Credit Card Brains

“[A] recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
National Bureau of Economic Research (NBER)

The Federal Reserve reported this morning that industrial production declined 0.7% in April. From the WSJ: Industrial Output Fell Last Month

U.S. industrial production plunged in April, suffering a broad decline in output ranging from cars to furniture and business equipment.

Industrial production decreased 0.7%, following a revised 0.2% climb in March, the Federal Reserve said Thursday. Originally, production in March was seen up 0.3%.

Capacity utilization receded sharply to 79.7% in April, a sign of easing inflationary pressure. March capacity use was 80.4%, revised down from an originally reported 80.5%. The 1972-2007 average is 81.0%.

A decline in industrial production is one of the indicators of a recession (see quote at top). The following graph shows capacity utilization and recessions for the last 40 years.

Click on graph for larger image.

The decline in capacity utilization suggests that the economy could be in recession.

Even more important is that industrial production is a key to the depth of the economic slowdown. So far exports have been strong, and the decline in industrial production has been mild. If the global economy slows significantly (”recoupling”), then industrial production and capacity utilization could fall sharply leading to a deeper recession.

Also, with capacity utilization below average, this probably means less investment in non-residential structures in the near future.

From Bloomberg: Fed’s Direct Loans to Banks Climb to Record Level

The Federal Reserve’s direct loans of cash to commercial banks climbed to the highest level on record in the past week, a sign of continued stress in financial markets that threatens to curtail credit for households and companies.

Funds provided through the so-called discount window for banks rose by $2.8 billion to a daily average of $14.4 billion in the week to May 14, the central bank said today in Washington. Separately, the Fed’s loans to Wall Street bond dealers rose by $75 million to $16.6 billion.

The increase indicates financial firms’ emergency needs for cash haven’t receded.

“In general, most markets are pretty tough. We’re still seeing pricing pressure out there and I think for the foreseeable future we’re still going to see it.”
Beazer Homes CEO Ian McCarthy on conference call, May 16, 2008

And some other recent home builder comments:

“I don’t think we’re anywhere near a bottom in housing. We’re going to have a big inventory of unsold, unoccupied homes that’s going to take three or four years to clear out.”
Eli Broad, founder, KB Homes, April 28, 2008

From MarketWatch: Spring a bust for housing market (hat tip charts)

[Toll Brothers] chief executive, Robert Toll, said traffic levels at its communities were “the worst that we have ever seen.”

And from the NAHB:

“[T]he message is very clear: The single-family housing market is still deteriorating…”
NAHB President Sandy Dunn

“[T]he housing market has shown no evidence of improvement thus far. In fact, conditions have continued to deteriorate in recent times…”
NAHB Chief Economist David Seiders

There is a reason home builder confidence is near record lows.

Retail sales in April (ex-auto) were decent. However, in real terms - inflation adjusted - retail sales are now below the year ago level.

This graph shows the year-over-year change in nominal and real retail sales since 1993.

Click on graph for larger image.

To calculate the real change, the monthly PCE price index from the BEA was used (April PCE prices were estimated based on the increases for the last 3 months).

Although the Census Bureau reported that nominal retail sales increased 1.8% year-over-year (retail and food services increased 2.0%), real retail sales declined 1.3% (on a YoY basis).

This is a recessionary level for real retail sales.

As I mentioned in the previous post, most condos are not included in the new home sales and inventory numbers from the Census Bureau (they are included in housing starts).

Here are some numbers for the Chicago market from the Chicago Tribune: Record condo numbers to saturate downtown (hat tip Lee)

Gail Lissner, vice president of Appraisal Research Counselors, said 2008 is the biggest year so far for downtown condos. Her firm says 5,984 units will come on the market this year. That compares with 4,794 last year and a projected 4,160 next year.

Yet buyers are not showing up.

Sales of newly built downtown condominiums plummeted by about 83 percent during the first quarter, to 201 units from 1,207 units a year earlier, according to a report to be released Wednesday by Appraisal Research Counselors.

