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Friday, May 28, 2010

University of Michigan Consumer Sentiment Index Up 1.4 Points

In May, the University of Michigan Consumer Sentiment Index rose 1.4 points to 73.6. Confidence has essentially been unchanged since February. Though off its cyclical low of last year, this level is still quite depressed based on historical standards. All of the modest improvement in May was due to the future expectations component, which rose 2.3 points. The current conditions components of the index remained unchanged.

After remaining unchanged for three months, inflationary expectations rose. The one-year outlook jumped to 3.2% from 2.7% in April. The five-year outlook rose to 2.9% from 2.7%.



10.05.28 (Source: University of Michigan)

Personal Income Up 0.4 Percent; Consumption Unchanged; PCE Deflator Unchanged

In April, personal income grew by 0.4%, the second fastest rate in a year. Most gains in income in recent months have been driven by increases in transfer payments. However, in April, solid wage growth was behind the increase. Wages and salaries grew by 0.4%. From a year-prior, personal income was up 2.5%. Wages were up only slightly from a year earlier; however, this was still an improvement from a negative year-over-year rate of change as recently as February.

Personal consumption growth came to a halt in April remaining unchanged over the month, after months of strong growth. April ended a period of seven consecutive monthly increase. From a year-prior, consumption was up 4.6%. This change reverses the trend of the past half year where consumers were increasing their spending at a rate faster than their income growth, therefore doing so at the expense of savings. The savings rate had been trending downward hitting a low of 3.1% in March. In April, it jumped back up to 3.6%, the highest it has been since January.

As measured by the PCE deflator, prices were unchanged over the month. Therefore, real incomes and real consumption rose at the same rate as the nominal numbers, 0.4% and 0.0%, respectively. From a year prior, the PCE deflator was 2.0% higher. Therefore, on a year-ago basis, real income was up 0.5% while real consumption was 2.6% higher. The core PCE deflator, which excludes energy and food prices, rose by 0.1% over the month and was 1.2% higher than a year prior.



10.05.28 (Source: Bureau of Economic Analysis)

Thursday, May 27, 2010

GDP Growth Revised Downward to 3.0%; Consumption Main Driver of Change

First quarter real GDP growth was revised downward somewhat to 3.0% annualized from the rate of 3.2% growth that was initially reported. Most of the downward revision was due to downward revision ofconsumption expenditures. Consumption added 2.4% to GDP, rather than 2.6%, as was first reported. Inventory accumulation was also revised downward; however, government expenditures and net exports were revised upward.

Even with the revision, growth over the quarter was reasonably solid, particularly consumption. However, this is rather slow growth when compared to recoveries of past deep downturns where growth rates averaged between six and nine% for the year immediately following recession. Furthermore, a large portion of growth over the past few quarters has been due to inventory accumulation; in the first quarter 1.7% of the 3.0% growth was due to this factor. Though inventories add to growth as any other component does, the effect will prove to be temporary if final demand does not begin to pick up further. Real final sales, which removes inventory effects and therefore measures only current demand, grew by a lesser 1.3% over the quarter. This will have to accelerate before there is enough aggregate demand to drive strong job growth.




10.05.27 (Source: Bureau of Economic Analysis)

Wednesday, May 26, 2010

High Unemployment Pushes Bankruptcy Filings Up 4% in 1st Quarter

According to the U.S. Bankruptcy Courts, first quarter bankruptcy filings were up 4% from the fourth quarter and 17% from a year earlier. In March, there were roughly 162,000 filings, up 32% from a year earlier. During the last year, there were on average 127,666 bankruptcies per month.


Despite rebounding sales and increasing consumer confidence, high unemployment remains a drag on widespread economic recovery. Naturally, when the economy enters a period with high levels of jobs loss, the volume of bankruptcy filings also rises. Historical data on bankruptcy filings and unemployment rates were used to confirm the relationship. The positive slope in the graph shows the correlation between states that have a high unemployment rate and high per capita bankruptcy filings.


