Monday, October 31, 2011

European Debt Crisis Plan

After working through the night on Wednesday, European leaders announced that they had come up with a comprehensive package designed to stem the sovereign debt crisis that has plagued the region for the last two years. The plan consists of three key parts: a 50 percent haircut on Greek debt, an expansion of the European Financial Stability Facility (EFSF), and a recapitalization of European banks. European leaders have yet to reveal most of the details of the plan but have promised to do so soon. The paper below details the plan as it currently stands.

Read the paper here.

Friday, October 28, 2011

Consumer Sentiment Rose in October

Consumer sentiment rose 1.5 points in October to 60.9 according to the University of Michigan Consumer Sentiment Survey. The improvement was led by a better future outlook. This is in contrast to a preliminary report that indicated consumer sentiment had fallen. Although still at historically low levels, it appears sentiment is improving.

While sentiment regarding current conditions was only up marginally, the future expectations component of the index rose 2.4 points over the month to 51.8.

Consumer sentiment is now 9% higher than the lows seen in August, when sentiment fell below recessionary levels to the fourth lowest reading ever.

Consumer Spending Grows Despite Falling Real Income

Consumer spending growth outpaced personal income growth in September leading to a plunge in the savings rate. Personal income recovered slightly from its negative August reading, posting a weak growth of 0.1%. Accounting for a 0.2% increase in prices, real disposable income fell by 0.1%, its third consecutive decline.

Despite the fall in real disposable income consumers increased purchases by a strong 0.6% during the month. Spending growth was led by goods, particularly durable goods, as auto sales rebounded.

The combination of strong spending and weak income growth pushed the savings rate down to 3.6%, its lowest reading since 2007.

Inflation, as measured by the PCE deflator, was at its lowest level since June, at 0.2%. Any inflation was driven by food and energy as core prices failed to rise.

Read the report.

Thursday, October 27, 2011

U.S. Economy Grew 2.5% in Third Quarter

Real GDP grew at a 2.5% annualized pace in the third quarter of 2011 according to the advance estimate by the Bureau of Economic Analysis. Gains in consumer spending and business investment helped the recovery gain steam. This level of growth improves significantly on the 0.9% rate seen in the first half of 2011.

ABA’s Chief Economist James Chessen commented: “Fears of a double dip have been overblown. The data shows that economic growth in the third quarter was broad based with both consumers and businesses driving the growth.”

Consumption contributed 1.72% to the growth in real GDP. Fixed investment was up as well, contributing 1.60% to real GDP. The fixed investment growth was driven primarily by non-residential growth, which contributed 1.54%. Residential investment was nearly flat contributing 0.05% to growth.

Increases in federal government spending were offset completely by cutbacks in state and local spending that led to a 0% government contribution to GDP growth.

Although 2.5% growth in GDP is a significant improvement over recent quarters, it still represents a relatively weak recovery. In 1Q 2010 we saw a stronger expansion, with the economy growing at 3.93%. Although this report has allayed fears of a double dip, the recovery remains weak and vulnerable to external shocks.

Read the report.

Wednesday, October 26, 2011

New Home Sales Rose 5.7% in September

New home sales rose 5.7% in September to 313,000 annualized units, up from 296,000 in August, according to a Census Bureau report released this morning. This improved pace remains 0.9% below the pace in September 2010.

The median home price fell by 7.7% to $202,800, the third consecutive decline. The fall puts the median home price 10% lower than the September 2010 level.

The months’ supply of new homes on the market fell to 6.2 from 6.6, due to the higher number of sales.

The strength reported was not consistent across regions. The South and West gained, 11.2% and 9.7% respectively, while the Northeast and Midwest fell 4.2% and 12.2% respectively.

Read the report.

Tuesday, October 25, 2011

Existing Home Prices Improved Slightly in August

Existing home prices rose by 0.2% in August according to both of Case Shiller’s 10- and 20-city indices. This increase led to an improvement on a year ago basis from July to August. The 20-city composite fell 3.8% from last year, a small improvement from the 4.1% drop seen last month. The 10-city index showed improvement, posting a 3.5% decline from last year, as opposed to the 3.7% drop reported in July.

