University of Michigan Consumer Confidence Down 0.5 Point

In October, the University of Michigan Consumer Sentiment Index fell 0.5 point to 67.7. The decline leaves the index at its lowest level since August 2009. Confidence levels remain very low. The weakening in October was entirely due to worsening in the current conditions component, which fell 3.0 points. In contrast, the future expectations component of the index rose by 1.0 point.

Short term inflationary expectations rose significantly. The one-year outlook rose to 2.7% from 2.2% in September. The five-year outlook rose 0.1% to 2.8%.

1966 = 100	Oct	Sep	Aug	Jul	Jun	May
Headline Index	67.7	68.2	68.9	67.8	76	73.6
Current Conditions	76.6	79.6	78.3	76.5	85.6	81
Future Expectations	61.9	60.9	62.9	62.3	69.8	68.8

10.10.26(Source: University of Michigan)

Q3 Real GDP Grows 2.0% Annualized

In the third quarter, real GDP grew at an annualized pace of 2.0 percent. This was a slightly faster pace of growth than in the second quarter, where GDP grew 1.7 percent. However, this pace is still only modest and not brisk enough to drive down unemployment. Much of the growth over the quarter was due to the continuing expansion of inventories on the part of businesses. Inventory accumulation accounted for 1.4 points of growth. This is somewhat troubling, because inventory adjustments are largely temporary. Real final sales, which measures the level of current demand, rose by 0.6 percent annualized.

The consumer continued to show improvement over the quarter. Consumption added 1.8 percent to growth. Though still modest, this was the largest contribution since before the recession began. What held growth back over the quarter was a sharp deceleration in investment. Housing investment, which had added to growth in Q2, took 0.8 point off of growth in Q3. Furthermore, non-residential investment slowed considerably, adding 0.9 point to growth compared to 1.5 points in Q2. In addition, net-exports continued to be a drag, shedding 2.0 percent off of growth. The economy is growing and consumers are becoming healthier; however, the economy is still expanding at too slow of a pace to create large amounts of job growth.

annualized % change	Q3 2010	Q2 2010	Q1 2010	Q4 2009	Q3 2009	Q2 2009
Real GDP	2.0	1.7	3.7	5.0	1.6	-0.7
% contribution to real GDP
Consumption	1.8	1.5	1.3	0.7	1.4	-1.1
Fixed Investment	0.1	2.1	0.4	-0.1	0.1	-1.3
Residential	-0.8	0.6	-0.3	0.0	0.3	-0.5
Non-Residential	0.9	1.5	0.7	-0.1	-0.1	-0.7
Inventories	1.4	0.8	2.6	2.8	1.1	-1.0
Government	0.7	0.8	-0.3	-0.3	0.3	1.2
Net Exports	-2.0	-3.5	-0.3	1.9	-1.4	1.5

10.10.26(Source: Bureau of Economic Analysis)

Consumers Pay Down Debt in Mortgage Refinancings

Consumers continue to take steps to improve balance sheets by shedding debt burdens. One-third of homeowners who refinanced during the third quarter lowered their principal by paying-in additional money at closing, according the Freddie Mac’s latest refinance analysis. It was the second highest cash-in share since Freddie began keeping records on refinancing patterns in 1985.

Frank Nothaft, Freddie Mac vice president and chief economist, commented "When rates fall to new lows we typically see more ‘rate and term’ refinancers, who are looking only to reduce their interest payments, and relatively fewer cash-out borrowers. But now we’re also seeing a very large share of borrowers reduce their mortgage debt when they refinance. Consumer debt across the board is down since the start of the recession, with non-mortgage consumer debt falling more than 5% since 2008, according to the Fed." (emphasis added).

Cash-out borrowers, those that increased their loan balance by at least 5%, represented 18% of all refinance loans – the lowest percentage since Freddie began the analysis. Freddie officials said the main causes of the decline in cash-out refinancing were reduced home prices, tighter underwriting standards for loan-to-value ratios, and borrowers’ desire to pay down debt.

Read Freddie Mac's full report.

Case-Shiller: Existing Home Prices Fall 0.2%

According to the twenty-city Case-Shiller Index, existing home prices fell in August by 0.2% on a non-seasonally adjusted basis. The ten-metro area index fell by a lesser 0.1%. This was the first decline in prices since March.

Prices have shown a modest level of softening in recent months as the effects of the home buyer tax credit tapered off. Of the twenty metro areas, only Las Vegas, Detroit, New York and Washington saw price appreciation over the month. From a year prior, the ten-city index was up 2.6% and the twenty-city index was up 1.7%.

