Thursday, September 30, 2010

2Q GDP Revised Upward Slightly to 1.7%

Second quarter real GDP growth was revised upward slightly to an annualized 1.7% from an annualized 1.6%. The adjustment was due to an upward revision to consumption and inventory accumulation. However, most of this improvement was offset by downward revisions to net exports and government spending. The updated GDP number is consistent with a modestly growing economy.

Net-exports were a huge drag on growth in the second quarter. This was partially due to the fallout following the Euro debt crisis in the spring, causing exports to fall and the dollar to strengthen, which supported greater import growth. In addition, the inventory adjustment cycle on the part of businesses, which had been the primary factor of growth in the three quarters prior, has mostly run its course. Moving forward, the real GDP number will come more in line with the real final sales number, which measures only present use of production. As such, growth has been - and will likely continue to be in the near future - only modest.

10.09.30 (Source: Bureau of Economic Analysis)

Tuesday, September 28, 2010

Credit Quality of Shared National Credits Improved in 2010

The credit quality of shared national credits (SNC) improved over the past year according to the 2010 inter-agency report. Classified assets declined $142 billion or 32% from 2009’s record level, and the share of classified assets decreased from 15.5% in 2009 to 12.1% in 2010.

The reduction in the level of classified assets was attributed to improved borrower operating performance, debt restructurings, bankruptcy resolutions, and greater borrower access to bond and equity markets. The automotive, materials, commodities, finance, and insurance industries all reported significant credit quality improvement.

FDIC-insured institutions’ share of the SNC portfolio increased from 40.8% in 2009 to 42.2% in 2010. While holding a majority of the SNC portfolio, FDIC-insured institutions held only 22.7% of the classified assets and 18.1% of nonaccrual assets.

While nonbanks owned the smallest share of SNC commitments (21.3% or $500 billion), they owned the largest volume and percentage in dollar value of classified assets - $161 billion or 52.9% of all classified assets. Nonbanks owned 57.8% of nonaccrual assets.

While credit quality improved over the year, classified assets remain at elevated levels as the SNC portfolio remained significantly exposed to 2006- and 2007-vintage credits.

Friday, September 24, 2010

New Home Sales Flat, Remain At Very Low Level – Median Sales Price Down 0.6%

The pace of new home sales was unchanged in August at an annualized pace of 288,000 units. However, July’s number was upwardly revised to 288,000 (previously reported to be 276,000). Sales fell quite sharply in the late spring after the effects of the homebuyer tax credit wore off. Since the rush of sales leading into April, housing activity has failed to recover to its pre-credit levels.

Like sales in recent months, the median sales price has been volatile in part due to the credit. In August, the median sales price fell 0.6% to $204,700, the third decline. From a year prior, prices were down 1.2%.

The months supply of inventory of homes at the current sales price fell slightly to 8.6 from 8.7. This was due to builders continuing to reduce their inventories. However, this number remains very high. The historical norm is about 4.5 to 5 months. Values near 8 have historically tended to indicate short term price declines moving forward.

10.09.24 (Source: Census Bureau)

Thursday, September 23, 2010

Existing Home Sales Rise 7.6%; Sales Prices Fall 1.9%

After plunging by 27.0% in July, existing home sales rebounded somewhat in August, rising 7.6% to an annualized sales pace of 4.13 million units. July’s pace of sales set a new cyclical low sales pace and was the slowest since the data series began in 1999. Much of the volatility over the past number of months has been due to the homebuyer tax credit. Sales rose swiftly through April, as buyers sought to take advantage of the credit. Afterwards though, sales fell sharply. From a year-prior, sales were down 18.9%.

With the increase in sales over the month, the months supply of inventory fell to 11.6 from 12.5. Though this is an improvement, it is still the second highest of the year. The historical normal is around 5 months of inventory. Ratios well above this level are historically correlated with short term price declines. Until the sales pace increases and/or the supply of inventory gets further worked off, price stability is unlikely. In August, the median sales price fell 1.9% to $178,600. This was the second month of price declines. Still, from a year earlier, prices were up 0.8%.

10.09.23 (Source: National Association of Realtors)

Household Net Worth Fell in 2Q Due to Financial Assets

The Federal Reserve’s Flow of Funds reported that household net worth fell by $1.5 trillion during the second quarter to $53.5 trillion.

As a result, household net worth as a percent of disposable personal income dropped to 472% as of second quarter 2010 from 490.6% as of the first quarter of 2010.

This decline in net worth comes after four consecutive quarterly increases. Despite recovering $4.7 trillion from the trough in the first quarter of 2009, household net worth is still down 19% or $12.3 trillion from the peak in the second quarter of 2007.

The primary factor contributing to the fall in household net worth was a $1.7 trillion contraction in the value of financial assets. The value of corporate equities, pension fund reserves, and mutual funds fell during the quarter.

Factors that positively impacted household net worth were the decline in household liabilities and an increase in the value of tangible assets. The value of tangible assets rose by almost $150 billion during the quarter, while liabilities of the household sector edged lower by almost $34 billion.

Households have reacted to the decline in net worth by increasing their savings. After hovering near 2% from 2005 through 2007, the savings rate has exceeded 6% in recent quarters.

Tuesday, September 21, 2010

Fed Funds Rate Kept Constant; Fed Uses More Aggressive Language

The Federal Open Market Committee voted to keep the Federal Funds Target in a range between 0 and 25 basis points. The Fed’s language was generally more accommodative then its prior statement. Though the Fed changed its language to suggest that the bank lending environment is beginning to improve, it made multiple language additions that suggest that when considering the balance between price stability and full employment, the Fed is clearly more worried about the latter. In a departure from the norm, the Fed explicitly stated that inflation is below the normal long term trend:

The general mood of the committee regarding the economy was more pessimistic this time around:
Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.
[the Fed] is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

This kind of explicit language is a departure from the usual more neutral “Fed Speak” of providing “price stability.” The FOMC seems to have the desire to send a message today that it is prepared to be more aggressive in the face of a slowing recovery, and that inflation is of little concern in the short run.

Statement additions suggesting relatively more accommodative policy in RED.

September 21st Meeting

August 10th Meeting

Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract,but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term.
Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.
Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

10.09.21 (Source: Federal Reserve)

THE RECESSION IS OVER! (It just doesn’t feel like it…)

Put away the balloons, folks. The NBER may have announced the technical end of the recession as of June 2009, but consumers and businesses continue to struggle, and the economy reflects that struggle in slow growth.

The NBER looks at numerous economic indicators when making its decision, including GDP, employment, personal consumption and income growth. In making its declaration, the NBER was careful not to state that the economy is operating at normal capacity or that it is back to health, but rather that the decline ended in June 2009. The NBER stated:
In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month.
Although this careful approach reflects the tenuous nature of our economic situation, the NBER did rule out a "double dip" recession. Because of the length and strength of the recovery thus far, any downturn would be considered a new recession, rather than a continuation of the first one.

Maybe this will become a case of the tortoise winning the race, as slow and steady growth brings us back to economic strength – it’s just a little painful to participate.

Housing Starts Jump 10.5%, Single Family Starts Up 4.3%

After falling considerably in the months following the expiration of the homebuyer tax credit, housing starts rose 10.5% in August. This brings the annualized sales pace to 598,000 units, the highest level since April. As with housing activity in general, housing starts have been very volatile over the past half year due to the effects of the homebuyer tax credit. Starts rose in the early part of the year through April, then fell off quite heavily in the months following. August displayed a rebound. Starts were up 2.2% from a year prior.

The increase over the month was heavily driven by the volatile multi-family unit component, which rose 32.2% over the month. Still, the single family component grew significantly, rising 4.3% over the month, after falling heavily for the prior three months. Unlike total starts, single family starts remain down 8.9% from a year prior.

New building permits, which tend to lead future starts, rose 1.8%. However, this was entirely due to an increase in multi-family unit permits. Single family permits declined by 1.2%.

