by Calculated Risk on 11/23/2010 02:00:00 PM

From the November 2-3, 2010 (and conference call held on October 15, 2010) FOMC meeting.

The Fed revised down their forecasts again:

Economic projections of Federal Reserve Governors and Reserve Bank presidents
	2010	2011	2012
Change in Real GDP	2.4 to 2.5%	3.0 to 3.6%	3.6 to 4.5%
June projections	3.0% to 3.5%	3.5% to 4.2%	3.5% to 4.5%
April projections	3.2% to 3.7%	3.4% to 4.5%	3.5% to 4.5%
Unemployment Rate	9.5 to 9.7%	8.9 to 9.1%	7.7 to 8.2%
June projections	9.2% to 9.5%	8.3% to 8.7%	7.1% to 7.5%
April projections	9.1% to 9.5%	8.1% to 8.5%	6.6% to 7.5%
PCE Inflation	1.2 to 1.4%	1.1 to 1.7%	1.1 to 1.8%
June projections	1.0% to 1.1%	1.1% to 1.6%	1.0% to 1.7%
April projection	1.2% to 1.5%	1.1% to 1.9%	1.2% to 2.0%

So the Fed expects slower growth, higher unemployment and about the same rate of inflation. The big changes were the increase in the forecast unemployment rates for 2011 and 2012, and the decrease in GDP for 2010 and 2011.

There was apparently some significant disagreement:

Participants generally agreed that the most likely economic outcome would be a gradual pickup in growth with slow progress toward maximum employment. They also generally expected that inflation would remain, for some time, below levels the Committee considers most consistent, over the longer run, with maximum employment and price stability. However, participants held a range of views about the risks to that outlook. Most saw the risks to growth as broadly balanced, but many saw the risks as tilted to the downside. Similarly, a majority saw the risks to inflation as balanced; some, however, saw downside risks predominating while a couple saw inflation risks as tilted to the upside. Participants also differed in their assessments of the likely benefits and costs associated with a program of purchasing additional longer-term securities in an effort to provide additional monetary stimulus, though most saw the benefits as exceeding the costs in current circumstances.

by Calculated Risk on 11/23/2010 12:44:00 PM

Plenty of data today ...

From Bloomberg: Euro in `Exceptionally Serious' Situation Amid Irish Bailout, Merkel Says

“I don’t want to paint a dramatic picture, but I just want to say that a year ago we couldn’t imagine the debate we had in the spring and the measures we had to take” over Greece, Merkel said ... “We are facing an exceptionally serious situation as far as the euro’s situation is concerned.”

Bond spreads for Spain hit a record today and the 10-year yield moved about 4.9%. The 10-year yields for Ireland and Portugal moved higher today too.

The FDIC released the Q3 Quarterly Bank report today.

Net income for the 7,760 insured commercial banks and savings institutions reporting quarterly financial results totaled $14.5 billion, a considerable improvement over the $2 billion reported a year ago. Third quarter net income was below the $17.7 billion and $21.4 billion reported in the first and second quarters of this year, respectively, but the shortfall was attributable to a $10.1 billion quarterly net loss at one large institution that had a $10.4 billion charge for goodwill impairment. Absent this loss, third quarter earnings would have represented a three-year high. Almost two out of every three institutions (63.3 percent) reported higher net income than a year earlier, and fewer than one in five (18.9 percent) was unprofitable. This is the lowest percentage of unprofitable institutions since second quarter 2008. A year ago, more than 27 percent of all institutions reported negative net income.

The number of problem institutions increased to 860 (about 11% of all institutions) with $379.2 billion in assets (about 2.8% of all assets are at official problem institutions).

The Richmond Fed manufacturing survey showed improvement in November.

In November, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — rose four points to 9 from October's reading of 5. Among the index's components, shipments rose four points to 7, new orders edged up two points to finish at 10, and the jobs index increased six points to 10.

This is slightly better than expected. I'll post a graph when after all the regional surveys have been released.

And earlier on existing home sales:

October Existing Home Sales: 4.43 million SAAR, 10.5 months of supply

Existing Home Inventory increases 8.4% Year-over-Year

by Calculated Risk on 11/23/2010 11:13:00 AM

Earlier the NAR released the existing home sales data for October; here are a couple more graphs ...

