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Friday, January 29, 2010

University of Michigan Consumer Sentiment Index Up 1.9 Points

In January, the University of Michigan Consumer Sentiment Index rose1.9 points to 74.4. This was the second consecutive modest improvement. The index has now topped its recent high in September. The increase was driven more by the current conditions component and but the future expectations component also rose. Current conditions rose 3.1 points and the future expectations component improved by 1.2 points.

Inflation expectations moved upward. Looking forward one year, expectations rose to 2.8% from 2.5% in December. The five-year outlook rose to 2.9%, up from 2.7% in December.









































1966 = 100 Jan Dec Nov Oct Sep Aug
Headline Index 74.4 72.5 67.4 70.6 73.5 65.7
    Current Conditions 81.1 78.0 68.8 73.7 73.4 66.6
    Future Expectations 70.1 68.9 66.5 68.6 73.5 65.0



10.01.29 (Source: University of Michigan)

GDP Growth Surges Upwards 5.7% – Primarily Driven By Inventory Accumulation

Growth in GDP for the fourth quarter reached 5.7% at an annualized rate. This followed expansion of 2.2% in the third quarter and was the fastest rate of growth since 2003. Growth was generally widespread across different output components. Personal consumption grew 2.0% annualized compared to 2.8% in Q3 and business investment grew 2.9% annualized, the first improvement in over a year.

Despite these gains however, the jump was primarily due to a large improvement in business inventory accumulation. This was likely due to firms correcting over draw downs from prior quarters. Therefore this acts as a temporary effect, and the large gain in Q4 could act as a drag on growth in coming quarters as much of the inventory adjustment will have passed. Real final sales, which measures total consumption of output over the quarter grew at a lesser 2.3%. This is solid growth; however, it remains modest when in comparison to recoveries following past deep recessions where there usually occurs a fast “snap back.” It is yet to be seen what will occur in upcoming quarters; however, if real final sales do not continue to accelerate to a higher growth pace, then output expansion will remain at a level that will only modestly push down unemployment.































































































annualized % changeQ4 2009Q3 2009Q2 2009Q1 2009Q4 2008Q3 2008
Real GDP5.72.2-0.7-6.4-5.4-2.7
% contribution to real GDP











    Consumption1.42.0-0.60.4-2.2-2.5
    Fixed Investment0.4-0.2-1.7-6.6-3.3-1.3
        Residential0.10.4-0.7-1.3-0.8-0.6
        Non-Residential0.3-0.6-1.0-5.3-2.5-0.7
    Inventories3.40.7-1.4-2.4-0.60.3
    Government0.00.61.3-0.50.21.0
    Net Exports0.5-0.81.72.60.5-0.1



10.01.29 (Source: Bureau of Economic Analysis)

Wednesday, January 27, 2010

Fed Funds Rate Kept in 0 to 25 Basis Point Range; Suggests Further Winding Down of Policy

The Federal Open Market Committee voted to keep the Federal Funds Target in a range between 0 and 25 basis points. The Fed foresees minimal inflation in the short to intermediate period, “With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.” The Fed also reaffirmed its previous announcement of ending many of its liquidly measures over the coming months.

What is new in this statement is that the Fed’s language seems to have shifted towards one of more sustainable growth, which implies the first move towards eventual tightening of policy. Prior recent statements included passages such as:







       

…the Committee anticipates that policy actions to stabilize financial markets and institutions fiscal and monetary stimulus and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.


In today’s statement, the language predicting future policy support was removed and replaced with, “While bank lending continues to contract, financial market conditions remain supportive of economic growth.” Furthermore, where the Fed acknowledged businesses inventories improving in past statements this statement uses the past tense. It states that businesses have improved their conditions, “Firms have brought inventory stocks into better alignment with sales.”

In addition, there was one dissenting vote from the FRB of Kansas City President Hoenig, “who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.”







































January 27th Meeting




December 16th Meeting



Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.







With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time.
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.







The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.







In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit wil be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.
In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.



10.01.27 (Source: Federal Reserve)

Tuesday, January 26, 2010

Case-Shiller Index: Existing Home Prices Fall 0.2%

According to the Case-Shiller Index, existing home prices fell in November by 0.2%. This was the first decline in the ten-city index in seven months and the second consecutive decline for the twenty-city index following five months of increases. Only six of the twenty metro areas surveyed saw price appreciation over the month and tended to be concentrated in western metro areas. From a year prior, the ten and twenty city indices were 4.5% and 5.3% lower, respectively. This however, is much less than year-over-year declines of close to 19% over the last winter. From its peak in 2006, home prices have fallen 29.2%, according to the broader index. This is modestly off the low of a 32.6% decline seen last April.

Monday, January 25, 2010

Existing Home Sales Fall Back 16.7%; Median Sales Price Up 4.9%

In December, existing home sales fell back heavily by 16.7% to an annualized pace of 5.45 million units, following months of large increases. The decline places sales at a pace near what occurred in September. The drop was likely driven due the effects of the home buyer tax credit wearing off. Sales saw a temporary boost in the prior months and now the pace is likely returning back to “normal.” Despite the decline however, from a year prior, sales were up still up 15.0%.

With this large decrease in the pace of sales, the months supply of inventory rose from 6.5 to 7.2. The supply of inventory will have to continue to decline before prices can be certain to have bottomed out. Despite this rise, over the month the median sales price rose 4.9% to $178,600. From a year prior, prices were up 1.2%, the first year-over-year increase since 2006.

Friday, January 22, 2010

Obama Proposals Destroy $50 Billion in Shareholder Value

Over the last week, we described in detail why the new tax proposal is a bad idea. New analysis today reveals that the $90 billion Financial Crisis Responsibility Tax combined with the proposal to introduce restrictions that limit both the scope and size of the largest financial institutions have destroyed $50 billion in combined shareholder value of six firms – Bank of America, JP Morgan Chase, Morgan Stanley, Goldman Sachs, Citigroup, and Wells Fargo.

On January 21, investors reacted negatively to the news that the Administration would seek legislation to limit the scale and scope of their operations. These financial institutions experienced a 4.4% decline in the value of their stocks. Almost $29 billion in shareholder wealth was destroyed in the large financial institutions that were directly targeted by the Administration. Even after adjusting for the decline in the value of the stock market, these institutions experienced a market adjusted return of -3.72% in a single day. Over the eleven-day period from January 11 to January 21, the losses experienced by the shareholders of these six firms, fully wiped out gains these firms had made in the first three weeks of 2010.

Thursday, January 21, 2010

Housing Starts Down 4.0 Percent, Single Family Starts Down 6.9 Percent

In December, housing starts fell back 4.0 percent to an annualized pace of 557,000 after surging upward 10.7 percent in November. Single family starts fell 6.9 percent while the more volatile multi-family starts rose 12.2 percent. The decline in starts was driven by the Northeast and Midwest. Despite the decline, from a year prior total starts were up 0.2 percent. This was the first-year-over-year increase since early 2006.

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Audio of the press conference for last week’s ABA Economic Advisory Committee meeting is now available online. It can be found here. The press release is available here. The committee’s semi-annual economic forecast is available here (pdf).

New Bank Tax Part IV: The Markets Don't Like It

In this last post in a four-part series on the new $90 billion tax on banks proposed by the Obama Administration, we show that the markets hate this idea. If our arguments about this tax increasing the cost of credit, slowing lending, and hitting community banks haven't convinced you, then consider this:

When the news of the tax was reported in the financial press, the KBW bank stock index fell by 1.70 percent on that day. On a market adjusted basis, the index declined by 0.76 percent.*

For the 24 large cap banks in the index, twenty posted a negative daily return on January 12, as shareholder wealth declined by $16.44 billion. Including both Goldman Sachs and Morgan Stanley, the Administration’s proposed fee destroyed almost $20 billion in shareholder value in one day.

Also see:


* Market adjusted return subtracts the daily return of the S&P 500 from the daily return of a company’s stock or index.

New Bank Tax Part III: Community Banks Not Immune

In this series of posts on the new bank tax the Obama Administration has proposed, we have reviewed how:
Today we see that, although community banks will not be paying the tax directly, since their assets are less than the $50 billion threshold, community banks will still feel the effects of this tax.

Since this tax is imposed on non-insured liabilities, impacted banks will shift their funding mix away from these sources and rely more heavily on insured deposits. The increased competition for insured deposits will pinch net interest margins at community banks as they compete with larger banks for deposits. Not only will this tax reduce profits for community banks, but also impede their ability to build capital and slow lending across the country.

Also see:

New Bank Tax Part II: Reducing Capital Hinders Lending

Yesterday, we discussed the new tax the Obama Administration proposed to pay for losses of non-bank TARP programs. This tax would be levied on financial firms with at least $50 billion in assets, and would certainly increase the cost of credit, as some portion would be passed along to borrowers.

In addition, the new tax will cause banks to reduce lending as it potentially reduces bank capital. One dollar in capital supports roughly seven dollars in loans. Thus, the incidence of this tax could reduce lending by $630 billion, enough to fund 3.75 million small business loans over the next decade.

Moreover, some banks that are approaching the $50 billion threshold may decide to slow their growth to avoid being hit by this tax. This further limits lending and economic growth over the duration that the tax is in place.

Also see:

New Bank Tax Part I

The Obama Administration has proposed a Financial Crisis Responsibility Tax on financial firms with at least $50 billion in assets to pay for losses of non-bank TARP programs. The proposed tax will adversely impact bank earnings, raise the cost of credit, reduce lending, increase deposit competition, and slow the economic recovery.

The proposal imposes a tax of 15 basis points on non-insured liabilities for at least the ten years. The Obama Administration projects that this fee will raise $90 billion over this period. This tax will act as a drag on bank earnings, reducing normalized earnings by an estimated 5 percent over the next 10 years. This tax has many other consequences.

Over the next few days, we're going to be reviewing this tax and the negative implications it holds for borrowers, the economic recovery, and community banks.

The $90 Billion Tax on Banks Increases the Cost of Credit
The proposed tax will cause the cost of loans to increase as simple economics suggests that some of the tax will be passed through to borrowers. This will increase interest rates by up to 15 basis points. In the current interest rate environment, this would amount to a 2 percent increase in the cost of credit, further impairing the ability for consumers and small businesses to borrow.

Also see:

Wednesday, January 20, 2010

PPI: Headline Up 0.2 Percent; Core Prices Unchanged

In December, the Producer Price Index for finished goods rose 0.2 percent, following a large jump of 1.8 percent in November. The PPI has been very volatile in recent months largely due to swings in energy prices. Still, from a year prior, producer prices were 4.7 percent higher, a sharp acceleration from a year-over year decline as recently as October. The core index, which excludes prices of food and energy products, was unchanged over the month. From a year prior, it was 0.9 percent higher.

At earlier stages of production, core intermediate goods prices rose 0.5 percent but were 0.2 percent lower than a year prior. At even earlier stages of production, the commodity heavy crude core goods index rose 5.0 percent and was up 28.4 percent from a year prior.

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Audio of the press conference for last week’s ABA Economic Advisory Committee meeting is now available online. It can be found here. The press release is available here. The committee’s semi-annual economic forecast is available here (pdf).