Wednesday, February 29, 2012

Beige Book: U.S. Economy Grew at “Modest to Moderate Pace”

The Federal Reserve’s Beige Book, released today, indicated that from January to early February most districts saw the economy expand at a modest to moderate pace. This expansion was driven by manufacturing, particularly automakers. The report was generally positive and consistent with a slow but steady recovery.

The report noted that manufacturing continues to expand at a “steady” pace across all twelve Federal Reserve Districts. “Most districts reported gains in new orders, shipments, or production.” In addition, several regions reporting gains in capital spending.

“Reports of consumer spending were generally positive except for sales of seasonal items, and the sales outlook for the near future was mostly optimistic.”

Residential real estate conditions improved “somewhat” in most districts. There were several reports of increased home sales and some reports of increased construction. New York was the one exception to the improvement noting “steady to softer” home sales.

Most districts indicated a “slight increase” in hiring activity. Hiring activity was broad based, with a number of industries reporting hiring. However, a number of industries reported difficulty finding qualified workers.

Read the Fed's report.

Credit Scores, Payment Choice and Durbin

The policy implication from a recent paper released by the Federal Reserve Bank of Boston is that younger, less educated, and lower income consumers, as a group, may be adversely affected by the Durbin interchange fee cap.

The study looked at the relationship between credit scores and consumer payment choices. It found that even when controlling for several variables that affect payment behavior, consumers with a higher credit score have a higher probability of holding a credit card, and a lower probability of holding a debit card. Moreover, cardholders with higher credit scores were found to use credit cards for a higher share of their payments and use debit cards less.

The study postulates that if financial institutions attempt to recoup forgone interchange revenues due to the Durbin amendment by charging a debit card fee, consumers with low credit scores are more likely to be harmed by a debit card fee. Low credit score consumers -- who tend to be younger, less educated and lower income -- use debit cards more intensively than those with high credit scores because their access to alternative means of payment is restricted.

Read the paper.

Bernanke: Policy to Remain Accomodative

Chairman Bernanke’s testimony today before the House Committee on Financial Services indicated that monetary policy is likely to remain accommodative, despite some falling unemployment and temporary inflation.

Bernanke noted we have seen “positive developments” in the labor market, with the decline in the unemployment rate over the past year, “somewhat more rapid than might have been expected.” Despite this the “job market remains far from normal.”

There are likely to be temporary inflationary pressures due to higher gasoline prices. Despite this, “longer-term inflation expectations…appear consistent with the view that inflation will remain subdued.”

Bernanke noted that “at present, with the unemployment rate elevated and the inflation outlook subdued, the committee judges that sustaining a highly accommodative stance for monetary policy is consistent with promoting both objectives.”

Bernanke also reiterated that “economic activity in 2012 will expand at or somewhat above the pace registered in the second half of last year.” Specifically, the FOMC forecasts have a central tendency of 2.2%- 2.7% real GDP growth over the next year.

Read Chairman Bernanke's testimony.

Fourth Quarter GDP Revised Up to 3%

Fourth quarter growth accelerated to 3%, up from 1.8% in the third quarter according to the BEA’s second estimate released this morning. The initial estimate reported fourth quarter GDP growth of 2.8%. For all of 2011 the economy grew at 1.6%, led by investment and exports. During this time, government spending contracted

Fourth quarter growth acceleration was led primarily by a large shift in inventories, which changed from dragging 1.35% on growth, to aiding growth by 1.88%. This amounted to about two thirds of growth over the quarter.

The revision from the initial estimate was led primarily by faster growth in fixed investment and lower imports. Consumer and government spending both saw minor upward revisions as well. Exports and inventory accumulation saw revisions that dragged on growth slightly.

Looking forward, the accumulation of inventories at the end of 2011 does not bode well for growth in early 2012. Furthermore, trade had begun to drag on growth in the fourth quarter and is likely to continue to do so as headwinds from Europe persist.

Read the report.

Tuesday, February 28, 2012

Banking Industry Continues to Gain Strength as Economy Improves

“Quarter after quarter, the banking industry continues to gain strength. Increasing loans, strong capital levels, sharply declining problem assets and an inflow of deposits mark a steady improvement in our industry’s financial performance.”

Increased Business Lending
“Banks continue to aggressively seek out business borrowers as companies consider expansion in an improving economic environment. Business lending was particularly strong, rising 13.6 percent compared to the same period a year ago. Commercial and industrial loans have now increased for six consecutive quarters, a milestone that reflects businesses’ growing optimism.”

Asset Quality and Problem Banks
“Asset quality took a major step forward in the fourth quarter, with problem loans rapidly becoming a thing of the past. This marks the seventh consecutive quarter that assets in nonaccrual status have declined. Charge-offs have fallen for eight straight quarters, reaching their lowest level since the first quarter of 2008. Bank failures have slowed considerably, and the number of problem banks continues to fall. The FDIC continues to rebuild reserves as banks -- which are solely responsible for all the agency’s expenses -- paid about $13.5 billion in premiums over the last year.”

Near-Record Capital
“The industry continues to put loan loses behind it and near-record capital ratios demonstrate a firm foundation of financial health. Banks have added over $223 billion in capital since 2008 when the financial crisis took hold. Total industry capital is now almost $1.6 trillion. Banks also have set aside more than $191 billion in reserves to cover possible loan losses. Capital plus reserves gives a total buffer protecting the industry of more than $1.76 trillion.”

