by Calculated Risk on 5/13/2005 01:51:00 PM

As a follow up to my earlier posts this week on the UK housing market (here on Angry Bear and here), the Bank of America has issued a report warning of potentially serious consequences from the housing bust in Britain. I've argued that Britian might be a little ahead of America in this cycle, and that America might see similar problems in the near future.

A few excerpts from the Telegraph article:

"Bank of America warned yesterday that Britain could face a "nightmare scenario" as collapsing house prices combined with the pain of tighter fiscal policy."

"...the debt financed spending spree of consumers is petering out while the almost unprecedented surge in government spending looks increasingly unsustainable"

"Skyrocketing house prices" had enabled consumers to draw down "staggering" levels of mortgage equity for spending. But the "multiplying" effect of the boom was running out under the delayed impact of earlier rate rises.

"We cannot rule out a nightmare scenario in which a decline in consumption caused by a sudden correction in house prices would lead to an explosive rise in the fiscal deficit that would have to be addressed by a tighter fiscal policy,"

Stephen Robinett once wrote: "Speculative bubbles go on longer and end quicker than most people expect." When the bubble ends, it will probably happen very quickly. Most likely prices will first stablize and then deflate slowly, but transaction volumes will drop precipitously.

by Calculated Risk on 5/13/2005 02:43:00 AM

Former Treasury Secretary Robert Rubin writes in the NYTimes about the fiscal challenges facing America:

"Most pressing is the 10-year federal deficit, which most independent analysts project at $4.5 trillion to $5 trillion ... "

The General Fund deficit is clearly the largest and most immediate fiscal problem facing America. Any good business manager or political leader would insist that the most pressing problem be fixed first. Rubin proposes:

"...if the tax cuts for those earning above $200,000 were repealed and the inheritance tax as reformed were continued rather than eliminated, the 10-year projected deficit would be reduced by roughly $1.1 trillion, or almost 25 percent, and the 75-year fiscal reduction would be roughly $3.9 trillion, or approximately equal to the Social Security shortfall. This course of action would be similar to the income tax increases that were combined with spending cuts in the 1993 deficit reduction program, which some predicted would lead to recession but which, instead, was followed by the longest economic expansion in our nation's history."

Unfortunately tax increases appear ideologically unacceptable to this administration. Instead they are relying on what Warren Buffett refers to as "wishful thinking and its usual companion, thumb sucking". Rubin concludes:

Of course, we can continue to close our eyes and hope for the best. There's no way to predict whether that will work for another few months or for many more years. But the odds are extremely low that our fiscal imbalances will solve themselves, and we place ourselves at great peril by not facing these realities. Conversely, if we do address these challenges, then with our flexible labor and capital markets, and our historic embrace of change and willingness to take risks, our prospects over time should be very favorable.

I agree with Rubin. I believe if we acknowledge our problems and address them in a rational manner, we can fix them. But all I see from the Bush Administration is denial and wishful thinking. With the Bush Administration's course of non-action, it is difficult to remain optimistic.

by Calculated Risk on 5/13/2005 12:57:00 AM

Dr. Mark Thoma has convinced his colleague, Dr. Tim Duy to write a regular piece on the Fed at Economist's View. Before going to the University of Oregon, Tim was an International Economist at Treasury and a Fed Watcher for The G7 Group, a private consulting firm.

Dr. Duy's first piece is up "The Art and Practice of Fed Watching" and offers some great advice, like:

The secret to remember is that Fed Watching is not about your interpretation of the economy or what you would do if you were a Board member. That approach will lead you down a bad road. The secret is to interpret the data as the Fed sees it, and remain agnostic about whether the policy is wrong or right.

And about the housing bubble:

... there may in an asset bubble in the housing market, but don’t expect the Fed to react to that, at least not before it bursts.

A very valuable addition to the econ blogosphere.

by Calculated Risk on 5/12/2005 12:43:00 PM

From CNN, the National Association of Realtors reports:

U.S. residential real estate markets lost no steam in the first quarter of 2005, according to statistics released Thursday by the National Association of Realtors.

The NAR's quarterly report covers 136 metro areas. A record 66 of these have experienced double-digit jumps in home prices over the past year.

The previous record was 62 in the last quarter of 2004. Only six areas showed a fall in prices and those declines were fairly modest.

In a separate news release, NAR report that "First Quarter State Existing-Home Sales in Record Territory".

