by Calculated Risk on 9/29/2010 01:31:00 PM

I cautioned that today was Fed speech day! Boston Fed president Eric Rosengren is currently a voting member of the FOMC ...

From Rosengren: How Should Monetary Policy Respond to a Slow Recovery?

I’ve called this talk “How Should Monetary Policy Respond to a Slow Recovery?” My answer to that question is: vigorously, creatively, thoughtfully, and persistently, as long as we have options at our disposal. And we do have options, despite having pushed short-term rates to the zero lower bound.

On unemployment:

[T]he most recent recession is far less a reflection of dislocation in a few industries but rather reflects a general decline in almost all industries. ... in this recession there has been a peak to trough loss of employment of 5 percent or greater in construction, manufacturing, retail trade, wholesale trade, transportation, information technology, financial activities, and professional and business services. To me, this does not suggest that the driver is structural change in the economy increasing job mismatches – although no doubt some of that exists – but instead I see here a widespread decline in demand across most industries.

And on QE2:

Now I’d like to make a few observations on Fed purchases of Treasury securities.

First, the positives: Purchases of long-term Treasury securities are likely to push down long-term interest rates on Treasury bonds, but also are likely to reduce rates on other long-term securities. Some have argued that it would be difficult to reduce Treasury rates further, but Figure 13 highlights, importantly, that U.S. Treasury rates are still well above the zero bound, roughly equivalent to rates in Germany, and well above long-term rates in Japan.

Now some concerns: While purchases of Treasury securities have the advantage of not directly “allocating credit” to a particular industry, they have the disadvantage of only indirectly affecting the private borrowing rates that more directly affect private investment spending. In addition, Treasury purchases raise for some a concern that the Fed intends to monetize the federal debt, using monetary policy to accommodate the financing of fiscal policy. I can assure you that we have no desire or intention whatsoever to do so.

While lower long-term rates are likely the primary channel through which asset purchases would influence the economy, purchases of Treasury or mortgage-backed securities also expand the Federal Reserve’s balance sheet and increase the amount of reserves in the financial system. This expansion of reserves might serve as an effective signal that highlights the determination of the Federal Reserve to reduce disinflationary pressures.

Certainly, views on securities purchases differ within the ranks of policymakers and all manner of observers. I would just reiterate that it is important to keep firmly in mind the goal of such purchases: to stimulate the economy by reducing long-term interest rates to a level that is more consistent with where they would be, were we able to further reduce the federal funds rate.

And his conclusion:

While the economy is growing, it is currently growing too slowly to significantly reduce the unemployment rate or stem disinflationary pressures created by the high degree of slack in the economy. While fiscal policies may be the most effective way to stimulate the economy when short-term interest rates approach the zero bound, unconventional monetary policies provide additional policy options. Of course, policymakers need to carefully weigh the benefits and costs of unconventional monetary policy – some of which I have tried to share with you today. Yet all in all, my firm view is that it is important that policymakers be open to implementing policies consistent with achieving full employment, and an appropriate level of inflation, within a reasonable time frame.

There is much more in this speech.

by Calculated Risk on 9/29/2010 12:49:00 PM

With QE2 arriving on November 3rd - barring an upside surprise in the economic data - it is interesting to hear the views of the Fed presidents.

From Philadelphia Fed President Charles Plosser: Economic Outlook. On QE2:

[I]t is difficult, in my view, to see how additional asset purchases by the Fed, even if they move interest rates on long-term bonds down by 10 or 20 basis points, will have much impact on the near-term outlook for employment. Sending a signal that monetary policymakers are taking actions in an attempt to directly affect the near-term path of the unemployment rate, and then for those actions to have no demonstrable effects, would hurt the Fed’s credibility and possibly erode the effectiveness of our future actions to ensure price stability. It also risks leading the public to believe that the Fed is seeking to monetize the deficit and make it more difficult to return to normal policy when the time comes.

And on the outlook:

While the near-term outlook has softened a bit, I expect growth in the national economy to be around 3 to 3½ percent over the next two years, with stronger business spending on equipment and software, moderate growth of consumer spending, and gradual improvement in household balance sheets.

