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: