Real GDP rises 0.6%; not yet a recession

The Bureau of Economic Analysis released the advanced estimates of Gross Domestic Product (GDP). Real GDP increased by an annual rate of 0.596% over last quarter.

Whether or not we are in recession is under much debate. Particularly because a recession is often thought of as being 2 quarters of negative growth. The current anemic growth seems to indicate that we are not in a recession (although the figures will undergo revision).

The National Bureau of Economic Research (NBER) officially identifies the start and finish of recessions. Their definition of a recession is as follows:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Nouriel Roubini, an economics professor at New York University, gives six reasons why the positive 0.6% growth is deceptive. First he notes:

First of all, if you exclude the increase of inventory of unsold goods (that moved positive after a negative figure in Q4) the Final Sales of Domestic Product were a negative 0.2%. In other terms, inventories of unsold goods added an artificial 0.8% to Q1 growth boosting it from a negative 0.2% to a positive 0.6%. So actual aggregate demand (Final Sales of Domestic Product) – the actual measure of growth of true demand - fell in Q1. And this build-up of inventories in Q1 means that the fall in GDP in Q2 will be larger than otherwise as firms will have to reduce that large inventory of unsold goods via a further reduction in production and employment.

Here is a graph of Real GDP with and without changes in private inventories:

Barry Ritholtz talks about per capita GDP.

Merrill Lynch North American Chief Economist David Rosenberg points out a simple but overlooked fact about economic growth: The US population is expanding 1.0 - 1.5% per year. Any GDP growth of less than that means that on a per capita basis, we are contracting.

Here is a graph of per capita GDP:

I would argue that we have not yet had a "significant decline in economic activity." Recessions are easy to spot on the charts. Economic activity has slowed, yet it has not slowed as much as in other previous recessions. Unemployment is a good example. Unemployment has started to go up, but it has not moved up as much as in other recessions. The stock market is pricing in that the worst is over. If that were to be the case then we would have averted recession or it would be the smallest recessions ever.

This economic downturn is being led by the housing crisis which is still in its early stages. Foreclosures, delinquencies, and bank writeoffs are still accelerating. Housing prices are falling at its fastest pace ever. I fear that whether or not we are in a recession will soon no longer be in debate; it will be significant and obvious to all.

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Wednesday, April 30, 2008

photo by Chris (archi3d)


Quote for the day:

"You can never say never."

- Gary Crittenden, Chief Financial Officer of Citigroup, April 18, 2008

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In the news:

Citigroup sold $4.5 billion of common stock, 50% more than originally expected, at a 4% discount to raise capital. Just over a week ago Citigroup sold $6 billion of preferred stock and has now raised more than $40 billion of capital since late last year.

"The Commerce Department said growth in real gross domestic product in the first quarter was estimated at 0.6% for the second straight quarter, ahead of the 0.2% growth rate expected by economists surveyed by MarketWatch." "With inventory building adding 0.8 percentage points to growth, the headline GDP figure was stronger than the details of the report. Final sales of domestic product fell 0.2%, while final domestic sales dropped 0.4% -- the first decline since the recession of 1991."

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Case-Shiller Home Price Index Plunges at Record Pace

The S&P/Case-Shiller Home Price Indices were released today reflecting data through February 2008. The Composite-10 declined by 2.80% in February 2008 compared to the previous month and is down 13.56% year over year. The index has now fallen at its fastest pace ever setting new records for declines for five consecutive months.

Charlotte is the lone city to post a positive gain year over year. However, Charlotte has been declining for 6 months in a row. Even if prices were to stay the same for the next two months, the year over year change for Charlotte would turn negative for the April 2008 numbers. Charlotte was at 214.97 in April 2007, it peaked at 221.32 in August 2007 and now is at 213.73. 8 out of the 20 cities are now down over 20% from their peak (Los Angeles, San Diego, San Francisco, Miami, Las Vegas, Phoenix, Tampa, and Detroit).

The CME futures are pricing in another 10.04% decline over the next 12 months for the Composite-10.

