Friday, May 30, 2014

Updated: Conditions of the Industry

The ABA white paper titled “ Conditions of the Banking Industry” has been updated with first quarter data gathered from the FDIC’s release of the Quarterly Banking Profile.

The paper, updated quarterly on, highlights essential information from the QBP such as earnings, changes in loans and deposits and asset quality. It also includes informational graphs displaying net income and ROA since first quarter 2010.

Read Conditions of the Industry.

Consumer Confidence Dipped Slightly in May

Consumer sentiment dipped slightly in May to 81.9, a 2.2 point decline from the month prior, according to the University of Michigan Consumer Sentiment index. The index is still at the second highest level this year.

Both current and future expectations declined. Current conditions dropped 4.2 points to 94.5. Future expectations shrank by 1.0 points to 73.7. Following current trend, the gap between current and future expectations remained. Consumers are less optimistic about the future in comparison to the present.

The report indicated that inflationary expectations moved slightly from April, calling for 3.3% inflation over the next year, an improvement of 0.1% and 2.8% over the next 5 years, a decline of 0.1%.

May’s setback indicates that stagnant wage growth may hold back consumer sentiment.

Personal Income Grew While Consumption Shrank in April

Personal income grew 0.3% in April, a slight slowing of the pace from the month prior. Personal consumption declined 0.1%, which caused the savings rate to increase to 4.0%. However a savings rate of 4.0% is still the second lowest level since 2008. Personal income increased 3.6% from year ago levels and consumption increased 4.3%.

Wage growth was the weakest this year, at 0.2%. Disposable income, which improved 0.3% in April, was also the weakest growth seen in 2014. Dividend growth was the driver behind income growth in April. Real personal consumption declined 0.3% and real personal income grew 0.1%.

Delayed spending due to the harsh winter was equalized in March, causing March to appear higher than usual. It could be a reason that April’s growth is low. April’s setback should be temporary as the economy gives way to stronger growth in the spring.

Inflation remained at low levels as the PCE deflator rose 0.2% in April, 1.6% above year-ago levels. While the annual rate is an improvement from last month, inflation remained below the 2.0% target of the Federal Reserve.

Read the BEA release.

Thursday, May 29, 2014

First Quarter GDP Growth Was Negative

Real GDP growth for the first quarter was revised down to a decline of 1.0% in the BEA’s second estimate. Growth was revised down from an initial estimate of 0.1%. The decline in GDP was largely driven by downward revisions to inventories. Adverse weather in the first quarter had a greater impact on GDP than originally estimated. Growth in the first quarter dropped substantially from the 2.6% growth seen in the fourth quarter. GPD growth was last negative in the first quarter of 2011.

Consumption was hardly revised. Its contribution to GDP was changed to 2.1% from 2.0% in the initial estimate. Consumption remains the driver of GDP and was the only category to improve.

Inventories reduced growth by 1.6%, a marked decline from the 0.6% growth reduction in the first estimate. Inventories were the single largest drag on growth. The government drag increased slightly to 0.2%, with the bulk of the drag coming from the state and local governments. Federal nondefense positively contributed to growth. Fixed investment improved slightly from the initial estimate, with less of a drag on GDP. Both residential and non-residential investments were less of a drag on GDP in the second estimate.

Due to the improved weather and the typical fluctuation of inventories, the second quarter is expected to see stronger, more normalized gains.

Read the BEA release.

Wednesday, May 28, 2014

ABA Statement on FDIC’s First Quarter Bank Earnings Report

ABA Chief Economist James Chessen provides his insight to the FDIC's first quarter bank earnings report, which was released today.

“Banks are working hard to meet their customers’ needs despite challenges arising from persistently low interest rates, rising compliance costs and declining revenue from trading activities. The harsh winter weather put a chill on loan demand in the first quarter, particularly for mortgage loans. Springtime has brought renewed confidence for businesses and consumers, which should help to boost both credit demand and bank revenue. One-time events will continue to present challenges for some banks, but the underlying strength and capital across the industry will provide a bedrock for strong performance over the next year.”

Read the full release.

Tuesday, May 27, 2014

Home Prices Continue to Grow, Albeit More Slowly

According to the Case-Shiller index, the pace at which home prices are rising continued to slow in March. The 20-city composite index indicated that prices in March are 12.4% above year-ago levels, slower than the 13.1% seen in January and 12.9% seen in February. Overall price levels rose slightly in March, with the 20-city composite 0.9% above the month prior. Cold weather in the first two months of the year likely held demand low, depressing home price appreciation, which rebounded in March.

