by Calculated Risk on 6/16/2009 10:15:00 AM

From the WaPo: Calif. Aid Request Spurned By U.S

The Obama administration has turned back pleas for emergency aid from one of the biggest remaining threats to the economy -- the state of California.

Top state officials have gone hat in hand to the administration, armed with dire warnings of a fast-approaching "fiscal meltdown" caused by a budget shortfall. Concern has grown inside the White House in recent weeks as California's fiscal condition has worsened, leading to high-level administration meetings. But federal officials are worried that a bailout of California would set off a cascade of demands from other states.
...
The administration is worried that California will enact massive cuts to close its deficit, estimated at $24 billion for the fiscal year that begins July 1, aggravating the state's recession and further dragging down the national economy.

After a series of meetings, Treasury Secretary Timothy F. Geithner, top White House economists Lawrence Summers and Christina Romer, and other senior officials have decided that California could hold on a little longer and should get its budget in order rather than rely on a federal bailout.
...
The state entered the downturn burdened with an inflexible budgeting apparatus, constrained by a state ballot initiative approved by voters in 1978 that severely limited property taxes in California. The signature example of "ballot box budgeting" left the Golden State inordinately reliant on the personal income tax, which accounts for half of revenue to Sacramento.

California's budget is also heavily dependent on taxes paid on capital gains and stock options, which have been clobbered during the meltdown of financial markets. State budget analysts made their annual estimate of revenue a month before the crisis spiked in the fall and have been backpedaling ever since.

"Those revenue projections turned out to be wildly optimistic, but nobody was predicting the October collapse of the financial markets," said Michael Cohen, deputy analyst in the Legislative Analyst's Office.

Hey, hoocoodanode?

California enjoyed the housing bubble, but is now being hit hard by the housing bust with house prices falling sharply and double digit unemployment. And it doesn't help that the state system of government is completely dysfunctional.

by Calculated Risk on 6/16/2009 09:15:00 AM

The Federal Reserve reported:

Industrial production decreased 1.1 percent in May after having fallen a downward-revised 0.7 percent in April. The average decrease in industrial production during the first three months of the year was 1.6 percent. Manufacturing output moved down 1.0 percent in May with broad-based declines across industries. Outside of manufacturing, the output of mines dropped 2.1 percent, and the output of utilities fell 1.4 percent. At 95.8 percent of its 2002 average, overall industrial output in May was 13.4 percent below its year-earlier level. The rate of capacity utilization for total industry declined further in May to 68.3 percent, a level 12.6 percentage points below its average for 1972-2008. Prior to the current recession, the low over the history of this series, which begins in 1967, was 70.9 percent in December 1982.emphasis added

Click on graph for larger image in new window.

This graph shows Capacity Utilization. This series is at another record low (the series starts in 1967).

In addition to the weakness in industrial production, there is little reason for investment in new production facilities until capacity utilization recovers.

by Calculated Risk on 6/16/2009 08:30:00 AM

Click on graph for larger image in new window.

Total housing starts were at 532 thousand (SAAR) in May, rebounding from the all time record low in April of 454 thousand. The previous record low was 488 thousand in January (the lowest level since the Census Bureau began tracking housing starts in 1959).

Single-family starts were at 401 thousand (SAAR) in May; above the record low in January and February (357 thousand) and above 400 thousand for the first time since last November.

Permits for single-family units were 408 thousand in May, suggesting single-family starts will remain at about the same level in June.

Here is the Census Bureau report on housing Permits, Starts and Completions.

Building Permits:
Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 518,000. This is 4.0 percent (±1.7%) above the revised April rate of 498,000, but is 47.0 percent (±2.1%) below the May 2008estimate of 978,000.

Single-family authorizations in May were at a rate of 408,000; this is 7.9 percent (±1.5%) above the revised April figure of 378,000.

Housing Starts:
Privately-owned housing starts in May were at a seasonally adjusted annual rate of 532,000. This is 17.2 percent (±14.4%) above the revised April estimate of 454,000, but is 45.2 percent (±5.8%) below the May 2008 rate of 971,000.

