by Calculated Risk on 9/16/2010 10:00:00 AM

Here is the Philadelphia Fed Index: Business Outlook Survey

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of -7.7 in August to -0.7 in September. The index, which has been negative for two consecutive months, suggests that growth has stalled over the last two months (see Chart). Indexes for new orders and shipments continued to indicate weakness this month: The new orders index fell 1 point, remaining negative for the third consecutive month, and the shipments index decreased 3 points, remaining negative for the second consecutive month.

Firms reported near steady employment this month but lower average work hours for existing employees. The percentage of firms reporting increases in employment (18 percent) narrowly edged out the percentage reporting decreases (16 percent). The index for employment was slightly positive this month, increasing 5 points from its negative reading in August. Indicative of weaker activity, more firms reported declines in average work hours for existing employees (30 percent) than reported increases (8 percent).emphasis added

Click on graph for larger image in new window.

This graph shows the Philly index for the last 40 years.

This index turned down sharply in June and July and was negative in August and September (indicating contraction).

These surveys are timely, but noisy. However this is further evidence of a slowdown in manufacturing. This was slightly worse than the consensus view of a reading of 3.8 (slight expansion).

by Calculated Risk on 9/16/2010 08:32:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Sept. 11, the advance figure for seasonally adjusted initial claims was 450,000, a decrease of 3,000 from the previous week's revised figure of 453,000 [revised up from 451,000]. The 4-week moving average was 464,750, a decrease of 13,500 from the previous week's revised average of 478,250.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since January 2000.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week by 13,500 to 464,750.

This is the lowest level for weekly claims since early July, but it is still very high - the 4-week moving average has been moving sideways at an elevated level for about 10 months - and that suggests a weak job market.

by Calculated Risk on 9/15/2010 09:22:00 PM

From the NY Times: Warren to Unofficially Lead Consumer Agency

Elizabeth Warren, who conceived of the Consumer Financial Protection Bureau, will oversee its establishment as an assistant to President Obama, an official briefed on the decision said Wednesday evening.

The decision, which Mr. Obama is to announce this week, would allow Ms. Warren, a Harvard law professor, to effectively run the new agency without having to go through a potentially contentious confirmation battle in the Senate.

I think Ms. Warren is an excellent choice.

by Calculated Risk on 9/15/2010 07:00:00 PM

I think there are two key problems for the housing market: 1) the excess supply of existing housing units, and 2) negative equity.

The excess supply is keeping pressure on residential investment, and therefore on employment and economic growth. As new households are formed, the excess supply will be absorbed - but this is happening very slowly.

Hence the quote of the day:

Time Warner Cable ... CFO Robert Marcus said "subscriber environment very, very weak," thanks to high unemployment, high ... vacancies and "really anemic new home formation."

It takes jobs to create households, and usually housing is the key driver for employment growth in the early stages of a recovery. So this is a trap: the excess supply means weak employment growth, leading to few new households, so the excess supply is absorbed slowly - putting off more robust employment growth.

The excess supply is also pushing down house prices (prices are just starting to fall again). Lower prices will eventually help clear the market, however lower prices will push more homeowners into negative equity.

And negative equity is the other key problem for housing. It is difficult for homeowners with negative equity to sell, it is difficult to move for employment or other reasons, it is hard to refinance, and it is demoralizing for many homeowners (especially those with substantial negative equity).

Negative equity frequently leads to distressed sales (short sales or foreclosures), and losses for lenders.

At the end of Q2, CoreLogic reported that "11 million, or 23 percent, of all residential properties with mortgages were in negative equity". And an "additional 2.4 million borrowers had less than five percent equity". With house prices falling, several million more properties will be in a negative equity position later this year and in 2011.

"Negative equity continues to both drive foreclosures and impede the housing market recovery. With nearly 5 million borrowers currently in severe negative equity, defaults will remain at a high level for an extended period of time," said Mark Fleming, chief economist with CoreLogic.

The negative equity problem is intractable. The administration has pushed modifications (HAMP), short sales (HAFA), the Fannie 125% LTV refinance program (HARP), the FHA short refinance option (for lenders willing to write down principal) and a number of other programs. These have had limited success so far (the FHA short refinance option just started).

It is important to note that falling house prices helps clear the excess supply, although more jobs and more households is the preferred solution. However falling prices makes the negative equity problem worse.

The "good" news is the banks were stress tested for much lower house prices. The following graph shows the two bank stress test scenarios compared to the Case-Shiller Composite 10 Index.

Click on graph for larger image in new window.

The heavy government support for house prices has kept prices well above the baseline scenario. With prices higher than projected, fewer homeowners are in negative equity, and banks have taken fewer write downs than originally expected. Meanwhile many homeowners have been able to refinance into Fannie and Freddie (or FHA insured) loans putting the future risk on the taxpayer.

