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Economy

Economists Expect 2008's Second Half To Be Worse Than First The U.S. economy is poised for an unpleasant finish to 2008, amid a consumer-spending slowdown and a weakening global economy. The emerging pattern is the reverse of what most forecasts showed at the beginning of the year. The U.S. economy, facing a consumer-spending slowdown and a weakening global economy, is poised for an unpleasant finish to 2008. The pattern of growth that is emerging this year -- a mediocre first half followed by a weaker second half -- is the reverse of what most forecasts showed at the beginning of the year. Economists have downgraded growth forecasts in recent weeks. "We are on the cusp of a renewed deceleration in growth," Goldman Sachs economists said, noting that a contraction in consumer spending is likely over the second half of this year and that "the risk that foreign-demand weakness will wash back onto U.S. shores is clearly growing." Households are grappling with layoffs, stagnant wages, falling home values and tighter credit. The U.S. government's economic-stimulus program, which was intended to give households a boost in the middle of the year, may not have done enough to stave off recession. The payments coincided with a run-up in fuel prices, so a portion of the checks were gobbled up at the gas pump. So far, most of the money appears to have gone to savings and debt rather than to immediate spending in stores."The air is coming out of the balloon pretty quickly here," said Brian Bethune, a senior economist with Global Insight, a Lexington, Mass., forecasting firm. "Consumers are just throwing in the towel." Retail sales in July were weaker than expected at many chain stores, suggesting the May and June sales boost from the stimulus checks is quickly fading. Talbots Inc., Kohl's Corp. and Gap Inc. were among those retailers reporting double-digit sales declines last month. Discounters, including Wal-Mart Stores Inc. and Costco Wholesale Corp., fared better, but Wal-Mart U.S. President Eduardo Castro-Wright warned that spending could slow: "With the end of the stimulus checks, we know consumers are spending more cautiously," he said. Consumer spending is poised to weaken just as foreign growth -- a vital offset to sluggish domestic demand -- also shows signs of slowing. Surging export growth, coupled with falling demand for imports, added 2.4 percentage points to second-quarter growth in U.S. gross domestic product -- marking the largest contribution in nearly three decades. Without that contribution, GDP would have slipped 0.5%. WSJ Vidclip Review

·          Economic Slump in U.S. to Worsen as Consumers Get `Squeezed' After Rebates [Kaufman Says U.S. Economy `About to Approach Recession']

·          Economic Slide to Extend Into 2009: Blue Chip, Economy Seen Slowing More Sharply: Philly Fed

·          Jobless Claims Fall Less Than Expected

·          Inflation Jumps to 17-Year High

U.S. Retail Sales Drop as Record Gasoline, Credit Squeeze Hurt Auto Sales Sales at U.S. retailers dropped in July for the first time in five months as record gasoline prices and tighter credit reduced automobile purchases. The 0.1 percent drop followed a 0.3 percent gain the prior month that was larger than previously reported, the Commerce Department said today in Washington. Sales excluding automobiles rose 0.4 percent, less than anticipated. The sales drop came even as the Treasury distributed tax rebates as part of the government's fiscal stimulus plan. Consumer spending, which accounts for more than two-thirds of the economy, is likely to keep fading, hurt by rising unemployment, falling property values and elevated fuel costs. Retail sales excluding gasoline fell 0.2 percent, the Commerce Department said. Spending, which has grown every quarter since 1992, may stall in the last three months of this year after growing at a 0.6 percent annual pace from July to September, according to the median estimate of economists surveyed by Bloomberg from Aug. 1 to Aug. 8. Figures from Commerce on July 31 showed spending grew at a 1.5 percent pace in the second quarter. The world's largest economy will expand at an average 0.7 percent annual pace from July through December, half the gain in the first six months of the year, according to economists surveyed. Retail Sales Drop for First Time in 5 Months

Morici wins contest for third time in a year  Morici wins contest for third time in a year The U.S. economy has fundamental flaws and won't fully recover until three structural problems are addressed, said Peter Morici, a business professor at the University of Maryland and the winner of the MarketWatch Forecaster of the Month award for July. "We have fundamental structural problems," Morici said. "This is not a classical recession that has a self-healing character" that the Federal Reserve can speed up with lower interest rates. "Things will happen in the next two years that will shock people," Morici said It's not just the broken banking system; it's also that the U.S. economy is being held hostage by oil and by China's undervalued currency. Morici doesn't have much confidence in policymakers' response to the economic crisis. They've been too timid and haven't really talked bluntly about the challenges the U.S. economy faces. Cutting interest rates won't do much to help the banking system regain the trust it has squandered. "Until you reform the management and compensation structures, it will be difficult for banks to earn anyone's trust," he said. In exchange for the open-ended loans and special safety nets for the banks, the Fed should be demanding changes in the way banks run their businesses and pay their top employees. "These banks would be bankrupt without the Fed," he said. "If Citigroup is a utility, vital to the public good, then they can't reward themselves like Saudi princes," Morici said. The politicians haven't done any better than the Fed. The Senate Banking Committee hasn't called the banks in on the carpet, the way other committees have savaged the oil companies. He has little faith in either Barack Obama or John McCain to grasp the extent of the rot. Obama, he said, is singing from the "liberal songbook from the 1970s." McCain, who could have run against Wall Street as a reformer, has simply tied himself closer to the policies of George Bush.

