Tuesday, March 24, 2009

Gone fishing, well, more like snorkeling

I will be on vacation until April 1, 2009. My body requires that I relax for a week in a warm place, and my husband requires that I take no computer....hence, no blog.

Be back in 7 days! Rebecca

OFHEO says home values rose in January??

The Office of Federal Housing Enterprise Oversight released its January home price data. According to the report:
U.S. home prices rose 1.7 p
ercent on a seasonally-adjusted basis from December to January, according to the Federal Housing Finance Agency’s monthly House Price Index. December’s previously reported 0.1 percent increase was revised to a 0.2 percent decline. For the 12 months ending in January, U.S. prices fell 6.3 percent. The U.S. index is 9.6 percent below its April 2007 peak.
What a cheery report!

Not really. This is unlikely to turn into a trend. The OFHEO index tracks home values on mortgages that were guaranteed or funded by Fannie Mae and Freddie Mac. Therefore, it is missing the entire subprime mortgage market, and lots of falling home values. Second, OFHEO was very careful to say the following: the surge is primarily in two areas - East North Central and South Atlantic - and "estimation imprecision associated with the January estimate is relatively large and subsequent revisions to the monthly figure could be significant".

Oh well, at the very minimum it is nice to hear good news for a change, even though it may only be transitory. Because over the year, we are very much still in the red. The Case Shiller index will release next week.

Rebecca Wilder

Real money supply: surging in some countries, not so much in others

The Fed's recent and extreme policies have made people nervous about inflation. They should be, but just not right now. Key central banks recently added hydrogen to their engines in the form of quantitative easing, causing high-powered money to surge. However, the multiplier is collapsing, and therefore, the new base is simply a measure to keep the money supply afloat. Some economies, though, are showing worrisome trends in their money growth rates.

The chart illustrates the 6-month annualized growth rate of the U.S. monetary base, commonly referred to as high-powered money. High-powered money is bank reserves plus currency, which does not cause inflation until it gets lent out to consumers and firms and turns into money. I like the 6-month growth rate because it captures more recent policy measures.

The chart illustrates the 6-month annualized growth rate of the broad measure of real money in the U.S., the U.K., Japan, and the Eurozone. In spite of the massive surge in the U.S. monetary base, 231% over the last 6 months, the real U.S. money supply grew just 22.6% over that same period. Can you imagine what would have happened had the Fed not eased so substantially? Troublesome deflation. The money multiplier is collapsing as banks hoard cash and consumers and firms pull back.

Furthermore, like the Fed, the Bank of England (BoE) is engaged in quantitative easing, resulting in a similar 6-month money growth rate, 22.8%. The ECB and the Bank of Japan (BoJ) are still increasing their broader measures of real money on a 6-month basis, but at a much slower rate. Admittedly, the BoJ is engaging in alternative policy measures, but the ECB and the BoJ are not pulling out all of the "easing stops" as are the Fed and the BoE.

This chart illustrates the monthly growth rate of the real measure of broad money for the same economies. The money supply data is current as of January 2009 for Japan and the Eurozone and February 2009 for the U.S. and the U.K. For now, the monthly real money supply growth rate remains above zero in the U.S., the U.K., and Japan. The European Central Bank (ECB) has let the money supply growth rate go negative; this is slightly worrisome if the trend continues.

This is a necessary policy action, given the alternative of allowing the money supply to collapse. However, John Taylor is worried, and frankly so am I. Because given the QE policies in place, the worst-case scenario or surging inflation, can only be avoided if the Fed gets its timing right. I tend to think that it will, but then again it might not.

Rebecca Wilder

Monday, March 23, 2009

Geithner: My Plan for Bad Bank Assets

I get a little irked when the Secretary of the Treasury writes an op-ed piece, and only paid subscribers can access it. I made a copy of Timothy Geithner's piece in the Wall Street Journal, My Plan for Bad Bank Assets, available for download here.

Rebecca Wilder

The mass layoffs might slow in coming months

The Bureau of Labor Statistics released a terrible report on mass layoffs for February. The BLS defines a mass layoff event as one where a single employer lays off 50 or more workers at one time. According to the BLS:
  • 2,769 mass layoff actions occurred in February on a seasonally adjusted basis.
  • 295,477 workers lost jobs associated with the mass layoffs.
  • The number of mass layoffs events increased by 542, the largest increase since Hurricane Katrina.
  • Over the year, the number of mass layoff events increased by 1,100, and the associated initial claims increased by 112,439.

Accordingly, the labor market is very weak, falling farther in February. However, there are signs that the mass layoff events may be nearing a peak.

The chart illustrates the annual growth in mass layoffs on a seasonally adjusted basis and on a non-seasonally adjusted basis. The seasonally adjusted mass layoffs (in persons) are up 61% over the year, marking the third consecutive month where the annual growth rate has accelerated. However, the nonseasonal growth rate is down to 83%.

Admittedly, the mass layoff growth rate is still very high, and furthermore, the series is very volatile. Mass layoffs are almost certain to remain at very elevated until the labor market works itself out. It's just that the seasonal adjustments may be masking the true situation of the mass layoff report; specifically, mass layoffs may, at the very best, not be worsening.

The reduction in layoff announcements tentatively suggests that mass layoffs may have peaked.

The chart illustrates the number of workers who lost their jobs in mass firings as a share of the total nonfarm payroll (to extract population trends from the data), and the number of announced layoffs tallied up by Forbes layoff tracker. The tracker implicitly follows mass layoffs, as most of the listed firms are laying off in bulk. Even though the Forbes layoff tracker only includes data since November 2008, it does move very positively with the mass layoff report.

