Unofficial Problem Bank List and Quarterly Transition Matrix

FDIC released its enforcement action activity through August 2012 and closed a bank this week leading to many changes in the Unofficial Problem Bank List. In total, there were 12 removals and eight additions that leave the list with 874 institutions with assets of $334.9 billion. While the number of banks on the list declined, it was the first weekly increase in assets since June 29th. A year ago, the list held 986 institutions with assets of $405 billion. For the month, assets increased by $3.4 billion while the institutions count fell by 17 institutions after 18 action terminations, nine unassisted mergers, three failures, and a voluntary liquidation.

Actions were terminated against Ames Community Bank, Ames, IA ($406 million); Farmers & Merchants Bank & Trust, Burlington, IA ($195 million); Bank of Lincoln County, Fayetteville, TN ($130 million); Lake Community Bank, Long Lake, MN ($128 million); EuroBank, Coral Gables, FL ($104 million); Twin City Bank, Longview, WA ($41 million); Beartooth Bank, Billings, MT ($38 million); America's Community Bank, Blue Springs, MO ($28 million).

First United Bank, Crete, IL ($328 million)was removed because of failure. Desert Commercial Bank, Palm Desert, CA ($139 million Ticker: DCBC); The Exchange National Bank of Cottonwood Falls, Cottonwood Falls, KS ($34 million); and Colorado Valley Bank, SSB, La Grange, TX ($28 million) were acquired through unassisted mergers.

The eight additions were Doral Bank, San Juan, PR ($7.6 billion Ticker: DRL); Northwestern Bank, Traverse City, MI ($869 million Ticker: NWBM); Alliance Bank Central Texas, Waco, TX ($208 million); Flathead Bank of Bigfork, Montana, Bigfork, MT ($207 million); Bay Bank, Green Bay, WI ($99 million); Colonial Co-operative Bank, Gardner, MA ($72 million); Elysian Bank, Elysian, MN ($45 million); and Community Bank and Trust - West Georgia, LaGrange, GA ($95 million), which joins its sister bank Community Bank and Trust ' Alabama on the list.

With the end of the third quarter, it is time to refresh the transition matrix. As seen in the table below, there have been a total of 1,588 institutions with assets of $810.9 billion that have appeared on the list. Removals have totaled 714 institutions or 45 percent of the total. Failures continue to be the leading removal cause as 340 institutions with assets of $288.2 billion have failed since appearing on the list. Removals from unassisted mergers and voluntary liquidations total 122 institutions. This year, there has been an acceleration in action terminations. In all, actions have been terminated against 252 institutions with assets of $112.9 billion, with 53 termination occurring in this quarter.

Schedule for Week of Sept 30th

Earlier:
' Summary for Week Ending Sept 28th

The key report for this week will be the September employment report to be released on Friday, Oct 5th. Other key reports include the ISM manufacturing index on Monday, vehicle sales also on Tuesday, and the ISM non-manufacturing (service) index on Wednesday.

On Monday, Fed Chairman Ben Bernanke will speak on monetary policy, and on Thursday, October 4th, there is a Governing Council meeting of the European Central Bank with a press conference to follow.

Reis will release their Q3 Office, Mall and Apartment vacancy rate reports this week. Last quarter Reis reported falling vacancy rates for apartments, a slight decline in vacancy rates for malls, and that the office vacancy rate was unchanged.

Fannie Mae and Freddie Mac Serious Delinquency rates declined in August

Fannie Mae reported that the Single-Family Serious Delinquency rate declined in August to 3.44% from 3.50% July. The serious delinquency rate is down from 4.03% in August last year, and this is the lowest level since April 2009.

The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.

Freddie Mac reported that the Single-Family serious delinquency rate declined in August to 3.36%, from 3.42% in July. Freddie's rate is down from 3.49% in August 2011. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. This is the lowest level for Freddie since August 2009.

These are loans that are "three monthly payments or more past due or in foreclosure".

Click on graph for larger image

In 2009, Fannie's serious delinquency rate increased faster than Freddie's rate. Since then, Fannie's rate has been falling faster - and now the rates are at about the same level.

Although this indicates some progress, the "normal" serious delinquency rate is under 1% - and it looks like it will be several years until the rates back to normal.

Bank Failure #43 in 2012: First United Bank, Crete, Illinois

by Bill McBride on 9/28/2012 07:13:00 PM

Summary for Week Ending Sept 28th

The economic data was mostly weak last week. Q2 GDP growth was revised down to 1.3% annualized (from an already anemic 1.7%), durable goods orders declined sharply (although mostly due to the volatile transportation sector), personal income barely increased in August, and the September Chicago PMI declined to the lowest level in 3 years.

There were a few positives: Even though new home sales were slightly below expectations, sales are still up solidly from last year. House prices, according to Case-Shiller, are now up 1.2% year-over-year. Mortgage delinquencies continued to decline. And initial weekly unemployment claims declined in the previous week.

This suggests the economy is still growing sluggishly.

Here is a summary of last week in graphs:

' New Home Sales at 373,000 SAAR in August

Click on graph for larger image in graph gallery.

The Census Bureau reports New Home Sales in August were at a seasonally adjusted annual rate (SAAR) of 373 thousand. This was down slightly from a revised 374 thousand SAAR in July (revised up from 372 thousand). Sales in June were revised up.

The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. This was below expectations of 380,000, but this was another fairly solid report and indicates an ongoing sluggish recovery in residential investment.

"The seasonally adjusted estimate of new houses for sale at the end of August was 141,000. This represents a supply of 4.5 months at the current sales rate."

This graph shows the three categories of inventory starting in 1973: Completed, under construction and not started.

The inventory of completed homes for sale was at a record low 38,000 units in August. The combined total of completed and under construction is at the lowest level since this series started.

Friday: Personal Income and Outlays, Consumer Sentiment, Chicago PMI

The beatings continue in Europe ...

From the NY Times: Despite Public Protests, Spain's 2013 Budget Plan Includes More Austerity

The Spanish government on Thursday presented a draft budget for 2013 with a package of tax increases and spending cuts that it said would guarantee the country could meet deficit-cutting targets agreed to with the rest of the euro zone.
...
The 2013 budget plan released Thursday is meant to help carry out a sweeping long-term austerity package outlined by Mr. Rajoy in July, which is aimed at reducing the central government's budget deficit by 65 billion euros, or $84 billion, over two and a half years.

The plan involves an average cut of almost 9 percent in the spending of each government ministry next year. The salaries of civil servants will be frozen for a third consecutive year.

And from the NY Times: Greece Agrees on New Package of Budget Cuts and Taxes

The government of Prime Minister Antonis Samaras must now present the proposed actions ' $15 billion in cuts to pensions, salaries and state spending, and at least $2.6 billion in new taxes ' for further discussion with the foreign lenders, who have demanded them in return for releasing the next portion of aid to the stricken country.
...
The government did not release specifics of the agreement, though it is said to call for a rise in the retirement age to 67 from 65.

On Friday:
' At 8:30 AM ET, the Personal Income and Outlays report for August will be released. The consensus is for a 0.2% increase in personal income in August, and for 0.5% increase in personal spending. And for the Core PCE price index to increase 0.1%.

This will give us two months of data (July and August) to estimate consumer spending in Q3.

' At 9:45 AM, the Chicago Purchasing Managers Index for September. The consensus is for an increase to 53.1, up from 53.0 in August.

' At 9:55 AM, the Reuter's/University of Michigan's Consumer sentiment index (final for September). The consensus is for a reading of 79.0, down from the preliminary September reading of 79.2, and up from the August reading of 74.3.

A final question for the September economic prediction contest:

Freddie Mac: Record Low Mortgage Rates

Another month, another record ...

From Freddie Mac today: All-Time Low: 30-Year Fixed-Rate Mortgage Averages 3.40 Percent

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing fixed mortgage rates breaking their previous average record lows ... All mortgage products, except the 5-year ARM, averaged new all-time record lows.

30-year fixed-rate mortgage (FRM) averaged 3.40 percent with an average 0.6 point for the week ending September 27, 2012, down from last week when it averaged 3.49 percent. Last year at this time, the 30-year FRM averaged 4.01 percent.

"Fixed mortgage rates continued to decline this week, largely due to the Federal Reserve's purchases of mortgage securities, and should support an already improving housing market." [said Frank Nothaft, vice president and chief economist, Freddie Mac]

Click on graph for larger image.

This graph shows the 15 and 30 year fixed rates from the Freddie Mac survey. The Primary Mortgage Market Survey® started in 1971 (15 year in 1991). Both rates are at record lows for the Freddie Mac survey. Rates for 15 year fixed loans are now at 2.73%.

