Thursday, May 31, 2012

First Quarter GDP Growth Revised Down to 1.9%

GDP growth in the first quarter was revised down to 1.9% in the BEA’s second estimate. This growth represents a slowdown from the 3.0% pace set in the fourth quarter of 2011, but is significantly better than the 0.4% growth in the first quarter of last year.

The revisions to the forecast were primarily due to increased drags from government spending and net exports. Government expenditures proved a 0.8% drag, more than the 0.6% initially reported. Net exports drag slowed growth by about 0.1%. Personal consumption reduced its contribution to growth as well, adding 1.9%, down from 2.0% in the first estimate.

Fixed investment improved in the second estimate, contributing 0.6% to growth, up from the 0.2%.

ADP Employment Increased by 133,000 Jobs in May

The nonfarm private sector added 133,000 jobs in May, according to the ADP National Employment Report released this morning. This represents an acceleration from April’s downwardly revised 113,000 jobs (initially reported at 119,000 jobs). Although May’s employment growth represents an acceleration from the previous month, it remains well below the 6-month average of 187,000 jobs created.

Job creation continues to be driven primarily by the services sector, which added 133,000 jobs in May. The goods producing sector rebounded moderately in May, adding 1,000 jobs, instead of shedding jobs as it did in April. Despite the small rebound, weakness remains in the goods producing sector, with manufacturing shedding 2,000 jobs in May.

Wednesday, May 30, 2012

Impact of GSE Conservatorship on Community Banks

The Federal Reserve recently released an analysis of the impact of the conservatorship of GSEs on community banks. They found that approximately five hundred banks, or about one in fourteen of the country’s banks, held preferred stock in Fannie Mae and Freddie Mac on their balance sheets entering into the 2008 financial crisis. The total exposure across banks and other depository institutions was at least $8 billion, and while a good portion of that was held by the largest institutions, community banks (banks with less than $10 billion assets) held at least $2.3 billion.

Many community banks found that the sharp, sudden drop in the GSEs’ preferred stock prices resulted in capital shocks from which they could not recover. The failures of fifteen depository institutions (either directly or indirectly) can be traced to losses from GSE investments, and another two institutions were forced to sell themselves to other institutions in order to avoid failure.

For the banks with GSE exposure, the median drop in the ratio of Tier 1 capital to risk-weighted assets was about three percent and this translated into loan growth two percentage points below other banks on average.

The study also found that banks with GSE losses were 50 percent more likely to be downgraded to a weak regulatory rating than other banks.

Read the Federal Reserve's full report.

Tuesday, May 29, 2012

Home Price Declines Slow

Home price declines slowed in March, as the Case-Shiller 20-city index indicated prices held steady over the month. Although prices were unchanged in the 20-city index, the more narrow 10-city index fell 0.1%. Prices remain below year-ago levels, however have improved from February as the 10- and 20-city indexes are now 2.8% and 2.6% below year ago levels respectively.

In 16 of the 20 metro areas measured prices were improved or unchanged in March. This is a vast improvement from February where only 2 of the 20 metro areas held steady or improved. Phoenix and Seattle fared the best, seeing prices rise 2.2% and 1.7% respectively. Detroit saw, by far, the largest decline, with prices falling 4.4% from the previous month.

Read S&P's release.

Friday, May 25, 2012

Consumer Sentiment Rises to Four Year High

Consumer sentiment rose to its highest level in four years in May, with the University of Michigan’s consumer sentiment index reaching 79.3, up from 76.4 in April. Improvement was a result of better sentiment regarding current conditions. Consumer sentiment has now improved for nine consecutive months, after hitting historical lows in August due to debates concerning the debt ceiling.

The present conditions portion of the index improved to 87.3 in May, up from 82.9 the previous month. Future expectations dropped slightly in May, falling to 71.7, down from 72.3 the previous month.

Inflationary expectations continue to moderate. One-year inflation expectations dropped to 3.0%, down from 3.1% in April. Longer term inflation expectations inched up, with consumers expecting 3.0% inflation over the next 5 years.

Chart of the Week: C&I Loan Growth

Durable goods orders are a forward indicator of commercial and industrial lending by banks. As durable goods rebounded after the Great Recession, the demand for C&I loans picked up with a lag.

