by Calculated Risk on 11/04/2009 06:47:00 PM

From Diana Golobay at HousingWire: FHA Delays Yearly Fiscal Report over ‘Accuracy’ of Methodology

A US Department of Housing and Urban Development (HUD) spokeswoman indicated hours before the scheduled release that the report would not be completed in time, and FHA commissioner David Stevens later issued a statement on the cause of the delay.

“FHA asked the independent actuary, IFE [Integrated Financial Engineering], to run additional economic scenario testing above and beyond what was going to be included in the actuarial study to better understand a broader range of risk scenarios,” Stevens said. “Based on these results, we raised questions about the accuracy of IFE’s modeling and IFE therefore advised us that we should not treat the report as final. IFE is now running additional tests to ensure that the final report is accurate.”

Stevens added, “We will only release a report that we are confident is accurate and fully reflects the health of the FHA.”

And from the WaPo: FHA abruptly delays audit of agency's financial health

In September, Stevens said the audit, when released, would show that the agency's cash reserves had dropped below federally mandated levels. ... But while the reserves are at a historic low, the audit predicted that they would rebound to the required level within two to three years largely as a result of the recovery in the housing market ...

On Wednesday, neither the FHA nor the auditing firm would publicly comment about whether the preliminary data are now in question.

But Barry Dennis, president and chief operating officer of the auditing firm, said his office is working as quickly as possible to produce the final report. "In an environment like we're in today, you need to look at a number of different economic scenarios and in the process of doing that, we needed to track down some potential issues," Dennis said.

The concern is that some of the "different economic scenarios" showed the FHA would require a significant taxpayer bailout.

by Calculated Risk on 11/04/2009 03:44:00 PM

Earlier this week there was some discussion about the increase in the ISM Manufacturing employment index.

ISM's Employment Index registered 53.1 percent in October, which is 6.9 percentage points higher than the 46.2 percent reported in September. This is the first month of growth in manufacturing employment following 14 consecutive months of decline. 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.

To check this statement, I posted a scatter graph of the relationship between the ISM Manufacturing employment index and the reported monthly change in manufacturing employment. (See: ISM and Manufacturing Employment) Sure enough, the increase in the employment index suggests an improvement in the BLS manufacturing employment numbers.

However the news today from the ISM non-manufacturing employment index was discouraging:

Employment activity in the non-manufacturing sector contracted in October for the 21st time in the last 22 months. ISM's Non-Manufacturing Employment Index for October registered 41.1 percent. This reflects a decrease of 3.2 percentage points when compared to the 44.3 percent registered in September.

And that calls out for another graph!

The following graph shows the ISM Non-Manufacturing Employment Index vs. the BLS reported monthly change in private service employment (as a percent of private service employment).

Note: There is a limited amount of data for the ISM non-manufacturing index (only back to July 1997).

Click on graph for larger image in new window.

Once again the ISM employment index is related to changes in BLS employment.

Although the relationship is noisy, the decline in the non-manufacturing employment index suggests that the October improvement in manufacturing employment will be more than offset by a decline in service employment.

by Calculated Risk on 11/04/2009 02:15:00 PM

Some people thought that the Fed might change the "extended period" statement, or the "economic activity ... to remain weak for a time". No change to those statements. Note: I doubt the Fed will raise rates for a long time.

From the Fed:

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

by Calculated Risk on 11/04/2009 11:21:00 AM

From the American Bankruptcy Institute: October Consumer Bankruptcy Filings Reach New Highs, Up 28 Percent Over Last Year

The 135,913 consumer bankruptcy filings in October represented a 27.9 percent increase over last October's monthly total of 106,266, according to the American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center (NBKRC). The October 2009 consumer filings represented an 8.9 percent increase from the September 2009 total of 124,790. Chapter 13 filings constituted 28.5 percent of all consumer cases in October, a slight increase from the September rate.

"The nearly 9 percent increase in consumer bankruptcy filings in October, together with a 7 percent jump reported in business cases, demonstrates the sustained stress on the U.S. economy," said ABI Executive Director Samuel J. Gerdano. ABI forecasts that total bankruptcies this year will exceed 1.4 million, the highest number since 2005.
emphasis added

Click on graph for larger image in new window.

This graph shows the non-business bankruptcy filings by quarter.

Note: Quarterly data from Administrative Office of the U.S. Courts, Q3 2009 based on monthly data from the American Bankruptcy Institute. Q4 is three times the October rate.

The quarterly rate is at about the same level as prior to when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) took effect. There were over 2 million bankruptcies filed in Calendar 2005 ahead of the law change.

There have been 1.18 million personal bankruptcy filings through Oct 2009, and the American Bankruptcy Institute is predicting over 1.4 million new bankruptcy filings by year end.

by Calculated Risk on 11/04/2009 10:00:00 AM

From the Institute for Supply Management: October 2009 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector expanded in October for the second consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

... "The NMI (Non-Manufacturing Index) registered 50.6 percent in October, 0.3 percentage point lower than the 50.9 percent registered in September, indicating growth in the non-manufacturing sector for the second consecutive month, but at a slightly slower rate.
...
Employment activity in the non-manufacturing sector contracted in October for the 21st time in the last 22 months. ISM's Non-Manufacturing Employment Index for October registered 41.1 percent. This reflects a decrease of 3.2 percentage points when compared to the 44.3 percent registered in September.
emphasis added

According to this survey, the service sector expanded in October, but at a slower rate than in September. Employment contracted at as faster rate than in September - the opposite of the manufacturing sector.

by Calculated Risk on 11/04/2009 08:17:00 AM

ADP reports:

Nonfarm private employment decreased 203,000 from September to October 2009 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from August to September was revised by 27,000, from a decline of 254,000 to a decline of 227,000.