Increased Deposits
“Banks saw a sharp increase in deposits as depositors around the world move money into the safety of U.S. institutions. U.S. banks remain the most secure place to keep your money, and this influx of deposits reflects continued confidence in our nation’s banking system.”

Strong Bank Earnings
"Banks are a reflection of the economy. A strong, growing and profitable banking sector is critical to our country’s vitality. The banking industry helps fuel economic growth, and the steady improvements in asset quality and earnings form a strong base that will propel lending in 2012 for businesses and consumers."

Existing Home Prices Continue to Decline

Housing prices continued to decline in December, with S&P’s Case-Shiller index falling 1.1% for both the 10- and 20-city indices. Home prices fell 4.0% from a year ago, according to the 20-city index, deteriorating from the 3.8% decline reported over the same period in November. The 10-city index also deteriorated to a 3.9% decline, from a 3.8% decline reported in November.

Only one metro area remains with prices above year-ago levels. Detroit saw home prices appreciate just 0.5% in 2011. Price declines range from a 0.4% year-over-year decline in Denver to a 12.8% decline reported in Atlanta.

Despite reports indicating that housing starts are picking up and home sales are stabilizing, prices continue to decline. Home prices will be the last housing indicator to improve, as the demand must improve enough to take up the excess inventory of homes on the market.

Read the report.

Monday, February 27, 2012

ABA Offers Practical Financial Advice for Farmers Buying Farmland

ABA’s Agricultural and Rural Bankers Committee, responding to a boom in farmland values, has produced a tip sheet for farmers considering buying farmland during this hot market.

“Record prices are being paid for farmland in many parts of the country. Members of the ABA Agricultural and Rural Bankers Committee developed some practical financial tips to assist farmers and ranchers who are contemplating making land purchases,” said John Blanchfield, ABA’s senior vice president for Agricultural and Rural Banking.

“In this hot real estate market, the need for buyer due diligence has never been higher, and bankers, who have deep experience in real estate acquisition and finance, are a great resource for producers to consult,” added Blanchfield.

ABA has also produced a video summary of agricultural credit conditions featuring the committee’s chairman Kim Greenland, market president of Great Western Bank, Mount Ayr, Iowa, and vice chairman Keith Geis, president of Platte Valley Bank, Wheatland, Wyo.

The tip sheet is available here

The video is available here

European Update

Greek Bailout Approved, Debt Exchange Offer Extended

Late Monday Eurozone finance ministers approved the second, €130bn, bailout for Greece, including a larger-than-expected haircut on privately held debt. In addition, Greece must still meet a list of "prior actions" before aid will be disbursed.

On Friday, Greece made a formal offer to bondholders to exchange €206bn of government debt for a 53.5% haircut in face value. The cuts amount to a nearly 75% loss in NPV for investors. According to the deal, investors will receive two-year, AAA bonds issued by the European Financial Stability Facility (EFSF). The remaining 31.5% of face value will be issued as Greek government bonds, maturing in 2023. The new bonds will pay a coupon of 2% for the next three years, 3% for the following five years, and 4.3% for the remaining maturity.

The bailout requires a permanent team of monitors in Greece to ensure bailout terms are abided by. Greece will be required to temporarily hold three months worth of bond payments in an escrow account, and Greek leaders have agreed to change the constitution to make debt repayment a top priority of government spending.

Official lenders have also increased their share in the bailout in order to get projected debt to GDP down to 120% of GDP by 2020. They have cut interest rates on bailout loans to 0.5% for the next 5 years and 1.5% from thereon. This is expected to cut an additional €1.4bn (2.2% of GDP) from Greece's debt burden.

See the formal bond exchange offer.

Sustainability Analysis Highlights Greece's Challenges

A confidential report circulated to finance ministers indicates that Greece may be worse off than previously thought and may need another bailout, past the one currently being discussed. The report warns that the current bailout may be making matters worse, as the forced austerity is actually causing debt levels to rise due to the blow to the economy. Moreover the €200bn debt restructuring could scare off future private investors and prevent the country from reentering financial markets.

The report indicated that "prolonged financial support on appropriate terms by the official sector may be necessary." The baseline scenario presented indicated that the proposed haircuts would only reduce debt to 129% of GDP by 2020.

The downside scenario presented in the report suggests that Greek debt may fall to only 160% of GDP by 2020 instead of the 120% required by the IMF bailout. Under this negative scenario Greece would require about €245bn in bailout funding, much more than the current €170 it is due to receive.

G20 Pressures Germany to Boost Rescue Fund

Finance ministers from the G20 have put pressure on Germany to boost the size of Europe's bailout fund, calling the move "essential" in their decision to contribute funds to the IMF. Some eurozone officials have called for the fund to be boosted to €750bn or even €1tn. Other nations have offered to contribute additional funds to the IMF but have stressed that "the IMF cannot substitute for the absence of a stronger European firewall." –Geithner

Germany has resisted an expansion of the ESM. On Wednesday, a German government spokesman said there was no reason to boost the size and that “the German government’s position has not changed. That means no.”

European Commission Forecasts Recession

According to the European Commission the Eurozone economy is experiencing a “mild recession,” yielding to modest growth in the second half of 2012. Overall the forecast calls for 0.3% contraction in 2012, an improvement from an earlier estimate of 0.5% contraction. Inflation is now forecast to be higher than previously expected at 2.3% in 2012. The forecast also noted there are still significant risks to “the downside amid still-high uncertainty,” going on to note, “the interim forecast relies on the assumption that adequate policy measures are decided and implemented.”

See the European Commission’s forecast.

Ahead this week

Monday - German lower house will vote on Greek bailout

Tuesday - Ireland to decide whether to hold a public referendum on porposed EU treaty changes.

Italian bond auction

Wednesday -
ECB holds unlimited issuance of 3-year funding

Finnish parliament will vote on Greek bailout

Friday - European Union leaders' summit

Friday, February 24, 2012

Chart of the Week

Consumer Sentiment Inched Up in February

Consumer sentiment rose by 0.3 points in February to 75.3, as measured by the University of Michigan’s Consumer sentiment index. The reading is significantly higher than the preliminary February reading of 72.5, indicating sentiment improved in the second half of the month. February’s improvement makes the sixth straight improvement since the index hit record lows in August on stalled debt talks in Washington.

The improvement in the index was led entirely by the future expectations portion of the index, which improved to 70.3 from 69.1. The present conditions component of the index fell from 84.2 to 83.0.

Short term inflation expectations remained unchanged at 3.3% over one year. Long term expectations rose with 5-year inflation expectations rising from 2.7 to 2.9%.

New Home Sales Strong in January

January’s existing home sales came in well above the initially reported December rate at an annualized rate of 321,000 units. A strong upward revision of December’s new home sales, from 307,000 units to 324,000 units, meant that sales were down slightly from December. January’s report included upward revisions as far back as October.

The Northeast and South saw the strongest growth in January, rising 11.1% and 9.3% respectively. The Midwest and West both saw declines in January of 24.5% and 10.6% respectively. The decline in the west may, however, be a correction from December’s 23.2% growth.

Inventories are continuing to drop as the months’ supply on the market fell to 5.6 in January from 5.7 the previous month and is down from 6.8 in July. January saw prices appreciate 6.9%, with the median price of a new home at $221,200.

Read the report.

Wednesday, February 22, 2012

Existing Home Sales Continue to Improve

Existing home sales picked up pace in January, increasing 4.3% from December’s pace to a seasonally adjusted annual rate of 4.57 million units. December’s growth was revised down significantly, from a pace of 4.61 million units to 4.38 million units per year. Despite the revision, January’s pace is the quickest since April 2010.

The quickening pace was seen across regions, with each region reporting month over month acceleration. The West fared the best, with its pace quickening 8.8% over the month. The South and Northeast saw acceleration of 3.5% and 3.4% respectively. The Midwest lagged the rest in January accelerating 1.0% .

Inventories continued to decline in January, falling to 6.1 months supply in the market, down from 6.4 in December. The median home price continue to fall, to $154,700, down from $162,200 the previous month. There was, however, improvement in the change from one year ago, which was -2.0% in January. This is considerably better than the -3.9% reported in December, and the highest reading since December 2010.

Read the report.

Ways and Means Panel Members Call Bank Tax ‘Bad Idea’

The $61 billion bank tax in the administration’s fiscal year 2013 budget proposal is a “bad idea,” House Ways and Means Committee members Aaron Schock (R-Ill.) and Erik Paulsen (R-Minn.) said yesterday in a “Dear Colleague” letter.

“This is a bad idea for several reasons, least of which is that it’s a mistake to raise taxes as our economy struggles to rebound,” they said. “It is important to remember that $1 of bank capital can support up to $10 in lending, which means that a 10-year tax of $61 billion would result in up to $600 billion in loans that would not be made over that 10-year period.”

Schock and Paulsen also attached a Washington Post editorial to the letter that points out that the Treasury Department has turned a $13 billion profit on the bank portion of the Troubled Asset Relief Program. ABA has made similar points in explaining its strong opposition to the bank tax.

Read the letter.

Tuesday, February 21, 2012

Positive Outlook for Asset Quality

The Federal Reserve’s January Senior Loan Officer Survey included a special set of questions regarding the outlook for delinquencies and charge-offs in the coming year. The survey asked for banker’s outlook, assuming that economic activity progresses as forecast. Overall between 15% to 60% of domestic banks, on net, expect improving delinquency and charge-off rates in 2012. Although expectations for improvement are less widespread than they were last year, last year’s expectations were the highest in the history of responses.

On net, about 20% of bankers expect improvement in credit card and other consumer loan quality. This indicator is the least widely expected to improve, likely because consumer loan quality has increased significantly recently.

The most marked improvement expected in loan quality is for non-traditional real estate, with a net 55% of bankers anticipating declining delinquencies and charge-offs in 2012. This compares to about 20% predicting improvement in 2011. Expectations for prime residential real estate loans remain near last year’s level with a net 33% of respondents expecting improvement.

Business loans are expected to improve as well, with a net 50% of domestic respondents expecting improvements in C&I asset quality for large, medium and small firms. Additionally, nearly 60% of respondents expect improvement in CRE this year. In contrast, foreign respondents, on net, anticipate no improvement in C&I loans, while 25% expect improvement in CRE loans.

Read the report

Farm Income to Decline in 2012, But Will Exceed 10-Year Average

The U.S. Department of Agriculture is projecting that farm income will fall in 2012; but will be above the 10-year average.

Net farm income is forecasted at $91.7 billion in 2012, down $6.3 billion or 6.5% from the 2011 forecast.

