Wednesday, December 31, 2008
The scorecard: Congress gave Treasury $350 billion; Treasury has allocated $354.4 billion. The department acknowledges that it needs Congress to approve the second half of the $700 billion rescue package simply to meet its commitments, let alone to address new emergencies. If Congress blocks the additional funding, as some members say they want to do, Treasury could be forced to break promises.
The situation gives increased leverage to those in Congress demanding concessions from Treasury, including greater transparency, restrictions on the use of the money and an ironclad guarantee that a significant portion is spent to reduce foreclosure. RW: I suspect that Congress will not force the Treasury to back out on its commitments. Can you imagine the headlines that would surround that story? "The Treasury takes back Christmas", "Paulson: makes more promises he can keep," "Treasury bailout a sham?", etc., etc.
Something to think about: according to the Congressional Budget Office, the President must submit a detailed plan for the final $350 billion to be approved by Congress after a 15-day review. Therefore, and as I understand it, Congress must approve the full amount ($350 billion) rather than an a la carte $4.4 billion. We will see what happens, but it could take a while - holiday, plus Bush's detailed plan, even longer if it's Obama's detailed plan.
The CCS and MCSS tell slightly different stories based on current and expected inflation rates. I can only conclude that there is an unmeasured gloominess in the two indeces. The CCS respondents are slightly less gloomy about the economy than are the MCSS respondents; they deem the recent drop in commodity and retail prices to be short-lived.
The CCS indicates that consumers are worried about the current state of th economy:
- Current business conditions worsened, with a larger number of consumers saying conditions are bad and a fewer number of consumers saying that they are good.
- Current employment conditions tumbled, with jobs becoming harder to get and less plentiful.
As the chart illustrates, the respondents of the MCSS phone survey were slightly less gloomy than the respondents of the CCS. It is not uncommon for the surveys to tell a slightly different story, but with a 0.89 correlation, they generally move in sync.
Rock-bottom pricing drove the positive MCSS current economic condition responses and boosted inflation expectation (see below), but had negligible effects on the CCS responses. These surveys can sometimes pick up price effects, but in spite of the MCSS' small December improvement, consumers are rightly nervous both now and going forward. I expect that the MCSS will catch up with the CCS, as inflation deceleration slows.
The consumer confidence survey also gives a slew of information about consumer expectations over labor, business climate, and prices.
Consumers expect the labor market to worsen slightly
Consumers expect business conditions to corrode as well
Unlike the current economic conditions index, the MCSS confirms bleak labor market and business conditions going forward. The MCSS reported that 70% of the survey respondents expect the unemployment rate to rise in 2009, and 75% expect the recession to continue throughout 2009.
However, the MCSS and CCS veered miles from each other regarding inflation expectations.
Current price declines have become embedded in the MCSS respondents' inflation expectations only. The CCS consumers expect a 5.8% inflation rate in 2009, while the MCSS consumers expect a 1.7% inflation rate. It is not uncommon for the inflation expectations responses to differ - the inflation correlation betwee the CCS and the MCSS, 0.72, is smaller than that between the overall indeces, 0.89 - but a 4.1% differential is quite substantial.
I appears that either the CCS respondents (a mail in survey rather than the MCSS’ phone survey) are avoiding gas pumps and malls, or are less convinced about the persistence of commodity price declines. Neither the CCSs coincident survey nor its inflation expectations survey are dominantly affected by the recent drop in prices.
The CCS respondents are less gloomy than the MCSS respondents, where the precipitous drop in energy and retail prices is expected to be short lived. The coincident indicators nor the inflation expectations index embed the drop in commodity prices, driven by the global recession.
Tuesday, December 30, 2008
From Fortune (including excerpts):
1. Detroit pleads poverty - in style:
Like someone arriving at a food bank in a limousine, the chief executives of the three major U.S. automakers spark outrage when they fly their corporate jets to Washington D.C. to beg Congress for a multi-billion dollar bailout.
2. Lamest road trip ever:
Let's see...corporate jets are a no-no...the subway doesn't go that far...A bike ride might just kill us...I know! Let's drive the 10 hours from Detroit to D.C. - in one of our cool hybrid cars! … Given a second chance after the private-jet fiasco to plead their case before Congress, the Detroit 3 take to the road (separately, of course) in a company fuel-sipper.
RW: = Several seriously stupid CEOs that are not deserving of our hard-earned $ mullah.
3. Paulson's 3-page plea for $700B:
All of three pages, the proposal seeks carte-blanche access to $700 billion in government funding to buy up troubled mortgage assets at the root of the financial crisis - with scant details on how or where the money will be spent.
RW: He should have just been “not so stupid” when drafting his slap in the face to the American taxpayer…
4. Bloating up the bailout:
Maybe three pages wasn't such a bad idea after all...When Congress is done with it, Paulson's proposal for saving the U.S. financial system balloons to 451 pages and is loaded with pork barrel spending - including, unbelievably, a cut in taxes on toy arrows and an extended tax break on "wool products."
RW…because we ended up paying $ billions more in mostly new and unecessary spending packages.
5. Mozilo's 'disgusting' reply-all:
Mozilo instead hits "reply all" and sends a response calling the beleaguered homeowner's request "unbelievable" and "disgusting."… Mozilo's heartfelt reply makes its way onto the Internet - and the onetime real estate king finds himself out of a job after Bank of America acquires Countrywide in July.
