Thursday, March 31, 2011

CBO: Dodd-Frank’s Changes to the FDIC Impose Significant Costs on the Industry

CBO estimated that the increase in the insured deposit limit from $100,000 to $250,000 and raising the minimum reserve ratio from 1.15% to 1.35% in the Dodd-Frank Act will cost the banking industry $15 billion.

These two changes “will require an increase in premiums paid by depository institutions,” according to testimony presented by CBO Director Douglas Elmendorf before the House Oversight and Investigations Subcommittee.

According to the report, the Dodd-Frank Act’s increase of the deposit insurance limit to $250,000 will cost banks and credit unions $9 billion through 2020. Institutions will have to pay larger assessments over an extended period of time to increase the fund’s size to compensate for the higher insured deposit limit.

Additionally, the increase in the reserve ratio from 1.15% to a new minimum of 1.35% will cost larger institutions an additional $6 billion.

Furthermore, the Dodd-Frank Act removed the hard cap on the designated reserve ratio for the deposit insurance fund. The FDIC Board recently set the target size of the fund at minimum of 2% of insured deposits, with the expectation that it would rise above 2.5% – a move that imposes a significant, prolonged assessment burden on the entire industry – which ABA opposed.

Having the fund grow from 1.35% to 2% by the end of 2020 imposes an additional $67 billion assessment burden on the entire industry.

A balanced, thoughtful approach is needed when changing FDIC’s policies, as the associated costs have a direct impact on the economy and local communities that banks serve.

The full cost of the FDIC – including personnel, administrative, examination, and bank failure costs – is borne by the banking industry. These increased costs drain funds from banks that could be used to build capital and support lending to local households and businesses.

TARP Bank Program Turns A Profit

The Treasury Department announced on March 30th that its investment in banks turned a profit after three financial institutions repaid a total of $7.4 billion in TARP funds.

Treasury Secretary Geithner said that "taxpayers have now recovered $251 billion from TARP’s bank programs through repayments, dividends, interest, and other income. That exceeds the original investment Treasury made through those programs ($245 billion) by nearly $6 billion. Treasury currently estimates that bank programs within TARP will ultimately provide a lifetime profit of approximately $20 billion to taxpayers."

Moreover, Treasury expects that TARP investment programs taken as a whole will result in little or no cost to taxpayers. If TARP losses materialize, they will be limited to funds disbursed for Treasury’s foreclosure prevention programs, which Treasury never intended to recover.

In a related story, the Congressional Budget Office (CBO) estimated the net gain from TARP's banking programs will be $23 billion. Additionally, CBO lowered its cost estimate of TARP transactions to $19 billion from its November 2010 TARP cost estimate of $25 billion.

Read the Treasury press release.

Read the CBO study.

Banks Pay a Premium to Avoid Stigma of the Fed's Discount Window

A working paper from the New York Federal Reserve Bank provides empirical evidence of the existence, size, and the economic impact of the stigma associated with banks borrowing from the Federal Reserve's discount window facility.

Historically, banks' utilization of the discount window has been low, even when faced with severe liquidity shortages. For example, at the onset of the financial crisis in 2007, few banks accessed the discount window, despite several policy changes by the Federal Reserve to encourage borrowing from the discount window.

There are two potential explanations as to the low level of bank participation at the discount window in the Fall of 2007. The first explanation was that banks wanted to avoid the stigma associated with such borrowings. The other explanation was that banks could potentially borrow elsewhere at equal or cheaper rates.

To identify whether there was a stigma associated with borrowing from the Fed's discount window, the authors compare banks borrowing behavior at the Fed’s Term Auction Facility (TAF) and the discount window. The TAF was a liquidity facility created by the Fed in December 2007 with virtually the same eligibility and collateral criteria as the discount window.

Using bid level data of TAF participation, the authors found that many banks submitted bids above the prevailing discount rate at TAF auctions throughout the crisis. In particular, banks consistently bid above the discount rate for a period of six months in 2008. This willingness to bid above the discount rate provides strong evidence that a stigma associated with discount window borrowings does exist.

Next the researchers measured the size of the stigma and found that, during the height of the financial crisis, banks were willing to pay an average premium of at least 37 basis points (and 150 basis points after Lehman’s bankruptcy) to borrow from the Term Auction Facility rather than from the discount window.