To date, Forbes tracked 26,000 announced layoffs in March, down sharply from the 125,700 announced in February. I understand that March is not over, but it is almost over. So barring a 100k surge in announced layoffs over the next week, the Forbes layoff tracker suggests that the BLS March mass layoff report might show a decline in the number of persons being laid off in mass. Still way too early to tell, and mass layoffs are very likely to remain elevated throughout 2009, but perhaps we are at a peak (only in mass layoffs, which is a small share of total layoffs).

Rebecca Wilder

Sunday, March 22, 2009

Willem Buiter on the ECB and CE/QE

Today I compared ECB policy versus Fed policy in charts, noting that the ECB has not engaged in quanitative easing, while the Fed clearly has. Willem Buiter does a really nice job (of course) of addressing the ECB's reluctance to engage in non-traditional monetary measures, such as quantitative or credit easing policies. An excerpt from his post today on FT.com Maverecon (hat tip, reader M G):

"The fiscal hole at the heart of the Eurosystem

An entirely valid reason for the ECB/Eurosystem to refuse to engage in either outright purchases of private securities or in unsecured lending to the banking sector (or to the non-financial enterprise sector directly), is that there is no ‘fiscal Euro Area’, just as there is no fiscal EU. The absence of a fiscal Europe that matters here is a narrow one. I am not talking about the absence of a significant supranational fiscal authority in the EU (or in the Eurozone ), with significant tax, spending and borrowing powers -one capable of material system-wide fiscal stabilisation and cross-border redistribution. I am talking instead about two related fiscal vacua.

The first vacuum is that there is no single fiscal authority, facility or arrangement which can re-capitalise the ECB/Eurosystem when the Eurosystem makes capital losses that threaten its capacity to implement its price stability and financial stability mandates.

The second related vacuum is that there is no single fiscal authority, facility or arrangement which can re-capitalise systemically important border-crossing financial institutions in the EU or the Euro Area, or provide them with other forms of financial support.

When the Bank of England develops an unsustainable hole in its balance sheet, Mervyn King knows he only needs to call one person: Alistair Darling, the UK Chancellor of the Exchequer. If the Fed were to become dangerously decapitalised, Ben Bernanke also needs to call just one person: Tim Geithner , the US Secretary of the Treasury. It is possible that no-one in the US Treasury will pick up the phone, as none of the senior political appointments below Geithner are in place yet, but Geithner clearly would be the man to call.

Whom does Jean-Claude Trichet call if the Eurosystem experiences a mission-threatening and mandate-threatening capital loss? Does he have to make 16 phone calls, one to each of the ministers of finance of the 16 Euro Area member states? Or 27 phone calls, one to each of the ministers of finance of the 27 EU member states whose NCBs are the shareholders of the ECB? I don’t know the answer, and I doubt whether Mr. Trichet does.

This situation is intolerable. We need a fiscal Europe, at least at the level of the Eurozone, to fill the first vacuum. If we are to fill the second vacuum, we need a fiscal Europe at the EU level also."

Read the rest of the post here, as Buiter proposes some solutions to the ECB's quandary. Hope that you are enjoying your Sunday!

Rebecca Wilder

Fed vs. ECB in charts

As global central banks continue alternative policy measures and/or quantitative easing (raising the balance sheet beyond that required to attain a zero policy rate), the European Central Bank (ECB) is the odd man out. And recently, the ECB is being pressured to broaden its accepted collateral to include commercial paper and other stressed assets.

ECB council member Weber hinted at further rate cuts below the current 1.5% policy rate, which would bring the rate uncomfortably close to zero, but nevertheless, still by the book and using traditional monetary measures. Traditional measures include enough money creation to lower the ECB refi rate (the rough equivalent to the federal funds rate) to the target level, 1.5%. Non-traditional means would include buying commercial paper, buying government debt in excess of what is needed to attain a zero policy rate (quantitative easing), purchasing asset-backed securities, or really anything under the sun.

This is what the Fed is doing: buying (almost) everything under the sun

The chart illustrates the Fed balance sheet since 2007. Notice that the size of the balance sheet has increased substantially, 130% to $2.09 trillion in the week ending on 3/18/09. Also notice that the composition of the balance sheet has changed drastically. The extension of bank credit (everything in the chart except for Other Fed assets, including gold, SDR's, and Treasury currency) has surged 139% to $2.04 trillion, mostly through non-traditional means.

Initially, the Fed added liquidity through traditional means, Term Auction Facility (TAF) or discount lending, but recently, and in addition to maintaining these lending programs, it is buying assets directly, including mortgage-backed securities, asset-backed securities (TALF, which only just begun), agencies, and more Treasuries (starts next week) than are needed for the (near) zero fed funds rate. See my recent post on how the Fed is shifting its focus. Basically, the Fed's balance sheet is big and holds a lot of alternative collateral and/or assets.

But not the ECB; it has done everything pretty much by the book.

The chart illustrates the ECB's balance sheet since 2007. Notice that the size of the balance sheet has increased substantially, but by a much lesser degree than has the Fed's, just 58% to 1.83 trillion euro. Also notice that the composition of the balance sheet remains relatively unchanged. Foreign currency claims on euro residents and traditional open market operations, main refinancing operations and longer-term refinancing operations, account for the bulk of the balance sheet growth. Basically, the ECB's balance sheet is sort of big, and there is little by way of alternative collateral and no alternative assets on balance.

We will see if the ECB succumbs to growing pressures to grow their balance sheet in both size and scope.