Total existing-home sales, which include single-family and condos, were at the third-highest pace on record in the first quarter. In addition, 44 states and the District of Columbia showed higher sales in comparison with a year earlier, according to the National Association of Realtors.

NAR’s latest report on total existing-home sales shows that nationwide the seasonally adjusted annual rate was 6.84 million units in the first quarter, up 8.3 percent from a 6.32 million-unit level in the first quarter of 2004. The record was a pace of 6.90 million units in the second quarter of 2004, followed by 6.88 million in the fourth quarter of last year.

CNN also provides a list of the price changes by metro area. The usual suspects are at the top of the list (mostly Florida), but many surprising cities reported double digit price gains:

Charleston WV	13.0%	$112,500
Champaign/Urbana/Rantoul IL	12.9%	$120,700
Biloxi/Gulfport MS	12.8%	$121,100
Wichita KS	11.7%	$105,100
Portland ME	11.5%	$243,100
Nashville TN	11.3%	$152,100
Albuquerque NM	11.1%	$149,700
Aurora/Elgin IL	11.0%	$229,300
New Orleans LA	10.9%	$141,200
Birmingham AL	10.9%	$152,100
South Bend/Mishawaka IN	10.7%	$91,100
Amarillo TX	10.7%	$102,600
Springfield IL	10.4%	$92,700
Green Bay WI	10.3%	$152,800

The boom is close to Nationwide.

by Calculated Risk on 5/12/2005 09:51:00 AM

The Census Bureaus released the retail sales report for April.

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $344.9 billion, an increase of 1.4 percent (±0.7%) from the previous month and up 8.6 percent (±0.8%) from April 2004. Total sales for the February through April 2005 period were up 7.5 percent (±0.5%) from the same period a year ago. The February to March 2005 percent change was revised from +0.3 percent (±0.7%)* to +0.4 percent (±0.3%).

Retail trade sales were up 1.4 percent (±0.7%) from March and were 8.7 percent (±1.0%) above last year. Gasoline station sales were up 19.8 percent (±3.1%) from April 2004 and sales of nonstore retailers were up 12.4 percent (±3.5%) from last year.

Meanwhile, WalMart warned:

Wal-Mart Stores Inc. reported a 14 percent increase in first-quarter earnings Thursday, but the results missed Wall Street estimates. The world's largest retailer also warned that second-quarter results would likely be lower than expected as unseasonably cool weather and higher gasoline prices continue to hurt business.

What is wrong with this picture?

by Calculated Risk on 5/12/2005 02:24:00 AM

The Financial Times is reporting that "France's manufacturing industry may be in recession after unexpectedly weak industrial production figures on Wednesday"

Manufacturing output tumbled by 0.3 per cent in the first three months of 2005, and by 0.9 per cent in March compared with February, according to Insee, the French statistics office. France has been one of the eurozone's best performing economies but the latest data point to a marked deterioration.

Confidence indicators suggest French manufacturing has also remained weak in the current quarter. A second successive quarterly fall would mark a technical recession in manufacturing although the strength of the rest of the economy means France is still some way from overall recession.

Meanwhile, the International Herald Tribune is reporting "Japan's index of leading economic indicators was below 50 percent in March for a second month, suggesting that the country's economic growth may stall, the Cabinet Office said Wednesday."

"The slump of the Japanese economy will continue, though the risk that it will fall back into recession is fading," said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo. "We can't expect corporate profits to expand this year as they did last year."

Industrial production fell 0.3 percent in March from February, the government said on April 28. Spending by households headed by a salaried worker slid 1.1 percent in the same month, the second month of decline, the government said on the same day.

The Japanese economy probably expanded at an annual 2.5 percent pace in the first quarter, according to a Bloomberg News survey.

The global imbalance story continues ...

by Calculated Risk on 5/11/2005 09:57:00 PM

Danielle DiMartino continues her series on housing with "More than real estate in danger".

How widespread will the fallout be when housing's no longer driving the train?

Mark Zandi, chief economist at Economy.com, was one of the first to identify the broad economic implications of a potentially overheated housing market.

Mr. Zandi breaks the sector's impact into three areas:

•Direct effects – home building, home improvement and professions directly tied to home sales.

•Indirect effects – the cash the American home is generating via cash-out refinancings, home-equity borrowing and capital gained from home sales.

