by Calculated Risk on 5/27/2011 07:27:00 PM

Here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released yesterday (graph as of May 24th).

From the Atlanta Fed:

Since the April FOMC meeting, peripheral European bond spreads over German bonds continue to be elevated, with those of Greece, Ireland, and Portugal setting record highs.

Since the April FOMC meeting, the 10-year Greece-to-German bond spread has widened by 192 basis points (bps), through May 24. The spreads for Ireland and Portugal have soared higher by 91 bps and 68 bps, respectively, over the same period.

Click on graph for larger image in new window.

The spreads for Greece, Ireland and Portugal were all at record highs.

Spreads for Spain and Italy have increased recently, but are still much lower than for Greece, Ireland and Portugal.

The second graph shows the Credit Default Swap (CDS) spreads:

From the Atlanta Fed:

The CDS spread on Greek debt has widened about 47 basis points (bps) since the April FOMC meeting, while those on Portuguese and Irish debt continue to be high.

The WSJ mentioned a new unreleased IMF paper that examines "debt restructurings by countries using a common currency": In Standoff Over Greece, Will ECB Have to Fold?

There aren't many precedents for debt restructurings by countries using a common currency, but there are some. An IMF working paper, as yet unpublished, examines them. According to two people who have read the paper, it shows that orderly debt restructurings—for example by Ivory Coast, which uses the West African CFA franc, and Grenada and Dominica, users of the East Caribbean dollar—haven't affected the viability of their respective currency unions.

Not great examples, but it isn't much of a jump to think this paper was motivated by the situation in Greece.

by Calculated Risk on 5/27/2011 03:27:00 PM

Fannie Mae reported that the serious delinquency rate decreased to 4.27% in March from 4.44% in February. This is down from 5.47% in March 2010. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.

Freddie Mac reported that the serious delinquency rate decreased to 3.57% in April from 3.63% in March. (Note: Fannie reports a month behind Freddie). This is down from 4.06% in March 2010. Freddie's serious delinquency rate also peaked in February 2010 at 4.20%.

These are loans that are "three monthly payments or more past due or in foreclosure".

Click on graph for larger image in graph gallery.

Some of the rapid increase in 2009 was probably because of foreclosure moratoriums, and also because loans in trial mods were considered delinquent until the modifications were made permanent.

Now the serious delinquency rate is falling as Fannie and Freddie work through the backlog of loans and either modify the loan, foreclose, short sale, or the loan cures. The serious delinquency rate is still very high ... but at least it is declining.

by Calculated Risk on 5/27/2011 01:17:00 PM

There are really two measures of GDP: 1) real GDP, and 2) real Gross Domestic Income (GDI). The BEA also released Q1 GDI yesterday as part of the second estimate for Q1 GDP. Recent research suggests that GDI is often more accurate than GDP.

For a discussion on GDI, see from Fed economist Jeremy Nalewaik, “Income and Product Side Estimates of US Output Growth,” Brookings Papers on Economic Activity. An excerpt:

The U.S. produces two conceptually identical official measures of its economic output, currently called Gross Domestic Product (GDP) and Gross Domestic Income (GDI). These two measures have shown markedly different business cycle fluctuations over the past twenty five years, with GDI showing a more-pronounced cycle than GDP. These differences have become particularly glaring over the latest cyclical downturn, which appears considerably worse along several dimensions when looking at GDI. ...

In discussing the information content of these two sets of estimates, the confusion often starts with the nomenclature. GDP can mean either the true output variable of interest, or an estimate of that output variable based on the expenditure approach. Since these are two very different things, using “GDP” for both is confusing. Furthermore, since GDI has a different name than GDP, it may not be initially clear that GDI measures the same concept as GDP, using the equally valid income approach.

The following graph is constructed as a percent of the previous peak in both GDP and GDI. This shows when the indicator has bottomed - and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%.

Click on graph for larger image in graph gallery.

It appears that GDP bottomed in Q2 2009 and GDI in Q3 2009. Real GDP finally reached the pre-recession peak in Q4 2010, but real GDI is still slightly below the previous peak.

Using GDI, the economy will be back to the pre-recession peak in Q2 2011.¹

However, by other measures - like real personal less transfer payments and employment - the economy is still far below the pre-recession peak.

The second graph is based on the April Personal and Outlays report this morning, and shows that real personal income less transfer payments is still 3.4% below the previous peak.

And of course there are still 6.955 million fewer payroll jobs than at the beginning of the 2007 recession.