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Tuesday, April 29, 2008

photo by Pierre Éthier

Quote for the day:

One touch of nature makes the whole world kin.

- William Shakespeare, Troilus and Cressida

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In the news:

Countrywide reported a $893.1 million first-quarter loss after taking more than $3 billion of charges for write-downs and bad loans. The loss was $1.50 a share whereas analysts had expected a loss of 12 cents per share.

Foreclosure filings in the first quarter of 2008 rose more than 112% over last year to nearly 650,000 foreclosure filings.

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Housing vacancies swell to a staggering total

The U.S. Census Bureau released the residential vacancies figures today.  Rental vacancies rose to 10.1% from 9.6% last quarter.   From 1987 to 2001, rental vacancies did not vary too much averaging 7.60%.  Without an increase in renters, 1,035,000 properties would need to be removed from the rental pool for the rental vacancies to go back to the average of 7.60% vacancies. 

The rate for homeowner vacancies increased to 2.9% from 2.8% last quarter.  From 1987 to 2001, rental vacancies were very steady averaging 1.63%.  Without an increase in homeowners, about 1,025,000 properties would need to be removed from the homeowners pool for the vacancies to go back to the average of 1.63% vacancies. 

The total combined excess units comes to 2,060,000.  As a comparison,  the total amount of listed properties per zillow.com is currently at 2,082,774.  In other words, if every home currently listed for sale were eliminated from the equation (were never built in the first place), then supply and demand would be back to normal.  From a different perspective, new homes are being sold at an annual rate of 526,000.    

The Census Bureau adjusts the vacancies for vacant units that have been recently sold or rented but are not yet occupied.  I don't have access to that data, so I am not omitting those units in my calculations or graphs.

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Monday, April 28, 2008

photo by Chris Gin

Quote for the day:

The game's isn't over until it's over.

-Yogi Berra

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In the news:

 

Mars Inc. will purchase Wm. Wrigley Jr. Co. for $23 billion. The purchase will be financed with $11 billion from Mars, $4.4 billion from Warren Buffet's Berkshire Hathaway and $5.7 billion from Goldman Sachs Group Inc. Berkshire will also buy a $2.1 billion stake in the Wrigley unit.

Commodity-index funds holdings jumped 29% over the past year to a record 4.51 billion bushels of corn, wheat and soybeans through Chicago Board of Trade futures, equal to half the amount held in U.S. silos on March 1. Futures are trading at a premium to the underlying commodity. The average premium for CBOT wheat has quadrupled in two years to 40 cents a bushel, compared with 10 cents the prior five years.

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Consumer Confidence at lowest point since 1982

The University of Michigan announced today that the Index of Consumer Sentiment fell to 62.6 in the April 2008 survey.  This is down from the mid-April reading of 63.2 and March 2008's reading of 69.5.  62.6 is the lowest reading since a recession in March of 1982.  Economists had expected the reading to come in at 63.2.

Here are a few highlights from the press release:

• The decline was due to high fuel and food prices as well as shrinking income gains and falling home values.
• Just three-in-ten consumers plan to spend the tax rebate in 2008, with most consumers preferring to repay debt and add to saving.
• “All households now anticipate smaller income gains and larger price increases, as just one-in-five now expect their overall finances to improve during the year ahead, the least favorable reading in more than a quarter century.”
• “More consumers reported hearing news reports of unfavorable economic developments in April than any other time in the fifty years history of the survey, with job losses, rising prices, and the fallout from the housing and credit crisis dominating the reports.

The American consumer feels we are in a recession.  Consumer spending is the largest component of GDP.

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Friday, April 25, 2008

 

photo by papalars

 

Quote for the day:

Laziness travels so slowly that poverty soon overtakes him.

- Benjamin Franklin, The Way to Wealth

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In the news:

 The amount of refinanced home loans will reach $321 billion by the end of June, the most in a year, according to Fannie Mae. According to Freddie Mac ARMs probably will account for 8% of new mortgages in 2008, a record low.