To read the paper click here.

Wednesday, March 30, 2011

ADP Employment Report: Private Payrolls Up 201,000

In March, according to the ADP Employment Report, private sector payrolls rose by 201,000. This follows a gain of 208,000 jobs in February (revised downward from 217,000). March’s gain continues a trend of about 200,000 jobs being created on net per month, a significantly faster pace of job growth than what occurred in most of the past year.

In showing this trend, the ADP report has generally been more positive than the government BLS report. However, the February number was similar. It will be seen on Friday whether the two numbers show a similar growth rate in March.

Payrolls must grow about 150,000 per month just to absorb new entrants to the labor market. Therefore, though recent payroll growth has been an improvement from last year, it is still at a pace just barely fast enough to keep up with the labor force growth. Payroll growth of at least 300,000 jobs per month will likely be needed to significantly drive down the unemployment rate.

The increase over the month was driven by gains in service sector jobs, which rose by 164,000. However, goods producing jobs also expanded, adding 37,000 to payrolls. The entirety of this increase was due to manufacturing, which grew by a similar 37,000.

Ch. in Payrolls ('000s)MarFebJanDecNovOct
    Goods Producing3721302621-11

Pace of Downsizing Fell in March; 1st Quarter Job Cuts At Lowest Level Since Q1 1995

The pace of downsizing declined in March, according to Challenger, Gray & Christmas.

Employers announced plans to reduce payrolls by 41,528 jobs during March, down 18 percent from 50,702 job cuts announced in February and down 39 percent from a year ago.

The public sector dominated monthly job cuts, accounting for 19,099 or 46 percent of all March layoffs. March's public sector job cuts were at its highest level, since March 2010 when 50,604 public sector jobs were cut.

Through the first quarter, employers announced 130,749 job cuts, the lowest first quarter total since 1995.

Read the press release.

Monday, March 28, 2011

Personal Income Up 0.3%, Consumption Up 0.7%

In February, personal income rose by 0.3% following a payroll tax reduction induced jump of 1.3% in January. Wages and salaries also grew by 0.3% over the month, the third straight gain of that size. From a year prior, personal income was 5.1% higher.

Personal consumption rose by a larger 0.7% over the month. The gain was driven by a large jump up in durable goods spending. Services spending growth continued a recent trend of lagging goods consumption growth. From a year prior, consumption spending was 4.1% higher.

The higher growth rate of consumption relative to income over the month caused the savings rate fall back slightly to 5.8% from 6.1% in January. Savings have been modestly higher in the past few months relative to the second half of last year.

As measured by the PCE deflator, prices increased 0.4% over the month, primarily due to energy prices. The PCE has risen considerably in the past three months. Still from a year prior, the PCE deflator was only 1.6% higher. However, this was up from 1.0% as recently as November. The core PCE deflator, which excludes energy and food prices, rose by a lesser 0.2% over the month and was 0.9% higher than a year prior.

m/m % changeFebJanDecNovOctSep
Personal Consumption0.
Personal Income0.
PCE Deflator0.
    Core PCE Deflator0.
Savings Rate (level)

Friday, March 25, 2011

Consumer Confidence Drops 10.0 Points, Most Pessimistic Future Outlook Since Early 2009

In March, the University of Michigan Consumer Sentiment Index fell 10.0 points to 67.5. Confidence levels had been modestly improving in recent months. However, March’s decline brings the index back to roughly where it was last October. It is likely the combination of the Middle East turmoil, the crisis in Japan and rising gasoline prices that drove the decline. In particular, the last of that list has historically been strongly correlated with swings in consumer confidence. The month’s decline was mostly due to a large drop in the future expectations component, which fell 13.7 points to the lowest level since the middle of financial crisis and trough in the stock market in early 2009. The current conditions component of the index also fell, but by a lesser 4.4 points.

Inflationary expectations rose sharply, likely due to gasoline price increases. The one-year outlook was 4.6%, up from 3.4% in February. The five-year expectation was 3.2%, up from 2.9% a month earlier.