Further analysis was performed to determine if large drops in state home price values were correlated with states that had high levels of bankruptcy filings per capita. The results of the analysis were inconclusive. But based on unemployment data tests, continuing high-single digit rates of unemployment will mean growing bankruptcies.

Tuesday, May 25, 2010

Housing Support Abating, Prices Down 0.5%

According to the twenty-city Case-Shiller Index, existing home prices fell from February to March by 0.5% on a non-seasonally adjusted basis. This was the sixth consecutive decline in both the ten-city and twenty-city indices, but were slower paces of decline than recorded in February. Support for the housing market is abating as the extended tax credit comes to an end and waves of foreclosures depress prices. From a year prior, the ten-city index was up 3.1% and the twenty-city index was up 2.3%. This was the second time the indices were positive year-over-year since 2006. From its peak in 2006, home prices have still fallen 30.6%, according to the broader index. Home prices are expected to fall through this year, yet at a more moderate rate than experienced in previous years of this downward cycle.


Monday, May 24, 2010

Tax Credit Pushes Existing Home Sales Up 7.6%

Existing home sales in April rose 7.6% to an annualized 5.77 million units, their fastest pace since November, when the original first-time home buyer tax credit expired. Aided by the extended tax credit, April registered the second consecutive month-over-month increase in sales of at least 7%, following three months of declines. To qualify for the tax credit, buyers must have contracted to purchase a home by the end of April and completed the purchase by the end of June. From a year prior, sales were up 23%.

The listings of homes available for sale increased for the third consecutive month, rising 12% from March to April, the largest gain since April 2000. The rise in listings offset the increased sales, pushing the months supply of inventory from 8.1 to 8.4. Aside from the tax credit pulling more properties on the market, listings of distressed properties may also be contributing to the rise. Over the month, the median sales price rose 2.1% to $173,100. From a year earlier, prices were up 4.0%.

Friday, May 21, 2010

April’s FOMC Minutes on Strategies to Unwind Fed’s Balance Sheet

Although the Federal Open Market Committee (FOMC) made no decision about its longer-term strategy of asset sales and redemptions, the minutes of the April 27-28 FOMC meeting provide some interesting insights into the thinking of the FOMC regarding the future contraction of the Federal Reserve’s balance sheet. The FOMC for now has agreed to continue the current approach of allowing all maturing agency debt and all prepayments of agency mortgage-backed securities (MBS) to be redeemed without replacement while rolling over all maturing Treasury securities.



However, according to the minutes, “most participants expressed a preference for strategies that would eventually entail sales of agency debt and MBS in order to return the size and composition of the Federal Reserve’s balance sheet to a more normal configuration more quickly than would be accomplished by simply letting MBS and agency securities run off.” From March to the end of 2011, the New York Fed projected that more than $200 billion of the agency debt and MBS in its portfolio would mature or be prepaid. Further, $140 billion of Treasury securities are set to mature between March and 2011. Yet, some FOMC members believe the pace of unwinding the Fed’s balance sheet should be accelerated. In general, FOMC participants felt that the sales of agency debt and MBS should be communicated in advance and be conducted at a gradual pace, but would be adjusted to changing economic and financial conditions.

There was a wide range of views regarding asset sales strategies. Most felt any asset sales should wait for some time with a majority believing it should come some time after the FOMC’s first increase in its target short-term interest rate. This approach would delay any asset sales until after the economic recovery was on firm footing and would keep short-term interest rates as the key policy tool for monetary policy.

Others supported an approach where a general schedule for asset sales would be announced soon. They did not believe that the sale of assets needed to be tied increase in its target short-term interest rate.

A few participants at the FOMC meeting wanted asset sales to begin soon. Their rationale was that earlier sales of assets would cause a quicker normalization in the size and composition of the Federal Reserve’s balance sheet. This would partially unwind the unconventional policy stimulus that was put in place during the financial crisis. They also wanted to see this done before conventional policy firming got underway.