Net cash income, at $96.3 billion, is expected to fall by $12.5 billion (11.5%) from 2011 levels, but will remain $15.9 billion above the 10-year average (2002-2011) of $80.3 billion.

Read more.

European Update

Greece Receives Second Bailout

Late Monday Eurozone finance ministers approved the second, €130 billion, bailout for Greece. The bailout includes a larger-than-expected haircut on privately held debt. Greece must also still meet a list of "prior actions" before aid will be disbursed or the IMF will participate in the program.

The largest surprise included in the deal was the increased private sector involvement. Bondholders will be offered a deal with a 53.3% cut in the face value of their bonds, up from the 50% they agreed to in October. Interest rates on the new notes will be significantly lower than initially agreed upon at 2% for the first three years and 3% for the following five years, after which the bonds will yield 4.2%.

The bailout includes tough terms which would require a permanent team of monitors in Greece to ensure Athens abides by the bailout terms. Greece would be required to temporarily hold three months worth of bond payments in an escrow account. Finally, Greek leaders have agreed to change the constitution to make debt repayment a top priority of government spending.

Official lenders have also increased their share in the bailout in order to get projected debt to GDP down to 120% of GDP by 2020. They have cut interest rates on bailout loans to 0.5% for the next 5 years and 1.5% from thereon. This is expected to cut an additional €1.4 billion (2.2% of GDP) from Greece's debt burden.

Read the eurogroup statement.

ECB Exempt From Losses on Greek Debt

The ECB is set to exchange its Greek bonds, purchased for about €40 billion, for new bonds that are exempt from any legal action by Athens to impose losses. This is a step the ECB has deemed crucial in its potential plan to put profits on the holdings towards the Greek bailout.

The ECB cannot take losses on investments, as this would be directly funding governments which is against its legal charter. It will instead redistribute profits it would earn on those bonds toward a Greek bailout. In effect, the ECB will writedown its holdings to the discounted value at which it purchased the bonds. As per the final bailout deal the ECB will redistribute profits from the bonds to various central banks in exchange for substantially lowering the interest rates on Greek bailout loans.

France to Forge Ahead on Tobin Tax

France will move ahead with implementing a financial transactions tax despite not seeing Eurozone-wide support for the measure. French finance minister, François Baroin, has said the tax will charge 0.1% and raise €1 billion per year. France hopes that by leading on the tax it will pressure the rest of Europe to follow.

Many are dismissing the move as “election politics,” designed to win French President Nicolas Sarkozy votes in the upcoming elections. The French Banking Federation has noted that the tax will be “ineffective and counterproductive for the French economy,” as it is easily bypassed if unilaterally implemented. Mr. Baroin has dismissed this criticism, noting that France is prepared to implement the tax alone, but is confident others will follow suit.

China to Aid European Bailout

China has pledged to invest in Europe’s bailout funds and maintain its holdings of European sovereign debt. People’s Bank of China Governor, Zhou Xiaochuan said “China will always adhere to the principle of holding assets of EU sovereign debt,” adding further that China “would participate in resolving the euro debt crisis.” There is hope that the aid from China could bring other countries such as Japan, Russia, and even the United States to contribute as well.

Eurozone Economy Shrunk in 4Q

Europe's economy shrunk by 0.3% in the fourth quarter of 2011, the first contraction in two and a half years. The decline was slightly milder than the forecast of a 0.4% decline. Year total growth for the eurozone was 0.7%.

Ahead this Week

Tuesday – Spanish T bill Auction

Wednesday – German Bond Auction

Thursday - Greek Parliament expected to vote on introducing collective action clause to bonds

Friday – Italian Bond Auction

Saturday - Group of 20 finance ministers and central bank governors meet

Friday, February 17, 2012

Chart of the Week: Dollar Liquidity Swaps

On December first, central banks coordinated to make unlimited cheap currency swaps available. Since then Federal Reserve dollar liquidity swaps jumped, to about $100 billion. This remains well short of the nearly $600 billion seen in 2008-2009.

These swaps are inflation protected and the corresponding central bank takes any risk from lending the funds farther, so the only real risk is a default from any of the central banks.

Consumer Prices Rose 0.2% in January

In January the consumer price index rose 0.2% according to a Bureau of Labor Statistics report released this morning, after failing to register growth in December. The year ago change from January 2011 is 2.9% for headline CPI. The increase in headline CPI was driven by higher prices charged at restaurants and higher gasoline prices.

Core prices rose 0.2% in January as well, increasing slightly from December’s 0.1% increase, due to increasing rents and apparel prices. The year ago change for core prices also increased slightly to 2.3%, from December’s 2.2%.

After falling 1.3% in December energy prices in January rose 0.2%, causing year over year growth of energy prices to fall to 5.7%, a decline from December’s 7.8% year over year increase and significantly less than September’s year over year increase of 19.6%. Food prices remained constant with December’s numbers rising 0.2%.

Price appreciation in core goods was driven by services and goods, as both saw prices rise 0.2%. The price of goods had previously fallen 0.1% in December. The price of services has remained at a constant 0.2% for over the past six months.

Read the report.

Thursday, February 16, 2012

Housing Starts Rose 1.5% in January

Housing starts rose a modest 1.5% in January to 699,000 annualized units according to a Census Bureau report released this morning. December’s housing starts were revised up as well, from 657,000 annual units to 689,000. Permit issuance also rose in January to 676,000 annual units, up 0.7% from December. Housing completions declined by 12% in January. All measures of housing construction are well above year-ago levels.