Personal Income increased 0.1% in August, Spending increased 0.5%

The BEA released the Personal Income and Outlays report for August:

Personal income increased $15.0 billion, or 0.1 percent ... in August, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $57.2 billion, or 0.5 percent.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in August, compared with an increase of 0.4 percent in July. ... The price index for PCE increased 0.4 percent in August, compared with an increase of less than 0.1 percent in July. The PCE price index, excluding food and energy, increased 0.1 percent in August, the same increase as in July.
...
Personal saving -- DPI less personal outlays -- was $444.8 billion in August, compared with $492.2 billion in July. Personal saving as a percentage of disposable personal income was 3.7 percent in August, compared with 4.1 percent in July

The following graph shows real Personal Consumption Expenditures (PCE) through August (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

Click on graph for larger image.

This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE.

Using the two-month method, it appears real PCE will increase around 1.3% annualized in Q3 - another weak quarter for GDP growth (June PCE was weak, so maybe PCE will increase 1.6%).

A key point is the PCE price index has only increased 1.5% over the last year, and core PCE is up only 1.6%. In August, core PCE increase at a 1.3% annualized rate.

New Home Prices: Average Highest since 2008

As part of the new home sales report, the Census Bureau reported that the average price for new homes increased to the highest level since August 2008.

From the Census Bureau: "The median sales price of new houses sold in August 2012 was $256,900; the average sales price was $295,300."

The following graph shows the median and average new home prices.

Click on graph for larger image.

During the bust, the builders had to build smaller and less expensive homes to compete with all the distressed sales. With fewer foreclosures now, it appears the builders are moving to slightly higher price points.

The second graph shows the percent of new home sales by price. At the peak of the housing bubble, almost 40% of new homes were sold for more than $300K - and over 20% were sold for over $400K.

The percent of home over $300K declined to 20% in January 2009. Now it has rebounded to around 35%. And less than 10% were under $150K.

Earlier:
' New Home Sales at 373,000 SAAR in August
' New Home Sales and Distressing Gap
' New Home Sales graphs

Thursday: Unemployment Claims, Durable Goods, GDP

On Europe ...

From the Financial Times: Rajoy fights Spanish turmoil

Mariano Rajoy will on Thursday attempt to stave off a backlash from financial markets by announcing budget plans for next year ... His government is also preparing to unveil a new reform programme and the results of a banking stress test.
Excerpt with permission.

From the NY Times: European Markets Jolted Amid Protests in Greece and Spain

On Tuesday in Spain, tens of thousands of demonstrators besieged Parliament to protest austerity measures planned by Mr. Rajoy. ...

In Athens, trade unions called a nationwide strike Wednesday to contest billions of dollars in new salary and pension cuts being discussed by the government and its international creditors. ...

[Prime Minister Antonis] Samaras is negotiating a $15 billion austerity package that is needed to persuade Greece's so-called troika of lenders ' the International Monetary Fund, the European Central Bank and the European Commission ' to release nearly $40.7 billion in financial aid that the country needs to stay solvent.

Mr. Rajoy has been trying for months to convince investors that Spain can handle its own problems and that it will not need a bailout that would force Madrid to cede some authority over its fiscal affairs to its lenders, and is set to introduce new cutbacks to meet budgetary goals. Those will include restrictions on early retirement and various measures to streamline regulations and fight unemployment ...

On Thursday:
' At 8:30 AM ET, The initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 376 thousand from 382 thousand.

' Also at 8:30 AM, the Durable Goods Orders report for August will be released by the Census Bureau. The consensus is for a 5.0% decrease in durable goods orders.

' Also at 8:30 AM, the BEA will released the third estimate of Q2 Gross Domestic Product. The consensus is that real GDP increased 1.7% annualized in Q2, unchanged form the second estimate.

' At 10:00 AM, the NAR will release the Pending Home Sales Index for September. The consensus is for a 0.3% increase in the index.

' At 10:30 AM, the Kansas City Fed regional Manufacturing Survey for September will be released. This is the last of the regional surveys for September. The consensus is for a reading of 5, down from 8 in August (above zero is expansion).

A question for the September economic prediction contest:

Earlier on new home sales:
' New Home Sales at 373,000 SAAR in August
' New Home Sales and Distressing Gap
' New Home Sales graphs

Weekly Initial Unemployment Claims decline to 359,000

Other releases: From the BEA, Q2 GDP was revised down to 1.3% from 1.7%.

From the Census Bureau:

New orders for manufactured durable goods in August decreased $30.1 billion or 13.2 percent to $198.5 billion, the U.S. Census Bureau announced today. This decrease, down following three consecutive monthly increases, was the largest decrease since January 2009 and followed a 3.3 percent July increase.

The decline was due to the volatile transportation sector.

The DOL reports:

In the week ending September 22, the advance figure for seasonally adjusted initial claims was 359,000, a decrease of 26,000 from the previous week's revised figure of 385,000. The 4-week moving average was 374,000, a decrease of 4,500 from the previous week's revised average of 378,500.

The previous week was revised up from 382,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 374,000.

This was below the consensus forecast of 376,000.

And here is a long term graph of weekly claims:

Mostly moving sideways this year, but moving up recently.

MBA: Mortgage Refinance Activity increases as mortgage rates fall to new survey lows

From the MBA: Mortgage Rates Drop to New Survey Lows

The Refinance Index increased 3 percent from the previous week to the highest level in six weeks. The seasonally adjusted Purchase Index increased 1 percent from one week earlier.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.63 percent, the lowest rate in the history of the survey, from 3.72 percent, with points decreasing to 0.41 from 0.45 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Click on graph for larger image.

The first graph shows the MBA mortgage purchase index. The purchase index has been mostly moving sideways over the last two years.

So far the purchase index has not indicated an increase in purchase activity, although the recent Fed survey of loan officers suggested there has been some increase.

The second graph shows the refinance index.

The refinance activity is at the highest level in six weeks and has been generally moving up over the last year.

DOT: Vehicle Miles Driven decreased 0.3% in July

The Department of Transportation (DOT) reported today:

Travel on all roads and streets changed by -0.3% (-0.8 billion vehicle miles) for July 2012 as compared with July 2011. Travel for the month is estimated to be 258.3 billion vehicle miles.

Cumulative Travel for 2012 changed by +0.9% (14.8 billion vehicle miles).

The following graph shows the rolling 12 month total vehicle miles driven.

The rolling 12 month total is still mostly moving sideways.

Click on graph for larger image.

In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.

Currently miles driven has been below the previous peak for 56 months - and still counting.

The second graph shows the year-over-year change from the same month in the previous year.

Gasoline prices peaked in April at close to $4.00 per gallon, and then started falling.

Gasoline prices were down in July to an average of $3.50 per gallon according to the EIA. Last year, prices in July averaged $3.70 per gallon - and even with the decline in gasoline prices, miles driven declined year-over-year in July.

Just looking at gasoline prices suggest miles driven will be down in August too.

However, as I've mentioned before, gasoline prices are just part of the story. The lack of growth in miles driven over the last 4+ years is probably also due to the lingering effects of the great recession (high unemployment rate and lack of wage growth), the aging of the overall population (over 55 drivers drive fewer miles) and changing driving habits of young drivers. With all these factors, it may be years before we see a new peak in miles driven.

Earlier on house prices:
' Case-Shiller: House Prices increased 1.2% year-over-year in July
' House Price Comments, Real House Prices, Price-to-Rent Ratio

Fed's Williams: Economic Outlook

by Bill McBride on 9/24/2012 03:25:00 PM

Tim Duy: "Policy is effective even in the aftermath of a financial crisis"

This is an excellent followup to Josh Lehner's post (and the graph I posted) earlier today showing that the US recovery is doing better than most recoveries following a financial crisis.

From Tim Duy at EconomistsView: Excuses Not To Do More. Duy discusses Reinhart and Rogoff and excerpts from a piece by Ezra Klein:

...if you look at the leaked memo that the Obama administration was using when they constructed their stimulus, you'll find, on page 10 and 11, a list of prominent economists the administration consulted as to the proper size for the stimulus package. And there, on page 11, is Rogoff, with a recommendation of '$1 trillion over two years' ' which is actually larger than the American Recovery and Reinvestment Act. So if they'd been following Rogoff's advice, the initial stimulus would have been even bigger ' not nonexistent.

As for Reinhart, I asked her about this for a retrospective I did on the Obama administration's economic policy. 'The initial policy of monetary and fiscal stimulus really made a huge difference,' she told me. 'I would tattoo that on my forehead. The output decline we had was peanuts compared to the output decline we would otherwise have had in a crisis like this. That isn't fully appreciated.'

Then Duy added this update:

Update: I notice some Twitter chatter of surprise that Rogoff was not completely opposed to fiscal stimulus (I thought everyone read Ezra Klein).

The key point here is that short term stimulus, in a depressed economy, can actually reduce the long term deficit.

Tuesday: House Prices

On Tuesday:
' At 9:00 AM ET, the S&P/Case-Shiller House Price Index for July will be released. The consensus is for a 1.2% year-over-year increase in the Composite 20 index (NSA) for July. The Zillow forecast is for the Composite 20 to increase 1.6% year-over-year, and for prices to increase 1.0% month-to-month seasonally adjusted.

' At 10:00 AM, the FHFA House Price Index for July 2012 will be released. The consensus is for a 0.8% increase in house prices.

' Also at 10:00 AM, the Conference Board's consumer confidence index for September will be released. The consensus is for an increase to 64.8 from 60.6 last month.

' Also at 10:00 AM, the Richmond Fed Survey of Manufacturing Activity for September will be released. The consensus is for an increase to -4 for this survey from -9 in August (below zero is contraction).

A question for the September economic prediction contest:

Update: House Prices will decline month-to-month Seasonally later in 2012

I've mentioned this before, but it is probably worth repeating ...The Not Seasonally Adjusted (NSA) house price indexes will show month-to-month declines later this year. This should come as no surprise and will not be a sign of impending doom.

' There is a seasonal pattern for house prices. Prices tend to be stronger in the spring and early summer, and then weaker in the fall and winter.

' Currently there is a stronger than normal seasonal pattern. This is because conventional sales are following the normal pattern (more sales in the spring and summer), but distressed sales (foreclosures and short sales) happen all year. So distressed sales have a larger negative impact on prices in the fall and winter.

' Two of the most followed house price indexes are three month averages. This means the indexes lag the month-to-month change. The Case-Shiller report for "July", to be released on Tuesday, is actually an average of May, June and July. The CoreLogic index is a three month average, but weighted to the most recent month. Prices have probably started declining month-to-month seasonally in August or September, but this will not show up in the indexes for several months. (Several real estate agents have told me the seasonal slowdown has started in their areas).

' The key is to watch the year-over-year change and to compare to the NSA lows earlier this year. I think house prices have already bottomed, and will be up slightly year-over-year when prices reach the usual seasonal bottom in early 2013.

Click on graph for larger image.

This graph shows the month-to-month change in the CoreLogic (through July) and NSA Case-Shiller Composite 20 index (through June) over the last several years. There is a clear seasonal pattern.

Right now I'm guessing the CoreLogic index will report negative month-to-month price changes for August or September, and Case-Shiller for September or October. Just something to be aware of ...

Yesterday:
' Summary for Week Ending Sept 21st
' Schedule for Week of Sept 23rd
' Goldman Estimate: QE3 could be $1.2 to $2.0 Trillion

Chicago Fed: Economic Activity Weakened in August

The Chicago Fed released the national activity index (a composite index of other indicators): Economic Activity Weakened in August

Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to '0.87 in August from '0.12 in July. All four broad categories of indicators that make up the index deteriorated from July, with each making a negative contribution to the index in August.

The index's three-month moving average, CFNAI-MA3, decreased from '0.26 in July to '0.47 in August'its lowest level since June 2011 and its sixth consecutive reading below zero. August's CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.

This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.

Click on graph for larger image.

This suggests growth was below trend in August.

According to the Chicago Fed:

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

Goldman Estimate: QE3 could be $1.2 to $2.0 Trillion

A few excerpts from a research note by Goldman Sachs chief economist Jan Hatzius:

' ... We now view the Fed as following a looser version of the 'threshold rule' championed by Chicago Fed President Charles Evans.

' What are the thresholds? We read the committee as signaling that the federal funds rate will not rise until the unemployment rate has fallen to the 6½%-7% range. The corresponding threshold for the end of QE3 may be in the 7%-7½% range.

'These implicit commitments are undoubtedly subject to an inflation ceiling ... may be a year-on-year core PCE reading of 2½%-2¾%.

' All this is subject to change ... The flexibility to respond to such changes is a key advantage of keeping the thresholds implicit rather than explicit.

' ... Under the committee's economic forecasts, we estimate that the funds rate would stay near zero until mid-2015, while QE3 would run through mid-2014 and total $1.2trn.

' Under our own economic forecasts, we estimate that the funds rate would stay near zero until mid-2016, while QE3 would run through mid-2015 and total just under $2trn.

' If the recovery continues to disappoint, additional steps are possible.

The keys will be to watch the unemployment rate and several core measures of inflation. As of August, the unemployment rate was at 8.1% - and mostly moving sideways - and core PCE for July was up 1.6% year-over-year (plenty of room to the 2½%-2¾% range).

Earlier:
' Summary for Week Ending Sept 21st
' Schedule for Week of Sept 23rd

Summary for Week Ending Sept 21st

Once again, the housing news was mostly positive last week and manufacturing was mostly disappointing.

Housing starts were a little below expectations - mostly because of the volatile multi-family sector - but starts are still up sharply from a year ago. Two-thirds of the way through 2012, single family starts are on pace for 515 thousand this year, and total starts are on pace for about 740 thousand.

In 2011, there were 609 total starts, and a record low 430 thousand single family starts. So housing starts are on pace for about a 20% increase from 2011. No wonder builder confidence was at the highest level since June 2006. That is a significant increase and will give the economy a boost.

Existing home sales increased too. The key numbers in the existing home sales report are inventory and months-of-supply. Inventory was down 18.2% year-over-year in August, and months-of-supply declined to 6.1 months - the lowest for the month of August since 2005.

The decline in inventory has been stunning, even for those of us expecting a significant decline - and I expect the year-over-year declines will start to decrease in the coming months.

Unfortunately both regional manufacturing surveys released this week (Empire State and Philly Fed) both showed contraction in September (although the Philly Fed index was close to unchanged).

A final note: The Fed's Flow of Funds survey showed household mortgage debt has decreased by over $1 trillion from the peak. Some of this decline is from homeowners paying down their mortgage (perhaps to refinance), but most of the decline was due to foreclosures or short sales (defaults). This reminded me of some of my posts from years ago ... new readers might not realize I was once one of the biggest bears around, see: The Trillion Dollar Bear

Here is a summary of last week in graphs:

' Housing Starts increased to 750 thousand in August

Click on graph for larger image.

Total housing starts were at 750 thousand (SAAR) in August, up 2.3% from the revised July rate of 733 thousand (SAAR). Note that July was revised from 746 thousand.

Single-family starts increased 5.5% to 535 thousand in August.

Total starts are up 57% from the bottom start rate, and single family starts are up 51% from the low.

This was below expectations of 768 thousand starts in August, but the key is starts are up solidly from last year. Right now starts are on pace to be up about 25% from 2011. Also total permits are up sharply from last year.

Sheila Bair: Former BofA CEO considered a "country bumpkin"

by Bill McBride on 9/21/2012 06:43:00 PM

Zillow forecasts Case-Shiller House Price index to show 1.6% Year-over-year increase for July

Note: The Case-Shiller report to be released next Tuesday is for July (really an average of prices in May, June and July).

Zillow Forecast: July Case-Shiller Composite-20 Expected to Show 1.6% Increase from One Year Ago

On Tuesday, Sept. 25, the Case-Shiller Composite Home Price Indices for July will be released. Zillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) will be up by 1.6 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will be up 1.1 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from June to July will be 1 percent for both the 20-City Composite and the 10-City Composite Home Price Index (SA). All forecasts are shown in the table below and are based on a model incorporating the previous data points of the Case-Shiller series and the July Zillow Home Value Index data, and national foreclosure re-sales.

Case-Shiller July data confirms what we have been seeing for several months in other data points: The housing market has started its recovery, albeit appreciation is not back to 'normal' pre-housing recession levels and most likely won't be for the next few years. Zillow's Home Value Index for August was released on Wednesday and shows a small decline in home values across the nation after nine consecutive months of appreciation. We expect Case-Shiller indices to moderate and likely report monthly declines toward the end of the year tracking the Zillow Home Value Index. Monthly depreciation toward the end of the year is largely a function of declining overall monthly sales volume which will increase the percentage of foreclosure re-sales in the transactional mix being tracked by Case-Shiller.

Zillow's forecasts for Case-Shiller have been pretty close.

Schedule for Week of Sept 23rd

Note: I'll post the weekly summary soon ... There are two key housing reports to be released this week: Case-Shiller house price index for July on Tuesday, and August New Home sales on Wednesday.

Other key reports include the third estimate of Q2 GDP on Thursday, and August Personal Income and Spending on Friday.

Friday: State Employment Report

First, from Freddie Mac: Mortgage Rates Back To Record Lows

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing fixed mortgage rates at or near their all-time record lows helping to keep homebuyer affordability high. The average 30-year fixed rate mortgage matched its all-time record low at 3.49 percent, and the average 15-year fixed fell to a new all-time record low at 2.77 percent.

And from David Wessel at the WSJ: Depression Lessons: Should Fed Stand Down to Compel Congressional Action?

As [economist James] Tobin put it in the American Economic Review in June 1965: 'The monetary authorities should have tried harder to promote expansion in 1933-36 and 1937-40 ' nothing would have been lost and something might have been gained. Throughout the period the authorities were too little concerned with deflationary risks immediately at hand and too much concerned to forestall the hypothetical future dangers of excess liquidity.'

... Friedman and co-author Anna Schwartz quote at length from a December 1935 technical memo from Fed files that made the case for tightening the credit spigot. ... The subsequent tightening by the Fed was, Friedman and Schwartz concluded, a mistake followed by 'a failure to recognize that the action had misfired.'

Friday:
' At 10:00 AM ET, the BLS will release the Regional and State Employment and Unemployment (Monthly) report for August 2012.

Earlier: The Trillion Dollar Bear

Over There: Greek and Spanish Aid

A plan for Spain will probably be announced next Thursday, and Greece will need additional aid by November.

From the Financial Times: EU in talks over Spanish rescue plan

EU authorities are working behind the scenes to pave the way for a new Spanish rescue programme and unlimited bond buying by the European Central Bank, by helping Madrid craft an economic reform programme ...
...
The plan, due to be unveiled next Thursday, will focus on structural reforms to the Spanish economy long requested by Brussels, rather than new taxes and spending cuts.
Excerpt with permission.

From the WSJ: Fight Looms on Greek Bailout

A report by international inspectors, due in October, will state how big the funding shortfall is in Greece's bailout program, but European officials say the deficit is far too big for Greece to close on its own.

That means the International Monetary Fund, the European Central Bank, and euro-zone governments such as Germany will have to negotiate over which of them will make painful concessions to ease Greece's debt-service burden.
...
The trio must agree to a plan by November at the latest, when the government in Athens'already in financial arrears'could run out of money altogether.
...
The '173 billion ($226 billion) bailout plan agreed with Athens in March this year'Greece's second bailout since 2010'is already badly off track, euro-zone officials admit.

Lawler: ACS 2011: Big Shift to Rental Market

CR Note: This is a fairly long technical piece. These are just excerpts. The complete article is here.

From housing economist Tom Lawler: ACS 2011: Big Shift to Rental Market; Gross Vacancy Rate Virtually Unchanged Despite Drop in Vacant Homes for Rent and For Sale; Household 'Estimate' Shockingly Low

The Census Bureau released it ACS 2011 one-year estimates, and for housing folks the data were in some cases interesting and in other cases quite puzzling. ...

A few things jump out: first, the ACS estimate for occupied housing units increased by just 424,306 in 2011, and at 114.992 million was 1.724 million lower than the 'official' Census household count on April 1, 2010. Second, the ACS' estimate of the gross vacancy rate in 2011 was virtually unchanged from 2010, despite a decline in the number of homes for rent or for sale. The reason was an increase in both housing units for seasonal/recreational/occasional use (up 181,000) and an increase in 'other' ' homes vacant and held of the market for unknown reasons (in the above I included 'usual residence elsewhere' and migrant workers' in 'other' to be consistent with the other measures.)

Third, the ACS homeownership rate fell from 65.4% in 2010 to 64.6% in 2011, which is a full 1.5 percentage points lower than the HVS.

In terms of the jump in the ACS' estimate of the number of renters in 2011 vs. 2010, almost half of the 1.033 million increase reflected a jump in the number of householders renting SF detached homes. The ACS estimate of the percent of the occupied SF detached home market that was occupied by renters for 2011 was 15.7%, up from 15.1% in 2010 and 13.1% in 2006. The renter-share of the occupied SF detached housing market increased by over three percentage points from 2006 to 2011 in eleven states plus DC, with the biggest increases coming in Nevada, Arizona, Oregon, and California. (The full list is Arizona, California, Colorado, DC, Florida, Georgia, Michigan, Nevada, Ohio, Oregon, Utah, and Washington.)
...
what is a reasonable assumption to make about the increase in US households in 2011, much less so far in 2012? HVS and ACS data suggest very slow growth in 2011, but neither has been consistent with decennial Census results, and HVS data suggest only a modest pickup in 2012. CPS/ASEC data, in contrast, suggest much faster growth in households since early 2010, but CPS/ASEC data are not consistent with decennial Census data either!

Gosh, it's no wonder there's so much confusion on the US housing outlook!

CR Note: This was an excerpt from an article by Tom Lawler.

Weekly Initial Unemployment Claims at 382,000

The DOL reports:

In the week ending September 15, the advance figure for seasonally adjusted initial claims was 382,000, a decrease of 3,000 from the previous week's revised figure of 385,000. The 4-week moving average was 377,750, an increase of 2,000 from the previous week's revised average of 375,750.

The previous week was revised up from 382,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 377,750.

This was above the consensus forecast of 373,000.

And here is a long term graph of weekly claims:

Mostly moving sideways this year, but moving up recently.

Thursday: Weekly Unemployment Claims, Philly Fed Mfg Survey

From Jim Hamilton at Econbrowser: Thresholds in the economic effects of oil prices

As U.S. retail gasoline prices once again near $4.00 a gallon, does this pose a threat to the economy and President Obama's prospects for re-election? My answer is no.
...
This is now the fourth time we've been near the $4 threshold. It first happened in June 2008, again in May 2011, and again in April of this year. In fact, on each of those previous 3 occasions the average U.S. retail price of gasoline was higher than it is today.
...
There is quite a bit of empirical support for the claim that the second or third time oil prices move back near a previous high, the economic disruption is significantly less than the first time; see for example the evidence and literature reviewed in my 2003 Journal of Econometrics paper (ungated version here) and two recent surveys [1], [2].

$4/gallon? Been there, done that.

See Professor Hamilton's piece for supporting data and graphs.

The good news is oil prices have fallen sharply over the last few days, with Brent down to $108.96 per barrel. Brent closed at $117.48 last Friday. The peak for the year was $128.14 back in March, and the closing low was $88.69 in June.

Thursday:
' At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to decrease to 373 thousand from 382 thousand.

' At 9:00 AM, the Markit US PMI Manufacturing Index Flash will be released. This is a new release and might provide hints about the ISM PMI for September. The consensus is for a reading of 51.5, down from 51.9 in August.

' At 10:00 AM, the Philly Fed Manufacturing Survey for September will be released. The consensus is for a reading of minus 4.0, up from minus 7.1 last month (below zero indicates contraction).

' Also at 10:00 AM, the Conference Board Leading Indicators for September. The consensus is for no change in this index.

' At 12:00 PM, the Q2 Flow of Funds Accounts from the Federal Reserve will be released.

' Note: On Thursday, the Census Bureau will release the 2011 American Community Survey estimates.

One more question for the September economic prediction contest (Note: You can now use Facebook, Twitter, or OpenID to log in).

Wednesday: Housing Starts, Existing Home Sales

Tomorrow will be about housing, and recently that has meant a little better news ...

' At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. Purchase applications have mostly been moving sideways this year at a low level.

' At 8:30 AM, Housing Starts for August will be released. The consensus is for total housing starts to increase to 768,000 (SAAR) in August, up from 746,000 in July.

' At 10:00 AM, the National Association of Realtors (NAR) will release the existing Home Sales report for August. The consensus is for sales of 4.55 million on seasonally adjusted annual rate (SAAR) basis. Housing economist Tom Lawler expects sales to be about 4.87 million SAAR.

A key will be inventory and months-of-supply. It is possible that months-of-supply will be close to 6.0 months; the lowest level for August since 2005.

' During the day: The AIA's Architecture Billings Index for August (a leading indicator for commercial real estate).

Two more questions for the September economic prediction contest (Note: You can now use Facebook, Twitter, or OpenID to log in).

MBA: Mortgage Applications decrease, Mortgage Rates decline to Survey Lows

From the MBA: Mortgage Rates Drop to New Survey Lows

The Refinance Index increased 1 percent from the previous week. The HARP 2.0 share of refinance applications was 22 percent this past week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.72 percent, the lowest rate in the history of the survey, from 3.75 percent, with points increasing to 0.45 from 0.44 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The effective rate decreased from last week.

Click on graph for larger image.

This graph shows the MBA mortgage purchase index.

The purchase index has been mostly moving sideways over the last two years.

It looks like refinance activity is picking up again as mortgage rates decline.

Housing Starts increased to 750 thousand in August

From the Census Bureau: Permits, Starts and Completions

Housing Starts:
Privately-owned housing starts in August were at a seasonally adjusted annual rate of 750,000. This is 2.3 percent above the revised July estimate of 733,000 and is 29.1 percent above the August 2011 rate of 581,000.

Single-family housing starts in August were at a rate of 535,000; this is 5.5 percent above the revised July figure of 507,000.

Building Permits:
Privately-owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 803,000. This is 1.0 percent below the revised July rate of 811,000, but is 24.5 percent (±1.7%) above the August 2011 estimate of 645,000.

Single-family authorizations in August were at a rate of 512,000; this is 0.2 percent above the revised July figure of 511,000.

Click on graph for larger image.

The first graph shows single and multi-family housing starts for the last several years. Starts are slowing increasing.

Total housing starts were at 750 thousand (SAAR) in August, up 2.3% from the revised July rate of 733 thousand (SAAR). Note that July was revised from 746 thousand.

Single-family starts increased 5.5% to 535 thousand in August.

The second graph shows total and single unit starts since 1968.

This shows the huge collapse following the housing bubble, and that total housing starts have been increasing lately after moving sideways for about two years and a half years.

Total starts are up 57% from the bottom start rate, and single family starts are up 51% from the low.

This was below expectations of 768 thousand starts in August - mostly because of the volatile multi-family sector - but the key is starts are up solidly from last year. Right now starts are on pace to be up about 25% from 2011. Also note that total permits are up sharply from last year.

Report: Housing Inventory declines 18.7% year-over-year in August

by Bill McBride on 9/18/2012 08:01:00 AM

Lawler: Early Read: Decent Bounce in Existing Home Sales in August

From economist Tom Lawler:

While I'm missing reports from some key areas of the country, what I've seen so far suggest to me that existing home sales as measured by the National Association of Realtors increased significantly on a seasonally adjusted basis last month. Right now my 'best guess' is that the NAR's existing home sales estimate for August will come in at a seasonally adjusted annual rate of about 4.87 million, up 8.9% from July's pace, and up 10.4% from last August's pace. Such a gain would be way above the 'consensus' forecast of a SAAR of 4.55 million, but is consistent with the local realtor/MLS reports I've seen so far.

If indeed the NAR reports such a bounce, this summer's 'pattern of surprises' will be reminiscent of last summer's. Below is a table showing (1) the 'consensus' forecast for existing home sales for last June, July, and August (as measured the NAR; of course the 'preliminary' data have been revised a boatload, including the benchmark and seasonal revisions) right before the NAR's release; (2) the 'actual' preliminary sales pace released by the NAR; and (3) the LEHC forecast for that release.

Tuesday: Homebuilder Confidence Survey

First a re-mention: Michael Pettis wrote an interesting article about supply and demand for commodities: By 2015 hard commodity prices will have collapsed

On house prices, Redfin released their "real time" home price tracker today for August: Home Prices Hit Two-Year High in August, Up 5% From 2011

Following is a summary of key metrics across 19 major metropolitan markets:

' Home prices in August increased 4.9% year over year, and were flat month over month (+0.1%).
' The number of homes for sale declined 28.5% from August 2011 to August 2012, and by 4.5% since July.
...
Home prices will no doubt decline a bit into the winter (as they do every year) ... All signs point to continued modest year-over-year price gains through the end of the year, more or less in line with inflation in most markets.

The decline in inventory is a huge story. It is possible that the NAR will report on Wednesday that months-of-supply for existing homes declined to around 6.0 months for August. This will be the lowest months-of-supply for August since 2005. Last year, in August 2011, there were 8.2 months-of-supply.

On Tuesday:
' At 10:00 AM ET, 10:00 AM: The September NAHB homebuilder survey. The consensus is for a reading of 38, up from 37 in August. Although this index has been increasing lately, any number below 50 still indicates that more builders view sales conditions as poor than good.

QE3 and the Residential Investment Transmission Mechanism

From Paul Krugman: How Could QE Work?

[A]t this point it's not at all clear that we have an overhang of excess housing capacity; we might even have a shortfall.

And we're seeing a modest housing recovery starting ...
...
This means that we actually can hope that the Fed's new policy will boost housing as well as operating through other channels, and therefore that it can act more like conventional monetary policy in fostering recovery.

That said, I'm still skeptical about whether monetary policy alone can come close to doing enough ' a skepticism shared by Ben Bernanke:

So looking at all the different channels of effect, we think it does have impact on the economy, it will have impact on the labor market but as again, the way I would describe it is a meaningful effect, a significant effect but not a panacea, not a solution for the whole issue.

We still need fiscal policy. But it's good to see the Fed doing more.

This is similar to the argument I made last weekend:

[O]ne of the key transmission channels for monetary policy is through residential investment and mortgages. The previous rounds of QE (and "twist") have lowered mortgage rates and allowed homeowners with excellent credit and income to refinance. However this channel has been limited ...

As residential investment recovers, and house prices increase (or at least stabilize), this channel will probably become more effective.

Last month I summarized some of The economic impact of a slight increase in house prices. This includes mortgage lenders and appraisers becoming more confident in the mortgage and housing markets. I think that is starting to happen, and I think QE might have more traction now through the housing channel.

Note: Krugman's comment on "overhang of excess housing" is very important. Although there isn't good timely data on household formation and the housing stock, I do think most of the excess supply has been absorbed.

For another view on QE3, see Jim Hamilton's: Effects of QE3

I think the correct interpretation of QE3 is that the Fed has unambiguously signaled that it's not going to re-run the Japanese experiment to see what happens when the central bank stands by and watches wages and prices fall even while unemployment remains very high. The Fed can and will keep U.S. inflation from falling much below 2%, and that may help a little. Investors should expect that, and not a whole lot more.

And for those who think commodity prices will soar, I suggest Michael Pettis' analysis of supply and demand: By 2015 hard commodity prices will have collapsed

Yesterday:
' Summary for Week Ending Sept 14th
' Schedule for Week of Sept 16th

NY Fed Empire State Mfg Index declines in September

From MarketWatch: Empire State index hits nearly two-year low

The Empire State index decreased to negative 10.4 in September from negative 5.9 in August, according to the manufacturing survey released by the New York Federal Reserve. It is the lowest reading since November 2010.

The new-orders index worsened to negative 14.0 in September from negative 5.5 in August.

One bright spot in the report was an increase in a key barometer of future activity that asks manufacturers about expectations six months ahead. The forward-looking index rose to 27.2 in September from 15.2 in August.

The index of the number of employees fell sharply in September but remained slightly above negative territory at 4.3.

The number of employees fell from 16.47 in August to 4.3 in September. This was significantly below expectations of a reading of minus 2.0.

Manufacturing remains a weak spot for the US economy.

Schedule for Week of Sept 16th

Earlier:
' Summary for Week Ending Sept 14th

There are three key housing reports to be released this week: September homebuilder confidence on Tuesday, and August housing starts and August Existing Home sales, both on Wednesday.

For manufacturing, the September NY Fed (Empire state) and Philly Fed surveys will be released this week.

Also, for data nerds, the Fed's Q2 Flow of Funds report, and the Census Bureau's 2011 American Community Survey will be released.

Unofficial Problem Bank list declines to 886 Institutions

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for Sept 14, 2012. (table is sortable by assets, state, etc.)

Changes and comments from surferdude808:

There were two removals and one addition to the Unofficial Problem Bank List, which leaves it standing at 886 institutions with assets of $330.5 billion. A year ago, the list held 984 institutions with assets of $402.4 billion.

The failed Truman Bank, St. Louis, MO ($282 million) and Alliant Bank, Sedgwick, KS, which merged out of existence on an unassisted basis. Added this week was The State Bank of Geneva, Geneva, IL ($84 million). Next week, we anticipate the OCC will release its actions through mid-August 2012.

CR Note: The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public. (CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest.)

As a substitute for the CAMELS ratings, surferdude808 is using publicly announced formal enforcement actions, and also media reports and company announcements that suggest to us an enforcement action is likely, to compile a list of possible problem banks in the public interest.

When the list was increasing, the official and "unofficial" counts were about the same. Now with the number of problem banks declining, the unofficial list is lagging the official list. This probably means regulators are changing the CAMELS rating on some banks before terminating the formal enforcement actions.

Earlier:
' Summary for Week Ending Sept 14th
' Schedule for Week of Sept 16th

Summary for Week Ending Sept 14th

The key event of the week was the FOMC announcement. Here were my posts:
' FOMC Statement: QE3 $40 Billion per Month, Extend Guidance to mid-2015
' FOMC Projections and Bernanke Press Conference
' Analysis: Bernanke Delivered

In other news, retail sales were strong due to higher gasoline prices. From Merrill Lynch:

Gasoline prices surged in the month, forcing consumers to spend more at the pump. Gasoline station sales climbed 5.5%, contributing to the majority of the gain in total sales. Netting out gasoline station sales, spending was only up 0.3%. ...

Outside of gasoline, autos and building materials, core control sales fell 0.1%. This was a decidedly weak report, showing a pullback in consumer spending. ...

The combination of weak August core retail sales and a downward revision to July and June (0.1pp in each month), slices 0.4pp from our Q3 GDP tracking model. We are now looking for GDP growth of only 1.1% in Q3.

Some of the other data was impacted by hurricane Isaac: Industrial production declined although this was partially due to the impact of Hurricane Isaac and weekly unemployment claims increased - also partially blamed on the hurricane.

In a little good news, consumer sentiment increased some in September.

Overall this suggests more sluggish growth.

Here is a summary of last week in graphs:

' Retail Sales increased 0.9% in August

Click on graph for larger image.

On a monthly basis, retail sales were up 0.9% from July to August (seasonally adjusted), and sales were up 4.7% from August 2011. This increase was largely due to higher gasoline prices.

Sales for July were revised down to a 0.6% increase (from 0.8% increase).

This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).

Retail sales are up 22.7% from the bottom, and now 7.3% above the pre-recession peak (not inflation adjusted)

This was above the consensus forecast for retail sales of a 0.8% increase in August, and above (edit) the consensus for a 0.7% increase ex-auto.

Bank Failure #42 in 2012: Truman Bank, Saint Louis, Missouri

by Bill McBride on 9/14/2012 06:13:00 PM

Fiscal Cliff: Goldman note and Merle Hazard

An excerpt from a Goldman Sachs research note by Alec Phillips today: The Fiscal Cliff Moves to Center Stage

While we are hopeful that lawmakers will manage to reach an agreement before year-end, we expect that the road to such an agreement will be a bumpy one.

Ahead of the election, lawmakers seem unlikely to reach any sort of compromise on major tax or spending policies, particularly now that the window for a legislative agreement is essentially closed. Once the election results are known, lawmakers will work toward compromise, but members of both parties have an incentive to make the threat of 'falling off the cliff' appear as credible as possible, so a resolution in November, or even early December, seems unlikely. Indeed, under a status quo election outcome, for example, a decision on even a short-term extension of expiring policies seems unlikely until late December, since political compromise would presumably come only after all other options have been exhausted.

... we think there is at least a one in three likelihood that lawmakers fail to agree by December 31. ... if a deal is reached by the end of the year it may not provide much certainty in 2013. After all, the debt limit may still need to be raised, and the since the most likely scenario seems to be a short-term extension of fiscal cliff-related policies, the risks from fiscal policy seem likely to continue into 2013, regardless of how the fiscal cliff is dealt with at year end.

I've just been ignoring the "fiscal cliff" until after the election. I suspect some sort of deal will be reached - but you never know.

Meanwhile, here is an animated version of Merle Hazard's "Fiscal Cliff"

Analysis: Bernanke Delivered

The FOMC delivered everything I expected - and more. This was a very strong move and I suspect many analysts are underestimating the potential positive impact on the economy.

However, as Fed Chairman said, monetary policy is "not a panacea". I do think this will help, but this will not solve the unemployment problem.

Here are a few key points:

' Forward guidance is a critical part of Fed policy (see Michael Woodford's paper presented at Jackson Hole). The FOMC didn't go as far as targeting nominal GDP, but they took two key steps today: 1) they extended the forward guidance until mid-2015, and 2) the FOMC made it clear that "a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens". "AFTER the economic recovery strengthens" is key.

' This easing was not based on new economic weakness. From the FOMC statement: "economic activity has continued to expand at a moderate pace in recent months". This easing was intended to help increase the pace of recovery.

' Another key change was the FOMC tied this easing directly to the labor market: "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability."

' I think this will be more effective than most analysts expect. As I noted last weekend, housing is usually a key transmission channel for monetary policy, and now that residential investment has started to recover - and house price have stabilized, or even started to increase, this channel will probably become more effective.

I also liked that Bernanke addressed three concerns that have been raised about monetary policy. Note: The replay of the press conference is available here.

The first "concern" was that some people are confusing fiscal and monetary policy. Monetary policy is NOT spending (see Bernanke's comments at 7:00).

The other two are legitimate concerns - that the Fed policies can hurt savers, and that there is a risk of inflation down the road. I agree with Bernanke that a stronger economy will lead to better returns for savers, and that inflation is not an immediate concern.

Friday: Retail Sales, Industrial Production, CPI

First, Tom Lawler has been discussing the rental demand for single family homes. He sent me this article today: Phoenix-area rental homes a red-hot commodity

In the Valley's most popular communities, desperate renters are submitting applications for multiple single-family homes to secure a place to live. ... The unprecedented demand for rentals is fueled by former homeowners whose houses were foreclosed on or sold in short sales and now need a place to live. Some of them can no longer qualify to buy a home. For others, the housing bubble sullied the aura of owning a home.

With the trend showing no sign of slowing, more investors than ever are buying homes to rent. Popular areas such as central and north Phoenix, south Scottsdale, Glendale, central Tempe, Chandler and Gilbert are hot spots for rentals.

Multiple indicators show demand for rentals has never been higher:

More rental contracts were signed in June and July than in any other months in the past decade, according to the Arizona Regional Multiple Listing Service.

The percentage of single-family homes purchased to be rented out hit a record 32 percent in July, more than triple the typical rate, said Mike Orr, a real-estate analyst at Arizona State University.

In July, the average rental home was empty for only 38 days, tied for the shortest period in 12 years, Orr said.

The vacancy rate for big apartment complexes recently hit an almost six-year low as of June 30, according to commercial broker Marcus & Millichap.

'It's a crazy rental market right now,' said Liza Asbury of Realty One Group. 'There are multiple offers for properties. If it (the home) is nice, it is definitely going fast.'

On Friday:
' At 8:30 AM ET, the Consumer Price Index for August will be released. The consensus is for CPI to increase 0.6% in August and for core CPI to increase 0.2%.

' Also at 8:30 AM, Retail Sales for August will be released. The consensus is for retail sales to increase 0.8% in August, and for retail sales ex-autos to increase 0.7%.

' At 9:15 AM, The Fed will release Industrial Production and Capacity Utilization for August. The consensus is that Industrial Production declined 0.1% in August, and that Capacity Utilization declined to 79.2%.

' At 9:55 AM, the Reuters/University of Michigan's Consumer sentiment index will be released (preliminary for September). The consensus is for sentiment to decrease to 74.0 from 73.5 in August.

' At 10:00 AM, the Manufacturing and Trade: Inventories and Sales report for July (Business inventories) will be released. The consensus is for 0.5% increase in inventories.

Two more questions for the September economic prediction contest:

Retail Sales increased 0.9% in August

On a monthly basis, retail sales were up 0.9% from July to August (seasonally adjusted), and sales were up 4.7% from August 2011. This increase was largely due to higher gasoline prices. From the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for August, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $406.7 billion, an increase of 0.9 percent from the previous month and 4.7 percent (±0.7%) above August 2011. ... The June to July 2012 percent change was revised from 0.8 percent to 0.6 percent.

Click on graph for larger image.

Sales for July were revised down to a 0.6% increase (from 0.8% increase).

This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).

Retail sales are up 22.7% from the bottom, and now 7.3% above the pre-recession peak (not inflation adjusted)

The second graph shows the same data, but just since 2006 (to show the recent changes). This shows that much of the recent increase is due to gasoline.

Excluding gasoline, retail sales are up 19.3% from the bottom, and now 7.2% above the pre-recession peak (not inflation adjusted).

The third graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993.

Retail sales ex-gasoline increased by 4.9% on a YoY basis (4.7% for all retail sales). Retail sales ex-gasoline increased 0.3% in August.

This was above the consensus forecast for retail sales of a 0.8% increase in August, and above (edit) the consensus for a 0.7% increase ex-auto.

FOMC Projections Preview

There is plenty of discussion about QE3 (will they or won't they), but another key piece of information released tomorrow is the projections of the FOMC participants. In advance of the meeting I thought I'd take a look back at the previous projections from the June meeting. 

The first chart is when participants project the initial increase in the target federal funds rate should occur, and the participants view of the appropriate path of the federal funds rate.

"The shaded bars represent the number of FOMC participants who project that the initial increase in the target federal funds rate (from its current range of 0 to ¼ percent) would appropriately occur in the specified calendar year."

The key is to see if this shifts further to the right with more participants thinking the first rate increase will happen in 2015 or beyond. Many analysts expect that the FOMC will push out their forward guidance to 2015 (from 2014), and that suggests many more participants will view 2015 or beyond as appropriate.

"The dots represent individual policymakers' projections of the appropriate federal funds rate target at the end of each of the next several years and in the longer run. Each dot in that chart represents one policymaker's projection."

This graph will probably be extended to 2015, and once again many participants will probably think the Fed Funds rate will be in the current range into 2015.

On the projections, GDP will probably be revised down again for 2012.

Thursday: FOMC Meeting, Unemployment Claims

From Tim Duy at EconomistsView: The Wait Should be Finally Over

With respect to the meeting tomorrow, I agree with Robin Harding at the FT on this point:

For me, the question of what the Fed will do is far less interesting ' and far less in doubt ' than how the Fed will do it. This will not be a pro forma repeat of previous actions. As Mr Bernanke's speech shows, the Fed is trying to address grave concerns about the labour market. The crucial issue is whether and how they tie any action to the state of the economy.

I don't anticipate a lump sum QE announcement. I anticipate an open-ended commitment to regular purchases of securities, Treasuries and/or MBS, that can be scaled up or down in response to the economy. Wall Street may be initially disappointed by the lack of a big number, but over time I think markets will come to appreciate the greater impact offered by a regular commitment based upon economic outcomes rather than the arbitrary amounts and time lines of previous QE efforts.

