Wednesday, August 31, 2011

Private Sector Employment Grew by 91,000 in August

The private sector added 91,000 jobs from July to August according to the ADP National Employment Report ®. This month’s growth follows a downward revision of July’s growth (109,000 down from 114,000). August’s growth, although below July’s growth, remains significantly above the lows seen in May (35,000). This however represents a trend of falling payroll growth since June.

The growth in private sector jobs was driven primarily by service sector jobs, which grew by 80,000, representing 20 straight months of growth. The goods sector expanded by 11,000 after contracting by 2,000 in July. Manufacturing continued to fall in August, contracting by 4,000.

Payrolls must grow at least around 150,000 in order to absorb all of the new entrants into the job market. As such 90,000 additional jobs will not likely be enough to keep the unemployment rate flat. We will need to see growth closer to 200,000 and above before we begin to see the unemployment rate begin to drop.

Read the report.

Announced Job Cuts Fall in August

After increasing for three consecutive months, U.S. employers announced fewer job cuts in August, according to a report issued by Challenger, Gray & Christmas.

Employers plan to reduce payrolls by 51,114 workers in August, a 23% decline from July; however, planned job cuts are up 47% from a year ago.

So far this year, there have been 363,334 announced layoffs, which is only 2.9% below the level of announced job cuts for the comparable period in 2010.

The government sector accounted for the largest portion of planned layoffs. In August, government agencies announced plans to cut 18,426 workers and year-to-date have announced 105,406 job cuts.

Read the report.

Tuesday, August 30, 2011

Federal Open Market Comittee Minutes From August 9th Meeting

The minutes were released this afternoon from the August 9th meeting of the FOMC, giving some additional insight into the move made by the Board of Governors. Notably, the governors discussed an additional round of quantitative easing, commonly refered to as QE3.

There were a few members that “felt that recent economic developments justified a more substantial move at this meeting, but they were willing to accept the stronger forward guidance.” The FOMC discussed other possible policy options as well.

  • Extending the average maturity of current holdings by selling shorter dated bonds and buying longer dated bonds would have an effect similar to another round of purchases.

  • Lowering the interest rate on excess reserves from its current level of 0.25% would likely have little effect on the economy.

  • A minority of Fed officials believe that none of the tools would likely do much to boost the economy.

Fed officials were downbeat on the economy, reducing growth forecasts for the second half of 2011 and for 2012 “notably.” Furthermore “many participants also saw an increase in the downside risks to economic growth.”

See the minutes.

Case Shiller: Existing Home Prices Rose 1.1% Last Month

The 10- and 20-city composites are down 3.8% and 4.5% from a year ago, as opposed to 3.6% and 4.5% reported in May. The 4.5% decline in the 20-city index for May and June represents the fastest depreciation since late 2009.

On a non-seasonally adjusted basis both the 10- and 20-city indices rose 1.1% month-over-month, however no metro areas have prices above year ago levels.

This release also included the quarterly index, which fell 5.9% from last year.

This report, although not encouraging, saw housing prices hold steady. Year-over-year price differences were almost unchanged or improved in 13 metro areas.

Read the release.

Monday, August 29, 2011

Consumer Spending Rose 0.8% in July

Consumer spending rose 0.8% in July according to a Bureau of Economic Analysis report released this morning, the strongest growth since February. After a 0.5% inflation adjustment, consumer spending showed its first growth since March, and largest since December 2009. The increase in consumer spending was led by durable goods, but was strong across the board.

As a result of the increased spending, the savings rate fell to 5% from 5.5% in June. Overall prices rose 0.4% with core inflation accounting for 0.2% of the increase.

Personal income grew 0.3%, improving from 0.2% growth in June. Wage income also grew by 0.4%, the fastest level since April.

Read the report.

Friday, August 26, 2011

Bernanke Discusses Weak Recovery, Yet Hopeful for the Future

In a speech this morning, Federal Reserve Chairman Ben Bernanke outlined causes of the weaker-than-expected recovery, but highlighted his optimism for the country’s long-term growth prospects.

Hopeful for the Future
Noting the concern that our slow recovery could morph into something more longer-lasting, Bernanke stated “my own view is more optimistic…as the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years.”

Bernanke noted improved balance sheets of consumers, a healthier financial system holding “substantially more capital”, and improved credit availability, yet cautioned that a return to normal economic growth would take time.

Reasons for the Slow Recovery
Historically, pent-up demand during recessions have typically sowed the seeds for increased production and hiring during the recovery. However, the hangover in the housing market has been a strong and continual drag on growth.

Bernanke stated, that there “seems little doubt that [concerns about European sovereign debts, the U.S. fiscal situation, downgrade of U.S. debt, and the debate over the federal debt ceiling] have hurt household and business confidence and that they pose ongoing risks to growth."

Recommendations for Moving Forward
Bernanke said “fiscal policymakers can also promote stronger economic performance through the design of tax policies and spending programs.”

He also noted that a better method of making fiscal decisions would benefit our country’s growth prospects.

The FOMC has extended its September meeting from one to two days (20th & 21st) to discuss conditions of the economy and ponder further monetary stimulus.

See the full speech.

See Jim Chessen's August 19th commentary on the state of the recovery here.