Rebecca Wilder

Saturday, March 21, 2009

My faves for the day (March 21, 2009)

From MarketBeat at the WSJ, The New New Plan — Same As the Old Plan.:
So who gets left out in the cold? The taxpayer, natch. According to the Wall Street Journal’s report, mortgage-backed securities will be purchased through several investment funds, and the government will act as a co-investor, matching private investments on a dollar-for-dollar basis. For bad loans, the government could offer as much as 80% of the financing.

“What would be a better plan? Seize the insolvent banks, write down the assets to market levels, and make the banks’ bondholders pay for most of the losses by converting a percentage of the bonds to equity,” writes Henry Blodget on BusinessInsider.com. “Then sell off and/or re-privatize the banks, which will now be well-capitalized.”
RW: Hmm. I suspect that the FDIC is not prepared nor does it have the resources to seize all of the insolvent banks, especially those the size of Citi. When all was said and done, the FDIC will have lost $10.7 billion after closing IndyMac, sifting through its assets, and selling of the good stuff. The latest details of Geihtner's Financial Stability Plan haven't even emerged in full yet, but what is out there is receiving some skepticism.

Oh, and I see that Edward Harrison over at Credit Writedowns agrees, Does the FDIC have enough money?:
My personal view is that the IndyMac bailout by the FDIC is the first of many to come. The FDIC does NOT have adequate capital to meet all of these bailouts. Many in the markets understand this and are selling shares in any questionable banks. I reckon this could lead to a run 0n some of the more vulnerable players, triggering another IndyMac-like rescue until the U.S. government steps in and raises the FDIC capital.
Brad Sester writes a nice piece about the reltaion between the Fed's buying of agencies and the selling of agencies by global central banks, Did the Fed bail out China by buying Treasuries?:
Actually, it makes more sense to think of the Fed as substituting for China in the market for Agencies — and other central banks — than to think of the Fed as bailing out China and other central banks. The end of the foreign central bank bid, as global reserve growth slowed and central banks shifte dto Treasuries — has had a big impact on the Agency market. That wasn’t helping the US housing market.
Traders always talk about the baltic dry index (the cost to ship raw materials) as a leading indicator of economic activity. The Financial Ninja noticed that the baltic has been crashing, Baltic Dry, Global Trade: The Rally in Equities Isn't Real:
The Baltic Dry Index (BDI) has been losing steam during this rally in equities. A sustainable trend changing rally in equities would be accompanied by an increase in BDI.
RW: Although there is dim light in some of the dark economic reports, its more like a 5-watt light bulb rather than a bright 200-watter.

Spencer has something to say about inflation over at the Angry Bear, DEFLATION ?:
Did you know that over the last six months the compound growth of the total CPI was -5.0%. Of course that is up from January when it was - 5.8%.You have to go back to 1948 to find actual deflation like this, when it bottomed at -4.2%.
RW: I agree, deflation is clearly the bigger threat, especially with the ongoing slack building in the economy (growing idle resources). But eventually, and only when the economy turns around and returns closer to potential output, the Fed must unwind this base (it doesn't turn into money until banks lend out the funds, and right now it is still mostly base, with $778 billion in banking reserves). I assume that we will get a little spurt of inflation when we come out of this thing, as the Fed is unlikely to pull a BoJ in 2000 - raising interest rates too early.

Uh-oh, James over at BubbleMeter reports Karl Case's predictions on the U.S. Housing Market, noting that Case has a tendency to see the rosier side of things, Karl Case on the housing market outlook:
The U.S. housing market slump is nowhere near over and home prices will probably keep falling well into next year, one of the property market's best-known economists said...."I did not think it was probable that we would have a home price decline of this magnitude," he said.

RW: There is a real chance that home values undershoot their equilibrium (whatever that may be).

And I hope that the photographer Kerry Hawkins keeps the spring shots coming; we could all use a break from the doom and gloom!

Rebecca Wilder

Friday, March 20, 2009

Congress is being stupid again

There is backward-looking regulation; there is forward-looking regulation; and then there's just stupid regulation. From the NY Times:
The House overwhelmingly approved on Thursday a near total tax on bonuses paid this year to employees of the American International Group and other firms that have accepted large amounts of federal bailout funds, rattling Wall Street as lawmakers rushed to respond to populist anger.

Despite questions about the legality of the retroactive 90 percent levy, Democrats and some Republicans said the tax on bonuses for traders, executives and bankers earning more than $250,000 was the quickest way to show angry Americans that Congress intended to recoup the extra dollars. Even backers of the measure noted it was an extraordinary step.
The legislation would apply to bonuses paid to executives at companies holding at least $5 billion in bailout money and would essentially wipe out the phenomenal paydays that have been a tradition on Wall Street, at least until the firms reduce the amount they owe taxpayers to less than $5 billion.
At this point, I wonder what the Congressional members are trying to accomplish? To get re-elected? It certainly seems so. I can only imagine that this silly back and forth about bonuses is going to throw a wedge into other government plans to actually fix the banking system. This is so counterproductive; it's not going to pass; it can't.

Take a close look at both the firms that would be subject to the tax and those that wouldn't:

This data can be found on the Treasury's website, however, the NY Times lists total TARP appropriations, and the WSJ lists the initial recipients of TARP capital injections. All of the companies below the bold black line will not face the 90% tax on bonus payments.