The report was mixed as only 10 of the 20 reported cities saw appreciation in home prices. Spring and summer tend to be seasonally strong periods for housing demand, as such it is important that monthly increases in prices be paired with improvement in annual rates before concluding that the market has stabilized. In August, 16 of 20 cities, as well as both composites, saw their annual rates of change improve, providing a glimmer of hope.

The Midwest was one region that displayed relative strength. Chicago, Detroit and Minneapolis have all displayed sharp monthly increases going back to May. These markets fared the worst during the crisis, but are now outperforming. Detroit, the hardest hit in the crisis, is now the healthiest when looking at an annual basis. As of August, Detroit saw prices rise 2.7% year-over-year.

Read the report

Friday, October 21, 2011

Bank Annuities Income Hits Record High

According to the Michael White-ABIA Bank Annuity Fee Income Report, income earned from the sale of annuities at bank holding companies (BHCs) in the first half of 2011 hit a record $1.53 billion, a 25.0% increase compared to the first half 2010. Second-quarter 2011 annuity commissions also reached record heights of $781.4 million, increasing 21.9% from the previous year and 4.4% from the previous quarter.

Three-fourths of BHCs with assets over $10 billion earned first-half annuity commissions of $1.46 billion, 95.2% of total annuity commissions reported by the banking industry. Among this asset class of BHCs in the first half, annuity commissions made up 11.6% of their total mutual fund and annuity income and 16.3% of their total insurance sales volume.

Among the top 50 BHCs nationally in annuity concentration (i.e., annuity fee income as a percent of noninterest income), the median Annuity Concentration Ratio was 7.6% in the first half 2011.

Read full report.

Tarullo: Federal Reserve Should Purchase MBS to Spur Economic Growth

The Federal Reserve should consider buying mortgage-backed securities (MBS) to spur economic growth, Fed Governor Daniel Tarullo told the World Leaders Forum yesterday at Columbia University in New York.

"Housing continues to hang like an albatross around the necks of homeowners and the economy as a whole, with millions of underwater mortgages, a staggering inventory of foreclosed homes, and depressed levels of sales," Tarullo said.

"We should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities,” Tarullo said. "The aggregate demand effect should be felt not just in new home purchases, but also in the added purchasing power of existing homeowners who are able to refinance."

He said there is a need and "ample room" for the Fed to take additional steps to stimulate more spending and investment, and housing is the area where the central bank should direct its efforts.

However, some Federal Open Market Committee members worry that the purchase of MBS is a form of credit allocation. Although Tarullo acknowledged this concern, he quickly dismissed it saying "we are talking about a widely traded instrument in a sector that appears, now more than ever, to be central to the slow pace of recovery."

Read the speech.

Thursday, October 20, 2011

Existing Home Sales Fell 3% in September

Existing homes sold at an annualized pace of 4.91 million units in September, 3% lower than the pace seen in August, according to a National Association of Realtors report released this morning. However, the pace remains higher than levels seen from May through July and slightly above the six month average of 4.88 million units.

In September, supply on the market remains lower than we have seen throughout the first half of the year. This may be due in part to a shrinking number of homes listed for sale.

Home prices are down 3.5% year-over-year, slightly worse than the same comparison in August.

Read the report.

Wednesday, October 19, 2011

Beige Book Showed Modest Growth from September to Mid October

The Federal Reserve’s Beige Book showed economic activity continued to grow at a modest pace in most Federal Reserve districts, from the end of August through mid October. Contacts generally noted weaker or less certain outlooks for business conditions.

Consumer spending was up slightly in September, driven primarily by auto sales and tourism.

While business spending was up in September, the uncertain economic outlook had increased caution and was weighing on future spending plans.

Both residential and commercial real estate remained weak.

Loan demand by and large moved lower, with the exception of an increase in mortgage refinancing. Several Federal Reserve Districts reported stronger competition among banks for high quality borrowers was leading to lower rates and fees for these customers.

Read the report.

Consumer Prices Rose 0.3% in September Driven by Energy

Consumer prices rose 0.3% overall in September according to a Bureau of Labor Statistics report released this morning. This level represents a moderation from the 0.4% and 0.5% growth seen in the previous two months. Core CPI rose by a more moderate 0.1%.