While communicating the pace of asset sales would limit market disruptions, views differed on the pace of sales. Most believed that the agency debt and MBS held in the portfolio should be sold at a gradual pace and that the sales should be completed about five years after they began. A possible variant of this strategy would be to start sales slowly and increase the pace over time. This would give markets time to adjust.

A couple of participants thought the pace of sales should be faster, completed in about 3 years. They did not believe the faster pace of sales would put undue strain on the financial markets. They viewed a more rapid contraction in the Fed’s balance sheet would lower the probability “that the elevated size of the Federal Reserve’s balance sheet and the associated high level of reserve balances could raise inflation expectations and inflation beyond levels consistent with price stability or could generate excessive growth of credit when the economy and banking system recover more fully.”

As for Treasury securities, the FOMC saw advantages and disadvantages associated with not rolling over the debt as it matures. Redeeming Treasury securities would contribute to a more expeditious normalization of the size of the balance sheet and the quantity of reserves. However, it could put upward pressure on interest rates and work against the objective of returning the Systems Open Market Account back to strictly Treasury debt.

Thursday, May 20, 2010

FDIC: Banking Industry Earnings Show Signs of Recovery in First Quarter

In the first quarter, the FDIC’s Quarterly Banking Profile reported that the industry was showing “signs of recovery.” New accounting rules has a significant effect on the income and balance sheets of some institutions; however, the industry as a whole showed improvement. Earnings rose to $18.1 billion over the quarter. While still low by historical standards, this was a large improvement from the $5.6 billion the industry earned in the first quarter 2009, and was the highest since the first quarter 2008. The largest year-over-year increases occurred at the biggest banks, but a majority of institutions (52.2%) reported net income growth. This is the highest percentage of institutions reporting increased quarterly earnings in more than three years (since third quarter 2006).



10.05.20 (Source: Federal Deposit Insurance Corporation)

The FDIC Expects Bank Failures to Peak this Year

Through May 14, 72 banks have failed in 2010, already over half of last year’s total of 140. April was a troubled month; with large failures in Illinois and Puerto Rico, 23 banks with $39 billion of assets failed – up 171% from March. By this point in the past two years, there were just 36 and 4 failures, respectively. The assets of failed bank have totaled $66 billion so far this year, compared to $34 billion at this point in 2009 and $2 billion in 2008.



The 2009-2010 spike in failures paralleled the rise in troubled loans in the banking industry. The noncurrent loan rate rose from 1.42% in 2007 to 5.37% at the end of 2009. In past periods of bank problems, nonperforming loans have peaked in the third year of the cycle. There are indications that the current cycle may follow that same pattern and crest sometime this year. The increase in noncurrent loans for the first quarter of 2009 was the smallest in three years.

Bank failures should follow this cycle as well. FDIC chairman Sheila Bair said in May that the current bank failure cycle is expected to peak in 2010. The peak is expected to be far lower than the 531-failure zenith in 1989. Total failures for this cycle will also be far lower than the 2,035 failures from 1986 to 1994 cycle.


The FDIC's cost of bank failures is also expected to peak in 2010, perhaps totaling slightly over the $36 billion in 2009. Failure costs have been concentrated in specific failures. In 2008, the IndyMac failure was responsible for over 60% of the $18 billion total. Seven failures in 2009 contributed half of the year’s $37 billion total. The same is true for this year, with five failures accounting for almost half of the aggregate cost so far. Last September, FDIC staff projected $100 billion in failure costs through 2013, with the bulk concentrated in 2009 and 2010; the total so far is almost $54 billion. The FDIC will update the failure cost projection this summer.