Notice that the table (above) lists TARP monies received by banks, insurers, auto companies, and non-banking financial firms. And look at the list on the margin. Below the $5 billion mark are several sketchy deals, including the sum $5.5 billion aid to Chrysler and Chrysler Financial, the $2.3 billion to CIT Group, who only recently became a bank-holding company (i.e., regulated) in order to get TARP funds and was the centerfold for the securitization industry. Fannie Mae is paying bonuses, but are they on Congress' radar?

Congress is playing with fire here. The government Financial Stability Plan cannot work if the private sector is worried about the political ramifications of participating, or worse, that the government will amend the terms of any agreement six months later - and the private sector must be involved to make the deal big enough. For example, the WSJ argues that TALF is off to a slow start - the first round of TALF loan requests was $4.7 billion - in part because of the rage over the AIG bonus:

One reason for the slow start: the outcry over bonuses paid by American International Group Inc., the troubled insurer that received federal bailout money. Some investors are concerned that they too could be exposed to a political storm should they make too much money from the taxpayer-funded program.
Even if this is just for show, which I imagine that it is, it is highly counterproductive.

Rebecca Wilder

Thursday, March 19, 2009

Are economic conditions improving? Americans hear that they are

News readers are hearing a larger share of good economic news according to the Pew Research Center for the People & The Press:
After months of bleak economic news, an increasing proportion of Americans now say they are hearing a mix of good and bad economic news, while fewer say they are hearing mostly bad news. As has been the case for the last few months, very few say they are hearing mostly good news about the economy.
As I said this morning, the recent U.S. indicators - retail sales, housing starts, and inflation - are offering glimmers of economic hope. But the good news should probably be better described as "slightly less bad" news, as we are still in the middle of Q1 2009 and many forecasters still are calling for a decline until the third quarter of 2009.

The Wall Street Journal consensus forecast is listed here (which is a paid subscription) and includes -5.2% U.S. growth in Q1 2009, -1.9% growth in Q2 2009, and just 0.4% growth in Q3 2009. So the "good" economic news better represents a falling rate of U.S. economic decline in Q1 and Q2, rather than an actual recovery.

Another thing to think about is that financial markets (at least equities) improved over the last couple of weeks, which survey participants might confuse for "good economic news".

Rebecca Wilder

Weekly world economic update: March 12- 18

This week, big economic indicators were released around the world. The recent U.S. indicators - retail sales, housing starts, and inflation - offered dim glimmers of economic hope. Unfortunately, though, the bigger picture is one of a continued precipitous decline in global economic conditions, with some ever-so-slight signs of relief. Let's see, using global economic reports over the last week: March 12- 18.




  • Both countries have announced fiscal spending and tax cuts to counter the decline in aggregate demand (see Canada's fiscal stimulus package here and we all know about the U.S. stimulus package). Trade is not going to get any country out of the recession this time. Unless, of course, they simply wait for the U.S. economy to turn around.


  • In this economic environment, disinflation (falling inflation rates) is inevitable. It is a simple adjustment process to ensure that demand (falling) eats up supply. At least in the U.S., deflation has yet to bite the macroeconomy, but there is always that risk. The risk is that falling prices become embedded into consumer and firm expectations, resulting in mass defaults and a forceful consumption declines.
Hope this helps to see the broader economic picture. Rebecca Wilder

Wednesday, March 18, 2009

Big Fed stuff for the day: inflation, debt monetization, MBS in bulk

Today's turn of events presents a story of sorts.

1. The BLS released the February Consumer Price Index (used to measure inflation). The highlight of the report is that inflation got a bounce to remain above zero over the year, 0.2%, and core inflation (ex food and energy prices) also rose 1.8% over the year. According to the BLS:

On a seasonally adjusted basis, the CPI-U increased 0.4 percent in February after rising 0.3 percent in January. The energy index rose 3.3 percent in February following a 1.7 percent increase in January as the gasoline index rose 8.3 percent in February after a 6.0 percent increase in January.
2. Economists react to the news, but with very different takes. From the WSJ Real Time Economics blog:
For a while, some analysts were actually worried about deflation. I think we can pretty much put that puppy to bed. At the same time, rising prices are hardly a threat. Where firms, other than oil companies, think they can find pricing power in this slowdown is beyond me. Thus, this report indicates that at least for now, the Fed can focus strictly on the financial sector with minimal near-term concerns about inflation. –Naroff Economic Advisors


Even with energy prices having flattened out of late, the deflation risk confronting the U.S. economy is real. Moreover, unless there is a powerful V-shaped recovery — which we deem highly unlikely — it is going to be several years before there is any legitimate reason to be concerned about a resumption of inflation risk. –David Greenlaw, Morgan Stanley
RW: I saw David Greenlaw give a talk last week in New York, and let me say, I agree with him. Inflation, both core and headline, will fall further, as the massive economic contraction currently underway seeps into prices at a lag. It is likely that we will see several months of negative inflation; however, that is not necessarily cause for worry, except for the economic slack - i.e., the elevated unemployment rate and output gap - is quite real. Falling prices raises purchasing power, which can be a good thing in bad economic times.

3. And then the Fed pulled out the big guns with a massive expansion of the MBS purchase program ($750 billion in addition to its previous limit of $500 billion), alongside an official announcement to purchase $300 billion in Treasuries over the near term (i.e., monetize the debt in order to drive interest rates down).

Clearly, the Fed believes that there is still some stimulus to be had in its alternative measures - longer term rates fall to grow consumer and firm spending. Today the Fed said that further aggressive monetary action is needed, no matter what is the monthly inflation trajectory.

According to the NY Fed, the Treasury purchase will span the 2-yr to 10-yr yield curve.