Housing 

A Third of New U.S. Homeowners Owe More Than Houses Are Worth, Zillow Says Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to Zillow.com, an Internet provider of home valuations. Second-quarter home prices fell 9.9 percent from a year earlier, giving 29 percent of owners negative equity, said Zillow, the Seattle-based service that offers values for more than 80 million homes. For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said. Negative equity and declining prices are making it difficult for homeowners to sell property for a profit. Almost one-quarter of U.S. homes sold in the past year were for a loss, Zillow said. That contributes to the foreclosure rate because some homeowners can't absorb the loss and end up surrendering their homes to the bank that holds the mortgage, said Stan Humphries, Zillow's vice president of data and analytics. ``For homeowners who need to sell, this is a gravely serious situation,'' Humphries said in an interview. ``It can also be harmful to communities where the number of unsold homes adds more to inventory and puts downward pressure on prices.'' The highest percentages of homeowners with negative equity were located in California. In four of the state's metropolitan areas -- Stockton, Modesto, Merced and Vallejo-Fairfield -- the number of homeowners whose mortgage debts exceeded the values of their properties topped 90 percent, Zillow said. In five more California areas -- the Inland Empire (Riverside-San Bernardino), Bakersfield, Yuba City, El Centro and Madera -- the percentages were more than 80 percent. 25% of home sales soak the seller

The next wave of mortgage defaults Prime mortgages are starting to default at disturbingly high rates - a development that threatens to slow any potential housing recovery. The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance, a unit of First American (FAF, Fortune 500) CoreLogic that compiles and analyzes residential mortgage statistics. Delinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier. And prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance. "The extent of how bad these loans are doing is very troubling," said Pat Newport, real estate economist with Global Insight, a forecasting firm. Washington Mutual (WM, Fortune 500) CEO Kerry Killinger said last month that the bank's prime loan delinquencies are on the rise. As of June 30, 2.19% of the prime loans issued by WaMu in 2007 were already delinquent, compared with 1.40% of prime loans issued in 2005. Also last month, JP Morgan Chase (JPM, Fortune 500) CEO Jaime Dimon called prime mortgage performance "terrible" and suggested that losses connected to prime may triple. For the second quarter, the bank reported net charges of $104 million for prime rate delinquencies, more than double the $50 million recorded three months earlier. Prime loans are just the latest class of mortgages to suffer a spike in failure rates. The first lot to go bad was, of course, subprime mortgages, whose problems set the housing meltdown in motion. Next were the Alt-A loans, a class between prime and subprime loans that doesn't require strict documentation of a borrower's assets or income. Now, as prime loans are added to the mix, the resulting foreclosures could haunt the housing market for a long time, according to Global Insight's Patrick Newport. "Home prices will drop for quite a while - maybe several years," he said. US Foreclosure Filings Surge 55 Percent, Home Prices Fall 7.6 Percent

A Few Housing Themes (by CalculatedRisk) 1: Alt-A; the new subprime. Or “We’re all subprime now!” There is some evidence that subprime defaults have peaked, but Alt-A defaults are picking up steam (Tanta will have more today). The next wave is here, and these defaults will impact house prices in the mid-to-high range. 2: And on house prices: In general – on a national basis - I think nominal house prices have probably fallen more than half way from the peak to the trough. There are some areas where prices are probably closer to the eventual nominal bottom than others; these are low end areas with high foreclosure rates and high demand for housing - or areas that saw little appreciation during the boom years. But in other areas, prices have really just begun to fall. 3:There will be two housing bottoms. A bottom for new construction is very different than a bottom for existing home sales. For existing homes, the most important number is price. So the bottom for a particular area would be defined as when housing prices stop declining in that area. Historically, during housing busts, existing home prices fall for 5 to 7 years - so I'd expect to start looking for the bottom in the bubble areas in 2010 to 2012 or so. For new construction, we have several possible measures of a bottom. These include Starts, New Home Sales, and Residential Investment (RI) as a percent of GDP. These measures will hit bottom much sooner than for prices for existing home sales, and one or more of these measures might even bottom in the 2nd half of this year. However ... 4: here will be no rapid recovery for housing. Usually, following a housing bust, new home sales pick up pretty quickly. However this time, with the huge overhang of excess housing inventory, new home sales and starts will probably not be an engine of recovery for the economy. Without a contribution from housing, I expect the economy will remain sluggish well into 2009 and the effects of the recession will linger.

