by Calculated Risk on 5/03/2005 05:18:00 PM

More bad news from Europe ... Times: "Economy shaken by worst fall in high street sales for 13 years".

A DOUBLE dose of bleak economic news fuelled fears for Britain’s prospects yesterday, casting a shadow over Labour’s final burst of pre-election campaigning.

High street sales suffered their steepest monthly drop for 13 years while manufacturing activity succumbed to its first decline in two years, according to two surveys. The much worse than expected figures dealt a twin blow to the Government’s hopes of trumpeting a strong economic outlook in the last phase of the election battle.

But there is some good news. Portugal's economy has rebounded from the 2004 recession and posted 1.1% annualized growth for Q1 2005.

by Calculated Risk on 5/03/2005 03:47:00 PM

For the first time since 2001, the spread between the Five Year Note and the Fed Funds Rate is less than 100 bps.

Click on graph for larger image.

This might indicate a slowing economy with a whiff of inflation.

Kash's "The Fed's Statement" provides a comparison between this statement and the previous statement from March.

by Calculated Risk on 5/02/2005 10:19:00 PM

The FDIC today released an update to their February report that shows the boom is even more widespread.

"... the number of boom markets according to our definitions increased by 72 percent last year, and now includes some 55 metropolitan areas."

They also express concern about excessive leverage and speculation:

"... there have been a number of changes in mortgage markets that could have an influence on home prices, including the emergence of high loan-to-value lending and subprime lending ...

In addition to increased leverage and subprime lending activity, use of adjustable-rate mortgages, or ARMs, remains high. According to the Mortgage Bankers Association, ARMs accounted for almost 46 percent of the value of new mortgages in 2004 and 32 percent of all applications. Both figures were up sharply from their 2003 levels of 29 percent and 19 percent, respectively. It is noteworthy that this development occurred despite the fact that the average annual fixed rate for a 30-year mortgage remained virtually unchanged from 2003.

Furthermore, data from the Federal Housing Finance Board indicate that the ARM share is high and rising in several of our boom markets. Taken together, these trends suggest that highly-leveraged borrowers are increasingly taking on interest-rate risk as they stretch to afford high-cost housing. ...

Another evolving trend that has not been tested in a housing market downturn is the increasing market penetration of innovative mortgage products, such as interest-only (I/O) and option ARMs. These mortgages are specifically designed to minimize initial mortgage payments by eliminating principal repayment; but these also can increase leverage and expose owners to large jumps in monthly payments as interest rates rise. According to Inside MBS and ABS, interest-only mortgages accounted for 23 percent of the value of non-agency mortgage securitizations in 2004. ...

Finally, although this factor is not directly related to credit conditions, heightened investor purchases of homes could also be signaling a higher degree of speculative activity in housing markets during 2004. Data from Loan Performance indicate that 9 percent of U.S. mortgages in 2004 were taken out by investors, up from just under 6 percent in 2000. Furthermore, this share is significantly higher in local markets that are experiencing the strongest home price appreciation. In some of these markets, it is estimated that the investor share of new mortgage originations is as high as 19 percent. Academic studies show that residential property investors are less loss-averse than owner-occupants and thus more likely to sell precipitously in a declining market, thereby aggravating any existing downtrend in home prices."

by Calculated Risk on 5/02/2005 03:18:00 PM

Financial Times Reports: Eurozone manufacturing data point to slowing growth.

Manufacturing in the eurozone contracted in April for the first time in 20 months, highlighting the scale of the economic slowdown across the region and adding to fears that some member states might even be facing recession, according to a survey on Monday.

And its not just Germany. "France and Italy experienced a particularly sharp deterioration."

Nevertheless, the sharp fall in the French manufacturing outlook was particularly worrying, economists said, because France's economy had been among the best-performing in the eurozone, buoyed by a strong housing market and government incentives for consumer spending. “France was supporting the eurozone. Now it is significantly less supportive,” he said.

UPDATE: See "David K. Smith Is Bearish On Britain" at Macroblog.

"An unseasonable chill has descended on the economy. Britain’s once-rampant consumers are minding the pennies, proof to me at least that there is a link between the housing market and people’s willingness to spend. The flatter the former, the more subdued the latter."

More at Macroblog ...

by Calculated Risk on 5/02/2005 02:45:00 AM

I'm getting a little ahead of the news this week with my post recent on Angry Bear: March Trade Balance Preview. But this story in today's NY Times kept me focused on trade: China Trade Surplus With West Still Rising.

China's global exports soared in the first quarter of this year, allowing the country to rack up huge trade surpluses with the United States and western Europe, according to detailed trade data released late last week by Chinese customs officials.

And more on China's trade with Germany:

Even Germany, which has long run trade surpluses with China because it sells heavy manufacturing equipment to Chinese factories, is now in the red: its $2 billion trade surplus in the first three months of last year evaporated, turning into a $159 million trade deficit in the first months of this year.

For those of us worried by the impact of global imbalances, this trend is disconcerting.

by Calculated Risk on 5/01/2005 05:52:00 PM

Here are a few quotes from Warren Buffett and Charles Munger from the Berkshire Hathaway annual meeting:

Buffett: "A lot of the psychological well-being of the American public comes from how well they've done with their houses over the years. If indeed there's been a bubble, and it's pricked at some point, the net effect on Berkshire might well be positive [because the company's financial strength would allow it to buy real-estate-related businesses at bargain prices]....