1966 = 100MarFebJanDecNovOct
Headline Index67.577.574.274.571.667.7
    Current Conditions82.586.981.885.382.176.6
    Future Expectations57.971.669.367.564.861.9

Q4 Real GDP Growth Revised Upward to 3.1% from 2.8%

In the fourth quarter, real GDP growth was revised upwards to 3.1% on an annualized basis, from the previously reported rate of 2.8%. This pace of growth is modestly stronger than in the third quarter, which was 2.6% annualized. The revision was primarily due to an upward revisions to inventory investment and non-residential fixed investment. This was partially offset by downward revisions to personal consumption and net-exports. Still, both consumption and net-exports showed the strongest quarterly growth since the recovery began.

Growth at 3.1% is still modest with regards to driving unemployment down. However, looking more at the underlying trend, it is encouraging that personal consumption continues to build steam. Assuming additional shocks to the economy do not derail some of the momentum building, moving forward, growth should accelerate.

annualized % changeQ4 2010Q4 PreviousQ3 2010Q2 2010Q1 2010Q4 2009
Real GDP3.
% contribution to real GDP
Fixed Investment0.
Net Exports3.33.4-1.7-3.5-0.31.9

63 Percent of Families Saw Their Wealth Decline Between 2007 and 2009

The Federal Reserve is reporting that over 60 percent of the families saw a decline in their wealth during the financial crisis and the recession, according to the Survey of Consumer Finances (SCF).

The 2009 SCF coupled with the 2007 SCF provides a fuller glimpse of the effect of the financial crisis and recession on the household balance sheets. The study found that changes in wealth appear to arise from changes in asset values more so than changes in the composition of families’ portfolios or their outstanding debt.

Sixty-three percent of families saw their wealth decline over the two-year period and the mean (median) family wealth fell from $595,000 ($125,000) in 2007 to $481,000 ($96,000) in 2009.

For families that experienced a decline in wealth, the median decline was 45 percent of their 2007 wealth.

The study found that the median value of households’ holdings of financial and nonfinancial assets fell by 5 percent and 14 percent, respectively, over the 2007–2009 period. Not surprisingly, stocks experience the sharpest decline falling 31 percent for families that held stocks. Among non-financial assets, vehicles, primary residences, and non-residential real estate suffered the largest declines.

The study found that the median family debt rose by $5,300 during the two year period to $75,600.

Read the working paper.

Thursday, March 24, 2011

Bernanke Announced Quarterly Press Briefings on Monetary Policy

Federal Reserve Chairman Ben Bernanke announced quarterly briefings to update the press and public on economic conditions and the Fed's policy decisions.

Upcoming briefings will be held at 2:15 p.m. EST on April 27, June 22 and November 2.

For these meetings, the FOMC statement will be released at around 12:30 p.m., one hour and forty-five minutes earlier than for other FOMC meetings.

The briefing will be broadcast on the Fed's website.

Wednesday, March 23, 2011

Bernanke Stresses Importance of Community Banks

Federal Reserve Chairman Ben Bernanke described the vital role that community banks play in the economy, the value that the Federal Reserve places on insights from community banks, and the growing pressures of regulatory reform.
[B]anks whose headquarters and key decisionmakers are hundreds or thousands of miles away inevitably lack the in-depth local knowledge that community banks use to assess character and conditions when making credit decisions.

In fact, a majority of the smallest banks (in this case, those with assets of $250 million or less) actually increased their small business lending during this period. And while banks with assets between $250 million and $1 billion showed a slight decline in small business lending over this period, the contraction was not nearly as sharp as it was for the largest banks.

Community banks face substantial challenges in the months and years to come, including still-difficult economic conditions, continued uncertainties in real estate and other key markets, and a changing regulatory environment.

But community banks have faced difficult times before, and the industry has remained vibrant and resilient. I am confident that community banking will successfully navigate these new challenges as well.
See Bernanke's full comments.

New Home Sales Fall 16.9% to New Record Low

New home sales fell sharply for the second straight month in February, dropping 16.9% to an annualized sales pace of 250,000. This level of sales sets a new record low since the data series began after WWII. Sales were 28% lower than a year prior.

With the slowing pace of sales, the months supply of inventory rose to 8.9 months from 7.4 in January. The ratio remains quite high despite home builders doing a lot in recent years to reduce their inventories. Until the ratio falls back to its historical norm of around 4-5 months, prices will likely remain weak.

