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Wednesday, March 31, 2010

Lending Metrics, Part II: Are Businesses Borrowing?

In Part I of this series of posts on lending metrics, we looked at the use of lending volumes to indicate whether or not banks are lending, arguing it is a poor indicator of current lending. A closer look that breaks down the numbers reveals that banks initiated roughly $1.2 trillion in new loans in 2009 – a remarkable accomplishment in difficult economic times.

Today we’ll look at loan demand – the metric that illustrates whether people and businesses are borrowing. According to the Federal Reserve, banks have been experiencing a deep fall off in loan demand (see the chart below) – no surprise during this, or previous recessions. High levels of unemployment clearly are affecting consumer loan demands; businesses as well either do not want to take on additional debt or are not in a position to do so, given the falloff in their customer base.

The decline in loan demand continues, but there are fewer banks reporting a falloff of demand. And some positive signs are beginning to appear, as more small businesses are returning to test the market for loans, even though they may not wish to borrow at the moment. It will take time for this renewed interest to be translated into new loans made, however. In fact, our research shows that it typically takes 13 months after the recession for business confidence to return and credit to return to pre-recession levels.



Also see Lending Metrics, Part I: Are Banks Lending?
And Lending Metrics, Part III: Are Businesses Using Available Credit?

Tuesday, March 30, 2010

Lending Metrics, Part I: Are Banks Lending?

Often repeated – yet rarely investigated – in Washington and in the media is that banks are not lending. Critics of the banking industry point to a simple metric to support their conclusion – lending volume at the beginning of the year versus at the end of the year. At the end of 2009, lending volume was $600 billion less than at the beginning of 2009. But the factors that determine the ultimate level of lending are complex and cannot be captured in a simple comparison of volumes. A look at the chart below illustrates some of these factors and shows that, in fact, banks initiated roughly $1.2 trillion in new lending in 2009.

At the start of the year, total loans across all business lines on the books of banks totaled $7.9 trillion. Over the course of the year, banks set aside $248 billion in provisions for anticipated loan losses. This can be seen in the red bar in the center of the chart. In addition, a rough estimate is that at least $1.6 trillion of loans matured or were paid off, visible in the blue box. If banks had initiated no new lending, the year-end loan volume would have been $6.1 trillion.

Just to stay even with last year, banks would have to originate over $1.8 trillion of new loans. In normal times of economic growth and low loan losses, this is possible, but it’s impossible today with the many economic challenges, such as:
  • 61,000 business failures,
  • 4.7 million jobs lost, and
  • 10 percent reduction in business inventories.
It is remarkable, in this context, that banks were able to originate about $1.2 trillion in new loans, for a total of $7.3 trillion at year-end.



Also see Lending Metrics, Part II: Are Businesses Borrowing?
And Lending Metrics, Part III: Are Businesses Using Available Credit?

Monday, March 29, 2010

Personal Income Unchanged; Consumption Up 0.3 Percent; PCE Deflator Unchanged

In February, personal income was unchanged. Wages and salaries were also unchanged as labor markets continue to be weak. Despite the lack of growth over the month, incomes were still up 2.0 percent from a year prior. Most of this increase over the past year though has been due to a large rise in transfer payment income. Non transfer income was flat on a year-ago basis.

Despite the lack of income growth, personal consumption rose 0.3 percent over the month. This was the fifth consecutive increase though the smallest of them. From a year prior, consumption was up 3.4 percent. Consumers are again starting to increase their consumption at faster rates than their incomes. Therefore, the savings rate has trended downward in recent months, now sitting at 3.1 percent in February. This is down from a recent high of 5.9 percent last May and 4.0 percent as recently as December.