The International Grains Council has projected a record world wheat crop of 645 million tonnes in 2008/09 which would exceed last year's total by 3.6%. Wheat futures fell to a low of $8.01 a bushel, the lowest level since November. Soaring food prices have sparked riots in several developing countries.

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New Home Sales fall further in March

The U.S. Census Bureau and the Department of Housing and Urban Development released the New Homes figures. New Single Family Houses were at a seasonally adjusted annual rate of 526,000. This is 8.52% below the revised February 2008 rate of 575,000 and 36.63% below the March 2007 rate of 830,000. Economists had forecast that sales would come in at 580,000.

This previous post has a chart going back to 1960.

The 3 month average of the median new homes sales price of $234,900 is down 8.22% from where it was a year ago at $255,933 (in February the average was down 6.01%). Monthly sales prices can be very volatile. January 2008 was at $232,900, February 2008 was at $244,200, and March 2008 was at $227,600. The S&P Case-Shiller Home Price index also uses a 3 month average to calculate the monthly index. There are officially 460,000 new homes for sale. This number is underestimated because the U.S. Census Bureau does not account for cancellations. At the current sales rate there is 11.0 months supply of inventory. If there was not another house built this year, it would take that approximately that long to sell the current inventory.

More new homes are currently being completed than are being sold, so this number is going to continue higher. Last year, 905,000 new homes were completed for sale. From November 2006 to October 2007, only 829,000 new homes were sold (new homes are calculated when a home goes into contract—the sale is usually completed a few months later). The U.S. Census Bureau has not yet released the figures for the new homes completed for sale for the first quarter yet. However they do release the figures monthly for the new homes completed for any purpose (for sale, for owner use, and for rental use). Homes built for sale has recently averaged about 75% of the total homes built. Using 75%, the number of new homes completed for sale for the first quarter will total approximately 152,825. Only about 146,000 new homes will have sold during that period (based on contracts from November 2007 to January 2008). The growth of excess inventory is slowing. However, the first quarter is also the slowest quarter for completions for the year due to weather and selling patterns.

New Home sales usually spike up at this time. March through June are the strongest months of the year for new home sales. November through January are the slowest for the year. Instead of picking up in pace, sales have slowed down further. Using 2001 and 2005 for comparisons, sales for March are at 54.3% of 2001’s pace and only 40.2% of the pace during the boom year of 2005. This is the slowest it has been during this housing slump.

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Thursday, April 24, 2008

photo by miyukiutada


Quote for the day:

Happiness is that state of consciousness which proceeds from the achievement of one's values.

Ayn Rand, Atlas Shrugged

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In the news:

In March Total orders for durable goods fell 0.3%; orders for February were revised to a drop of 0.9% from a drop of 1.1% as previously estimated. Excluding transportation equipment, orders for durable goods in March rose by 1.5%.

Ford reported a profit of $100 million, or 5 cents a share, up from the loss of $282 million, or 15 cents a share, a year ago. Analysts had expected a loss of 11 cents a share. Ford has reported losses of more than $15 billion the past two years. Sales at Ford dropped 14.3% from a year ago to 227,143 vehicles.

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Ambac posts loss of $1.7 billion; market cap is at $351.65 million

Ambac Financial, the second biggest bond insurer behind MBIA, reported first-quarter net losses of $1.7 billion or $11.69 a share. Analysts had expected a loss of $1.51 a share. Ambac insures bonds worth more than half a trillion dollars and yet has a market cap of only $351.65 million after today’s close.

Some of their losses are coming from suspect deals. Per the Wall Street Journal:

Ambac has hired legal and forensic experts to examine 17 of its financial guarantee transactions covering residential mortgage-backed securities as performance deteriorates.

During its first quarter earnings conference call Wednesday, David Wallis, Ambac's chief risk officer, said the company is examining transactions that have performed much worse than expected.

Wallis suggested that one prime candidate for legal scrutiny is a deal with Bear Stearns Co. it closed in April 2007. Another is a transaction with First Franklin.

