May (red, light vehicle sales of 9.91 million SAAR from AutoData Corp).

May was the best month of 2009 (on seasonally adjusted basis), but sales are still on pace to be the worst since 1967.

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

The small increase in May hardly shows up on the graph.

In 1967 there were 103 million drivers; now there are about twice that many (205.7 million licensed drivers in 2007). Compared to the number of drivers, the current sales rate is the lowest since the BEA started tracking auto sales.

by Calculated Risk on 6/02/2009 02:04:00 PM

From MarketWatch: GM May U.S. vehicle sales drop 29%

GM ... reported a 29% drop in May U.S. light vehicle sales ... GM posted sales of 190,881 vehicles, down from 268,892 a year ago.

Also from MarketWatch: Toyota U.S. May sales fall 40.7%

Toyota said ... May U.S. sales declined 40.7% to 152,583 vehicles from 257,406 a year ago

More on auto sales soon (with a graph of course)

by Calculated Risk on 6/02/2009 11:54:00 AM

From MarketWatch: Ford U.S. May sales fall 24.2%

Ford Motor Co. said Tuesday that total U.S. May sales fell 24.2% to 161,531 vehicles from 213,238 a year ago. ... Ford said it will increase North American production by 10,000 vehicles to 445,000 in the second quarter, and by 42,000 vehicles to 460,000 vehicles in the third quarter

Note: This is year-over-year (May 2009 vs. May 2008)

Previous months:
Ford April U.S. vehicle sales off 31.3%

Ford U.S. March sales dropped 40.9%

February Ford sales were off 46.3% YoY

January off 42.1%

December off 32.4%

November off 31%

by Calculated Risk on 6/02/2009 10:00:00 AM

From the NAR: Pending Home Sales Up for Three Months in a Row

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in April, rose 6.7 percent to 90.3 from a reading of 84.6 in March, and is 3.2 percent above April 2008 when it was 87.5.
...
[Lawrence Yun, NAR chief economist] cautions that the reporting sample for pending home sales is smaller than that of existing-home sales, so it is subject to greater variability. “In addition, the relationship between contracts on pending home sales and closings on existing-home sales is taking longer than in the past for several reasons,” he said. “Mortgage processing time has increased, it is taking many months to close on those homes requiring short sales with lender approval, and some sales are falling through at the last moment.”

This is for contracts signed in April and that are expected to close in late May or June.

Note: Ignore the "affordability index". That just means interest rates were low in April.