The Bureau of Economic Analysis released the Personal Income figures today. Personal increased $20.1 billion, or 0.17% in April. Adjusted for inflation, personal income was virtually the same decreasing by 0.07% for the month after rising by the same amount in March. Year over year, real personal income is up by 0.67%.
Personal income is continuing the recent trend of flirting with recession but not exhibiting the deep effects of one.
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photo by extranoise
Quote for the day:
"We ran into a hurricane."
Jimmy Cayne, Bear Stearns Chairman to a group of shareholders as they approved the merger with JPMorgan Chase.
The Bureau of Economic Analysis released the preliminary GDP numbers today updating last month's advance figures. GPD grew by an annual rate of 0.898% in the first quarter over the fourth quarter of 2007, up from the previously announced rate of 0.596%. This upward revision was in line with economist's expectations. Total GDP for the first quarter was at $11.7019 trillion. This was $8.8 billion higher than estimated last month. Personal Consumption Expenditures were $0.6 billion higher than previously estimated, Gross private domestic investment was $8.7 billion lower, and Government spending was $0.2 billion lower. This was offset by an improvement of $15.7 billion in the trade deficit. Exports were $9.7 billion less than previously estimated, but this was offset by a bigger decrease of $25.4 billion in imports.
Adjusted for population growth and inflation, GDP grew by 0.05% last quarter. That is about as close to zero as you can get. Bloomberg had a perfect quote from Jeffery Frankel, an economist at Harvard University who is a member of the NBER panel that dates U.S. economic cycles:
It's basically like an airplane at stall speed, just skimming above the water, I wouldn't rule out going into a recession later in the year.
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The U.S. Census Bureau announced the advanced figures for Durable Goods (goods that usually have a lifespan of several years like TVs, Cars and appliances). New Orders for manufactured durable goods decreased by 0.5% in April and were down 1.6% compared to the previous year. Economists had expected a 1% drop compared to March. Excluding transportation, new orders increased by 2.5% for the month of April and by 5.2% compared to April 2007. Shipments of manufactured durable goods increased by 1.2% for the month and by 0.3% year over year. Unfilled Orders increased by 1% for the month and 16.0% year over year. Finally inventory increased by 0.5% in April over the previous month and by 4.9% compared to the previous April.
Unfilled orders (unfilled orders are defined as unfilled orders for the previous month plus new orders for the current month less shipped orders) are usually a gauge of future demand. A large increase in unfilled orders occurs when the manufactures can not keep up with demand. However there seems to be a breakdown in the last couple of years. Unfilled orders is at record levels, yet shipments have been declining.
New orders for durable goods is starting to diverge from durable goods without transportation reflecting the effects of the high prices of crude oil.
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Today Standard and Poors released the S&P Case-Shiller Home Price Index. The Composite-10 fell 2.37% in March 2008 compared to February 2008 and is down 15.30% compared to the previous year. The CME Futures market is pricing in a further decline of 12.14% over the next year (March 2009).
Charlotte and Dallas home prices increased last month compared to the previous month. Out of the 20 cities in the Composite-20 only Charlotte is positive year over year. 8 cities out of the 20 cities are now down over 20% from their peak.
From 1890 to 2000, home prices were relatively flat when adjusted for inflation. The CME Futures market is now pricing in for the home price index to return close to its long term average by the end of 2009.
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The U.S. Census Bureau and the Department of HUD released the new homes data today. New one-family home sales were at a seasonally adjusted annual rate of 526,000 for April 2008. This is up 3.3% from the revised March rate of 509,000, but is 42.0% below April 2007. March 2008 was revised from 526,000 to 509,000. Economists had forecast a level of 520,000 for April 2008.
Months Supply improved from 11.1 in March to 10.6 in April. However this is still at an elevated level for inventory. Over 6 months supply puts a downward pressure to home prices as supply exceeds demand. As discussed in this post, the amount of new home completions is now around the level of new home sales. However, there is still a huge amount of excess inventory to work through.
