Thursday, 22 May 2008

Fed Data Gives Little Cause For Optimism

The Fed released the minutes of the April 29-30 meeting along with a summary of economic projections yesterday. Those projections were none too pretty.

  • 2008 real GDP growth revised from 1.3 - 2.0% to 0.3 - 1.2%.
  • Unemployment rate revised from 5.2 - 5.3% to 5.5 - 5.7%.
  • PCE inflation revised from 2.1-2.4% to 3.1 -3.4%.
  • Core Inflation revised from 2.0 - 2.2% to 2.2% -2.4%.

None of these measures are moving in the right direction. They are are all moving in a direction that is commensurate with a weakening economy buffeted by higher prices for food and energy.

Meanwhile more positive news from the Fed in the form of delinquency rates in 1Q08. The graph below comes from Calculated Risk:

Credit card delinquency rates are at 4.86%, about the same level as the peak of '01 recession. Credit card delinquencies peaked at 5.45% in the '91 recession.

Commercial real estate delinquencies are rising rapidly, and are at the highest rate since '95 (as delinquency rates declined following the S&L crisis).

Residential real estate delinquencies are at the highest level since the Fed started tracking the data (since Q1 '91).

You don't have to be an economic forecaster to see where these figures are headed. C'card delinquencies have already hit 2001 recession highs, no doubt they will push through the highs of the 91 recession also.

Commercial Real Estate delinquencies are at a 13 year high and real estate delinquencies are at their highest since statistics started to be compiled back in 1991. None of these trends are headed lower or even look like moderating. Here is what Goldman Sachs had to say about the latest figures:

"The Fed’s first-quarter report on loan performance at commercial banks shows mortgage credit quality deteriorating at an accelerating pace. ...

The rapid pace of deterioration is particularly significant because the mortgage holdings of commercial banks appear to be tilted toward higher-quality loans, with more prime and less subprime. ...

The Fed data suggest that mortgage credit performance outside the subprime sector is deteriorating rapidly. This reinforces our long-standing view that the surge in mortgage defaults is much broader than simply a reflection of poor underwriting standards in specific subprime vintages. We don’t doubt that lax underwriting standards were an important issue. But the main driver of the defaults is the decline in home prices, the increase in negative equity positions, and the resulting inability of borrowers who encounter financial stress to sell or refinance their way out of trouble. Although subprime borrowers are more likely to encounter financial stress than prime borrowers—and the share of negative-equity borrowers who will end up defaulting is therefore much higher in the subprime sector—the qualitative outlook for the trajectory of credit losses in the much larger prime market is not all that different."

The stockmarket once again, has clearly gotten ahead of itself. The notion that this widespread deleveraging of credit has been fully discounted in financial markets is wishful thinking.