In fact, in February, the median sales price fell 15.7% to $200,700. Most of the price decline is likely due to a shift in the mix of homes that were sold over the month, as the high priced North East was the region with the largest sales decline and therefore made up a smaller portion of the sales basket. Still, the overall decline shows the continued price weakness in the market. From a year prior, the median sale price was 9% lower.

Sales (mil. SAAR)0.250.300.330.290.280.32
m/m % change-16.9-9.616.42.1-11.715.7
Median Price ('000s)$200.7$238.1$239.0$219.3$207.5$227.6
m/m % change-15.7-
Months' Supply8.

Tuesday, March 22, 2011

Fed Reported $82 Bil Income in 2010 - $79 Bil of Which Benefited Treasury

The Federal Reserve transferred $79 billion of their $82 billion income to the U.S. Treasury in 2010, a $32 billion increase from the amount transferred in 2009. The Fed transfers excess income to the Treasury’s general fund.

The increase was due to interest earned from federal agency debt and GSE MBS holdings, which the Federal Reserve purchased through a monetary policy response to the financial crisis and recession.

The Federal Reserve’s LLCs, which purchased assets during the financial crisis, also contributed to the increase in Reserve Banks' 2010 comprehensive income, with net earnings of $8 billion for the year ended December 31, 2010, a $2 billion increase from the 2009 net earnings of $6 billion.

See the Federal Reserve’s audited 2010 financial statements for the 12 individual Federal Reserve Banks, the limited liability companies (LLCs), and Board of Governors.

NY Fed: Reduction in Credit Driven by Households Borrowing Less, Paying Off Debt

Analysis by the New York Federal Reserve found that the over $1 trillion reduction in household debt since the summer of 2008 has primarily been the result of consumers paying off debt and borrowing less, not bank charge-offs.

The research found that consumers have been reducing their debts at a pace not seen over the last ten years.

The decline in housing values and swings in the stock market “may have led families to want to reduce their debts, in an effort to restore their net worth.”

See the analysis.

Monday, March 21, 2011

Existing Home Sales Down 9.6%; Sales Prices Down 5.2% From Year Earlier

After generally following an upward trend over the past six months, existing home sales fell back sharply in February. Sales dropped 9.6% to an annualized sales pace of 4.88 million units. The decline wiped out most of the rise over the prior two months. From a year prior, sales were down 2.8 %.

With the increase in sales, the months supply of inventory rose to 8.6 from 7.5. The long-term inventory supply ratio has historically been around 5 months. Ratios above about 6 to 7 months are historically correlated with short term price declines. Indeed, this has been the trend over the past months. The median sale price in February fell 1.1% over the month to $156,100. This was down 5.2% from a year prior. What should be kept in mind is that the decline in price may be at least in part due to a change in the mix of houses sold, and not necessarily because home values have fallen this much. Regardless, housing market demand remains soft, and excess inventories remain prevalent.

Sales (mil. annual.)4.885.405.224.644.384.41
    M/M % Change-9.63.412.55.9-0.74.0
Med. Price (‘000s)$156.1$157.9$168.8$170.2$170.6$171.0
    Y/Y % Change-5.2-4.2-1.00.1-0.8-2.6
Months Supply8.

Friday, March 18, 2011

Fed Releases Terms of Capital & Dividend Review of Largest Institutions

The Federal Reserve released its Comprehensive Capital Analysis and Review (CCAR) – an evaluation of the capital planning processes for the 19 largest, most complex institutions. The report found broad improvement in the capital position of these institutions (referred to as “SCAP” institutions).
In total, the 19 SCAP bank holding companies have added roughly $25 billion in retained earnings to common equity since the end of 2008.

Overall, both the quantity and quality of capital at many large bank holding companies have improved since the financial crisis, with the weighted average Tier 1 common ratio for the 19 SCAP bank holding companies rising from 5.4 percent as of 4Q 2008 to 9.4 percent as of 4Q 2010, reflecting an overall increase in Tier 1 common capital of $275 billion at these firms.
The review assessed the capital planning processes – including increasing dividend payments or repurchasing or redeeming stock. All 19 institutions were required to submit plans by January 7, 2011, even if no change in stock or dividends were planned. Not all of the institutions proposed dividend or stock changes; for those that proposed changes, the Federal Reserve will report any objections in a confidential notice no later than March 21, 2011.

