Someone please call the English Department to come save the world’s oil analysts. Words are failing them.
On one side of the net are analysts looking at graphs of oil production and saying something along the lines of Boone Pickins’ recent summary of world oil: we need 87 but can only produce 85. I’m not sure where Boone gets his numbers, since last I looked (see below) the all liquids graphs were showing 87 mb/d being produced in recent months. But that’s not the point. The point is that a lot of people are running around saying “peak oil is here” because, the fact is, there has been more or less of a plateau in both light sweet and all liquids production since about mid-2006, give or take a little.
Last month, we discussed States and Cities Impact On GDP. They account for about 12.5% of total U.S. GDP.
The Sunday NYT had a related article in the Week in Review: Think the Economy Is Bad? Wait Till the States Cut Back. Here’s an excerpt:
“Struggling as we are with the housing bust, the credit crunch, shrinking consumption, rising unemployment and faltering business investment, we can be forgiven for thinking that all the big shoes have dropped. There is another one up there, however, and it is about to come down.
State and city governments have yet to shrink the economy; indeed, they have even managed to prop it up. They have quietly maintained their spending at pre-crisis levels even as they warn of numerous cutbacks forced on them by declining tax revenues. The cutbacks, however, are written into budgets for a fiscal year that begins on July 1, a month away. In the meantime the states and cities, often drawing on rainy-day savings, have carried their share of the load for the national economy.
That share is gigantic. At $1.8 trillion annually in a $14 trillion economy, the states and municipalities spend almost twice as much as the federal government, including the cost of the Iraq war. When librarians, lifeguards, teachers, transit workers, road repair crews and health care workers disappear, or airport and school construction is halted, the economy trembles. None of that, or very little, has happened so far, not even in California, despite a significant decline in tax revenue.”
Previously:
States and Cities Impact On GDP (May 2008) http://bigpicture.typepad.com/comments/2008/05/states-and-citi.html
Source:
Think the Economy Is Bad? Wait Till the States Cut Back
LOUIS UCHITELLE
NYT, June 1, 2008
http://www.nytimes.com/2008/06/01/weekinreview/01uchitelle.html
Further signs of the vulnerability of the “not quite prime” mortgage sector emerges in Fitch Ratings’ decision to revise its ratings methodogy for mortgage securities backed by Alt-A mortgages. Indeed Fitch suggests Alt-A borrowers are starting to look more subprime than prime.
Pools characterized as Alt-A credit quality generally have credit attributes that are
slightly more risky than prime but more sound than subprime.
The number of job listings on employment Web site Monster Worldwide (MNST) fell dramatically in May compared with a year earlier, according to Deutsche Bank analyst Jeetil Patel.
Patel says that U.S. job postings are down 18% on a year-over-year basis for the quarter to date, with a 21% drop in May. That’s worse than the 8% slide in April. Patel says the shrinking number of listings could pressure revenue and profits in the June quarter. He says revenue from the North American careers segment could be down 10% year-over-year in the quarter, well below the 4% decline he had been projecting.
There’s a whole lot of stress-testing going on these days in the capital markets. And one of the striking lessons is that emerging markets have proven to be far more durable than many investors, including yours truly, thought possible. Yes, the durability could evaporate tomorrow for all we know. But for the moment, it’s hard not to be impressed by the resiliency of equities in the developing world.
Consider the table below, which compares the major asset classes and ranks performance by May 2008 total returns (click to enlarge). Once again, emerging markets were the clear winner, rising by more than 3% last month. Other than commodities, emerging markets equities are comfortably in the lead for the past year through May 31, 2008 as well.
When the euro was born, there were some reasonably good economic reasons why the UK shouldn’t be part of it from day one. Gordon Brown came up with his famous five tests, with the predictable (and desired) result that the UK to this day has retained the pound as its currency, even as the euro increases in scope and popularity. (There are now 15 full members of the eurozone, as well as nine more states and territories using the euro as their sole currency, and many others, like Poland, the Czech Republic, and the Baltics, obliged to join in the future.)
Today, the UK would pass the five tests with flying colors. Yet even as the euro becomes increasingly useful and powerful, the chances of the UK ever joining seem to get ever slimmer. So Willem Buiter pops the question on his blog: When will the UK wake up and join the Euro Area?