Consumer Sentiment Falls in August

Consumer confidence fell in August, according to the Reuters/University of Michigan consumer sentiment index.

The consumer sentiment index fell from 63.7 in July to 55.7 in August, although it was higher than the preliminary August reading of 54.9.

The index has only been lower in three other surveys, which were taken in April and May 1980 and November 2008.

The survey's barometer of current economic conditions was 68.7, down from 75.8 in July. The outlook also worsened, with the gauge of consumer expectations falling to 47.4 from July's final reading of 56.0.

Read the release.

Real GDP Increased by 1% in Second Quarter

The Bureau of Economic Analysis reported that real gross domestic product (GDP) grew at an annual rate of 1.0% in the second quarter of 2011, which was revised downward from an initial estimate of 1.3%. In the first quarter, real GDP increased 0.4%.

The acceleration in real GDP in the second quarter compared to the first quarter primarily reflected a deceleration in imports (which are a drag on GDP), an upturn in federal government spending, and an acceleration in nonresidential fixed investment. This was partly offset by decelerations in personal consumption expenditures and in exports and a downturn in private inventory investment.

Consumer spending, which accounts for almost 70 percent of GDP, softened in the second quarter increasing by 0.4% compared with an increase of 2.1% in the first quarter.

Real final sales of domestic product -- GDP less change in private inventories -- increased 1.2% in the second quarter, after increasing less than 0.1% in the first quarter.

Read the press release.

Thursday, August 25, 2011

Credit Quality of Large Loan Commitments Improves for Second Consecutive Year

The credit quality of large loan commitments improved in 2011 for the second consecutive year, according to the Federal Reserve's Shared National Credits (SNC) Review for 2011.

Total criticized loans declined more than 28% to $321 billion in 2011, representing 13% of the SNC portfolio, down from 18% in 2010. Loans rated as doubtful or loss--the two weakest categories--fell 50% to $24 billion in 2011.

Although nonbanks owned the smallest share of loan commitments, they owned the largest share (58%) of classified credits. FDIC-insured institutions owned only 17% of classified assets and 15% of nonaccrual loans, while nonbanks and foreign banks held the remainder.

Despite progress, poorly underwritten loans originated in 2006 and 2007 continue to weigh on performance, comprising 60% of criticized assets.

Better borrower performance, debt restructurings, bankruptcy resolutions, and access to bond and equity markets are responsible for the improvement. Real estate and construction, media and telecommunications, and finance and insurance companies led the improvement.

See the full report.

Wednesday, August 24, 2011

Budget Deficit for 2011 Equals $1.3 Trillion, Third Highest Ever

The Congressional Budget Office (CBO) released a report today projecting that the 2011 budget deficit will be the third-largest in the past 65 years, only surpassed by the deficits of the previous two years.

CBO is estimating that budget defict for 2011 will be $1.3 trillion or 8.5 percent of gross domestic product (GDP).

Under CBO's baseline scenario, deficits are expected to fall to 6.2 percent of GDP in 2012 and 3.2 percent in 2013, and will average 1.2 percent of GDP from 2014 to 2021. Over the period of 2012 through 2021, deficits are expected to average 1.8 percent of GDP under the baseline scenario.

This means that the cumulative deficits between 2012 and 2021 will total $3.5 trillion -- well below the March forecast of $6.7 trillion. As a result, by the end of 2021, debt held by the public will equal 61 percent of GDP -- down from the current level of 67 percent of GDP. CBO states that about two-thirds of the reduction will arise from the enactment of the Budget Control Act.

The projected decline in deficits under the baseline scenario occurs because revenues are expected to increase, in large part due to the expiration of tax provisions enacted during the past 10 years. Under CBO’s current-law projections, revenues are expected to rise from 16.8 percent of GDP in 2012 to 20.2 percent in 2014 and to 20.9 percent in 2021.

However, if some or all of the current policies are extended, the outcome will be larger deficits and more debt. CBO writes:

"For example, if most of the provisions in the 2010 tax act that were originally enacted in 2001, 2003, 2009, and 2010 were extended (rather than allowed to expire on December 31, 2012, as scheduled); the alternative minimum tax was indexed for inflation; and cuts to Medicare’s payment rates for physicians’ services were prevented, then annual deficits from 2012 through 2021 would average 4.3 percent of GDP, compared with 1.8 percent in CBO’s baseline projections... With cumulative deficits during that decade of nearly $8.5 trillion, debt held by the public would reach 82 percent of GDP by the end of 2021, higher than in any year since 1948."

Read the CBO Report.

New Orders for Durable Goods Up in July

The U.S. Census Bureau announced that new orders for manufactured durable goods in July increased $7.7 billion or 4.0% to $201.5 billion. This was the second monthly increase in new orders in the last three months.

Transportation equipment had the largest increase, $6.7 billion or 14.6% to $53.0 billion. This was led by nondefense aircraft and parts which increased $3.2 billion.

If the volatile transportation sector is excluded, new orders increased by 0.7%.

Shipments of manufactured durable goods in July was up $5.0 billion or 2.5% to $202.2 billion. This was the seventh increase in eight months.

Unfilled orders for manufactured durable goods increased in July, up fifteen of the last sixteen months, and inventories of manufactured durable goods were up for the
nineteenth consecutive month in July.