As measured by the PCE deflator there was no price inflation over the month. Therefore, real incomes and real consumption were the same as the nominal numbers. From a year prior, the PCE deflator rose 1.8 percent. As recently as September, the year-over-year change had been negative. Therefore, from a year prior, real income was up 0.2 percent while real consumption was 1.6 percent higher. The core PCE deflator, which excludes energy and food prices, was unchanged month-over-month and was 1.3 percent higher from a year prior.














































































m/m % change Feb Jan Dec Nov Oct Sep
Personal Consumption 0.3 0.4 0.4 0.5 0.6 -0.6
    Real 0.3 0.2 0.2 0.3 0.3 -0.7
Personal Income 0.0 0.3 0.4 0.4 0.2 0.1
    Real 0.0 0.1 0.2 0.2 -0.1 0.0
PCE Deflator 0.0 0.2 0.2 0.2 0.3 0.1
Core PCE Deflator 0.0 0.0 0.1 0.1 0.3 0.1
Savings Rate (level) 3.1 3.4 4.0 3.8 3.9 4.2




10.03.29 (Source: Bureau of Economic Analysis)

University of Michigan Consumer Sentiment Index Unchanged

In March, the University of Michigan Consumer Sentiment Index remained unchanged at 73.6 compared to a month prior. The two components of the index moved in opposing directions. The current conditions component improved slightly, rising 0.6 point, while the future expectations component fell 0.5 point.

Inflation expectations also remained steady. Looking forward both the one-year and five-year outlook remained at 2.7 percent.



10.03.26 (Source: University of Michigan)

GDP Growth Still Primarily Due to Inventory Accumulation

In its final estimate, the Bureau of Economic Analysis downwardly revised Q4 GDP growth to 5.6 percent at an annualized rate compared to 5.9 percent previously reported. The revision was due to lower business investment, consumer spending and inventory growth. Still, growth was strong in the fourth quarter. However, the bulk of the expansion was still due to inventory accumulation by businesses, which added 3.9 percent to growth. Though this adds to output, it is largely temporary in nature as final demand for goods and services have not grown as greatly. Real final sales, which excludes inventories, and therefore measures demand for US output grew by a lesser 1.7 percent annualized. Until this number grows higher, recovery will remain modest.



10.03.26 (Source: Bureau of Economic Analysis)

Thursday, March 25, 2010

End of Fed's Balance Sheet Growth Approaching

In what will likely mark the beginning of the end of the Federal Reserve’s balance sheet expansion, the central bank is scheduled to purchase the last installment of its pledged $1.25 trillion in mortgage-backed securities (MBS) next week.

The Fed’s balance sheet has grown from $890 billion in January 2008 to $2.26 trillion in March 2010. Initially, the increase in its balance sheet was due to numerous liquidity programs aimed to address frozen credit markets in the fall of 2008. As the credit markets healed over 2009 allowing the Fed to unwind many of the programs, the outstanding balances of the liquidity programs declined.

As the liquidity crisis passed, the Fed shifted its focus to revive the morbid housing market. The Fed will have purchased all of its $1.25 trillion in MBS by March 31, 2010. As a result, the Fed’s balance sheet is expected to peak later this Spring, as it finalizes and books all of its securities purchases.

Prior to this balance sheet growth, Treasury holdings, used for conducting monetary policy, comprised about 80 percent of its balance sheet. As of March 2010, U.S. Treasury debt, at $776 billion, was 34 percent of the balance sheet, while MBS comprised 52 percent, and liquidity programs were 13 percent, near their January 2008 share of 17 percent yet $141 billion larger in dollar terms.

Wednesday, March 24, 2010

New Home Sales Slide 2.2%; Prices Up 4.1%

In February, new home sales fell 2.2% to an annualized pace of 308,000 units. This was the sixth decline out of the past seven months. New home sales had grown steadily through the summer months before falling again to levels even lower than this time last year. The sales pace in February was the lowest on record (past 47 years). The drop-off over the month was likely due in part to the continuing declining effect of the homebuyer tax credit coupled with greater competition from foreclosures and fire sales. Sales were also likely driven down due to the worse than normal weather through much of the country. From a year prior, sales were down 14.3%.

However, the median sales price rose 4.1%, following a large decline of 7.0% in January. Prices were up 5.2% from a year prior.

At the current sales pace, the months supply of inventory of homes for sale rose to 9.2 from 8.9. The ratio had been falling steadily through October; however this has moderated over the past three months as sales have declined. Before new home prices solidly form a bottom, it is likely that the inventory ratio will have to approach the historical average of around 4.5 months.



10.03.24 (Source: Census Bureau)

Why Should We Care About Greece’s Fiscal Problem?

Excerpt from March 22, 2010 Speech by Dennis Lockhart, President and CEO of Federal Reserve Bank of Atlanta

What do fiscal problems in Greece have to do with my economic outlook for the United States?

