Credit Card Brains

Until recently the manufacturing sector (except the automakers) was holding up pretty well. Not anymore …

Here is the Philadelphia Fed Index for November activity released today: Business Outlook Survey.

Conditions in the region’s manufacturing sector continued to deteriorate, according to firms polled for this month’s Business Outlook Survey. Most broad indicators declined again in November, following sharp decreases in October. … Most of the survey’s indicators of future activity slid further into negative territory this month, suggesting that the region’s manufacturing executives expect continued declines over the next six months.
…
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from -37.5 in October to -39.3 this month. This index, which fell a dramatic 41 points last month, is now at its lowest level since October 1990.
…
The current employment index fell notably this month, declining seven points, to -25.2

Click on graph for larger image in new window.

This graph shows the Philly index vs. recessions for the last 40 years. The manufacturing sector is clearly in recession - although still not as bad as during earlier recessions.

A couple of quotes from Bloomberg: Commercial mortgages seen at risk as economy weakens (hat tip Dwight)

“There is a growing concern that (commercial real estate) is going to be another tripping point in the economy.”
William Larkin, portfolio manager with Cabot Money Management

“The mall operators are really, really in trouble. There aren’t even signs on the empty stores in the malls. They’ve been empty for a while, barren, tumbleweeds blowing through.”
Kevin Quinn, a managing director of equity trading at Stanford Group Company

And here is a forecast of office vacancy rates increasing significantly in Chicago via the Chicago Tribune: Chicago’s commercial real estate climate may soon grow colder. (hat tip Walt) A few excerpts:

With banks and investment firms occupying 12 million square feet of office space, consolidation and downsizing could push the downtown vacancy rate from 12 percent to nearly 18 percent by 2010.
…
Commercial real estate faces one of its most challenging climates in nearly two decades.
…
“I think we could easily see an effective drop in rents over the next 12 months of 15 to 20 percent from where they are today.” [said John Goodman, Chicago-based executive vice president with Studley, a real estate firm]

This story is playing out all over the country.

There are a couple of key points:

A couple of major holes in the ground in Vancouver, BC, Canada.

From the Province: Bank pulls funding on luxury condo project

A splashy jewel of a downtown condo development … has been put on hold after a bank pulled funding, the latest in a growing list of failed residential projects.
…
At the site, a crane sat idle and there was no activity in the partially completed seven-storey-deep hole at the $180-million project that was scheduled to be finished by spring 2010.

From the LA Times: FDIC to open temporary office in Irvine (hat tip jb)

The Federal Deposit Insurance Corp. has leased 200,000 square feet of space in Irvine for a temporary office that will manage receiverships and liquidate assets from failed financial institutions in the western United States.
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In choosing Irvine, the agency is benefiting from Orange County’s depressed office market, which has been hurt by the collapse in recent years of New Century Financial Corp., Ameriquest Mortgage Co. and other financial companies.

The office vacancy rate in Orange County soared to 17.4% in the third quarter from 12.1% a year earlier, while rents fell 4.4%, according to Cushman & Wakefield.

From PricewaterhouseCoopers: PricewaterhouseCoopers Forecasts a Substantial Reduction in Hotel RevPAR in 2009

According to the PwC forecast, 2008 RevPAR will decrease by 0.8 percent, primarily due to a 3.7 percent decrease in occupancy, the highest annual decrease in occupancy since 2001. In 2009, demand is forecast to decrease by 2.0 percent, which, when coupled with a 1.6 percent increase in supply, is expected to further reduce occupancy to 58.6 percent, the lowest since 1971.
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“The deteriorating outlook for the economy is impacting travel habits and spending, and hotels are expected to experience reduced occupancy levels, and to a lesser degree, some room rate erosion through 2009,” said Scott Berman, principal and U.S. Leader of PricewaterhouseCoopers’ Hospitality and Leisure practice.

Note: RevPAR is revenue per available room. The article also mentions ADR: average daily room rate.

Click on graph for larger image in new window.

This graph shows the annual occupancy rate for the last 50 years. The data is from PricewaterhouseCoopers LLP (1958 to 1986), and Smith Travel Research (1987 to 2007).

The PricewaterhouseCoopers forecast for 2008 and 2009 are in red. Note: The y-axis starts at 50% to better show the change.

Just more evidence of the coming slowdown in non-residential investment.

Goldman Sachs has a research note out tonight asking: Fourth-Quarter GDP – How Bad Could It Be? Their answer: pretty bad.

The Goldman forecast is for a 3.5% annualized decline in GDP for Q4. But in the research note tonight they calculate some alternative scenarios.

In a “just awful” scenario, Goldman estimates GDP could decline by 6% annualized in Q4, and in a “worst case” scenario by 7.8% (either would be the worst quarter since the early ’80s). GDP was -7.8% annualized in Q2 1980 and -6.4% in Q1 1982.

Looking at the details, I think the “just awful” scenario is possible (with consumer spending off 5%), but the worst case is very unlikely. We will know more as PCE is released monthly.

