by Calculated Risk on 6/22/2011 08:29:00 PM

Just thinking out loud ...

Fed Chairman Ben Bernanke argued that the recent slowdown was mostly due to temporary factors. From the FOMC statement: "The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan."

I also think we will see some pickup in the 2nd half of 2011, although I think the recovery will remain sluggish and choppy.

There has been some progress on the supply chain issues, and oil and gasoline prices have fallen sharply since late April.

So when will we see some better economic news?

Clearly we will see some ugly reports over the next few weeks. The regional manufacturing surveys will probably all show contraction in June, and that means the ISM manufacturing survey will be pretty bad, and maybe below 50 - indicating contraction nationally (to be released Friday, July 1st).

The May Personal Income and Outlays (Monday, June 27th) will be weak (May was a tough month), and there is little indication that the June employment report will be strong (Friday July 8th).

However, the Pending Home sales index (Weds, June 29th) will probably show a decent rebound from April. And several house price indexes have shown a bounce in house prices in April including the FHFA index released today.

U.S. house prices rose 0.8 percent on a seasonally adjusted basis from March to April, according to the Federal Housing Finance Agency’s monthly House Price Index.

Of course the FHFA index is based on GSE houses only, and almost everyone follows the Case-Shiller index now (Tuesday June 28th).

Even though Case-Shiller is a three month average - and the April report is for February, March and April - it is likely that Case-Shiller will be less negative in April than the previous months, and maybe even slightly positive. Seasonally April is usually one of the worst months of the year for the Case-Shiller index, so a less negative reading would be viewed as a positive.

And auto sales (Friday, July 1st) will probably show a rebound in June after the sharp falloff in May. From the Detroit News: GM will have 'good' sales month in June, exec says

"GM is going to have a good month — and I will leave it at that ... I feel good about June, and Ford does, too," [General Motors North American President Mark] Reuss said.

Ford Americas President Mark Fields told reporters earlier this week that June is "off to a good start."

But for manufacturing in general it might be some time before we see some more positive reports - the earliest would be mid-July, but it might not be until August or later.

And although gasoline prices are falling, prices are still much higher than earlier this year - and still above the levels in March. Consumption was somewhat weak in March, and that was when we saw the sharp decline in consumer sentiment. So falling gasoline prices will help, but consumption will probably still be fairly weak.

Last year at this time I was looking for weaker reports, and this year I'm looking for slightly better reports. Of course, as I mentioned above, some of the ugly reports are still coming (ISM manufacturing, Q2 GDP, etc) - but I think we will see a little better news here and there. I'm just starting to figure out when (and if) we will see a little pickup.

Unfortunately, even if the news is a little better, the recovery will still be sluggish ... (and remember, I have no crystal ball).

by Calculated Risk on 6/22/2011 03:32:00 PM

Moody's reported that the Moody’s/REAL All Property Type Aggregate Index declined 3.7% in April. Note: Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales and there are a large percentage of distressed sales - and that can impact prices and make the index very volatile.

The Moody’s/REAL Commercial Property Price Index dropped 3.7 percent from March and 13 percent from a year earlier. It’s now 49 percent below the peak of October 2007 and at its lowest point in data going back to December 2000 ...

“In a case of the strong getting stronger and the weak getting weaker, major asset/major market prices have recovered more than half of their post-peak losses, while prices for distressed transactions continue to bounce around the bottom,” Moody’s said in the report.

Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index. Beware of the "Real" in the title - this index is not inflation adjusted.

Click on graph for larger image in graph gallery.

CRE prices only go back to December 2000. The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).

According to Moody's, CRE prices are down 13% from a year ago and down about 49% from the peak in 2007. Prices are at new post-bubble lows - and at new lows for the index.

by Calculated Risk on 6/22/2011 01:57:00 PM

Below is a live video feed for Ben Bernanke's press conference.

UPDATE: The forecast updates are below the video.

The FOMC statement was released at 12:30 PM. The FOMC noted that the recovery was "continuing at a moderate pace" although slower "than the Committee had expected". They also noted "inflation has picked up in recent months".