Gains in housing starts were led by multifamily construction, which rose 8.5% in January. Single family starts declined by 1.0% to an annualized rate of 508,000 homes. Permits for both single and multi-family homes rose by 0.4% and 0.9% respectively.

Although we have seen significant improvements in housing starts in the last year, they are improving from a low base and have a long way to go. The post-recession peaks near 700,000 units per year are nowhere near the 30-year average of 1.5 million units per year.

Read the report.

Wednesday, February 15, 2012

Industrial Production Failed to Grow in January

Industrial production was unchanged in January as manufacturing growth, particularly in durable goods, could not offset large declines in mining and utility output. January represents the second month in the past three where industrial production has failed to grow. December’s growth was revised up significantly to 1.0% from 0.4%, its highest level since July, due primarily to manufacturing growth.

January’s lack of growth is not as bad as the headline figure indicates, as manufacturing continued to grow at a strong pace. Manufacturing rose 0.7% in January, driven by a 1.8% growth in durable goods. Business equipment also displayed notable growth, rising 1.8% over the month. Automobile production contributed heavily to the growth, growing 6.8% over the quarter.

Utilities and mining proved to be the largest drags on growth in January, with production falling 2.5% and 1.8% respectively. The decline in mining growth represents the first contraction in eight months. Utilities, on the other hand, have now fallen for five of the last six months.

Read the report.

Tuesday, February 14, 2012

OMB Stays Out of Touch With Reality

"What OMB has here is completely out of touch with the realities of the FDIC's fund." –James Chessen, American Banker, February 14, 2012

The Obama Administration’s proposed 2013 budget, released yesterday, predicted that the FDIC’s deposit insurance fund (DIF) will fall into negative territory despite recent trends and FDIC forecasts which suggest otherwise.

The Administration said that the fund will fall into deficit “driven in part by higher projected bank failures and constant assessment schedule, which slows down the DIF reserve growth rate.” In fact, recent data shows an improvement in the DIF, a trend the FDIC projects will continue. Furthermore, given the strength of the banking industry, it is unlikely bank failures will accelerate and in fact, should slow.

The Administration’s budget predicts that the reserve ratio will fall into negative territory, remaining negative until 2015. In reality the fund balance has improved for 7 consecutive quarters and now stands at $7.8 billion, 0.12 percent of insured deposits. The FDIC predicts1 the DIF coverage ratio to continue improving, reaching 1.15 percent by 2018.

The Administration’s budget believes the deterioration in the DIF will result from in $33 billion in bank failure losses for 2012 and 2013 combined. In order for this to occur, bank failures would have to more than double from their 2011 levels. In 2011, losses from bank failures were just $7.2 billion, down from $24.2 billion in 2010 and down even farther from the peak cost in 2009. The FDIC’s forecasts1 are well below these levels, predicting just $19 billion in losses from 2011 through 2015. The OMB’s estimate implies bank failure losses averaging $16.5 billion per year, while the FDIC’s own budget forecasts less than one quarter of that, averaging $3.8 billion.

Given the strength of the banking industry, it is unlikely that bank failures are set to increase. Banks added over $24 billion in equity capital during the third quarter and $288 billion since 2008. Total industry capital is almost $1.6 trillion. Moreover, the FDIC’s problem bank list shrunk for the second consecutive quarter, with problem bank assets shrinking as well. This is a trend the FDIC sees continuing. In a September statement , the FDIC noted that “improved prospects for individual troubled banks, an expected continued decline in the pace of CAMELS rating downgrades, and a reduction in the rate at which troubled banks fail are responsible for the modest reduction in projected losses to the DIF over the next five years.”1

Of course, banks are inseparably tied to their local economies. Should the economy falter, there could be an uptick in bank failures. However the outlook – including that of the Administration – is for the national economy generally to improve over the next two years. This improvement should support a strengthening banking industry and DIF.

"They're using old numbers and they haven't looked at the trends. Losses last year were half of what the FDIC even expected. Losses this year are going to be a lot less,” said James Chessen.

1 Update of Projected Deposit Insurance Fund Losses, Income, and Reserve Ratios for the Restoration Plan, Arthur Murton (Sept, 27,2011)

Retail Sales Rose 0.4% in January

Retail sales picked up pace in January growing 0.4% after displaying no growth the previous month. The headline growth understates how positive this report is. Retail sales excluding autos and gas grew 0.6% in January after falling 0.2% in December. This strong core growth is encouraging as it may signal that November and December growth may have just been a blip rather than a true slowdown. Core growth is now back near the strong levels seen from August to October.

January’s growth in retail sales was led by purchases of necessities as general merchandise stores (excluding department stores), gasoline stations, and grocery stores were the strongest this month. Motor vehicle sales as well as sales at non-store retailers fared the worst, falling 1.1% over the month.

Read the report

Commentary on the Administration's Proposed Bank Tax

The American Bankers Association (ABA), representing the nation's $13 trillion banking industry and its over two million employees, strongly opposes the tax on banks that was included in the Administration's February 13, 2012, Fiscal Year 2013 budget proposal. The "financial crisis responsibility fee" (bank tax) was originally introduced in January 2010 to recoup losses from the Troubled Asset Relief Program (TARP). The fact is that just last week, Treasury's report on TARP stated that taxpayers have already recovered $13 billion more than the $275 billion invested in banks and "the banks programs will result in a lifetime positive return for taxpayers of more than $20 billion."

