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Thursday, August 05, 2010

2nd Half Slowdown Update

by Calculated Risk on 8/05/2010 05:11:00 PM

My view is that the real GDP growth rate will slow in the 2nd half, and I've posted a list of the reasons over the last few months:

1) less Federal stimulus spending in the 2nd half of 2010,
2) the end of the inventory correction,
3) more household saving leading to slower growth in personal consumption expenditures,
4) another downturn in housing (lower prices, less residential investment),
5) slowdown in China and Europe and
6) cutbacks at the state and local level.

Note: The first half real GDP growth rate was reported as just over 3% annualized (before revisions).

There have been some updates:

  • The qualification dates for the various tiers of Federal unemployment benefits have been extended through Nov. 30. This was also made retroactive to June 2nd.

  • The Senate approved a $26 billion aid to the states package today. This will be approved by the house and signed into law shortly. This bill will reduce the cutbacks at the state and local level - although more cutbacks are still coming.

  • The personal saving rate was revised up sharply in the annual revision to the GDP report. In June, the personal saving rate was reported at 6.4%. My view has been that the saving rate would rise to around 8% or so as households slowly repaired their balance sheets (there is nothing magical about 8%). During a period with a rising saving rate, household consumption grows slower than income - and that acts as a drag on consumption. Although I expect the saving rate to rise further, most of the drag from a rising saving rate appears to be behind us.

  • Although I thought the inventory correction was mostly over at the end of Q1, it appeared that inventory adjustment contributed 1.05 percentage points to Q2 GDP growth (annualized real rate). The Manufacturers’ Shipments, Inventories, and Orders report for June suggests this initial estimate was too high. As Phil Izzo at the WSJ noted earlier this week, this means a downward revision to Q2 GDP of about 0.5% (there will be other data released that might lead to revisions up or down). I still expect little contribution from inventory adjustments - and maybe even a drag - in the 2nd half of 2010.

    Overall I still expect growth to slow in the 2nd half of 2010, but this lessens some of the expected drag or pushes it out to Q4 or 2011.

  • Hotel Occupancy Rate at 71% last week

    by Calculated Risk on 8/05/2010 01:33:00 PM

    Hotel occupancy is one of several industry specific indicators I follow ...

    From STR: US results for 31 July 2010

    In year-over-year measurements, the industry’s occupancy increased 6.8 percent to 71.0 percent. Average daily rate rose 1.5 percent to US$99.27. Revenue per available room increased 8.5 percent to US$70.45.
    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).

    Hotel Occupancy Rate 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 6.3% compared to last year (the worst year since the Great Depression) and 5.7% below the median for 2000 through 2007.

    Just over half way back to normal, and almost back to the levels of 2008 (the occupancy rate started to fall off in the 2nd half of 2008).

    Data Source: Smith Travel Research, Courtesy of

    Nonsense Rumor on Fannie and Freddie

    by Calculated Risk on 8/05/2010 12:28:00 PM

    Several people have sent me a political blog post on Reuters: An August Surprise from Obama?

    Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion
    The blog post includes the poorly considered proposal from Morgan Stanley (that Tom Lawler responded to last week), and an excerpt from a July 16th Goldman Sachs research note that suggested "while there are ways in which the GSEs could provide support through policy, the effects on the broader economy would ultimately be fairly modest."

    Not exactly foretelling a "gigantic bailout".

    This nonsense is part of the silly season. Sure, some small changes could be made to Fannie and Freddie, but nothing like this post would suggest.

    Not. Gonna. Happen.

    Alert Drudge and the tinfoil hat sites - they will run with this story. It is a political post ... I'm already sorry I mentioned it.

    Residential Investment Components in Q2

    by Calculated Risk on 8/05/2010 11:19:00 AM

    More from the Q2 2010 GDP underlying detail tables ...

    Note: Residential investment (RI), according to the Bureau of Economic Analysis (BEA), includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

    Residential Investment Components Click on graph for larger image in new window.

    This graph shows the various components of RI as a percent of GDP for the last 50 years. Usually the most important components are investment in single family structures followed by home improvement.

    Investment in home improvement was at a $150.8 billion Seasonally Adjusted Annual Rate (SAAR) in Q2, significantly above the level of investment in single family structures of $119.7 billion (SAAR).

    Investment in single family structures has been increasing since bottoming in Q2 2009, however - based on home builder comments and a collapse in new home sales - this will decline sharply in Q3.

    Brokers' commissions will also decline sharply in Q3 as the number of existing home sales falls off a cliff in July and August (based on pending home sales).

    And investment in multifamily structures - already at a series low as a percent of GDP (since 1959) - will decline further in Q3 since completions have been significantly above starts for some time.

    According to the BEA, RI contributed 0.59 percentage points to real annualized Q2 GDP growth, and a RI will probably subtract about the same amount from Q3 (part of the 2nd half slowdown).

    Weekly Initial Unemployment Claims increase to 479,000

    by Calculated Risk on 8/05/2010 08:30:00 AM

    The DOL reports on weekly unemployment insurance claims:

    In the week ending July 31, the advance figure for seasonally adjusted initial claims was 479,000, an increase of 19,000 from the previous week's revised figure of 460,000. The 4-week moving average was 458,500, an increase of 5,250 from the previous week's revised average of 453,250.
    The advance number for seasonally adjusted insured unemployment during the week ending July 24 was 4,537,000, a decrease of 34,000 from the preceding week's revised level of 4,571,000.
    Weekly Unemployment Claims Click on graph for larger image in new window.

    This graph shows the 4-week moving average of weekly claims since January 2000.

    The four-week average of weekly unemployment claims increased this week by 5,250 to 458,500.

    The dashed line on the graph is the current 4-week average. The 4-week average of initial weekly claims has been at about the same level since December 2009 (eight months) and the 4-week average of 458,500 is high historically, and suggests a weak labor market.

    This is the highest number of initial weekly claims since April.

    Wednesday, August 04, 2010

    China's Stress Tests: 60% Decline in House Prices

    by Calculated Risk on 8/04/2010 10:26:00 PM

    From Bloomberg: China Said to Test Banks for 60% Home-Price Drop

    Banks were instructed to include worst-case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively ... Previous stress tests carried out in the past year assumed home-price declines of as much as 30 percent.
    At least they are realize prices can fall sharply. In some European countries the regulators assumed steady prices was a worst-case economic scenario!