10.09.21 (Source: Census Bureau)

Friday, September 17, 2010

Most Consumers Avoid Overdraft Fees

Most bank customers don’t pay overdraft fees, according to a survey ABA released this week. According to the survey, 77 percent of consumers said they did not pay any overdraft fees in the previous 12 months, while 21 percent said they paid one or more. Two percent said they did not know whether they paid an overdraft fee.

Of the 21 percent who said they did pay an overdraft fee in the previous twelve months, most more than half said they paid only one or two.

The majority of consumers who did pay an overdraft fee in the previous 12 months said they were glad the payment was covered (69%). Twenty-nine percent said they wished the bank had refused the payment.

New regulations are now changing the nature of overdraft protection programs. To help banks navigate the uncertainties associated with the new regulations, the ABA Overdraft Program Task Force created a Framework for Overdraft Program Compliance, available to ABA members at the issues page on Overdraft Accommodation Programs.

The annual survey of 1,000 consumers was conducted for ABA by Ipsos-Reid, an independent market research firm, on August 14 and 15, 2010.

Thursday, September 16, 2010

Industrial Production Up 0.2%, Manufacturing Up 0.2%

In August, industrial production rose 0.2% following a downwardly revised increase of 0.6% in July (previously reported to be a 1.0% increase). Manufacturing output also rose by 0.2%. Growth was held back by a large decline in auto production of 5.0%. Auto manufacturing output has been volatile in recent months; this month’s drop followed a large rise in July. Manufacturing output not including autos rose 0.5%. The leading areas or growth continued to be in business equipment and high tech.

Mining output rose 1.2%, while utilities output fell 1.5%. The latter category rose heavily in May and June due to unusually warm weather across much of the county, spurring increased air conditioning related electricity demand. Following this rise, production levels have fallen back into more normal ranges.

The capacity utilization rate rose 0.1 point to 74.7%. This was the third consecutive increase. There still remains heavy productive slack; however, the utilization rate is considerably higher than its lows of last year. It will have to continue to increase in order to drive significant capital expenditures and payroll expansion.

10.09.15 (Source: Federal Reserve)

Tuesday, September 14, 2010

Retail Sales Up 0.4% – Core Sale Up 0.5%

In August, retail sales grew 0.4%, following a rise of 0.3% in July. The volatility over the past few months, in part, has been due to fluctuations in auto sales and gas prices. Sales excluding autos and gas sales rose by 0.5% over the month, following a 0.1% decline in July. Most retail subcategories saw significant sales improvement in August, in particularly clothing and food and beverages. Housing driven categories such as furniture and appliances continued to see sales declines.

From a year prior, sales were up 3.6%, down from 5.4% in July and a recent high of 8.7% in April. Core sales, which exclude autos and gasoline, were up 4.1% from a year earlier. This was the same annual growth rate for the previous two months.

10.09.14 (Source: Census Bureau)

Friday, September 10, 2010

Cleveland Fed Responds to ABA's Concerns on Chapter 12 Bankruptcy

On September 2nd, ABA's John Blanchfield and Ryan Zagone responded to a Cleveland Fed paper discussing the creation of Chapter 12 bankruptcy, which was one part of a broad solution to the 1980's ag crisis. The Cleveland Fed's paper was broadly interpreted as an approval of residential mortgage cram down.

The Cleveland Fed authors, James Thomson and Thomas Fitzpatrick, provided the following response to ABA's concerns, clarifying that they did not claim Chapter 12 bankruptcy was a viable solution to addressing home mortgages. The authors concurred with many of ABA's concerns, while noting differing views on some issues.

Click the paper to read the Fed's full response.

Click here for the Fed's research.
Click here for ABA's comments.

Thursday, September 9, 2010

Aging Baby Boomers Affect Asset Prices... Negatively

As the baby boomers age, this is going to negatively impact asset prices. This is a conclusion of a Bank of International Settlement paper.

Looking at housing price data across 22 advanced countries from 1970 to 2009, the study examines the impact of aging on real housing prices. According to regression analysis, the paper found:

One percent higher real GDP per capita corresponds to around one percent higher real house prices. Similarly, one percent higher population implies around one percent higher real house prices. Finally, one percent higher dependency ratio is associated with around 2/3 percent lower real house prices.