Interesting times, indeed. Rebecca Wilder

Cartoon about AIG

From Slate.com

China now expected to grow 6.5% in 2009

In a series of downward revisions, the World Bank is the latest to reduce its forecast of 2009 economic growth in China. As with many export-led economies, China has been hit hard by the precipitous decline in export demand, falling 25.7% in February 2009. For this reason, the World Bank reduced its 2009 growth forecast for China 1% to 6.5%. You can watch the World Bank's quarterly update on video here.

The new World Bank forecast is in line with that of the IMF; the IMF downgraded their forecast of 2009 Chinese economic growth to 6.7% at the end of January. Although 6.5% is well above zero, and certainly not comparable to the industrialized world's economic growth rates - the World Bank's 2010 growth forecast for high income OECD economies is 2.0%, or 6% below that of China - but it is well below Chinese potential growth.

The Chinese government recognizes that export-led growth is not sufficient in the current economic environment. In addition to supporting its export sector - the government plans to reduce export taxes to zero - the Chinese government is focusing on the domestic economy with fiscal stimulus measures and promoting domestic consumption. The fiscal stimulus already in place (4-trillion yuan announced in November) is probably passing through to the economy, as China's PMI increased for the third consecutive month in February.

Chinese growth is expected to improve in 2010, where the World Bank forecast is 8.0%. However, China, like any other country, is subject to diminishing returns to capital investment. Eventually, growth will fall as the economy joins the ranks of the higher income economies, however, that is still decades off.

Rebecca Wilder

Tuesday, March 17, 2009

Housing starts surprised the consensus!

It seems like some of the economic reports are looking slightly-less foreboding these days, suggesting that the rate of aggregate decline is probably falling. Today, the Census Bureau released February's report on new residential construction:
Privately-owned housing starts in February 2009 were at a seasonally adjusted annual rate of 583,000. This is 22.2 percent above the revised January 2009 estimate of 477,000.
The February bounce was 130,000 starts better than the level expected by the consensus (you can see the Bloomberg consensus here by clicking on the indicator in question), revealing some upside risk to the gloomy economic outlook if this trend continues.

The chart illustrates the number of total residential housing units started and the number of single-family units started. The 22% monthly bump in housing starts was driven by the first sizable increase in single-family units since 2007 (sizable meaning greater than the single 0.15% monthly in May '08), 1.1%.

However, starts are down sharply, almost 50% since just last year, so take the monthly bump with some grain of salt. Nevertheless, it is good news. The more ominous part of the report shows that housing completions are still way above starts, indicating that construction jobs are likely to be cut in March and April.

The chart illustrates the housing completions minus housing starts and the monthly growth in construction payroll (from the BLS establishment survey). The two series are negatively correlated, -0.53. As completions move farther away from new housing starts, construction payroll declines faster.

Completions are probably still far enough away from new construction to slash more construction jobs in March and April. However, the rate at which the construction payroll declines will probably slow if starts continue to rise and catch up with completions.

Rebecca Wilder

Mortgage fraud on the rise, mortage applications anemic

Mortgage applications for home purchases remain at record lows. On a volume basis, the annual growth rate of purchase-only applications index is 45% below its level this time last year. And as we all know, this time last year was three months into the recession. This is squeezing the mortgage industry, and fraud is on the rise.

The chart illustrates the Mortgage Bankers Association (MBA) measure of purchase-only and refinance mortgage applications. The Fed and Treasury programs have successfully lowered mortgage rates by purchasing mortgage-backed securities, which has resulted in a flood of refinancing applications, 33% higher than March of 2008. However, the real demand that the government would like to grow is still anemic. The purchase-only mortgage application index is 45% below its level this time last year.

Basically, homeowners that can afford it are getting a great deal by refinancing at lower rates. Those who can't, because they are underwater or cannot come up with the capital to finance the deal, won't.

Hard times in the mortgage business has also resulted in record mortgage fraud activity according to the Mortgage Asset Research Institute. Mortgage fraud is at an all time high, loan origination is at an all-time low, and both have led to a 30% increase in fraud reports since last year. Although much of the fraud activity is primarily due to increased regulatory intervention, a trend is nevertheless developing. And the fraud is on both the demand (borrower) side, with application misrepresentation, and on the supply side (originator), with verification issues.

Rebecca Wilder

Monday, March 16, 2009

Industrial production: not out for the count yet

The industrial production report indicates that manufacturing, mining, and utilities production is now below the average 2002 level. February industrial production fell 1.4% (consensus -1.2%), with a 0.7% cut in manufacturing output, a 0.4% slash in mining production, and a 7.7% slice in utilities. Although the report suggests further economic drag coming from the industrial sector, there is a very dim positive number that shines between the mountains of red ink.

Production of motor vehicles and parts rose 10.2% over the month. It’s not difficult pull off a double-digit monthly growth rate when production is down almost 50% off its peak; but nevertheless, for an industry that has fallen to just 3.3% of personal consumption, or 2% below its 2000-2007 average, in one little year, a nudge in the up direction is good news for growth.

However, something’s always gotta give, and in a recession it’s oil and gas well drilling, which is down 15.2% in February and over 30% off its peak in just five months. The problem here is: as production falls, so too does investment in drilling equipment and jobs. There is a growing risk to the level of capital equipment investment, hence GDP, in this sector in coming quarters.

Overall, the report suggests that there is an upside risk to economic growth: auto production. In spite of the dismal February auto sales report, 40% down over the year, the industrial production monthly bounce suggests that firms might believe it time to start re-filling auto inventories.

