by Calculated Risk on 12/27/2011 09:14:00 AM

From MarketWatch: Oct. U.S. home prices fall 1.2%: Case-Shiller

U.S. home prices fell 1.2% in October to take the 12-month drop to 3.4%, according to the S&P/Case-Shiller 20-city composite home price index released Tuesday. Nineteen of 20 cities saw price drops, and the index is now down 32.1% from its peak in 2006.

S&P hasn't released the data online yet. The 1.2% decline is Not Seasonally Adjusted (NSA), and the seasonally adjusted decline will be smaller (prices decline seasonally in October). I'll post graphs after the data is released.

by Calculated Risk on 12/26/2011 09:05:00 PM

I always pay close attention to Fed stories from Jon Hilsenrath at the WSJ: Slowing Inflation Cheers Fed

U.S. inflation is slowing after a surge early in the year. ... The Fed has been considering new steps to spur growth. Two ideas are on the table: commit to keep short-term interest rates near zero for even longer than through mid-2013, and restart a bond-buying program aimed at driving already-low long-term interest rates lower. Before taking either step, though, Fed officials would want to have some comfort that they wouldn't be creating undesired inflation.

As Hilsenrath notes, inflation is slowing by most key measures, and this will give the Fed more leeway. It always seems the Fed telegraphs their intentions, and it now seems very likely the Fed will add a range of Fed funds rate forecasts to their quarterly economic projections at the next FOMC meeting on January 24th and 25th.

If the Fed funds rate forecasts are added, this would replace the sentence in the FOMC statement - "The Committee ... currently anticipates that economic conditions ... are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013". The bond buying program (aka QE3) would be data dependent and probably start a little later in the year if economic growth disappoints.

Weekend:
• Schedule for Week of Dec 25th
• Summary for Week ending Dec 23rd

by Calculated Risk on 12/26/2011 03:41:00 PM

Discussions of the business cycle frequently focus on consumer spending (PCE: Personal consumption expenditures), but one key is to watch private domestic investment. Even though private investment usually only accounts for about 15% of GDP, private investment experiences significantly larger swings than PCE during the business cycle and has an outsized impact on GDP. Note: currently private investment is just over 12% of GDP - much lower than normal.

The first graph shows the real annualized change in GDP and private investment since 1960 (this is a 3 quarter centered average to smooth the graph).

Click on graph for larger image.

GDP has fairly small annualized changes compared to the huge swings in investment, especially during and just following a recession. This is why investment is one of the keys to the business cycle.

The second graph shows the contribution to GDP from the four categories of private investment: residential investment, equipment and software, nonresidential structures, and "Change in private inventories". Note: this is a 3 quarter centered average of the contribution to GDP.

This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment lags the business cycle. Red is residential, green is equipment and software, and blue is investment in non-residential structures. The usual pattern - both into and out of recessions is - red, green, and blue.

The dashed purple line is the "Change in private inventories". This category has significant ups and downs, but is always negative during a recession, and provides a boost to GDP just after a recession. Change in private inventories has made a large negative contribution to GDP over the last four quarters, and will probably make a positive contribution in Q4.

The key leading sector - residential investment - has lagged this recovery because of the huge overhang of existing inventory. Usually residential investment is a strong contributor to GDP growth and employment in the early stages of a recovery, but not this time - and that weakness is a key reason why the recovery has been sluggish so far.

Equipment and software investment has made a significant positive contribution to GDP for nine straight quarters (it is coincident).

The contribution from nonresidential investment in structures was positive in Q3. Nonresidential investment in structures typically lags the recovery; however investment in energy and power is masking weakness in office, mall and hotel investment.

And residential investment has finally turned slightly positive and will make a positive contribution to GDP in 2011 for the first time since 2005.

What does this mean for the business cycle? Usually residential investment would turn down before a recession, and that isn't happening right now. Instead residential investment is mostly moving sideways.

The third graph shows residential investment as a percent of GDP. Residential investment as a percent of GDP is at a record low, and it seems unlikely that residential investment will decline significantly lower as a percent of GDP - especially with a pickup in multifamily investment and some increase in home improvement (Note: Residential investment is mostly investment in new single family and multifamily structures, home improvement and brokers' commissions). It seems likely that residential investment will make a positive contribution to GDP in 2012.