Wednesday, May 19, 2010

CPI Falls for First Time in Over Year

In April, the Consumer Price Index fell 0.1%. This was the first decline since March of 2009. The index was dragged down by declining energy prices, which fell 1.4% over the month. Still, even without the energy component, there was little upward price pressure existent in April. The core index, which excludes prices of energy and food products, was unchanged for a second straight month. From a year prior, the CPI was 2.2% higher. This was down from a recent high of 2.8% in December; however, it is up from negative year-over-year changes as recently as last October. The core CPI was up by a lesser 1.0% from a year prior, a new cyclical low. The growth in core prices has continued to trend downward on a year-over-year basis, indicating that at least currently, little inflationary pressure exists.



10.05.19 (Source: Bureau of Labor Statistics)

Tuesday, May 18, 2010

PPI: Headline Down 0.1%; Core Prices Up 0.2%

In April, the Producer Price Index for finished goods fell 0.1 percent, following a jump of 0.7 percent in March. The index has been quite volatile over the past few months largely due to changes in energy prices. The core index, which excludes prices of food and energy products, rose 0.2 percent over the month. From a year prior, the topline index was 5.4 percent higher, down slightly from a 6.1 percent year-over-year increase in March. The core index was up by a much smaller 1.0 percent from a year earlier.





10.05.18 (Source: Bureau of Labor Statistics)

Housing Starts Up 5.8%, Single Family Starts Up 10.2%

In April, housing starts rose 5.8 percent to an annualized pace of 672,000 units. This is a rate not seen since 2008. The increase was driven by a large surge in starts of single-family units, which jumped 10.2 percent. The far more volatile multi-family component fell by 18.6 percent after a large jump of over 22 percent in March. From a year prior, single family starts were up 52.8 percent. Total starts were up 40.3 percent.



Though total starts showed a large increase in April, the rise may be temporary. New building permits, which tend to lead future starts, fell by 11.5 percent.



10.05.18 (Source: Census Bureau)

SF Fed: Current Recovery Stronger Than Past Two Recoveries

An article by Weidner and Williams in the Federal Reserve Bank of San Francisco Letters states that the recovery from the most recent recession is likely to be faster than from the two previous recessions, but slower than earlier V-shaped recoveries.

The paper cites three major factors that will affect the growth rate of real GDP coming out of a recession – the degree of slack in the economy, the stance of monetary policy, and the trend growth rate of potential GDP. The greater the degree of economic slack, the more accommodative the stance of monetary policy, and the higher the rate of growth in potential output would contribute to a stronger pace of economic recovery coming out of a recession.

During the post-war period prior to 1990, the U.S. economy tended to bounce back relatively briskly from downturns. During the first 8 quarters after the economic trough, pent-up demand added about 1 percent to real GDP growth, monetary policy about .9 percent to real GDP, and potential output growth 3.6 percent.

However, during the recoveries from the last two recessions, these three factors made smaller contributions to real GDP growth. That is why these recoveries had a U-shaped, instead of a V-shape that was associated with earlier recoveries.

Weidner and Williams estimate that the current recovery will be stronger than the past two recoveries; because there is greater level of economic slack and pent-up demand in the system and monetary policy is very accommodative. However, the large unknown is potential output growth. Weidner and Williams are modeling potential output growth’s addition to real GDP growth of 2.1 percent; but the Congressional Budget Office is estimated that its contribution to real GDP growth will be closer to 1.6 percent. If the latter estimate holds, the recovery will be more U-shaped, while the former estimate will point to a more V-shaped expansion.

Friday, May 14, 2010

University of Michigan Consumer Sentiment Index Up 1.1 Points

In May, the University of Michigan Consumer Sentiment Index rose 1.1 points to 73.3. Confidence has essentially been unchanged since February. Though off its cyclical low of last year, this level is still quite depressed based on historical standards. Most of the modest improvement in May was due to the future expectations component, which rose 1.8 points. The current conditions components of the index rose only 0.1 point.

