ATA Truck Tonnage Index Jumped 2.7 Percent In NovemberTurning to the weekly indicators I use to gauge how well the economic expansion is being sustained:
The latest gain boosted the SA index from 103.6 (2000=100) in October to 106.4, its highest level in a year.
Let’s start with “uncapping” Treasury support under the Preferred Stock Purchase Agreements (PSPAs) authorized by the Housing and Economic Recovery Act (HERA) of 2008. Under the new calculation the maximum amount either enterprise may draw is the greater of $200 billion, or $200 billion plus the cumulative amount of deficiency amounts covered by Treasury preferred purchases as of December 31, 2012, less any surplus at December 31, 2012.Deficiencies are negative net worth measured in any quarter; these require the enterprise to sell preferred stock to the Treasury to maintain net worth at zero. Surpluses are positive net worth. Please notice that the new calculation provides for the possibility that the enterprises will not continuously run in the red. The mechanics are a little vague - suppose an enterprise draws $210bn through Q111 but emerges with a $20bn surplus at December 31, 2012. Does the Treasury claim the surplus at that time?
Nonetheless, including surpluses in the cap formula is an important and appropriate adjustment. Freddie Mac did draw a total of $51bn over the first three quarters the agreements were in place (Q3 and Q4 of 2008, Q109), but it finished Q2 and Q3 with positive net worth ($8.2bn and $10.2bn respectively). It had no need to draw on Treasury for funding.
More fundamentally, the game has radically changed since Congress (spurred on by a strong scapegoating and retribution-mongering spirit) and the Paulson Treasury wrote the rules for GSE support. Private lenders (including the biggest ones paying back their TARP money, Ms. Story) are making few residential mortgages for their own books, and there is NO investor appetite for privately securitized mortgages. And furthermore, between FAS 166/167 and proposed requirements that securitizers retain significant risk, prospects are not bright for a renewal of private securitization.
Like it or not, at present home sales and refinancings are overwhelmingly supported by FHA/Ginnie Mae, Fannie and Freddie. Equally significant, and completely unforeseen by the Congress and Administration that authored HERA, Fannie and Freddie are bearing a disproportionate share of the burden for mortgage modifications. Although there is much that can be written on this issue, Credit Suisse mortgage analysts Mahesh Swaminathan and Qumber Hassan put it succinctly in a report published last November on the expected impact of HAMP modifications on prepayments:
The GSEs have a much higher share of HAMP trial mods compared with their share of overall delinquencies for the mortgage universe. No PSA constraints and relaxed NPV requirements for mods make it easier for servicers to initiate trial mods on GSE-backed loans.
(Translation: PSAs are the pooling and servicing agreements that govern, among other things, what modifications of securitized private mortgages. Although mass reviews of PSAs and the creation of a legal safe harbor should give servicers sufficient latitude to modify much larger numbers of loans, the possibility of law suit remains as the interests of different classes of investors in a deal are often not aligned and decision-making responsibility appears divided between servicers and trustees.)
Also, thanks to high unemployment and the precipitous decline in home values, the delinquency and foreclosure crisis has spread to loans underwritten to traditional credit standards - the bulk of Fannie and Freddie’s books of business. Official estimates from Treasury and the Congressional Budget Office indicate the caps are sufficient, but some analysts have been arguing for more headroom. In a December 11, 2009 piece, Barclays Capital analysts led by Rajiv Setia published a lengthy examination of the GSE’s current condition and the future of government involvement in US housing finance. Noting that serious delinquencies continue to rise, they tested the original caps under a base and stress-case scenario. In both cases they found that $200bn was more than sufficient for Freddie. However, given that Fannie’s credit book is 50% larger, they questioned the wisdom of providing the same level of support to both enterprises. Under the stress scenario, “the $200bn backstop may prove too close for comfort, especially in a double-dip recession.”
Swaminathan at Credit Suisse, in a note written over Christmas weekend, similarly saw the risk as small: “The only way GSEs would need to tap more than the $400bn capital line previously provided is if there is a housing double dip that causes losses on GSE credit books to exceed 8%.”
Third, there is the simple fact that people who write about the economy don't understand the economy.
WSJ, last night:
GMAC Financial Services is close to getting approximately $3.5 billion in additional aid from the U.S. government, on top of $12.5 billion already received since December 2008, according to people familiar with the situation.We're now at Stage 4 of the process.The announcement, expected within days, will coincide with GMAC taking additional steps to absorb losses related to its mortgage operations, these people said. The cleanup is designed to return the Detroit-based finance company to profitability in the first quarter of 2010, according to one of these people.
In housing, the S&P composite index of home prices in 20 metropolitan areas was flat in October, falling short of expectations for a rise of 0.2 percent according to a Reuters survey. September's index was revised upward to a gain of 0.4 percent, from a previously reported 0.3 percent.