I see three ways the Greek crisis might directly affect the U.S. economy. First, adjustment across the EU to fiscal problems could dampen euro area growth and constrain U.S. exports to that region. The European Union as a whole is this nation's largest export market. Second, related to this, safe haven currency flows from the euro into dollar assets could cause appreciation of the dollar and hurt U.S. export competitiveness. Third is the possibility that the Greek fiscal crisis could lead to a broad shock to financial markets. This could play out in the banking system or in the form of a general retreat from sovereign debt.

10.03.22 (Source: Federal Reserve Bank of Atlanta)

Tuesday, March 23, 2010

Household Sector Continues to Deleverage

Unease about the economy and the job market has caused households to pay down their existing debts and to be reluctant to take on new debt obligations.

The Federal Reserve’s Flow of Funds reported that amount of outstanding debt held by the household sector has declined since the middle of 2008. Mortgage debt fell for the seventh consecutive quarter to $10.26 trillion, as of the fourth quarter of 2009. Mortgage debt peaked at $10.55 trillion in the first quarter of 2008. Consumer credit has fallen for four consecutive quarters from $2.59 trillion at the end of the fourth quarter 2008 to $2.48 trillion at the end of 2009.

Additionally, banks are reporting weak demand for consumer loans, according to the Federal Reserve’s Senior Loan Officer Opinion Survey.

As a result of this decline in consumer and mortgage debt, the household debt (mortgage plus consumer loans) to disposable personal income ratio has fallen to 115.3 percent – its lowest level since the second quarter of 2005.



Existing Home Sales Fall 0.6%; Median Sales Price Up 0.1%

In February, existing homes sales fell for the third consecutive month, falling 0.6% to an annualized pace of 5.02 million units. This small decline followed two months of large drops. Sales had grown quickly over the late summer and fall, greatly aided by the home buyer tax credit. However, as the effects of the credit wore off, sales have since fallen back down to a pace similar early last summer. It would appear at this point a good amount of the new sales generated over the summer were simply a temporal shift, increasing demand at the expense of sales currently. Still from a year prior, sales were up 7.7%.

Partially sue to the drop in the pace of sales, the months supply of inventory rose to 8.6 from 7.8. However, much of this increase was due to a large rise in homes listed for sale. For the first time in over three years, the number of properties listed for sale rose on a year-over-year basis. The supply of inventory will have to decline before prices can be certain to have bottomed out. The historical “normal” value is around five to six months.

Over February, the median sales price rose 0.6% to $165,100. From a year prior, prices were down 1.9%.



10.03.23 (Source: National Association of Realtors)

Thursday, March 18, 2010

Long-term Unemployment Jumps

As of February, 6.13 million of the 15 million unemployed men and women have been without a job for over 26 weeks. The sharp increase could signal structural unemployment – jobs being permanently eliminated and a mismatch between job requirements and the skills of potential workers. If structural, a reduction in unemployment will likely be slow.

Prior to this cycle, long-term unemployment, the red portion of the graph below, averaged 13% of the total unemployment count. As of February, long-term unemployment accounted for 41% of the total jobless count, the highest share since available records dating to 1950.

CPI: Headline Unchanged; Core Prices Up 0.1 Percent

In February, the Consumer Price Index was unchanged following five consecutive months of 0.2 percent increases. Prices were held back by the price of energy products, which fell by 0.5 percent. The core CPI, which excludes prices of food and energy, rose 0.1 percent. From a year prior, the CPI was 2.2 percent higher. This was down from a 2.8 percent rise in December, however up from negative year-over-year changes as recently as October. The core CPI was up by a lesser 1.3 percent from a year prior, a new cyclical low.



10.03.18 (Source: Bureau of Labor Statistics)

Wednesday, March 17, 2010

Household Financial Position Strengthening

The financial position of the household sector is getting stronger.

Two measures of financial health, the debt service ratio and the financial obligations ratio, have steadily improved over the last several quarters. The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt. The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.

According to the Federal Reserve, the FOR is at 17.76 percent – its lowest level since the first quarter of 2001 when it was 17.72 percent. The DSR at the end of the third quarter was 12.85 percent. The last time it was this low was nine years ago, when it was 12.73 percent.