A continuing misconception of the TARP program is that financial support was provided only to the banking industry. In fact, TARP was expanded to provide financial support to General Motors, Chrysler, AIG, and the Administration's housing programs. To the extent that there will be losses on TARP, it is from these other uses of funds, not the investments made in banks. Given non-bank programs are responsible for all of TARP's losses, the bank tax is an arbitrary tax on institutions of a certain size without regard to where the losses actually occurred. After last year's proposal in the budget, The Congressional Budget Office acknowledged this, saying "the firms responsible for paying would not be those that are directly responsible for losses realized by TARP."

Besides the unfairness of banks paying a tax on top of the significant return on investment for taxpayers, there are significant unintended negative and unintended consequences of taking capital out of the banking system. It is important to remember that $1 of bank capital can support up to $10 in lending, which means that a 10-year tax of $61 billion would result in up to $600 billion in loans that would not be made over that 10-year period. This means that millions of small business loans would be in danger of not being funded.

The ABA believes that a bank tax in ill-conceived regardless of the economic cycle. It is, however, irresponsible to assess such a tax at this time when the economy is just starting to gain momentum. Credit availability is vital to future economic growth and job creation. Implementing any tax now would likely lead to a greater withdrawal of resources in a shorter period of rtime than is appropriate or prudent. The bank tax would mean higher borrowing costs and less credit availability for consumers and businesses, while pushing financial activity to unregulated non-bank sectors.

We urge the Administration to resist efforts to propose unwarranted taxes on the banking industry. Such proposals only harm an already weak economy.

By Frank Keating, ABA President and CEO

Monday, February 13, 2012

President Obama Introduces FY 2013 Budget

President Obama introduced a $3.4 trillion budget for 2013. The budget projects a $1.33 trillion deficit for the year ending Sept 30, accounting for 8.5% of GDP. The budget included the so called “buffet rule,” including a 30% tax on incomes greater than $1 million. In addition, the budget raises the top individual income tax rate to 39.6%, taxes capital gains at 20%, and taxes dividends as income for top income brackets.

The budget includes a $61 billion bank tax, that ABA commented on today.

In all, the Obama administration says the budget will reduce deficits by $3 trillion via new taxes and $360 billion in savings that include changes to Medicare and Medicaid over the next 10 years.

The budget extends the 2.0% payroll tax cut through the end of 2012 as well as the 100% bonus depreciation provision. It also extends the Earned Income Tax Credit permanently.

The president’s budget predicts economic growth will reach 2.8% in 2012, accelerating to 3.0% in 2012, remain constant at 3.0% in 2013, and increase to 4.1% in 2015. The forecast predicts GDP growth will fall back down to 2.5% by 2020. This contrasts sharply with the CBO’s economic growth forecast, which has GDP growing 2.6% in 2013.

See the budget.

ABA Statement On Proposed Bank Tax

By Frank Keating, ABA President and CEO

“The banking industry strongly opposes the $61 billion bank tax included in President Obama’s budget proposal. Despite claims to the contrary, the facts on TARP are very clear: Taxpayers have profited $13 billion from their investments in banks through the program and Treasury predicts they will see a lifetime positive return of more than $20 billion. Given that non-bank programs are responsible for all of TARP’s losses, this would simply be an arbitrary tax with no regard to where losses actually occurred.

“While such a plan may make for a good political sound bite, the proposed tax would needlessly damage our economy by reducing credit availability and driving capital out of the banking industry. A 10-year tax of $61 billion means that up to $600 billion in loans would not be made over that same time period. Millions of small business loans would be in danger of not being funded, borrowing costs would likely increase and consumers and businesses would have less credit availability as the economy struggles to find its way forward.

“The industry is gravely concerned that this bad public policy will have unintended consequences that will damage our country’s already weak economy.”

European Update

We are pleased to introduce another recurring column, the European Update. The column will provide a look back at major European events from the previous week as well as provide a road map of the week ahead.

Greece Passes Austerity Measures

After a week of negotiations Greek political leaders finally agreed on a set of measures to cut €3.3 billion which was approved by Greek Parliament on Sunday. The measure is designed to appease official creditors in order to secure their most recent bailout package.

European Finance Ministers will meet on Wednesday to determine whether the measures are sufficient. Without the bailout funds Greece will likely be unable to pay €14.5 billion of bonds maturing on March 20th. European Finance Ministers have warned that a deal must be done by this Wednesday in order for Greece to have the funds by March 20th. The ministers will likely want to know specifically where the pledged cuts will occur, as well as endorsements of the terms of the bailout from all Greek party leaders.

As Greek parliament passed the austerity measures, riots grew in Athens; with police reporting 130 stores looted and 34 buildings set ablaze. Prime Minister Papademos has warned that, without the bailout, a hard default would drag the country “into a spiral of recession, instability, unemployment and misery.” Papademos continued to note that any politician who votes against the measure does not belong in government.

ECB Approved Broadening Collateral

On Tuesday the ECB approved measures to widen the collateral acceptable to post against its unlimited offering of three-year loans. The broadening of collateral means that the uptake for the LTRO could be much greater. The original LTRO saw banks take €489bn in three-year loans from the ECB at a low 1.00% rate. The Financial Times estimates that broadening the acceptable collateral could boost uptake by €200bn. The total pool of eligible collateral is near €14 tn.