RW: Okay, the CEOs get ousted – why not the firms themselves (ahem, AIG)?
6. An iPhone app for just $999.99:
But one application sneaks past Apple's gatekeepers and onto the company's new App Store: "I Am Rich," a $999.99 screen-saver whose sole feature is a glowing red jewel. Apple gets blasted for making the application available for sale and then quietly removing it, but the real losers? The eight suckers who bought it.
RW: Wonder if they got a refund? Who would be stupid enough to buy a screen-saver worth $1,000?
7. Paulson's 'bazooka' backfires:
Treasury Secretary Henry Paulson assures Congress that merely promising to give the beleaguered mortgage lenders access to Treasury funding would calm market fears - at no cost to Uncle Sam…. Two months later, Treasury takes over both companies in a move that could cost taxpayers billions of dollars.
8. Fannie's delusions of grandeur:
In May, [Fannie Mae CEO Dan] Mudd predicts that the government-sponsored mortgage lender will "feast" on weakened competition in the mortgage market.
RW: Feast? If he means on American $ 200 billion + in American taxdollars, then he was right on!
9. Sex for oil:
The agency's [Department of Interior] Inspector General finds that staffers were taking gifts, having sex and engaging in illegal drug use with employees of some of the oil companies they oversee.
RW: This probably made FOX news – you know, the classiest of all papers.
10. Global warming? What a 'crock':
The General Motors exec behind the Chevrolet Volt electric car hands environmentalists another twig to beat GM with when he reportedly calls global warming "a crock of sh-t."
RW: Again, stupid CEOs. No wonder the American auto industry has been slowly deteriorating.
11. Housing rescue comes up short:
Remember Hope for Homeowners? We didn't think so. In July, Congress passes the only housing rescue to date: a plan to guarantee up to $300 billion worth of mortgages and prevent more than 300,000 foreclosures.
RW: I didn’t forget about it – this plan was too complicated and doomed to failure right from the get go. I do seem to remember a provision of $2-$3 billion to help foreclosure-ridden cities. Wonder what happened to that? AIG?
12. Cox's short-selling ban:
SEC chief Christopher Cox finally institutes a temporary ban on shorting, or betting against, 799 financial stock… some investors say the short ban hastened the flight of capital from stock and bond markets, by showing the government could intervene in markets in unexpected and troublesome ways.
13. McCain's economic denial:
On the morning of Sept. 15, as Lehman Brothers declares bankruptcy, Republican presidential candidate John McCain declares "the fundamentals of this economy are strong." …By day's end, the Dow falls more than 500 points, the date becomes known as Black Monday, and McCain starts backpedaling fast.
14. Obama's tough talk on NAFTA:
In a rare off-message moment for Barack Obama's presidential campaign, a top economic adviser privately assures Canadian officials in February that his candidate didn't really mean it when he threatened to renegotiate the North American Free Trade Agreement, which U.S. blue-collar workers complain has shifted jobs to Canada and Mexico.
15. Microsoft overbids for Yahoo:
Microsoft makes a $44.6 billion play for Yahoo in yet another bid to catch up to Google. The $31-per-share offer represents a 61% premium over Yahoo's price at the time of the February overture.
16. Yahoo turns down payday
RW: = more stupid CEOs
17. SEC's Madoff miss:
Leave it to the markets to do the SEC's job for it.
RW: Ahem, number 12?
18. Rage against oil speculators:
Oil traders, hedge funds, Wall Street types...they're all to blame for artificially inflating the price of crude….Or so the thinking (and Congressional hearings) goes until prices suddenly collapse throughout the fall, bringing oil down to about $37 a barrel. The culprit this time? Softening demand amid a reeling global economy. So much for thinking fundamentals.
19. Jobs' 'greatly exaggerated' death:
In August, Bloomberg News accidentally releases an obit for Apple CEO Steve Jobs, who - despite a well-publicized brush with pancreatic cancer - is still alive and kicking.
RW: I seem to remember another slip up with UAL.
20. Phil Gramm's 'mental recession':
In early July, as the financial crisis spreads to Main Street, McCain campaign co-chair and former senator Phil Gramm appeals to voters and their economic anxieties by calling them a "nation of whiners" and dismisses a troubled economy as a "mental recession."
RW: That is classy! Almost as classy as FOX News' reporting.
21. Bill Miller's bad bets
RW: Thank you Fortune for a spat-on representation of 2008's biggest bloopers! Rebecca Wilder
The chart illustrates the Fed’s balance sheet (Table 1 Factors Affecting Reserve Balances of Depository Institutions) spanning 2008, including the various lending measures instituted since the beginning of the year (to see these measures, click on policy tools here). Notable changes in the most recent release (December 29, 2008) include:
- Bank reserve balances are now $785 billion, which is a $779 billion increase since this time last year.
- The Fed continues to prop up the commercial paper market with its massive $326 billion net holdings under the Commercial Paper Funding Facility (CPFF), up by $10.5 billion since just last week.
- The Fed has dedicated no resources to the money market investor funding facility – I guess that they are holding this facility in place “just in case”?
- Other federal reserve assets – essentially the currency swap lines opened up with various global central banks – fell $28 billion to $614 billion. I suppose this is a good sign: the $US is now more accessible to foreigners.