The unemployment rate continues to be one of the biggest challenges our economy faces. Although unemployment will begin to decline gradually, it will take some time for it to return to its long-run level. As the economy strengthens and firms become convinced that the recovery is sustainable, hiring will pick up over the rest of this year and in 2011. But it may take even longer to address the sectoral, geographic, and skill imbalances that seem to plague the labor markets.

I expect inflation to remain subdued. As long as inflation expectations remain well anchored, I see little risk of a period of sustained deflation.

Although I agree that there will be some geographic and skill mismatches going forward because of the housing bubble - I don't think that is the main problem impacting the labor markets right now. There are many highly skilled people currently unemployed in many sectors - so Plosser's view appears incorrect.

I'm surprised that Plosser is sticking with his optimistic (so far wrong) economic outlook. Right now Plosser is an alternate member of the FOMC and next year he will be a voting member (along with several other Fed presidents with similar views).

by Calculated Risk on 9/29/2010 10:31:00 AM

Minneapolis Federal Reserve President Narayana Kocherlakota spoke in London today. He has been one of more optimistic Fed presidents, and he revised down his forecast today ...

From Kocherlakota: Economic Outlook and the Current Tools of Monetary Policy

Our September estimates are distinctly lower than our August estimates. I now expect GDP growth to be around 2.4 percent in the second half of 2010 and around 2.5 percent in 2011.
...
From the fourth quarter of 2009 through the second quarter of 2010, the change in the PCE price level was just over 0.5 percent, which works out to an annual rate of just over 1 percent. ... I expect inflation to remain at about this level during the rest of this year. However, our Minneapolis forecasting model predicts that it will rise back into the more desirable 1.5-2 percent range in 2011.
...
To summarize: GDP is growing, but more slowly than I expected or than we would like. Inflation is a little low, but only temporarily. The behavior of unemployment is deeply troubling.

This still seems too optimistic, but he is moving in the right direction.

And on the coming QE2:

My own guess is that further uses of QE would have a more muted effect on Treasury term premia. Financial markets are functioning much better in late 2010 than they were in early 2009. As a result, the relevant spreads are lower, and I suspect that it will be somewhat more challenging for the Fed to impact them.

Kocherlakota is currently an alternate member of the FOMC and will be a voting member next year. It is interesting that certain Fed presidents are now revising down their overly optimistic forecasts - all but guaranteeing QE2 (even if he thinks it will have little impact).

by Calculated Risk on 9/29/2010 10:02:00 AM

The Census Bureau released the weekly payroll data for the week ending September 18th today (ht Bob_in_MA).

If we subtract the number of temporary 2010 Census workers in the week containing the 12th of the month, from the same week for the previous month - this provides a close estimate for the impact of the Census hiring on payroll employment.

The Census Bureau releases the actual number with the employment report.

Click on graph for larger image in new window.

This graph shows the number of Census workers paid each week. The red labels are the weeks of the BLS payroll survey.

The Census payroll decreased from 83,955 for the week ending August 14th to 6,038 for the week ending September 18th.

So my estimate for the impact of the Census on September payroll employment is minus 78 thousand (this will probably be close). The employment report will be released on October 8th, and the headline number for September - including Census numbers - will probably be close to zero. But a key number will be the hiring ex-Census (so we will add back the Census workers again this month).

The following table compares the weekly payroll report estimate to the monthly BLS report on Census hiring - this shows the estimate is usually very close:

	Payroll, Weekly Pay Period	Payroll, Monthly BLS	Change based on weekly report	Actual Change (monthly)
Jan	25	24
Feb	41	39	16	15
Mar	96	87	55	48
Apr	156	154	61	67
May	574	564	418	410
Jun	344	339	-230	-225
Jul	200	196	-144	-143
Aug	84	82	-116	-114
Sep	6		-78
All thousands

There are very few temporary decennial workers left on the payroll, and this month marks the end of the weekly payroll report from the Census Bureau: "These data will continue through the end of September with the last release of data being the week of Sept. 26-Oct. 2."

