Friday, December 21, 2012

Treasury Estimates TARP Auto Program Lifetime Cost of $24 Billion

Earlier this week, Treasury announced plans to sell its remaining TARP investment in General Motors (GM) within the next 12 to 15 months.

Treasury currently holds 500.1 million shares of GM common stock. Treasury has approved a plan in which GM will purchase 200 million shares of this common stock at $27.50 per share (a total of $5.5 billion). Treasury plans to sell the remaining 300.1 million shares through various means within the next 12 to 15 months. At current prices this would produce a loss of over $12 billion to taxpayer from the GM program alone.

The automotive industry was bailed out by Treasury at a total cost of $79.69 billion through TARP—GM received $49.5 billion of this. Including the upcoming purchase of common stock by GM, Treasury will have recovered less than $29 billion of the GM investment. As of November 30, Treasury estimated the automotive bailout to cost taxpayers $24.27 billion.

Earlier this week, Treasury announced that it expects to make significant additional progress winding down TARP’s bank programs in 2013. Overall, to date, through repayments and other income, Treasury has recovered more than $267.9 billion of the $245.1 billion disbursed through TARP bank programs. Treasury’s investment in banks has resulted in a net profit of $22.8 billion for taxpayers.

TARP legislation requires any TARP losses be recouped from the financial industry. However, this was established before TARP was expanded to non-bank sectors. This requirement needs to be reassessed to adequately reflect where TARP losses have occurred. Banks should not be responsible to pay for losses which they have not produced.

OCC: Q3 Mortgage Quality Up from a Year Ago

The overall quality of first-lien mortgages serviced by large national and federal savings banks improved from the same period a year ago but declined slightly from the prior quarter, according to a report released by the Office of the Comptroller of the Currency (OCC).

The OCC Mortgage Metrics Report for the Third Quarter of 2012 showed 88.6% of mortgages were current and performing at the end of the quarter, compared with 88.7% the prior quarter and 88.0% a year earlier. The percentage of mortgages that were seriously delinquent at the end of the quarter was 4.4%, the lowest level in three years.

Servicers initiated 252,604 new foreclosures during the third quarter of 2012, 95,124 fewer than the same period a year ago.

Servicers continued to emphasize alternatives to foreclosure during the quarter, as servicers implemented 382,899 home retention actions. This included 136,316 modifications, 131,403 trial-period plans, and 115,180 payment plans during the quarter.

Read the Report.

Consumer Sentiment Plunges as the Fiscal Cliff Approaches

Consumer Sentiment dropped almost 10 points to 72.9 in December according to the University of Michigan's Consumer Sentiment Index. The drop was considerably more than expected, as concerns regarding the fiscal cliff weighed on consumers. Both components of the index declined in December, however the decline was led by future expectations.

Consumer sentiment is extremely vulnerable the debate taking place in Washington. During the debt ceiling debate at the end of 2011, consumer sentiment dropped to levels lower than the middle of the most recent depression.

The present conditions portion of the index fell 3.7 points to 87.0. The majority of December's deterioration was seen in the future expectations portion of the index, which fell form 77.6 to 63.8, the lowest level since last december, when congress was debating the debt ceiling.

Inflationary expectations rose slightly in December, with one-year expectations rising to 3.2% and five-year expectations rising to 2.9%.

Personal Income Grew 0.6% in November

Personal income growth outpaced consumption growth in November, rising 0.6% and leading the savings rate to tick up slightly. November's growth was the fastest rate since February. Hurricane Sandy played a role in November's strength, as it depressed growth in October, leading to a rebound in November.

The improvement in personal income was welcome, as growth has averaged just 0.2% over the past 7 months. Real personal income preformed better than nominal rising 0.8% due to a falling PCE index. Wage income rose 0.6% in November as well, recovering from a 0.3% drop the previous month.

Consumption recovered in November, rising 0.4% over the month after falling in October. Consumption gains were led by durable goods purchases, which rose 2.7% over the month. Some of this strength is due to auto sales delayed by Sandy. Non-durable goods purchases fell for the second consecutive month in November, losing 1.0%.

Consumer prices, as measured by the PCE deflator, fell 0.2% in November, their first decline since May. Much of the decline was due to energy prices falling 4.4%. Core prices remained unchanged.

With income growth outpacing spending growth, the savings rate rose 0.2 points to 3.6%. November is the second month the savings rate has improved, putting it on par with August's level.

Read the BEA report.