Paul Krugman discusses some of the differences between the current credit crisis and inflationary environment and the 1970s.
Professor Krugman is correct in pointing out that today does not have the spiraling wage inflation of the 1970s. I’ll add that globalization and outsourcing has put a cap on many U.S. wages, especially outside of technology and other high education specialties. However . . .
There are 129 million housing units in the United States, comprising owner-occupied, rented, and vacant units. Of these, 18.5 million are empty. This vacancy rate is 2.5 percentage points higher than it has been at any point in the half century the data have been tracked, translating into at least 3 million too many empty housing units in the country. This number, moreover, is rising. This is the most intractable part of the real estate bubble, for we cannot find a true bottom to home prices until this inventory of empty units starts to clear, and we cannot find a bottom to the mortgage finance market until home prices bottom out.
No question – there is a huge overhang of inventory in the U.S., but I think Lindsey’s analysis overstates the problem. Here is my estimate:
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Click on graph for larger image in new window.
This graph shows the homeowner vacancy rate since 1956. A normal rate for recent years appears to be about 1.7%.
There is some noise in the series, quarter to quarter, so perhaps the vacancy rate has stabilized in the 2.7% to 2.9% range.
This leaves the homeowner vacancy rate almost 1.2% above normal, and with approximately 75 million homeowner occupied homes; this gives about 900 thousand excess vacant homes.
The rental vacancy rate increased to 10.1% in Q1 2008, from 9.6% in Q4. It’s hard to define a “normal” rental vacancy rate based on the historical series, but we can probably expect the rate to trend back towards 8%. According to the Census Bureau there are 35.7 million rental units in the U.S. If the rental vacancy rate declined from 10.1% to 8%, there would be 2.1% X 35.7 million units or about 750,000 units absorbed.
This would suggest there are about 750 thousand excess rental units in the U.S. that need to be absorbed.
If we add this up: 750 thousand excess rental units, 900 thousand excess vacant homes, and 200 thousand excess new home inventory, this gives approximately 1.85 million excess housing units in the U.S. – very high, but well below Lindsey’s estimate of 3 million units.
And Lindsey on demand:
The math of the housing market is fairly clear. Each year roughly half a million homes are destroyed to make better use of the land on which they sit. Population growth also helps whittle down inventory. The household formation years–ages 25 to 34–have 39.5 million people in them forming 19 million households, a group that creates demand for 1.8 to 1.9 million units each year. On the other hand, households pass from the scene later in life, and the homes they used to live in go onto the market. There are 11.6 million households of 65- to 74-year-olds and 9 million households of 75- to 84-year-olds. Their departure increases supply by around 1.1 million units per year. On net, therefore, demographic realities add about 850,000 units to demand on top of the half-million homes that are destroyed and removed from supply.The home building industry is in a deep recession, with additional yearly new home supply cut in half since 2006. But homebuilders are still adding nearly a million units per year. The math is simple: Build a million, tear down half a million, form 850,000 households, and the country only whittles down its excess inventory by 350,000 units per year. This is one reason to expect a further drop in new home construction, but it will still take years to get our housing inventory back to normal. The economic, social, and financial damage over that time could be staggering.
It’s important to understand that during a recession (or economic slowdown) fewer household are formed than normal, and also fewer housing units are demolished. Lindsey is estimating the demand for a normal economy (some people get confused by temporary changes in demand due to economic conditions, as opposed to the demand during more normal times).
Once again, I think Lindsey is a little too pessimistic. But this does illustrate the key problem for housing; it will take years to work off the current excess inventory.
S&P: More Write Downs Coming for Morgan Stanley, Merrill and Lehman
From Bloomberg: Morgan Stanley, Merrill, Lehman Ratings Cut by S&P
Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. had their credit ratings lowered by Standard & Poor’s on expectations the securities firms will be forced again to write down the value of their assets.
…
“The negative actions reflect prospects of continued weakness in the investment banking business and the potential for more write-offs, though not of the magnitude of those of the past few quarters,” Tanya Azarchs, an S&P analyst, said today in a statement.
Also the outlooks for just about the entire large financial institutions sector are now negative.
Contained. Problems behind us. … Not!
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