Compare that to the National Association for Business Economics (NABE) forecast released this morning, from the WSJ NABE: ‘Prolonged’ Recession Expected:

According to NABE, 96% of survey respondents said the U.S. is in recession, with respondents split on whether it began in late 2007 to early 2008 or in the third quarter of this year. Gross domestic product contracted 0.3%, at an annual rate, during the third quarter. The NABE panel expects GDP to fall at a 2.6% rate this quarter and 1.3% in the first quarter of 2009.

Even though most NABE economists finally recognize the recession, I think they are still too optimistic. But the consensus could be correct - guessing inventory changes, government spending and even net exports is always tricky.

But the number could be shockingly bad, even for those of use that expect a really bad number.

No matter who you voted for, last night was an historic night for the city of Chicago. Here is a link to my cousin’s photos from the main rally so you can see how massive the crowds were in Grant Park. My camera did not perform quite as well (add that to the list of things to buy), but I’ve uploaded a few photos from the non-ticketed rally here, too (but go to the link above first, they’re really amazing photos).

This is yet another example of all the cool things you can do for free. The largest political rally in the country on election night in a safe, secure, beautiful and happy environment? Check. I was so proud of my country and my city last night.

To the city of Chicago:
Thank you to the police officers, fire fighters, officials, security guards, emergency workers and city planners for putting on a breathtaking show last night. The city absolutely sparkled, and you made it possible for so many of us to witness history in the making. Your sacrifice and courage are appreciated by the masses who attended the rally. The world was watching, and you showed them the city at its best.

And now… my pictures. (My camera is really, really bad in low light. Go visit my cousin’s photos before you see these.)

The Art Institute, patriotically perfect


Cool sign on the way to the rally


Walking in on Michigan Ave


Looking back on security


The non-ticketed folk (mostly students and families) walking to our unplanned rally


Getting excited


People in trees


Two of the big screens in our area. There are TONS of people watching them, but I think the effect of the screens is really cool with my cheap-o camera.


Obama addressing the crowds


Walking home, a sea of people behind us (look all the way back, the entire bridge is covered in people).









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From the FDIC: FDIC Loss Sharing Proposal to Promote Affordable Loan Modifications

Although foreclosures are costly to lenders, borrowers and communities, the pace of loan modifications continues to be extremely slow (around 4 percent of seriously delinquent loans each month). It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures.

Modifications should be provided using a systematic and sustainable process. The FDIC has initiated a systematic loan modification program at IndyMac Federal Bank to reduce first lien mortgage payments to as low as 31% of monthly income. Modifications are based on interest rate reductions, extension of term, and principal forbearance. A loss share guarantee on redefaults of modified mortgages can provide the necessary incentive to modify mortgages on a sufficient scale, while leveraging available government funds to affect more mortgages than outright purchases or specific incentives for every modification. The FDIC would be prepared to serve as contractor for Treasury and already has extensive experience in the IndyMac modification process.

Basic Structure and Scope of Proposal
This proposal is designed to promote wider adoption of such a systematic loan modification program:

by paying servicers $1,000 to cover expenses for each loan modified according to the required standards; and

sharing up to 50% of losses incurred if a modified loan should subsequently re-default

We envision that the program can be applied to the estimated 1.4 million non-GSE mortgage loans that were 60 days or more past due as of June 2008, plus an additional 3 million non-GSE loans that are projected to become delinquent by year-end 2009. Of this total of approximately 4.4 million problem loans, we expect that about half can be modified, resulting in some 2.2 million loan modifications under the plan.

There are more details in the press release, and the following table provides a summary:

“Armageddon is here.”
a private comment from a Senior Buyer at a home improvement retailer, Nov 13, 2008

Note: this was private and I can’t reveal the source or company (I have no position in the company)

From a previous post, here are a couple of graphs on two key components of Residential Investment (RI):

Click on graph for larger image in new window.

As everyone knows, investment in single family structures has fallen off a cliff. This is the component of RI that gets all the media attention - although usually from stories about single family starts and new home sales (related to RI in single family structures).

Currently investment in single family structures is at 1.22% of GDP, significantly below the average of the last 50 years of 2.35% - and just above the record low in 1982 of 1.20%.

But what about home improvement?

The second graph shows home improvement investment as a percent of GDP.

Home improvement is at 1.21% of GDP, off the high of 1.3% in Q4 2005 - but still well above the average of the last 50 years of 1.07%. Maybe lenders are boosting home improvement spending fixing up all those damaged REOs!

This would seem to suggest there is significant downside risk to home improvement spending over the next couple of years.

Lowe’s is scheduled to announce results on Monday and Home Depot on Tuesday.

From CNBC: Paulson: Worsening Crisis Forced Change in Strategy

“By the time the process with Congress was completed, it was clear that we were facing a much more severe situation than we had envisioned earlier on,” Paulson said in a live interview. “We have this limited pool of resources—big, but limited, $700 billion—and how do we use that, and get the maximum impact, and it’s by putting capital in (banks).”

And from Reuters: US’s Paulson-adding bank capital needed-CNBC

“We have in many ways humiliated ourselves as a nation with some of the problems that have taken place here,” Paulson said in an interview with CNBC television.

Speak for yourself Mr. Paulson.

Update: Looks like Kashkari had fun today (a 36 second video):