Thursday, December 20, 2012

Existing Home Sales Surged in November

Existing home sales continued their strong recent trend in November, gaining 5.9% from the previous month to reach an annualized pace of 5.0 million units. November’s pace is 14.5% above the pace seen one year ago, this is the strongest growth in over three years. Although Hurricane Sandy caused disruptions in affected areas, gains elsewhere more than offset the weakness.

Although Hurricane Sandy caused disruptions in the Northeast, the region was resilient, seeing a 6.9% increase in home sales. The Midwest and South both saw strong gains in November as well, increasing 7.2% and 7.9% respectively. The West continues to lag the recovery, improving just 0.5% in November.

Distressed sales accounted for just 22% of sales in November, down from 24% the previous month and 29% one year ago. As a result of the falling share of distressed homes, median prices rose, reaching $180,600 in November, a 2.0% improvement month-over-month and 10.1% above year-ago levels.

The supply of existing homes on the market continues to tighten from historically low levels. Supply fell for the fifth consecutive month, reaching 4.8 months in November, its lowest level in over seven years. Supply of existing homes on the market is now 32% below year-ago levels.

Read the NAR report.

Third Quarter GDP Growth Revised Up to 3.1%

Real economic growth for the third quarter was revised up to 3.1% in the BEA’s final estimate released today. The upward revision puts third quarter growth 50% higher than the first estimate. This third and final estimate is higher than the second estimate of 2.7% and even higher than the initial estimate of 2.0%. Third quarter growth was the fastest pace seen all year.

Overall, third quarter GDP growth was led by consumption, with strong contributions from both government spending and inventory accumulation. Consumption contributed 1.1% to third quarter growth, up from the second quarter, but far from the strong levels seen at the end of last year continuing into the first quarter. Government spending provided its largest boost to growth in three years, adding 0.8% to growth. Inventory accumulation also made strong contributions to growth, adding 0.7%.

Although the strong third quarter growth is encouraging, it is unlikely that either the government or inventory contributions are sustainable. Strong inventories tend to be a bad sign for future growth, and government spending is expected to fall sharply in the coming year.

Compared to the previous estimate, the upward revisions were due primarily to improvements in trade, including more exports and fewer imports. Government spending, at both state and local levels also increased, reaching its largest contribution to growth in three years. Consumer spending also improved from the initial estimate. In fact, residential investment was the only category to see a downward revision.

Read the BEA report.

Wednesday, December 19, 2012

Housing Starts Slowed in November

New residential construction slowed somewhat in November, reaching an annual rate of 861,000 units, down from 888,000 the previous month. Despite November’s mild decline, housing starts remain 15% above levels seen as recently as August, at nearly the fastest pace since early 2008. In the past year, the pace of new home construction has increased 21.6%.

Single-family starts led the decline in November, falling 4.1% over the month. Despite the strong loss, single-family starts remain near their fastest pace in over four years and maintain a positive trend.

Permit issuance rose in November, rising 3.6% to an annual pace of 899,000 permits. Strong permit issuance points to a continuing recovery in housing construction. Total permit issuance is up 26.8% from year-ago levels.

Read the Census report.

Friday, December 14, 2012

Industrial Production Surged in November

Industrial production rose more than expected in November, gaining 1.1%, its strongest gain since 2010. November’s report included a large downward revision to October’s production as the impacts of Hurricane Sandy turned out to be greater than initially thought. Moreover, November’s strength is, in part, due to production that was delayed by the storm coming back online.

Manufacturing production rose 1.1% in November, with strong contributions form autos, which rose 4.5% over the month. Excluding autos manufacturing rose 0.8%. Durable goods production was strong in November, gaining 1.6%. Nondurable goods production rose 0.5% over the months as well.

Utilities production rose 1.0% in November and Mining rose 0.8%.

November’s strength pushed the capacity utilization rate up to 78.4%, a four-month high.

Read the Fed report.

Consumer Prices Fell in November

Consumer prices fell in November for the first time in six months, as sharp declines in energy prices outweighed modest increases in food and core prices. The consumer price index fell 0.3% in November, slightly more than expected. With the drop, consumer prices are now 1.8% above year-ago levels, down from 2.2% the previous month.

Core goods saw a modest 0.1% appreciation in November, slower than the 0.2% seen in October. Core prices are now 1.9% above year-ago levels, down from 2.0% the previous month. The appreciation in core prices was due entirely to services, which rose 0.2% over the month. Goods prices saw modest declines, falling 0.1%. Goods prices have now fallen in all of the past four months.