The study then concludes that real housing prices benefited in the United States over the last forty years as our population slowly aged. The paper estimates that “the baby boom generation increased real house prices by around 40 percent in the United States compared to neutral demographics in the past forty years.”

But the aging of the U.S. population is going to switch from a tailwind to a headwind, depressing housing price appreciation. Baby boomers are going to become sellers of housing. This will cause real housing prices to fall by 30 percent compared to neutral demographics over the next 40 years.

The good news is that the United States is not likely to experience an asset price meltdown due to its changing population demographic.

Trade Deficit Narrows By 14.1%; Exports Up, Imports Down

In July, the trade deficit narrowed considerably, falling 14.1% to a monthly pace of $42.8 billion. The trade gap had expanded greatly in June to a pace of $49.8 billion per month. This drop in net-exports was a major drag on Q2 GDP growth. In contrast, the narrowing of the gap in July bodes well for Q3 GDP growth.

Over the month, exports grew 1.8%, after falling 1.3% in June. At the same time, imports fell 2.1%, following two months of strong growth. From a year prior, exports were up 19.9%, while imports were up 22.7%.

Wednesday, September 8, 2010

Consumer Credit Falls 1.8% in July as Households Focus on Reducing Debt

According to the Federal Reserve’s G. 19 report, outstanding consumer credit fell for the month of July at an annualized pace of 1.8%.

Revolving credit fell at an annual pace of 6.3%. This is the twenty-third consecutive monthly decline. Revolving credit is down almost 15% from its peak in August 2008. Revolving credit continues to decline as high unemployment and an uncertain economic outlook have spurred households to reduce debt burdens.

On the other hand, nonrevolving or installment credit rose 0.6%. This is the third consecutive monthly increase.

See the full release here.

Thursday, September 2, 2010

Cleveland Fed Inaccurately Portrays Impact of Chapter 12 Bankruptcy

Recent commentary by the Federal Reserve Bank of Cleveland’s Thomas Fitzpatrick IV and James Thomson suggests that the creation of Chapter 12 bankruptcy during the ag crisis in the 1980s is a viable solution for addressing today’s delinquent home mortgages. Fitzpatrick and Thomson attribute Chapter 12 with resolving much of the financial troubles of family farmers in the 1980s, while having few, if any, negative consequences, and imply a similar approach could be a solution for today’s mortgage situation.

Having worked in agricultural finance for the last 32 years, I question the authors’ narrow retelling of history and broad generalizations about the impact and “success” of Chapter 12 bankruptcy. Ryan Zagone, research manager in our Office of the Chief Economist, and I wrote a counter argument to what the Cleveland Fed economists concluded about the lessons learned from Chapter 12. The full article is here.

The following is a summary of our concerns.

The Federal Courts, Congress, and the Collapse of the Farm Credit System had a Much Greater Impact than Chapter 12
Precipitous declines in farm land values, volatile commodity prices, and rising interest rates left many family farmers financially strained and eventually delinquent on their farm loans in the late 1980s. While Chapter 12 bankruptcy was created to allow judges to cram down debt obligations of family farmers, it was only one of numerous legislative and judicial responses to the ag crisis. Two court cases, Coleman v. Block in 1987 and Coleman v. Lyng in 1988, prompted Congress to pass new laws requiring the USDA Farmers Home Administration to reduce principle balances on many of their loans. USDA ended up writing off nearly half of its existing loan portfolio.

Around the same time, Congress provided a cash infusion to the Farm Credit System following its near collapse. The terms of the Farm Credit System recapitalization created “borrower’s rights” in which System lenders had to provide their debt-stressed farm customers with the opportunity to have their mortgage principle balances reduced.

Despite Fitzpatrick and Thomson’s emphasis on Chapter 12, federal court action, legislation, and the need to recapitalize the government-sponsored Farm Credit System had much more to do with farm debt write-downs than Chapter 12.