Energy and food contributed most heavily to inflation seen in September, growing 2.0% and 0.4% respectively. The rise in gasoline prices was due mostly to a seasonal adjustment, as unadjusted gasoline prices fell. Additionally, the food index decelerated from its brisk pace seen so far this year.

This report suggests that inflation is set to moderate from the fast pace we have seen so far this year. This will provide the Federal Reserve more freedom to administer monetary stimulus, should conditions warrant.

Read the report.

New Residential Construction Surged in September

Housing starts in September rose to 658,000 annualized units, gaining 15.0% from August according to a Census Bureau report released this morning. This level is 10.2% higher than September last year. Despite this growth, housing starts remain well below the 50-year average of 1.5 million units per year.

Apartment construction drove the growth with multi-family starts rising 51.3% over the month. Single family starts rose by a more modest 1.7% over the month.

Total permits came in 50.0% lower than the previous month but remain 5.7% above their level this time last year.

This report is good news as the economy struggles to maintain its recovery. However, it is important to note, September’s growth was driven mostly by multi-family construction, which tends to be volatile. Despite this, it appears that momentum is growing in homebuilding.

Read the report.

Tuesday, October 18, 2011

Bernanke Discusses Effects of Great Recession on Monetary Policy

Federal Reserve Chairman Ben S. Bernanke spoke today at the Federal Reserve Bank of Boston and discussed ways in which our current economic situation has changed the way monetary policy is used, noting that public communication is likely to be a key tool moving forward.

“The FOMC continues to explore ways to further increase transparency about its forecasts and policy plans,” Bernanke said “Forward guidance and other forms of communication about policy can be valuable even when the zero lower bound is not relevant, and I expect to see increasing use of such tools in the future.”

The Federal Reserve has taken unprecedented steps to provide monetary stimulus in its last two meetings, including a pledge to hold interest rates near zero until mid-2013 and swapping $400 billion in short-term debt for long-term securities in an effort to lower interest rates.

Bernanke noted that these extraordinary measures will not become the norm.“In more normal times, when short-term policy rates are not constrained, I expect that balance-sheet policies will be rarely used,”

Bernanke also described the Fed’s inflation targeting policies; although there is not a “formal, numerical inflation target,” its policies demonstrate “many of the elements of flexible inflation targeting.” Namely the FOMC “is committed to stabilizing inflation over the medium run while retaining the flexibility to help offset cyclical fluctuations in economic activity and employment.”

Read the full statement

Monday, October 17, 2011

Housing and Mortgage Market Trends Updated

The Housing and Mortgage Market Trends has been updated. You can find it in the located in our documents section, located at the right side of the page. In this report we saw mixed results in the housing market; new home sales and housing starts fell slightly during August. However, existing home sales and building permits rose during the same period. The Percent of banks tightening standards was lower across all loan categories in 2Q 2011 amid falling demand for loans.

Take a look here.

Industrial Production Rose 0.2% in September

Industrial production increased by 0.2% in September following no growth in August according to a Federal Reserve report released this morning. Growth in August was revised down from 0.2% to 0.0%. The report showed growth in manufacturing and mining, offsetting a drop in utilities.

Manufacturing increased by 0.4% in September driven by gains in high tech (up 0.5%) and motor vehicles (up 0.7%). Even excluding motor vehicles, manufacturing rose 0.3%. Mining output rose for the sixth consecutive month, increasing 0.8%. Utilities decreased for the second straight month, falling 1.8%.

Overall, this report indicates decent growth in industrial production for the end of the third quarter. This marginal growth is better than was expected given weak final demand.

Read the report.

Friday, October 14, 2011

Retail Sales Rose 1.1% in September

Retail sales rose 1.1% during September, providing the largest monthly gain since February according to a Census Bureau report released this morning. Although autos provided a sizable boost in September, there was broad-based strength as non-auto sales rose 0.6%.