The FOMC believes the slowdown is temporary and the pickup in inflation is transitory.

Here are the new FOMC projections.

GDP growth was revised down to around 2.8% this year.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2011	2012	2013
Jan 2011 Projections	3.4 to 3.9	3.5 to 4.4	3.7 to 4.6
April 2011 Projections	3.1 to 3.3	3.5 to 4.2	3.5 to 4.3
June 2011 Projections	2.7 to 2.9	3.3 to 3.7	3.5 to 4.2

¹ Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was revised up to 8.6% to 8.9% (this is Q4 unemployment rate). The FOMC thinks the unemployment rate will still be around 8% at the end of 2012!

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2011	2012	2013
Jan 2011 Projections	8.8 to 9.0	7.6 to 8.1	6.8 to 7.2
April 2011 Projections	8.4 to 8.7	7.6 to 7.9	6.8 to 7.2
June 2011 Projections	8.6 to 8.9	7.8 to 8.2	7.0 to 7.5

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

Inflation was revised up for 2011.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2011	2012	2013
Jan 2011 Projections	1.3 to 1.7	1.0 to 1.9	1.2 to 2.0
April 2011 Projections	2.1 to 2.8	1.2 to 2.0	1.4 to 2.0
June 2011 Projections	2.3 to 2.5	1.5 to 2.0	1.5 to 2.0

But core inflation is seen at levels still below the FOMC target.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2011	2012	2013
Jan 2011 Projections	1.0 to 1.3	1.0 to 1.5	1.2 to 2.0
April 2011 Projections	1.3 to 1.6	1.3 to 1.8	1.4 to 2.0
June 2011 Projections	1.5 to 1.8	1.4 to 2.0	1.4 to 2.0

by Calculated Risk on 6/22/2011 12:30:00 PM

Note: the Press Conference with Fed Chairman Ben Bernanke is scheduled at 2:15p.m. EDT.

"[S]lower pace of the recovery reflects in part factors that are likely to be temporary (the Fed's forecast will be released at the press briefing). A little more on inflation, but still transitory.

From the Federal Reserve:

Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

by Calculated Risk on 6/22/2011 10:04:00 AM

From CoreLogic: CoreLogic® Reports Shadow Inventory Continues to Decline

CoreLogic ... reported today that the current residential shadow inventory as of April 2011 declined to 1.7 million units, representing a five months’ supply. This is down from 1.9 million units, also a five months’ supply, from a year ago. The decline was due to fewer new delinquencies and the high level of distressed sales, which helped reduce the number of outstanding distressed loans.

CoreLogic estimates current shadow inventory, also known as pending supply, by calculating the number of distressed properties not currently listed on multiple listing services (MLSs) that are seriously delinquent (90 days or more), in foreclosure and real estate owned (REO) by lenders.
...
Of the 1.7 million current shadow inventory supply, 790,000 units are seriously delinquent (2.6 months’ supply), 440,000 are in some stage of foreclosure (1.4 months’ supply) and 440,000 are already in REO (1.4 months’ supply).
...
In addition to the current shadow inventory, there are 2 million current negative equity loans that are more than 50 percent or $150,000 “upside down.” These current but underwater loans have increased risk of entering the shadow inventory if the owners’ ability to pay is impaired while significantly underwater.

Mark Fleming, chief economist for CoreLogic commented, “The shadow inventory has declined by nearly one-fifth since it peaked in early 2010, in large part due to a reduced flow of newly delinquent loans in recent months. However, it will probably take several years for the shadow inventory to be absorbed given the long timelines in processing and completing foreclosures.”

Click on graph for larger image in graph gallery.

This graph from CoreLogic shows the breakdown of "shadow inventory" by category. For this report, CoreLogic estimates the number of 90+ day delinquencies, foreclosures and REOs not currently listed for sale. Obviously if a house is listed for sale, it is already included in the "visible supply" and cannot be counted as shadow inventory.

This report provides a couple of key numbers: 1) there are 1.7 million homes seriously delinquent, in the foreclosure process or REO that are not currently listed for sale, and 2) there are about 2 million current negative equity loans that are more than 50 percent or $150,000 “upside down”.