Thursday, May 24, 2012

ABA Comments On FDIC Bank Earnings Report

“The banking industry continues to steadily march forward, with solid increases in business lending, strong capital levels and a continued decline in problem loans. At the same time, uncertainty surrounding the pace of economic growth is keeping risk higher than normal and may make businesses less inclined to borrow going forward.”

Business Loans Grow for Seventh Consecutive Quarter

“Business loans continue to be in high demand, showing a year-over-year, double-digit increase. Total lending volumes continue to suffer solely because of weakness in the housing sector. The overall lending volume for banks will continue to grow at a gradual pace until the housing market improves.”

Problem Loans Plummet, Failures Continue to Decline

“The industry’s asset quality continues to improve as banks put losses behind them, with problem loans falling to levels not seen since early 2009. The number of problem banks dropped below 800 for the first time since December 2009, and bank failures continue to fall. Failure costs are running about one-third below what the FDIC expected for this year. Banks, not taxpayers, are solely responsible for all of the FDIC’s expenses, paying about $13.7 billion in premiums over the last year.”

Capital Continues to Grow

“The industry’s capital ratios are at or near record levels, the latest indicator that banks are well prepared for any challenging economic circumstances that could arise. Banks have added almost $300 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 $183 billion in reserves to cover possible loan losses. Capital plus reserves gives a total buffer protecting the industry of more than $1.77 trillion.”

Steady Growth in Bank Earnings

"Mortgage refinancing and capital markets, along with a gradually improving economy, have led to a steady growth in bank earnings. The pace of the economy will determine how quickly banks’ core lending business will return. In addition, the European crisis and continued concerns over U.S. debt will have a significant impact on whether businesses decide to expand operations. Banks remain focused on controlling costs as a means of sustaining earnings in today’s environment.”

Deposits Continue to Flow Into U.S. Banks

“Deposits continue to flow into U.S. banks as depositors around the world seek the safety of U.S. institutions. U.S. banks remain the most secure place to keep your money, and this steady increase in deposits reflects continued confidence in our nation’s banking system.”

James Chessen, ABA chief economist

Wednesday, May 23, 2012

New Home Sales Rose 3.3% in April

New home sales improved 3.3% in April to an annualized pace of 343,000 units in April. The Census report also revised up March’s pace by 1%. The pace of new home sales is now nearly 10% above its year-ago levels.

Similarly to existing home sales, gains in new home sales were widespread geographically, with only the south reporting a decline in sales in April. Sales in the Midwest and West were both strong.

Supply of new homes on the market remains extremely tight at 5.1 months. This measure has remained below the six month mark for the past six months, indicating an extremely tight supply. This is a result of an extremely low level of new construction.

Although the median home price fell in April, to $230,000, there are signs of firming prices. The median home price is a volatile measure month to month, but in April, the median price is 4.9% above one year ago.

Read Census' report.

CBO Comments on Fiscal Cliff

The scheduled increases in taxes and, to a lesser extent, scheduled reductions in spending – a development that some observers have referred to as a “fiscal cliff” – will dramatically lower the federal budget deficit between 2012 and 2013.

According to CBO’s estimates, this fiscal cliff will reduce the federal budget deficit by 5.1 percent of GDP between calendar years 2012 and 2013. Under those fiscal conditions, growth in real GDP in calendar year 2013 will be just 0.5 percent. CBO expects the economy to slip into a recession in the first half of 2013 as real GDP contracts at an annual rate of 1.3 percent before expanding at an annual rate of 2.3 percent in the second half of 2013.

However, eliminating or reducing the fiscal restraint scheduled to occur next year without imposing comparable restraint in future years would reduce output and income in the longer run relative to what would occur if the scheduled fiscal restraint remained in place. Federal debt held by the public would grow at a faster rate than GDP. CBO views this path as unsustainable – increasing the likelihood of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would lose its ability to borrow at affordable rates.

Read the CBO's full report.

Tuesday, May 22, 2012

Existing Home Sales Rose 3.4% In April

Existing home sales accelerated 3.4% in April to an annual pace of 4.6 million units, up from the 4.5 million units reported in March. After falling in March, home sales are now back near the rapid pace set in January. January’s pace was the strongest since mid-2010. April’s pace is 10% faster than at this time last year.