Those sales numbers are quarterly, so 1,200 sales in Q1 2007 was reasonable compared to the 4,794 new condos added last year. But with close to 6,000 units being added this year, and sales of only 201 units in Q1, there is a serious oversupply - with more units coming in 2009.

There are probably many areas with similar or worse numbers for new condos - like San Diego, Miami, Las Vegas, Orange County and more.

I haven’t been feeling much like myself lately. I’ve been in a funk and stressed out for some reason - probably due to increased stress at work and some small health issues (which seem to go hand-in-hand). I’ve been meaning to post, but haven’t had the heart to write what’s on my mind. I tried to work out a bit, but don’t have the energy. I’ve been spending weekends in, mostly sleeping or just lounging, rather than going out with my girls. And you know what? I’m sort of sick of myself.

I realized today that I’ve been spending more time talking about my health and nutrition issues lately than, well, anything else. And I think it’s driving my family and friends crazy. I need to get back to my normal, energetic and engaging self. But how?

Well, as most of you know, I’m not an unhealthy person. I usually eat plenty of veggies and fruits, try to eat “clean,” or organic/unprocessed whenever I can, avoid sodas and too much sugar and work out regularly. This isn’t the cheapest or easiest, but it’s how I feel my best and has worked well for me. Despite my healthy ways, about two weeks ago, my digestive system staged a protest and I ended up at the doctor’s office to get some advice.

Digestive issues are nothing new for me. I’ve had a sensitive stomach my whole life and regularly carry around a purse full of everything from antacids to Pepto to Immodium to chamomile tea to fiber to gas tablets (sorry for the TMI!). I’ve tried digestive enzymes, tried going vegan, tried avoiding dairy. How I’m processing foods really just depends on the mood of my tummy on any given day.

This time around, my doc advised me to be really restrictive about what’s going in, and suggested I limit my fiber, uncooked vegetables and raw fruits until I get back on track. So I’ve been doing that for two weeks now and I hate it. Though my body seems to be back in order, I don’t have the spring in my step that I usually do. So today I’ve gone back on veggies, fruit and fiber. Screw the brown-rice bread, bring on the whole grains! I’m scrapping the “sensitive stomach” diet and getting myself back into shape.

Here’s how I’m going to get back to normal…

1) To start, I made an appointment with a GI doc. I like my doc just fine, but she’s never tested me for what starts my issues in the first place. She recommends a high-fiber diet one day, and a low-fiber diet the next.

I have no idea what the GI doc will cost, but he’s in my network so it should be reasonable. For those of you wondering, I don’t want to delve to much into symptoms or history. We’ll leave all that to the health and nutrition bloggers out there.

2) As I noted, I’m going back to my pre-protest diet… high-fiber, good fats, yummy fruits and veggies. If I weren’t going out of town all week, I’d be at Whole Foods or Trader Joe’s right now, buying $80 bags of groceries.

3) I’m going to keep taking the probiotics I started last week. The kind I’m using now is about $30/month.

4) I’m going to try to take a multivitamin every day.

Hopefully this strategy will keep me running right, with the energy levels and nutrients I need, until I see the GI doc at the end of the month. Until my appointment, I’m not going to complain or wallow one minute longer. I’m going to get off the couch and start exercising and cleaning my house.

Speaking of cleaning my house (how’s that for a transition?)… My vacuum cleaner has also staged a protest this week, and has decided it is no longer cleaning up cat hairs. Unfortunately for the vacuum cleaner, this means we have reached an impasse and will no longer be working together.

That said, I now need to buy a vacuum cleaner. And not just any vacuum cleaner; one that will actually clean my floor. My 5-year-old $40 Hoover probably “lost suction” about a year ago; we’ve been fiddling with bags and cleaning brushes, but it’s progressively getting worse. So in the name of spring cleaning, I’m going to splurge and actually buy an adult vacuum [read: expensive] this time. (My family had a top-of-the-line Rainbow growing up… I still remember when the sales lady came to my family’s house in the mid-80’s for a demonstration and all six of my family members sat in my living room in awe as she picked up a bowling ball with only one small attachment!)

