by Calculated Risk on 1/03/2006 07:25:00 PM

After three months, Fiscal 2006 continues to set new records for the YTD increase in National Debt. For the first three months of fiscal year 2006, the National Debt increased $237.7 Billion to $8.17 Trillion as of Dec 30, 2005.


Click on graph for larger image.

The previous record for the first three months was in fiscal 2004 with an increase in the National Debt of $218.1 Billion.

Each month I will plot the YTD increase in the National Debt and compare it to the proceeding years. I expect fiscal 2006 to set a new record for the annual increase in the National Debt.

by Calculated Risk on 1/03/2006 01:53:00 PM

There are two distinct views of the US fiscal situation.

VIEW 1:

National Debt = $8.1 Trillion or about 63% of GDP.

General Fund Deficit = ~$600 Billion per year (about 4.7% of GDP)

Social Security Insurance (SSI) has a small, but manageable shortfall.

VIEW 2:

Publicly held portion of the National Debt is $4.7 Trillion or 37% of GDP. The rest of the National Debt the US owes to itself.

Unified Budget Deficit = ~ $350 Billion per year - a problem, but manageable.

Social Security Insurance is a massive problem.

Dr. Thoma posted Mankiw's Guidelines for Policy Makers. Mankiw's first resolution for policy makers:

Mankiw's #1: "This year I will be straight about the budget mess. I know that the federal budget is on an unsustainable path. I know that when the baby-boom generation retires and becomes eligible for Social Security and Medicare, all hell is going to break loose. I know that the choices aren't pretty -- either large cuts in promised benefits or taxes vastly higher than anything ever experienced in U.S. history. I am going to admit these facts to the American people, and I am going to say which choice I favor."

Obviously Mankiw holds View #2 above. One of the unstated, but obvious components of View #2, is that the excess SSI taxes collected over the last 20+ years has really just been another General Fund tax. In the eyes of Mankiw, these extra payroll taxes have been a surreptitious method of instituting a flatter tax system.

Ostensibly the excess payroll tax is not a General Fund tax; it is a prepayment on future benefits. Legally, the General Fund receives most of its revenue from high income individuals, whereas the revenue burden for the SSI Trust Fund falls mostly on low and middle income wage earners.

Those holding View #1 see reversing the Bush tax shifts as the primary method for restoring fiscal balance. By bringing the General Fund back into balance, SSI is only a minor problem.

Those holding View #2 see cutting future benefits, primarily for low and middle income earners, as the solution for restoring fiscal balance.

So its a question of who pays: high income earners or low and middle income earners.

Although this is mostly a normative question, View #1 has the advantage of being straightforward. In fact, any politician who really explained View #2 to their constituents would likely be removed from office, tarred and feathered, or far worse.

by Calculated Risk on 1/02/2006 03:53:00 PM

My friend, Ramsey, has started calling Feb 1, 2006 G.R.E.B.B. DAY (Greenspan real estate bubble bursting day). Very funny.

Although I think the slowdown will be gradual, Ramsey provided the following data today on the San Diego housing market:

San Diego real estate update:

December 05 closings 2,107
That is 36.2% less than YTY Dec 04 of 3,300
That is 12.7% less than sequential Nov 05 of 2,414

2005 total closings 39,950
2004 total closings 42,809

December 05 avg sold price $633,223
That is 9.2% higher than YTY Dec 04 of $579,749
That is 1.3% higher than sequential Nov 05 of $625,172

December 05 closings averaged 63 days on market.
That is 16.6% longer than YTY Dec 04 of 54 days.
That is 6.8% longer than sequential Nov 05 of 59 days.
Avg days on market for all 2005 closings was 52 days.
Avg days on market for all 2004 closings was 33 days.

32.9% of Dec 05 sales were condos.
35.1% of all 2005 sales were condos.

December 05 pending sales 1,775
Jan 06 closings, based on Dec 05 pendings, are going to fall off the cliff unless sales miraculously pick up right now.

For sale inventory peaked at just over 15,000 early December 05 and dropped back to 13,876 on Dec 31, 05 due to the holidays. We should see a number of listings coming back on the market soon. How fast this inventory gets absorbed is going to tell us the health of the market.