9 of the 10 metropolitan areas saw home prices improve from the previous month. Moreover, every metropolitan area continues to see prices above year-ago levels. New York was the only city to see a decline, with prices falling 0.3%. San Francisco has the strongest growth at 2.4%. Las Vegas continues to see the largest year-over-year growth, at 21.2%.

Read the S&P release.

Friday, May 23, 2014

Keating: Housing Market Rising Slowly

A combination of regulation and the economy is resulting in a slow rising housing market, ABA president and CEO Frank Keating said on CNBC’s Squawk Box. A soft labor market, $1 trillion in student loan debt and poor household formation have all contributed to weak growth in the housing market. These factors, coupled with regulators “codifying excessive caution with their Qualified Mortgage rule,” have all contributed to the lagging recovery of the housing market.

[The banks] want to make qualified mortgage loans. So to go and ask your mom and dad to co-sign a note, that’s not a QM loan. To ask the owner to collateralize the first X thousand dollars of the mortgage loan, that’s not a qualified mortgage loan. So you have a lot of people being turned down.

Single-family mortgages have been declining, with 1-4 family residential property loans decreasing year-over-year for the past six years, “[and] that’s not healthy for the economy because housing makes a big difference in terms of economic growth and jobs.”

Watch the interview.

New Home Sales Rebound in April

The sale of new homes picked up to an annual pace of 433,000 units in April, improving 6.4% from March’s weak growth, which was revised upward. However, April’s sales are 4.2% below year ago levels.

Month-over-month sales rose in the Midwest and South by 47.4% and 3.1%, respectively, remained unchanged in the West and fell 26.7% in the Northeast. Sales rose in the Northeast and Midwest from a year ago, while sales in the South and West fell.

The supply of new homes on the market declined to 5.3 months of supply. The median sales price for new houses sold and for sale decreased 2.1% from a month ago to $275,800, 1.3% below year-ago prices.

Read the Census release.

Thursday, May 22, 2014

Existing Home Sales Rose in April

Existing homes sales rose by 1.3% in April to an annual pace of 4.65 million units. The previous month was the lowest level in 2 years. Sales are still 6.8% below year ago levels.

Only two of the four regions saw gains in April. The West and South grew by 4.9% and 1.0% respectively. The Northeast remained the same and the Midwest shrank by 1.0%.

The market supply jumped in April to 5.9 months, from 5.1 months in March, the largest supply in a year and a half.

The median house price increased to $201,700, the highest median price since last summer. The rise in the median home price along with an increase in market supply points to a housing market that will continue to improve over the summer.

Read the NAR release.

Wednesday, May 21, 2014

FOMC Minutes Highlight Discussions Around Monetary Policy Normalization

The FOMC minutes from the April 29-30 meeting highlight the FOMC’s discussions around how to normalize monetary policy in the future and how to raise short term interest rates when the Committee decides to do so.

The minutes stated that, “Participants generally agreed that starting to consider the options for normalization at this meeting was prudent, as it would help the Committee to make decisions about approaches to policy normalization and to communicate its plans to the public well before the first steps in normalizing policy become appropriate.”

The committee noted the large size of the Federal Reserve’s balance sheet. Since the FOMC has never raised rates with such a large balance sheet, committee members generally favored the testing of different policy tools to use when they want to raise rates.

The improvement in weather caused a general increase in economic activity. However despite payroll improvements, “the unemployment rate held steady and was still elevated.” Moreover, “Consumer price inflation continued to run below the Committee's longer-run objective, but measures of longer-run inflation expectations remained stable.” The committee still feels it is abiding by its dual mandate to reduce unemployment and control inflation.

Read the FOMC minutes.

Tuesday, May 20, 2014

CFPB Director Presents Student Loan Tool

At the Boulder Summer Conference on Consumer Financial Decision Making, CFPB Director Richard Cordray addressed student loans, the second largest debt category after the mortgage market, as one of the growing financial issues in our country. Because the “individual debt load from student loans has increased by 70% in less than a decade,” younger people are delaying large life purchases, such as their first mortgage. In the past, college educated young adults typically had higher incomes and therefore were more likely to buy a home. Cordray said:

Today, however, we are seeing more student loan borrowers shying away from making this investment. According to an analysis by the Federal Reserve Bank of New York, for the first time in at least a decade, households with student loan debt are less likely to have a mortgage than those without student loan debt.