Read the press release.

Tuesday, August 23, 2011

Despite Headwinds, Banking Industry Reports Accelerating Strength

While economic headwinds remain, higher capital levels, increased liquidity and lower losses mark a turning point as the banking industry continues to gain strength. Additional improvement can be seen in fewer troubled institutions and in the deposit insurance fund returning to positive territory. These figures are clear indications that the worst has passed and the industry is returning to health.

Banks added $26.6 billion in equity capital during the second quarter and over $264 billion in capital since 2008 when the financial crisis took hold. Total industry capital is now more than $1.5 trillion. Banks also have set aside more than $207 billion in reserves to cover possible loan losses. Capital plus reserves gives a total buffer protecting the industry of more than $1.76 trillion. In addition, the industry capital-to-assets ratio – a key measure of financial strength – continues to remain very strong and ended the quarter at 11.3 percent, the highest level since 1938.

The fact that lending saw modest growth – the first increase in three years – is a positive as the economy continues to seek a way forward. Business lending improved slightly for the fourth consecutive quarter, but businesses remain reluctant to invest in new equipment or hire new workers due to uncertainty about the pace of economic growth. Loan demand remains weak due to the current soft patch in the economy and the lack of confidence is freezing current business expansion plans. The housing market continues to face an oversupply of existing homes and buyers remain hesitant during a climate of uncertainty.

Asset quality is improving, as noncurrent loans reported sizeable declines, the fifth consecutive quarter of improvement. In every loan category, the level of delinquent loans declined. In fact, non-current loans were down by $22.2 billion (6.5 percent) compared to last quarter. Banks are putting losses behind them and are building a portfolio of quality loans.

“The number of banks on the FDIC’s list of troubled institutions has declined for the first time in more than four years, a turning point as the country continues to recover from the recession. In addition, the pace of failures declined for the fourth consecutive quarter, allowing the deposit insurance fund to recover more rapidly. The banking industry, which contributes about $14 billion a year in premiums, pays the full cost of the FDIC without any tax dollars. Banks are committed to maintaining the strength of the deposit insurance fund. Each depositor is fully insured up to $250,000, and there is full protection for non-interest bearing transaction accounts through the end of 2012. In the 78-year history of the FDIC, no depositor has ever lost a penny of insured deposits.

With recent volatility in the financial markets, FDIC-insured deposits at banks are proving to be a prudent choice for those who want to guarantee principal and interest are protected. More than $230 billion in new deposits flowed into banks in the second quarter and the third quarter will show strong deposit growth as well due to the stock market volatility.

Today’s report shows banks are well positioned to deal with the many challenges ahead as the economy slows once more. Banks have navigated these economic gyrations many times in the past. Nearly 5,000 banks – or 64 percent – have been in business for more than 50 years, and one out of three banks has served its local community for more than a century.

See the FDIC's release.

Richmond Fed: Economic Activity Weakened in August

The Federal Reserve Bank of Richmond reported that economic activity retreated in August, according to its surveys of manufacturing and service sector activity.

Manufacturing activity in the Fifth Federal Reserve District pulled back in August after stalling in July, as the composite index of manufacturing activity declined nine points to −10 from July's reading of −1.

The index of overall activity was pushed lower as growth in new orders and shipments declined further into negative territory. Employment remained in positive territory but grew at a pace below July's rate.

Other indicators also suggested weakening manufacturing activity, as backlogs and capacity utilization continued to contract, while delivery times turned negative. Moreover, manufacturers reported that inventory building remained on pace with July.

Looking ahead, manufacturers' optimism regarding future business prospects dropped considerably in August. An increasing number of firms anticipated slower growth and are scaling back hiring plans.

The service sector also retreated in August. Retail sales fell and retail inventories inched up. Non-retail services firms reported the revenues edged higher, compared to July. Retailers had a bleak outlook for sales in the six months ahead, while non-retail firms were mildly optimistic about demand for their services.

The number of employees in the service sector dipped as retailers and non-retail services providers trimmed their payrolls.

Read the Manufacturing Activity Survey.

Read the Service Sector Activity Survey.

New Home Sales Fractionally Lower in July

The U.S. Census Bureau and the Department of Housing and Urban Development reported that new home sales in July 2011 were at a seasonally adjusted annual rate of 298,000. This is 0.7% below the June revised rate of 300,000, but is 6.8% above the July 2010 estimate of 279,000.

The median sales price of new houses sold in July 2011 was $222,900; the average sales price was $272,300.

At the current pace of sales, there is a 6.6 month supply of new homes available for sale.

Read the press release.

Monday, August 22, 2011

Hopeful for the Future

It’s easy to react to every economic statistic that is released each morning. Good or bad, emotions take over. The spate of bad statistics lately combined with little meaningful movement here and abroad on addressing government debt levels and high unemployment has overwhelmed markets.

The uncertainty and confusion increase worries that we are on the verge of another recession. Certainly, the odds of another recession have risen -- to 1 out of 3 and perhaps higher as uncertainty breeds inaction. In the face of all the day-to-day changes, it’s useful to step back and look at the picture across many months and years. Some important observations emerge -- both positive and negative.