Read the report.

See the final page for the economic stress conditions used during the review.

Thursday, March 17, 2011

Industrial Production Down 0.1%, Manufacturing Output Up 0.4%

In February, industrial production fell back slightly, declining 0.1%. This was the first drop in output since October. However, the entire decline was due to the volatile utilities component, which fell 4.5%.

Manufacturing output rose by 0.4%. Growth got a boost from a 4.2% increase in auto production. Not including autos, manufacturing output rose only 0.2%. Growth was driven by solid gains in business equipment and tech manufacturing, but was held down by a non-durable goods manufacturing which was unchanged over the month. Overall, industrial output growth was somewhat weaker in February when compared to recent months, but the underlying trend is continued manufacturing sector expansion.

M/M % ChangeFebJanDecNovOctSep
Total Output-
Capacity Utilization R.76.376.476.375.375.175.2

CPI Up 0.5%; Core Prices Up 0.2%

In February, the Consumer Price Index rose 0.5%. This was the third straight big rise. The recent drive up in the index has primarily been due to rising energy and food product prices. February was no different. Energy product prices jumped 3.4% over the month and food product prices rose 0.9%. The core index, which excludes prices of energy and food products, rose by a lesser 0.2%. However, though this is still modest, it continues a recent trend of relatively higher core inflation. Inflation is beginning to accelerate somewhat. Businesses are beginning to be able to pass through cost increases seen in the producer price index in recent months.

From a year prior, the CPI was 2.2% higher. The core CPI was up by only 1.1% from a year prior but this is considerably higher than the recent historical low of 0.6 percent.

M/M % ChangeFebJanDecNovOctSep
    Core CPI0.
Year/ Year % Ch.
    Core CPI1.

Wednesday, March 16, 2011

Report: TARP Distorted Markets and Created Public Stigma

The Congressional Oversight Panel's final report on Troubled Asset Relief Program (TARP) found that TARP provided critical support to markets at a moment of profound uncertainty; but also leaves behind a troublesome legacy of continuing distortions in the market, public anger toward policymakers, and a lack of full transparency and accountability.

While the Congressional Budget Office (CBO) initially estimated that TARP would cost taxpayers $356 billion, CBO now estimates the loss at $25 billion. But the report states that part of the reason for the lower cost was not due to the success of the program, but rather due to the failure of the foreclosure prevention program, which had a price tag of $50 billion.

The report also states that TARP exacerbated "too big to fail." The report concluded that TARP caused "small banks continue to pay more to borrow than very large banks - an ongoing distortion in the marketplace. By protecting very large banks from insolvency and collapse, the TARP also created moral hazard." Moreover, Treasury‘s intervention in the automotive industry extended the too big to fail guarantee and its associated moral hazard to non-financial firms.

Moreover, TARP was unpopular from its inception; but Treasury's implementation of TARP just increased its stigma. For example, the report notes that only healthy banks were suppose to be recipients of TARP funds. It was later disclosed that several banks that were near the brink of failure received funds, thus tainting all recipients. Another factor contributing to stigmatization was the haphazard, constantly shifting, and in some ways misleading manner in which the TARP was sold to the public.

As a result of the increased stigma, the program became detested with some smaller banks refusing to participate.

Read the press release.

Read the report.

Housing Starts Fall 22.5%, Lowest Level of Construction Since April 2009

Housing starts plummeted in February to an annualized pace of 479,000 units, a pace only slightly above the record low set in April 2009. This represented a 22.5% decline. It was lead by the multifamily unit component, which prior to this month was showing signs of stability. Multifamily starts fell 46.1%. Single family starts also fell sharply, but by a lesser 11.8 percent. It is possible that some of this decline was due to inclement weather throughout much of the country over the month, but the broader trend is that housing construction has failed to rebound. January’s large increase had lead to hopes of recovery, but that level of construction was not sustained. Activity remains at a depressed level. From a year prior, starts were down 20.8%.