After remaining unchanged for three months, inflationary expectations rose. The one-year outlook jumped to 3.1% from 2.7 in April. The five-year outlook rose to 2.9% from 2.7%.



10.05.14 (Source: University of Michigan)

Industrial Production Up 0.8%, Manufacturing Up 1.0%

In April, industrial production rose 0.8 percent. For the third consecutive month, a drop in utility output dragged down the top line number. Utilities production fell 1.3 percent over the month, following a large drop of 6.1 percent in March.

Manufacturing output continued to expand, increasing by 1.0 percent for the second straight month. Excluding auto manufacturing, output grew at a higher 1.2 percent. The manufacturing sector remains in a phase of strong recovery.

The capacity utilization rate rose for the eighth consecutive month, increasing by 0.6 point to 73.7 percent. There still remains heavy productive slack; however, an increasing utilization rate is an encouraging step in the right direction as it will have to continue to increase in order to dry significant payroll growth expansion.




10.05.14 (Source: Federal Reserve)

Retail Sales Rise 0.4%; Core Sales Also Up 0.4%

In April, retail sales rose 0.4% following a large rise of 2.1% in March. Though this is solid retail sales growth, the strength was concentrated in only a few retail categories rather than the broad based growth experienced in recent months. Only about half of retail sector subcategories posted sales growth. The total increase was heavily led by a strong surge in sales at building supply stores, which rose 6.8%. This was the second continuous large increase. Core sales, which do not include the volatile autos and gasoline components, rose by the same 0.4% as the top line number.

From a year prior, sales were up 8.8%. This is a new cyclical high and a turnaround from a negative year-over-year rate as recently as last October. Core sales followed a similar pattern, and rose 5.1% from a year prior.




10.05.14 (Source: Census Bureau)

Thursday, May 13, 2010

How Could the Greek Debt Turmoil Affect Us?

Greece has a tiny economy compared to the U.S., and is not a major trading partner. Nonetheless, there are reasons for concern for a backlash on the U.S. economy, despite concerted efforts by the European Union, Federal Reserve, and other major central banks to stabilize the situation.

In the short run, a global “flight to safety” is driving down interest rates on U.S. Treasury securities and raising the value of the dollar. A stronger dollar makes American goods more expensive abroad and hurts our exports. Moreover, the turmoil and necessary fiscal restraint in Greece and other over-stretched European nations will likely slow European economic growth, further reducing purchases from the States. The Euro area in total accounts for over 15% of American exports. The turmoil could lead to a measureable reduction in American exports, and thus slow economic growth here.

While rates on U.S. Treasuries decline, the European financial distress is driving LIBOR higher. With much short-term borrowing in the U.S. indexed to LIBOR, the resulting uptick in interest rates will hurt American businesses.

In the long run, the potential default of Greek debt has raised interest in the global financial markets for fiscal discipline in other nations, including the U.S. So far, Treasury rates have not responded, but the risk is there. The result in the U.S. could be either a tighter federal budget or higher interest rates, either of which would be a drag on our economy.

Import Prices Up 0.9%; Export Prices Up 1.2%

In April, import prices rose 0.9%, following an increase of 0.5% in March. The increase was primarily driven by higher petroleum prices. Still, non-petroleum imports still rose in price significantly, increasing 0.3% over the month. From a year prior, petroleum import prices were up 58.7%, while total import prices were up 11.1%. Excluding energy products, prices were up by a lesser 3.2% on a year-ago basis; however, this is still a significant acceleration from a negative year-over-year change as recently as last November.

Export prices rose 1.2% over the month. From a year prior, export prices were up 5.7%.



10.05.13 (Source: Bureau of Labor Statistics)

Wednesday, May 12, 2010

Trade Deficit Widens 2.5%; Strong Increases in Both Exports and Imports

In March, the trade deficit widened by 2.5% to a monthly pace of $40.4 billion. Though the pace has been choppy in recent months, the trade deficit has been trending upwards for most of the past year. Exports rose 3.2% over the month while imports grew 3.1%. Because imports were starting from a larger base than exports, the smaller percentage increases still resulted in a higher trade deficit. Trade in general has been recovering strongly over the past year. March’s increase was particularly strong. This is indicative of continuing economic recovery.