First, it’s not a repeat of 2008. Things are slow and tough, but they’re better than they were. Financial market conditions are much better now -- even with the current problems -- than in 2008. Risk spreads are much lower and liquidity is vastly better. For example, risk spreads are under 50 basis points now -- the norm for a functioning market -- compared to over 450 basis points during the height of the crisis.

Second, while unemployment is still very high, consumer debt levels have fallen fast and savings rates have risen considerably. For example, the Fed’s Consumer Financial Obligation (debt service) ratio is at its lowest point since 1994. Nominal personal income has risen and regained what it lost during the recession.

The private sector has had 17 straight months of positive job growth. It’s not strong enough to reduce the unemployment rate (particularly with public sector payrolls falling), but it’s a far better picture than the 8.5 million jobs that were lost in the recession. Hiring today, while at low levels, is absorbing the current level of layoffs and the voluntary quits.

Third, businesses are more conservative and many are stockpiling cash and lowering debt levels. Tens of thousands of businesses have failed throughout the recession, but the survivors are by-and-large positioning themselves for a slow recovery and to expand when things improve. Lack of confidence is freezing current expansion plans.

And fourth, U.S. banks continue to improve. Banks have added $238 billion in capital since 2008 and pushed the industry’s capital-to-assets ratio to a record high of 11.3 percent. Asset quality is improving. Banks have ample liquidity (excess reserves at the Fed now exceed $1.6 trillion) and borrowing from the Fed has practically disappeared (from $700 billion during the crisis to about $12 billion today). U.S. banks are seeing large inflows of deposits -- $100 billion in the second quarter alone and before the current flight to quality. FDIC-insured bank deposits are the safest thing around.

These positive trends are critically important and it reflects the continued healing from the recession. But I’m a realist as well. It will be a long and winding road to recovery. There is no straight line going upward. The high level of unemployment and the overhang of housing will take many years to resolve. The time horizon is five or six years, not one or two.

For example, past recessions suggest that the unemployment rate comes down very slowly. It took 76 months for the unemployment rate to return to “normal” levels following the 1980-81 recession when unemployment peaked at 10.8 percent. The same pace of improvement was seen following the 1991 recession and there’s little to suggest that today will be any different. If anything, that six-year timeframe of the 1980s will be even longer this time. A 6 percent unemployment rate by 2016 requires GDP to grow at about 4 percent per year.

Housing problems will also take years to resolve. With a shadow inventory of about 1.7 million units, it will take years to eliminate the overhang at the current pace of sales. The most stunning chart that I’ve seen is housing starts over the last half-century (you can see this, and many other charts, in the link below). Housing starts are near historic lows, running at about 600,000 a year compared to the 50-year annual average of 1.5 million. Even more troubling is the demand for new homes doesn’t appear strong enough to absorb the record low levels of new homes being built.

Sovereign debt issues in Europe are adding enormous volatility to markets. Losses on debt of Greece, Portugal and Ireland have yet to be recognized and dealt with. Each day, there is more talk and no resolution. The sovereign debt struggles in the Eurozone are a constant reminder that the U.S. may not deal well with our own debt problems. It’s a global economy, and worries in one corner are instantly transmitted to all of them.

Despite all of the headwinds that we face, it’s useful to remember these points: The United States remains the most productive nation, with the strongest banking system and the currency of choice. It is second only to China in manufacturing and has businesses that remain extremely attractive to foreign investors. The United States is also the world leader in technology and innovation.

It will not be a straight road to recovery and the daily grind of economic statistics will darken our mood, but there is good reason to be hopeful for the future.

See more charts on the economy.

-James Chessen, ABA Chief Economist

Thursday, August 18, 2011

Existing-Home Sales Fall in July

Existing-home sales declined in July but are higher than a year ago, according to the National Association of Realtors®.

Exisitng-home sales fell 3.5% to a seasonally adjusted annual rate of 4.67 million in July from 4.84 million in June, but are 21.0% above the July 2010 pace.

The national median existing-home price was $174,000 in July, down 4.4% from July 2010. Distressed homes – foreclosures and short sales – accounted for 29% of sales in July.

Total housing inventory at the end of July fell 1.7% to 3.65 million units, which represents a 9.4-month supply at the current sales pace.

Regionally, the Northeast and Midwest posted gains in existing-home sales, while the South and West saw a drop in existing-home sales.

Read the press release.

Consumer Prices Surge in July on Higher Food and Gas Prices

Consumer prices surged in July on higher food and gasoline prices, according to the Bureau of Labor Statistics.

The Consumer Price Index (CPI) increased 0.5% in July on a seasonally adjusted basis, after falling by 0.2% in June. Over the last 12 months, the all items index increased 3.6% before seasonal adjustment.

Gasoline prices rose sharply in July and accounted for about half of the seasonally adjusted increase in the all items index. Additionally, food prices accelerated in July and contributed to the increase in consumer prices, as dairy and fruit prices posted notable increases and five of the six major grocery store food groups rose.

The core CPI, which excludes volatile food and energy price components of the CPI, increased as well at 0.2% in July, although the increase was slightly smaller than the increase in the core CPI for the two previous months.

Read the release.