The household sector still faces formidable headwinds in a weak job market. But these recent improvements with respect to servicing debts and other financial obligations – coupled with the news that household net worth is increasing – makes us more hopeful that consumers will step up their spending in the coming months.

PPI: Headline Down 0.6%; Core Prices Up 0.1%

In February, the Producer Price Index for finished goods fell 0.6%, following a large increase of 1.4% in January. The volatility over these two months has largely been driven by changes in energy prices. The PPI has increased quickly in recent months and has been very volatile largely due to swings in energy prices. The core index, which excludes prices of food and energy products, rose 0.1% over the month. From a year prior, the top line index was 4.5% higher, lower than January’s year-over-year increase of 5.0%, but still a reverse from a negative change as recently as last October. The core index was 0.9% higher from a year earlier.






































































FebJanDecNovOctSep
Headline Index











    M/M % Change-0.61.40.41.70.2-0.7
    Y/Y % Change4.5 5.0 4.5 2.2 - 2.3 - 4.9
Core Prices











    M/M % Change0.10.30.00.5-0.5-0.2
    Y/Y % Change0.91.00.91.20.71.7


10.03.17 (Source: Bureau of Labor Statistics)

Tuesday, March 16, 2010

Unemployment Jumps Most for Less Educated

Unemployment rates for all education levels have increased, but most significantly for segments of the labor force with limited education. As of February, the unemployment rate for those without a high school diploma was 10.6 percentage points above that of those with college degrees. The gap hit 10.8 percentage points in October 2009, the largest spread on record.

While the severity of the gap is alarming, the general trend is somewhat expected, since there have been declines in segments have high concentrations of lower-wage labor that generally do not require higher education credentials. These segments include new home and commercial real estate construction, some manufacturing, and auto production.

Fed Funds Rate Kept in 0 to 25 Basis Point Range; View Of Economy Generally More Upbeat

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. Generally, the Fed’s statement was more positive than prior ones. It stated that economic conditions had generally improved since its last meeting but the Fed also noted that housing starts were still at a depressed level and firms were reluctant to add to payrolls.

There was one vote against the policy statement coming from Thomas M. Hoenig. He believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.








































March 16th Meeting




January 27th Meeting



Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. 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 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.









With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
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.









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 has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
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.









In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.
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.



10.01.27 (Source: Federal Reserve)

Import Prices Fall 0.3%; Export Prices Drop 0.5%

In February, import prices fell 0.3%, following an increase of 1.3% in January. This was the first decline since last July. However, on net, it was entirely due to a 2.2% drop in petroleum prices, which had been trending upward over the prior months. Import prices, not including oil, rose 0.2%. Prices were up 11.2% from a year prior, mostly due to higher energy prices. This is a sharp turnaround since the recent trough of past July, where prices were down 19.1% year-over-year.

Export prices also fell, declining 0.5% over the month. This was the first drop since September. From a year prior, export prices were up 3.1%.





































































Feb Jan Dec Nov Oct Sep
Import Prices





    M/M % Change -0.3 1.3 0.2 1.5 0.8 0.2
    Y/Y % Change 11.2 11.5 8.6 3.4 -5.6 -12.0
Export Prices





    M/M % Change -0.5 0.7 0.7 0.8 0.0 -0.2
    Y/Y % Change 3.1 3.3 3.4 0.4 -3.6 -5.6



10.03.16 (Source: Bureau of Labor Statistics)

Housing Starts Down 5.9%, Single Family Starts Down 0.6%

In February, housing starts fell 5.9% to an annualized pace of 575,000 units. The decline however, was almost entirely due to a large drop in the volatile multi-family unit component, which fell 30.9%. Single family starts, which are far less volatile month-to-month fell by a much more modest 0.6%. Since last June, single family starts have been remarkably stable at a pace at or just below 500,000 units per month. From a year prior, single family starts were up 39.8%. Total starts were essentially flat from a year earlier, rising 0.9%.


















































Millions (SAAR)FebJanDecNovOctSep
Housing Starts 0.580.610.570.580.520.59
    M/M % Change-5.96.6-1.010.5-10.60.9
Single Family Starts 0.500.500.480.490.470.51
    M/M % Change-0.64.4-2.24.5-7.35.6


10.03.16 (Source: Census Bureau)

Friday, March 12, 2010

University of Michigan Consumer Sentiment Index Down 1.1 Points

In March, the University of Michigan Consumer Sentiment Index fell back slightly, falling 1.1 point to 72.5. This was the second consecutive, modest, monthly decline. Even so, the index is significantly higher than its low last year. The drop was about equally due to both the current conditions component and the future expectations component. The prior fell 1.0 point, while the latter fell 1.2 points.

