by Calculated Risk on 3/02/2009 11:36:00 AM

Amid all the gloom this morning - the AIG bailout and massive losses, the weak manufacturing ISM index, the cliff diving construction spending numbers - there was this Personal Income and Outlays report for January from the BEA.

This report showed that personal income increased in January, however the increase was mostly because of special factors related to government and military wage increases. But this report also showed that PCE was up slightly from October to January (the period that matters for GDP); about 0.7% in real terms annualized. Not much - and this is just one data point and could be revised, and this might be impacted by gift cards (this data uses the January retail numbers) - but perhaps PCE won't fall completely off a cliff in Q1. I still expect PCE to decline sharply in Q1, but maybe not as rapidly as in Q3 2008 (-3.8% SAAR) and Q4 2008 (-4.3% SAAR)
(SAAR: seasonally adjusted annual rate)

Also interesting:

Personal saving -- DPI less personal outlays -- was $545.5 billion in January, compared with $416.8 billion in December. Personal saving as a percentage of disposable personal income was 5.0 percent in January, compared with 3.9 percent in December.

This increase in the percent saved is an important part of the rebalancing process and helps repair household balance sheets.

Click on graph for larger image in new window.

This graph shows the saving rate starting in 1959 (using a three month centered average for smoothing).

Although this data may be revised significantly, this does suggest households are saving substantially more than during the last few years (when they saving rate was close to zero). This is a necessary but painful step ... and a rising saving rate will repair balance sheets, but also keep downward pressure on personal consumption.

by Calculated Risk on 3/02/2009 10:30:00 AM

From the ISM: February 2009 Manufacturing ISM Report On Business®

"Manufacturing continues to decline at a rapid rate in February. While production has slowed its rate of decline, employment continues to fall precipitously. Prices continue to decline, but price advantages are not sufficient to overcome manufacturers' apparent loss of demand. Survey respondents appear generally pessimistic about recovery in 2009."
...
Manufacturing contracted in February as the PMI registered 35.8 percent, which is 0.2 percentage point higher than the 35.6 percent reported in January. This is the 13th consecutive month of contraction in the manufacturing sector. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
...
ISM's Employment Index registered 26.1 percent in February, which is 3.8 percentage points lower than the 29.9 percent reported in January. This is the seventh consecutive month of decline in employment. An Employment Index above 49.7 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.

Manufacturing is still contracting, and employment is especially weak with the employment index at a record low (since the index started in 1948).

by Calculated Risk on 3/02/2009 10:01:00 AM

Click on graph for larger image in new window.

The first graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted.

Residential construction spending is still declining, and now nonresidential spending has peaked and will probably decline sharply over the next 18 months to two years.

The second graph shows the year-over-year change for private residential and nonresidential construction spending.

Nonresidential spending is now at the year ago level and will turn strongly negative going forward. Residential construction spending is still declining, although the YoY change will probably be less negative going forward.

These are two key stories for 2009: the collapse in private non-residential construction, and the probably bottom for residential construction spending.

From the Census Bureau: January 2009 Construction at $986.2 Billion Annual Rate

Spending on private construction was at a seasonally adjusted annual rate of $682.6 billion, 3.7 percent (±1.1%) below the revised December estimate of $709.0 billion. Residential construction was at a seasonally adjusted annual rate of $291.5 billion in January, 2.9 percent (±1.3%) below the revised December estimate of $300.3 billion. Nonresidential construction was at a seasonally adjusted annual rate of $391.0 billion in January, 4.3 percent (±1.1%) below the revised December estimate of $408.7 billion.

by Calculated Risk on 3/02/2009 06:21:00 AM

For the Fed and Treasury AIG restructuring announcement, please see the previous post.

From MarketWatch: AIG reports fourth-quarter loss of over $61 billion

[AIG] said its fourth-quarter loss widened to $61.66 billion, or $22.95 a share, from the $5.29 billion loss in the year-earlier period. Continued severe credit market deterioration, particularly in commercial mortgage-backed securities, and charges related to ongoing restructuring-related activities weighed down results.

The numbers just keep getting bigger ...

by Calculated Risk on 3/02/2009 06:15:00 AM

From the Fed: U.S. Treasury and Federal Reserve Board Announce Participation in AIG Restructuring Plan

The U.S. Treasury Department and the Federal Reserve Board today announced a restructuring of the government's assistance to AIG in order to stabilize this systemically important company in a manner that best protects the U.S. taxpayer. ...

The company continues to face significant challenges, driven by the rapid deterioration in certain financial markets in the last two months of the year and continued turbulence in the markets generally. ...

As significantly, the restructuring components of the government's assistance begin to separate the major non-core businesses of AIG, as well as strengthen the company's finances. The long-term solution for the company, its customers, the U.S. taxpayer, and the financial system is the orderly restructuring and refocusing of the firm. This will take time and possibly further government support, if markets do not stabilize and improve.
...
Treasury has stated that public ownership of financial institutions is not a policy goal and, to the extent public ownership is an outcome of Treasury actions, as it has been with AIG, it will work to replace government resources with those from the private sector to create a more focused, restructured, and viable economic entity as rapidly as possible. This restructuring is aimed at accelerating this process. Key steps of the restructuring plan include:

Preferred Equity
The U.S. Treasury will exchange its existing $40 billion cumulative perpetual preferred shares for new preferred shares with revised terms that more closely resemble common equity and thus improve the quality of AIG's equity and its financial leverage. The new terms will provide for non-cumulative dividends and limit AIG's ability to redeem the preferred stock except with the proceeds from the issuance of equity capital.

Equity Capital Commitment
The Treasury Department will create a new equity capital facility, which allows AIG to draw down up to $30 billion as needed over time in exchange for non-cumulative preferred stock to the U.S. Treasury. This facility will further strengthen AIG's capital levels and improve its leverage.