Ambac originally projected that losses on the underlying collateral of the Bear Stearn's transaction would be between 10% and 12%, but now expects losses at 81.8% of underlying collateral, a transaction that has seen an unexpectedly "rapid escalation of losses," and represents an outsized percentage of the insurer's expected credit impairment, Mr. Wallis said.

Some of the factors the company will examine include loan-level document review and a review of legal documents "focusing on representations and warranties," Wallis said. "Hypotheses are being built which involve fraudulent activity in various guises."

Here is a chart from Ambac's presentation showing the losses incurred. Highlighted in yellow are the Bear Stearns and First Franklin Deals.



Mortgage delenquencies have not yet peaked and are still accelerating. The financial crisis is like an iceburg. We can see some of the losses, but the bigger question is how much future losses are lurking beneath the surface.

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Wednesday, April 23, 2008

photo by jamesrdoe


Quote for the day:

It's a poor sort of memory that only works backwards.

Lewis Carroll, Alice Through the Looking Glass

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In the news:

Ambac Financial Group, the world's second largest bond insurer, reported a first-quarter net loss of $1.66 billion, or $11.69 a share. The company's operating loss of $6.93 a share was more than three times expectations. Ambac kept its AAA rating by raising $1.5 billion in a March stock sale which nearly tripled Ambac's outstanding common shares to 285 million. The company this week said it's seeking to increase authorized shares to 650 million from 350 million.

Boeing's first-quarter profit increased 38% and has delivered more planes and built up a record order backlog; EMC and Broadcom both beat estimates.

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Existing Home Sales fall but prices rise

The National Association of Realtors released the statistics on Existing-Home Sales for March 2008 today.



Seasonally adjusted, Sales were down from February 2008 by 2.0% to an annual rate of 4.93 million and were down 19.3% from a year ago. On the positive side, the median price rose to $200,700 from $195,600 in February but was down 7.7% from the median of $217,400 reached in March of 2007.



Total housing inventory rose 1% to 4.06 million which is a 9.9 month supply (February 2008 was at 9.6 month supply). 6 month supply is where supply and demand are balanced. Inventory started rising rapidly in 2006. At that time supply went over 6 month’s supply and prices started to drop at the same time.



Lawrence Yun, NAR chief economist, is now calling for caution in further rate reductions: “With elevated inflation, the Federal Reserve should be extra careful about further rate cuts. Mortgage interest rates, which do not move directly with Fed funds rates, may rise measurably and hurt the housing recovery if inflation gets out of hand. Monetary stimulus is plentiful – what is needed more at this point is a home buyer tax credit to get buyers off the sidelines and prevent the market from overshooting on the downside.”

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Tuesday, April 22, 2008

photo by a DELL


Quote for the day:

Art ... is an attempt to bring order out of chaos.

Stephen Sondheim

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In the news:

Royal Bank of Scotland Group, the U.K.'s second-biggest lender, will sell 12 billion pounds ($23.7 billion) of new shares to investors at 200 pence each, 46% below yesterday's close. RBS wrote down assets by 5.9 billion pounds.

"U.S. stocks fell for a second day after earnings reports from UnitedHealth Group Inc., Texas Instruments Inc. and Coach Inc. rekindled concern that the economic slowdown has spread beyond the financial industry."

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Market is pricing in a quick recovery

The stock market is shrugging off massive writedowns by banks and brokerage firms. In the beginning of this month when UBS wrote off $19 billion in bad debt, the stock market had a strong rally. The stock market is pricing in that the worst is over. Here is a chart of the S&P 500’s earnings over the last 20 years. Earnings peaked in Q3 2007 and fell sharply as banks and brokerages took a lot of mark-downs. Over 20% of the S&P 500 companies have reported already. Earnings have been on average better than last quarter. The majority of banks and brokerages have already reported for this quarter, so it looks like Q1 2008 will rebound from the lows reached last quarter. In fact, according to the earnings estimates, the market is pricing in that Q2 2008 will be higher than the highs reached in Q3 2007. The market is then estimating that earnings will then regain their old form and continue accelerating higher at a rapid pace.This would be a very fast recovery. After the recession in 1990, it took 4 years for the market to surpass the highs reached before the recession. After the recession in 2001, it took the market 3.5 years to surpass the highs.