I've felt the housing slowdown would start with rising inventories, followed by falling transaction volumes, and then falling prices. Inventories for both new and existing homes have been rising for months. Now the second phase may be starting: from Ramsey's comparison of Dec 2005 to Dec 2004 for San Diego, transaction volumes dropped significantly (36%).

It is no surprise that inventories fell in December. That happens every year as sellers take their houses off the market during the holidays. When the December existing homes numbers are released, I expect inventories to fall 10% to 20% from 2,903,000 in November (in 2004, inventories dropped 13% from November to December). That doesn't mean the market is recovering - it is just part of the seasonal pattern.

by Calculated Risk on 1/01/2006 09:18:00 PM

Happy New Year to All! It does appear we are living in interesting times. The biggest story of the New Year is the Constitutional Crisis concerning the warrantless surveillance of US citizens. And on the economic front, housing is still the hot topic.

The San Diego Union has a series of articles on housing:

Understand risks of 'creative' loans

Creative loans push overextended owners into dangerous waters

When she bought her two-bedroom condominium in Mira Mesa in mid-2004, Elizabeth Eure didn't envision herself one day sleeping on an egg-crate mattress in an empty unit.

The furniture was gone in December because Eure was preparing to move, awaiting the close of escrow. After living there less than a year and a half, she had sold her home to cut her losses. Her monthly mortgage payment of $2,500 was too much for her to handle.

"It was a mistake," Eure, 29, said of the purchase. "If I could do it all over again, I would have rented an apartment."

Richard Mehren, a real estate agent who specializes in condominiums, said Eure's predicament is a common one. Many recent buyers are beginning to realize they have taken on too much debt.

Pressure grows as market cools

And from the Southwest Florida Herald Tribune: Clock is running down on 'cheap' mortgages

Lenders who started making those teaser-rate loans a few years ago are getting ready to charge real-world payments on them.

Starting in 2006 and accelerating into 2007, as much as $2.5 trillion worth of the fancy mortgages called "hybrids" are coming to the end of the free-lunch part of the deal.

And while prices in Southwest Florida are hovering at twice those of three years ago, the house party seems to have ended in July. Since then, as mortgage rates continue their upward creep, inventories are stacking up, while the rate of closings is slowing down.

by Calculated Risk on 12/30/2005 02:51:00 PM

One of my predictions for top economic stories for 2006 concerned problems with pension plans. From the LA Times today: How Bedrock Promises Of Security Have Fractured Across America

...That's when Delphi Chief Executive Robert S. "Steve" Miller, citing global competition and crippling "legacy costs," ushered the $28.6 billion-a-year company into one of the largest industrial bankruptcies in U.S. history. In short order, Miller called for slashing workers' compensation by almost two-thirds, threatened to void the company's union contracts, and hinted broadly that he would follow the playbook he had used elsewhere of pushing responsibility for paying the firm's pensions to the federal government and dumping its retiree health benefits altogether.

Although Delphi has since backed off a bit — it says it's willing to negotiate with its unions and its former parent and largest customer, General Motors Corp. — the parts firm has left little doubt that its ultimate aim remains steep reductions in wages, benefits and retiree costs.

Delphi is at the cutting edge of a crisis that's engulfing the U.S. auto industry, much as it did steel and airlines. Its actions are adding to a gathering trend, a shift of economic risks once largely borne by business and government to the backs of working families.

Before the trouble is over, some believe, a corporate icon such as Ford Motor Co. or GM could be swept from the American landscape. So too could much of what remains of the already frayed relationship between millions of working people and their employers.

"When the history of this period is written, Delphi will be viewed as the tipping point where the auto industry either got its act together or failed," said David E. Cole, the son of a former GM president and head of the Center for Automotive Research, based in Ann Arbor, Mich. "The spillover to the rest of the economy is going to be tremendous."