Millions (SAAR)FebJanDecNovOctSep
Housing Starts0.480.620.520.550.530.60
    M/M % Change-22.518.8-5.12.8-11.3-2.1
Single Family Starts0.380.430.420.460.430.45
    M/M % Change-11.81.9-8.45.1-3.13.5

PPI: Headline Up 1.6%; Core Prices Up 0.2%

In February, the Producer Price Index for finished goods jumped upwards by 1.6%. Producer prices have been growing quickly in recent months, primarily due to rising energy products and to a lesser extend food items. February continued this trend. Energy product prices rose 3.3% over the month and food prices rose 3.9%. From a year prior, producer prices were up 5.8%.

The core index, which excludes energy and food products, rose by a lesser 0.2%. Still the core index has grown significantly in recent months. From a year prior, core goods prices were up 1.9%, compared to 1.2% as recently as November. Inflationary pressure is beginning to build at the producer level. Continued increases at early stages of production should continue this trend in upcoming months. It is only a matter of time before producers are able to pass more of these costs over to consumers where price pressure will start to show up in the CPI.

Headline Index
    M/M % Change1.
    Y/Y % Change5.
Core Prices
    M/M % Change0.
    Y/Y % Change1.

Friday, March 11, 2011

Principal Reduction Will Not Cure What Ails the Housing Market

Research by the Federal Reserve Bank of Atlanta states that mortgage principal reduction as a cure for what ails the housing market has serious logical flaws.

The Obama Administration, in conjunction with the state attorneys general, have floated a settlement agreement that would have large mortgage servicers write down borrower principal balances by $20–$25 billion to address procedural problems in foreclosure filings.

The problem with the principal reduction argument is that it erroneously assumes that all borrowers with negative equity will default on their mortgages. This clearly is not supported by the empirical evidence. Many homeowners with negative equity continue to make their mortgage payments.

The research concludes that "only the borrowers have all the information about whether they really can or want to repay their mortgages, information that lenders don’t have access to."

Read The Seductive But Flawed Logic of Principal Reduction.

Treasury Details TARP Progress: $20 Bil Profit From Banks

The Treasury released a TARP fact sheet which details many parts of the program and highlights the $20 billion expected lifetime profit from the banking programs.

From as early as 2008, when the TARP legislation was passed, ABA has been repeating the message that these investments in viable institutions would return healthy profits to the taxpayers.

As the Treasury previously stated “every one of its programs aimed at stabilizing the banking system…will earn a profit thanks to dividends, interest, early repayments, and the sale of warrants.”

The bank investments have broadly been completely mischaracterized as “bailouts”; in reality, the Treasury is realizing a significant profit from the banking programs.

See ABA's recent statement on TARP.
See Treasury's fact sheet.

Thursday, March 10, 2011

Household Net Worth Rose in 4th Quarter

According to the Federal Reserve's Flow of Funds, household net worth rose by more than $2.1 trillion during the fourth quarter of 2010 to slightly more than $56.8 trillion.

The increase in net worth was due to an increase in the value of financial assets, which went up by $2.3 trillion during the quarter. Factors negatively impacting household net worth were a slight increase in the liabilities of the household sector and the continued slide in the value of real estate assets.

Since bottoming in the first quarter of 2009, household net worth is up almost 16.6 percent.

ABA Banker Participates in FDIC’s Farmland Value Forum

Matthew H. Williams, president of Gothenburg State Bank in Gothenburg, Neb., spoke at the FDIC symposium on U.S. farmland prices today and highlighted that banks are successfully managing agricultural loan risk.

“Farmers, especially those who produce crops, are enjoying some of the best profitability they’ve seen in a generation,” Williams said. “As a result, farmers are carrying less leverage today than they did just a few years ago.”

FDIC Chairman Bair said, “ while we don't see a credit problem in agriculture at this time, the steep rise in farmland prices we have seen in recent years creates the potential for an agricultural credit problem sometime down the road.”

Williams stressed the importance of managing credit risk highlighting that “knowing our customer is fundamental…along with what risks our customer faces.”

Williams is the vice chairman of the American Bankers Association.

Read the press release.
Read Bair’s speech.

Tuesday, March 8, 2011

CoreLogic: 23% of Mortgage Borrowers Underwater

According to newly released data from CoreLogic, the number of hosueholds who owe more on their mortgages than their homes are worth rose in the fourth quarter.
[CoreLogic] today released negative equity data showing that 11.1 million, or 23.1 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2010, up from 10.8 million, or 22.5 percent, in the third quarter. The small increase reflects the price declines that occurred during the fourth quarter and led to lower values.

