Friday, May 29, 2009

Confidence Game: Consumer, CEO and Investor Confidence May 2009 (Final)

This post combines the latest results of the Rueters/University of Michigan Survey of Consumers, the Conference Board’s Index of CEO Confidence and the State Street Global Markets Index of Investor Confidence indicators into a combined presentation that will run twice monthly as preliminary data is firmed.

These three indicators should disclose a clear picture of the overall sense of confidence (or lack thereof) on the part of consumers, businesses and investors as the current recessionary period develops.

Today’s final release of the Reuters/University of Michigan Survey of Consumers for May showed a another bump up for consumer sentiment with a reading of 68.7 an increase of 14.88% above the level seen in May 2008.

The Index of Consumer Expectations (an important component of the Conference Board’s Index of Leading Economic Indicators) increased to 69.4 climbing 35.81% above the result seen in May 2008.

As for the current circumstances, the Current Economic Conditions Index declined to 67.7 or -7.64% below the result seen in May 2008.

The latest quarterly results (Q1 2009) of The Conference Board’s CEO Confidence Index increased to a value of 30, but still remains near the lowest reading in the history of the index.

The May release of the State Street Global Markets Index of Investor Confidence indicated that confidence for North American institutional investors increased 9.6% since April while European confidence increased 7.5% and Asian investor confidence decreased 4.9% all resulting in an increase of 3.1% to the aggregate Global Investor Confidence Index which now rests 5.74% above the result seen last year.

It’s important to note that with the May release, State Street revised the entire series in an effort to “provide a better guide as to the level of risk tolerance”.

In the release they suggest that the only change that made was a re-basing of the series to 100 but the curve seems to reflect a change in the methodology too.

In any event, the current series appears to confirm that since 2000 the trend has been consistently down as investor’s sentiment and apparently “tolerance for risk” has continually eroded.

The chart below (click for larger version) shows the Global Investor Confidence aggregate index.

Bull Trip!: GDP Report Q1 2009 (Preliminary)

Today, the Bureau of Economic Analysis (BEA) released their second installment of the Q1 2009 GDP report showing a (revised) significant contraction with GDP declining at an annual rate of -5.7%.

Easily the most notable features of today’s report are the stunning declines to residential and non-residential as well as exports of both goods and services.

Fixed investment provided significant drags on growth with non-residential investment declining a whopping -36.9% and residential investment plunging -38.7% while net exports of goods and services declined -28.7%.

Making a positive contribution to GDP were equally stunning declines to imports of goods and services slumping -34.1% as well as positive personal consumption expenditures increasing 1.5%.

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

Thursday, May 28, 2009

The Almost Daily 2¢ - “L” Is For ILLusion!

There is simply no such thing as an “L”-shaped recession (or recovery as some seem to call it).

It’s more than a misnomer… it’s a figment of our seriously delusional collective imagination.

An economy either expands or it contracts… it either sheds jobs or it gains them… stock markets either grow in value in “real” terms or they contract in value in “real” terms…

Now, you can always find a period whereby you can pick points on a data series where the value has gone nowhere… for example, the average “real” (inflation adjusted) value of the S&P 500 during April of 1995 is roughly equivalent to its “real” value during February of 2009.. does that constitute an “L” whereby the stock averages value had gone nowhere for 14 years?... of course not… during that period stocks trended up and then, since 2000, down.

We know innately (whether we want to admit it or not) that what’s important is the trend and you would be hard pressed to find a period where a given important economic data point (unemployment, stock index, non-farm payrolls, consumer prices, etc.) simply went sideways.

Japan is most often cited as the prototypical example of an “L”-shaped economy yet upon closer inspection (look at the “real” NIKKIE 225 for instance) we will see that the trend has NOT been sideways but, in fact, down.

Japan didn’t have a “lost decade”… it’s quickly approaching a “lost score”.