- The Fed purchased a new $2.5 billion for a total of $20 billion in residential mortgage-backed securities from AIG and its subsidiaries (Maiden Lane II in the chart above, the Fed first announced the purchase here).
- The Fed purchased a new $8.5 billion in collateral debt obligations on which the Financial Products Group of AIG wrote credit default swaps (see this Washington Post article about Financial Products Group).
The Fed has extended direct credit to AIG and is now shoring up assets related to AIG and its subsidiaries; this is obscene. The bottomless pit that is AIG (currently, the government has invested $152 billion) goes deeper.
Have you seen Parenthood? Steve Martin is Gil Buckman, a dedicated father, who struggles with the tradeoff between career and family. Tom Hulce plays Gil’s younger brother, Larry, who fathers a son Cool that he cannot support in his plight to get rich quick. Larry promises Frank that he will change his life after he gets a loan, but he does not. Larry leaves Cool in Frank’s care and takes the money from Frank for his scheming, and is assumed to never never pay back the loan. AIG is Larry - Larry is AIG.
I am seriously disgusted by this facet of the government’s handling of the financial crisis; it goes against everything that is good about free markets. Bad business models should fail, certainly including AGI, Citigroup, GM, and GMAC (of course they got their $6 billion). The government is barricading the healthy process of consolidation.
Monday, December 29, 2008
RW: I hope you are right, and I tend to agree. But existing home sales have been at the bottom of the barrel for quite some time, dropping for a couple of years now. We need some serious demand, and rock-bottom pricing is not doing it. I just called about a refi – will see how it goes.
From WSJ Marketbeat, 2008 Lookback: Surprise, Surprise: It is often said that markets hate uncertainty, but in 2008, one of the few certainties was just that — uncertainty.
RW: I think that was well said!
From Money & Co., 2008 memories: Infamous moments from the meltdown: "Nobody could have predicted this," Wall Street pros like to say as they seek to absolve themselves for failing to foresee the financial system meltdown of 2008.
Well, almost nobody at the top of the financial industry saw what was coming, that's for sure. Either that, or they were just flat-out lying to us along the way.
Here, listed chronologically, are my nominees for the most infamous pronouncements as the crisis unfolded this year:".....
RW: ..... And you must click on the link to see the top blips – Trichet (you all know how I love Trichet) is part of number 3.
From Drudge Report, Russian Professor Predicts End of U.S. Former KGB analyst Igor Panarin, dean of the Russian Foreign Ministry's academy for future diplomats, has predicted that the U.S. will fall apart in 2010.
RW: I'm pretty sure that no comment is necessary on this one. Wait a minute, I just commented!
From Across the Curve, Closing Comments December 29 2008: "Prices of Treasury coupon securities surged today as international geopolitical factors combined with market technicals to steepen the Treasury yield curve.The front end of the Treasury market received a boost from money seeking to hide from the ongoing problems in the Mideast. So the latest sad imbroglio there fostered a mini flight to quality."
RW: As if we needed another reason for Treasuries to bounce.
From Macro and Other Market Musings, The Hangover Debate: "My own view is similar to Waldman's--some but not all boom-bust cycles fit the hangover theory. I think this view can be best illustrated by the double-dip recessions of Paul Volker in the early 1980s that are now credited with (1) eliminating double digit inflation and, in turn, (2) laying the foundation for the subsequent 20+ years relative macroeconomic stability."
RW: Volcker gets nominated the Best Federal Reserve Chairman ever! Greenspan is so yesterday. I wonder how Bernanke’s name will ultimately play out in the history books?
From Bloomberg (hat tip, Reader Steve Conlon), Holiday Sales Drop to Force Bankruptcies, Closings (Update4): "Retailers may close 73,000 stores in the first half of 2009, according to the International Council of Shopping Centers. Talbots Inc. and Sears Holdings Corp. are among chains shuttering."
RW: The carnage has only just begun.
And FOX News always keeps us on the edge of our seats with its top-notch reporting:
'Grey's Anatomy' Star Expecting Third Child
And to you cat lovers out there (I have two), WATCH THESE VIDEOS: Ninja Cat and Santa Cat in Boots
And as always, my most talented friend, Kerry Hawkins:
(2006 season) January 13, 2007: The Wall Street Journal reports December Retail Sales Jump 0.9% Amid Robust Holiday Shopping Season: As it turned out, shoppers spent more freely during the just-ended holiday season than had been thought, helping some retailers end the year on strong footing and suggesting that economic growth could be rebounding faster than expected.
Retail sales jumped 0.9% in December from the month before, to a seasonally adjusted $369.9 billion, the Commerce Department said Friday. December's growth was up from a gain of 0.6% in November and was the strongest rate of growth in retail sales since July. When compared to December a year ago, retail sales were up 5.4% compared with December-to-December growth of 5.7% in 2005.
Although full-year growth in 2006 was lower than in 2005, economists noted that sales in the final three months of last year were regaining momentum. (2007 Season) January 11, 2008: Wall Street Journal reports Retailers Post Tepid Growth: U.S. retail sales last month weakened, especially among clothing chains, but weren't the disaster some predicted.