I think it is too early to call a bottom in the financial crisis. Housing prices are declining at an accelerating pace. Delinquencies and Foreclosures are also surging.

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Monday, April 21, 2008

photo by Montrasio International


Quote for the day:

Always in motion is the future.

Yoda, Star Wars Episode V: The Empire Strikes Back

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In the news:

Bank of America, the second-largest U.S. bank, reported that First-quarter net income declined 77% to $1.21 billion from $5.26 billion a year earlier. Results included $1.31 billion in trading losses and $2.72 billion in costs for uncollectible loans. B of A set aside $6.01 billion for bad loans.

National City plans to raise $7 billion from a group led by Corsair Capital by selling $6.37 billion in convertible securities. The bank will also sell shares of common stock for $5 apiece, about 40% less than National City's closing price on Friday.

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Ted Spread remains at a high level; maybe being kept artificially low

The Wall Street Journal had an article on the LIBOR and how the rates could be artificially low. Here are some excerpts from the article:

Libor plays a crucial role in the global financial system. Calculated every morning in London from information supplied by banks all over the world, it's a measure of the average interest rate at which banks make short-term loans to one another. Libor provides a key indicator of their health, rising when banks are in trouble.
...
The concern: Some banks don't want to report the high rates they're paying for short-term loans because they don't want to tip off the market that they're desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans.
...
In a recent research report on potential problems with Libor, Scott Peng, an interest-rate strategist at Citigroup Inc. in New York, wrote that "the long-term psychological and economic impacts this could have on the financial market are incalculable." Mr. Peng estimates that if banks provided accurate data about their borrowing costs, three-month Libor would be higher by as much as 0.3 percentage points.
...
The Libor system was developed in the 1980s. Banks were looking for a benchmark that would allow them to set rates on syndicated debt -- corporate loans that typically carry interest rates that adjust according to prevailing short-term rates. By pegging lending rates to Libor, which is supposed to represent the rate banks charge each other for loans, banks sought to guarantee that the interest rates their clients pay never fall too far below their own cost of borrowing.
...
When banks want to borrow money, they contact banks directly or phone a loan broker, such as ICAP PLC in London. Much of the interbank lending takes place between 7 a.m. and 11 a.m. London time. In broker speak, a bank might ask for a "yard" -- one billion in a designated currency. Brokers communicate with bank clients by phone or through desktop voice boxes, which are faster. At ICAP, brokers track bids and offers by looking up at a big whiteboard above the trading floor, where a "board boy" posts information. The actual rates at which banks borrow from each other are known only to the lenders and borrowers, and possibly to their brokers.

Every morning by 11:10 London time, "panels" of banks send data to Reuters Group PLC, a London-based business-data and news company, on what it would cost them to borrow a "reasonable amount" in a designated currency. The dollar Libor panel, for example, consists of 16 banks, including U.S. banks Bank of America Corp. and J.P. Morgan Chase & Co. and U.K. banks HBOS PLC and HSBC Holdings PLC. Reuters uses the reported borrowing rates to calculate Libor "fixings." To reduce the possibility that any bank could manipulate an average by reporting a false number, Reuters throws out the highest and lowest groups of quotes before calculating averages.

Justin Abel, global head of data operations for Reuters, said in a statement that his company's role is solely to calculate fixings based on the information provided by banks. "It is their data alone we distribute. Reuters is purely the facilitator," he said.
...
Citigroup's Mr. Peng believes banks could be understating even those abnormally high Libor rates. He notes that the Federal Reserve recently auctioned off $50 billion in one-month loans to banks for an average annualized interest rate of 2.82% -- 0.1 percentage point higher than the comparable Libor rate. Because banks put up securities as collateral for the Fed loans, they should get them for a lower rate than Libor, which is riskier because it involves no collateral. By comparing Libor with that indicator and others -- such as the rate on three-month bank deposits known as the Eurodollar rate -- Mr. Peng estimates Libor may be understated by 0.2 to 0.3 percentage points.

