by Calculated Risk on 7/03/2008 10:25:00 PM

Note: this video is from the WaPo - this is the first time I've tried to embed one of their videos, and I hope it works OK.

Here is Dana Milbank's article: The Economy? Words Fail Me.

Think you're worried about the economy? Phillip Swagel is a wreck.

Here is the video. I think Swagel did fine given what he had to sell (a bad jobs report) ... more Milbank:

For a brief, joyous moment for the economist, it appeared he had exhausted all the questions, but as soon as Swagel got out "I hope everyone has a good holiday," another hand went up.

The reporter asked if he saw any hope for economic revival in the new employment report. Swagel exhaled loudly. "No," he said, then sniffed and exhaled again. "You know, the data today, right, we had, wage gains were decent, but of course we know that overall inflation, uh, is going to fully offset and more those, uh, you know, those wage gains," he said. The unemployment rate remained at 5.5 percent, but "I don't . . . take any comfort from that."

by Calculated Risk on 7/03/2008 05:51:00 PM

From Bloomberg: Fed Cuts Bear Stearns Asset Estimate to $28.9 Billion

The Federal Reserve said the portfolio of Bear Stearns Cos. assets it accepted as part of the firm's takeover by JPMorgan Chase & Co. is now worth $28.9 billion, down from the $30 billion estimated in March.

The central bank cut the ``fair value'' of the assets by 3.7 percent as of June 26, the Fed said today in Washington. ... The central bank will provide quarterly updates on the portfolio's value.
...
JPMorgan is absorbing the first $1.15 billion of any losses realized on the holdings.
...
The Fed is valuing the portfolio in accordance with accounting guidelines that call for an estimate based on sales in an ``orderly market,'' rather than a hypothetical forced liquidation.

That is a loss of $1.1 billion for JPMorgan, and there are probably more losses to come - to paid by the Federal Reserve. The market value of these assets was reported as $30 billion on March 14, 2008 by the New York Fed.

by Calculated Risk on 7/03/2008 04:43:00 PM

Regional bank Marshall & Ilsley expects a $900 million loss provision:

M&I expects to take a 2008 second quarter provision of up to $900 million ... This provision is expected to be approximately $485 million in excess of expected 2008 second quarter charge- offs of up to $415 million.
...
"The continuing deterioration in the housing market, particularly in Arizona, on Florida's west coast and in selected relationships in our correspondent business, makes this the prudent action to take at this time. While we cannot predict whether or not we have reached the bottom of the current housing cycle, we do believe the actions we have announced adequately address the current exposure embedded in our housing-related construction and development portfolio," said Mark F. Furlong, president and CEO, Marshall & Ilsley Corporation.
emphasis added

A regional bank with C&D (construction & development) loan problems. This will be a common theme.

Maybe they should have just stayed in the Midwest!

by Calculated Risk on 7/03/2008 02:49:00 PM

Whenever Tanta doesn't post for a few days, I receive several emails asking about the health of my good friend and co-blogger. Thanks to everyone for your thoughts and concern.

First, Tanta posted as recently as Tuesday: When In Doubt, Blame the Accountants

Second, I spoke with her at length on Monday, and she assured me she is OK. Her health is a private matter, but she has disclosed this before: Tanta is on extended medical leave recovering from cancer treatment. Fortunately her cancer is in remission; unfortunately the effects of the cancer treatment linger on.

She is currently experiencing some back pain, and that limits her time at the computer. As we all know - see the UberNerd posts - Tanta writes very detailed and informative posts, and that takes extensive computer time.

I've encouraged her to write a few shorter posts now and then until her back recovers. Meanwhile, thanks to everyone for your thoughts.

by Calculated Risk on 7/03/2008 01:35:00 PM

Back in October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter: House Prices and Fundamental Value.

Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is an update to their graph.

Click on image for larger graph in new window.

This graph shows the price to rent ratio (Dec 1982 = 1.0) for both the OFHEO House Price Index and the Case-Shiller National Home Price Index. For rents, the national Owners' Equivalent Rent from the BLS is used.

The Fed letter used the OFHEO index (Blue), but this index includes refinances and has other problems. The OFHEO index shows that prices have barely fallen from the recent peak, and therefore the price-to-rent ratio has barely declined.

Data is available quarterly for the Case-Shiller National Index starting in 1987. For this graph, the price-to-rent ratio for Case-Shiller in Q1 1987 was set to the OFHEO price-to-rent for Q1 1987.