An excellent article. I was once the trustee of a retirement plan and I will write about my experiences in the new year.

by Calculated Risk on 12/29/2005 06:47:00 PM

Reuters reports: Snow urges Congress to raise debt limit U.S. Treasury Secretary

John Snow warned lawmakers on Thursday that a legally set limit on the government's ability to borrow will be hit in mid-February and urged Congress to raise it quickly.
...
"The administration now projects that the statutory debt limit, currently $8.184 trillion, will be reached in mid-February 2006," Snow said in a letter to 21 members of the U.S. House of Representatives and Senate released by Treasury after financial markets had closed.
...
The debt limit was last raised in November 2004 by $800 billion to its current level. The letter to Congress does not specify an amount the Treasury wants the ceiling set at this time.
...
Treasury officials had said in November it was bracing for hefty borrowing needs in the January-March quarter, likely around a record $171 billion, and that it likely would hit the debt limit in that period.

by Calculated Risk on 12/29/2005 11:23:00 AM

The National Association of Realtors (NAR) reports: Existing-Home Sales Trend Lower in November

Total existing-home sales – including single-family, townhomes, condominiums and co-ops – eased 1.7 percent to a seasonally adjusted annual rate of 6.97 million units in November from a pace of 7.09 million in October. Sales were 0.1 percent below the 6.98 million-unit level in November 2004.

Inventories increased to a 5 month supply:

Total housing inventory levels rose 1.2 percent at the end of November to 2.90 million existing homes available for sale, which represents a 5.0-month supply at the current sales pace.

This represents a 14% increase from November 2004, when the inventory of existing homes was 2.54 million.

Just a note for next month: Inventories usually fall in December as sellers take their houses off the market for the holidays.

by Calculated Risk on 12/28/2005 07:10:00 PM

First, here are a few stories that I don't think will be big in 2006:

1) Energy Prices: I expect oil prices to stabilize or decline next year. WTI spot prices closed at $59.96 today. This prediction could be wildly wrong, especially if production falls at Ghawar or the US bombs Iran. This prediction is based on the increased level of investment, the current levels of crude oil stocks and a slowing World economy in 2006.

2) Bush Economic proposals: I think the Bush Administration will be shackled by scandals and Iraq, so I don't expect any major new proposals. I hope I'm wrong about Iraq.

3) Trade Deficit / Current Account Deficit: I could be wildly wrong here too, but I think the trade deficit will stabilize or even decline slightly next year. As the economy slows, I think imports will slow.

4) The Budget Deficit: Although I expect the General Fund deficit to grow to around $600 Billion in 2006, I don't think it will become a huge story until '07 or '08.

So, without trying to predict natural disasters, a pandemic or human stupidity (terrorism, bombing Iran, etc.), I think these are five possible candidates for the top economic stories of 2006:

5) The End of the Greenspan Era

OK. I'll start with a gimme. I think Dr. Bernanke will face a significant challenge in '06, perhaps by one the following top stories - perhaps by something completely unexpected. Stephen Roach recently wrote:

"Alan Greenspan faced a stock-market crash two months after he took over in August 1987. Paul Volcker had to cope with a rout in the bond market three months after he became chairman in August 1979. G. William Miller was challenged immediately by a dollar crisis in the spring of 1978. For Arthur Burns, it was the inflation bogie in the early 1970s."

When the challenge comes, expect investors to pine for their lost love: Alan Greenspan.

4) Housing Slowdown

In my opinion, the Housing Bubble was the top economic story of 2005, but I expect the slowdown to be a form of Chinese water torture. Sales for both existing and new homes will probably fall next year from the records set in 2005. And median prices will probably increase slightly, with declines in the more "heated markets".

3) Pension Blowup / Major Bankruptcy

Of course I am thinking GM, but maybe it will be another major corporation. Bankruptcy has become a tool to break labor agreements and terminate pension plans. This allows companies to "privatize profits and socialize risk" - and companies will increasingly use this tool.

Even "freezing" the pension plan has enormous consequences for many employees, since a large portion of the retirement benefit is accrued in the last few years before retirement. See the USAToday article: Pension problems loom for boomers.

2) Slowing Economy

If the US and the World economies slide into recession, this will be the top story next year. I still think it is too early to call, but I do think economic growth will slow substantially next year.

This slowdown will be partially housing related; as housing slows, real estate related employment will decline and jobs could become an issue in '06. Also, as mortgage equity withdrawal declines, consumer spending will slow.