One central bank noted that, in effect the provision means that they will accept BB- credit rating as collateral when previously they would only accept BBB-.

S&P Downgraded Italian Banks

On Friday S&P downgraded 34 Italian banks, including the nation’s largest three, Unicredit, Intensa and Monte dei Paschi. UniCredit and Intensa both saw their ratings fall from A to BBB+ with a negative outlook. Italy’s credit rating was cut two levels on Jan 13 to BBB+. S&P cited the effect of the debt crisis limiting the banks’ ability to roll over debt in wholesale market.

IMF Warns About China’s Vulnerability to Europe

An IMF report released yesterday indicated financial volatility from Europe could drag China’s growth down by as much as 4 percent below the baseline scenario. The contagion would be felt primarily through trade, with knock-on effects to domestic demand. This scenario would see global growth fall by 1.75%. The report notes that the effect could be mitigated with a stimulus amounting to 3% of GDP in 2012-13, which would lessen the impact to 1% slowing of GDP from the baseline.

See Page 6 of the IMF’s China Economic Outlook

Ahead this Week

The Greek Government is likely to reshuffle on Monday, replacing those who defected and voted against the austerity package.

Tuesday: Italian BTP auction and Greek Spanish T-bill auctions.

Wednesday: Eurozone finance ministers will meet to determine Greece’s eligibility for the most recent bailout package.

EU 4Q GDP released.

Portugal T-bill auction.

Greece expects to finalize the “private sector involvement” in its bailout, involving private creditors to take a write-down amounting to nearly 70% loss in NPV. The formal offer is expected to be made Friday.

French and Spanish bond auctions.

Spain 4Q GDP released.

€1.6bn Greek bonds mature.

Friday, February 10, 2012

Chart of the Week

We are happy to introduce a new weekly post, the Chart of the Week. Every Friday we will post a chart that represents interesting or significant data. Please let us know what you think or suggest ideas for a future Chart of the Week.

Initial claims show a strong leading correlation to the unemployment rate. Initial claims have fallen notably in the past year, suggesting that unemployment is likely to continue to fall.

Banks Reducing Private CMO Exposure

A recent article in the Financial Times noted that banks are increasing holdings of collateralized mortgage obligations (CMO’s), credit instruments that aggregate mortgages into pools. The article noted that banks were increasing holdings of “the sliced-and-diced debt that some blame for the financial crisis.” Later in the article the author noted that some of these instruments were backed by the U.S. government and “generally considered safe.”

A closer inspection of the data shows that all of the growth in CMO holdings comes from the safe, government backed CMO’s. Moreover, banks have been allowing holdings of privately issued CMO’s to run off.

In fact privately issued CMO’s have decreased by 54% from their peak at the end of 2007, and currently represent 1.2% of bank assets, down from 2.7%. During this same period banks grew their holdings of government backed CMO’s to 3.5% of assets, from 1.3% in 2007. It is this growth alone that led to a 21% growth in CMO holdings.

Interestingly, the growth cited in the article looks only at the government backed CMO holdings. By not including the runoff in privately issued CMO’s, it overstates the growth of the entire market. In fact, the overall CMO growth did increase from the end of 2007 to present by 21%; however looking simply at government backed CMO’s for the same period makes growth appear to be 175%.

*The article mentioned appeared in the Financial Times on February 8th under the title “US banks snap up bundled mortgage products”

Trade Gap Widened by $1.7 Billion in December

The U.S. trade gap widened by 3.7% to $48.8 billion in December to its largest level since June. Despite the widening, the trade gap is smaller than was assumed by the government in the initial estimate for fourth quarter GDP. Notably, exports broke a two month slide and gained despite decreased demand from Europe.

Both imports and exports grew in December, however, imports grew more quickly. Imports grew by 1.3% to $228 billion. Exports improved by a more modest 0.7% to $179 billion. Goods and services purchased abroad are at three year highs, driven by demand for capital equipment such as machinery and semiconductors.

Read the report.

Thursday, February 9, 2012

ABA to Host Free Telephone Briefing on Winding Down CPP

ABA on Tuesday, Feb. 14 will host a free telephone briefing for bank members on the Treasury Department’s strategy for winding down the Capital Purchase Program. Sloan Deerin, director of equity asset management at Treasury’s Office of Financial Stability, and Matt Pendo, chief investment officer at the OFS, will provide a short briefing on the agency’s plans. The remainder of the session will be devoted to bankers’ questions.

Bankers are encouraged to submit questions on the CPP’s future and Treasury's exit strategy before the briefing.

ABA's members can read more and sign up here. Members: see the staff analysis and get involved with the working group here.

Tuesday, February 7, 2012

Consumer Credit Jumped $19.3 Billion in December

Consumer credit rose by a robust $19.3 billion or 9.3% in December. This large growth follows a strong November report, the 2-month jump is the largest since October-November 2001. This increase puts overall credit levels at their highest level since mid-2009.

ABA Chief Economist James Chessen commented, “consumers are feeling more confident, and are willing to take on more debt.”

Non-revolving credit continues to drive the gains, increasing $16.6 billion (12.5%), its largest gain since November 2001. “Strong auto sales and student loan growth have driven the expansion in non-revolving credit,” said James Chessen.