Rebecca Wilder

Liddy on AIG compensation

Seriously, how many times have we heard this same song and dance about attracting the best and the brightest? A letter from AIG Chairman and CEO Edward Liddy to Secretary Geithner:
I would not be doing my job if I did not directly advise you of my grave concern about the long-term consequences of the actions we are taking today. On the one hand, all of us at AIG recognize the environment in which we operate and the remonstration of our President for a more restrained system of compensation for executives. On the other hand, we cannot attract and retain the best and brightest talent to lead and staff the AIG businesses – which are now being operated principally on behalf of the American taxpayers – if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.
RW: Whatever. Liddy doesn't care about the American taxpayer. He should be focusing on the near-term health of AIG (whatever that may mean) before he starts thinking longer term and maintaining the best "talent". It seems to me that AIG is not only too big to fail, but too big to control. That's a problem...a big problem.

Rebecca Wilder

State well-being ranking: Utah #1, West Virginia # 50

According to a new survey, overall well-being of Utah's population is the highest across the 50 United States. This a neat survey (and possibly a little kooky, too), as it tries to quantify unmeasurable qualities of life, like health care or work environment. Interestingly, the survey's ranking of well-being across the 50 states is only tenuously related to the ranking of real per-capita income, the economists' proxy for well-being.

Some of the results reported by Gallup are:
Mapping well-being scores across the country, a clear pattern emerges with higher well-being states located primarily in the West and lower well-being states clustered in the Midwest and the South.
Hawaii, for instance, does rank high on five of the six sub-indexes, but reports the lowest quality work environments out of all 50 states. On the flipside, certain bottom ranked states in overall well-being shine in select sub-indexes. Oklahoma is eighth to last in overall well-being, but reports the third best score for work environment in the country.

The chart illustrates the 15 U.S. states with the highest well-being, as measured by the survey. In economics, we commonly use real per-capita income to proxy well being with the understanding that, on average, higher per-capita income signals better access to goods and services. However, some contributors to well-being (health care, environmental control, tendency toward happiness, etc.) cannot be directly measured.

The survey is interesting, as it tries to quantify unmeasurable identifiers of well-being, including life evaluation, physical health, emotional health, healthy behavior, work environment, and basic access. The phone survey is conducted by Gallup and Healthways on a daily basis of over 1,000 adults.

I suspect that the survey doesn't interview the same adults over the course of the year (because the methodologies doesn't state this fact), which makes it slightly kooky. But nevertheless, it does paint a different picture of well-being than does the standard economic measure, real per-capita income.

This survey shows only a tenuous relationship between per-capita income and the well-being index by state.

The scatter plot illustrates the effect of a change in the log of real per-capita income on the log of the survey index well-being. The relationship is tenuous with an R^2 of just 0.2. This implies that the survey respondents' definition of well-being is only slightly correlated with real income, and that the unmeasurable effects may be quite strong.

This is a new survey, and has no time series with which to base inference. It will be interesting to see how this survey plays out in the economics literature, as it does counter the standard measure of well-being. I would definitely want to know more about the methodology (the description on the website is quite vague), as survey methodologies are important in judging the reliability of the data.

Rebecca Wilder

Sunday, March 15, 2009

Fed and Treasury MBS purchase programs are big

Since the Fed and the Treasury started their respective mortgage-backed securities (MBS) purchase programs, mortgage rates are down one-full percentage point. The government intervention in the mortgage market is very big, certainly the reason that rates are tumbling.

The chart illustrates the month-end (or mid-month in the case of March) conventional mortgage rate and the net-accumulation of MBS on the part of the Federal Reserve (see the NY Fed) and the Treasury (see Table 6 of its monthly statement). The correlation is clear: the government's intervention in the MBS market, where to date the Fed has purchased $217 billion and the Treasury holds another $107 billion, resulted in a 1% reduction in the average conventional mortgage rate.

The government intervention has been sizable!

To add some perspective on the size of the intervention, the chart illustrates the annual net-issuance of Agency and GSE-backed MBS, or the type of MBS paper that the Fed and the Treasury are accumulating. In all 4 quarters of 2008, $501.5 billion of MBS was issued. Since just September (6 months ago), the Fed and the Treasury have acquired $324 billion in MBS, or 65% of the total net-issuance in 2008. That's big intervention.

If the government was not buying MBS in bulk, mortgage rates would undoubtedly be sitting above 5.03%. I imagine that low rates, alongside further price declines and the stimulus tax credit, will spur some new demand for housing. However, record job declines and the ongoing delevering of households (reducing debt burden) are likely to hamper at least part of the government's plan.

Rebecca Wilder

Saturday, March 14, 2009

The rising unemployment rate can't be entirely cyclical

Guess what happened between the start of the recession, December 2007, and now? The federal minimum wage jumped $0.70 to $6.55. And guess what is going to happen between now and August 2009? The federal minimum wage will rise another $0.70 to $7.25 (hat tip, reader Milton R.). This probably has implications for the natural of the unemployment rate.

The chart illustrates the federal minimum wage and the unemployment rate.The federal minimum wage had gone unchanged at $5.15/hour since 1997. In Q3 (third quarter) of 2007, the minimum wage started to climb. By July 2009, the minimum wage will have increased $2.10/hour in just two years.

States have their own minimum wage laws, which are often higher than the federal minimum wage. But as you can see here, there are plenty of states that set the minimum wage either at the federal wage, below the federal wage, or have no minimum wage at all. In the latter two cases, the state rate would default to the federal minimum wage.

This is important. The surge in the minimum wage rate implies that some (I don't know exactly how much) of the 3.2% surge in the unemployment rate since December 2007 is probably structural, where the long-run level of unemployment might be higher, rather than cyclical, or due to the recession.

