by Calculated Risk on 1/03/2012 07:13:00 PM

From Bloomberg: MBIA Wins Judgment Ruling Against Countrywide

MBIA, which says it was duped into guaranteeing payment on Countrywide mortgage bonds, need only show the lender made misrepresentations about the loans backing the bonds, instead of having to prove they caused the losses the insurer is seeking to recover, New York state Judge Eileen Bransten said in a decision.

“No basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy,” she wrote.

More from the WSJ: MBIA Wins Key Ruling in Mortgage Suit vs. Countrywide

Earlier:
• ISM Manufacturing index indicates faster expansion in December
• Construction Spending increased in November
• FOMC Minutes: Agreement to provide "projections of appropriate monetary policy" in January
• Question #7 for 2012: State and Local Governments

by Calculated Risk on 1/03/2012 04:14:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2012. I'm trying to add some thoughts, and a few predictions for each question.

Many of the questions are interrelated. The question on monetary policy depends on inflation (question #9), the unemployment rate (question #6) and what happens in Europe (question #8). And the unemployment rate is related to GDP growth (question #4), and on and on ...

Question #7: State and Local Governments: It is starting to look like there will be less drag in 2012 than in 2011. How much of a drag will state and local budget problems have on economic growth and employment?

How about this headline from Bloomberg this morning: Michigan Fiscal Agency Anticipates $735 Million Budget Surplus for 2011-12? This doesn't mean the cuts are over because the budget assumes further cuts, especially for education. But it suggests progress.

There was a similar article about California a couple of weeks ago in the San Francisco Chronicle: California leaders say time for cuts may be ending. Once again there are more cuts coming, but the end may be in sight.

The National Conference of State Legislatures (NCSL) recently released a report "State Budget Update: Fall 2011,":

State fiscal conditions continue to improve, but at a very slow pace. A fall 2011 survey of state legislative fiscal officers found that the deterioration that dominated state finances in recent years has eased. Revenue performance has improved, expenditures in most states are stable and, in a significant departure from past years, few states are reporting budget gaps in the early months of fiscal year (FY) 2012. However, despite these positive developments, the effects of the Great Recession continue to linger. State tax collections still remain well below pre-recession levels.

With the enactment of their FY 2012 budgets, lawmakers successfully closed a cumulative budget gap of $91 billion. This is on top of shortfalls that states began
addressing in FY 2008. In total, lawmakers have resolved an aggregate gap of more than $500 billion over four consecutive years. But the tide may be turning. Halfway into the second quarter of FY 2012, new gaps are practically non-existent.

Note: "Fiscal years for all but four states—Alabama, Michigan, New York, and Texas—begin on July 1.", Source. So the FY 2012 budgets (and associated cuts) will end on June 30, 2012.

Here is a table of the annual change in state and local GDP and payroll employment for the last several years. State and local governments have been a significant drag on both GDP and payroll employment.

State and Local Government
	Change, Employment (000s)	Change in Real GDP
2008	160	0.0%
2009	-132	-0.9%
2010	-249	-1.8%
2011e	-246	-2.2%
2012f	-100	-1.0%

Note: estimate for 2011, forecast for 2012 (aka guess).

It is looking like there will be less drag from state and local governments in 2012, and that most of the drag will be over by the end of Q2 (end of FY 2012). This doesn't mean state and local government will add to GDP in the 2nd half of 2012, just that the drag on GDP and employment will probably end. Just getting rid of the drag will help.

This is a significant improvement from last year!

A final comment: there was a debate last year if there would be a large number of muni defaults in 2011. One analyst predicted "hundreds of billions of dollars' worth of defaults". I disagreed strongly with that prediction, and the total defaults was only a small fraction of that number. With improving finances, the threat of a huge number of muni defaults is even less likely in 2012.

Earlier:
• Question #8 for 2012: Europe and the Euro
• Question #10 for 2012: Monetary Policy
• Question #9 for 2012: Inflation

by Calculated Risk on 1/03/2012 02:00:00 PM

From the Fed: Minutes of the Federal Open Market Committee, December 13, 2011 and conference call on November 28th. Excerpts:

In their discussion of the economic situation and outlook, meeting participants agreed that the information received since their previous meeting indicated that economic activity was expanding at a moderate rate, notwithstanding some apparent slowing in global economic growth.
...
Regarding the economic outlook, participants continued to anticipate that economic activity would expand at a moderate rate in the coming quarters and that, consequently, the unemployment rate would decline only gradually. The factors that participants cited as likely to restrain the pace of the economic expansion included an expectation that financial markets would remain unsettled until the fiscal and banking issues in the euro area were more fully addressed. Other factors that were expected to weigh on the pace of economic activity were the slowdown of economic activity abroad, fiscal tightening in the United States, high levels of uncertainty among households and businesses, the weak housing market, and household deleveraging. In assessing the economic outlook, participants judged
that strains in global financial markets continued to pose significant downside risks. With the rate of increase in economic activity anticipated to remain moderate, most participants expected that inflation would settle over coming quarters at or below levels consistent with their estimates of its longer-run mandate consistent rate.