There are an additional 2.4 million borrowers that had less than five percent equity. If this number is added to the underwater total, negative and near-negative equity mortgages accounted for 27.9% of all residential properties with a mortgage.

The continued prevalence of underwater mortgages will continue to put pressure on loan performance. In addition, this is a factor that prevents people from moving in order to take new jobs, slowing down employment growth and contributing to structural unemployment problems.

NFIB: Weak Sales Leads to Weak Demand for Credit

The biggest issue confronting small businesses is the lack of sales, not access to credit, according to the most recent monthly survey from the National Federation of Independent Business (NFIB)

The NFIB found that 92 percent of small businesses either had all their credit needs met or were not interested in borrowing. Thirty-one percent of small businesses reported borrowing on a regular basis, which remains near the record low.

Only eight percent of small businesses stated that not all of their credit needs were satisfied.

A historically high number of small business owners cited weak sales as the major factor inhibiting hiring and capital spending plans. Despite low interest rates, small businesses are hesitant to invest in new equipment or new workers, because they view such investments as unlikely to pay off. As a result, this means the demand for credit from small business remains weak.

Read the survey.

Monday, March 7, 2011

Consumer Credit Up for the Fourth Consecutive Month

The Federal Reserve reported that consumer credit grew at annual rate of 2.5% in January to slightly above $2.41 trillion, as the growth in nonrevolving credit outpaced the contraction in revolving credit. This was the fourth consecutive monthly increase in total consumer credit.

Revolving credit fell in January, after posting its first monthly increase in December 2010. In 28 of the last 29 months, outstanding revolving credit has declined.

In January, revolving credit contracted by 6.4% (annualized rate) to $795.5 billion. Revolving credit is at its lowest level since Fall 2004. Overall, revolving credit is down more than 18% from its peak in August 2008.

On the other hand, nonrevolving credit grew at an annual rate of 6.9 percent in January. This was the sixth consecutive monthly increase in nonrevolving consumer debt.

Read the G. 19 report.

Friday, March 4, 2011

Payrolls Up 192,000; Unemployment Down to 8.9%

The Bureau of Labor Statistics reported that non-farm payroll employment rose by 192,000 in February. This follows an upwardly revised gain of 63,000 in January (previously reported to be 36,000). The month’s payroll gain was the strongest since the Census Bureau hiring of last year. Private sector employment rose by 222,000, the strongest growth since last April. Furthermore, the job gains were broad based with virtually all major industry sectors showing growth, including manufacturing and construction.

If this rate of job growth continues, then the unemployment rate should begin to start moving downward. It takes about 125,000 jobs created each month to absorb new labor market entrants. Though job growth momentum seems to be building, there remain significant risks, rising oil prices being one of them.

Jim Chessen, ABA Chief Economist stated, “Today’s job report is good news and shows improvement across a broad swath of the economy. However, the risk of even higher oil prices, for an extended period of time, may create enough uncertainty to slow hiring.”

In February, the unemployment rate fell 0.1 point to 8.9% following a large drop in January. Though the payroll growth seen in February is consistent with a modest unemployment rate decline, the drops in previous months are not likely as positive of an indication. Over the past few months, about three quarters of a million people have left the labor force. This is likely due to survey effects related to inclement weather and to increased levels of discouraged workers. The labor force participation rate remains at a cyclical low of 64.2%. If this rate begins to move upward back to a historical norm, even will solid payroll growth, the unemployment rate may start to move up in the near to intermediate future.

Payroll Change (000s)1926315293171-29
    Goods Producing7035481-6
    Private Sector22268167128143109
Unemployment Rate8.
Labor Force Particip. R.

Wednesday, March 2, 2011

ADP Employment Report: Private Payrolls Up 217,000

In February, according to the ADP Employment Report, private sector payrolls rose by 217,000. This follows a gain of 189,000 jobs in January. February’s gain continues a significantly faster pace of job growth than what occurred in most of the past year.

In showing this trend, the ADP report has been significantly diverging from the BLS numbers the past few months. The government figures have generally shown a much more modest pace of job growth. It is yet to be seen if the Friday release of the February data continues this discrepancy. If job growth is indeed occurring at levels above 200 thousand per month as the ADP report estimates, then the unemployment rate may begin to be pushed down. Payrolls must grow about 150,000 per month just to absorb new entrants to the labor market.