10.05.12 (Source: Census Bureau)

ATM Price Controls, A Bad Idea For Consumers

An amendment by Senator Harkin (D-Iowa) would cap ATM fees at 50 cents per transaction. This amendment would result in fewer choices for customers. It costs money to provide ATMs, and those costs have to be recovered in order to continue making the service available. ATM’s are costly – a full-service ATM may cost more than $50,000 per machine when it includes customer-friendly features like check imaging for deposits. Maintenance costs, particularly in remote areas, are considerable and include the cost of delivering cash and removing deposits, telecommunications costs, rental for space, and the costs related to security and compliance.

Most people never pay ATM fees, as they can use their own bank’s ATM for free. It is the customers that have no relationship with the bank or the nonbank ATM owner – yet want access to cash wherever they are in the world – that pay a small fee for this very valuable service. Without the fee, there would simply be far fewer ATMs in existence, since providing these machines as a free convenience only for customers would be too expensive for wide deployment. The result would be that the banks’ customers and, more importantly, all depositors everywhere, would have fewer options to obtain cash.

The importance of ATM fees is obvious when looking at the growth of ATMs after surcharging was allowed in 1996. With fees, the entire market opened up in order to provide convenient access to any depositor. Now, 68% of all ATMs are at off-branch locations, many provided by nonbanks. Clearly, customers wanted access to cash and were willing to pay for it. As a result, the number of ATMs has more than tripled to a total of 425,010, as many as ¼ of these provided by nonbanks. The market has matured at the current rates, and competition has intensified among bank and non-bank ATM owners, which has led to more services at reasonable prices.



The Harkin amendment would freeze expansion – hurting manufacturers of the machines and the employees that make them – and cause the closing of ATMs, many in rural areas. The Harkin amendment would also hurt many nonbank ATM providers as well, including small retail and convenience stores that lease space in their shops for these machines and rely on them to facilitate sales. Only those ATMs with the highest usage could generate enough revenue to be worth the expense of maintaining. Others would simply disappear.

Finally, it is important to note that consumers are in complete control of ATM fees. Currently, ATMs must advise consumers of any fee prior to the transaction, and consumers have the opportunity to discontinue the withdrawal if they wish do not wish to pay the fee. According to a national telephone survey of 1,000 consumers in August 2009, 56% said they paid no banks fees at all – including ATM fees. Another 14% said they paid $3 or less per month for any type of bank fees.

We should not turn back the clock. Price controls have failed in the past; price controls on ATMs would give consumers fewer choices, inhibit innovation, put a halt to future ATM production, and would shut down thousands of ATMs.

See our one-pager on ATM price controls by clicking here.

Friday, May 7, 2010

Payroll Employment Up 290,000; Unemployment Rate Jumps Up to 9.9%

In April, payroll employment rose by 290,000. This followed upward revisions for the months of February and March that totaled roughly 110,000 addition jobs. There have now been four consecutive months of expanding payrolls, though only two months of significant gains.



The improvement in payrolls was generally broad-based, and significant improvements in private sector employment growth drove the top line number. Private firms added 231,000 jobs over the month. Goods producing firms added 65,000, while services contributed the remainder.

Despite the payroll number gain, the unemployment rate, which is measured by a different survey, increased to 9.9 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. In addition, 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 fourth straight month. Over the past four months over 1.6 million people have joined the workforce, with over 800,000 of them doing so in April. As payrolls continue to improve, it is likely that many discouraged workers will rejoin the labor force and this will continue to be a damper on lowering the unemployment rate.