Federal Reserve Revolving Credit Facility
The Federal Reserve will take several actions relating to the $60 billion Revolving Credit Facility for AIG established by the Federal Reserve Bank of New York (New York Fed) in September 2008, to further the goals described above.

[see statement for more details]

by Calculated Risk on 3/01/2009 10:25:00 PM

From AIG:

American International Group, Inc. (AIG) will report its fourth quarter and full year 2008 results on Monday, March 2, 2009 at approximately 6:00 a.m. EST. AIG’s earnings release and financial supplement will be available in the Investor Information section of www.aigcorporate.com following the filing of AIG’s Form 10-K for the year ended December 31, 2008.

AIG Chairman and Chief Executive Officer Edward M. Liddy will host a conference call, broadcast live over the Internet, on Monday, March 2, 2009 at 8:30 a.m. EST to discuss AIG’s fourth quarter results.

The audio webcast of the conference call can be accessed at www.aigwebcast.com.

From the WSJ: U.S. Revamps Bailout of AIG

The new deal, the government's fourth for AIG, represents a nearly complete reversal from the one first laid out in mid-September. Back then, federal officials acted as a demanding lender, forcing the insurer to pay a steep interest rate for what was expected to be a short-term loan. Now the government is relaxing loan terms by wiping out interest in hopes of preserving AIG's value over a longer period.

With the latest move, AIG will have the benefit of up to $70 billion from the TARP program; it got a $40 billion TARP investment in November. The total amounts to 10% of the $700 billion financial-sector rescue fund, money that most lawmakers did not expect would go toward propping up a troubled insurer. Officials believed they had little choice but to use the TARP money, particularly because they lack the authority to unwind a troubled firm such as AIG the way the government can do now with failing banks.

AIG: a black hole.

by Calculated Risk on 3/01/2009 07:50:00 PM

Just an open thread (I'm working on fixing the comments):

For those interested, here are few sources for futures and the foreign markets.

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

Futures from barchart.com

And the Asian markets.

Right now the futures are off a little for the U.S. markets. It appears DOW 7000 is in jeopardy.

Best to all.

by Calculated Risk on 3/01/2009 03:15:00 PM

As we discussed yesterday, AIG will not be alone in the confessional tomorrow. HSBC is about to announce a £17bn hit on bad loans.

Now the Financial Times reports: HSBC to scale back US lending

HSBC will on Monday announce plans to scale back its US consumer finance operations as the bank launches a £12bn-plus ($17bn) rights issue ... HSBC is expected to say that it is further shrinking HSBC Finance Corporation, its US-based credit card and mortgage lender ...

The WSJ has a headline only: HSBC plans to cease U.S. personal loans and mortgages but will continue to provide credit cards.

I'm sure HSBC regrets the Household International acquisition!

by Calculated Risk on 3/01/2009 02:32:00 PM

The NY Times asked several economists and forecasters 'When Will the Recession Be Over?'

Here are a few excerpts:

Beware the False Dawn
By STEPHEN S.ROACH (Chairman of Morgan Stanley Asia)

IT would be premature to declare an end to America’s recession at the first sign of a resumption of growth. After the unusually steep declines in the economy late last year and early this year, a statistical rebound in the second half of 2009 would hardly be shocking. ... But any such whiffs of growth are likely to herald a false dawn, because the consumer remains in terrible shape. ...

This points to an unusually anemic upturn, at best — not strong enough to keep the unemployment rate from rising to near 10 percent over the next year and a half. Since it’s hard to call that a recovery, it looks to me as if this recession won’t end until late 2010 or early 2011.

A Long Goodbye
By A. MICHAEL SPENCE (Stanford Professor, Nobel prize, economics)

THE short answer is not soon.

The recession is global: exports, production and consumption are in high-speed descent. The headwinds are powerful because of excessive leverage, damaged balance sheets and the resulting tight credit.
...
Governments and central banks are the only major sources of credit, liquidity and incremental demand ... If governments are quick and clear in their intentions and intervene in a coordinated way in both the real economy and the financial sector, we will probably have an unusually long and deep global recession through 2010. If they don’t, it is likely to be worse than that.

An Ordinary Crisis
By GEORGE COOPER

TODAY’S financial crisis is the biggest in recent history, when measured by its speed, the scale of its capital losses or its global reach. Yet viewed from another perspective the crisis is surprisingly ordinary, following the same path as dozens of previous bubbles.
...
If we go by the first measure [started in mid'80s] we may see two or more decades of readjustment. If we go by the second [started turn of the millennium], we are still probably in the early stages of the credit correction, meaning that while the technical recession could be over by the end of the year, the broader credit cycle will likely remain a significant drag on economic activity well into the next decade. Either way, we have a long way to go.

There are number of other short Op-Eds from Nouriel Roubini, James Grant and others.

by Calculated Risk on 3/01/2009 10:50:00 AM

First a repeat of Eric's great AIG cartoon! Click on cartoon for larger image in new window. Cartoon from Eric G. Lewis

From the WSJ: Rating Agencies Endorse Revised AIG Bailout

Major credit rating agencies have signed off on the latest revamp of American International Group Inc.'s $150 billion government rescue package ... Both Standard & Poor's and Moody's Investors Services have quietly endorsed the terms of the revised bailout ...

The agreement clears the way for the insurer's board to give its final approval when it meets on Sunday. AIG's latest restructuring ... is expected to be announced with the insurer's results on Monday.

... Many details of the new plan aren't clear but ... it will result in a complete reconfiguration of AIG. ... The revised plan relies on a series of complicated financial maneuvers that will reduce AIG's interest and debt burdens, while also deepening government involvement and taxpayer exposure.

One aspect of the plan is clear - taxpayers will be more exposed.