·          Subprime and Alt-A: The End of One Crisis and the Beginning of Another Unfortunately, Alt-A seems nowhere near its peak yet. Clayton's report, based on May data, indicates that both new delinquencies and foreclosure starts in Alt-A pools are still rising. Fannie Mae's recent conference call suggesting that Alt-A deteriorated even more sharply in July is yet more evidence that the Alt-A mess is still ramping up. If the "subprime crisis" was about "exotic securities," the "Alt-A crisis" is going to be about bank balance sheets. And the fun is only beginning.

Credit vs the Economy 

Credit Crisis `Far From Over,' Banks Must Merge, Merrill's Bernstein Says The credit crisis is ``broad, deep, and global'' and ``far from over'' for financial companies even after they reported $500 billion in writedowns and credit losses, Merrill Lynch & Co.'s chief investment strategist said. ``Investors are significantly underestimating both the scope and the extent of the credit bubble and the consequences of its subsequent deflation,'' Richard Bernstein wrote in a note to clients. ``The problems are not confined to large institutions that are overexposed to U.S. subprime loans.'' The lingering effects of the crisis mean banks and brokerages need ``massive'' consolidation because of the glut of lending worldwide, Bernstein said. Profit for U.S. banks and brokerages tumbled 94 percent in the second quarter from a year earlier, according to Bloomberg data. Financial stocks in the Standard & Poor's 500 Index have tumbled 28 percent this year for the worst performance among 10 industry groups.

J.P. Morgan and the disappearing profit Slipped in on page 10 of the report was a disclosure that its investment banking arm held some collateralized debt that had lost about $1.5 billion in value since the end of the quarter. J.P. Morgan tells me that they weren't trying to hide anything. They say it was at the top of the filing and those filings are highly scrutinized. Maybe so. On the other hand, they didn't give this the fanfare the second-quarter profit received: press releases and conference calls. In other words, it took about a month, maybe less, for J.P. Morgan to lose about 75% of its second quarter profit. It doesn't get much worse, or does it? J.P. Morgan, a bank many -- including me -- thought had weathered the banking crisis and moved on, said it could get worse and may be worse already because the investment bank still had a $19.5 billion exposure in Alt-A mortgages, $1.9 billion in subprime mortgage exposure and an $11.6 billion exposure in commercial mortgage-backed securities. For these securities, though hedged, "the trading conditions have substantially deteriorated," the bank said. Here we go again. Anyone get the feeling that the banking and credit crisis is about to get worse? We may be waiting a lot longer than the third quarter for the bleeding to stop. J.P. Morgan seems to be taking one of the two strategies that have emerged during the crisis: hold onto the junk and hope the market turns. This is the same plan that's in place at Lehman Brothers Holdings Incand was in place at Bear Stearns Cos. There's a technical term for the other strategy that's being employed at Merrill Lynch & Co. and to some degree at Citigroup Inc.: dump it. That doesn't mean Hintz is whistling like Frank Quattrone past the courthouse. He's worried about a couple of things: commercial mortgage backed securities, the kind J.P. Morgan copped to having $11.6 billion worth, and good old prime mortgages, which like the Titanic would never default and are now taking on water. If the prime stuff goes, the whole system implodes and we're all sleeping in the park. The commercial stuff is more likely to fail.

Banks in Euro Zone Tighten Lending Again Banks in the euro zone continued to tighten lending standards during the second quarter amid a deteriorating economic outlook, and criteria could become even tighter, according to the European Central Bank's July Bank Lending Survey. It was the fourth consecutive quarter that banks tightened their lending requirements, although fewer banks reported tighter credit standards for corporations than in the first quarter.The net percentage of banks reporting a tightening of credit standards for loans to enterprises fell to 43% from 49% in the first quarter, the ECB said. For the third quarter, the survey indicated a slightly higher reading of 45% in corporate lending. Meanwhile, for consumers in the second quarter, banks were more stringent. The net percentage of banks reporting a tightening of credit standards for consumer credit and other lending to households rose to 24%, compared with 19% in the first quarter, the ECB said. The results add to the evidence that economic growth in the euro zone is flagging, economists said.