Single-family housing starts in May were at a rate of 401,000; this is 7.5 percent (±14.2%)* above the revised April figure of 373,000.

Housing Completions:
Privately-owned housing completions in May were at a seasonally adjusted annual rate of 811,000. This is 3.3 percent (±20.6%)* below the revised April estimate of 839,000 and is 28.8 percent (±11.1%) below the May 2008 rate of 1,139,000.

Single-family housing completions in May were at a rate of 491,000; this is 9.4 percent (±13.8%)* below the revised April figure of 542,000.

Note that single-family completions of 491 thousand are still significantly higher than single-family starts (401 thousand). This is important because residential construction employment tends to follow completions, and completions will probably decline further.

It is still too early to call the bottom for single family starts in January, however I do expect single family housing starts to bottom sometime in 2009.

by Calculated Risk on 6/15/2009 10:59:00 PM

From David Streitfeld at the NY Times: Credit Bailout: Issuers Slashing Card Balances

... Mr. McClelland’s credit card company was calling yet again, wondering when it could expect the next installment on his delinquent account. He proposed paying half of his $5,486 balance and calling the matter even.

It’s a deal, the account representative immediately said, not even bothering to check with a supervisor.

As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed.

... many credit card issuers have revised internal guidelines to give front-line employees the power to cut deals with consumers. The workers do not even have to wait for customers to call and ask for a break.
...
An example of how quickly the card companies are shifting their approach is in the behavior of HSBC, a major issuer, toward Mr. McClelland.

He was paying fitfully on his card, which was canceled for delinquency. In April, HSBC offered him full settlement at 20 percent off. He declined. A few weeks later, it agreed to let him pay half.

...a line has been crossed, credit experts say.

“Even in the early stages of delinquency, settlements can be dramatic,” said Carmine Dorio, a longtime industry executive who ran collection departments for Citibank, Bank of America and Washington Mutual.

The story notes that these settlements still damage the borrowers credit. But this appears to be a significant shift.

As an aside: My personal view is that in a financially literate world, almost all borrowers would pay off their credit card balances monthly (there are exceptions).

by Calculated Risk on 6/15/2009 09:29:00 PM

A few more details on the Extended Stay Bankruptcy (ht Brian):

Purchase Price in April 2007: $8 billion. Source WSJ: "Wachovia, Bear Stearns and others lent Lightstone founder David Lichtenstein $7.4 billion so he could buy the 684-hotel chain from Blackstone Group for $8 billion in April 2007."

Current Value: $3.3 Billion. Source WSJ: "The hotel chain is now valued at $3.3 billion, according to its filing. That figure isn't even 60% of the buyout price and even lower than the amount of the first mortgage, $4.1 billion."

Capital structure: Source WSJ: "The hotel chain has $4.1 billion in a senior first mortgage that was mostly sold to investors as CMBS. Behind those secured creditors is the $3.3 billion of mezzanine debt divided into 10 classes ranked one through 10 in seniority."

Federal Reserve has Bear Stearns share. Source WSJ: "U.S. taxpayers also have had an interest in the talks because another lender in the buyout was Bear Stearns Cos., whose stake was taken over by the Federal Reserve after Bear collapsed in March 2008."

Federal Reserve Losses: If the Bear Stearns held only the senior debt, the Federal Reserve appears to have taken a 20% haircut. If the Fed owns any of the Junior debt - that is probably worthless.

And from the NY Times Dealbook (April 2008)

Under questioning from Robert Casey Jr., a Democratic Senator from Pennsylvania, Mr. Bernanke said Wednesday that the assets making up the Fed’s collateral were “entirely investment grade, entirely current and performing.” He said BlackRock, which the Fed has hired to manage the collateral, is “confident, or at least reasonably confident, that we would be able to recover the full amount.”

But, he was asked, what if BlackRock concludes that the collateral is worth far less than $30 billion? Can the Fed go back and ask for more?

Mr. Bernanke’s answer was brief: No, we cannot.

by Calculated Risk on 6/15/2009 07:48:00 PM

From the WSJ: Banks Challenge N.Y. Insurance Regulator Over MBIA Split

A group of large banks stepped up their fight against MBIA Inc.'s decision to split its businesses, filing a petition claiming the New York State Insurance Department had no right to approve the move.