I'll have more on the September employment report (due Oct 8th) this Sunday in the weekly schedule.

by Calculated Risk on 9/29/2010 07:34:00 AM

The MBA reports: Mortgage Refinance Applications Decrease Despite Decline in Rates in Latest MBA Weekly Survey

The Refinance Index decreased 1.6 percent from the previous week, which is the fourth straight weekly decrease. The seasonally adjusted Purchase Index increased 2.4 percent from one week earlier.
...
The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.38 percent from 4.44 percent, with points increasing to 1.01 from 0.81 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The 30-year contract rate is a new low for this survey. The previous low was 4.43 percent for the week ending August 27, 2010.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 1990.

Purchase applications have increased slightly from the lows in July and are at about the same level is in 1996 or 1997. This suggests existing home sales (closed transactions) in September, October, and even November will not be much above the August sales rate.

by Calculated Risk on 9/28/2010 07:56:00 PM

From the American Trucking Association: ATA Truck Tonnage Index Plunged 2.7 Percent in August

The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index fell 2.7 percent in August, which was the largest month-to-month decrease since March 2009. The latest drop lowered the SA index from 110 (2000=100) in July to 106.9 in August.
...
Compared with August 2009, SA tonnage climbed 2.9 percent, which was well below July’s 7.4 percent year-over-year gain. Year-to-date, tonnage is up 6.2 percent compared with the same period in 2009.

ATA Chief Economist Bob Costello said that August’s data highlights that the economy, while still growing, is slowing. “We fully anticipate sluggish economic growth for the remainder of this year and the latest tonnage numbers are reflecting that slowdown.”

This graph from the ATA shows the Truck Tonnage Index since Jan 2006 (no larger image).

by Calculated Risk on 9/28/2010 05:44:00 PM

From Atlanta Fed President Dennis Lockhart: The Approaching Monetary Policy Decision Dilemma

In the coming weeks monetary policymakers must come to grips with the question of whether there is anything they can do to improve the situation in the economy and, if so, what that action should be. The circumstances of weak recovery, persistent unemployment, dangerously low inflation, and the policy interest rate (the primary tool of modern monetary policy) at the zero lower bound present a tough analytical challenge.
...
If action is taken by the Fed, a clear option is to grow the size of the balance sheet since the policy interest rate, for all practical purposes, cannot go any lower. Growth of the balance sheet would be accomplished by a second round of asset purchases (probably Treasury bills and notes) paid for by newly created money. The technical term for this policy is "quantitative easing," and the prospect of more of this approach is being referred to as QE2.

Will it work? And, how much would be needed to make a difference? In my view, a consensus on these pivotal questions remains to come together, and I will not take a position here today. In the weeks ahead my staff and I will be tackling these and related questions to prepare for the important decisions coming.
...
I cannot tell you how the economic policy story will play out. I can assure you, however, that the Fed has scope for further action to influence the course of recovery. And, importantly, I believe the Fed and the committee have the will to act—or not—as demanded by economic conditions in the near term.

Lockhart is not a voting member of the FOMC this year, but I think a consensus is building for QE2 in early November.

by Calculated Risk on 9/28/2010 04:22:00 PM

From Jeff Cox at CNBC: States Are Poised to Be Next Credit Crisis for US: Whitney

"The similarities between the states and the banks are extreme to the extent that states have been spending dramatically and are leveraged dramatically," [Meredith Whitney] said. "Municipal debt has doubled since 2000, spending has grown way faster than revenues."
...
"You have to look at the states and the risk that the states pose, because the crisis with the states will result in an attempt at least for the third near-trillion-dollar bailout."
...
[On banks] "We think October, after the banks report, you'll see a really ugly Case-Shiller number, which means the fourth quarter is going to be very tough for banks."

Many states have serious budget and debt issues, but I doubt it will result in a "near-trillion-dollar bailout" (note that Whitney is saying an "attempt" at a bailout). More likely the states will raise some taxes and cut more services - and this will be a drag on growth for some time.

I think Whitney is correct on the timing of the Case-Shiller numbers, but I don't think the numbers will be anywhere near as "ugly" as earlier price declines.

by Calculated Risk on 9/28/2010 12:26:00 PM

Case-Shiller Headlines

The headlines on Case-Shiller seemed contradictory this morning. Here are a few examples:

From the Financial Times: US home prices slip in July

From the WSJ: Home Prices Rose in July

From CNBC: US Home Prices Slipped In July And May Stabilize Near Lows

From MarketWatch: Home price growth slows in July

From HousingWire: S&P/Case-Shiller 20-city composite index rose 0.6% for July

The reason for the confusion is S&P Case-Shiller reports both seasonally adjusted (SA), and not seasonally adjusted (NSA) data. Because of concerns about the impact of foreclosures and government programs on prices, S&P switched to reporting NSA numbers in their press release, but many analysts are still using the SA numbers (I reported the SA numbers - see this post for the SA graphs from earlier this morning).