The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change.

Click on graph for larger image in new window.

Although inventory decreased from September 2010 to October 2010, inventory increased 8.4% YoY in October. This is the largest YoY increase in inventory since early 2008.

The year-over-year increase in inventory is especially bad news because the reported inventory very high (3.864 million), and the 10.5 months of supply in October is far above normal.

By request - the second graph shows existing home sales Not Seasonally Adjusted (NSA).

The red columns are for 2010. Sales for the last four months are significantly below the previous years, and sales will probably be well weak for the remainder of 2010.

The bottom line: Sales were weak in October - almost exactly at the levels I expected - and will continue to be weak for some time. Inventory is very high - and the significant year-over-year increase in inventory is very concerning. The high level of inventory and months-of-supply will put downward pressure on house prices.

by Calculated Risk on 11/23/2010 10:00:00 AM

The NAR reports: Existing-Home Sales Decline in October Following Two Monthly Gains

Existing-home sales1, which are completed transactions that include single-family, townhomes, condominiums and co-ops, declined 2.2 percent to a seasonally adjusted annual rate of 4.43 million in October from 4.53 million in September, and are 25.9 percent below the 5.98 million-unit level in October 2009 when sales were surging prior to the initial deadline for the first-time buyer tax credit.
...
Total housing inventory at the end of October fell 3.4 percent to 3.86 million existing homes available for sale, which represents a 10.5-month supply4 at the current sales pace, down from a 10.6-month supply in September.

Click on graph for larger image in new window.

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in October 2010 (4.43 million SAAR) were 2.2% lower than last month, and were 25.9% lower than October 2009.

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory decreased to 3.86 million in October from 4.00 million in September. The all time record high was 4.58 million homes for sale in July 2008.

Inventory is not seasonally adjusted and there is a clear seasonal pattern with inventory peaking in the summer and declining in the fall. I'll have more on inventory later ...

The last graph shows the 'months of supply' metric.

Months of supply decreased to 10.5 months in October from 10.6 months in September. This is extremely high and suggests prices, as measured by the repeat sales indexes like Case-Shiller and CoreLogic, will continue to decline.

These weak numbers are exactly what I expected. The ongoing high level of supply - and double digit months-of-supply are the key stories. I'll have more ...

by Calculated Risk on 11/23/2010 08:30:00 AM

From the BEA: Gross Domestic Product, 2nd quarter 2010 (second estimate)

The upward revision came from PCE (revised up from 2.6% to 2.8%), from net exports (added 0.25 percentage points to growth), and state and local government expenditures (revised up from -0.2% to 0.8%).

As expected, non-residential structure investment was revised down from 3.9% to -5.7%.

Click on graph for larger image in new window.

This graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The current quarter is in blue.

The dashed line is the median growth rate of 3.05%. The current recovery is still below trend growth.

by Calculated Risk on 11/22/2010 09:38:00 PM

From Sewell Chan at the NY Times: Fed Adopts Washington Tactics to Combat Critics

Faced with unusually sharp ideological attacks after its latest bid to stimulate the economy, the Federal Reserve now faces a challenge far removed from the conduct of monetary policy: how to defend itself in a hyperpartisan environment without becoming overtly political.
...
The situation forms an odd corollary to the early 1980s, when ... Paul A. Volcker, sharply raised interest rates, setting off back-to-back recessions in a painful but effective war on inflation.

Liberals attacked Mr. Volcker, a Democrat, as an inflation-fighting zealot who disregarded the plight of the unemployed. Now conservatives are portraying Mr. Bernanke, a Republican, as trying too hard to stimulate growth and underestimating the risk of inflation.

Click on graph for larger image in new window.

When Paul Volcker became Fed Chairman in August 1979, inflation was close to 10% (year-over-year change in core CPI). The unemployment rate was close to 6%. As the Fed tightened (taking the Fed funds rate to around 20%), the unemployment rate started to rise sharply.

So there were two problems in the early '80s: very high inflation, and a rising unemployment rate. It is understandable there was friction between the dual mandates of the Fed - especially when inflation started to fall and the unemployment rate was in double digits.

Now the unemployment rate is at 9.6% - a real and painful problem. And inflation is low and falling. So what is the source of the friction today? The risk of future inflation? This "odd corollary" doesn't work.