Ag Loan Modifications Were Different From Mortgage Cram Down
Further, most ag loan modifications were completely different from the mortgage cram down that Fitzpatrick and Thomson discuss. The USDA farm loan modifications required borrowers to sign a “shared appreciation” agreement, entitling USDA to a portion of any gains realized through the future sale of the property. Modifications through the Farm Credit System also contained these shared appreciation agreements. Shared appreciation modifications differ entirely from the principle cram downs being proposed today on home mortgages; any comparison is completely erroneous.

Home Mortgage “Cram Down” Would Indeed Hurt Credit Availability
Fitzpatrick and Thomson claim, “[Chapter 12 bankruptcy] did not change the cost and availability of farm credit dramatically,” citing a 1989 GAO report that actually argues the opposite. Seventy-eight percent of commercial bank respondents in the cited GAO report said they were less willing to lend to farmers who had filed for Chapter 12 bankruptcy, and 56% said they were less willing to lend to farmers who would be eligible but had not filed for Chapter 12. Additionally, the report found that those who “said they were less likely to restrict credit availability to farmers as a result of Chapter 12 bankruptcy were the ones most likely to say that they raised interest rates to recover losses taken as a result of the Chapter 12 process.”

Research by the USDA found that creditors charged farm borrowers an average of 25 to 100 basis points more in interest to recoup the costs of Chapter 12. The report stated, “Much higher costs will be borne by financially weaker farm borrowers, either in the form of increased interest or other charges, or in their inability to obtain loans at any price.”

While there were many hard lessons learned from the meltdown of the farm economy in the 1980s, the creation of Chapter 12 bankruptcy is perhaps one of the least valuable legacies from that period, imposed many burdens for banks and family farm borrowers, and is not a viable road map for addressing today’s mortgage market.

John Blanchfield
Senior Vice President
Agricultural and Rural Banking
American Bankers Association

July Housing and Mortgage Market Trend Sheet – On Nitrous

My post-college son recently bought a manual transmission car. He’s quite pleased. The ability to shift through the gears gives him the feeling of a race car. Although it’s great not having to loan out my car and I’m pleased that he’s happy, the phrase “race car makes me apprehensive. Since my son and his car have been on my mind lately, it coincided with my thoughts on the housing market – so this month’s episode will be auto themed.

If you’ve seen “Fast and the Furious,” a Hollywood flick set amidst the underground culture of street racing – the heavily modified Japanese imports are retro-fitted with nitrous-oxide injectors. The nitrous makes the car go faster for a short period of time, typically to overcome a fellow racer at the end of a race (see clip). The government’s housing tax credit was like the nitrous fed into the engine. Last July, though, we felt like Paul Walker pushing the nitrous button too soon – the housing market hit a wall. Both new and existing home sales saw month-to-month declines in the double digits and year-over-year fall-offs greater than 25%.

To put the drop-off in existing home sales into perspective, there were 3.8 million homes sold in July in comparison to the monthly average of 5.4 million units in the first half of 2010. The plunge was so severe, that existing home sales dropped to a level last seen in 1995.

The July sales of new homes were equally troubling, although the numbers were less surprising, since the last three months have seen double digit year-over-year declines in new home sales.

There was some positive news on the delinquency and foreclosure front. The Mortgage Bankers Association reported in their Q2 National Delinquency Survey that the delinquency rate for mortgages dropped to a seasonally adjusted rate of 9.85% of all loans outstanding, a reduction of 21 basis points from the first quarter. Meanwhile, 1.11% of loans had foreclosure actions started on them, which was down 12 basis points from last quarter and down 25 basis points from one year ago.

The drop was followed by optimistic news – for the first time since 2006, the inventory of homes in the foreclosure process fell, the largest drop in the inventory since 2005. However, this good news was followed by a rise in the number of short-term delinquencies, which will likely lead to a growing number of foreclosures.

The housing market, for now, is sputtering along a little like Nick’s Yellow Yugo from the movie, “Nick and Nora’s Infinite Playlist.” However, Nick still gets the girl, which should remind my son that it’s not the car, it’s the driver.