•Spillover effect – the impact housing is having on non-household balance sheets.

I tried to quantify these same impacts in "After the Housing Boom: Impact on the Economy" on Angry Bear.

"More and more alarm bells are going off every day," Mr. Zandi said, "and speculation is infecting a growing number of communities across the country."

I hope Zandi is wrong, but I'm afraid he is right.

by Calculated Risk on 5/11/2005 08:30:00 AM

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis released the monthly trade balance report today for March:

"... total March exports of $102.2 billion and imports of $157.2 billion resulted in a goods and services deficit of $55.0 billion, $5.6 billion less than the $60.6 billion in February, revised.

March exports were $1.5 billion more than February exports of $100.7 billion.

March imports were $4.1 billion less than February imports of $161.2 billion."

Note: all numbers are seasonally adjusted.

UPDATE: See also:
Kash, Angry Bear: US Imports: What and from Where?
Brad Setser: Good News. Trade deficit falls to $55 billion
Macroblog: The U.S. Current Account Deficit: How Big Is Sustainable?
UPDATE2: More from Kash: The US's Comparative Advantage
And pgl responds to the paper by Kouparitsas(recommended by macroblog): Pleasant Current Account Arithmetic (or was it fuzzy math)


Click on graph for larger image.

This graph shows the monthly trade balances for 2003, 2004 and 2005 and depicts the worsening year over year trade imbalance. The March trade deficit improved from February as exports increased $1.5 Billion and imports decreased $4.1 Billion.



The recent increase in oil prices had an impact on the March trade deficit. The average contract price for oil jumped from $36.85 in February to $41.14 in March. This is below the DOE estimate for the contract price and below the record for the import contract price of $41.79 in October.



This graph shows total petroleum imports per month for 2003, 2004 and the first three months of 2005. Petroleum imports were about 30% of the trade deficit or about 1.5% of GDP. Even without petroleum imports, the trade deficit would be close to 4% of GDP - a serious problem.


This is an unexpected improvement in the trade deficit and reminds us that this number is difficult to predict.

by Calculated Risk on 5/11/2005 01:29:00 AM

Danielle DiMartino has been writing a series on the Real Estate bubble. In "A delicate question of policy" she writes:

If it really is dangerous to have all your eggs in one basket, we might be fried.

The Bank Credit Analyst research firm published three statistics on the housing industry this week that show how heavily the economy is leaning on the housing market.

•Real estate lending represents a record 53 percent of bank loans.

•Housing accounts for a record 29 percent of household assets.

•Residential real estate has captured 35 percent of private investment – the highest in 35 years.

"Housing has assumed a worryingly large role in the U.S. economy and financial system," the report concluded, "and it will be traumatic when the bubble bursts."

Doug Kass, the astute hedge fund manager of Seabreeze Partners, echoed the report: "There's no doubt we're in a real estate concentric economy."
...

"There is tremendous interest rate risk right now because of the abusive use of interest-only and adjustable-rate mortgages in the last few years," Mr. Kass said. "If we have to reset those mortgages at higher rates, it presents a huge risk to households' balance sheets."

His conclusion: "It's an accident waiting to happen."

DiMartino asks: "Just how widespread will the fallout be? More on that tomorrow."

I'll be waiting.

by Calculated Risk on 5/10/2005 04:36:00 PM

According to the National Association of Home Builders: "Housing To Stay Healthy As It Recedes From Its Peak".

"... economists appearing at a forecasting conference held by the National Association of Home Builders (NAHB) last week said housing should remain healthy through next year even as it recedes from peak levels. Driven by ongoing population growth and household formations, an expanding market for second homes and the need to replace aging units, demand for housing should hold up well in the foreseeable future, said panelists."

There was some concern expressed about "speculative investment activity" in some of the hotter housing markets: California, Las Vegas, South Florida, Washington, D.C. and the New York-Boston corridor, but the panelists expect to see a slowdown in the rate of price appreciation rather than a decline in prices.

J.P. Morgan’s Glassman discounted fears of reduced house-price appreciation taking a toll on the economy. With the exception of a few boom markets, he said, higher prices largely reflect the real estate market catching up with the lagging prices of the 1990s. “Worry if you want to,” he told audience members. “But I think I would take most of the worries with a grain of salt and just get back to business.”

Whew! I guess I've been wrong: "After the Housing Boom: Impact on the Economy". That is a relief.