Again, as I have often cited, our own economy is nearing its own “lost” moniker as the latest economic decline sets new lows in arguably the two most notable barometers of macroeconomic health, Jobs and Stocks.

So it’s not surprising that we, collectively, have a hard time digesting the trend seen above as it speaks volumes for our general economic climate and, of course, all it speaks is bad.

But it’s also important to recognize when we are inventing a theme that in some way assuages the collective mood rather than deals in reality.

An “L”-shaped recession is a simple pictographic theme … an “L”-shaped recession is better than a “\”-Shaped depression…

A “jobless recovery” is a better theme than “the weakest job recovery in history” or the more recent reality the “all the jobs gained since the 2002 ‘expansion’ have now been lost … and then some … while work age population has increased over 20 million over the same period” theme.

These realities are hard to accept but equally hard to avoid.

At the beginning of this year I began developing a theme of my own… The “PRIME BOMB!”… which you can read in better detail here and here… and, as of today’s headlines, appears to be gaining some significant traction on the playing field of reality.

New Home Sales: April 2009

Subtitle: Still… No Bottom…

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for April showing a continued deterioration in demand for new residential homes with a 33.96% year-over-year decline and a truly horrendous 74.66% peak sales decline nationally.

The following charts show the extent of sales declines seen since 2005 as well as illustrating how the further declines in 2009 are coming on top of the 2006, 2007 and 2008 results (click for larger versions)

It’s important to note that although the new home sales data appears to have prompted the traditional media to make many “bottom calls” recently, the evidence for their conclusions are scant.

First, most “bottom callers” have focused too closely on just the new home sales series and its historic bottoms rather than other important indicators that disclose a more complete state of the new home market.

As I have argued recently, the level of inventory and supply and level of completed new homes are still too high for a real sustained bottom for the new home market.

The following chart (click for larger) plots the new home sales (SAAR) series along with the current inventory level (NA) and the level of homes completed (NA) since 1973.

As you can see, although the new home sales series has breached the lowest level in over 30 years, the level of inventory (homes for sale at end of period) still remains higher than past historic bottoms and the level of homes completed remains much higher.

In fact, the level of completed new homes remains WELL ABOVE the PEAK levels for past housing boom periods… a truly bad sign for pricing going forward.

Make no mistake, I’m not suggesting that these three series will all bottom simultaneously, a simple cursory review of the chart above will dispel that notion, BUT I believe that if you consider the downward trend in home prices, the state of the job market, the lack of credit availability as well as the extent of the former boom (just look at the run builders had above.. steadily increasing sales from January 1991 to July 2005… truly unparalleled!) any sustained bottom is still a long way off.

The new home market might be in the process of clearing but at the moment it still looks seriously impaired and of the steadily shrinking pool of prospective buyers (from lack of confidence, lack of job or lack of cash and credit availability) those who wait to buy will almost certainly continue to find better pricing…. Thus sales will continue to fall.

Look at the following summary of today’s report:


  • The median sales price for a new home declined 14.89% as compared to April 2008.
  • New home sales were down 33.96% as compared to April 2008.
  • The inventory of new homes for sale declined 35.4% as compared to April 2008.
  • The number of months’ supply of the new homes has decreased 2.9% as compared to April 2008 and now stands at 10.1 months.

  • In the Northeast, new home sales were down 52.5% as compared to April 2008.
  • In the Midwest, new home sales were down 45.8% as compared to April 2008.
  • In the South, new home sales were down 25.4% as compared to April 2008.
  • In the West, new home sales were down 39.7% as compared to April 2008.

Mid-Cycle Meltdown!: Jobless Claims May 28 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims declined 13,000 to 623,000 from last week’s upwardly revised 636,000 claims while “continued” claims jumped 110,000 resulting in an “insured” unemployment rate of 5.1%.

It’s important to note that the two most significant periods for job cuts on a non-seasonally adjusted basis is January 15 and July 15 so as July and clearer visibility on H2 quickly approaches it will be interesting to see how initial jobless claims fares.

Also, the continuing claims series is presenting the clearest picture of what is likely to be one of the most problematic aspects of this period of economic crisis namely how to make an immense and growing number of highly specialized (college educated) service/professional service workers productive again.

It’s obvious now that we have reached the first real test of our majority services-based economy.

Unlike the “tech-wreck” of 2000-2002, our current downturn is very broad, leaving no sector and virtually no corner of the country untouched.

With millions of college educated workers now on the market incomes will clearly suffer but moreover, it will be soon all too clear that our prior bubble economy significantly overproduced service workers (particularly professional service workers) for which current employment opportunities will be scant resulting in continued and fundamental vicious-cycle effects.

The following chart shows the recent trend in initial non-seasonally adjusted initial jobless claims with the year-over-year percent change acting as a rough equivalent of a seasonally adjustment.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

I have added a chart to the lineup which shows “population adjusted” continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit but as you can see, the pattern is still indicating that recession has arrived.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967 and from 2000.

NOTE: The charts below plot a “monthly” average NOT a 4 week moving average so the latest monthly results should be considered preliminary until the complete monthly results are settled by the fourth week of each following month.

As you can see, acceleration to claims generally precedes recessions.

Also, acceleration and deceleration of unemployment claims has generally preceded comparable movements to the unemployment rate by 3 – 8 months (click for larger version).

In the above charts you can see, especially for the last three post-recession periods, that there has generally been a steep decline in unemployment claims and the unemployment rate followed by a “flattening” period of employment and subsequently followed by even further declines to unemployment as growth accelerated.

This flattening period demarks the “mid-cycle slowdown” where for various reasons growth has generally slowed but then resumed with even stronger growth.

Until late 2007, one could make the case (as Fed chief Ben Bernanke surly did) that we were again experiencing simply a mid-cycle slowdown but now those hopes are long gone.

Adding a little more data shows that in the early 2000s we experienced a period of economic growth unlike the past several post-recession periods.

Look at the following chart (click for larger version) showing “initial” and “continued” unemployment claims, the ratio of non-farm payrolls to non-institutional population and single family building permits since 1967.

The most notable feature of the post-“dot com” recession era that is, unlike other recent post-recession eras, job growth has been very weak, not succeeding to reach trend growth as had minimally accomplished in the past.

Another feature is that housing was apparently buffeted by the response to the last recession, preventing it from fully correcting thus postponing the full and far more severe downturn to today.

It is now completely clear that the potential “mid-cycle” slowdown that appeared to be shaping up in late 2007, had been traded for a less severe downturn in the aftermath of the “dot-com” recession, and now has we have fully entered, instead, a mid-cycle meltdown.

Wednesday, May 27, 2009

Commercial Cataclysm?: Moody’s/REAL Commercial Property Price Index March 2009

The latest results of the Moody’s/REAL Commercial Property Index strongly suggests that the nation’s commercial real estate markets are now firmly experiencing a tremendous downturn with prices plummeting a whopping 20.79% on a year-over-year basis and 22.83% since the peak set in October 2007.

The Moody’s/REAL CPPI data series is produced by the MIT/CRE but is noted to be “complimentary” to their alternative transaction based index (TBI) as it is published monthly and is formulated from a completely different dataset supplied by Real Capital Analytics, Inc.

Existing Home Sales Report: April 2009

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for April indicating that home sales are continuing to fall, despite the significant slide to median selling prices, record low interest rates and significant numbers of speculative sales of distressed properties in the western region.

Existing single family home sales were down 2.8% on a year-over-year basis while the median selling price declined a dramatic 14.9% over the same period.

More notably though, the Condos now seem to have fully tipped into the major decline phase with sales declining 9.4% on a year-over-year basis with median selling prices declining a whopping 18.5% over the same period.