Finally, recoveries following the bursting of a credit bubble - with a financial crisis - are always sluggish. So this isn't surprising, but it is still very painful.

¹ Last year I disagreed with St Louis Fed President James Bullard - and I argued that real GDI would probably be back to pre-recession levels in Q1 2011 (close, but it now looks like Q2).

by Calculated Risk on 5/27/2011 09:55:00 AM

From NAR: April Pending Home Sales Drop

The Pending Home Sales Index, a forward-looking indicator based on contract signings, dropped 11.6 percent to 81.9 in April from a downwardly revised 92.6 in March. The index is 26.5 percent below a cyclical peak of 111.5 in April 2010 when buyers were rushing to beat the contract deadline for the home buyer tax credit.

The data reflects contracts but not closings, which normally occur with a lag time of one or two months.

This suggests a sharp decline in existing home sales in May or June.

Consumer Sentiment: The final May Reuters / University of Michigan consumer sentiment index increased to 74.3 from the preliminary reading of 72.4, and from 69.8 in April.

Click on graph for larger image in graphic gallery.

This was above expectations for a reading of 72.5.

In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices.

This is still a low reading, but sentiment probably improved a little possible due to the decline in gasoline prices.

by Calculated Risk on 5/27/2011 08:53:00 AM

The BEA released the Personal Income and Outlays report for April:

Personal income increased $46.1 billion, or 0.4 percent ... Personal consumption expenditures (PCE) increased $41.5 billion, or 0.4 percent.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in April, the same increase as in March.

The following graph shows real Personal Consumption Expenditures (PCE) through April (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

Click on graph for larger image in graph gallery.

PCE increased 0.4% in April, but real PCE only increased 0.1% as the price index for PCE increased 0.3 percent in April. The graph shows the recent slowdown in the growth rate in real PCE.

Note: The PCE price index, excluding food and energy, increased 0.2 percent.

The personal saving rate was at 4.9% in April.

Personal saving -- DPI less personal outlays -- was $570.6 billion in April, compared with $576.7 billion in March. Personal saving as a percentage of disposable personal income was 4.9 percent in April, the same as in March.

This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the April Personal Income report.

The saving rate has declined even as growth for real personal consumption expenditures has slowed. Part of this is due to higher overall inflation and higher oil / gasoline prices.

by Calculated Risk on 5/26/2011 07:55:00 PM

I'll have some thoughts on this topic in the next few days, but here are a couple of articles with differing views.

From David Leonhardt at the NY TimesThe Economy Is Wavering. Does Washington Notice?

The latest economic numbers have not been good. ... Macroeconomic Advisers ... tries to estimate the growth rate of the current quarter in real time, and it now says annualized second-quarter growth is running at only 2.8 percent ... Not so long ago, the firm’s economists thought second-quarter growth would be almost 4 percent.

An economy that is growing this slowly will not add jobs quickly. For the next couple of months, employment growth could slow from about 230,000 recently to something like 150,000 jobs a month, only slightly faster than normal population growth. That is certainly not fast enough to make a big dent in the still huge number of unemployed people.
...
The latest signs of weakness suggest that policy makers remain too sanguine. It is easy to see how the rest of 2011 could end up disappointing, much as 2010 did.

And from Patti Domm at CNBC: Some Economists Expect Recovery Later This Year

"We can put our finger on the problems, and they're temporary, I think," said Mark Zandi of Moody's Economy.com. "Oil prices were a blow. You can see that in the consumer spending numbers in Q1, and prices are coming back down."
...
Goldman Sachs economists Andrew Tilton said the ripple effect from supply chain issues were a big part of the reason for the [slow down, however] "That doesn't explain all the weakness relative to our original forecast. There are other things going on, the most obvious of which is oil prices," he said.

... "If oil is coming back down you certainly wouldn't want to be cutting your growth forecast for the second half of the year," he said.
...
"In so far as you think it's supply chain-related, the deeper the cutback due to supply chain factors now, the better you should feel about second half because it should bounce back," said Tilton.

The supply chain issues should be resolved over the next several months. And gasoline prices are falling and will continue to decline over the next few weeks, but oil at $100 a barrel is still a drag on the economy.