The last graph shows non-residential investment in structures and equipment and software.

Equipment and software investment has increased sharply, but is still at a fairly normal level of GDP. And non-residential investment in structures increased in Q3, but this is still very low.

A key fear is that the financial crisis in Europe could drag the US economy into another recession. That is possible, especially combined with ongoing household deleveraging and fiscal tightening in the US (with current policy, Federal, state and local governments will all subtract from GDP growth in 2012).

However it seems unlikely there will be a sharp decline in private investment. Residential investment is already at record lows as a percent of GDP and will probably increase in 2012. Changes in private inventories will probably rebound a little, and investment in non-residential structures is also near record lows. It is possible that investment in equipment and software could decline in 2012, but it doesn't seem likely there will be a sharp decline in overall private investment.

If the euro zone comes apart rapidly - or there is further non-private tightening - a new recession is possible in the US, but without a sharp decline in private investment, it is unlikely a US recession would be severe. Right now it appears overall US private investment will increase in 2012, and that the US will avoid a new recession.

by Calculated Risk on 12/26/2011 09:48:00 AM

From Brady Dennis at the WaPo: Falling home values mean budget crunches for cities

Because of the time it often takes for property assessments to reflect falling home values, the bust that began in 2007 has just begun to ravage tax revenues in communities from coast to coast. The problem is unlikely to subside soon.

For instance, Baltimore collected $815 million in property taxes during the most recent fiscal year, according to Bill Voorhees, Baltimore’s director of revenue and tax analysis. Next year, the figure is predicted to shrink to $803.5 million. The following year, $773 million. The year after that, $735.7 million. The year after that, $729.4 million.

As the article notes, some states cap the annual increase in property taxes (there is a 2% annual cap in California). For long term owners, this means their property taxes will continue to increase since their assessed value is probably still below the current market value. This will keep overall taxes from falling quickly in certain states.

In California, property values are assessed annually - and most cities have already reduced assessments and taxes on many homeowners. Also in California, properties are assessed whenever ownership changes, and all the foreclosures and short sales have already pushed down property taxes. So these communities will probably not see a further dramatic decline in property tax revenue.

But there is still more pain to come in other areas.

Weekend:
• Schedule for Week of Dec 25th
• Summary for Week ending Dec 23rd

by Calculated Risk on 12/25/2011 07:36:00 PM

Update: The UK has a stamp tax on stock shares (but not other financial transactions), see:
http://www.hmrc.gov.uk/stats/stamp_duty/table15-1.pdf
and
http://www.cepr.net/documents/publications/financial-transactions-tax-2008-12.pdf

This could be a key story in 2012 ...

From Bloomberg: Schaeuble vows to push for financial transaction tax

"In the EU we've agreed to explore the chances of a financial transaction tax in the first months of the new year," [Schaeuble] said. "If the hurdles are too high then Germany and France will push for introducing the tax only in the euro zone."
...
"I don't want to wait until such a tax is introduced worldwide. Otherwise we would risk not only the stability of our financial markets... but we would also be endangering the legitimacy in the public eye for the entire system.

"That's why I'm fighting with such determination for a financial transaction tax. It might not be able to stop the ludicrous developments in financial markets but it would at least brake them a bit."

Schaeuble said he wanted the tax to slow down the pace of financial transactions and possibly make some speculative business unprofitable.

"The markets are a bit too preoccupied with themselves these days rather than supporting the real economy," he said. "We've got to decelerate the pace of transactions."
...
"I'm very much in favour of Europe leading the way," he said. "That can possibly mean that certain speculative business models are no longer profitable. But that is what we want."

This might sound good, but if this was just introduced in the euro zone, many financial transactions would move to the UK or the US. I think a transaction tax would have to enacted everywhere to be effective.

Schaeuble also said the European financial situation is "controllable". That is pretty scary since Schaeuble has misdiagnosed the problems in Europe - calling for more and more austerity - and it looks like Europe will get "Schaeubled" again in 2012!

Yesterday:
• Schedule for Week of Dec 25th
• Summary for Week ending Dec 23rd

Happy Holidays!