The banks contend the move benefited some policyholders at the expense of others.

The 18 financial institutions, which include Barclays PLC., Bank of America Corp. and J.P. Morgan Chase & Co ...

The New York State Insurance Department earlier approved MBIA's restructuring plan to split its municipal-bond insurance business from its mortgage-backed securities insurance business. Many banks and hedge funds bought MBIA insurance on their structured product portfolios, and they are concerned about the financial strength of the MBS insurance business (and whether they will be paid or suffer further losses).

by Calculated Risk on 6/15/2009 06:38:00 PM

"Green Shoots" by Slick Dog's twenty month old daughter Piglet. Click on painting for larger image in new window.

by Calculated Risk on 6/15/2009 05:16:00 PM

Note: this is not seasonally adjusted. There is a very distinct seasonal pattern for imports, but not for exports.

Sometimes port traffic gives us an early hint of changes in the trade deficit. The following graph shows the loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported.

Click on graph for larger image in new window.

Inbound traffic was 19.7% below May 2008.

Outbound traffic was 15.3% below May 2008.

There has been some recovery in exports over the last few months (the year-over-year comparison was off 30% from December through February). But this is the 3nd worst YoY comparison for imports - only February and April were worse. So imports from Asia appear especially weak.

This suggests a little more improvement in the trade balance with Asia in the May trade report. Of course the overall trade deficit will probably be worse because of rising oil prices.

by Calculated Risk on 6/15/2009 03:52:00 PM

From CNBC: Credit Card Default Rate Hits Record High

U.S. credit card defaults rose to record highs in May, with a steep deterioration of Bank of America's lending portfolio ...

Bank of America—the largest U.S. bank—said its default rate, those loans the company does not expect to be paid back, soared to 12.50 percent in May from 10.47 percent in April.

In addition, American Express ... said its default rate rose to 10.4 percent from 9.90 ...

Capital One said its credit card default rate rose to 9.41 percent from 8.56 percent, while Discover said its charge-off rate increased to 8.91 percent from 8.26 percent.

JPMorgan Chase ... said its default rate rose to 8.36 percent in May from 8.07 percent in April

For the stress tests, the indicative two year loss rate for the more adverse scenario was 18% to 20% for credit cards (around 9% per year). That test might have been too lenient.

by Calculated Risk on 6/15/2009 01:00:00 PM

Click on graph for larger image in new window.

This graph shows the builder confidence index from the National Association of Home Builders (NAHB).

The housing market index (HMI) decreased to 15 in June from 16 in May. The record low was 8 set in January.

Note: any number under 50 indicates that more builders view sales conditions as poor than good.

Press release from the NAHB (added): Builder Caution Reflects Fragile Housing Market In June

Indicating that single-family home builders remain cautious and concerned about the fragile state of today’s economy and housing market, the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) declined one point to 15 in June.
...
“As expected, the housing market continues to bump along trying to find a bottom,” said NAHB Chief Economist David Crowe. “Meanwhile, builders are taking their cue from consumers, who remain uncertain about the economy and their own situation. Builders are also finding it difficult to complete a sale because customers cannot sell their existing homes.”
...
Two out of three of the HMI’s component indexes were unchanged in June, including the index gauging current home sales, which held at 14, and the index gauging traffic of prospective buyers, which held at 13. Meanwhile, the index gauging expectations for the next six months declined a single point, to 26.

Regionally, the decline was entirely focused in the South, which is the nation’s largest housing market. There, the HMI declined 3 points to 15, while the rest of the regions posted gains. The Northeast had a one-point gain to 20, the Midwest, a one-point gain to 15, and the West, a two-point gain to 14.

by Calculated Risk on 6/15/2009 11:56:00 AM

Fitch: Multifamily & Retail Defaults Drive U.S. CMBS Delinquencies Past 2%

Large loan defaults coupled with declining performance on multifamily and retail properties resulted in a 29 basis point (bp) climb to 2.07% for U.S. CMBS delinquencies in May, according to the latest Fitch Ratings Loan Delinquency Index. This marks the highest percentage of delinquencies since Fitch began its Index in 2001.