The decline prompted a number of retailers, led by Kohl's Corp., to chop fourth-quarter earnings projections. Investors, however, pushed up depressed share prices in a relief rally as January inventories appeared tame and a weak U.S. dollar continues to boost international results.
Sunday, December 28, 2008
Here are some excerpts from a few of today's bankruptcy articles.
Post-Christmas Sales May Not Help Retailers Salvage Holidays:
Retailers counting on post-Christmas sales to spruce up the sluggish holiday season may be disappointed as tapped-out shoppers turn their noses up at discounts of 70 percent or more.
More than a dozen retailers, including electronics chain Circuit City, have sought bankruptcy protection this year as the credit squeeze and the U.S. recession drained sales. The holiday results indicate possible consolidation and further bankruptcy filings, said Gilbert Harrison, chief executive officer of retail advisory firm Financo Inc. Retailers Brace for Major Change: Other retailers are saying they will trim inventory and reduce the number of suppliers. That, in turn, will cause a ripple effect, prompting a number of weaker manufacturers, small brands and underfunded fashion labels to fail. New retail formats and concepts stores are likely to be curtailed in the coming year. And luxury-goods makers already are working to cut the long lead times between orders and store delivery as a way to reduce risk.
"We will have a lot fewer stores by the middle of 2009," says Nancy Koehn, professor of business administration at Harvard Business School. "It's happening very, very quickly because of the financial crisis and the recession." Mish Shedlock highlights the origins of Chapter 9 (municipal bankruptcy law) and several counties/states that will be affected in Massive Surge In Municipal Bankruptcies Coming: Given that Florida is ground zero for the housing bust and Florida has no restrictions on filing Chapter 9, I confidently predict several cities or counties in Florida declare bankruptcy. Rebecca here. Retailers are already running to the courts to file Chapter 7 or Chapter 11.
The chart illustrates the quarterly growth rate of total business bankruptcy filings – Chapter 11 filings + Chapter 7 filings - as reported by the Administrative Office of the U.S. Courts spanning 2006:3 through 2008:3. In 2008:3 (third quarter of 2008), total business bankruptcy filings surged by 20%, driven by a 50% rise in Chapter 11 bankruptcy filings.
Businesses account for 91% of total Chapter 11 bankruptcy filings, but only 4% of Chapter 7 filings, and accounted for most of the total bankruptcy filings (business + non-business) in 2008:3. But amid the carnage of the housing market, surging energy prices throughout most of the year, and a tanking labor market, non-business bankruptcy filings also surged in 2008.
The chart illustrates the quarterly growth in total bankruptcy filings spanning 1980:4 through 2008:3. The trend in 2008 is clear: consumers and firms alike are increasingly filing for bankruptcy protection. Although most of the third quarter surge is due to business filings, the surge in Chapter 7 filings in the first half of 2008 is not.
Annual Chapter 7 filings increased steadily from 34% in 2007:3 to 48% in 2008:3, and going forward, filings are likely to rise further. Consumers are becoming more and more indebted just to offset the drag on consumption coming from surging energy prices for most of 2008, destruction of housing and equity wealth, tight credit conditions, and the ever weakening labor market conditions (nice article by Mark Thoma).
Rising credit card indebtedness signals that an increasing number of consumer bankruptcy filings are on the horizon. Here is a chart from this article:
Finally, falling prices pose a risk. Falling prices (deflation) can put downward pressure on nominal variables like mortgage rates, car loan rates, and saving rates; it’s already happening. And for those of us with fixed mortgages or car loans - with no means of refinancing - paying off rising real debt may become more difficult, causing even more bankruptcy filings.
One thing is a near-certainty: the serious recession underway is likely to increase bankruptcy filings for businesses, consumers, and municipalities alike, as the labor market and consumer demand continue in reverse.
Saturday, December 27, 2008
And "of course", if GM gets a loan, GMAC should access Federal funds via the U.S. commercial banking system. From Bloomberg:
GMAC will transfer at least 25 percent of the mortgage unit’s outstanding debt to ResCap for equity in IB Finance Holding Co., which is the parent of GMAC Bank, the Detroit-based company said in the statement. The transaction may trigger a “succession event” in ResCap credit-default swaps, GMAC said. A succession event could erode the value of those contracts.
The move may be an attempt to coerce bondholders to participate in GMAC’s $38 billion exchange offer, which was designed to help it convert to a bank holding company and gain access to federal aid. Bondholders that also bought credit- default swaps on ResCap debt “are a major factor in preventing the exchange from meeting the necessary threshold,” Barclays Capital analyst Bradley Rogoff said in a report dated Dec. 10. GMAC said yesterday it remains short of the 75 percent participation it needs for its plan to work.
2. GMAC (and its parent, IB Finance) become members of the U.S. commercial banking system.
3. But GMAC's access to TARP funding still in question. From the Washington Post: The financing arm of General Motors Corp. wasn't immediately saying early Saturday whether it had met a midnight deadline to clear a final hurdle in its quest to become a bank holding company, which would allow it to access billions in federal bank bailout money.
GMAC Financial Services LLC already received the Federal Reserve's stamp of approval earlier this week, but needed to complete a complicated debt-for-equity exchange by 11:59 p.m. EST Friday.
In an e-mail at 12:45 a.m. Saturday, GMAC spokeswoman Gina Proia did not say whether the company met the deadline. She didn't respond to repeated requests for further comment.