I periodically post updates on the TED Spread - the difference between the 3 month treasury and the 3 month Eurodollar rate. This measures the amount of perceived risk to lend to a banking counterparty. From 2002 to 2006 the spread averaged .288. Currently it is at 1.42. You have to go back to the stock market crash of 1987 to see the spreads that high.



The spreads sometimes reached very high levels in the 70s and early 80s when inflation was running rampant. The spread reached a high of 5.97 in July of 1974, and the Eurodollar rate was 13.52%. This next chart shows the spread as a percentage of the Eurodollar. This allows for a more equal comparision. Using this matrix, the current spreads are at historic highs. The chart also shows the year over year change in the S&P 500.

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Friday, April 18, 2008

photo by jam343


Quote for the day:

The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.

William Arthur Ward

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In the news:

Citigroup reported a $5.11 billion loss and almost $16 billion of writedowns for the first quarter. Their shares are trading higher as the losses were better than feared.

Google shares surged as much as 18% Friday, after reporting a 31% jump in first-quarter profit. Google's paid clicks grew 20% in the quarter compared with the period a year earlier.

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U.S. Leading Index posts small increase after 5 months of decline

The Conference Board announced that the U.S. Leading Index increased by 0.1%. The Leading Index had declined for five consecutive months. There are 10 indicators that make up the leading index. M2, the index of supplier deliveries (vendor performance), and the interest rate spread had large positive contributions that offset the large negative contributions from initial unemployment claims, building permits, and stock prices. Average weekly manufacturing hours and manufacturers’ new orders for consumer goods and materials had small gains. Manufacturers’ new orders for nondefense capital goods was unchanged and the index of consumer expectations had a small decline. Here are five of the charts going back to 1998.







M2 and the interest spread indicators are making positive contributions to the leading index. However, looking back to 1960 both of these indicators often bottom at the beginning of a recession and peak after the recession has ended (making positive contributions through the recession). These two indicators are acting like we are in a recession (even though they are giving large positive contributions to the leading index).

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Thursday, April 17, 2008

photo by brentbat

A Dream Within A Dream

Take this kiss upon the brow!
And, in parting from you now,
Thus much let me avow-
You are not wrong, who deem
That my days have been a dream;
Yet if hope has flown away
In a night, or in a day,
In a vision, or in none,
Is it therefore the less gone?
All that we see or seem
Is but a dream within a dream.

I stand amid the roar
Of a surf-tormented shore,
And I hold within my hand
Grains of the golden sand-
How few! yet how they creep
Through my fingers to the deep,
While I weep- while I weep!
O God! can I not grasp
Them with a tighter clasp?
O God! can I not save
One from the pitiless wave?
Is all that we see or seem
But a dream within a dream?

Edgar Allan Poe

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In the news:

Merrill Lynch posted a quarterly loss of $2 billion and said it planned to cut 4,000 jobs after recording more than $9.5 billion in write-downs.


"For the week ended April 12, initial claims rose to 372,000, up 17,000. Economists say readings running consistently higher than 350,000 signal significant weakening in the labor market. Conversely, first-time claims in the 300,000 to 325,000 range are a sign of a healthy rate of employment growth."

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CPI for March increased moderately

The Consumer Price Index for All Urban Consumers (CPI-U), not seasonally adjusted, increased 0.87% in March compared to February the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The March level of 213.528 was 3.98% higher than in March 2007.

Inflation typically goes down during recessions as the slowdown in the economy affects demand. However, the price of oil and the inflationary pressures China is applying is counterbalancing this tendency. The weakening dollar is also making imports more expensive and is causing prices to rise. It remains to see how this tug-of-war will play out.

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