The increase over the month was driven by gains in service sector jobs, which rose by 202,000. However, goods producing jobs also expanded, adding 15,000 to payrolls. Manufacturing added 20,000 jobs, the fourth straight month of expansion.

Ch. in Payrolls ('000s)FebJanDecNovOctSep
    Goods Producing15232621-11-23

Planned Job Cuts Jump in February

Challenger, Gray & Christmas reported that planned job cuts rose for the second consecutive month in February.

There were 50,702 planned layoffs in February -- a jump of 32% compared to January's layoffs -- and the highest total since March 2010.

February' s job cut numbers are also 20% higher than planned layoffs announced in February 2010 making this the first year-over-year increase in monthly job cuts since May 2009.

Roughly a third (32.3%) of the layoffs last month came from government and non-profit employers.

Despite the consecutive monthly increase in planned job cuts, layoffs still remain relatively subdued compared to a year ago.

Read the press release.

Tuesday, March 1, 2011

Consumers and Small Businesses Will Lose from Proposed Debit Card Interchange Rule

A study conducted by University of Chicago Law School Lecturer David Evans, Brookings Institute Senior Fellow in Economic Studies Robert Litan, and MIT Sloan School of Management Professor Richard Schmalensee found that the proposal to regulate debit card interchage fees would “impose direct, immediate, and certain harm on consumers, especially lower-income consumers, and small businesses that use checking accounts.”

Specifically, the study concluded that:

1. During the first two years, the proposed rules will eliminate $33.4-$38.6 billion of debit card interchange fee revenues for banks and credit unions. As a result, consumers and small business will face higher retail banking fees and lose valuable services as banks and credit unions seek to offset the loss of debit card interchange revenue.

2. As a result of the anticipated increase in banking fees, the number of unbanked individuals will increase. As a result, many low-income individuals will have to use higher-priced alternative financial service providers, such as check-cashers.

3. Small businesses will lose up to $4.2-$4.8 billion in the first 24 months of the proposed rules, if implemented. Many small businesses will see an increase in bank fees and will not receive any offsetting benefit from lower debt card interchange fees because they do not accept debit cards.

4. Large retailers will receive a windfall of $17.2-$19.9 billion in the first 24 months of the proposed rule being in effect.

To download the paper, click here.

Construction Spending Falls 0.7% – Residential Up, Non-Residential Down

New construction spending fell for the second straight month in January, dropping 0.7% on a seasonally adjusted basis. These two months followed a brief period of modest construction spending growth. The month’s decline was due to a sharp drop in non-residential construction, which fell 6.9%over the month. In contrast, residential spending increased by 5.3%. Public sector spending, which had been declining in recent months, posted a modest increase of 0.1%.

On a year-ago basis, total construction spending was 5.9%lower. Private residential spending was down 7.7%, and private non-residential spending was down% percent. Public sector spending was up 2.7%from a year earlier.

m/m % changeJanDecNovOctSepAug
    Private Residential5.3-
    Private Non Res.-6.9-

ISM Manufacturing Index Up 0.6 Point to 61.4 – Highest Level Since 2004

The Institute for Supply Management's Manufacturing Index rose 0.6 point to 61.4 in January further showing that the manufacturing sector is continuing a pace of strong growth. This places the index at the highest level of the recovery thus far. After decelerating last summer, the index has been strengthening over the past six months. A value over 50 indicates manufacturing sector activity expansion. Therefore, the increase in value in February indicates that the sector’s growth is accelerating.

The production component rose 2.8 points to 66.3, the highest level since the 1970’s. Meanwhile, the employment component gained 2.8 points to 64.5. Looking forward, the new orders component rose 0.2 point to 68.0 and the backlogged orders index rose 1.0 point to 59.0. The continued strength in these two components suggest that manufacturing activity will continue to expand at a brisk pace in coming months and will remain one of the key drivers to overall economic expansion.

> 50 = expansionFebJanDecNovOctSep
Activity Index61.460.858.558.256.955.3
    New Orders68.067.862.059.659.951.6
        Export Orders62.562.054.557.060.554.5
    Backlogged Orders59.