The NAR leadership continues their shameless spin with their chief economist Lawrence Yun suggesting the Federal Reserve needs to subsidize extravagant home purchases by the most affluent in our society and in turn, bail out the Realtor industry.

“The Federal Reserve needs to help restore liquidity for the jumbo mortgage market by buying these loans under the TALF program.”

The following (click for larger versions) are charts showing sales for single family homes, plotted monthly, for 2006, 2007, 2008 and 2009 as well as national existing home inventory and month supply.

Below is a chart consolidating all the year-over-year changes reported by NAR in their most recent report.

Reading Rates: MBA Application Survey – May 27 2009

The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages, 1 year ARMs as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage increased 12 basis points since last week to 4.81% while the purchase application volume increased 1% and the refinance application volume dropped 18.86% compared to last week’s results.

It’s important to recognize that the Federal Reserve’s “quantitative easing” measures have clearly pushed mortgage rates down spurring increased re-finance activity yet the rate reductions have yet to impact purchase activity, arguably the more important goal.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).

The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).

Tuesday, May 26, 2009

Beantown Bust: Boston CSI and RPX March 2009

Subtitle: 20% Down… Just 30% More to Go!

The S&P/Case-Shiller (CSI) Home Price index together with the Radar Logic (RPX) for Boston represent the most accurate indicators of the true price movement for both single family homes and the entire residential real estate market as a whole (singles, multi and condos).

For March, both the CSI and RPX showed continued weakness with the CSI declining 8.01% on a year-over-year basis while the RPX dropped 16.65% over the same period.

Further, both reports indicate that area home prices have suffered significant peak declines with the Boston CSI showing a decline of 20.07% since the peak set in September 2005 while the Boston RPX shows a 34.67% price decline since its peak of June 2005.

It’s important to note also that with the March release the Boston CSI has registered over a 20% peak decline, well in excess (see peak charts below) of the than the peak decline seen during the 90s “savings and loan” housing bust.

Unfortunately for “homeowners” and housing speculators though, we are likely only just now reaching the cliff side for Boston area residential real estate prices.

The most obvious difference between the 90s housing bust and today is that during the 90s the home price decline occurred mostly in-line with the larger macroeconomic decline.

Today though, all of the home price decline seen prior to mid-2008 occurred within a backdrop of an (more or less) expanding economy.

Now that the economy has firmly taken a turn for the worse (particularly our local Boston area economy), home prices will suffer to the greatest degree seen in this cycle.

The following two charts compares the Boston CSI to the Massachusetts unemployment rate during the 90s bust and today.

Notice how early we are in the unemployment cycle today… there is lots more pain to go.

Recently S&P introduced a new line of data series that specifically track condominium prices in five select markets including Boston which showed that in March Boston condo prices declined 7.05% on a year-over-year basis and 16.76% on a peak decline basis (see chart below).

In all likelihood the still low consumer confidence and substantial increases in unemployment will work to place significant downward pressure on property prices, particularly condo prices, for the foreseeable future.

As you can see from the chart below (click for larger), although the RPX captures a greater degree of seasonality, both series are very strongly correlated.

To better illustrate the drop-off in home prices and the potential length and depth of the current housing decline, I have compared BOTH the normalized price movement, annual and peak percentage changes to the Boston CSI home price index from the 80s-90s housing bust to today’s bust.

Notice that with today’s release, Boston has now exceeded the number of months of annual declines seen in the 90s bust as well as fallen further on a peak percentage basis.

The “normalized” chart compares the normalized Boston price index from the peak of the 80s-90s bust to the peak of today’s bust.

Notice that during the 80s-90s bust prices took roughly 46 months (3.8 years) to bottom out.

The “annual” chart compares the percentage change, on a year-over-year basis, to the Boston CSI from the last positive value through the decline to the first positive value at the end of the decline.

In this way, this chart captures only the months that showed monthly “annual declines”.