As Harding says, how they tie the policy to the economy is key.

From Jon Hilsenrath at the WSJ: Four Things to Watch at Fed Meeting. Some excerpts:

'QE STRATEGY: Many investors expect the Federal Reserve to launch a new round of bond purchases, often called quantitative easing or QE. One big question is how the Fed would structure such a program.
...
'WHAT TO DO WITH TWIST: Officials must decide what to do about the 'Operation Twist' program if they launch a new bond-buying program. The Fed is funding the Twist purchases with money it gets by selling short-term Treasury securities.
...
'COMMUNICATION: How the Fed describes its impetus for action, and its criteria for even more in the future, could matter a lot. Is it responding to a darkening outlook? Or has it decided to take more aggressive action because its patience with slow growth and high unemployment is running out and it has a new commitment to changing that?
...
'WHETHER TO LOWER ANOTHER RATE: The Fed now pays banks 0.25% interest on reserves they keep with the central bank. The Fed could reduce the rate it pays on reserves that aren't required of banks (known as excess reserves) a little bit to try to give banks more impetus to lend.

On Thursday:
' At 8:30 AM ET, The initial weekly unemployment claims report will be released. The consensus is for claims to increase to 370 thousand from 365 thousand.

' Also at 8:30 AM, the Producer Price Index for August will be released. The consensus is for a 1.4% increase in producer prices (0.2% increase in core).

' At 12:30 PM, the FOMC Meeting Announcement will be released. Additional policy accommodation is very likely. The FOMC might lengthen their forward guidance for the first rate hike to mid-2015 or later, and / or also launch an open ended Large Scale Asset Purchases(LSAP) program (commonly called QE3).

' At 2:00 PM, The FOMC Forecasts will be released. These include the Federal Open Market Committee (FOMC) participants' projections of the appropriate target federal funds rate along with the quarterly economic projections. Earlier I posted a preview with the June projections for reference.

' At 2:15 PM: Fed Chairman Ben Bernanke will hold a press briefing and discuss the FOMC policy decisions.
.

Weekly Initial Unemployment Claims increase to 382,000

The DOL reports:

In the week ending September 8, the advance figure for seasonally adjusted initial claims was 382,000, an increase of 15,000 from the previous week's revised figure of 367,000. The 4-week moving average was 375,000, an increase of 3,250 from the previous week's revised average of 371,750

The previous week was revised up from 365,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 375,000.

This was above the consensus forecast of 370,000.

Update via MarketWatch: "The government said about 9,000 claims stemmed from the storm that passed through the Gulf Coast in late August."

And here is a long term graph of weekly claims:

Mostly moving sideways this year.

Sacramento August House Sales: Percentage of distressed sales lowest in years

I've been following the Sacramento market to look for changes in the mix of house sales in a distressed area over time (conventional, REOs, and short sales). The Sacramento Association of REALTORS® started breaking out REOs in May 2008, and short sales in June 2009.

Recently there has been a dramatic shift from REO to short sales, and the percentage of distressed sales has been declining. This data would suggest some improvement although the percent of distressed sales is still very high.

In August 2012, 52.0% of all resales (single family homes and condos) were distressed sales. This was down from 54.4% last month, and down from 62.0% in August 2011. The percentage of REOs fell to 16.6%, the lowest since the Sacramento Realtors started tracking the data and the percentage of short sales increased to 35.4%, the highest percentage recorded.

Here are the statistics.

Click on graph for larger image.

This graph shows the percent of REO sales, short sales and conventional sales. Usually there is a seasonal pattern for conventional sales (stronger in the spring and summer), and distressed sales happen all year - so the percentage of distressed sales decreases every summer and the increases in the fall and winter.

There has been an increase in conventional sales this year, and there were twice as many short sales as REO sales in August. The gap between short sales and REO sales is increasing.

Total sales were unchanged from August 2011 (same pace as last year even with fewer foreclosures).

Active Listing Inventory for single family homes declined 62.0% from last August, although listings were up 10.6% in August (from July).

Cash buyers accounted for 33.1% of all sales (frequently investors), and median prices were up 12.0% from last August.

This seems to be moving in the right direction, although the market is still in distress.

We are seeing a similar pattern in other distressed areas to more conventional sales, and a shift from REO to short sales,.

Wednesday: iPhone 5

On QE3 from Binyman Appelbaum at the NY Times: Economic Stimulus as the Election Nears? It's Been Done Before

In September 1992, the Federal Reserve culminated a long-running effort to stimulate the sluggish economy by cutting its benchmark interest rate to 3 percent, the lowest level it had reached in almost three decades.

The cut was avidly sought by the administration of President George H. W. Bush, but it was not enough to change the course of the presidential election. Years later, Mr. Bush told an interviewer that the Fed's chairman, Alan Greenspan, had cost him a second term by failing to act more quickly and more forcefully.
...
Experts say Fed officials are sensitive to the danger of a political reaction. But Randall S. Kroszner, a Fed governor from 2006 to 2009, said the Fed's current chairman, Ben S. Bernanke, has concluded that the best defense of the Fed's independence is to demonstrate its value by reaching decisions on the economic merits, then offering clear explanations to politicians and the public. 'Any decision the Fed will make will make someone unhappy, but what you want out of an independent agency is a careful deliberative process,' said Mr. Kroszner, a professor of economics at the University of Chicago Booth School of Business.

'Providing as much substantive economic explanation as possible for the actions that the Fed is taking, that's the best way to maintain the Fed's independence,' he added.

Monetary policy impacts the economy with a lag, and it is too late to have an impact before the election - so politics shouldn't be a consideration.

The iPhone 5 is almost an economic event, from the WSJ: Expectancy Builds Up For Apple's New iPhone

The next iPhone, which has been referred to internally by the code name N41, has been in the works for more than a year, a person familiar with the matter said. Apple is expected to tweak the smartphone's shape with a slightly larger screen and a different shell, and it will work with wireless carriers' fastest LTE networks and run new mobile software. That software, iOS 6, includes improvements to voice-activated assistant Siri, a new digital-coupon-and-passes service called Passbook, and new call-blocking features, among several others.

On Wednesday:
' At 7:00 AM ET, The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index.

' At 8:30 AM, Import and Export Prices for August will be released. The consensus is a for a 1.5% increase in import prices.

' At 10:00 AM, Monthly Wholesale Trade: Sales and Inventories for July. The consensus is for a 0.4% increase in inventories.

MBA: Mortgage Applications increase, might be distorted by Holiday adjustment

From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey

The adjusted Refinance Index increased 12 percent from the previous week. The seasonally adjusted Purchase Index increased 8 percent from one week earlier.

The holiday adjusted numbers may overstate the level of refinance applications because some lenders who rely primarily on the internet/consumer direct channel for originations saw little if any decline in applications for Labor Day as compared with the drops for lenders relying on retail offices, perhaps because borrowers had additional time over the Labor Day weekend to complete online refinance applications.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.75 percent from 3.78 percent, with points increasing to 0.44 from 0.37 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The effective rate decreased from last week.

Click on graph for larger image.

This graph shows the MBA mortgage purchase index.

The purchase index has been mostly moving sideways over the last two years.

Trade Deficit at $42.0 Billion in July

The Department of Commerce reported:

[T]otal July exports of $183.3 billion and imports of $225.3 billion resulted in a goods and services deficit of $42.0 billion, up from $41.9 billion in June, revised. July exports were $1.9 billion less than June exports of $185.2 billion. July imports were $1.8 billion less than June imports of $227.1 billion.

June was revised down from $42.9 billion. The trade deficit was below the consensus forecast of $44.3 billion.

The first graph shows the monthly U.S. exports and imports in dollars through July 2012.

Click on graph for larger image.

Both exports and imports decreased in July. Exports are 10% above the pre-recession peak and up 3% compared to July 2011; imports are just below the pre-recession peak, and up about 1% compared to July 2011.

The second graph shows the U.S. trade deficit, with and without petroleum, through July.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Oil averaged $93.83 in July, down from $100.13 per barrel in June, and the lowest level since early 2011. Import oil prices will probably start increasing again in August. The trade deficit with China increased to $29.4 billion in July, up from $27.0 billion in July 2011. Once again most of the trade deficit is due to oil and China.

The trade deficit with the euro area was $10.2 billion in July, up from $7.7 billion in July 2011.

Employment Graphs: Construction Employment, Unemployment by Education

A couple more graphs based on the August employment report. The first graph below shows the number of total construction payroll jobs in the U.S. including both residential and non-residential since 1969.

Construction employment increased by only 1 thousand jobs in August, and so far is down for the year.

Unfortunately this graph is a combination of both residential and non-residential construction employment. The BLS only started breaking out residential construction employment fairly recently (residential specialty trade contractors in 2001).

Click on graph for larger image.

Construction employment appears to be moving sideways, although I expect this will change soon (and I'd expect some upward revisions to construction employment). The preliminary annual Benchmark Revision will be released on September 27, 2012.