April’s increase in sales was broad based, with all regions reporting improved sales. The gains ranged from 5.1% in the Northeast, to 1.0% in the Midwest.

The supply of existing homes on the market increased 9.5% to 6.6 months, its highest level since November. A surge in homes listed for sale drove the inventory up despite the faster pace. April’s growth in listings is the strongest one month gain since 2006, indicating that homeowners are beginning to gain confidence in the market.

House prices rose notably in April, with median home price rising 10.1% to $177,400. Home price appreciation is being driven by a declining share of distressed homes sold. According to the NAR, the share of distressed sales fell from 37% one year ago to 28% in April.

Read the report.

Friday, May 18, 2012

Chart of the Week: Budget

In April the U.S. government ran its first monthly budget surplus since September 2008, with receipts outpacing outlays by $59 billion.

Thursday, May 17, 2012

ABA Applauds Confirmation of Federal Reserve Board Members

“ABA applauds the Senate for confirming Jeremy Stein and Jerome Powell to the Federal Reserve Board. Their strong backgrounds and extensive experience will prove invaluable as they work on our nation's banking, economic and financial issues. We are also pleased that today’s action will allow the Federal Reserve Board to operate with a full seven members for the first time since 2006.”

By Frank Keating, ABA President and CEO

Wednesday, May 16, 2012

Industrial Production Rose 1.1% in April

Industrial production gained more than expected in April, rising 1.1% after falling 0.6% the previous month. This is the largest jump since December 2010. Although there were strong revisions, they mostly offset each other and overall gains remain the same.

The details of April’s report were encouraging as well, with manufacturing growing 0.6%. Manufacturing growth was led by gains in durable goods, which grew 1.2%. Motor vehicles and parts grew by 3.9% from the previous month. Business equipment also grew by a strong 1.5%.

Non-manufacturing sectors contributed to April’s gain as well. Utilities surged, growing 4.5%. Mining also gained in April, rising 1.6%, mostly offsetting a fall of 1.7% in the previous month. Mining has been weak in recent months due to falling natural gas prices.

Capacity utilization surged in April as well, rising to 79.2% up from 78.4% the previous month. This represents a new high for the current cycle.

Read the report.

Housing Starts Grew 2.6% in April

New residential construction accelerated 2.6% in April to an annualized pace of 717,000 units. April’s report saw strong upward revisions in the past three months. March’s pace was revised up by 7% to 699 units annually, January and February were also both revised making both months stronger. April’s pace is 29.9% above the pace seen one year ago.

Single family starts were strong in April, rising 2.3% for the second consecutive month to a pace of 492,000 annual units. Two consecutive months of strong gains have helped offset the 8.0% drop in single family starts seen in February.

Permit issuance fell sharply in April, with permits issued falling 7% to an annual rate of 715,000. This, however remains 23.7% above its year ago levels.

Housing completions surged in April, rising 10% above March’s level to an annual rate of 651,000 units. This pace is 20.1% above year ago levels.

Read the report.

Tuesday, May 15, 2012

Retail Spending Slowed in April

Retail sales grew by just 0.1% in April, down from the 0.8% growth averaged over the past three months. The slowdown was seen across the board, and some of the slowdown may payback for strong sales due to warm weather early in the year. The last time retail sales saw less growth was in December when they failed to grow. Total sales were only 6.4% above year ago levels, the slowest pace since August 2010.

Despite the slow growth in April, some industries saw particular strength. Nonstore retailers saw sales rise 1.1% over the month. Furniture and sporting goods stores all saw 0.7% growth in sales.

Sales fell sharply at building supply stores and department stores, falling 1.8% and 0.7% respectively. Apparel stores and gasoline stores were also weak in April.

Read the report.

Consumer Prices Unchanged In April

The consumer price index was unchanged in April as energy prices receded, offsetting modest gains in the prices of goods and services. The headline index has moderated substantially from the rapid pace seen in March and February (0.3% and 0.4% respectively). Overall, consumer prices now stand at 2.3% above year-ago levels, down from the 2.6% reported in March.

Core prices continued to grow at a healthy 0.2% in April, the same pace seen in March. Goods prices continued to grow at 0.2% while prices on services accelerated slightly to 0.3%.