Earlier:
• Weekly Initial Unemployment Claims increase to 424,000
• Q1 real GDP growth unrevised at 1.8% annualized rate
• LPS: Mortgage Delinquency Rates increased slightly in April, Foreclosure pipeline "Bloated"
• Lawler: Census 2010 Demographic Profile: Highlights, Excess Housing Supply Estimate, and Comparison to HVS

by Calculated Risk on 5/26/2011 04:14:00 PM

CR Note: This is a long piece from economist Tom Lawler. First Lawler looks at the Census 2010 data and compares to the Housing Vacancies and Homeownership (HVS). This is very important because the HVS is used by many analysts to estimate the excess housing supply.

Later in the piece, Lawler looks at several quick and dirty methods of estimating the national excess housing supply. I suspect housing analysts and journalists will want to read the entire post (the excess supply is critical and just about everyone uses the HVS). For those only interested in the excess supply section, scan down to "excess supply" NOTE: I've added a page break because this is very long!

I will work up my own estimate of the excess supply very soon. The following is from Tom Lawler ...

From economist Tom Lawler: Census 2010 Demographic Profile: Highlights, and Comparisons to the Now Officially Discredited HVS/CPS

Census released the decennial Census 2010 demographic profile of the United States today, and the data confirmed that other Census housing data derived from the Current Population Survey are based on a sample not representative of the US housing market as a whole.

On the homeownership front, the Census 2010 data showed that the US homeownership rate on April 1, 2010 was 65.1%, or 1.9 percentage points below estimates from both the Current Population Survey (CPS) Annual Social and Economic Supplement (ASEC) for March and the CPS Housing Vacancy Survey (HVS) for the first half of 2010.

According to Census, the 90% confidence interval for the annual CPS/HVS US homeownership rate was +/- 0.5 percentage points. Given the actual “gap” between the CPS/HVS estimate and the Census 2010 homeownership rate, it is pretty clear from a statistical standpoint that one can firmly reject the hypothesis that the sample used to generate housing tenure estimates from the CPS/HVS is NOT representative of the US as a whole.

Here is a chart showing homeownership rate estimates for (1) the last 3 decennial Censuses; (2) the CPS/ASEC; and (3) the CPS/HVS.

Click on graph for larger image in new window.

The differences among the various homeownership rate estimates were de minimus in 1990, but were significant in 2000 – with the CPS based homeownership rates significantly higher than the Census 2000 estimates. That gap widened dramatically in 2010. E.g., the CPS/ASEC and the CPS/HVS both suggested that the US homeownership rate from the middle of the first half of 2000 to the middle of the first half of 2010 declined just marginally – to 67.0% from 67.2%. The decennial Census, in marked contrast, suggests that from 2000 to 2010 the US homeownership rate fell to 65.1% from 66.2%. From a demographers’ standpoint, these are HUGE differences.

Read more »

by Calculated Risk on 5/26/2011 12:40:00 PM

LPS Applied Analytics released their April Mortgage Performance data. From LPS:

•Delinquencies increased slightly in April. Delinquencies are down almost 10% on the year and over 25% from the peak in January 2010.
•The inventory of late stage delinquencies continues to age, with 40% of borrowers who are in 90+ delinquency status having not made a payment in over a year.
•Improvement continues in the early stages of the pipeline as new seriously delinquent loan rates have dropped to three year lows.
•Both foreclosure starts and sales declined in April -foreclosure sales are still well below the pre-moratoria levels of late 2010.
•The foreclosure pipeline remains bloated with overhang at every level and limited foreclosure sale activity

According to LPS, 7.97% of mortgages were delinquent in April, up from 7.78% in March, but down from 8.80% in February and down from 9.52% in April 2010. Some of this increase is the normal seasonal pattern.

LPS reports that 4.14% of mortgages were in the foreclosure process, down from the record 4.21% in March. This gives a total of 12.11% delinquent or in foreclosure. It breaks down as:

• 2.24 million loans less than 90 days delinquent.
• 1.96 million loans 90+ days delinquent.
• 2.18 million loans in foreclosure process.

For a total of 6.39 million loans delinquent or in foreclosure in April.

Click on graph for larger image in graph gallery.

This graph provided by LPS Applied Analytics shows the aging for the 90+ days delinquent bucket.

What is surprising is the large percentage in the 90+ days delinquent bucket that are more than 12 months delinquent and haven't moved to the "in foreclosure process" bucket. About 40% of loans in the 90+ days bucket - or about 800,000 loans - have been delinquent over a year.

The second graph - from the March report - shows the aging of loans in the foreclosure process.

"31% of loans in foreclosure have not made a payment in over 2 years." So about one third of the 2.2 million loans in the foreclosure process haven't made a payment in over 2 years.