Analysts have speculated that without financial help, GMAC would have had to file for bankruptcy protection or shut down, dealing a serious blow to GM's own chances for survival.
When the Fed on Wednesday made GMAC eligible to access part of the government's $700 billion bank rescue fund, it was contingent ailing auto and home loan provider completing the debt exchange.
The Federal Reserve apparently needed to see that the bondholders were willing to inject more capital into GMAC, a critical requirement to get bank holding status. GMAC bondholders needed reassurance that the Fed would approve GMAC's application to qualify for federal aid. RW: The way that Congress is writing checks these days makes it more likely than not that GMAC will get its $6.3 billion. How many of you believe that the auto industry bailout, including its financiers (GMAC), will ultimately cost just $17.4 + $6.3 = $23.7 billion? Not I; this is simply ludicrous.
The saga that is the auto industry bailout has just begun.
Friday, December 26, 2008
(Click to enlarge chart)
The chart illustrates annualized real personal consumer spending (PCE) growth on a quarterly basis spanning the years 1947:1 to 2009:2 and includes the following forecast: 2008:3, -3.8%; 2009:1, -2.6%; 2009:2, -0.1%. Since 1947, this would mark the first time that consumer spending fell three consecutive quarters.
It is remarkable that the depth of the decline in consumer spending does not make history as well. The forecasted accumulated loss of 1.1% (not annualized) is smaller than the 2.4% that occurred in Q1 and Q2 of 1980, when real PCE fell by an annualized 8.6% in the second quarter. Nevertheless, consumers are cutting back, and will continue to do so into 2009. Note: an annualized growth rate is the annual rate of growth that would occur if each quarter averaged the same amount of quarterly growth. The accumulated growth is the total reduction in spending over the consecutive quarters of PCE decline (the total % loss over Q1 and Q2 in 1980 for example).
Consumers are stressed in 2008 and 2009
Prices, labor, and housing have kept consumers on edge. Oil hit its peak in July and remained above $100/bbl throughout September. Energy prices seriously restricted consumer purchasing power, and spending was cut (reluctantly). Since September, job loss has quickened. The carnage that occurred in the labor and housing markets – around 1.3 million jobs lost since September and the ongoing destruction of housing wealth - is passing through to consumer spending. Consumers are getting a break at the pump – oil was just $34/bbl ending on 12/19/08 – but that is only a minor offset the negative forces currently underway.
Prices played their part
This chart illustrates monthly nominal and real PCE growth from January 2007 to November 2008. In the spring of 2008, nominal and real PCE growth turned negative on average. This was a sharp turn for the worse relative to the average positive PCE growth in 2007.
Seesawing prices have certainly played their part. From January 2008 through August 2008, real PCE growth was greater (less negative) than nominal PCE growth because prices were rising quickly and consumers were holding on as best they could. Since September, weak economic conditions and a masive job loss have driven down headline prices (-1.7% in November), and real PCE gains were smaller than expected. Nominal spending dropped relative to real spending, which grew just 0.6% on the sharp price declines (PCE price index fell 1.1%). Whatever the underlying catalyst, consumers are cutting back hard.
Why has consumer spending not fallen by more? Credit cards
This chart illustrates consumer bank lending, credit card and other (non-revolving) loans, since Christmas of last year. During the first half of 2008 through June, revolving credit was rather stable and other consumer loans were growing. However, since July revolving credit has surged, and other consumer credit has stabilized, if not declined. Many consumers are living on their credit cards, and have been since July.
It is possible that consumer credit takes a stochastic tumble, which would drag down the forecast of consumer spending (see forecast chart above).
Consumers are in trouble. The economy is in trouble. No wonder SpendingPulse called the 2008 holiday shopping climate one of the worst in modern times. It is not surprising that consumers are cutting back: prices, credit, labor, and housing have wreaked havoc on consumer spending. But this cutback is setting up to be the worst in modern history.
Wednesday, December 24, 2008
Santa is not here yet (Boston) - still in Southeast Asia. As of 10:53 am, he is in Malaysia. Man he is quick - 10 minutes ago, Santa was in the Philippines!
Go to NORAD Tracking Santa (you can view pictures and videos as well) to keep an eye on Santa's progress.
Merry Christmas you all and Happy Holidays!
The chart illustrates the reported inventory of new homes for sale and existing homes for sale through November 2008. The existing inventory is clearly troubling, and since it is roughly 10 times bigger than that of new homes, it is understandable why Joshua Shapiro of MFR, Inc. is concerned:
The inventory of existing home sales rose in November, and even worse, it remains elevated at peak levels. Rock bottom pricing is not driving sales quickly enough. The current trend in mortgage rates (downward) should instigate some positive demand from potential homebuyers!
On the other hand, the inventory of new homes for sale continues to move in the right direction – down! The number of new homes for sale, 374,000, are reverting back to their sample monthly average (1978-2008) of 350,000, rather than stabilizing at a peak as is the existing inventory. New construction at its slowest pace since 1959 (the beginning of the series) – November housing starts fell 18.9% over the month to 625,000 – and new home sales are dragging the inventory down.
Inventory of existing home sales is clearly troubling, especially if there are sellers waiting in the shadows to put their homes on the market when housing prices rise slightly (CR calls this shadow inventory). But the number of new homes for sale is clearly a step in the right direction.