So given how I’m partial to expensive vacuum cleaners because they actually, you know, work, I have narrowed down my search to two models: the Kenmore Progressive Model 35922, rated number one for pet owners by consumer reports and retailing for about $300, and the Dyson Animal, which retails for about $550 and is rated number one by my brother, who works with inventory for Best Buy. I have read glowing reviews for both. I’m guessing the Kenmore will be the winner based on price… after all, I am still the Budgeting Babe.

OK, so I think we’ve covered it all today: digestive ailments, probiotics and vacuuming. I have officially become the most boring blogger ever. Oh well. If it makes me sound any more glamorous, I also bought a plane ticket to visit a friend in Elko, Nevada. They have a cowboy museum there! Don’t think I was going to let the opportunity to visit a cowboy-lovin’, gold-mining western town pass me by. Spring cleaning season might suck, but I’m feeling an adventurous summer just around the corner.

I’m thrilled to say that I reached my fundraising goal of $300 for the Chicago Police Memorial Foundation with help from you guys. I didn’t originally post my fundraising link on Budgeting Babe because I wasn’t sure if that crossed a line or would be unwelcome, but consider the lesson learned: I will definitely share future fundraising opportunities with you — you guys put me over my goal (though it’s not reflected on the digital meter because I got a few checks).

Together, we raised $305.00 $325.


So without further ado, I’d like to thank my list of sponsors for the race and people who ran with me:

My sponsors:
Reader Jennifer M. (!) … thanks!
Mom & Dad
Uncle Jim
Bob and Kim
Trisha M.
Allison A.
Chandra L.
Desta D.
Nichole V.
Christina W.

And a special shout-out to the folks who ran with me:
Aunt Pam & Uncle Gabe
Megan W. (who happens to be a reader)
Carla R.

Now it’s onto training for the 1/2 marathon in September!

Here is an overview of non-residential investment and commercial real estate (CRE) from our most recent newsletter.

Recently many companies have announced plans to cut capital spending in 2008. This probably means non-residential fixed investments will decline in 2008, as compared to 2007.

This decline in investment is an important indicator for the economy, since changes in fixed investment correlate very well with GDP. The first graph shows the change in real GDP and Private Fixed Investment over the preceding four quarters through Q1 2008.

Click on graph for larger image.

The red line is the year-over-year change in fixed investment, and the blue line (scale on left axis) is the year-over-year change in GDP. Correlation is 79%.

A decline in residential investment is one of the best indicators of a future recession, and that has been flashing a recession warning for some time. Now some of the focus is on non-residential investment, especially on commercial real estate, to determine if a recession has started.

The second graph shows two components of private fixed investment: residential (shifted 5 quarters into the future) and nonresidential structures.

This graph shows something very interesting: in general, residential investment leads nonresidential structure investment. There are periods when this observation doesn’t hold - like ‘95 when residential investment fell and the growth of nonresidential structure investment remained strong.

Another interesting period was in 2001 when nonresidential structure investment fell significantly more than residential investment. Obviously the fall in nonresidential structure investment was related to the bursting of the stock market bubble.

However, the typical pattern is that residential investment leads non-residential structure investment. The normal pattern would be for investment in non-residential structures to have turned negative now.

There is plenty of evidence of an imminent slump in non-residential structure investment. Research firm Reis recently reported that the strip mall vacancy rate have risen to 7.7%, the highest level since 1996. For offices, the vacancy rate has risen to 13.6% nationally according to Grub & Ellis, and they expect the vacancy rate to rise sharply:

“With demand turning negative at the same time that the construction pipeline will deliver the 94 million square feet still underway, [office] vacancy is expected to peak at 18% by the end of 2009.”
Grubb & Ellis economist Robert Bach, April 2008

The Fed survey in April of Senior Loan officers provides further evidence of an imminent slump. The April survey showed an increase in tighter lending standards for Commercial Real Estate (CRE) loans. This graph compares investment in non-residential structure with the Fed’s loan survey results for lending standards (inverted) and CRE loan demand. This suggests investment in non-residential structures should decline soon since lending has tightened considerably.