The Housing and Mortgage Market Trend Sheet, located in the "OCE Documents of Interest" column at the right, is now updated with June figures. The trend sheet includes sales, pricing, construction, underwriting and delinquency data.

Labor Productivity Revised Down to 1.8% Decline; Unit Labor Costs Rise 1.1%

Labor productivity was revised downward for Q2 to decline of 1.8% on a seasonally adjusted, annualized basis. This compares to the previously reported decline of 0.9%. The drop ended five quarters of very strong prodcutivity growth. The growth rate had been decelerating for the past year, and the change represents a transition into the next period of economic recovery. In early stages of expansion, as has been the case the past year, productivity surges as firms find new ways to get more out of their existing labor forces. Therefore, GDP growth occurs without a lot of new hiring. Productivity growth is required in the long run if incomes are to grow, but in the short run it reduces the demand for new hires. However, at some point, firms existing labor forces cannot continue to produce more and new hiring is required. Assuming that the economic recovery does not stall, new employment growth will likely soon begin.

Over the quarter, output per hour of labor fell by 1.8% annualized, while compensation per hour fell 0.7%. At least part of the compensation decline was likely due to the mix of workers as firms have begun to hire new entrants that tend to have lower starting wages. Unit labor costs, the measure of cost of a unit of output per hour, rose 1.1%, the first increase since Q2 of 2009. Even with the increase, inflationary pressure from the labor market will remain minimal as heavy slack still persists.

10.09.02 (Source: Bureau of Labor Statistics)

Wednesday, September 1, 2010

ADP Employment Report: Private Payrolls Down 10,000 – First Decline in Seven Months

In August, according to the ADP Employment Report, private sector payrolls fell by 10,000. This followed a downwardly revised increase of 37,000 in July (previously reported to be an increase of 42,000). The decline in August ended a period of six consecutive monthly increase in private payrolls. The labor market is clearly continuing to show weakness. Payrolls need to expand at about 100,000 to 150,000 per month in order to begin to drive down the unemployment rate. Considering that temporary census workers were continuing to be let go in August, it is very likely that the employment number released by the BLS this Friday (which includes public sector payrolls) will also come in as a negative number.

The decline over the month was driven by a drop in goods producing jobs, which fell by 40,000. Manufacturing lost 6,000 jobs; the second decline following four months of expansion. Service sector jobs continued to increase, rising by 30,000. However, this was not enough growth to counteract the decline in goods producing sectors.

10.09.01 (Source: Automatic Data Processing)

ISM Manufacturing Index Up 0.8 Point to 56.3; Employment Up; New Orders Down

In August, the Institute for Supply Management's Manufacturing Index rose 0.8 point to 56.3, reversing a three month trend of softening in the index. This move was a surprise to the upside, as it had been widely expected that the index would follow previously reported regional manufacturing indices and decline somewhat. The month’s improvement places the index at about the same level as it was in June, and significantly above the expansionary threshold of 50. Manufacturing activity continues to expand, even if not as quickly as earlier in the year.

The production component rose 2.9 points to 59.9. However, as a forward looking indicator of future production, the new orders component fell for the third second straight month. It declined 0.4 point to 53.1, the lowest level since June 2009. In contrast, the employment component improved for the second straight month, rising 1.8 points to 60.4.

10.09.01 (Source: Institute for Supply Management)

Construction Spending Down 1.0%, Non-Residential Spending Up

In July, new construction spending fell 1.0%. This was the third consecutive decline. The month’s decrease was primarily due to a 2.6% drop in private residential spending. Housing construction continued to decline in the wake of the expired homebuyer tax credit. In contrast, private non-residential spending rose 0.8%. This was the first increase since March 2009. Public sector spending, which has been volatile in recent months, fell 1.2%.

On a year-ago basis, total construction spending was 10.7% lower. Private residential spending was up 5.5%, but private non-residential spending was down 23.7%. Public sector spending was down 7.9% from a year earlier.

10.09.01 (Source: Census Bureau)