In the past, the ADP report has been used to help forecast BLS report, but in 2008 the ADP report has grossly underestimated the job loss reported by the BLS – 1.7 million jobs to be exact. Well, ADP got a new face! Macroeconomic Advisers (models payroll estimation) advanced their econometric methodology for a new and improved ADP employment report.
In 2008 through November, the ADP report outpaced the BLS report by 1.7 million jobs, or 154,000 on average per month. There are fundamental differences between the ADP and BLS reports – size and coverage of the report (Boeing is not included in the ADP report), survey methods, definition of employess (actively paid or just listed on payroll), etc. – that prevented the ADP report from being a perfect substitute to the BLS report, but this differential is alarming.
As always, click on the chart to enlarge.
The model was estimated both in and out of sample, and Macroeconomic Advisers concludes that the revised ADP methodology will improve the ADP payroll report. In fact, the new methodology (using the in sample estimation) surpassed the BLS payroll by just 221,000 jobs in 2008, or 20,000 per month, and the correlation improved to 0.94.
The December 2008 ADP report will include the new methodologies.
Tuesday, December 23, 2008
Values below -0.7 signal that the economy has moved into a recession, while those above 0.2 indicate that the economy has emerged from the recession. The index correctly predicted the start of the current downturn; the CNAI fell below -0.7 to -0.74 in December 2007.
Twelve months into this cycle, the index surpassed the 1990-1991 and 2001 recession lows and rivals the index trough of the 1981-1982 recession, -2.55. Not surprisingly, the November CNAI plummeted mostly on a quickening deterioration of the labor market. Job loss as measured by the nonfarm payroll worsened significantly since September compared to the first eight months of the year. Industrial production, manufacturing sentiment, consumption, and housing also weighed down overall economic activity.
With almost every sector of production and overall demand sinking at an increasing rate, economic growth continues in reverse. Look for the CNAI to hit 0.2 for signs of economic life, but that is unlikely until the middle to second half of 2009.
New York City is special, as government finance is heavily dependent on Wall Street compensation packages. The Bureau of Economic Analysis released its report on annual compensation, and New York county ranked top on the list of total compensation: $294,612,000,000 - $294 billion.
The table above to the left lists the 50 counties with the highest total compensation, ranging from New York and Los Angeles with $294 billion and $274 billion, respectively, to Riverside and Salt Lake with $31 billion each (you can see the full list of 164 counties at the BEA's website here).
The average compensation per job in New York county is $116,977, and certain to decline with negligible bonus compensation (if any) and capped pay raises on Wall Street in 2008 and 2009 (through word of mouth, I have heard of many firms capping raises at between 0%-2%). And for New York, whose government finance depends on the compensation of Wall Street, roughly 10% tax revenue base is set to decline.
Click on chart to enlarge (from the BEA report).
The broad-based cutbacks in state and local spending are sure to offset - at least partially, if not a majority - the massive fiscal stimulus package that Obama will approve in January. What a mess.
Monday, December 22, 2008
And as the pace of job loss quickens, mass layoffs (50 or more firings at once from one employer) accrue quickly.
The chart illustrates monthly mass layoff events of total and private nonfarm payroll reported by the Bureau of Labor Statistics for the period April 1995-November 2008 (the full series). Total and private nonfarm mass layoff events have reached levels not seen since 2001; and consistent with aggregate job loss, the pace of mass layoff events have quickened since September 2008, peaking in November at 2,328.
Since December 2007, 20,712 total mass layoff events sent 2.1 million workers to their state unemployment claims offices. The manufacturing sector continues to dominate mass layoff events – 39% in November – but the following industries saw record-level average mass layoff unemployment claim filings (since the series started in 1995): accommodation and food services; construction; finance and insurance; real estate and rental and leasing; retail trade; transportation and warehousing; utilities; and wholesale trade.
But federal, state, and local governments executed just 72 mass layoff events, essentially unchanged from the 70 events in November 2007. State and local governments are hoarding workers, but with surging budget deficits, the pace of government mass layoff events will rise. From the Wall Street Journal: click on chart below to enlarge.
The next mass layoff shoe to drop: state and local government jobs. From the LA Times: Gov. Arnold Schwarzenegger on Friday ordered mass layoffs and unpaid furloughs for state workers starting in February to address California's growing fiscal crisis.
Under his executive order, 238,000 employees will be forced to take off two unpaid days per month through June 30, 2010. Managers will receive either the furlough or an equivalent salary reduction during the same period. RW: And if the growing number of mass layoff events wasn’t bad enough, the rising pace of job loss is expected to tie up precious resources in the courts. From the LA Times: Lured away from her job in Houston to take an executive position at Dell Inc., Jan Chapman persuaded her husband to quit his job, move with her to Austin, Texas, and buy a house at the height of the real estate bubble.
Seven months later, the computer maker laid off Chapman, whose 25-year career in human resources had been filled with flattering performance evaluations.
Chapman, 59, and three other top female managers have filed a class-action lawsuit against Dell, alleging age and sex discrimination in the company's termination of 8,000 employees over the last year.
The suit, filed in federal court in San Francisco, is one of only a few so far emanating from the mass layoffs sweeping the country.