Only seven of the 20 cities in the composite index had month-over-month gains in prices in October, S&P said.
A sustained upturn in home prices is seen vital in the fledgling rebound in the hardest hit housing market since the Great Depression. There has been growing concern that record-high levels of foreclosures will mount even further and depress prices anew.
"The report signals that we have a growing stabilization in house prices. Obviously it's at a very slow pace and that is because the market is still saddled with a significant amount of inventory," said Anna Piretti, senior U.S. economist at BNP Paribas.
"We're likely to see some negative cross currents come into home prices in November, but that doesn't really change the trend -- the trend should be toward stabilization."
S&P said the annual rate of price declines improved, with the 20-city index dropping 7.3 percent from a downwardly revised 9.3 percent in September. A 7.2 percent downturn was forecast in the Reuters survey.
All 20 metropolitan areas and both the 20-city and 10-city indexes showed smaller rates of decline in October compared with September.
The year over year rate of deterioration continues to lessen. This is good news. However,
Confidence among U.S. consumers rose in December for a second month as pessimism over the outlook for jobs diminished.The Conference Board’s confidence index increased to 52.9, in line with the median forecast of economists surveyed by Bloomberg News, from 50.6 in November, the New York-based research group said today. Another report showed home prices climbed in October for a fifth consecutive month.
The report showed consumer attitudes about current conditions decreased to the lowest level in 26 years and expectations over wages also fell, a reminder that spending may be slow to recover with government assistance. A jobless rate that is forecast to exceed 10 percent through the first half of next year may prompt policy makers and retailers to maintain tax breaks and incentives to entice buyers.
In other words, the pace of job losses has been severe to say the least. That means the recovery will be long and difficult. And it has been. The second point from the chart above of establishment job losses shows that we are almost at the rate of 0 job losses. Put another way, we are near a time when the economy should finally start adding jobs sometime in the next few months.
There was much hay made of the fact that of the 2.2%, 1.45% came from motor vehicle output, and especially that this was from the cash for clunkers program. In response, consider these points. First, a large number of the people complaining about that figure are the same people who argued for the first stimulus and in some cases are arguing for a second stimulus. In other words -- there people will complain no matter what. Secondly, government spending accounts for 20% of GDP growth throughout the economic cycle. Finally, it is standard for the government to use programs to bring an economy out of a recession. A favorite method is increasing the upfront depreciation deduction. However, there is nothing wrong with using standard demand simulating measures as well. So, some type of government programs are standard for getting an economy out of a recession.
I describe the initial phase of the next expansion the "fits and starts" expansion because not one of the four elements outlined about will lead completely or continually. I think it's far more likely we'll see an increase in consumer spending one quarter followed by increased stimulus spending and an increase in exports the next quarter. In other words, various economic sectors will take the lead one quarter and then fall back. In other words, we'll see fits and starts from the above sectors.
This month's new vehicle sales (including fleet sales) are expected to be 1,010,000 units, a 13.3 percent increase from December 2008 and a 3.57 percent increase from November 2009. Edmunds.com analysts predict that December's Seasonally Adjusted Annualized Rate (SAAR) will be 11.11 million, up from 10.89 in November 2009.
Finally, the December 22 Daily Treasury Statement, at $105,187 B, is about 10% less than the same day last year, which showed $116,642 B in withholding taxes paid for December. (Of note, on the 21st the two years were almost exactly equal). Either way, tax revenues are still in a state of severe stress.
In summary, the economy still isn't out of the woods. But there are increasing signs that consumer and producer spending are improving significantly, a good sign for employment going forward.
Most importantly of all, best wishes for a very happy holiday!
----------Gains outside of transportation were broad-based, with increases in demand for machinery, metals, computers and communications gear.
Shipments of non-defense capital goods excluding aircraft, which is used in calculating gross domestic product, climbed 0.8 percent in November and October’s reading was revised to show a 1.5 percent jump, compared with a previously estimated 0.3 percent drop. Bookings for such goods, a proxy for future business spending, increased 2.9 percent in November.
The figures suggest business investment will contribute to growth.
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.2 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent.
The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was 2.8 percent (see "Revisions" on page 3).
The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment that were partly offset by a negative contribution from nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
The upturn in real GDP in the third quarter primarily reflected upturns in PCE, in exports, in private inventory investment, and in residential fixed investment and a smaller decrease in nonresidential fixed investment that were partly offset by an upturn in imports, a downturn in state and local government spending, and a deceleration in federal government spending.
Inventories have dropped like a stone for roughly a year. At some point these will need to be replaced. While there is no indication the bottom has occurred yet at some point it will. And when that happens, another item of growth will be added to the equation.