March through June is usually the strongest months for New Home Sales. Using 2001 and 2005 for comparisons, sales for April are at 56.0% of 2001’s pace and only 40.5% of the pace during the boom year of 2005. Sales continue to be anemic.
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photo by *Micky
Quote for the day:
Liberty, when it begins to take root, is a plant of rapid growth.
- George Washington
The National Association of Realtors announced today that existing home sales for April 2008 declined 1.0% from the previous month and declined by 17.5% versus the previous year. The national median sales price for existing homes was $202,300 which is 8.0% below a year ago.
There are now 11.2 months supply of homes on the market. 6 months supply is where supply and demand are balanced. 11.2 months supply for combined single-family homes and condos is the highest level on record since the NAR started tracking this in 1995. Condos were at a record 14.2 months supply and single-family homes were at 10.7, the highest since 1985.
Inventory reached 4.552 million homes. Inventory normally peaks in the summer months. The growth in inventory had seemed to stabilize over the last few months, but now is reversing course. Months supply also is surging up after pausing for a few months.
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The Office of Federal Housing Enterprise Oversight (OFHEO) announced their quarterly home price indexes for the U.S., the 9 Census divisions, all individual 50 states, and 381 Metropolitan Statistical Areas (MSAs).
The OFHEO analyzes the mortgage records of Fannie Mae and Freddie Mac's conforming mortgage transactions (currently $417,000 maximum loan amounts and "temporarily" up to $729,750 in high-cost areas). They analyze repeat transactions to determine the home price index. Unlike the S&P Case-Shiller index which only uses purchases, the OFHEO analyzes refinances and purchases. They also issue a purchase only index for the U.S., the Census divisions and the individual states.
Before seasonal adjustments, the U.S. index was virtually unchanged versus a year ago with a decline of 0.03%. The U.S. purchases only index showed a decline of 3.07%. In contrast, the S&P Case-Shiller Composite-10 index was down 13.6% versus a year ago in the latest reading. This is quite a disparity.
The first reason for the disparity is the geographic composition. The S&P Case-Shiller Composite-10 is an index of 10 cities: Los Angeles, Miami, Washington D.C., San Diego, Las Vegas, San Francisco, New York, Boston, Chicago, and Denver. There are a lot of cities in that index that had a huge runup in home prices followed by a large decline. The composite-10 covers 30.2% of U.S. real estate. The rest of the country did not have as large of a swing. The S&P Case-Shiller Composite-20 adds Tampa, Phoenix, Seattle, Portland, Minneapolis, Atlanta, Charlotte, Dallas, Cleveland, and Detroit to the list. The spike up and down in these cities was not as dramatic. The composite-20 covers 42.5% of U.S. real estate. Finally, S&P Case-Shiller put out a National index that covers all 9 Census divisions and covers about 70.8% of the U.S. Real estate. Fittingly, the National index did not move up and down as the other two indexes. The OFHEO, having a national composition, had the flattest curve of all the indexes.
The OFHEO issued a research paper detailing the major factors for the disparity between the S&P Case Shiller index and the OFHEO index. They found that besides the geographic makeup, there are 3 major differences accounting for the other variance. The first major difference is the fact that the OFHEO's index looks at both purchases and refinances whereas the S&P Case-Shiller index only looks at purchases. Purchase transactions are considered to be more accurate. For one, it is the price at which the buyer is valuing the property. The buyer does not want to pay more than a fair price. In a refinance transaction, there may be pressure to overinflate the value (to maximize cash out, or a certain value may be needed for the transaction to work). The refinance values are also staledated. An appraisal can usually be up to 120 days old by the time the property is completed. The appraisal uses comparable sales to value the house. The comparables that the appraiser uses are sometimes up to 6 months old. A typical appraisal may have comparables that are 4 to 6 months old by the time the loan closes but could be up to 10 months old (120 days plus 6 months). In an update to the study, the OFHEO found that on average their figures were 6.87% higher than the S&P Case-Shiller year over year declines for the 10 cities in the Composite-10. By eliminating refinances from the data, the discrepancy was reduced by 2.38%.