Energy prices fell 4.1% in November, offsetting some of their strong gains seen earlier in the year. In September and August energy prices rose 4.5% and 5.6% respectively. Food prices continued their appreciation in November, rising 0.2%.

Read the BLS report.

Thursday, December 13, 2012

Retail Sales Increased 0.3% in November

Retail sales reversed the previous month’s loss in November, rising 0.3%. Auto dealers were primarily responsible for the gain, as core sales (excluding autos and gasoline) rose by just 0.7%. Despite the modest overall rise there were big moves within individual segments. Year-over-year growth held steady at 3.7% in November.

Non-store retailers saw strong gains in November rising 3% over the previous month, about three times their recent average. The strong growth contributed 0.3% to overall growth. Electronics and appliances stores also saw strong growth, rising 2.5%. Rebuilding from Hurricane Sandy likely contributed to the strong 1.6% growth in sales at building materials stores.

Sales fell the most sharply at Gasoline stations, falling 4.0% over the month. The decline in gasoline sales was likely a direct result of lower gasoline prices. Sales also fell unusually sharply at general stores, which were down 0.9%.

Read the Census report.

Producer Prices Fell in November

Producer prices fell for the second consecutive month in November, dropping 0.8% over the month. A sharp drop in energy prices more than offset a modest rise in the prices of core goods and food. Finished core goods saw prices appreciate just 0.1% in November, rebounding from their 0.2% decline the previous month.

Prices for finished energy products fell 4.6% in November, the sharpest drop in over three years. The decline was driven almost entirely by a 10% plunge in gasoline prices. Food prices rose 1.3% in November, up from a moderate 0.4% the previous month.

Producer prices are now only 1.4% above year-ago levels, considerably weaker than the 2.3% reported last month. Producer price appreciation has slowed notably from the rapid pace seen over the summer and will likely drag on consumer prices in coming months.

Read the BLS report.

Wednesday, December 12, 2012

Federal Reserve to Increase Purchases and Introduce Explicit Targets: Updated

In its December meeting, the Federal Open Market Committee (FOMC) announced that they would begin a bond purchase program to offset the completion of “Operation Twist.” The program will add $45 billion in purchases to the existing bond purchases (QE3). In addition to the purchases, the FOMC announced explicit conditions under which it will hold rates low, dropping its pledge to keep rates low until mid-2015.

Under the additional bond purchases announced today, the Federal Reserve will purchase $45 billion per month in long-term treasuries. These purchases will be made in addition to the $40 billion monthly purchases of mortgage backed securities being purchased as a part of QE3. The additional purchases are designed to offset the expiration of “Operation Twist,” at the end of the year, which saw the Fed sell $45 billion in short-dated treasuries and purchase $45 billion in longer-term treasuries in an effort to depress long-term interest rates. The programs combined mean Fed purchases will rise to $85 billion per month. The Fed did not announce a completion date for the bond purchases, instead noting that “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate.”

In addition to the additional bond purchases, the FOMC announced for the first time ever the exact conditions under which it will hold interest rates low. As long as unemployment remains above 6.5% and inflation remains less than 0.5% above the committee’s long-run goal of 2% the fed funds rate will remain at its current near-zero levels. The FOMC also noted that long-term inflationary expectations must remain anchored. The introduction of explicit targets mean that the Fed has dropped its pledge to hold rates at exceptionally low levels through mid-2015, however “the Committee views these thresholds as consistent with its earlier date-based guidance.”

The FOMC noted that economic activity has continued to expand at a moderate pace in recent months, which has led the unemployment rate to improve. Despite the improvements the unemployment rate remains elevated. The committee also observed that inflation has been running somewhat below the long run objective of 2%.

There was one dissenting vote, from Jeffery Lacker, who opposed both the additional asset purchases as well as the introduction of explicit targets.


See Chairman Bernanke's Press Conference

FOMC Fed Funds Forecast

Notes from Bernanke's Press Conference:
  • The targets for interest rates are not triggers, but instead guidelines. So, the unemployment rate falling below 6.5% will not automatically trigger a rate increase. 
  • Providing an explicit connection between economic data and the policy rate is "more transparent and more helpful to markets."
  • The explicit targets do not change the weighting or importance of the Federal Reserve's dual mandate.
  • Today's announcement indicates a continuation of previous policies rather than a shift to more accommodation.  
  • If the U.S. goes off the "Fiscal Cliff," the Fed would "perhaps increase [purchases] a bit," but the Fed does not have the tools to offset the full impact.
See below to compare the two most recent statements.