Wednesday, August 17, 2011

Producer Prices Rose by 0.2 Percent in July

The Bureau of Labor Statistics reported that producer prices rose in July after falling in June.

The Producer Price Index (PPI) for finished goods rose 0.2% in July, seasonally adjusted. This advance followed a 0.4% decrease in June and a 0.2% rise in May.
On an unadjusted basis, prices for finished goods moved up 7.2% for
the 12 months ended July 2011.

Core PPI (minus food and energy) increased by 0.4% in July. Prices for finished energy goods fell for the second consecutive month -- declining 0.6% in July after declining 2.8% in June. Food prices rose 0.6% in July. Nearly one-quarter of the July advance can be attributed to a 2.8% increase in prices for tobacco products.

Read the press release.

Tuesday, August 16, 2011

Industrial Production Increases in July

The Federal Reserve reported that industrial production rose in July.

Total industrial production advanced 0.9% in July to 94.2% of its 2007 average and was 3.7% above its year-earlier level.

Manufacturing output rose 0.6% in July, as the index for motor vehicles and parts jumped 5.2% and production elsewhere moved up 0.3%. The output of mines advanced 1.1%, and the output of utilities increased 2.8%, as the extreme heat during the month boosted air conditioning usage.

The capacity utilization rate for total industry climbed to 77.5%, a rate 2.2% above the rate from a year earlier but 2.9% below its long-run (1972--2010) average.

Read the press release.

Housing Starts Drop in July

The U.S. Census Bureau and the Department of Housing and Urban Development jointly announced that privately-owned housing starts dropped in July. Privately-owned housing starts were at a seasonally adjusted annual rate of 604,000 -- 1.5% below the revised June estimate of 613,000, but 9.8% above the July 2010 rate of 550,000.

Single-family housing starts in July were at a rate of 425,000; this is 4.9% below the revised June figure of 447,000. The July rate for units in buildings with five units or more was 170,000, which was up 6.3% from the revised June figure.

Building permits in July were at a seasonally adjusted annual rate of 597,000. This is 3.2% below the revised June rate of 617,000, but is 3.8% above the July 2010 estimate of 575,000.

Read the press release.

FDIC Recapitalization Six Quarters Ahead of Schedule

An ABA white paper shows that despite some headwinds the industry’s recovery is well underway and the recapitalization of the Deposit Insurance Fund (DIF) is ahead of schedule.

The white paper, prepared by the ABA Economics Department, points out that industry averages for all three regulatory capital ratios have risen to historically high levels, and 85 percent of banks were profitable in 2011’s first quarter, up from 65 percent in 2009’s fourth quarter.

The FDIC next week also is expected to report that the Deposit Insurance Fund achieved a positive balance in the second quarter -- six quarters ahead of the forecast the agency used to set higher assessment rates.

The white paper notes that the higher assessment rates along with lower-than-projected bank-failure costs are the key contributors to the DIF’s early comeback.

Read the white paper.

Monday, August 15, 2011

Banks Ease Standards and Terms on Business Loans

The Federal Reserve's Senior Loan Officer Opinion Survey showed that banks continued to ease standards and terms with regard to business lending in the three-month period ending in July.

Domestic banks indicated that they had eased standards on commercial and industrial (C&I) loans to large and middle-market firms with slightly more than 20 percent indicating an easing of standards. However, on net, fewer domestic banks -- about 10 percent -- indicated an easing of standards on loans to smaller firms.

On balance, domestic banks eased terms on C&I loans to large and middle-market firms, with the most respondents reporting easing of price terms, including the spread of loan rates over banks' cost of funds, the use of interest rate floors, and the cost of credit lines. Domestic respondents also indicated some easing of loan terms for smaller firms, though the reported easing was less widespread than for loans to larger firms.

The most commonly cited reason for easing standards and terms was more aggressive competition from other banks or nonbank lenders. A number of domestic banks also pointed to a more favorable or less uncertain economic outlook as an important reason for the change in their lending policies.

The demand for C&I loans were modestly higher from large and middle-market firms over the past three months, while stronger loan demand from smaller firms was close to zero (on net). Most domestic banks that experienced a strengthening of demand cited a shift to bank borrowing from other funding sources as an important reason for the change in demand, as well as to an increase in customers' inventory financing needs.

Additionally, banks noted an increase in inquiries from potential business borrowers regarding the availability and terms of new credit lines or increases in existing lines.

On net, the standards on commercial real estate (CRE) loans over the past three months were largely unchanged -- about the same as in the previous two surveys. However, there was a modest increase in CRE loan demand over the last three months -- as about 20 percent (on net) stated there was increase in loan demand.

Friday, August 12, 2011

Fed Governor Explained Dissent On Monetary Policy

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said he dissented from the FOMC’s August 9 policy statement because he felt economic conditions did not warrant a change in monetary policy.

The FOMC had previously stated that interest rates would remain low for an “extended period,” which Kocherlakota explained to mean between three and six months.

During the August 9 meeting, the committee voted to replace “extended period” with language saying that rates would remain low until mid-2013, a more accommodative monetary policy.

Kocherlakota said “I do not believe that providing more accommodation—easing monetary policy—is the appropriate” given that inflation increased in the first half of 2011 and the unemployment rate, while high, has decreased from its peak.