In fact, Cordray continued, a recent Pew study showed that more than one third of people age 18 to 31 are living with their parents, an increase of nearly 18% since the start of the recession. This has contributed to a 15% decline in the homeownership rate among young people since its peak before the financial crisis. According to a survey by National Association of Realtors, 49% of Americans cited student loan debt as a “huge obstacle” to homeownership.

To help students understand how much debt they may have after graduation, the CFPB created the “Financial Aid Shopping Sheet”, a model that provides a uniform way to inform potential students of their true college costs before they commit to a school. This tool is part of the bureau’s set of tools titled “Paying for College”, which is modeled after the “Know Before You Owe” initiative.

Read the speech.

Monday, May 19, 2014

FDIC Announces Additional Research on Community Bank Trends

The Federal Deposit Insurance Corporation (FDIC) published an article today in its FDIC Quarterly on rural population trends and their effect on community banks. The article, entitled “Long-Term Trends in Rural Depopulation and Their Implications for Community Banks,” addresses the biggest obstacles that bankers face in rural areas that are experiencing depopulation, a trend that has been ongoing for over a century.

Click here for the press release and here for the article.

Friday, May 16, 2014

Housing Starts Rose Above 1 Million Unit Pace in April

Housing starts rose to an annualized pace of 1.072 million units in April. The rise was due to a sharp rise in multi-family construction, which can be volatile. April’s rate jumped 13.2% from the month prior. The warmer weather was likely a contributing factor, because the harsh winter depressed levels earlier this year. The pace of new construction is now 24.6% higher than a year ago.

Multi-family starts drove April’s growth. They improved to an annual pace of 413,000, a 43% jump from March. It’s the highest level since before the recession. Single-family starts showed slight improvement in April, growing 0.8% to a pace of 649,000.

Permit issuance also improved. Single family grew 0.3%. Multi-family improved 19.5%. Despite the improvement, housing starts remain below the long run average of 1.5 million units.

Read the Census report.

Thursday, May 15, 2014

Home Builder Sentiment Lowest in a Year

Home builder confidence dropped to 45 in May, the lowest level in a year, according to the National Association of Home Builders and Wells Fargo. The index has remained below 50 for 4 months, indicating general pessimism from home builders. The decline in sentiment signals the housing market is still modestly recovering.

Home builders are more optimistic about the future as job growth improves and home buyers feel more financially secure and return to the housing market.

Read the NAHB release.

Consumer Prices Rose 0.3% in April

Inflation picked up slightly in April with the consumer price index growing 0.3%. The gain is the strongest since last June. Gains were driven by increased gasoline and good prices. The increase from year-ago levels grew to 2.0%, on par with the 2.0% year over year growth goal set by the Federal Reserve.

Core prices maintained the same pace of growth from the month prior, 0.2%. Goods prices grew 0.1%, the first time goods grew since January 2013. Services grew 0.3% in April, the same pace as the prior month. Food prices increased 0.4%, the third consecutive month of strong gains. Energy prices improved 0.3%, and saw the largest year-over-year gains at 3.3%.

The future outlook is positive, as prices are improving, annual growth hit 2.0% and the sluggish winter is over.

Read the BLS report.

Wednesday, May 14, 2014

Producer Prices Jumped 0.6% in April

Producer prices accelerated in April, gaining 0.6% from the month prior. Similar to March, April’s gains were led by wholesale and retail improvements. The goods categories also contributed to April’s growth. The year-over-year change was 2.1%, the largest annual growth since March 2012.

Producer prices for finished goods rose 0.6%, the same growth seen for finished services. Crude products rose 0.4% in April, coming off a previous month of decline. Notably, year-over-year growth for crude products was 6.5%. Intermediate goods was mainly strong, aside from energy which was a 1.2% decline in April, the same magnitude decline from March as well. However, energy prices were higher than usual and distorted due to the winter weather, which caused a sharp decline in the spring and should normalize next month.

Read the BLS report.

Tuesday, May 13, 2014

Retail Sales Rose a Weak 0.1% in April

Retail sales improved modestly in April, growing 0.1% from the month prior. However, April’s report included a strong upward revision to March’s headline number. Excluding automobile and gasoline sales, retails sales declined slightly in April. Year-over-year growth was 4.0%, down 0.1% from the previous month.