"Defaults on larger loans continue to drive delinquency increases because later vintage transactions have larger loans, many underwritten with now unrealized proforma income, as well as now-depleted debt service reserves and high leverage," said Managing Director and U.S. CMBS group head Susan Merrick.
emphasis added

Some CRE loans were based on overly optimistic proforma income (aka wishful thinking like stated income), and the loans included reserves to pay interest until rents increased (like a negatively amortizing option ARM). When the reserves run dry, and the proforma income is "unrealized", the borrower defaults.

And by sector:

Declining performance, particularly in oversupplied markets, as well as in secondary and tertiary markets, has pushed the multifamily delinquency rate to 4.55%, the highest of all property types. Multifamily properties have been highly susceptible to default in CMBS during the current economic downturn.

The 60 days or more delinquency rate for retail properties is slightly higher than the index at 2.24%.
...
Loans backed by hotels have thus far withstood economic pressures and continue to slightly outperform the Index with a 1.91% delinquency rate.

by Calculated Risk on 6/15/2009 10:56:00 AM

From Bloomberg: Extended Stay Hotels Chain Declares Bankruptcy in New York

Extended Stay Hotels ... which has more than 680 properties, said it had $7.1 billion in assets and $7.6 billion in debts at the end of last year. The company employs approximately 10,000 ...

Hotel occupancy is off more than 10% compared to last year - and revenue per available room off more than 20% - a very difficult operating environment, especially for hotel chains laden with debt.

Added: Some background from the WSJ :

Wachovia, Bear Stearns and others lent Lightstone founder David Lichtenstein $7.4 billion so he could buy the 684-hotel chain from Blackstone Group for $8 billion in April 2007. Mr. Lichtenstein, with help from Arbor Realty Trust, put in about $600 million. He estimated earnings were around $575 million, meaning the deal was levered at nearly 13 times -- high even for that era.

Much of the debt in the 2007 buyout of Extended Stay was converted into commercial mortgage-backed securities, or CMBS ...

The hotel chain has $4.1 billion in a senior first mortgage that was mostly sold to investors as CMBS. Behind those secured creditors is the $3.3 billion of mezzanine debt divided into 10 classes ranked one through 10 in seniority. Most of the holders of junior mezzanine debt bought at a discount, some around 60 cents on the dollar, but others as low as 10-15 cents, say debt holders. Both the senior and mezzanine loans mature June 12, with extension options.

by Calculated Risk on 6/15/2009 08:38:00 AM

From the NY Fed: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to deteriorate in June, at a moderately faster pace than in May. The general business conditions index fell 5 points, to -9.4. The new orders index remained negative and near last month’s level, while the shipments index fell 6 points to -4.8.
...
In a series of supplementary questions, manufacturers were asked about their capital spending plans for 2009 relative to their actual spending for 2008, both overall and for a few broad categories of capital (see Supplemental Report tab). Similar questions had been asked in June 2008 and June 2007. In the current survey, 56 percent of respondents reported reductions in overall capital spending in 2009, while just 20 percent reported increases. These results contrast fairly markedly with those of the June 2008 survey, which showed nearly as many respondents reporting increases (32 percent) as decreases (36 percent).

Here is the general business conditions index. Note that the data only goes back to July 2001 (chart to Jan 2002). Any reading below zero is contraction, so this index shows manufacturing is contracting in June.

by Calculated Risk on 6/15/2009 12:06:00 AM

From Paul Krugman in the NY Times: Stay the Course

The debate over economic policy has taken a predictable yet ominous turn: the crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts. For those who know their history, it’s déjà vu all over again — literally.

For this is the third time in history that a major economy has found itself in a liquidity trap ...

The first example of policy in a liquidity trap comes from the 1930s. The U.S. economy grew rapidly from 1933 to 1937, helped along by New Deal policies. America, however, remained well short of full employment.

Yet policy makers stopped worrying about depression and started worrying about inflation. The Federal Reserve tightened monetary policy, while F.D.R. tried to balance the federal budget. Sure enough, the economy slumped again, and full recovery had to wait for World War II.