The “peak” chart compares the percentage change, comparing monthly Boston index values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 105 months (almost 9 years) peak to peak including 34 months of annual price declines during the heart of the downturn.

The final chart shows that the Boston housing market has been, in a sense, declining steadily since early 2001 when annual home price appreciation peaked and the intensity of the housing expansion began to wane (click on following chart for larger version).

It appears that that the main thrust of the housing expansion occurred “in-line” with the wider economic expansion that was fueled primarily by the dot-com bubble and that since the dot-com bust, the housing market has never been quite the same.

S&P/Case-Shiller: March 2009

Today’s release of the S&P/Case-Shiller home price indices for March 2009 again confirms the washout conditions seen in the nation’s housing markets with ALL of the 20 metro areas tracked reporting significant year-over-year declines and ALL metro areas showing large and even shocking declines from their respective peaks.

Further, March brought a slight seasonal deceleration of the month-to-month price slide with the 10-city index dropping 2.06% and the 20-city index dropping 2.17% since February.

Even a cursory glance at the charts below should result in the firm understanding that what we are experiencing today is unprecedented.

Thirty three months into the decline and the bottom to the home price slide is nowhere in sight.

The most optimistic argument one could make at the moment is that the pace of the decline is currently slower than it was a few months ago.

That should come as little comfort though considering that this decline will more than likely continue for another two to three years.

It’s important to consider that the 90s housing bust took roughly 50 months to reach the bottom in prices but as you can see from the charts below, our current housing bust literally dwarfs the 90s era tumult.

Further, the 90s housing recovery played out against the backdrop of a truly unique period of growth in the wider economy fueled primarily by novel and ubiquitous technological change (cell phones, internet, personal computers, telecommunications, etc).

In all likelihood, our current decline will play out at least as long as the 90s era (more than likely far longer) with a full recovery measured not in years but in decades.

The 10-city composite index declined 18.65% as compared to March 2008 far firmly placing the current decline in uncharted territory in terms of relative intensity.

Topping the list of regional peak decliners were Phoenix at -53.03%, Las Vegas at -50.40%, Miami at -47.00%, San Francisco at -46.07%, Detroit at -44.13%, San Diego at -42.25%, Los Angeles at -41.27%, Tampa at -40.62%, Washington DC at -33.88%, Minneapolis at -36.23%, Chicago at -27.44%, Seattle at -22.50%, Cleveland at -21.56% and Boston at -20.07%.

Additionally, both of the broad composite indices showed significant declines slumping -33.09% for the 10-city national index and 32.21% for the 20-city national index on a peak comparison basis.

To better visualize the results use the PaperEconomy S&P/Case-Shiller/Futures Charting Tool as well as the PaperEconomy Home Value Calculator and be sure to read the Tutorial in order to best understand how best to utilize the tool.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as compared to each metros respective price peak set between 2005 and 2007.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as on a year-over-year basis.

Additionally, in order to add some historical context to the perspective, I updated my “then and now” CSI charts that compare our current circumstances to the data seen during 90s housing decline.

To create the following annual charts I simply aligned the CSI data from the last month of positive year-over-year gains for both the current decline and the 90s housing bust and plotted the data with side-by-side columns (click for larger version).

What’s most interesting about this particular comparison is that it highlights both how young the current housing decline is and clearly shows that the latest bust has surpassed the prior bust in terms of intensity.

Looking at the actual index values normalized and compared from the respective peaks, you can see that we are still likely less than half of the way through the portion of the decline in which will be seen fairly significant annual declines (click the following chart for larger version).

The “peak” chart compares the percentage change, comparing monthly CSI values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 97 months (over 8 years) peak to peak including roughly 43 months of annual price declines during the heart of the downturn.

Notice that peak declines have been FAR more significant to date and, keeping in mind that our current run-up was many times more magnificent than the 80s-90s run-up, it is not inconceivable that current decline will run deeper and last longer.