Read Kocherlakota’s statement.

Consumer Sentiment Fell to Lowest Level Since 1980

Consumer confidence plunged in August to its lowest level since 1980, according to the University of Michigan’s Consumer Sentiment Survey. Confidence fell 8.8 points to 54.9, below the lowest level seen in the recession.

The index has now fallen 20 points in three months, a decline that has only been exceeded twice, in 1990 and 2005. The fall is likely a result of fears generated by the debt-ceiling debate and S&P’s downgrade of the U.S. credit rating. Recent volatility and declines in the stock market also played into the fall.

The decline was driven by both present conditions and future expectations, which declined the most, falling from 56.0 in July to 45.7 in August.

Expectations for inflation were unchanged from July, with one year expectations at 3.4%. The inflation index has dropped 1.2 percentage points since April as gasoline prices have fallen.

Thursday, August 11, 2011

Trade Gap Widened in June

The U.S. trade gap widened from $50.8 billion to $53.1 billion in June, driven by a 2.3% fall in exports. The real goods balance for the month widened as well from $47.9 billion to $50.9 billion.

The widening trade gap deficit came from a variety of factors, primarily the 2.3% fall in exports from $175 billion to $170.9 billion. This represents the largest drop since January 2009. Imports fell by 0.8% as well.

The widening in the trade gap is considerably larger than expected and is due in part to a global slowdown that is hurting demand for our exports. Despite the fall in exports, imports fell as well rather than grow as was anticipated. The widening trade gap is more than the government assumed in its first estimate of second quarter GDP and could lead to a downward revision.

Read the release.

Wednesday, August 10, 2011

Texas bank to Forfeit Charter Due to Regulatory Burden

The Wall Street Journal reported this morning that Main Street Bank in Texas is planning on forefitting its charter in order to reopen as a non-bank lender.

In an extreme example of the frustration felt by many bankers as regulators toughen their oversight of the nation's financial institutions, Main Street's chairman, Thomas Depping, is expected to announce Wednesday that the 27-year-old bank will surrender its banking charter and sell its four branches to a nearby bank.

Mr. Depping plans to set up a new lender that will operate beyond the reach of banking regulators—and the deposit-insurance safety net.

"The regulatory environment makes it very difficult to do what we do," says Mr. Depping.

Read the article (WSJ paid subscription required)

Tuesday, August 9, 2011

FOMC Pledges Low Rates Through 2013

The Federal Open Market Committee (FOMC) voted to keep the Federal Funds Target in a range between 0 and 25 basis points, adding that the federal funds rate would remain at “low levels…at least through mid-2013.” The FOMC maintained its existing policy of reinvesting principal payments from its securities holdings.

The FOMC revised down its economic forecasts, noting that downside risks have increased. Economic growth continues to weaken and the labor market has experienced further deterioration. The unemployment rate is expected to decline “only gradually.”

The Committee noted that temporary factors, such as the natural disasters in Japan and high food and energy prices – which drove the economic slowdown in the previous statement –accounted for “only some of the recent weakness.”

The Committee began discussing policy tools to stimulate economic growth, language that was not present in the previous statement.
Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser dissented from the decision, favoring “extended period” language over the “mid-2013” language used to describe the duration of the low levels of the federal funds rate.

See the statement.

August 9th MeetingJune 22th

Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.

Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability.

Productivity fell 0.3% in 1Q 2011

Business productivity fell 0.3% (SAAR) in the second quarter according to the Bureau of Labor Statistics’ report released this morning. This fall of 0.3% compares to a downwardly adjusted fall of 0.6% (from a rise of 1.8%) in the first quarter. This represents two quarters of falling productivity. Over the year nonfarm business productivity has increased by 0.8%.

The report indicated that hours increased more than output. Unit labor costs rose 2.2% SAAR and compensation per hour rose at 1.9% SAAR.

Read the report.

Monday, August 8, 2011

Despite Downgrade, Insured Deposits Remain Secure

Despite the downgrade from Standard and Poor's, insured deposits remain safely backed by the FDIC.

The FDIC, an independent agency fully funded by banking industry premiums, is financially secure and has the resources it needs to protect customer deposits.

Nineteen months ago banks paid three years of assessments to the FDIC -- totaling nearly $46 billion -- to assure the agency had the necessary funds to protect insured depositors.

The banking industry remains committed to making sure the FDIC has the resources it needs to protect insured depositors, and this commitment is independent and unrelated to the rating of U.S. debt. Additionally, the banking industry’s capital -- $1.53 trillion -- stands behind the FDIC to assure it remains strong.

Last week, an FDIC spokesman confirmed the agency’s strong financial position:

The FDIC’s Deposit Insurance Fund has more than adequate liquidity, currently more than $44 billion, to meet all of our deposit insurance responsibilities. The FDIC receives no federal tax dollars. Insured financial institutions fund the DIF [Deposit Insurance Fund].