Energy prices proved a severe drag on overall appreciation in April as they fell from highs seen in previous months. The energy index fell 1.7% from the previous month. This follows growth of 0.9% and 3.2% in March and February respectively.

Read the report.

Friday, May 11, 2012

Chart of the Week: Autos

Auto loans and sales return to 2008 levels.

Thursday, May 10, 2012

Potential Economic and Job Growth Engine: A Renovated U.S. Manufacturing Sector

At an MIT conference yesterday, Commerce Secretary Bryson said the just-released report, The Benefits of Manufacturing Jobs, is fresh evidence that manufacturing jobs support economic security for America’s middle class.

The role of the manufacturing sector in the U.S. economy is more prominent than is suggested solely by its output or number of workers. It is a cornerstone of innovation in our economy: manufacturing firms fund most domestic corporate research and development (R&D), and the resulting innovations and productivity growth improve our standard of living. Manufacturing also drives U.S. exports and is crucial for a strong national defense…

The innovative manufacturing sector relies more heavily on STEM (science, technology, engineering and mathematics) education than the non-manufacturing sectors. In 2011, nearly 1 out of 3 (32 percent) of college-educated manufacturing workers had a STEM job, compared to 10 percent in non-manufacturing sectors…

Total hourly compensation, which includes employer-provided benefits, was $38.27 for workers in manufacturing jobs and $32.84 for workers in non-manufacturing jobs, a 17 percent premium...

He also noted a recent report, A Third Industrial Revolution, in The Economist which makes the case for a resurgence in manufacturing through use of social and 3D technologies. This report says a more individualized and digital production sector could bring jobs back to richer countries.

Read the Commerce report.

ABA Testifies On Agriculture Credit Recommendations for the Farm Bill

The American Bankers Association testified today before the Subcommittee on Department Operations, Oversight, and Credit of the House Committee on Agriculture offering recommendations to preserve and improve access to agriculture credit in the upcoming Farm Bill.

ABA Chairman-Elect Matthew H. Williams recommended that term limits on loans guaranteed by the USDA’s Farm Service Agency be repealed to expand access to credit for small and beginning farmers. Williams also said Federal Crop Insurance should be preserved as it is a broadly used tool that allows farmers and bankers to manage the risk presented by weather and volatile agriculture conditions.

Williams is the chairman and president of Gothenburg State Bank headquartered in Gothenburg, Neb. The bank was founded by Williams’ grandfather in 1902 and has since been family-operated with a focus on agriculture lending.

“As a result of term limits on loans guaranteed by the USDA Farm Service Agency, an increasing number of farmers and ranchers are no longer eligible for additional credit under the program, which could make access to credit in the future very difficult, if not impossible, for these producers,” Williams said. “For this reason, the American Bankers Association and many other lender and farm organizations recommend the repeal of term limits on the USDA Farm Service Agency Guaranteed Loan Program.”

Williams noted that over 35,000 agriculture producers use the guaranteed loan program for credit, yet the practical application of term limits has caused hardships for producers that can least weather a financial setback.

Williams testified that given the volatile nature of the agricultural economy, Federal Crop Insurance is a key risk management tool used to protect against unpredictable weather and potential catastrophic losses.

“Federal Crop Insurance provides my customers with the certainty they need to make responsible planting decisions and provides my bank with the confidence we need to extend credit to our customers,” Williams said. “The program is widely accepted by farmers as a key element of a solid risk management plan that they can take to the bank.”

For a copy of Williams’ full testimony, please click here.

Bernanke Discusses Banking Industry Health

In a speech before the Chicago Fed’s Bank Structure and Competition Conference, Federal Reserve Chairman Ben Bernanke noted that the U.S. banking industry has made significant progress but face some challenges as banks adapt to the new post-crisis economic and regulatory environment. Here are some of the highlights from Bernanke’s speech.

Since the financial crisis, banks have made considerable progress in repairing their balance sheets and building capital. Risk-based capital and leverage ratios for banks of all sizes have improved materially and are significantly above their previous highs.