Note: When housing was collapsing, one of the mysteries was why construction employment wasn't declining - and then finally employment started falling sharply. I think we are seeing a similar "mystery" now, and I expect BLS reported construction employment will start increasing soon.

Tuesday: Trade Deficit, Job Openings

A couple of interesting stories ...

From the NY Times: Chinese Leader's Absence Stokes Rumor Mills

Over the past week, the new leader, Xi Jinping, has missed at least three scheduled meetings with foreign dignitaries, including Secretary of State Hillary Rodham Clinton last Wednesday and the prime minister of Denmark on Monday. So far officials have declined to provide an explanation for his absences.

That set off furious speculation on the Internet that the 59-year-old Mr. Xi's health, either physical or political, has taken a turn for the worse. Some diplomats say they have heard that Mr. Xi suffered a pulled muscle while swimming or playing soccer. One media report, since retracted, had it that Mr. Xi was hurt in an auto accident when a military official tried to injure or kill him in a revenge plot. A well-connected political analyst in Beijing said in an interview that Mr. Xi might have had a mild heart attack.

Whatever the actual reason, Mr. Xi's unexplained absences are conspicuous on the eve of what is supposed to be China's once-in-a-decade transfer of power.

I heard he was spotted standing in line waiting for the iPhone 5!

And on Apple, from Catherine Rampell at the NY Times Economix: How the iPhone 5 Could Bolster the G.D.P.

Michael Feroli, the chief United States economist at JPMorgan Chase, did a back-of-the-envelope calculation and estimated that the upcoming release of what is expected to be the iPhone 5 could add one-quarter to one-half of a percentage point to the annualized growth rate of America's gross domestic product next quarter.

' At 8:30 AM, the Trade Balance report for July will be released. The consensus is for the U.S. trade deficit to increase to $44.3 billion in July, up from from $42.9 billion in June. Export activity to Europe will be closely watched due to economic weakness.

' At 10:00 AM, the BLS will released the Job Openings and Labor Turnover Survey for July from the BLS. This survey has been showing an increase in job openings; in June openings were up about 16% year-over-year compared to June 2011.

Another question for the September economic contest:

LPS: Mortgage Delinquencies decreased slightly in July

LPS released their Mortgage Monitor report for July today. According to LPS, 7.03% of mortgages were delinquent in July, down from 7.14% in June, and down from 7.80% in July 2011.

LPS reports that 4.08% of mortgages were in the foreclosure process, down slightly from 4.09% in June, and down slightly from 4.11% in July 2011.

This gives a total of 11.12% delinquent or in foreclosure. It breaks down as:

' 1,960,000 loans less than 90 days delinquent.
' 1,560,000 loans 90+ days delinquent.
' 2,042,000 loans in foreclosure process.

For a total of '5,562,000 loans delinquent or in foreclosure in July. This is down from 5,663,000 last month.

This following graph shows the total delinquent and in-foreclosure rates since 1995.

Click on graph for larger image.

The total delinquency rate has fallen to 7.03% from the peak in July 2010 of 10.57%. A normal rate is probably in the 4% to 5% range, so there is a long ways to go.

The in-foreclosure rate was at 4.08%. There are still a large number of loans in this category (about 1.96 million).

The second graph shows new problem loans by equity position.

From LPS:

'The July mortgage performance data shows a continuing correlation between negative equity and new problem loans,' explained Herb Blecher, senior vice president, LPS Applied Analytics.

The third graph shows percent negative equity by state.

From Herb Blecher:

'Nationally, 18 percent of borrowers who are current on their loan payments are 'underwater' (owing more on the mortgage than the home's current market value), ranging from a low of 0.4 percent in Wyoming to nearly 55 percent in Nevada. As negative equity increases, we see corresponding increases in the number of new problem loans. In Nevada and Florida, two of the states with the highest percentage of underwater borrowers, more than three percent of borrowers who were up to date on their payments are 60 or more days delinquent six months later. This suggests that further home price declines ' should they occur ' could jeopardize recent improvements.'

Employment Report Graphs: Participation Rate, Duration of Unemployment and Diffusion Indexes

Below are three more graphs based on the August employment report.

For more employment graphs and analysis, see:
' August Employment Report: 96,000 Jobs, 8.1% Unemployment Rate
' Employment: Another Weak Report (more graphs)
' All Employment Graphs

Schedule for Week of Sept 9th

Earlier:
' Summary for Week Ending Sept 7th

The key event this week is the two day FOMC meeting on Wednesday and Thursday. There is a very strong possibility that the Fed will provide additional accommodation.

The key reports for this week will be the July trade balance report on Tuesday, the August retail sales report on Friday, Industrial Production on Friday, and August CPI also on Friday.

In Europe, Germany's Constitutional Court is expected to rule if the European Stability Mechanism (ESM, the proposed permanent replacement for the EFSF or European Financial Stability Facility) is constitutional on Wednesday at 6 AM ET.

Analysis: I expect QE3 on Sept 13th

Since the Jackson Hole Symposium, I've been thinking it is very likely that so-called "QE3" would be announced at the next FOMC meeting (Sept 12th and 13th). And after thinking about Columbia University professor Michael Woodford's paper presented at Jackson Hole, I think this round of asset purchases might be more effective than most people expect.

Notes: QE3 is shorthand for another Large Scale Asset Purchases (LSAP) program. "QE" is monetary policy, not fiscal policy (not spending).

Yesterday, Goldman Sach economist Sven Jari Stehn beat me to the punch. He wrote:

[W]e expect the Federal Open Market Committee (FOMC) to announce a return to asset purchases as well as a lengthening of the FOMC's forward guidance for the first hike in the funds rate to mid-2015 or beyond at the September 12-13 FOMC meeting. Our baseline forecast is an open-ended purchase program, focused on agency mortgage-backed securities.

[O]ur 'double punch' Fed call relates to the much-discussed study presented by Columbia University professor Michael Woodford at Jackson Hole last Friday. Woodford argues that forward guidance is a powerful tool both in theory and practice. But in his view the effect of asset purchases is largely confined to their role in conveying guidance about future monetary policy actions. ...

We fully agree with Woodford's view that such aggressive guidance measures could be a powerful tool. However, we also believe that Fed officials are unlikely to adopt them anytime soon.

Fortunately, we are somewhat more optimistic than Woodford with regard to the impact of Fed asset purchases. ... we believe that a more moderate strengthening of the forward guidance coupled with renewed asset purchases could provide a decent amount of monetary easing next week.

I'd like to add a few points:

' Nothing in recent data suggests a "substantial and sustainable strengthening" in economic activity. This was the key sentence from the last FOMC minutes:

"Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery"

' Note that Goldman Sachs expects BOTH "a lengthening of the forward guidance to mid-2015" AND "an open-ended purchase program". Atlanta Fed President Dennis Lockhart alluded to this in his interview in the WSJ last week:

If the Fed were to act, Mr. Lockhart said half-measures would not get the job done. While he didn't state what the steps could be, he said stimulus, if chosen, should be "a package. When I say package that means two or three things done at the same time to create maximum possible gains."

' As far as additional forward guidance, imagine if Fed Chairman Ben Bernanke made it very clear that the 2% inflation target is symmetrical - not a ceiling, and that the FOMC would not move quickly to slow inflation if the unemployment rate was still high.

This isn't as strong a forward guidance as nominal GDP targeting (NGDP), but it would still provide guidance that the Fed will show patience before raising rates.

In fact, back in April, Fed Chairman Ben Bernanke said:

'[The 2 percent target is] not a ceiling, it's a symmetric objective, and we attempt to bring inflation close to 2 percent. And in particular, if inflation were to jump for whatever reason'and we don't have, obviously don't have perfect control of inflation'we'll try to return inflation to 2 percent at a pace which takes into account the situation with respect to unemployment.'

I expect Bernanke to reiterate this again in the press conference this week.

' And on effectiveness, one of the key transmission channels for monetary policy is through residential investment and mortgages. The previous rounds of QE (and "twist") have lowered mortgage rates and allowed homeowners with excellent credit and income to refinance. However this channel has been limited as Bernanke noted in his Jackson Hole speech:

It is likely that the crisis and the recession have attenuated some of the normal transmission channels of monetary policy relative to what is assumed in the models; for example, restrictive mortgage underwriting standards have reduced the effects of lower mortgage rates.

As residential investment recovers, and house prices increase (or at least stabilize), this channel will probably become more effective.

Last month I summarized some of The economic impact of a slight increase in house prices. This includes mortgage lenders and appraisers becoming more confident in the mortgage and housing markets. I think that is starting to happen, and I think QE might have more traction now through the housing channel.

Conclusion: I expect both QE, and an extended forward guidance, to be announced this week at the FOMC meeting.

Earlier:
' Summary for Week Ending Sept 7th
' Schedule for Week of Sept 9th