S&P Discusses U.S. Debt Downgrade

During an S&P conference call this morning the ratings agency explained Friday’s downgrade of U.S. debt from AAA to AA+ with a negative outlook. The primary reasons cited for the downgrade were the political setting as well as the deteriorating fiscal position. The political setting took precedence, with the recent debt deal illustrating that U.S. officials are unwilling to take the take serious action to improve out fiscal situation. As a result the S&P outlook is that our fiscal situation, even under the most optimistic scenarios, will continue to deteriorate. S&P evaluates sovereigns on five “pillars” that include political, economic, external, fiscal and monetary risk, this downgrade represents deterioration in only the political and fiscal risk categories.

The S&P decision was based upon a baseline scenario that saw U.S. debt increasing as a portion of GDP to 74% in 2011, 79% by 2015, and 85% in 2021. In addition to this they provided a more optimistic scenario that assumed the Bush tax cuts lapsing. Under this scenario U.S. debt to GDP is expected to reach 74% by the end of 2011, 77% in 2015, and 78% in 2021. This scenario would be consistent with a AA+ rating with stable outlook. In addition S&P presented a scenario incorporating risks to the downside. These risks include slower than expected economic growth, growing interest expenses, and a failure to implement the current deficit reduction plan. Under this scenario net debt to GDP is expected to reach 74% in 2011, 90% by 2015, and 101% by 2021.

During the call, John Chambers the head of S&P’s sovereign rating committee, noted the five countries that have lost, and then regained the AAA rating: Canada, Australia, Finland, Sweden and Denmark. In order to gain back the AAA rating, all of the countries had to undertake significant fiscal consolidation as well as economic reform. It took between 9-18 years for each to earn back its AAA rating.

S&P also commented on the status of various European sovereigns including France and the UK. S&P noted that although some fiscal indicators for France are worse than the U.S., the French government has shown significant political will to improve their fiscal situation. By passing pension reform against popular will, the French government has reduced future entitlement burdens without taking away present economic support. S&P sees French debt as having peaked as a portion of GDP and expects it to decline slightly in the future. S&P also seemed confident in the rating of the UK following the austerity deal that was implemented last year. They did note that the British rating was dependent on holding to that austerity plan. The US differs from other AAA countries in that our debt to GDP is expected to increase over the near and long term.

S&P noted that later today they would make announcements of downgrades of other entities related to the U.S. government, specifically noting GSE’s, insurers, and clearinghouses as industries of interest. As of 11am S&P announced that Fannie Mae and Freddie Mac as well as prominent clearinghouses have been downgraded. They did however stress that there is no “sovereign ceiling” meaning that companies rated AAA will not automatically be downgraded with the U.S. debt. In addition to this S&P noted that they expect very little forced selling of Treasuries as a result of investment protocols that require AAA holdings.

See S&P's release.

See S&P's methodology and assumptions for sovereign government ratings.

Listen to the call.
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Saturday, August 6, 2011

Bank Regulators Respond to S&P Downgrade of US Debt

Below is the response of the federal banking regulators to S&P's one notch downgrade of U.S. debt from AAA to AA+.

"Earlier today, Standard & Poor’s rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+. With regard to this action, the federal banking agencies are providing the following guidance to banks, savings associations, credit unions, and bank and savings and loan holding companies (collectively, banking organizations)

For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change. The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected."

Friday, August 5, 2011

GAO Identified 6 Concerns with FDIC During Audit

The GAO released a review of FDIC’s internal controls, and found six deficiencies that needed FDIC’s attention but that did not pose an immediate threat nor justify a formal review of their financial filings. The GAO found:

  • The FDIC lacked documentation of its process to derive the $39 billion year-end estimate of DIF's losses.

  • The FDIC's internal controls were not effective in finding and correcting errors for deriving the allowance for losses on DIF's Receivables from resolutions.

  • The FDIC's internal controls were not effective to ensure compliance with its methodology for valuing failed financial institution assets.

  • The FDIC's internal controls were not effective in identifying and correcting receivership disbursements applied to incorrect general ledger expense accounts.

  • The FDIC did not document an analysis supporting its decision to not recognize additional amounts of the deferred revenue related to the Temporary Liquidity Guarantee Program (TLGP) as income to the DIF in 2010.

  • The FDIC's procedures over the monthly general ledger closing process were not sufficiently detailed to ensure staff understood and completed their responsibilities correctly.

Read the report.

Consumer Credit Rose $15.5 Billion

Consumer credit rose $15.5 billion in June at an annualized rate of 7.7%, driven by gains in both revolving and non-revolving credit. This was the largest growth in consumer credit since the recession.

Revolving credit grew by $5.2 billion (8.2% annualized) providing the second month of solid growth.

Non-revolving credit was up by $10.3 billion (7.8% annualized,) the greatest growth of the year.

Read the report.

Economy Added 117,000 Jobs in July and Unemployment Fell to 9.1%

The labor market created 117,000 jobs in July and the unemployment rate fell to 9.1% according to an encouraging BLS report released this morning. This report follows a massive market selloff yesterday that wiped out more than $4.4 trillion from equity values. The report included strong upward revisions: May’s growth was revised upward from 18,000 to 53,000 and June’s job growth was revised up from 25,000 to 46,000.

Private sector payrolls increased by 154,000 in July, driven primarily by a 112,000 gain in private services. Manufacturers added 24,000 reflecting a recovery in the auto industry, which contributed 12,000 of the gain.