Auto sales drove the growth increasing 3.6%, however, there was solid growth in other sectors such as clothing, furniture and gasoline. There may have been some boost to sales following hurricane Irene, but overall this report represents solid growth. This report indicates that real spending will rise in September, setting us up well to see some growth in the third quarter.

Read the report.

Thursday, October 13, 2011

US Trade Deficit Held at $45.6 Billion in August

The US Trade deficit held steady at $45.6 billion in August, sustaining the sharp drop seen in July. The goods deficit widened slightly to $61.4 billion from $61.3 billion.

Adjusting for inflation the real trade gap widened by $1 billion. Real exports fell slightly from $102.1 billion to $101.4 billion, while real imports rose from $148.1 billion to $148.3 billion. The widening of the real trade gap was primarily a result of the petroleum deficit widening to $11.5 billion, as the real non-petroleum deficit rose only 0.1%.

One notable factor was the US Trade deficit with China rose 7.4% to $29.0 billion. Exports to China rose 2.9%, but were not nearly enough to offset a 6.4% jump in imports from China. This comes amid rising tensions between the US and China over currency valuations. The US Senate voted Tuesday in favor of legislation targeting China's currency valuation prompting a response in China to devalue the currency further.

Read the report

Philadelphia Fed President Shares Concerns on Operation Twist

Philadelphia Federal Reserve Bank President Charles Plosser gave additional detail of the impact and his concerns of operation twist and unwinding monetary policy in a speech yesterday. Fed President Plosser stated:
Based on our experience with Operation Twist in the 1960s and with last year’s QE2, the reduction in long-term rates from our actions in September is likely to be less than 20 basis points for the 10-year Treasury yield, which is currently only 2 percent. The pass-through to the rates at which consumers and businesses actually borrow is likely to be considerably less. Thus, I am skeptical that this will do much to spur businesses to hire or consumers to spend.

In my view, the actions taken in August and September risk undermining the Fed’s credibility by giving the impression that we think such policies can have a major impact on the speed of the recovery.

I was concerned that tying monetary policy to the calendar could be misinterpreted by the public; it could suggest that monetary policy is no longer contingent on how the economic outlook evolves. This could lead to a loss of credibility should economic conditions develop in a way that requires the federal funds rate to be adjusted prior to mid-2013.

Read full speech.

Wednesday, October 12, 2011

Some Fed Governors Sought to Retain Option of QE3

Some of the members of the Federal Open Market Committee sought to keep the option of a third round of quantitative easing open, should future stimulus be required. The FOMC minutes released today revealed a number of stimulus options discussed at the September 20-21 session. In addition to reinvesting principal payments and extending maturities of the existing portfolio (a process known as operation twist) the Fed considered the following additional options to loosen monetary policy.

The potential QE3 would involve buying longer maturity bonds, without selling off the shorter dated maturities. "A number of participants saw large-scale asset purchases as a potentially more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted."

The FOMC also considered reducing the IOR rate, the rate that the Federal Reserve pays on reserve balances that depository institutions hold in accounts at various Federal Reserve Banks, in order to boost bank lending.

Most participants favored giving additional guidance on the central bank's goals and how they influence the Fed's decisions. Specifically, many felt that tying the Fed's near-zero interest rates to certain developments in the economy could help anchor expectations.

Officials that dissented believe the efficacy of monetary policy is limited at present and further stimulus has the potential to cause inflation.

Read the minutes here.

Tuesday, October 11, 2011

Credit Supply Not A Concern to Small Businesses

The National Federation of Independent Business (NFIB) said that credit availability was not a problem for a vast majority of small businesses in September.

The survey found that 92% of small business owners reported that all their credit needs were met or that they were not interested in borrowing. Only 8% of small businesses reported that not all of their credit needs were satisfied (the record low is 4%), and 51% said they did not want a loan.

Only 31% percent of small business owners said they regularly borrow -- this is just 3% above the record low.

According to the survey, 3% of small business owners stated that credit supply was their number one issue.

While lenders have available credit, most business owners are not interested in a loan to finance the purchase of equipment they don’t need.

The NFIB concluded that the weak recovery provides little incentive for borrowing to support expansion or buy new equipment, despite low interest rates.

Read the report.