Rebecca Wilder

SNL - Straight talk about the stock markets

Friday, March 13, 2009

More on the flow of funds: debt and assets

Two more thoughts on the Fed's fourth quarter 2008 flow of funds accounts. Tangible assets are taking a hit, but equities really got slammed.

The chart illustrates the fourth quarter 2008 growth rate (not annualized) for different classes of household assets, tangible (real estate) and financial markets. Corporate equities and mutual fund shares were hit the hardest, -23.2% and -20.8%, respectively.

Possibly more disturbing is the massive hit to pension fund reserves, -12%. This would be particularly bad if (a) markets do not rebound, or (b) big companies go bankrupt, leaving a large pension liability to the U.S. taxpayer (This is a little dated, but Fidelity produced an interesting report on retirement contributions in 2008).

Government is levering up, while the private sector is trying to reduce debt burden.

I don't have a whole lot to say about this one. Wait a minute, of course I do! First, amid financial strain and overleverage in the private sector, the federal government is levering up. Its debt burden increased an annualized 37% in the fourth quarter, which is 30% above the average quarterly growth rate spanning 2001-2007.

The household sector saw the only reduction in debt burden for both consumer loans (auto loans, credit cards, student loans, etc.) -3.2%, and mortgages, -1.2%. This is a 180-degree U-turn from the 2001-2007 average consumer debt growth of +5% and mortgage debt growth of +11.45%.

Debt growth accelerated slightly in the domestic financial sector, up 0.4% to 7.2%, but still 2.5% shy of its 2001-2007 average.

Rebecca Wilder

Record wealth loss in 2008; saving rises

Yesterday the Federal Reserve released the fourth quarter flow of funds report. This is a massive report with stock and flow data across all sectors of the U.S. economy, including households, businesses (financial and nonfinancial), and government. First, let's look at the headline: the household. From Bloomberg:
U.S. household wealth fell by a record $5.1 trillion from October to December, almost twice the decrease in the previous quarter, as home values and stock prices plunged, Federal Reserve figures showed.

Net worth for households and non
-profit groups decreased to $51.5 trillion, the lowest level in four years, from $56.6 trillion in the third quarter, according to the Fed’s quarterly Flow of Funds report yesterday. Wealth dropped $11.2 trillion in 2008 from the year before, the biggest annual decline since the government began keeping quarterly records in 1952.
The chart illustrates annual growth in net worth (quarter over quarter from year ago) since 1952, which clearly illustrates Bloomberg's record - biggest annual decline since 1952, -14.5%. It should probably be noted that Q1 (first quarter), Q2, and Q3 of 2008 also broke that same record, so wealth really posted its biggest annual decline since Q3 2008.

Since its peak in Q2 (second quarter) of 2007, $64.4 trillion, household (and nonprofit organizations) net worth has declined 20%, or $12.9 trillion. This is massive wealth destruction, and probably the biggest catalyst to the recent surge in personal saving.

The scatter plot relates the ratio of net-worth (wealth) to disposable income, measure of the wealth effect, and the level of personal saving since 1980. There has been a fairly strong and negative relationship between wealth and saving, suggesting that the recent destruction in household wealth has caused consumers to increase saving (i.e., reducing consumption). And furthermore, the level of saving will probably rise until equity and house prices stabilize.

The wealth effects on consumption were strong in 2008. Clearly, there are other factors here that affect personal saving; but nevertheless, the destruction of wealth is probably a dominant force dragging down real consumption for two consecutive quarters (Q3 and Q4, see Table 8 on the personal income report).

Rebecca Wilder

Wednesday, March 11, 2009

Libor inching up - this could be a problem

This is not good news: banks are starting to hoard cash. From Bloomberg (hat tip, reader Jay):
The cost of borrowing in dollars is rising as the global recession deepens and central bank efforts to prop up the financial system fail to prevent a growing number of banks from requiring government bailouts.

The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans stayed at 1.33 percent today, near the highest level in since Jan. 8 and up from this year’s low of 1.08 percent on Jan. 14, the British Bankers’ Association said. The Libor-OIS spread, a gauge of bank reluctance to lend, widened to the most since Jan. 9.

Short-term borrowing costs are increasing as banks hoard cash and governments struggle to thaw credit markets after finance companies reported almost $1.2 trillion of writedowns and losses since the start of 2007. Banco Popolare SC yesterday became Italy’s first lender to seek state aid. Lloyds Banking Group Plc, the U.K.’s largest mortgage provider, ceded control to the government March 7. U.S. regulators seized 17 failing banks so far this year.

“The market is beginning to think that the solution is either not politically possible, or we can’t afford it, or maybe there isn’t a solution,” said Bob Baur, chief global economist at Des Moines, Iowa-based Principal Global Investors, which manages $198 billion of assets. Libor’s rise “is just another indication of that concern,” he said.
Brings back memories of September 2008.

Rebecca Wilder

Economic news around the world: not good....still

The global central bank easing continues. The Bank of England is very near its lower bound, 0%. From Bloomberg:
The Bank of England opens a new front in its effort to ward off deflation today as it prepares to buy government bonds with newly created money. The central bank said today it will purchase 2 billion pounds ($2.7 billion) of gilts, its first deployment in a three- month plan that may see it spend 75 billion pounds. The results of the operation will be released after 2:45 p.m. in London.