These two graphs show the "bloated" backlog of seriously delinquent loans (90+ days and in foreclosure).

The good news is the improvement in the early stages, however there is still an enormous number of seriously delinquent loans.

Note: Earlier today, RealtyTrac put out their monthly foreclosure report. The report included the statement: "[T]he current inventory of 1.9 million properties already on the banks’ books, or in foreclosure." I think that number is incorrect. RealtyTrac estimates about 872,000 REOs (Real Estate Owned) and another 1 million in foreclosure.

However, as LPS reported (the MBA has reported similar numbers), there about 2.2 million loans in the foreclosure process, and economist Tom Lawler has estimated the number of REO on lenders' books at about 600,000. Plus there are an additional 2 million loans 90+ days delinquent (about 800,000 are over 1 year delinquent). Some of these loans will cure because of modifications or other reasons. And some of these homes will be sold as short sales. But it appears the number of homes in the pipeline is well over 1.9 million. Just trying to get the numbers correct!

Final note: Recently I've seen seen some very high estimates of the percentage of distressed U.S. homes. So here are some numbers to use:
• There are just under 75 million owner occupied homes in the U.S.
• Just over 50 million homes have a mortgage (LPS estimated 54 million in 2010). The remaining are owned free and clear.
• There are 6.4 million loans delinquent, with about 4.1 million seriously delinquent (90+ days or in foreclosure).

by Calculated Risk on 5/26/2011 11:19:00 AM

From the Kansas City Fed: May Survey Results are Flat Following Rapid Growth the Past Two Months

The Federal Reserve Bank of Kansas City released the May Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity was largely unchanged in May, although new orders for exports continued to grow.

“Factory activity in our region was essentially flat in May following rapid growth in recent months,” said Wilkerson. “But, survey contacts remain generally optimistic about the future and reported plans to continue expanding their workforces.”

Wilkerson said price indexes eased in May with fewer firms planning to raise selling prices and some slowdown in price increases for materials.
...
The month-over-month composite index was 1 in May, down from 14 in April and 27 in March. ... By contrast, the employment index eased but remained well above zero.

There was almost no growth in May, but the good news was price pressures eased a little and employment continued to expand.

The last regional survey (Dallas) will be released on Tuesday May 31st. All of the regional surveys have indicated a sharp slowdown in activity in May, and combined, suggest the ISM manufacturing survey for May will be in the mid-50s (to be released June 1st).

by Calculated Risk on 5/26/2011 09:00:00 AM

From the BEA: Gross Domestic Product, First Quarter 2011 (second estimate)

This was below the consensus forecast of an upward revision to 2.1%, and the details were weaker. Overall GDP growth was unrevised in the second estimate, although Personal Consumption Expenditures (PCE) growth was revised down, mostly offset by an increase in the "Change in private inventories". (see table at bottom for changes in contribution to GDP).

The following graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The current quarter is in blue.

Click on graph for larger image in graph gallery.

The dashed line is the current growth rate. Growth in Q1 at 1.8% annualized was below trend growth (around 3.1%) - and very weak for a recovery, especially with all the slack in the system.

The following table shows the changes from the advance release (this is the Contributions to Percent Change in Real Gross Domestic Product).

Contributions to Percent Change in Q1 Real Gross Domestic Product
	2nd Estimate	Advance	Change
Percent change at annual rate:
Gross domestic product	1.8	1.8	0.0
Percentage points at annual rates:
Personal consumption expenditures..	1.53	1.91	-0.4
Goods	0.83	1.12	-0.3
Durable goods	0.66	0.78	-0.1
Nondurable goods	0.17	0.34	-0.2
Services	0.69	0.80	-0.1
Gross private domestic investment	1.45	1.01	0.4
Fixed investment	0.26	0.09	0.2
Nonresidential	0.33	0.18	0.2
Structures	-0.48	-0.63	0.2
Equipment and software	0.81	0.80	0.0
Residential	-0.07	-0.09	0.0
Change in private inventories	1.19	0.93	0.3
Net exports of goods and services	-0.06	-0.08	0.0
Exports	1.16	0.64	0.5
Imports	-1.22	-0.72	-0.5
Government consumption expenditures	-1.07	-1.09	0.0
Federal	-0.68	-0.68	0.0
National defense	-0.68	-0.69	0.0
Nondefense	0.00	0.00	0.0
State and local	-0.39	-0.41	0.0