Inflation expectations were essentially unchanged. Looking forward one year, expectations rose slightly to 2.8 percent, from 2.7 percent in February. The five-year remained at 2.8 percent.








































1966 = 100 Mar Feb Jan Dec Nov Oct
Headline Index 72.5 73.6 74.4 72.5 67.4 70.6
    Current Conditions 80.8 81.8 81.1 78.0 68.8 73.7
    Future Expectations 67.2 68.4 70.1 68.9 66.5 68.6





10.03.12 (Source: University of Michigan)

Retail Sales Rise 0.3%; Core Sales Up 0.9%

In February, retail sales rose 0.3%, following a rise of 0.1% in January. Sales growth in January were broad based with every major retail subcategory posting sales gains with the exception of auto and parts dealers. Retail sales not including the volatile autos and gasoline components rose 0.9% over the month, the strongest since November. From a year prior, sales were up 3.5%. This is a slower pace than December’s year-over-year gain of 4.3%; however, this is still a strong improvement from the negative annual rate see as recently as last October. Core sales, followed a similar patter, rising 1.5% from a year prior, down from a 2.9% gain in January.



























































Mo./ Mo. % Change Feb Jan Dec Nov Oct Sep
Total Sales 0.3 0.1 -0.2 2.0 1.2 -2.0
    Ex Autos and Gas 0.9 0.5 -0.2 1.1 0.1 0.6
Year/ Year % Change
Total Sales 3.5 4.3 5.5 2.7 -2.0 -6.1
    Ex Autos and Gas 1.5 1.9 2.3 0.9 -0.9 -1.7





10.03.12 (Source: Census Bureau)

Thursday, March 11, 2010

Household Net Worth Grew During 4th Quarter

The Federal Reserve is reporting that household net worth in the fourth quarter of 2009 increased by $682.7 billion during the fourth quarter to almost $54.18 trillion. This was the third consecutive quarterly increase in household net worth.

During the fourth quarter, assets of the household sector increased by approximately $657 billion, while liabilities fell by $25.6 billion.

The Federal Reserve reported that tangible assets of the household sector fell during the last quarter of 2009 due to continued decline in the value of real estate assets. However, the Federal Reserve Flow of Funds data shows that owner’s equity as a percentage of household real estate increased to 38.1 percent, after bottoming out at 33.5 percent during the first quarter of 2009.

Financial assets of the household sector grew by $676.8 billion during the 4th quarter to $45.11 trillion. Household assets in deposits, corporate equities, mutual fund shares, and pension fund reserves expanded during the quarter.

Friday, March 5, 2010

Consumer Credit Up for the First Time in a Year

The Federal Reserve reported that consumer credit (seasonally adjusted) in January 2010 grew for the first time in a year as non-revolving credit posted a solid increase. However, revolving credit continued to decrease.

Consumer credit grew at an annualized pace of 2.4 percent in January to $2.4563 trillion, up from a revised $2.4513 trillion in December 2009.

Revolving credit in January fell at an annual rate of 2.5 percent to $864.4 billion – although the pace of contraction slowed. Revolving credit has now fallen for 16 consecutive months and is 11.4 percent below its peak of $975.2 billion as of September 2008.

On the other hand, non-revolving credit in January grew at an annualized rate of 5 percent in January 2010, after posting annual growth rate of 3.7 percent in December 2009. As of January 2010, non-revolving credit was almost $1.6 trillion.

10.03.01 (Source: Federal Reserve)

Payroll Employment Down 36,000; Unemployment Rate Steady at 9.7 Percent

In February, payroll employment fell by 36,000. This followed a downwardly revised decline of 26,000 in January (previously -26,000). This downward revision however, was more that counteracted by an upward revision in November from a loss of 150,000 to a loss of 109,000. Though job losses are continuing, the rate of loss is clearly slowing down and modest increases in payrolls are likely to begin in coming months.