The second example is Japan in the 1990s. After slumping early in the decade, Japan experienced a partial recovery, with the economy growing almost 3 percent in 1996. Policy makers responded by shifting their focus to the budget deficit, raising taxes and cutting spending. Japan proceeded to slide back into recession.

And here we go again.
...
To sum up: A few months ago the U.S. economy was in danger of falling into depression. Aggressive monetary policy and deficit spending have, for the time being, averted that danger. And suddenly critics are demanding that we call the whole thing off, and revert to business as usual.

Those demands should be ignored. It’s much too soon to give up on policies that have, at most, pulled us a few inches back from the edge of the abyss.

Let me add I think the "green shoots" metaphor we keep hearing is wrong. That implies new growth and some sort of immaculate recovery. Yes, right now the pace of contraction appears to have slowed - and that is good news - but even if we are nearing the bottom of the economic cliff, the eventual "recovery" will be very sluggish.

As I've written over and over (see A Return to Trend Growth in 2010? and The Impact of Changes in the Saving Rate on PCE ), the usual engines of recovery - personal consumption expenditures (PCE) and residential investment (RI) - will both remain under pressure (even if they show some sluggish growth).

The end of cliff diving is not the same as new growth.

And look at the unemployment rate ...

UPDATE: ht Geoff at Innocent Bystanders

Click on graph for larger image in new window.

This graph compares the actual quarterly unemployment rate (in red) with the Obama economic forecast from January 10th: The Job Impact of the American Recovery and Reinvestment Plan

If anything the situation is worse than expected, not better.

by Calculated Risk on 6/14/2009 08:06:00 PM

From the WSJ: Maguire Sells Office Site at 40% Off (ht Ron)

Maguire Properties Inc ... sold a newly developed office building in Irvine, Calif., for about $160 million, a price representing an estimated 40% discount to its construction cost.
...
Emmes Group of Cos. ... purchased the 19-story building, which was completed in 2007 and is about 60% leased. ...

The building ... was originally slated to be anchored by [subprime lender] New Century Financial Corp. ... The building is roughly estimated to have cost about $500 a square foot, according to Michael Knott, a senior adviser with Green Street Advisors in Newport Beach, Calif. Emmes's price was about $300 a square foot.

Quite a haircut. New Century still causing damage ...

by Calculated Risk on 6/14/2009 03:40:00 PM

Here is an interesting short discussion on reusing mall space from Rob Walker in the NY Times Magazine: Repurpose-Driven Life

Talk of American infrastructure tends to focus on inadequacies: roads that need to be repaired or widened, bridges fortified, electrical grids updated. All the more striking, then, that America’s retail infrastructure — its malls, supercenters, big boxes and other styles of store-clumping — has come to be characterized by rampant abundance. This has been a decades-long trend. But it has taken the economic downturn, with chain stores liquidating, mall tenancy slipping and car dealerships scheduled for closure, to focus popular attention on the problem with our retail infrastructure: there is too much of it.

A recent book, “Retrofitting Suburbia,” by Ellen Dunham-Jones and June Williamson, notes that in 1986, the United States had about 15 square feet of retail space per person in shopping centers. That was already a world-leading figure, but by 2003 it had increased by a third, to 20 square feet. The next countries on the list are Canada (13 square feet per person) and Australia (6.5 square feet); the highest figure in Europe is in Sweden, with 3 square feet per person.

And that was in 2003 - before the most recent mall building boom began (see graph at bottom).

From Italian cartoonist Giovanni Fontana (used with permission). Here is his website, the vignettist's corner Click on cartoon for larger image in new window.

Of course the housing bubble in the U.S. was much large than the mall bubble.

In 2005, investment in single-family structures hit a peak of $481 billion (all residential investment including multi-family and home improvement was $761 billion in 2005.)

Investment in malls peaked at $32.5 billion in 2007. So the mall bubble isn't anywhere near as big as the housing bubble in absolute numbers or potential negative impact on the overall economy.

Here is a graph of mall investment through Q1 2009 as a percent of GDP based on data from the BEA ...