But labor and employment lawyers warn that a tidal wave of wrongful-termination suits is expected in the coming months as the jobless burn through their savings, run up debt and find few work prospects in the worst economic downturn in decades. State governments are running large budget deficits. California owns one of the most delinquent budgets, but others are following in suit (see chart).
Relative to 2001, 2008 has accrued 976 fewer mass layoff events through November, but with rising government layoffs – as in California – the 61 state and local government mass layoff events will swell. December's report may show accululated mass layoffs that exceed those in 2001.
Sunday, December 21, 2008
Here are some of Friday’s headlines following the BLS report:
California posts 8.4% jobless rate, third highest in U.S.
State's unemployment rate hits 25-year high (South Carolina)
Tiny State, Huge Pain R.I. Has Lost Jobs 11 Months in a Row
State's unemployment rate took hit in November (Indiana)
State Unemployment Figures Remain Steady (Ohio)
And for a static view of state-level unemployment rates, click here?: Unemployment state by state
In November, Michigan had the highest unemployment rate, 9.6%, while Wyoming had the lowest unemployment rate, 3.2%. But this is just November's data; a more thorough data set would include statistics across states AND time. However, a pretty 51-column table including each state’s unemployment rate since 1976 (the beginning of the series) is hard to come by. It is a cumbersome process to sift through the massive state-level data; but don't worry, I did this (partially) for you all.
According to the BLS (see Table 1 above, which is a sorted version of Table C here), the worst 5 state labor markets – the states with the largest annual increase in the unemployment rate – are:
- Rhode Island
- North Carolina
The chart illustrates the monthly unemployment rates for the worst 5 states + California (number 7) and the national unemployment rate (civilian unemployment rate in chart) spanning the years Jan. 1976 to Nov. 2008. As expected, the unemployment rates for all six states are surging with the national unemployment rate. For every state except for Idaho, the state unemployment rate has risen above the national average, 6.7% in November.
Currently, the worst 5 states (plus California) are experiencing a larger labor contraction compared to November 1982. In November 2008, the national unemployment rate increased 2.0% since November 2007, while the unemployment rate surged 3.2% on average across Rhode Island, North Carolina, Georgia, Idaho, Florida, and California. That is a severe cycle for those 6 states compared to November 1982, when the national unemployment rate grew 2.5% over the year and the state-level unemployment rate averaged a 1.7% increase.
The top 5 most resilient states – the states with the smallest annual increase in the unemployment rates – are:
- South Dakota
This chart illustrates the monthly state unemployment rates for the top 5 resilient states. In the spring of 2008 – roughly March through May – each state’s unemployment rate surged, but has been quite stagnant since. To be sure, except for in Wisconsin (November saw a surge), the unemployment rates are not rising precipitously as is the national unemployment rate.
Currently, the 5 most resilient states are experiencing a lesser labor contraction compared to November 1982. In November 2008, the national unemployment rate rose 2.0% since November 2007, while the unemployment rate grew just 0.6% on average across Utah, Wisconsin, Iowa, South Dakota, and Nebraska. That is a very mild cycle for those 5 states compared to Novmber 1982, when the national unemployment rate grew 2.5% over the year and the state-level average advanced 1.8%.
In the 1980s, state labor markets jointly contracted, while in 2008, the dispersion of contraction is more heavily weighed in key states. I will be keeping a close eye on the state-level trends to gather further evidence on this phenomenon.
Saturday, December 20, 2008
A little background. Matthias is deaf compared to me - he listens to the television (the big HDTV on the main level) at a volume that can be heard in Alaska (I live in MA). This is problematic for me, as I go to bed very early (to blog for you all at 5am) and hear the volume emanating from the room below. So, Matthias is relegated to watching TV in the downstairs bedroom, where we have a nice Sony tube TV (bought it in college).
So here is what I was thinking: (1) new HDTV for the bedroom downstairs, or (2) super nice wireless headphones for the TV in the main room.
What do you all think? I am also open to suggestions for alternative gifts (he usually responds well to the electronics, as he would never go out and buy them for himself).
Friday, December 19, 2008
At any rate, Merkel is going forward with Deutsche Stimulus Plan 2. From Deutsche Welle: German Chancellor Angela Merkel called for more investment in the country's western states which have lost out due to the funding focus on the former East Germany since the 1989 fall of the Berlin Wall.
The remarks came after a meeting of state leaders on Thursday to discuss a possible new steps to boost Europe's biggest economy. The chancellor said Germany's 16 states will help finance a second national recovery package to be announced next year.
"All the states will approve a second package in January," Merkel told a press conference in Berlin.They will all "contribute to the extra investment," she said, adding that the infrastructure package aimed at streets, rail tracks, schools and kindergartens is made up of "projects that will modernize our country for the long term."
Berlin has already laid out a package worth 31 billion euros to fight a recession triggered by the global credit crunch, but Merkel has been accused of timidity as European neighbors lay out plans for even more public spending to kick-start their troubled economies. Without a central bank that is willing to monetize the new debt incurred by the deficit spending - Trichet is certainly not going to buy German debt - investment may actually be crowded out via increased borrowing costs to firms (interest rates).