The second big factor in the difference between the two indexes is the weight that is given to homes that have lengthy intervals between valuations. OFHEO discounts homes with long intervals between valuations more than the S&P Case-Shiller index does. This led to a bigger variance by 1.35%. The biggest difference between the two indexes was the omission of homes that sold with financing other than Fannie Mae and Freddie Mac loans (subprime loans, jumbo mortgages, VA, FHA and other types of financing arrangements). This led to a variance of 2.85%. The majority of ARMs, and interest only loans were financed outside of Fannie Mae and Freddie Mac. Borrowers with this type of financing may have overpaid on their purchases. For example if a borrower wanted $2000 a month payments and the interest rate was 6%, then loan amount for an interest only loan would be $400,000; a fully amortized loan would be $333,583. An interest only loan would give more buying power. Moreover, ARMs usually had a lower rate inflating the possible loan amount at those payments even more. Another reason for the variance in non agency loans was the lack of skin in the game, or 100% financing. A borrower without a vested interest in a property is apt to take more risks. If a borrower overpays on a house and puts 10-20% down, then they risk losing their money. A borrower that puts 0% wins if the property shoots up in value. If it drops in value they lose, or in today's world they walk away. 100% financing also led to overinflated purchase prices in some cases. For example, if a borrower wanted to buy a $200,000 house, but had no money for a downpayment or closing costs, they might structure the purchase at $205,000 with a seller credit to the buyer for $5,000 to cover closing costs. They would get a loan for $205,000 and basically have the bank finance the closing costs. A borrower putting 10-20% down might not want to do this. Surprisingly the loans that were not eligible for sale to Fannie Mae and Freddie Mac due to loan amount (over $417,000 loan amount) did not contribute to the larger declines in the S&P Case-Shiller index (they lessened the decline by 0.19%). It was the lower and mid priced homes with non-agency financing that led to the variance of 2.85%. This is contrary to the common assumption that the reason for the variance is the loan size constraints.
Here are graphs of the 10 cities in the composite-10 comparing the S&P Case-Shiller index to the OFHEO index. The OFHEO index (includes refinances) lags the S&P Case-Shiller index by around 6 months. Amazingly the peaks reached were very similar across the board. The lag between the indexes was also fairly consistent.
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The Federal Reserve's April meeting minutes were released today. They believe that the threat of the credit crisis has dissipated.
Although participants anticipated that further improvement in market conditions would occur only slowly and that some backsliding was possible, the generally better state of financial markets had caused participants to mark down the odds that economic activity could be severely disrupted by a further substantial deterioration in the financial environment.
The TED spread has lessened in recent weeks to under 1%, the lowest it has been since July 2007.
Due to the improvement in the Financial markets and the threats of inflation, the Fed signaled that they are probably done with the rate cuts. The possibility of the rate cuts combined with the gloomy economic projections spooked the markets today.
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The Bureau of Labor Statistics released the Producer Price Index for Finished Goods (PPI) today. Seasonally adjusted, PPI increased by 0.17% in April 2008 compared to March and was 6.40% higher than a year ago. Core PPI (PPI less food and energy) was up 0.30% compared to March and was 3.04% higher than a year ago. This is the highest core PPI has been since 1991.
Part of the reason for the drop in PPI and the rise in the core PPI was the seasonal adjustments. The Non-seasonally adjusted PPI was up 0.74% compared to March 2008 and up 6.51% compared to a year ago. The Non-seasonally adjusted core PPI was up 0.30% compared to March 2008 and up 3.04% compared to a year ago.
Inflation is at an interesting crossroads. Will inflation creep into the core numbers excluding the increases in food and energy? Or will the slowing economy dampen inflation as it typically does during recessions. The wild card is the global economy. In the past, the world was dependent on America and the world would catch a cold if the U.S. sneezed. Now the roles are reversing; we are watching China and OPEC to see what will happen to prices.
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