10.05.07 (Source: Bureau of Labor Statistics)

Tuesday, May 4, 2010

Bank Tax a Bad Idea: Oral Statement in Senate Finance

I will be giving testimony in the Senate Finance Committee shortly. What follows is my oral statement. The full written statement can be downloaded here. You can see it live shortly on the Senate Finance Web site.

There is no question that the banking industry – indeed, the entire country – benefited from the extraordinary actions taken in the fall of 2008. It was a time of considerable stress and required decisive action to stop the growing anxiety and uncertainty in markets worldwide. The programs implemented to deal with the crisis, however, were not well articulated, and often changed as new issues arose.

This was particularly true of TARP, which was originally, as its name implied, for the purchase of troubled assets. In a matter of days after enactment, everything changed and the policy shifted to putting capital in healthy, viable banks under the Capital Purchase Program. The fact that this was a program for generally healthy banks – and one that promised a significant return to the government – was lost on the public and often mischaracterized.

As the economic recession took hold, the use of TARP funds expanded well beyond providing capital to the banking industry and became a ready source of funds for dealing with the bankruptcies of non-banks, including General Motors, Chrysler, and AIG. It is the non-banking part of TARP where the losses are concentrated. The CBO, in response to your questions Senator Grassley, acknowledged that “For the most part, the firms paying the fee would not be those that are directly responsible for losses realized by the TARP.”

Had the TARP been limited to the banking industry, there would be no losses on that program. President Obama acknowledged this last December when he said that “…assistance to banks, once thought to cost the taxpayers untold billions is on track to actually reap billions in profit for the taxpaying public.” Treasury has already received $19 billion in dividends and warrant proceeds from banks and earned an 8.5% profit for taxpayers – a very good return by any measure.

Besides the unfairness to pay for losses outside the banking industry, the bank tax proposed would have significant unintended consequences. The proposed tax of $90 to $117 billion means that $90 to $117 billion cannot be used directly for lending. But even that does not begin to capture the impact on lending as $1 dollar in capital supports up to $10 dollars of new loans – thus the total impact could well be nearly $1 trillion in foregone credit.

Large banks are, of course, directly impacted by this large bank tax. But the tax will have a broader impact on smaller banks as well. Because the proposed tax will affect how large banks fund themselves, it will inevitably alter the economics of all bank-funding markets, including the deposit market, the federal funds market, the pricing of Federal Home Loan Bank advances, and the short-term Repo market – which will raise the cost of funding loans for community banks. Ultimately, it is the owners and borrowers – particularly small business borrowers who are often financed by local community banks – that end up paying for the tax.

There is a broader issue that worries community banks: Many small banks believe that once the precedent is set to assess an additional tax on large banks, it is only a matter of time before the tax is spread to other smaller banks.

Finally, it is worth noting that the estimates of losses on TARP continue to decline. This is the reason why the law requires a report on TARP losses in 2013, so that there would be a clearer picture of the magnitude of losses and the source of those losses. It is certainly too soon to know the extent of losses from the auto companies or AIG, which is where the current losses are concentrated.

Given the continual downward revisions in expected losses, any discussion of repayment is premature. In fact, implementing such a tax now would likely lead to a greater withdrawal of resources – in a shorter period of time – than is appropriate or prudent, particularly given the anemic state of the economy.

For my full written testimony, click here.

Fed: Business Loan Demand Continues to Weaken As Banks Cease Tightening of Credit Standards

The Federal Reserve’s April Senior Loan Officer Survey highlighted two trends in the business loan market: continuing weak demand and an end to the tightening of lending standards. Net business loan demand continued rebounding from the lows of early 2009 on signs of a widespread business rebound. However, net demand remained negative in the April survey, indicating a majority of firms still experienced declining demand. Survey results mirrored comments from 1Q earnings calls, which described signs of stabilization and the potential for future increases in business credit line utilization. Businesses’ own reductions in credit line borrowings were the largest source of loan shrinkage during this cycle. Business loan demand is nearing the corner, but has yet to make the turn.