Just a thought. Rebecca Wilder
What is Fed policy? Fed policy is massive:
- Adding $1.4 trillion in liquidity to the domestic and global banking systems via loanable funds and currency swaps
- Making unprecedented loans to the private sector, American International Group and Bear Stearns
- Buying agency bonds directly
- Creating demand in the commercial paper market with $315 billion net transactions
- Using the Treasury to sterilize inflows
- On the horizon: buying U.S. Treasuries directly, mortgage-backed securities (MBS), and perhaps other instruments not yet mentioned (CDS, corporate debt, etc.)
Corporate spreads are stabilizing if not falling
The chart illustrates corporate bond indices for investment grade and high yield corporate bonds since the beginning of the year. A sign of relief is emerging as corporate bonds spreads - borrowing costs for investment grade and high yield companies - stabilize, even fall.
Corporate bond rates are important - the higher are the costs to borrow, the lower will the borrowing be for new capital investment. See this post to for corporate bond spread indices (against Treasuries) on a longer horizon.
The money supply – all measures of – is growing faster on a weekly basis
And surging on an annual basis
The chart illustrates various measures of the U.S. money supply (the data and definitions are listed here). The growth rate of non-M1 components of M2 (Table 4) started to fall slightly at the end of October, but has since then picked up speed. The 4-week average M2 – a better look at the trend – is growing at a record 8%. Finally, M3 (at least most of M3) is slowing on an annual, but it is reverting back to its longer-term trend rather than falling off a cliff. The Fed is keeping the money supply afloat; this will offset some of the negative price pressures going forward.
Mortgage rates are falling
Who said that traditional monetary policy – cutting the target federal funds rate – was dead, because clearly it is not. In the wake of the Fed’s December 16th announcement, mortgage rates fell with force to 5.27% (as of 7am on December 19th from Bankrate.com). And with the Fed gearing up for its $500 billion MBS program, I expect that mortgage rates will fall further, potentially driving up buyer demand in the housing market.
It looks like the U.S. economy is just skirting a financial meltdown. Phew, now we have a recession to contend with.
Thursday, December 18, 2008
The charts illustrate Macroeconomic Advisers’ (the all-star forecasting firm – including Laurence Meyer who sat on the Board of Governors) baseline forecast that includes a stimulus package, and an alternate forecast where no stimulus is added. The highlights of the December 8, 2008 forecast are (this is a paid subscription, but I can send it to you if you email me):
- In the stimulus forecast, the economy starts to expand in 2009.3 (third quarter of 2009), and rebounds quickly throughout 2010. The unemployment rate peaks at 8.5% in 2009.3 and starts to descend in 2010.2.
- In the no-stimulus forecast, the economy starts to expand in 2009.4 and rebounds more slowly throughout 2010. The unemployment rate peaks at 9.5 in 2010.2 and starts to descend in 2010.4.
- Infrastructure spending, 24%
- Increase in Medicaid matching, 10%
- Extended unemployment benefits (included in both forecasts), 5%
- Individual income tax cuts, 61%
The latest proposal is circulating in Congress as Obama’s advisers work with lawmakers to craft a package aimed at improving roads, bridges and other parts of the U.S.’s crumbling infrastructure. The plan probably will also include state aid for unemployment and health-care programs and incentives such as tax credits to promote renewable energy production, lawmakers have said.
Tax credits to promote renewable energy production? That sounds like an sure bet to boost the economy.
Tax cuts really should be a large share of the fiscal stimulus. An increasing share of individuals and firms are cash constrained, and it is more likely that most of the tax reductions will be spent, rather than saved. Imagine $850 billion in tax breaks over the next year (about 6% of GDP)!
From Greg Mankiw:My advice to Team Obama: Do not be intellectually bound by the textbook Keynesian model. Be prepared to recognize that the world is vastly more complicated than the one we describe in ec 10. In particular, empirical studies that do not impose the restrictions of Keynesian theory suggest that you might get more bang for the buck with tax cuts than spending hikes.Compared to choice previous recessions (I picked the deepest and/or longest since 1950), this recession will be deep and long.
The chart illustrates previous recessions, as measured by real GDP and dated by the National Bureau of Economic Research (NBER). The current cycle (2007-current) includes the forecast values from Macroeconomic Advisers’ under the stimulus and no-stimulus scenarios. The values for GDP have been indexed to 100 at the start of each recession for comparison, and a 6-quarter recovery period after each recession's end is included.
The 1981-1982 recovery was quick, where with or without fiscal stimulus, the 2007-2009 recession will not be; this is typical of recessions that include a financial crisis. Reagan passed the Economic Recovery Tax Act of 1981 (ERTA), which contributed to the quick recovery following a very deep recession.Compared to previous recessions, the unemployment rate will rise very quickly.
This chart indexes the unemployment rate to 100 at the onset of the recession for previous cycles and the current cycle (similar to the previous chart). The current cycle is expected to produce a serious labor market contraction with or without the stimulus package, but even more extreme without the fiscal stimulus. Furthermore, the unemployment fell quickly in the wake of Reagan’s ERTA.
I don’t like Obama’s plan. If the government must spend massive amounts of money, why not put it directly into the hands of consumers and firms via tax cuts. It will work quickly, and history suggests that the effects can be quite dramatic.
The quickest way to create some demand is via tax reductions and not spending on infrastructure and roads. The Obama plan is too complicated, too slow, and obviously increasing in magnitude with each week, no day, that passes.