Tuesday, December 11, 2012

Trade Deficit Widened Slightly in October

The U.S. trade deficit widened by $1.9 billion in October, reaching $42.2 billion. The trade deficit has tracked in a narrow range, from $40 to $43 billion, since June. Both exports and imports fell in October, with the decline in exports outpacing the fall in imports. It is not surprising that both imports and exports fell in October, as Hurricane Sandy shut down many ports in the Northeast.

Exports fell 3.6% in October, reaching $180.5 billion, their lowest level since February. Imports fell in February as well, but by a more modest 2.1%, reaching $222.8 billion.

The real good’s deficit, which has a direct impact on GDP, shrank slightly in October to $46.2 billion. The European crisis has widened the U.S trade gap, as Europeans import fewer goods due to slowing economic activity.

Read the Census report.

Friday, December 7, 2012

Unemployment Dropped to 7.7 Percent as the U.S. Economy Added 146,000 Jobs in November

The labor market weathered Hurricane Sandy better than expected, adding 146,000 jobs in November. Job creation was expected to see a much larger impact from the hurricane. November’s strength suggests that the labor market fundamentals are strong enough to continue improving even in the face of adversity.

November’s report was not all good news however, as October and September job growth was revised down by a total of 49,000 jobs. Much of the revision, however, was a result of weaker than expected government job creation. In October, the government sector shed 51,000 jobs, up from the initially reported 12,000. September’s revisions saw the government sector lose an additional 10,000 jobs as well.

The service sector continues to be the primary driver behind job creation, adding 168,000 jobs in November, its strongest level since August. The goods producing sector shed 22,000 jobs in November and has now done so for three of the past four months.

The public sector presented a smaller drag to Job growth in November, shedding just 1,000 jobs. In October it shed 51,000 jobs.

The unemployment rate fell 0.2% in November, reaching 7.7 %, its lowest level since December 2008. November’s drop in the unemployment rate was a direct result of a shrinking labor force, which dropped by 350,000. It is possible the drop in labor force is due to impact from Hurricane Sandy. The decline led the labor force participation rate to fall further to 63.6%.

Read the BLS release.

Wednesday, December 5, 2012

ISM Non-Manufacturing Improved Slightly in November

The ISM’s non-manufacturing index performed better than expected in November, rising a slight 0.5 points to 54.7. November’s gain offsets part of the previous month’s decline, and returns the index to growth. The ISM index has now improved for four of the past five months. As opposed to the manufacturing index – which fell sharply in November – the service sector has held up well in the face of uncertainty associated with the fiscal cliff.

The details of November’s report were encouraging as well. Business activity rose 5.8 points, reaching 61.2. November is only the second month this year that business activity has been above 60. New orders improved in November as well, rising to 58.1, its highest level since March.

Exports rebounded slightly over the month, but remain below their expansionary threshold at 48.0. The employment portion of the index deteriorated notably, falling to 50.3 from 54.9 the previous month. Supplier deliveries fell below their expansionary threshold reaching 49.0.

Read the ISM release.

ADP Employment Increased by 118,000 Jobs in November

ADP’s National Employment Report indicated that the private sector increased employment by 118,000 jobs in November. Although November’s growth is lower than October’s 157,000, it is still a strong result given the effects of Hurricane Sandy. ADP estimates that the effects of Sandy cut 86,000 jobs from payrolls in November. Accounting for this effect, ADP estimates November’s employment would have risen by 204,000 jobs.

In October, ADP moved to a new methodology of calculating payroll employment, designed to ensure that employment numbers line up more closely with the BLS’s employment situation. The 157,000 jobs created in October, translated to growth of 171,000 jobs as reported by the BLS.

The report indicates that the service sector continues to drive job creation, accounting for 114,000 of the jobs created in November. November’s service sector growth represents a slowing from the 149,000 jobs the sector created in October. The goods producing sector also slowed in November, creating 4,000 jobs, less than the 8,000 jobs created in October. The manufacturing sector remains weak, shedding jobs for the past five months.

Read the ADP report.

Tuesday, December 4, 2012

Banks Report Strong Third Quarter Results

By James Chessen, ABA chief economist

“The third quarter was another strong one for the banking industry, with solid earnings, higher capital levels, lower losses and stable asset quality signifying an industry that continues to gain strength. At the same time, continuing uncertainty surrounding the fiscal cliff is already slowing economic activity and businesses are hesitant to borrow. Decisions made in the month ahead will have a profound impact on our economic path and the outlook for all businesses – banks included.”