Pent up demand created from the winter was released the month prior resulting in a 1.5% gain, which may have depressed April’s weak growth. Not all aspects of the report were weak. Clothing and accessories sales rose 1.2% in April. Electronics and appliances saw the biggest decline, dropping 2.3%.

Read the Census Report.

Small Business Optimism Reaches Post Recession High

The NFIB’s Small Business Optimism index jumped to 95.2, a 1.8 point gain and the first time the index is above 95 since October 2007. However the index is still below historical averages. Expected business conditions heavily contributed to the gain and is at the highest level in 8 months.

Financing continues to remain the least cited problem for small businesses in April, dropping to 1% of respondents reporting it as their single most important problem. Loan availability is often seen as a leading indicator of business investment, hiring and economic growth. Taxes along with government requirements and red tape continue to be the most cited problems for small businesses, with 22% and 20% of respondents reporting it as their top problems respectively.

The report was positive given the optimistic future outlook of small businesses. Small businesses on net saw a 9% increase in their expectations of the economy to improve.

Finding qualified applicants is a persistent problem for small businesses. A net 24% have positions they are not able to fill, the highest since at least the recession.

Read the NFIB report.

Wednesday, May 7, 2014

Consumer Credit Grew $17.5 Billion in March

Consumer credit saw its largest increase in a year in March, rising $17.5 billion. March’s strong gains continue to be driven by demand for student loans and auto lending captured in non-revolving credit. Revolving credit also contributed to the gain, reversing a decline the month prior. The annualized credit growth improved to 6.7%, from 5.0% in February.

Revolving credit grew $1.1 billion. It’s the largest gain this year. As the weather thaws, consumers are increasing their appetite to take on additional credit.

Non-revolving credit jumped by $16.4 billion, of which only $2.6 billion was federal student loans. The majority of non-revolving credit was auto loans.

Read the Federal Reserve release.

Tuesday, May 6, 2014

Trade Deficit Dropped to $40.4 Billion in March

The U.S. trade deficit contracted by 4% in March to $40.4 billion, due primarily to export strength. March’s report revised down February’s headline number. Despite the improvement, the trade deficit in March was larger than the government assumed in its advance first quarter GDP estimate. As such this report could further depress the already low first quarter growth.

Exports increased by 2.1% to $193.9 billion. The petroleum deficit narrowed by $1.4 billion in March to $18.6 billion. The service industry increased its surplus and the goods deficit contracted slightly to $60.7 billion.

Imports also increased by 1.1% to $234.3 billion. The greater increase in exports compared to imports creased a reduction in the real deficit.

Read the Census report.

Monday, May 5, 2014

Banks Continue Trend of Easing Loan Standards

Banks loosened lending standards slightly amid improving loan demand over the past three months in certain sectors, according to the Federal Reserve’s Senior Loan Officer Survey released today. The report, which covers the past three months, indicated that demand for loans generally improved for C&I and CRE loans. The report found mixed changes in lending standards to households.

A net 11.1% of respondents reported seeing looser standards on commercial and industrial (C&I) lending to large and medium sized borrowers. A net 13.9% of banks reported stronger loan demand for large and medium sized businesses. A net 7.0% of banks offering small business loans loosened standards, while 8.5% reported weaker demand for those same loans.

For households, the report found that credit card and auto loans saw looser standards, while the standards tightened for nontraditional closed-end mortgages. There was little change to lending standards on prime real estate loans and equity lines of credit.

Read the report.

ISM Nonmanufacturing Index Rose in April

The ISM nonmanufacturing index improved for the second consecutive month, growing 2.1 points to 55.2. The index finally recovered from the winter and is at its highest level since October 2013. The index has been above its expansionary threshold of 50 for a year now. The details of the report were generally strong, although a few week spots such as employment persist.

Business output jumped to 60.9 in April. It’s the strongest growth in 16 months. Exports entered into expansionary territory, growing 7.5 index points to 57.0. New orders also jumped, gaining 4.8 points and settling at 58.2.

There still were some weak spots in the report. The unemployment index declined to 51.3, however it still remains in expansionary territory. Backlogged orders dropped to 49.0 and below the 50 threshold. This was expected. Backlogged orders were higher during the harsh winter and are returning to equilibrium.

Read the ISM report.