Revolving credit gained $2.8 billion (4.2%), half of last month’s gain, but well above the average for 2011. Commercial bank’s balances constitute nearly 80% of this gain in the not seasonally adjusted data.

Read the release.

Friday, February 3, 2012

ISM Non-Manufacturing Rose 3.8 Points January

The ISM’s Non-Manufacturing index grew 3.8 points to 56.8 in January, indicating that the non-manufacturing sector continues to expand more rapidly than the manufacturing sector and is growing at its fastest level since March. Non Gains in the index were broad based, but led by employment. The business activity index improved 56.2 to 59.5.

The details of today’s report are encouraging as well, with new orders rising from 53.2 to 59.4, the third consecutive monthly increase and largest since April 2009. New export orders rose as well, gaining 5.5 points, indicating that the hit from Europe’s recession has been mild.

The employment index jumped as well, entering expansionary territory as it moved from 49.4 to 57.4. This is the second consecutive monthly gain and the largest since the inception of the series in July 1997.

Read the report.

Payroll Employment Jumps by 243,000, Dropping Unemployment Rate to 8.3%

Payroll unemployment grew 243,000 in January, exceeding expectations of 140,000 and dropping the unemployment rate to 8.3%. The private sector continued to drive job growth in January with widespread gains. The unemployment rate dropped 0.2 points to 8.3%, its lowest level since February 2009. Past reports were revised upward as well, with November’s growth revised from 100,000 to 157,000 and December’s revised from 200,000 to 203,000.

ABA’s chief economist James Chessen commented, “This is good news. It shows that the economic recovery has successfully transitioned into a self-sustaining economic expansion.”

January’s employment gains were broad based, across the private sector, which added 257,000 jobs. The service industry continued to see the largest gains, adding 162,000 jobs while the goods producing sector added 81,000 jobs. Specific industries seeing the largest boost in January were the professional and business services, leisure and hospitality, and manufacturing. Professional and business services added 70,000 jobs. Notably, the manufacturing sector added 50,000 jobs. The manufacturing sector has only added more than 50,000 jobs once since 1998.

Government continues to drag on growth, shedding 14,000 jobs in January.

The unemployment rate continues to drop, falling to 8.3% in January. Labor force participation fell to 63.7% in January. Although this isn’t directly comparable with last year due to revisions, it is the lowest level since the recession began. Factory workers recorded an average work week of 41.9 hours, the longest since January 1998.

The household portion of the data was revised to reflect 2010 Census data. The adjustment increased the estimated size of the civilian non-institutional population by 1.51 million, but left the unemployment rate unaffected. The labor force was revised higher by 258,000 and employment was revised up by 216,000.

Read the report.

Wednesday, February 1, 2012


By Frank Keating, president and CEO, American Bankers Association

“Recovery in the housing market is vital to future economic growth, and we commend the Obama administration for their attention to housing recovery efforts. However, many current proposals and programs will limit or delay that recovery. The refinance proposal announced today, unfortunately, includes a tax on banks, which will directly reduce lending capacity and banks’ ability to lend up to $100 billion.

“ABA is concerned that uncoordinated and ever-changing government programs, including those detailed today, create uncertainty in the market, increase the cost of homeownership, and reduce credit availability needed to support homeownership and the economic recovery.

“The banking industry is committed to supporting a strong, stable housing market and has completed twice as many private modifications as there have been modifications under various government programs. Since 2007, four out of five modifications have been done outside of government programs by individual lenders.

“The refinance program proposed today will require congressional approval. ABA will continue to work with the administration and Congress to effectively address the nation’s housing problems and our members will continue to work with borrowers to address their needs in a responsible and fair manner.”

Read the release.

U.S. Manufacturing Continues to Improve

The manufacturing sector continues to expand as the ISM manufacturing index rose from 53.1 to 54.1 in January. This marks the third improvement in the index and leaves it at its highest level since June. The index has now remained above its expansionary threshold for 30 straight months.

The improvement was driven primarily by an increase in new orders, with the index rising 2.8 points to 57.6. Surprisingly, export orders improved in January, despite turmoil in Europe. The production index fell slightly to 55.7, but remained well in expansionary territory. The employment index also dropped slightly, falling from 55.1 to 54.3. Inventories improved in January, but remained the only contractionary sector, with a reading of 49.5. Inventories have now contracted for four consecutive months.

Read the report.

Construction Spending Rose 1.5% in December

Construction spending continued to improve, rising 1.5% in December, its fastest level since August. Spending has now improved for 5 months and is 4.3% above its level one year ago.

Both private and public construction contributed to December’s growth. Private construction recovered in December, growing 2.1% after falling 0.4% in November. The improvement in private construction was led by non-residential construction, which grew 3.3% in December. Residential construction grew as well, but by a more modest 0.8%.

Public construction grew 0.5% in December, down from the 1.7% growth the previous month. The largest contributor to public spending was highway and street construction, which rose 1.8% from the previous month.

Read the report.

ADP: 170,000 Private Sector Jobs Added in January

ADP reported today that employment in the U.S. nonfarm private business sector increased by 170,000 from December to January on a seasonally adjusted basis.

ADP lowered its estimate of private sector jobs added in December from 325,000 to 292,000.

Employment in the private, service-providing sector rose 152,000 in January, and employment in the private, goods-producing sector increased 18,000 in January, while manufacturing employment increased 10,000.

Read the report.