The decline in payrolls was primarily due to a loss of construction jobs, which shed 65,000 over the month. The large snow storms over the month that hit the South and East Coast likely helped drive up construction jobs losses. Service sector jobs rose by 24,000 driven by the private sector. Public sector payrolls declined by 18,000.

Despite continued job losses, the unemployment rate which is measured by a different survey, remained steady at 9.7 percent. Due to the smaller sample size of the unemployment survey, it tends to be more volatile and single month changes often are less meaningful than a multiple month trend. The labor force participation rate, which had fallen sharply for months hitting a 24 year low in December as more workers likely became discouraged rose for the second straight month by 0.1 percent. Over the past two months over 450,000 people rejoined the workforce. As payrolls begin to improve, it is likely that many discouraged workers rejoin the labor force and this will be a damper on lowering the unemployment rate.



























































Feb Jan Dec Nov Oct Sep
Payroll Change (000s) -36 -26 -109 64 -224 -225
    Goods Producing -60 -53 -54 -33 -131 -121
    Services 24 27 -55 97 -93 -104
Unemployment Rate 9.7 9.7 10.0 10.0 10.1 9.8
Labor Force Participation R. 64.8 64.7 64.6 64.9 65.0 65.1


10.03.05 (Source: Bureau of Labor Statistics)

Thursday, March 4, 2010

Labor Productivity Revised Upward to 6.9%; Unit Labor Costs Fall 5.9%

Labor productivity growth was revised upwards for the fourth quarter to 6.9% at a seasonally adjusted annualized rate. This compares to 6.2% growth previously reported. This was the third consecutive quarter where labor productivity grew at rates near or in excess of 7%. The gains occurred due to increasing output as firms also reduced their payrolls. Output rose 7.6% on an annualized basis compared to 7.2% previously reported. Before widespread hiring occurs, firms are seeking to increase output from their existing workforce. Though these past quarters of productivity growth are a positive for long term income growth, for the time being its reducing firms need to hire new workers and is helping to keep the unemployment rate up in the short run.

Labor cost per unit of output fell 5.9%. As productivity increases, there is no inflationary pressure occurring from the labor markets at this time.








































(SAAR) % Q4 2009 Q3 2009 Q2 2009 Q1 2009 Q4 2008 Q3 2008
Output Per Hour 6.9 7.8 7.6 0.9 2.2 1.1
Compensation Per Hour 0.6 -0.4 7.7 -4.2 4.5 6.0
Unit Labor Costs -5.9 -7.6 0.1 -5.0 2.2 4.9


10.03.04 (Source: Bureau of Labor Statistics)

Wednesday, March 3, 2010

Condition of the FDIC

Two years of major losses dropped the FDIC insurance fund from an all-time high of $52.4 billion going into 2008 to a deficit of $20.9 billion at the end of last year. The decline was despite $17.8 billion of premiums, including a $5.6 billion “special assessment.”

The large deficit is the result of nearly $100 billion of provisioning for insurance expenses. The FDIC predicts that bank failures will cost this much over 2009-2013 – most of this by the end of 2010. Noting the continued rise in the “Problem Bank List” mostly due to commercial real estate troubles –FDIC Chairman Sheila Bair recently forecast that there will be more bank failures this year than last (140).

However, Chairman Bair also forecasted that bank failures will peak this year, and that the insurance fund will reach a nadir in mid-year (see below). Premium assessment rates rose significantly last year and the assessment schedule will rise by three basis points again starting next year. The good news is that Chairman Bair indicated that the insurance fund is expected to recapitalize on the timeline established last September – without additional hikes of the assessment schedule or “special assessments.”



ADP Employment Report: Private Payrolls Down 20,000

In February, according to the ADP Employment Report, private sector payrolls fell by 20,000. This followed a downwardly revised decline of 60,000 over the month of January (previously a decline of 22,000). February’s drop was the smallest decline since payrolls began to fall at the start of 2008. The drop was entirely due to losses in construction sector payrolls. Manufacturing added 3,000 jobs, the first increase in over two years and services added 17,000 the second consecutive increase since following continually declines from the start of the recession. It is likely that the economy is on the verge of payroll expansion.