The banking sector overall also has substantially improved its liquidity position over the past few years. Indeed, large banks in the aggregate have more than doubled their holdings of cash and securities since 2009. Large banks have reduced their collective dependence on short-term wholesale funding, and many are flush with retail deposits. … [T]he liquidity needs of the banking system as a whole may become somewhat higher for a while as some of the securities issued under the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program come due, and as the unlimited insurance on noninterest-bearing transaction accounts expires at the end of the year.

The credit quality of large banks' assets is looking better as well, although the improvements have been uneven across types of loans. In the aggregate, delinquency rates on loan portfolios at large banks have declined substantially from their peaks.

Notwithstanding the various headwinds, credit conditions in the United States have improved significantly in a number of areas. Many--though certainly not all--businesses and households are finding it easier to borrow than they did a few years ago, in part because of better conditions in financial markets more broadly.

Read Chairman Bernanke's full remarks.

Trade Deficit Grew to $51.8 Billion in March

The U.S. trade deficit widened considerably in March to $51.8 billion, nearly offsetting February’s substantial narrowing. In February, the trade deficit narrowed by $7.1 billion to fall to its lowest level since October. March’s $6.4 billion dollar increase puts the trade gap near January’s high of $52.5 billion.

It is likely that February’s narrow trade gap was a result of low factory output in China due to the Chinese New Year. As a result we expected the trade gap to widen to previous levels. However, not all of March’s widening was a result of a catch up in China as the deficit with Europe grew by $3.8 billion (not seasonally adjusted).

All of March’s increase in the trade gap was due to an increase in imports, as exports also saw gains. Exports grew by $5.3 billion in March. Imports, however, surged increasing by $11.7 billion.

Read the report.

Wednesday, May 9, 2012

New York Fed Examines Use of Payroll Tax Cut

The New York Federal Reserve took a look at the impact of payroll tax cuts on spending, measuring recipients' intended use for the funds as well as the actual use. Their findings are below:
Three of our findings are noteworthy. One, our larger MPC estimates highlight the importance of the design of tax holidays (rebates or cuts) in determining the response of spending to policies. Second, our finding—that people who perceive tax cuts to be more permanent plan to spend more of their funds—has fiscal policy implications as to whether such tax cuts are implemented as long-term extensions or sequential short-term extensions. Third, we find that people spend a large portion of their tax-cut funds to pay off debts—this may be good news considering the large debt issues leading up to and during the financial crisis—and may also suggest that our estimated MPC is an underestimate because by facilitating deleveraging, it can indirectly lead to higher future spending through a reduction in future interest payments.
Read the rest of the NY Fed's report.

Monday, May 7, 2012

Consumer Credit Rose $21.4 Billion in March

Consumer credit surged in March rising by $21.4 billion, its largest one month gain since 2001. Consumer credit grew at an annualized rate of 10.2% continuing a recent trend of strong growth. In the past five months, consumer credit has grown by $85 billion. Growth over a five month period has only exceeded this rate once, for a five month period in 2000 .

Non-revolving balances continued to drive the increases in credit, growing by $16.2 billion. As we discussed earlier, student loans contributed heavily to this growth. When looking at non-seasonally adjusted numbers, student loan growth accounted for nearly 80% of the overall increase.

Revolving credit grew by $5.2 billion in March, its first gain in three months. This is also the largest gain in revolving credit since November, when consumers were financing holiday purchases.

Read the report.

Friday, May 4, 2012

Chart of the Week: Student Loans

While consumer installment credit has expanded in recent months, much of the growth in non-revolving credit has been fueled by student loans. The chart above shows the increase in non-revolving consumer credit with student loans broken out. Student loans have accounted for the majority of the increase over the past two years.

ABA Chief Economist James Chessen commented. “In September 2009, legislation was enacted barring private lenders from participating in the guaranteed student loan program.. Since then, the federal government has directly funded and guaranteed $305 billion in student loans with the taxpayer being the ultimate guarantor of these loans.”

U.S. Economy Added 115,000 Jobs in April as Unemployment Fell to 8.1%

Job growth disappointed in April, with the U.S. economy creating 115,000 jobs. Expectations were for an increase of 160,000 jobs. The report did note upward revisions of February and March job growth that added 53,000 jobs. April’s pace of job growth is the lowest since October. Despite the slow job creation the unemployment rate fell to 8.1% as labor force participation fell to decade lows.