And Trichet leaves room for further cuts on anemic fourth growth numbers after the ECB announcement to cut its refi rate to 1.5%. From Reuters (Trichet comment):
"We did not decide ex ante that we were at the lowest level. If justified by facts, figures...if some of the risk that I am mentioning are materialising, I don't exclude that the policy rate could be changed and could go down."

The retrenchment in global demand is passing through to Malaysia's exports in January:
Malaysia's January exports plunged 27.8 per cent year-on-year, hitting their lowest level since 2001 amid falling demand from key trading partners, according to official data released Friday.

China also showing a sharp decline in exports, with anemic demand for imports. In February, exports fell at a 26% annual rate and imports at a 24% rate. And according to Bloomberg, the Chinese government plans to take action:
The government has halted the yuan’s gains against the dollar and plans to cut export taxes to zero as demand dries up because of the global slump. Premier Wen Jiabao is relying on a 4 trillion yuan ($585 billion) stimulus package to propel economic expansion after the weakest growth in seven years threw millions out of work.

Economists react to the sharp drop in China's February inflation rate. From WSJ's Real Time Economics:
Inflationary pressures have weakened significantly in China during recent months, despite continued government efforts to boost domestic consumption in an attempt to build a more sustainable growth path for the economy. Steps taken thus far have involved direct subsidies for low-income households. For an average middle-class household, the habit of saving still outshines any temptation to spend. The central bank needs to cut interest rates now so that the incentives to save will diminish. — Sherman Chan, Moody’s Economist.com

And the Bank of Japan is holding on - February money supply is still growing, M2 at a 2.1% rate and M3 at a 1.1% rate. But is this enough to offset the downward price pressures coming from a strong yen, slumping exports, and anemic domestic demand?

Rebecca Wilder

Tuesday, March 10, 2009

Merchant wholesalers and manufacturing data point toward a long haul on inventory draw

Manufacturing and wholesale sales and inventory data tell the following story: inventory build likely subtracted from GDP in January; sales are anemic; firm production is still probably too high for the negative sales growth; and firms will probably be drawing on inventories for quite some time (i.e., no production).

Here is what the Census Bureau reported today about merchant wholesaler sales and inventory activity for January:
January 2009 sales
of merchant wholesalers, except manufacturers’ sales branches and offices,after adjustment for seasonal
variations and trading-day differences but not for price changes, were $326.1 billion, down 2.9 percent (+/-0.9%) from the revised December level and were down 15.4 percent (+/-1.1%) from the January 2008 level. The December preliminary estimate was revised downward $0.3 billion or 0.1 percent.

Total inventories
of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $424.2 billion at the end of January, down 0.7 percent (+/-0.4%) from the revised December level, but were up 1.0 percent (+/-0.9%) from a yea
r ago.
The news is not good (of course). The chart (above) lists the inventory and sales activity in wholesale and manufacturing markets since January 2007. As you can see, sales are declining at a faster rate, -2.9%, than are inventories, -0.7%; this suggests that production is probably still too high for the weak demand for wholesale goods. Hence, the inventory to sales ratio continues its unfettered surge.

The final piece of the January inventory puzzle comes out on Thursday, when the report on total business (retail + manufacturing + wholesale) sales and inventories is released.

But the outlook for GDP is grim. Even if the decline in sales slows substantially, firms will be drawing on inventories over the near term; that's the rational course of action. Therefore, expect for inventories to subtract from Q1 2009 GDP, rather than add to it (like in Q4 2008).

Rebecca Wilder

Credit remains tight; corporate spreads are elevated

Credit markets remain tight and corporate spreads are still at all-time highs.The chart illustrates monthly corporate spreads (measured by the Federal Reserve's Moody's seasoned Aaa and Baa yields) over the 10-yr Treasury since 1953 in basis points (bps), where basis point = yield/100. The Aaa and Baa spreads remain elevated and at record levels, or credit markets are still on red alert. Spreads generally rise during recessions with growing default risk, but current spreads are above what could be called a "recession average".

This is monthly data, and spreads started to tighten in February (see chart above). But now, corporate spreads are rising again

It is troubling for the macroeconomy that corporate spreads remain relatively unchanged from October 2008. The trend here is clear: corporate debt issuance is expensive, as the spreads to Treasuries remain wide. Until these levels fall back to the longer term average - the 2003-2007 average for Aaa is 113 bps and for Baa is 204 bps - firms will continue to scale back on debt-financed needs, i.e., investment.

According to the WSJ, markets await definitive government action:
After what seemed like the beginning of a thawing of debt markets early in the year, sentiment has deteriorated, analysts say. The markets remain open only to the strongest companies. A rally in U.S. Treasury bonds last week reflects another bout of flight-to-quality buying. Junk bonds now yield 19 percentage points more than safe Treasury bonds, up from a 16-point spread in February, according to Merrill Lynch. The spread is still narrower than the 21-percentage-point premium reached last December, but any widening shows investors are becoming more fearful.

Part of the problem is that investors are still waiting for key details from the government about its plans to bolster U.S. banks and unfreeze the credit markets. After launching a $1 trillion program to kick-start consumer lending last week, the Obama administration is considering creating multiple investment funds to purchase bad loans and other distressed assets. The intent of the funds is to stabilize the prices of good assets and restore investor confidence.

Without more clarity from the government on its bailout plans, the market could continue to drop, say analysts. That would further harm the economy and the institutions the government hopes to help, compounding its task of shoring up the financial system.
The economy remains in free fall. The labor market is contracting precipitously, consumer confidence is plummeting, home and equity values continue to crumble, and on top of that, the banks are insolvent. There's a long way to go on this one, and spreads will remain wide until signs of economic stabilization are evident.

Rebecca Wilder