The net percentage of banks tightening lending standards for business loans continued declining in April. The January survey noted the first net easing of business loan standards to large and medium firms; this April survey showed a slight increase in the share of firms that had eased standards. This was the first time since 2006 that the survey has reported two consecutive quarters of banks easing standards for this loan category. Banks cited increased competition from both other banks and nonbank credit sources, as well as either a more favorable or less uncertain economic outlook as reasons for changes in lending terms. Large institutions were responsible for the eased standards, as none of the smaller banks, which composed half of the respondent panel, indicated eased standards over the past quarter. Lending standards for smaller borrowers were essentially unchanged.

Monday, May 3, 2010

ISM Manufacturing Index Up 0.8 Point to 60.4

In April, the Institute for Supply Management's Manufacturing Index rose 0.8 point to 60.4. The increase put the index at a new cyclical high and was at a level not seen since 2003. This was the ninth consecutive month where the index was above 50, indicating manufacturing activity expansion. The recovery of manufacturing is continuing to accelerate. The production component jumped 5.8 points to 66.9. The new orders component also improved, increasing 4.2 points to 65.7. Though at a lower level, the employment component joined in the increase, rising 3.4 points to 58.5. However, the inventories component fell back below the expansionary threshold to 49.4, indicating perhaps that the inventory realignment of the past couple quarters may be coming to an end.


Personal Income Up 0.3%; Consumption Up 0.6%; PCE Deflator Up 0.1%

In March, personal income grew by 0.3%. The increase was led by increased transfer payments. Wages and salaries grew by a lesser 0.2%. From a year-prior, incomes were up 3.0%, a stark turnaround from a negative year-over-year change as recently as last December. However, most of this increase was due to transfer payments. Non-transfer payment income was up only slightly on a year-ago basis.

Personal consumption growth outpaced income growth in March, rising 0.6%. This is solid consumption growth and was the seventh consecutive increase. From a year-prior, consumption was up 4.5%. Consumers in recent months have been increasing their spending at faster rates than their incomes. Therefore, the savings rate has trended downward, now sitting at 2.7%. This is down from a recent high of 5.9% in May of 2009 and 4.0% as recently as December. The ability for consumers to expand their consumption faster than the rate of income growth cannot be sustained for long. At some point, either income growth will have to become more robust or the resurgence of the consumer in recent months will be short lived.



As measured by the PCE deflator prices rose by 0.1% over the month. Therefore, real incomes rose by 0.2% and real consumption rose by 0.5% , From a year prior, the PCE deflator rose 2.0 percent. As recently as September, the year-over-year change had been negative. Therefore, on a year-ago basis, real income was up 1.0% while real consumption was 2.5% higher. The core PCE deflator, which excludes energy and food prices, also rose by 0.1% over the month and was 1.3% higher from a year prior.



10.05.03 (Source: Bureau of Economic Analysis)

Construction Spending Up 0.2%, Driven By Public Sector Spending

In March, new construction spending reversed a four month period of declines, rising 0.2% over the month. The increase, however, was entirely due on net to an increase in public construction spending, which rose 2.3% over the month. This rise comes after months of declines as local and state government budgets have been tight. From a year prior, public spending was down 6.3%.

Residential spending, which has been volatile in recent months, fell 1.1%. However, from a year prior, spending was up 1.2%. The rate of spending though still remains at a historically low level. Private non-residential spending also fell over the month, declining 0.7%. From a year earlier, expenditures were down 25.5%.



10.05.03 (Source: Census Bureau)

March Housing and Mortgage Market Trend Sheet Now Available

The Housing and Mortgage Market Trend Sheet, located in the "OCE Documents of Interest" column at the right, is now updated with March figures. The trend sheet includes sales, pricing, construction, and delinquency data.

For the March update, mortgage trends from the Federal Reserve's Senior Loan Officer Survey have been added.