Another indicator is the architectural billing index from the American Institute of Architects. From the AIA (emphasis added):

“[T]he Architecture Billings Index (ABI) dropped two points in March and fell to its lowest level since the survey’s inception in 1995. As a leading economic indicator of construction activity, the ABI shows an approximate nine to twelve month lag time between architecture billings and construction spending.”

Clearly the CRE slump is here. Now the question is how deep and how fast CRE investment will decline. One way to think about this is to look at previous declines in non-residential investment.

The following graph shows non-residential investment in structures as a percent of GDP since 1960. Over time there has been a decline in spending (as a percent of GDP), probably related to globalization (more factories were being built overseas).

The non-residential investment boom related to the S&L crisis (and energy investment) is obvious on the graph, and we should probably ignore that period when looking at a typical CRE bust.

The two light red circles show the investment busts during the ‘90/’91 and ‘01 recessions.

The decline in non-residential investment was fairly rapid during the previous two recessions (a decline in non-residential investment is usually more rapid than a decline in residential investment). In fact most of the decline in investment happened within four quarters.

During the ‘90/’91 investment slowdown, non-residential investment declined 17% in total, and about 14% in the first year. For the ‘01 investment slowdown, non-residential investment declined almost 20%, and 19% in the first four quarters.

It is very possible - based on tighter lending standards that the decline in non-residential investment will be greater (on a percentage basis) than the previous two busts. However, based on commercial vacancy rates, it doesn’t appear that some segments of commercial are as overbuilt as in the ‘90/’91 and ‘01 periods.

These two factors somewhat balance out, and my guess - based on these two previous busts - is that non-residential investment will decline about 15% to 20% over the next four quarters, from a $501 billion seasonally adjusted annual rate (SAAR) in Q4 2007, to about $400 billion to $425 billion in Q4 2008 - and that most of the bust will happen during 2008.

The Census Bureau reported a goods and services deficit of $58.2 billion for March 2008. Exports, in March, decreased $2.6 billion to $148.5 billion, but are up almost 16% year-over-year. Imports decreased by over $6 billion to $206.7 billion, and excluding petroleum, are up only 4% year-over-year.

So ignoring monthly fluctuations, the story remains the same: exports are surging and imports (ex-petroleum) have slowed. A few years ago the story was how the ports could increase import capacity. Now the problem is finding enough containers for exports - see from the WSJ: Container Shortage Frustrates U.S. Exporters

Click on graph for larger image.

The red line is the trade deficit excluding petroleum products. (Blue is the total deficit, and black is the petroleum deficit). The current probable recession is marked on the graph.

Unfortunately the dollar amount of petroleum imports is surging, and this increase in petroleum imports (because of price, not quantity) is mostly offsetting the improvement in the non-petroleum trade deficit.

And the petroleum deficit will worsen in April and May.

The second graph compares petroleum import prices with the EIA World Spot Price. This shows that import prices in April and May will be significantly higher than for March. Note that the May prices are for last week - and oil prices are setting new records again every day every hour!

From FedEx:

FedEx Corp. today announced that earnings for the fourth quarter ending May 31, 2008 are expected to be in the range of $1.45 to $1.50 per diluted share, compared to the previous forecast of $1.60 to $1.80.

“Since we provided earnings guidance for the fourth quarter in March when the crude oil price was slightly above $100 per barrel, our estimated fuel costs for the quarter have increased more than 7 percent, or $100 million from our previous estimate, and the weak economy has restrained demand for U.S. domestic express package and LTL freight services,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer. “While we have dynamic fuel surcharges in place, they cannot keep pace in the short-term with rapidly rising fuel prices. This revised outlook assumes no additional increases to the current fuel price environment and no further weakening of the economy.”

Mostly an oil related warning.