ABA Chief Economist James Chessen commented, "When the economy is slow, as it was is the first quarter, job growth will slow. As the economy picks up, so will job growth."

High oil prices have likely restricted new hiring. "Gas prices have an impact. If you have other input costs rising, you have to compensate on other expenses, because you can't raise prices on your products,"commented Chessen.

Warm weather early in the year may be responsible for some of the slowdown in April, as employers added jobs earlier than expected. April’s report indicated slowdowns in seasonal industries such as construction, leisure/hospitality, and manufacturing.

The private sector created jobs for the 26th consecutive month, adding 130,000 jobs. This is a slower pace than the 166,000 private sector jobs added in March. Both services and goods producing sectors slowed job growth. The service sector created 101,000 jobs, down from 116,000 the previous month. The goods-producing sector added 14,000 jobs, down from 38,000 in March.

The public sector continues to drag on job creation, shedding 15,000 jobs in April.

The unemployment rate fell to 8.1% in April. Although this would normally be a good sign, the reason for the decline was a continued fall in the labor force participation rate. The labor force participation rate fell to 63.6% in April, its lowest level since 1981. If labor force participation were at ’04-’09 levels (66.1%) the unemployment rate would be 11.5%.

Read the report.

Thursday, May 3, 2012

Services Weak in April

The service sector was unexpectedly weak in April, as the ISM Non-Manufactuiring index fell 2.5 points to 53.5. The second monthly decline puts the index at its lowest level since December 2011. Despite a strong manufacturing report yesterday, it appears that the service sector has slowed from the rapid pace seen at the beginning of the year. Any reading above 50 indicates industry expansion, so April's slowdown still indicates growth. The services sector has now seen expansion for 28 consecutive months.

The details of April's report deteriorated as well, with new orders falling 5.3 points to 53.5. New orders have now fallen by 7.7 points in the past two months. The employment index also declined noticeably, from 56.4 to 54.2. There were pockets of good news, however, as export orders jumped 5.5 points to 58.0. Prices paid also saw a notable decline dropping from 63.9 to 53.6.

Read the report.

Wednesday, May 2, 2012

ADP: Employment Rose 119,000 in March

Employment in the non-farm private sector increased by 119,000 jobs in April according to ADP data released this morning. April’s jobs growth represents a decline from the 201,000 jobs (revised down from 209,000) added in March. April’s gain is disappointing, given expectations for nearly 170,000.

March’s ADP report, initially indicating 209,000 new jobs, preceded a disappointing employment report by the BLS, which reported only 120,000 non-farm jobs added in the month. This month’s disappointing ADP report could be a bad sign for Friday’s employment situation.

April’s job growth came primarily from the service sector, which added 123,000 jobs. The goods producing sector shed 4,000 jobs over the month. Notably, the small and medium sized firms reported the majority of the gains in employment, with large firms (500 or more employees) only reported gains of 4,000 jobs.

Read the report.

Tuesday, May 1, 2012

Construction Spending Rose 0.1% in March

Constructions spending rose 0.1% in March, its first gain in three months. Although construction spending fell in January and February (0.7% and 1.4% respectively) Total spending is 6.0% above its level last year.

Construction spending in March was driven entirely by increased private spending, which rose 0.7%. Both residential construction and non-residential construction expanded by 0.7%.

Public spending fell in March, contracting 1.1% over the month. This decline was led by a sharp decline in spending on highway and street construction, which has now fallen 0.5% from last year.

Read the report.

Manufacturing Improved Notably in April

The ISM-Manufacturing index jumped in April, rising from 53.4 to 54.8. Despite expectations for a small decline the index increased for the fifth consecutive month and remains at its highest level since June. April’s reading is well above the first quarter average of 53.3.

The details of the report improved from March as well, with strong gains in new orders, production and employment. The production index rose to 61.0, its highest level since March 2011.

New orders also experienced notable growth rising to 58.2 from 54.5. Moreover, the gap between new orders and inventories, a proxy for future production, widened from 4.5 to 9.7 in April, this is the largest the gap has been since March 2011. New export orders rebounded in April, offsetting a drop seen in March. Export orders have now risen in five of the past six months, which is stronger than expected given that GDP has fallen in the U.K., Spain, Italy, Germany, and Japan.

Read the report.