And there was discussion about communication:

After the Committee’s vote, participants turned to a further consideration of ways in which the Committee might enhance the clarity and transparency of its public communications. The subcommittee on communications recommended an approach for incorporating information about participants’ projections of appropriate future monetary policy into the Summary of Economic Projections (SEP), which the FOMC releases four times each year. In the SEP, participants’ projections for economic growth, unemployment, and inflation are conditioned on their individual assessments of the path of monetary policy that is most likely to be consistent with the Federal Reserve’s statutory mandate to promote maximum employment and price stability, but information about those assessments has not been included in the SEP.
...
At the conclusion of their discussion, participants decided to incorporate information about their projections of appropriate monetary policy into the SEP beginning in January. Specifically, the SEP will include information about participants’ projections of the appropriate level of the target federal funds rate in the fourth quarter of the current year and the next few calendar years, and over the longer run; the SEP also will report participants’ current projections of the likely timing of the first increase in the target rate given their projections of future economic conditions. An accompanying narrative will describe the key factors underlying those assessments as well as qualitative information regarding participants’ expectations for the Federal Reserve’s balance sheet.

by Calculated Risk on 1/03/2012 11:39:00 AM

Catching up ... This morning the Census Bureau reported that overall construction spending increased in November:

The U.S. Census Bureau of the Department of Commerce announced today that construction spending during November 2011 was estimated at a seasonally adjusted annual rate of $807.1 billion, 1.2 percent (±1.6%)* above the revised October estimate of $797.4 billion. The November figure is 0.5 percent (±1.9%)* above the November 2010 estimate of $803.0 billion.

Private construction spending increased in November:

Spending on private construction was at a seasonally adjusted annual rate of $522.3 billion, 1.0 percent (±1.0%)* above the revised October estimate of $517.3 billion. Residential construction was at a seasonally adjusted annual rate of $243.7 billion in November, 2.0 percent (±1.3%) above the revised October estimate of $238.9 billion. Nonresidential construction was at a seasonally adjusted annual rate of $278.6 billion in November, nearly the same as (±1.0%)* the revised October estimate of $278.5 billion.

Click on graph for larger image.

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

Private residential spending is 64% below the peak in early 2006, and non-residential spending is 33% below the peak in January 2008.

Public construction spending is now 12% below the peak in March 2009.

The second graph shows the year-over-year change in construction spending.

On a year-over-year basis, both private residential and non-residential construction spending have turned positive, but public spending is now falling on a year-over-year basis as the stimulus spending ends. The year-over-year improvements in private non-residential are mostly due to energy spending (power and electric).

Earlier:
• ISM Manufacturing index indicates faster expansion in December

by Calculated Risk on 1/03/2012 10:00:00 AM

PMI was at 53.9% in December, up from 52.7% in November. The employment index was at 55.1%, up from 51.8%, and new orders index was at 57.6%, up from 56.7%.

From the Institute for Supply Management: December 2011 Manufacturing ISM Report On Business®

Economic activity in the manufacturing sector expanded in December for the 29th consecutive month, and the overall economy grew for the 31st consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The PMI registered 53.9 percent, an increase of 1.2 percentage points from November's reading of 52.7 percent, indicating expansion in the manufacturing sector for the 29th consecutive month. The New Orders Index increased 0.9 percentage point from November to 57.6 percent, reflecting the third consecutive month of growth after three months of contraction. Prices of raw materials continued to decrease for the third consecutive month, with the Prices Index registering 47.5 percent, which is 2.5 percentage points higher than the November reading of 45 percent. Manufacturing is finishing out the year on a positive note, with new orders, production and employment all growing in December at faster rates than in November, and with an optimistic view toward the beginning of 2012 as reflected by the panel in this month's survey."

Click on graph for larger image.

Here is a long term graph of the ISM manufacturing index.

This was above expectations of 53.2%, and suggests manufacturing expanded at a faster rate in December than in November. It appears manufacturing employment expanded in December with the employment index at 55.1%. New orders were up, and prices declined.