And my prediction for the Top Story of '06:

1) Interest Rates

Like most investors, I expect the Fed to raise the Fed Funds rate 25 bps at each of the next two meetings to 4.75% in March. See Dr. Altig's graphs: An Inversion Arrives

And like many observers, I expect the Fed to start lowering rates later next year as the economy slows. But here is the surprise, I think long rates will start to rise when the Fed starts cutting the Fed Funds rate.

This will be Bernanke's "conundrum"! As the economy slows, this will reduce the trade deficit and also lower the amount of foreign dollars willing to invest in the US - the start of a possible vicious cycle.

I couldn't resist going out on a limb ... or a couple of limbs. Its fun making predictions - I'm looking forward to the comments.

Best to all. Happy New Year!

by Calculated Risk on 12/28/2005 10:49:00 AM

The Mortgage Bankers Association (MBA) reports: Mortgage Application Activity Slows Preceding Holiday Weekend

The Market Composite Index - a measure of mortgage loan application volume was 554.1 -- a decrease of 6.8 percent on a seasonally adjusted basis from 594.6 one week earlier. A holiday adjustment was included in the seasonally adjusted numbers to help account for the reduced application activity prior to the holiday weekend. On an unadjusted basis, the Index decreased 17.0 percent compared with the previous week and was up 3.1 percent compared with the same week one year earlier.

The seasonally-adjusted Purchase Index decreased by 4.5 percent to 432.9 from 453.1 the previous week whereas the Refinance Index decreased by 11.2 percent to 1259.1 from 1418.1 one week earlier.

Rates were steady:

The average contract interest rate for 30-year fixed-rate mortgages decreased to 6.21 percent from 6.22 percent on week earlier ...

The average contract interest rate for one-year ARMs decreased to 5.36 percent from 5.41 percent one week earlier...

Activity is falling, but still reasonably strong. These reports will be more informative after the holidays.

by Calculated Risk on 12/27/2005 01:09:00 AM

Looking back, I think these were the Top Five economic stories of 2005:

5) Social Security

Social Security is the story of what didn't happen.

Drs. Mark Thoma, Brad DeLong, Paul Krugman, Andrew Samwick and my friends at Angry Bear all contributed to my understanding of this issue.

4) Interest Rates

The Federal Reserve raised the Fed Funds Rate eight times in 2005; steadily increasing the rate at a measured pace (25 bps) after each Federal Reserve meeting. The Fed Funds rate started the year at 2.25% and finished at 4.25%.

The eight increases might be a big story in and of itself, except the even bigger story was Greenspan's "conundrum" with long rates. The Ten Year Treasury Note started the year yielding 4.22% and closed last week yielding 4.38%.

Amazing.

Looking ahead: It appears the yield curve will officially invert after the next Fed Meeting (Jan 31, 2006 - Greenspan's last meeting).

For more on the Fed, I suggest reading Dr. Tim Duy and Dr. William Polley.

3) Energy Prices

Another huge story was energy prices. Even though prices have dropped recently, oil and gasoline prices are substantially higher than last year. According to the DOE, at the end of 2004, the weighted average price was $32.07 per barrel (all grades) and $51.58 last week. That is a 61% increase in the price of crude oil.

For Energy issues, see Dr. James Hamilton.

2) Trade Deficit

The trade deficit continued to increase in 2005. For the Jan through Oct period, the US trade deficit was $598 Billion, up from $504 Billion for the comparable period in 2005. The US is heading for a $720+ Billion trade deficit for 2005, or close to 6% of GDP.

For more, see Dr. Brad Setser and Dr. Menzie Chinn.

And the biggest story of the year ...

1) The Housing Bubble

I've written extensively about housing on this blog and at Angry Bear. For daily updates, I've linked to several sites on the right under "Housing Sites".

I'll write a "looking forward" to 2006 post later this week. Note: Iraq and Katrina were also huge stories in 2005 from an economic perspective, as were hurricanes in general and global warming. Iraq is a huge story from many perspectives, but I am trying to stick to macroeconomics.

Best to all. Happy New Year!