Business Loans Grow for Ninth Consecutive Quarter
“Banks continue to make the loans that help drive our economy forward. Business loans achieved double-digit growth, increasing 13.5 percent year-over-year. In addition, loan growth has become more broad-based, with an uptick in real estate lending and auto loans signaling that consumers have become increasingly more confident in their finances.”

Capital Continues to Grow
“Bank capital continues to grow and remains near record levels. It’s important to remember that bank capital has increased throughout the financial crisis and is now 25 percent higher than 2008 levels. Regulators have categorized over 97 percent of banks as well-capitalized, which means their capital levels are at least 25 percent higher than minimum standards.

“Total industry capital is now over $1.6 trillion, providing an important buffer for any economic challenges that could arise. Adding reserves banks have set aside for possible loan losses, there is a total buffer protecting the industry of almost $1.8 trillion.”

Temporary Account Guarantee Program Should be Extended
“ABA is urging Congress to pass a temporary two-year extension of the FDIC’s Temporary Account Guarantee program. Customers value the protection of FDIC insurance and balances in TAG accounts continue to increase. In today’s uncertain environment, security of deposits is trumping yield for businesses. A temporary extension will take at least one piece of uncertainty off the table for businesses at year-end.”

Bank Earnings Grow in Challenging Environment
"Strong business loan growth, aggressive cost controls and recaptured reserves have helped banks maintain earnings in a challenging environment. Reserves have declined because loan losses were less than expected and future losses will undoubtedly be lower. Low interest rates continue to squeeze margins and put significant pressure on traditional banking. Extremely low rates and regulatory pressure on non-interest income will continue to challenge banks’ top line revenue growth.”

Problem Loans Stable, Failures Continue to Decline
“The industry’s asset quality has remained stable, with problem loans holding at levels not seen since early 2009. The number of problem banks fell below 700 for the first time since the third quarter of 2009, and bank failures continue to fall dramatically. Banks, not taxpayers, are solely responsible for all of the FDIC’s expenses, paying nearly $13 billion in premiums over the last year.”

For more detailed statistics on the banking industry please visit our Center for Banking Information.

Monday, December 3, 2012

U.S. Manufacturing Unexpectedly Weakened in November

The manufacturing sector unexpectedly contracted in November, according to the ISM’s manufacturing index. The index dropped below its expansionary threshold to 49.5 in November. Manufacturing had begun to expand again in September and October, however November’s report shows this improvement could not be sustained. It is unclear whether November’s weakness was a temporary impact from Hurricane Sandy or whether it represents a true softening due to fears associated with the fiscal cliff.

November’s weakness is complicated by the effects of Hurricane Sandy. It is possible that the storm’s impact on manufacturing in the northeast drove the index lower. However, traditionally substitution from storm-affected areas to other parts of the country offset any regional disruptions. For example, the ISM’s index rose following hurricane Katrina. It is possible that Sandy has obscured a true softening in manufacturing in November, but we won’t be able to tell until December’s data is released.

Despite the general weakness in November, production remained strong, gaining 1.3 points and rising to 53.7, making production the strongest component of the index. Other details of the report were much less encouraging. New orders fell by 3.9 points, reaching 50.3 in November. Employment also dropped substantially in November, falling into contractionary territory at 48.4.

The sharp decline in inventories, falling from 50.0 to 45.0 pulled the index lower in November, but is positive for future growth. The fall widens the gap between new orders and inventories – a proxy for future production – to 5.3 points, its highest level since May.

Read the ISM report.

Construction Spending Rose 1.4% in October

Construction spending increased more than expected in October, rising 1.4% from the previous month. Spending is now 9.6% above year-ago levels. October’s improvement was broad based, with both private and public spending contributing to growth.

The recovery continues to be driven by strong growth in private residential construction, which rose 3.0% in October. In the past year, spending on private residential construction has increased 20.8%. Private non-residential construction improved as well, rising 0.3% over the month to 10.7% above year ago levels. One of the largest components of non-residential construction, spending on power and utilities structures, saw strong gains that offset a decline on spending on manufacturing structures.

Government spending rose 0.8% in October, but remains slightly below year ago levels. Increased spending on education and transportation structures offset a decline in highway and street construction.

Read the Census report.