Government payrolls continued to decline for the ninth consecutive month, falling by 37,000. This shows that state and local governments continue to lay off workers and cut costs to reduce deficits. Despite this much of this month’s decline in government payrolls can be attributed to the shutdown of the Minnesota government, a temporary situation, that idled around 30,000 workers.

Although the unemployment rate fell to 9.1%, it was much a result of the labor force participation rate falling to a new low of 63.9%

ABA’s Chief Economist James Chessen commented,"These are encouraging numbers and they are right at the 12-month average of 150,000 private sector jobs and above the average of 122,000 private sector job growth since January 2010. However, this pace isn’t enough to bring the unemployment rate down below 9%. It will be a long slow climb and the uncertainty surrounding the market is making businesses think twice about new hires."

Read the report.

Thursday, August 4, 2011

Bank Economists Cut Forecasts

JPMorgan Chase cut its forecast for U.S. economic growth reflecting a slowdown in consumer spending as well as a number of poor economic indicators. The growth forecast for the third quarter was cut by 1%, with a revised estimated growth of 1.5%. The fourth quarter forecast was lowered as well by 0.5% to an estimated growth of 2.5%. The forecast for the first half of next year was revised 0.5% lower as well to a rate of 2%.

With the economy expanding at these rates, the jobless rate is expected to hold above 9% until the end of third quarter 2012. The revised forecast also pushed back the estimated date of the first increase in the Federal Reserve’s overnight lending rate to mid 2013.

As of July 13th Wells Fargo had lowered their forecast for the year from 2.6% to 2.3%, however this forecast reflected expectations of consumer spending to grow, which has not occurred since.

Wednesday, August 3, 2011

ISM Non-Manufacturing Fell to 52.7

In July the Institute for Supply Management’s Non-Manufacturing Index fell 0.6 percentage points to 52.7, down from 53.3 in June. Despite the drop, the index remains over 50, which is the threshold for growth. As such, the decline still represents expansion, but just at a slower pace than what occurred in May.

What was concerning about this report were the details. The employment index dropped in July, to 52.5 from 54.1, after increasing marginally the previous month. New orders fell as well from to 51.7 from 53.6. Export orders fell sharply as well, to 49.0, and now sit below their expansionary threshold. Although these numbers are down, many still represent growth. This report shows that growth is occurring, just at a frustratingly slow pace.

Read the report.

Private Sector Employment Grew by 114,000 in July

Private sector jobs rose by 114,000 from June to July according to the ADP National Employment Report®. This month’s report follows a downward revision of June’s growth (145,000 down from 157,000). July’s growth, although below June’s growth, is a significant improvement over May, (35,000) and could signal a return to steady job growth.

The growth in private sector jobs was driven primarily by service sector jobs, which grew by 121,000, down from June. The goods sector contracted by 7,000 in July. Manufacturing also fell in July, but just slightly, shedding 1,000.

Payrolls must grow at least around 150,000 in order to absorb all of the new entrants into the job market. As such 114,000 additional jobs will not likely be enough to keep the unemployment rate flat. We will need to see growth closer to 200,000 and above before we begin to see the unemployment rate begin to drop.

Read the report.

Job Cuts Surge in July; Reach 16-Month High

July announced job cuts reached a 16-month high of 66,414, according to Challenger, Gray & Christmas.

The July job cuts were up 60 percent from June's announced plans to shed 41,432 workers and were 59 percent higher than the 41,676 layoffs recorded in July 2010. This was the third consecutive monthly increase in announced layoffs.

The July job cuts announcement was the largest monthly total since March 2010, when 67,611 job cuts were announced by the nation’s employers.

The report stated that five companies accounted for 38,100 or 57 percent of the July total.

Read the release.

Tuesday, August 2, 2011

Personal Income Rose 0.1% and Consumption Fell 0.2%

Personal Income rose by 0.1% in June, the slowest rate of growth since November. In addition, consumer spending fell 0.2%, the first decline since September 2009. This does not, however, represent a decrease in real spending, as prices also declined 0.2%.

Much of the drop in spending was due to an increase in the savings rate, which jumped from 5.0 in May to 5.4 in June.

Wage income failed to rise for the first time since November; instead, asset income and transfer payments drove growth.

Read the report.

Monday, August 1, 2011

Construction Spending Rose in June

Construction spending in June was 0.2% higher than May’s revised numbers ( according to a Census Bureau report released this morning. This slight increase yields a year-over-year decline of 4.7%; despite this, it represents three straight months of growth.

The best improvement was in private nonresidential construction, which increased by 1.8%. This improvement more than offset the 0.3% decline in private residential construction. Total public spending,which fell 0.7%, was the serious drag on this month’s report.

See the report.

ISM Manufacturing Fell to 50.9

The July ISM manufacturing survey showed a severe decline from 55.3 in June to 50.9 in July. This fall puts the index slightly above the expansionary threshold of 50.

Many of the leading indicators declined from June to July, as well. Demand is poor, with new orders falling below the neutral threshold of 50 for the first time since mid-2009. Employment fell, as well, from 59.95 to 53.5.

Although 50 is the breakeven point, a reading above 42.5 generally indicates an expansion of the overall economy. As such, this month’s reading represents 24 consecutive months above 42.5

Read the report.