FDIC Updates Bank Failure Cost

"The FDIC’s update on the recapitalization of the Deposit Insurance Fund reaffirms the fact that the banking industry is rapidly returning to health and the losses once expected were overstated. The FDIC had set aside $17.7 billion for possible bank failures losses at the start of 2011, twice what the actual losses are likely to be this year.

“The banking industry, not taxpayers, is solely responsible for the financial health of the FDIC. Banks are paying $13.5 billion in yearly premiums to the FDIC, which is far in excess of the yearly costs expected by the FDIC over the next several years. The insurance fund is rebuilding faster than the FDIC had projected at the end of 2009 when the industry paid $46 billion in pre-paid assessments to ensure the FDIC would have adequate cash to handle any contingency.

“The banking industry has a positive fiscal trajectory with asset quality improving, capital at record levels and profitability returning to most banks. As a sign of strength of both banks and the FDIC, deposits are rapidly flowing into banks. There is no safer place for money than in an FDIC-insured account at a bank.”

See FDIC’s statement.

Read more about FDIC’s forecast.

Friday, October 7, 2011

Consumer Credit Fell $9.5 Billion in August

Consumer credit fell by $9.5 billion in August for the first time in 11 months according to the Federal Reserve’s G19 report released this afternoon. July’s growth in consumer credit was revised down slightly as well from $12.0 billion to $11.9 billion.

The fall in consumer credit was driven by a $7.2 billion fall in non-revolving credit, the first fall since May 2010. In addition revolving credit fell $2.3 billion for the second month in a row.

ABA’s Chief Economist James Chessen commented: “The August drop in consumer credit is the result of economic uncertainty. The political debacle over raising the debt ceiling, the European debt problem, the decline in stock prices, and weak job outlook undermined consumer confidence. Consumers aren’t willing to make big purchases and borrow when they are unsure about the economy.”

Read the release.

Economy Added 103,000 Jobs in September

Payroll employment rose by 103,000 in September with the unemployment rate holding steady at 9.1% according to a Bureau of Labor Statistics report released this morning. Although this growth represents an improvement , it remains well below levels needed to drive down unemployment.

The growth was driven by an increase of 137,000 private sector jobs, more than offsetting the 34,000 public sector jobs lost. The increase in employment reflects the return of 45,000 Verizon workers who were on strike in August, which makes the real growth 58,000 jobs.

July and August growth were both revised up from 85,000 to 127,000 and from 0 to 57,000 respectively.

September’s job growth, although positive, remains weak. When accounting for the 45,000 Verizon workers returning to work, the level of 58,000 new jobs is well below the Q1 average of 191,000 as well as the Q2 average of 138,000. This report is consistent with an economy that has not slipped into a recession, but remains stagnant.

Read the release.

Thursday, October 6, 2011

Bank Offices Decline for the Second Consecutive Year

The Federal Deposit Insurance Corporation is reporting that the number of bank offices fell for the second consecutive year.

As of June 30, 2011, the number of bank offices stood at 98,192. This is down from 98,507 as of June 2010 and 99,540 office as of June 2009.

This data does not include 10 U.S. branches of foreign banks as of June 2011.

See graph from FDIC on bank offices.

Nationally chartered commercial banks account for 45% of all bank offices. State chartered commercial banks have 44% of bank offices and savings associations and savings banks account for approximately 11% of all offices.

See graph.

Between 2010 and 2011, the number of commercial bank offices increased by 150 to 87,873, while the number of savings institution offices fell by 465 to 10,319.

Wednesday, October 5, 2011

ISM Nonmanufacturing Held Steady in September

The ISM nonmanufacturing index fell only slightly during September, falling from 53.3 to 53.0. The index remains above its neutral level of 50, indicating industry expansion. The details were mixed, with six out of the nine measures lower.

There were a several bright spots in this report, including the business output index, which rose from 55.6 to 57.1 over the month. The forward looking new orders indicator also rose from 52.8 to 56.5.

Some notable disappointments included the employment index, which fell 2.9 points, dropping below 50 for the first time since 2010. New export orders also fell 4.5 points to 52.0.