The important points are:
1) this is a three month average of May, June, and July. Seasonally this is the strongest time of the year for house prices.
2) sales collapsed in July, so the next report (for June, July and August) will probably show falling prices.

Regional Fed Manufacturing Surveys

Here is an update to the graph comparing the regional Fed surveys with the ISM manufacturing survey, including the Richmond survey released this morning (Kansas City will be released Thursday):

Click on graph for larger image in new window.

For this graph I averaged the New York and Philly Fed surveys (dashed green, through September), and averaged five surveys including New York, Philly, Richmond, Dallas and Kansas City (blue, through September - KC through August).

The Institute for Supply Management (ISM) PMI (red) is through August (right axis).

Last month, when the ISM survey came in slightly better than expected, I wrote: "Based on this graph, I'd expect either the Fed surveys to bounce back in September - or the ISM to decline." So far there has been little "bounce back" in the Fed surveys - so I expect a decline in the ISM survey.

The consensus is for a decline in ISM Manufacturing Index to 54.5 in September from 56.3 in August.

Quantitative Easing (QE2) from the Federal Reserve

There was a very important article from Jon Hilsenrath at the WSJ yesterday: Fed Weighs New Tactics to Bolster Recovery (note: many people think that Hilsenrath has taken over Greg Ip's role (now at the Economist) and leaks to Hilsenrath might be part of the Fed's communication strategy).

I reviewed the article here, but the key points are the Fed is debating between announcing "massive bond purchases with a finite end" and a "smaller-scale program that they could adjust" over time. Based on the article, it appears the Fed is leaning towards the latter (small-scale program).

Although QE2 isn't a done deal, the odds are very high that the next round will be announced on November 3rd at 2:15 PM ET.

European Issues

The crisis is not over in Europe.

From Reuters: Ireland Faces Threat of New Downgrades

Two more credit rating agencies warned Ireland on Tuesday that its debt was at risk of being downgraded further, setting off another leap in borrowing costs and heaping pressure on the government to accelerate the planned late-October release of a budget preview.

The Ireland and Portugal to Germany bond spreads have hit new highs again today.

by Calculated Risk on 9/28/2010 10:00:00 AM

Note: Usually I don't post all the regional manufacturing surveys, however with the inventory adjustment over, export growth slowing, and domestic consumer demand sluggish, these surveys provide an early look at weakness in the manufacturing sector.

From the Richmond Fed: Manufacturing Activity Pulled Back in September, But Expectations Upbeat

Manufacturing activity in the central Atlantic region pulled back in September after expanding during the previous seven months, according to the Richmond Fed's latest survey. The index of overall activity was pushed lower as shipments and employment edged into negative territory. Other indicators also suggested softer activity. District contacts reported that the volume of new orders flattened, order backlogs turned negative, and delivery times held steady. Furthermore, manufacturers reported growth in capacity utilization flat lined, while inventories grew at a slightly quicker pace.
...
In September, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — turned negative, losing thirteen points to −2 from August's reading of 11. Among the index's components, shipments fell fifteen points to −4, new orders lost ten points to finish at 0, and the jobs index declined fifteen points to −3.

Other indicators also suggested weaker activity. The backlogs of orders measure turned negative losing eleven points to −11, and the index for capacity utilization flattened declining fourteen points to 0. The delivery times index held steady at 8, while our gauges for inventories were somewhat higher in September.
...
Labor market activity also weakened in September. The manufacturing employment index registered a −3 versus August's reading of 12, and the average workweek measure lost fourteen points to 0. In addition, wage growth posted a five-point loss to 8.

This is further evidence of the slowdown in manufacturing.

Also, from CNBC: Consumer Confidence Falls to Lowest Level Since February

The Conference Board, an industry group, said its index of consumer attitudes fell to 48.5 in September from a revised 53.2 in August.