Of note is that the ADP estimate is likely to be quite different than the government report due out this Friday. Due to methodology differences, the large snow storms over the month that hit the east coast will likely have a significant downward effect on the government estimate and then a corresponding upward effect in the future March number. However, this factor is not significant in the ADP number.

















































Ch. in Payrolls (‘000s) Feb Jan Dec Nov Oct Sep
Total -20 -60 -149 -125 -197 -234
    Goods Producing -37 -70 -88 -93 -121 -142
        Manufacturing 3 -22 -37 -43 -76 -62
    Services 17 10 -61 -32 -55 -92


10.03.03 (Source: Automatic Data Processing)

Federal Reserve Beige Book Released

The Federal Reserve Beige Book reported that while economic activity remains at a low level, economic conditions have shown modest improvement and those improvements are more geographically spread out than in the January report.

Consumer spending was slightly higher during the last holiday season than a year earlier. Consumers were described as cautious, price sensitive, and focused on necessities, but were sometimes willing to spend on discretionary purchases. Retail inventory levels remain very lean.

Manufacturing activity has increased or held steady since the last report. Manufacturers are more optimistic about the near-term, but their spending plans remain cautious.

Although some hiring was reported, labor market conditions remained generally soft.

Toward the end of 2009, home sales increased, especially for lower-priced homes. However, home prices appeared to have changed little since the last Beige Book, and residential construction remained at low levels. Commercial real estate was still weak with rising vacancy rates and falling rents.

Loan demand continued to decline or remained weak, as credit quality continued to deteriorate. In general, there was an underutilization of lines of credit, especially commercial credit.

10.03.03 (Source: Federal Reserve)

ISM Non-Manufacturing Index Up 2.4 Points to 53.0

In February, the ISM Non-manufacturing Index rose 2.5 points to 53.0. This move placed this index significantly over the expansionary threshold of 50 for the first time since the beginning of the recession. Service sector activity has rebounded more slowly than manufacturing activity, according to the ISM indices. The business output component moved upwards by 2.6 points to 54.8. Though the employment component improved, rising 4.0 points, the level was still below the expansionary threshold, coming in at 48.6. Therefore, though output is expanding and the service sector is in recovery, employment is still yet to see improvement.




































































>50 = expansionFebJanDecNovOctSep
Headline Index53.050.549.848.450.150.1
    Business Output54.852.253.249.654.053.2
        Exports47.046.046.054.553.548.5
    Employment48.644.643.641.741.744.1
    New Orders 55.054.752.053.754.253.1
    Backlogged Orders46.045.548.048.553.551.5



10.03.03 (Source: Institute for Supply Management)

Tuesday, March 2, 2010

Why is lending not increasing if the recession is over?

Previous recessions have shown that it typically takes 13 months after the recession for business confidence to return and credit to return to pre-recession levels. This is because the risk of lending in the current economic environment is much greater today than several years ago when the economy was much stronger. Banks are actively looking for lending opportunities. Business confidence is down, however, and many businesses either do not want to take on additional debt or are not in a position to do so given weak sales. Consequently, loan demand has fallen dramatically since the start of the recession.

Because of the increased risks, credit terms are different in this environment, with higher downpayments required. In addition, loans tend to be smaller, which is consistent with diminished collateral values. These are prudent business practices and ones bank regulators expect. But it means that some projects that might have been funded when the economy was stronger may not find funding today. The NFIB recognized this, stating, “[T]he continued poor earnings and sales performance has weakened the credit worthiness of many potential borrowers. This has resulted in tougher terms and higher loan rejection rates (even with no change in lending standards).” [NFIB Small Business Economic Trends, November 2009. National Federation of Independent Business.]

Monday, March 1, 2010

ISM Manufacturing Index Fell to 56.5, Still Signaling Expansion

The Institute for Supply Management’s manufacturing index declined from 58.4 to 56.5 in February; however, remained above the expansionary threshold of 50. New orders declined from 65.9 to 59.5 after hitting a five-year high last month. Inventories increased 0.8 points to 47.3, as the speed of destocking has slowed for three consecutive months.

The gap between new orders and inventories, an indicator for future production, declined from 19.4 to 12.2 in February. The spread has been narrowing since late last year, indicating manufacturing’s expansion will slow over the next months.