Read the report

Private Sector Employment Grew by 91,000 in September

The private sector added 91,000 jobs from August to September according to the ADP National Employment Report ®. This month’s growth follows a downward revision of August’s growth (89,000 down from 91,000). September’s growth is slightly better than August’s revised growth and significantly better than the lows seen in May (35,000).

The growth in private sector jobs was driven primarily by service sector jobs, which grew by 90,000, representing 21 straight months of growth. The goods sector expanded by just 1,000 after growing 6,000 in August. Manufacturing continued to fall in September, contracting by 5,000.

Traditionally, 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 release.

September Announced Job Cuts Worst Since April 2009

Employers announced plans to shed 115,730 workers from their payrolls in September, making it the worst job cut month in over two years, according to a report issued by Challenger, Gray & Christmas.

September's announced job cuts were 126% higher than August job cut announcements of 51,114 and 212% higher than September 2010 announcements. September's job cuts is the highest since April 2009, when 132,590 job cuts were announced.

To date, U.S.-based employers have announced 479,064 planned layoffs in 2011, a 16.5% jump from the same point last year, when job cuts totaled 411,272.

The government sector has accounted for one-third of the announced layoffs so far in 2011, followed by the financial sector, which has announced 54,013 planned layoffs between January 1 and the end of September.

On the other hand, employers announced plans to hire 76,551 workers during September.

Read the press release.

Consumer Delinquencies Rose in the Second Quarter Amid Slowing Economy

Consumer delinquencies rose 17 basis points to 2.88% of all accounts in the second quarter according to American Bankers Association’s Consumer Credit Delinquency Bulletin released this morning. Nine out of eleven loan categories showed slightly higher delinquencies amid weak job creation and a slowing economy.

Bank cards were a bright spot, with delinquencies falling 18 basis points from the previous quarter to 3.22% of all accounts. This improvement puts bank card delinquencies well below both the 15-year average and their level one year ago, 3.94% and 3.62% respectively.

ABA Chief Economist James Chessen noted that “the small increases in delinquencies reflect continuing pressures as consumers navigate the consequences of high unemployment, rising gas prices and a struggling economy.”

He also noted, “lackluster job creation, private sector uncertainty and public sector job cuts have stalled momentum and increased pressure on consumers as the economy struggles to find a way forward,”

Read the release.

Tuesday, October 4, 2011

Bank Failures Falling Off

During the third quarter of 2011, twenty six bank failed, costing the FDIC's Deposit Insurance Fund $2.4 billion. Although slightly higher than the 22 banks that failed in the second quarter, the third quarter saw 15 fewer failures than the same period last year. This level of failures is well below the high of 45 failures in 2Q 2010.

Importantly the cost to the FDIC of these failures remains well below levels seen in previous years. This year, the quarterly cost of the failures has ranged from $1.9 billion to $2.4 billion throughout 2011, this compares to quarterly costs of up to $15.7 billion during the financial crisis.

The loss rate, the cost of the failure to total assets, ranged from 18.5% to 23.2% over the last six months, substantially lower than loss rates as high as 44.2% seen during the crisis.

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.

For a full list of failed banks visit the FDIC.

Monday, October 3, 2011

Construction Spending Rose 1.4% in August

Construction spending in August increased 1.4% from July and is 0.9% higher than its year-ago level. This represents the first year-over-year growth in nearly three years.

All three main areas of spending increased in August, with public spending posting an unexpectedly large increase of 3.1% after a fall of 1.5% in July. Both residential and nonresidential private spending rose by 0.7% and 0.2% respectively.

Read the report.

ISM Manufacturing Index Rose in September

The ISM manufacturing index was stronger in September than the previous month, rising from 50.6 to 51.6. The index has risen only two out of the last six months and is at its highest level since June. While this expansion represents an improvement, the index is down 3.7 points over the past year.

Production drove the improvement, rebounding from 48.6 to 51.2, above its breakeven level of 50. Also contributing to the improvement was the employment index, rising 2 points to 53.8. Trade details were positive, suggesting exports are likely to contribute to third quarter GDP growth. The forward looking new orders indicator remained below its expansionary threshold of 50 for the third consecutive month.

Read the release.