Friday, May 2, 2014

Jobs Growth Fastest in Over Two Years in April as Unemployment Falls to 6.3%

The economy added 288,000 in April and the unemployment rate dropped to 6.3%, according to the U.S. Bureau of Labor Statistics. April’s pace of growth is the fastest since January 2012. The economy is now just 113,000 jobs away from recovering all of the jobs that were lost during the recession. April’s report also included positive revisions to February and March, adding a combined 36,000 jobs.

The private sector, particularly the services industry, continues to drive job growth. The services sector alone added 220,000 jobs, up from the revised 173,000 the month prior. The goods producing sector added an additional 53,000 jobs. Construction saw large gains as well, adding 32,000 jobs. Government employment increased by 15,000 jobs, driven by the local and state governments. The federal government contracted by 3,000 jobs, a trend that is likely to continue as the federal government cuts its budget and shrinks in size.

The unemployment rate dropped to 6.3%, a 0.4% decline from the month prior. However, the labor force participation rate shrank to 62.8% from 63.2%, and much of the drop in unemployment is due to people leaving the labor force. Notably, the labor force shrank in April by 806,000 people.

During the recession the economy lost 8.7 million jobs, of which it has recovered all but 113,000. Although the U.S. may have regained most of the jobs, the numbers are not comparable because the job gains do not include population growth. When accounted for, it would take until roughly the end of this year to recover all jobs lost during the recession. Moreover, the jobs lost during the recession have higher salaries then the ones created post-recession, lowering the median wage and hourly earnings.

The strong jobs report raises the question if the Federal Reserve will taper at a more aggressive pace at the next meeting.

Read the BLS report.

Thursday, May 1, 2014

Construction Spending Improves Modestly in March

Construction spending increased 0.2% in March, and improved 8.4% over year-ago levels. The report included downward revisions to the previous two months as well. Given the revised decline of 0.2% in February and 0.4% in January, March was expected to have a bigger rebound effect. Both private residential and nonresidential contributed to March’s growth.

Construction spending growth was driven by strong growth in private residential construction, which increased 0.8% and 16% from year ago levels. Private non-residential construction increased 0.2% from the month prior and 8.6% year-over-year. Construction spending in the Northeast and Midwest, the two regions most impacted by the winter, drove March’s gains.

Government spending declined 0.6%, and is down 0.5% from March 2013. Government construction spending should continue an overall downward trend as the government cuts back spending that was ramped up during the recession and recovery.

Read the Census report.

ISM Manufacturing Index Continued Upward Trend in April

The ISM manufacturing index improved for the third consecutive month in April. It grew 1.2 points to 54.9. April’s levels, however, are still below last December’s, as the index has yet to fully recover from the harsh winter. The index has now been above its expansionary threshold of 50 for 11 months. The details of the report were modest, given that a greater rebound effect from the cold winter was anticipated.

New orders remained the same as the month prior, at 55.1. New export orders grew 1.5 points to 57.0. The inventory index grew to 53.0. As a result of new orders remaining the same and inventories improving, the gap between new orders and inventories – a proxy for future production – shrank 0.5 points to 2.1. Production saw a slight decline, losing 0.2 points and settling at 55.7.

The employment index grew from 51.1 to 54.7 in April and is at its highest level this year.

Read the ISM report.

Personal Strong Consumption Growth Outpaced Personal Income in April, Lowering Savings Rate

Personal consumption jumped 0.9% in March, the largest monthly growth since August 2009. Personal consumption has a 0.7% real consumption growth in March. Vehicle sales drove the growth, accounting for over half of March’s improvement.

Personal income increased also saw strong increases of $78.4 billion, or 0.5%. Of that increase, $68.0 billion of it was disposable personal income. Personal income growth was led by wage growth, which has been rare throughout the recovery. Real income growth was slightly lower than nominal growth at 0.3% compared to 0.5% respectively.

There was likely pent-up demand from the harsh winter that accelerated spending in March. Moreover, the weather impacted wages, reducing job growth and hours worked, which reduced income. Utility bills were higher from the weather. All these factors combined placed downward pressure on income and spending, which was alleviated in March.

The strong surge in spending outpaced strong wage growth, pushing the savings rate down to one of the lowest levels in years. March’s savings rate of 3.8% is the second lowest reading since August 2008.

Inflation remained at low levels as the PCE deflator rose 0.2% in March, 1.1% above year-ago levels. While the annual rate is an improvement from last month, inflation remained below the 2.0% target of the Federal Reserve.

Read the BEA release.