The employment index, now at 56.1, reported its third consecutive increase, climbing 2.8 points further into expansionary territory.


















































>50 = expansion Feb Jan Dec Nov Oct Sep
Index 56.5 58.4 54.9 53.7 55.2 52.4
New Orders 59.5 65.9 64.8 61.5 58.5 60.8
Inventories 47.3 46.5 43.0 41.4 46.9 42.5
Employment 56.1 53.3 50.2 49.6 53.1 46.2




10.03.01 (Source: ISM)

Construction Spending Down 0.6%

Total construction spending in January fell 0.6% from December and was down 9.3% from January 2009. A 1.3% increase in residential spending was overtaken by a 2.1% decline in non-residential construction spending, pushing total private spending down 0.6%. The fall in non-residential construction was in part the result of a 4.8% decline in manufacturing and industrial structures.

Public construction fell 0.7% from its December level, a sign of continued fiscal tightening by state and local governments. Spending on highways and street construction increased 1.2%, while spending on sewage and waste disposal structures fell 3.0% and education structures remained unchanged.



























































m/m % change Jan Dec Nov Oct Sep Aug
Total -0.6 -1.2 -2.5 1.5 -1.6 -0.9
Total Private -0.6 -1.7 -2.6 2.7 -2.4 -0.5
    Residential 1.3 -2.8 -2.5 11.8 -0.6 3.1
    Non-Residential -2.1 -0.7 -2.7 -3.6 -3.7 -2.9
Total Public -0.7 -0.4 -2.2 -0.9 -0.1 -1.7



10.03.01 (Source: U.S. Census Bureau)

Personal Income Up 0.1%, Personal Consumption Up 0.5%

Personal income rose 0.1% from December to January, the slowest growth since September. The slight increase followed a downwardly revised 0.3% growth in December. Higher contributions to unemployment-related government programs in addition to declines in dividend, rental, and other asset income were drags on total income in January.

Consumption rose 0.5% in January, on a 1.8% surge in nondurable goods, with some of that growth being price related. Real spending grew 0.3% on strong durable and nondurable spending, while service spending was weak. This is the highest increase in real spending since May 2008. The increased spending was at the expense of the savings rate, which fell from 4.2% in December to 3.3% in January.

Prices rose 0.2% from the previous month, while prices excluding food and energy were flat, signaling inflation continued to be well-contained.



























































m/m % change JanDecNovOctSepAug
Personal Income0.10.30.40.30.10.3
Consumption0.50.30.50.5-0.61.3
PCE Deflator0.20.10.20.20.10.3
Core Prices0.00.10.10.20.10.1
Savings Rate, %3.34.24.14.14.23.4



10.03.01 (Source: Bureau of Economic Analysis)

Growth Revised Upward To 5.9 Percent – Growth Still Primarily Due to Inventory Accumulation

Growth in GDP for the fourth quarter was revised up slightly to 5.9 percent at an annualized rate compared to 5.7 percent first reported. The revision was due to increases in exports, inventories and business investment. This offset an upward revision to imports and a downward revision to consumption. Growth was strong in the fourth quarter; however, the bulk of the expansion was still due to inventory accumulation by businesses, which added 3.9 percent to growth. Though this adds to output, it is largely temporary in nature as final demand for goods and services have not grown as greatly. Real final sales, which excludes inventories, and therefore measures demand for US output grew by a lesser 2.0 percent annualized. Until this number grows higher, recovery will remain modest.































































































annualized % change Q4 2009 Q3 2009 Q2 2009 Q1 2009 Q4 2008 Q3 2008
Real GDP 5.9 2.2 -0.7 -6.4 -5.4 -2.7
% contribution to real GDP
    Consumption 1.2 2.0 -0.6 0.4 -2.2 -2.5
    Fixed Investment 0.8 -0.2 -1.7 -6.6 -3.3 -1.3
        Residential 0.1 0.4 -0.7 -1.3 -0.8 -0.6
        Non-Residential 0.6 -0.6 -1.0 -5.3 -2.5 -0.7
    Inventories 3.9 0.7 -1.4 -2.4 -0.6 0.3
    Government -0.2 0.6 1.3 -0.5 0.2 1.0
    Net Exports 0.3 -0.8 1.7 2.6 0.5 -0.1