Looking at the price-to-rent ratio based on the Case-Shiller index, the adjustment in the price-to-rent ratio is probably more than half way complete as of Q1 2008 on a national basis. This ratio will probably continue to decline with some combination of falling prices, and perhaps, rising rents. And the ratio may overshoot too.

The second graph shows the price-to-rent ratio for three cities: Los Angeles, Miami, and New York. On this monthly graph, January 1987 = 1.0. The OER from the BLS for each individual city is used.

Some combination of falling prices, and perhaps rising rents, will probably push the ratio back towards 1.0. By this measure of housing fundamentals, it appears that Miami has correct about 2/3 of the way to the eventual bottom, Los Angeles about half way, and New York about 40%.

This ratio has flaws, but it gives a general idea of how far prices need to fall (or rents increase). It would be nice to add Houston (with the booming energy business), but the data isn't available.

by Calculated Risk on 7/03/2008 10:14:00 AM

From MarketWatch: U.S. June ISM services falls sharply to 48.2%

Below 50% means services are contracting. Prices are rising sharply and employment falling.

by Calculated Risk on 7/03/2008 09:09:00 AM

First a correction: last week I mentioned that historically weekly claims increase after Congress passes an extension to unemployment insurance benefits. In the past, workers who had exhausted their benefits could reapply for extended benefits, and these workers were included in the first time claims report.

Although the above was true during previous downturns, the DOL BLS has apparently changed their methodology and the extended benefits are not included in first time claims anymore.

So the jump to 400K first time claims is not the result of Congress extending benefits (and it would be too soon anyway).

Here is the current report from the Department of Labor for the week ending June 28, showing initial unemployment claims increased to 404,000, and the 4-week moving average was 390,500.

This graph shows the weekly claims and the four week moving average of weekly unemployment claims since 1989.

The four week moving average has been trending upwards for the last few months, and is now at 390,500 - solidly above the possible recession level (approximately 350K).

by Calculated Risk on 7/03/2008 08:41:00 AM

From the BLS: Employment Situation Summary

This graph shows the unemployment rate and the year-over-year change in employment vs. recessions.
Click on graph for larger image.

Although the unemployment rate was unchanged from last month, the rate has jumped sharply from a cycle low of 4.4% to 5.5%; a strong recession indicator.

The YoY change in employment is close to zero (the economy has added only 15 thousand jobs in the last year), also suggesting a recession.

The private sector (excluding government jobs) declined 242 thousand over the last year.

Note the current recession indicated on the graph is "probable", and is not official.

This is the sixth straight month of job losses.

by Calculated Risk on 7/03/2008 01:28:00 AM

From the LA Times Money & Co: Regulators to Schumer on IndyMac: Please shut up

From a letter to Schumer today, John M. Reich, director of the Office of Thrift Supervision wrote:

"Dissemination of incomplete or erroneous information can erode public confidence, mislead depositors and investors, and cause unintended consequences, including depositor runs and panic stock trades. Rumors and innuendo cause damage to financial institutions that might not occur otherwise and these concerns drive our strict policy of privacy."

The LA Times also quotes John D. Hawke, the U.S. comptroller of the currency (regulator of national banks) from 1998 to 2004:

"If Schumer continues to go public with letters raising questions about the condition of individual institutions, he will cause havoc in the banking system," Hawke said.

"Leaking his IndyMac letter to the press was reckless and grossly irresponsible. I don't see how he can be trusted with confidential information in the future. What this incredibly stupid conduct does is put at risk the willingness of regulators to share any information with the [congressional] oversight committees. After this, you'd be crazy to share information with Schumer."

I agree. Naming an individual institution was reckless and irresponsible. I was very surprised that a letter like Schumer's was made public.

by Calculated Risk on 7/03/2008 12:32:00 AM

From the WSJ: Businesses Take Less Office Space Nationwide

For the second quarter in a row, businesses vacated more office space than they took nationwide, a phenomenon known as negative absorption. The national vacancy rate edged up to 13%, from 12.8% last quarter.
...
The worst-hit areas of the country in terms of office space are those whose local economies are reeling from the housing-bubble burst. ... Only 17 of the 79 markets Reis tracks saw rent growth outpace inflation.

With a combination of negative absorption, and much more office space being completed, the vacancy rate will most likely rise sharply over the next couple of years.

Here is a forecast from Grubb & Ellis back in April:

“With demand turning negative at the same time that the construction pipeline will deliver the 94 million square feet still underway, [office] vacancy is expected to peak at 18% by the end of 2009.”
Grubb & Ellis economist Robert Bach, April 2008