Note: ADP is private nonfarm employment only (no government jobs).
The BLS reported a 210,000 decrease in nonfarm private employment in September (-263,000 total nonfarm), so once again ADP was only marginally useful in predicting the BLS number.


On the Challenger job-cut report from MarketWatch: Planned layoffs down 3 months in a row

Planned job reductions at major U.S. corporations declined for the third month in a row in October, falling to the lowest level since March 2008, according to a monthly tally compiled by outplacement firm Challenger Gray & Christmas.

Planned layoffs fell to 55,679 last month, down 16% compared with September and down 51% compared with October 2008.

The BLS reports Friday, and the consensus is for 175,000 net job losses, and a 9.9% unemployment rate, for October.

by Calculated Risk on 11/03/2009 11:56:00 PM

From the NY Times: Congress Agrees to Keep Homebuyers’ Tax Credit

The Senate and House are poised to agree on a compromise measure to extend unemployment benefits that also would expand a [un]popular $8,000 tax credit for homebuyers ...

The bill also extends the net-operating-loss carryback period for firms from two years to five years (to help homebuilders).

The Senate might pass its version as early as Wednesday, and aides to Congressional leaders say the House could accept it this week, sending the bill to President Obama to sign into law.

Oh well ...

by Calculated Risk on 11/03/2009 09:43:00 PM

David Leonhardt at the NY Times gives "equal time" to a more optimistic outlook: Through a Glass Less Darkly

In the fall of 1982, with a long recession ending but the unemployment rate heading toward 10 percent, The New York Times ran an article titled “The Recovery That Won’t Start.”

It quoted prominent economists who worried that “the recovery may amount to nothing more than a few quarters of paltry growth — and possibly not even that.” The economists, the article noted, had “growing doubts about whether the mechanisms of economic recovery will — or can — operate as they have in other postwar business cycles.”

Over the next two years, the American economy grew at a blistering annual rate of more than 6 percent.
...
People tend to become overly pessimistic at the end of a recession, partly because they can see that the forces behind the last boom — housing and mortgage lending, in this case — won’t be around for the next one. If anything, the excesses from the last boom seem likely to hold back the economy for years to come. People are left to wonder where future growth will come from.

I want to take a stab at that question today. To be clear, I am not predicting a boom over the next two years. I’m just trying to give equal time to the side of the economic ledger that often doesn’t get discussed until after the fact.

Leonhardt goes on to discuss a few reasons the economy might grow quicker than many expect: consumption in China, pent-up demand in the U.S., more stimulus spending, and some surprising unknown innovation.

My comment: Usually the deeper the recession, the more robust the recovery. So why is it different this time?

First, this recession was preceded by the bursting of the credit bubble (especially housing) leading to a financial crisis. And there is research showing recoveries following financial crisis are typically more sluggish than following other recessions. See Carmen Reinhart and Kenneth Rogoff: Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison

Second, most recessions have followed interest rate increases from the Fed to fight inflation, and after the recession starts, the Fed lowers interest rates. There is research suggesting the Fed would have to push the Fed funds rate negative to achieve the same monetary stimulus as following previous recessions (see San Francisco Fed Letter by Glenn Rudebusch The Fed's Monetary Policy Response to the Current Crisis). Welcome to ZIRP! (Note: Professor Taylor disagrees on the size of the negative Fed funds rate).

Third, usually the engines of recovery are investment in housing (not existing home sales) and consumer spending. Both are still under severe pressure with the large overhang of housing inventory (record vacancies rates!), and the need for households to repair their balance sheet (the saving rate will probably rise - slowing consumption growth).

We are a long way from normal.

by Calculated Risk on 11/03/2009 07:04:00 PM

Just one more post on auto sales ...

The following table is from the GM restructuring plan, presented to Treasury in mid-February (no longer available online).

This data is for all vehicles (the charts in the previous post excluded heavy trucks). All information in Red is added.

Click on graph for larger image in new window.

GM overestimated sales in Q2. Of course they weren't planning on going bankrupt! And GM underestimated sales in Q3 because of cash-for-clunkers.

Overall their forecast has been pretty close for 2009.

And I wouldn't be surprised to see sales increase to 12 million plus in 2010, even with a sluggish recovery. That is about the replacement level for auto sales.

The real question mark is what happens in the later years. Although total sales in the U.S. were above 17 million for several years, some of those sales were probably the result of incentives and loose lending (buying cars using home equity, and many subprime auto loans). I doubt we will see a return to those practices any time soon.

I'd like to emphasize that the 10.5 million (SAAR) for light vehicles in October is a very low number, and is close to the average sales rate during the early '80s recession.

If sales increase to 12 million in 2010 that would still be worse than the depths of the '91 recession.

by Calculated Risk on 11/03/2009 04:00:00 PM

Click on graph for larger image in new window.

This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for October (red, light vehicle sales of 10.46 million SAAR from AutoData Corp).

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Obviously sales were boosted significantly by the "Cash-for-clunkers" program in August and some in July.

This was the first month over a 10 million sales rate (SAAR) - excluding July and August - since December 2008. Still very low ...