Based on the stress test results, the large banks should be able to handle further price declines - and falling prices will help clear the excess supply.

Both of these problems are very frustrating and will take time to resolve, but this suggests that policy should not be targeted at trying to support house prices.

by Calculated Risk on 9/15/2010 03:44:00 PM

Via Dow Jones (ht Brian):

Time Warner Cable ... CFO Robert Marcus said "subscriber environment very, very weak," thanks to high unemployment, high ... vacancies and "really anemic new home formation."

Although housing completions are at a record low (adding few net new housing units to the housing stock), additional household formation is key to absorbing the overhang of excess housing units.

by Calculated Risk on 9/15/2010 02:47:00 PM

From cartoonist Eric G. Lewis:

by Calculated Risk on 9/15/2010 11:18:00 AM

Notes: CoreLogic reports the year-over-year change. The headline for this post is for the change from June 2010 to July 2010. The CoreLogic HPI is a three month weighted average of May, June and July and is NSA.

From CoreLogic (formerly First American LoanPerformance): CoreLogic Home Price Index Remained Flat in July

CoreLogic ... today released its Home Price Index (HPI) that showed that home prices in the U.S. remained flat in July as transaction volumes continue to decline. This was the first time in five months that no year-over-year gains were reported. According to the CoreLogic HPI, national home prices, including distressed sales showed no change in July 2010 compared to July 2009. June 2010 HPI showed a 2.4 percent year-over-year gain compared to June 2009. ...

Although home prices were flat nationally, the majority of states experienced price declines and price declines are spreading across more geographies relative to a few months ago. Home prices fell in 36 states in July, nearly twice the number in May and the highest since last November when national home prices were declining," said Mark Fleming, chief economist for CoreLogic.

Click on graph for larger image in new window.

This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.

The index is flat over the last year, and off 28% from the peak.

The index is 6.1% above the low set in March 2009, and I expect to see a new post-bubble low for this index later this year or early in 2011.

by Calculated Risk on 9/15/2010 09:15:00 AM

From the Fed: Industrial production and Capacity Utilization

Industrial production rose 0.2 percent in August after a downwardly revised increase of 0.6 percent in July [revised down from 1.0 percent]. ... The index for manufacturing output rose 0.2 percent in August after having advanced 0.7 percent in July; the step-down in the rate of increase reflected a fallback in the production of motor vehicles and parts, which had jumped sharply in July. Excluding motor vehicles and parts, manufacturing output increased 0.5 percent in August after having gained 0.2 percent in July. ... At 93.2 percent of its 2007 average, total industrial production in August was 6.2 percent above its year-earlier level. The capacity utilization rate for total industry rose to 74.7 percent, a rate 4.7 percentage points above the rate from a year earlier and 5.9 percentage points below its average from 1972 to 2009.

Click on graph for larger image in new window.

This graph shows Capacity Utilization. This series is up 9.6% from the record low set in June 2009 (the series starts in 1967).

Capacity utilization at 74.7% is still far below normal - and well below the the pre-recession levels of 81.2% in November 2007. (Note: this is actual a decrease before the revision to July)

Note: y-axis doesn't start at zero to better show the change.

The second graph shows industrial production since 1967.

This is the highest level for industrial production since Oct 2008, but production is still 7.2% below the pre-recession levels at the end of 2007.

The increase in August was about consensus, however the sharp downward revision to July puts this below consensus.

by Calculated Risk on 9/15/2010 08:30:00 AM

From the NY Fed: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that conditions held relatively steady in New York’s manufacturing sector in September. The general business conditions index remained positive, although it slipped 3 points to 4.1. The new orders and shipments indexes were both up moderately for the month, at levels signaling stable activity.
...
Employment indexes were positive, suggesting that employment levels and the average workweek continued to expand over the month. The degree of optimism about the six-month outlook continued to deteriorate, with the future general business conditions index hitting its lowest level since early 2009.

These regional surveys have been showing a slowdown in manufacturing and are being closely watched right now. This was slightly below expectations.

by Calculated Risk on 9/15/2010 07:14:00 AM

The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey

The Refinance Index decreased 10.8 percent from the previous week. The seasonally adjusted Purchase Index decreased 0.4 percent from one week earlier.
...
The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.47 percent from 4.50 percent, with points increasing to 1.08 from 0.96 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 1990.

Purchase applications are at about the levels of 1996 or 1997, suggesting existing home sales (closed transactions) in August, September and even October, will only be slightly higher than in July. Note: economist Tom Lawler's "early read" is for August existing home sales of 4.1 million SAAR.