Investment in multimerchandise shopping structures (malls) peaked in Q4 2007 and is continuing to decline.

Note that the article above stated there were 20 square feet of retail space per person in shopping centers in 2003 - and that was before the more recent building boom. There is just too much retail space in the U.S.

by Calculated Risk on 6/14/2009 02:17:00 PM

Way back in 2005 I stated the obvious:

"Of all the areas experiencing a housing boom, the areas most at risk have had the greatest increase in real estate related jobs. These jobs include home construction, real estate agents, mortgage brokers, inspectors and more.
...
Not surprisingly, California has become more dependent on construction than the rest of the country, and construction has really boomed in San Diego. But San Diego has nothing on the Inland Empire.

I believe that areas like the Inland Empire will suffer the most when housing activity slows."

To update the graphs:

Click on graph for larger image in new window.

This graph (using Not Seasonally Adjusted data) shows construction as a percent of total employment for the Inland Empire, California and the U.S.

Although there was a surge in construction employment in the U.S., and about a 50% increase in California (as a percent of total employment), construction employment doubled (as a percent of total employment) in the Inland Empire.

Now construction employment in the Inland Empire - as a percent of total employment - is getting close to the lows of the early '90s.

The second graph shows the percent of construction employment and the unemployment rate for the Inland Empire.

With the housing bust, the percent construction employment has declined sharply and the unemployment rate has risen to around 13% (about the same as Detroit).

by Calculated Risk on 6/14/2009 09:37:00 AM

From The Observer: Paul Krugman's fear for lost decade (ht Jonathan)

A few excerpts:

Krugman: The risk of a full, all-out Great Depression - utter collapse of everything - has receded a lot in the past few months. But this first year of crisis has been far worse than anything that happened in Japan during the last decade, so in some sense we already have much worse than anything the Japanese went through. The risk for long stagnation is really high.

And on the stimulus:

Will Hutton: [I]s Obama doing enough on fiscal policy?

PK: Well we have a stimulus which is a little over 5% of one year's GDP but some of it is not real - something that was going to happen anyway and not very stimulative. So it's really about 4% of GDP of genuine stimulus, but spread over two and a half years. So, it's actually quite a lot less than what I was arguing for.

WH: So, will it be sufficient?

PK: Well, sufficient to actually restore full employment would probably have to be 5% or more. More than we have would certainly be a good thing. It actually might happen. You know, the buzz I'm getting is that a second-round stimulus might well come on the agenda.

by Calculated Risk on 6/13/2009 08:31:00 PM

Earlier I posted that Fitch expects "home prices will fall an additional 12.5% nationally and 36% in California" from Q1 2009.

Here is Eric's take ...

From cartoonist Eric G. Lewis. Click on cartoon for larger image in new window.

by Calculated Risk on 6/13/2009 06:03:00 PM

From Reuters: Geithner: It's Too Soon To Withdraw Economic Stimulus

US Treasury Secretary Timothy Geithner said on Saturday it was too early to start withdrawing stimulus for the world's top economies, but governments should pledge a return to more sustainable fiscal policies in the future.

"Growth should remain the principal focus of policy among the G8 and broader G20 economies," Geithner told a news conference ... He said recovery has not yet arrived, and governments need to keep reinforcing recent improvements in global demand.

"It is too early to shift toward policy restraint," Geithner said
...
Geithner said the "force of the economic storm is receding" he told the BBC in Lecce that he wanted recovery firmly in place before withdrawing stimulus.

"We don't have a world economy that's growing anywhere close to potential yet. We want to see recovery firmly established before we start to get on to the next challenge," he said in the interview.

From NY Times: At Talks, Geithner Defends Stimulus

“Where we have seen improvements, they are the result of the unprecedented scope and intensity of policy actions to support demand and financial repair,” Mr. Geithner said in a statement. “These early signs of improvement are encouraging, but the global economy is still operating well below potential, and we still face acute challenges.”
emphasis added

Despite the "unprecedented scope and intensity of policy actions", the global economy (and U.S. economy) are still in recession, and the so-called "improvements" are that the pace of contraction has slowed. We still have a ways to go.