"Certainly at the high end of the real estate market in some areas, you've seen extraordinary movement.... People go crazy in economics periodically, in all kinds of ways. Residential housing has different behavioral characteristics, simply because people live there. But when you get prices increasing faster than than the underlying costs, sometimes there can be pretty serious consequences."

Munger: "You have a real asset-price bubble in places like parts of California and the suburbs of Washington, DC. "

And on the Trade Deficit:

Buffet: "It seems to me that a $618 billion trade deficit, rich as we are, strong as this country is, well, something will have to happen that will change that. Most economists will still say some kind of soft landing is possible. I don't know what a soft landing is exactly, in how the numbers come down softly from levels like these...."

Munger: "The present era has no comparable referent in the past history of capitalism. We have a higher percentage of the intelligentsia engaged in buying and selling pieces of paper and promoting trading activity than in any past era. A lot of what I see now reminds me of Sodom and Gomorrah. You get activity feeding on itself, envy and imitation. It has happened in the past that there came bad consequences."

Buffett: "I have no idea on timing. It's far easier to tell what will happen than when it will happen. I would say that what is going on in terms of trade policy is going to have very important consequences. "

Munger: "A great civilization will bear a lot of abuse, but there are dangers in the current situation that threaten anyone who swings for the fences."

Buffett to Munger: "What do you think the end will be?"

Munger: "Bad."

Read the article for more quotes on other subjects.

by Calculated Risk on 4/29/2005 06:35:00 PM

Reviewing the first quarter 2005 (advance) GDP report, the first unusual item was inventories. Kash covered inventories in "Changes in Inventories".

Trade

UPDATE: All numbers are seasonally adjusted from the advance GDP report and the Trade report. So these numbers are correct. However, my calculation of $4.5 Billion in additional oil imports is not seasonally adjusted (I noted this in my previous post) so this might be a little less after adjustment.

But another area for concern is the balance of trade. The following table includes the reported trade balance, export and imports, for January and February and the projected numbers for March according to the GDP report.

Monthly Trade Balance (Billions)

	Trade	Exports	Imports
	Balance
January	-$58.5	$100.4	$158.9
February	-$61.0	$100.5	$161.5
March (est. from GDP)	-$59.9	$110.3	$170.1
Q1 TOTAL	-$179.4	$311.2	$490.6

Numbers rounded, might not add.

We already know the dollar value of oil imports surged in March, probably adding another $4.5 Billion to imports. Therefore imports of $170 Billion is very possible. But why does the BEA expect exports to surge? The global slowdown is impacting other countries more than the US, so we might expect exports to be flat.

I expect the March trade deficit (due May 11) to be worse than the BEA estimate and to negatively impact GDP (preliminary) due on May 26th. Other factors may lead to a positive GDP revision.

by Calculated Risk on 4/28/2005 01:29:00 AM

In a four post series (1, 2, 3, 4) , Dr. Altig defends the Federal Reserve against Stephen Roach's most recent Fed bashing piece: "Original Sin".

Stripping aside Roach's hyperbole, I believe Roach makes three arguments:
1) that recent growth in the US economy has resulted from borrowing against inflated assets leading to "imbalances and distortions";
2) the FED should consider asset prices when setting interest rates and
3) that FED officials have made some irresponsible comments in recent years.

On the first point, I mostly agree with Roach. In my mind there is no question that the US has been buying growth with debt, both public (general fund deficit) and private (mortgage equity withdrawal).

On the second point, I believe the FED should not consider asset prices when setting interest rates, so I disagree with Roach. Much of Roach's scathing commentary is based on his belief that the FED should target asset prices.

And on the third point, I generally agree with macroblog that FED officials have, with the exception of Mr. Greenspan, been responsible in their comments, especially in recent months. I believe Chairman Greenspan has made several irresponsible and inaccurate comments when speaking for himself.

Perhaps the FED could have spoken out sooner on certain issues, like the general fund deficit and the housing bubble. As Dr. Thoma wrote in the macroblog comments concerning the 'behavior of congress over the deficit/trust fund':

"... watching out for the public interest is an important role of the Fed, but that's not something the Fed had direct control over and other than publicly denouncing such policy, they have little choice but to do their best in spite of poor policy elsewhere in government."

In my view Roach's anger is misdirected. Although I agree with Roach's general economic assessment, I believe the problems are primarily due to poor fiscal and public policy.

by Calculated Risk on 4/27/2005 12:45:00 AM

UPDATE: The Economist (on Germany): If not now, when?

Germany:

NYTimes: Fears Mount That Germany Faces Recession

Financial Times: German business data add to eurozone gloom

Japan:

Bloomberg: Japan's Household Spending Falls; Economy Sheds Jobs

Financial Times: Japanese economy stuck in deflation

And the really dark side ...

$100 (US) oil, major recession seen as likely
Conference told of imminent price shocks as world demand rises while reserves fall

by Calculated Risk on 4/26/2005 08:21:00 PM

Here is a graph of actual monthly New Home Sales for the last 3 years.


Click on graph for larger image.

March is usually one of the strongest months of the year, and for March 2005, sales were a monthly record of 144 thousand units.

Interestingly the median sales price dropped significantly in March. The reason probably is due to the surge in sales in the South. Over half the sales in March (73 thousand) occured in the South (the Census bureau segments the data into four regions). The previous record for the South was 59 thousand last March.

So sales in the South increased 23% from last March, but only 10% over the other three regions.