	Aug	Jul	Jun	May	Apr	Mar
10 City Index
M/M % Change	-0.1	0.8	1.0	1.3	0.7	-0.4
Y/Y % Change	2.6	4.1	5.0	5.4	4.6	3.1
20 City Index
M/M % Change	-0.2	0.6	1.0	1.3	0.9	-0.5
Y/Y % Change	1.7	3.2	4.2	4.6	3.8	2.3

10.10.26 (Source: Standard and Poors)

Existing Home Sales Rise 10.0%; Sales Prices Fall 3.3%

In September, existing home sales continued their rebound for the second month following a 27% plunge in July. Sales rose 10.0% to a pace of 4.53 million annualized units. Sales have been volatile in recent months. Sales were boosted in the spring due to the homebuyer tax credit. When the credit expires, sales plunged. Now, sales are beginning to recover, though they are still at a pace lower than the pre-credit surge. From a year-prior, sales were down 19%.

With the increase in sales over the month, the months supply of inventory fell to 10.7 from 12.0. Though this is an improvement, it is still above the ratio of most of the past year. Long term, the historical normal is around 5 months of inventory. Ratios well above this level are historically correlated with short term price declines. Until the sales pace increases and/or the supply of inventory gets further worked off, price stability is unlikely. In September, the median sales price fell 3.3% to $171,700. This was the third month of price declines. From a year earlier, prices were down 2.4%.

	Sep	Aug	Jul	Jun	May	Apr
Sales (mil. annual.)	4.53	4.12	3.84	5.26	5.66	5.79
M/M % Change	10.0	7.3	-27	-7.1	-2.2	8.0
Med. Price (‘000s)	$171.7	$177.5	$182.1	$183.0	$174.6	$172.3
M/M % Change	-3.3	-2.5	-0.5	4.8	1.3	1.6
Months Supply	10.7	12	12.5	8.9	8.3	8.4

10.10.25 (Source: National Association of Realtors)

FDIC Proposes Changes to the Deposit Insurance Fund, Assessments, & Dividends

The FDIC board unanimously adopted a revised Deposit Insurance Fund Restoration Plan and issued notice of proposed rulemaking (NPR) that establishes a higher reserve ratio for the fund and creates a scaled assessment rate schedule in lieu of the traditional dividend policy. The NPR is out for a 30-day comment period.

There are some important changes being considered:

• The FDIC revoked its planned increase in premium rates at year-end. This is very appropriate given the downward revision in bank failure costs and the extra time Congress has allowed to rebuild the fund. It also keeps money in banks’ communities where it can be used to help rebuild the economy. Given the expected growth of the assessment base, it means that the banks will have $2.5 billion next year – and every year as the fund is recapitalized – that could now be used in their communities rather than being paid as additional premiums to the FDIC. Simply put, the FDIC’s decision to forego the premium increase means that banks will have $2.5 billion every year that can now be used for loans in their communities.
• The FDIC proposes a system with steady premiums to build the fund to a higher level. I have no disagreement with the concept as the high rates paid by banks over the last several years have made it harder to provide needed credit. This issue will be what the appropriate long-term level should be. There needs to be a balance that assures the FDIC has the resources necessary to meet future bank failures but not an excessive amount of funding that takes resources out of communities.
• Missing from the FDIC’s analysis is the impact of the Dodd-Frank Act and the higher capital levels already being put into place by regulators. These are important in determining what size of fund is truly needed and together they argue for a lower long-term target than would be needed in the absence of these changes.

Here are the details of what the FDIC has proposed:

Restoration Plan
The FDIC reported that bank failure loses from 2010 to 2014 are expected to be $52 billion, down from June’s $60 billion projection. Given these lower loss projections, the reserve ratio could reach 1.15% by the end of 2018 even without the three basis point uniform increase in rates presently scheduled to take effect in January 2011. Further, the fund is expected to reach 1.35% by September 30, 2020, the minimum provided for in the Dodd-Frank Act. In light of these projections, today’s proposal eliminates the three basis point increase in January 2011. This saves the industry an estimated $2.5 billion annually.



The Dodd-Frank Act mandates that banks over $10 billion in assets pay for the fund’s growth from 1.15% to 1.35%. The FDIC will propose details of the payment structure sometime next year; however, it is expected that banks under the threshold will pay some assessment premium during this period.

NPR: Fund Target, Assessment Rates, & Dividends
Today’s proposal calls for a reserve ratio of at least 2% and would allow for an average long-term assessment rate of about 8.5 basis points. At 2%, the Deposit Insurance Fund would be $109 billion using June 30, 2010 data. At 2.5%, the fund would be $136 billion.

The Dodd-Frank Act gives the FDIC discretion to provide dividends after 1.50% of insured deposits. The NPR proposed that the dividends not be used, but rather that a lower assessment rate be applied to control the growth of the fund. Using lower premiums may have a more direct and predictable benefit, but dividends can also be an important tool to prevent the fund from reaching excessive levels.

The proposal would lower the average effective assessment rates from their current elevated levels to an average 8.5 basis points when the reserve ratio reaches 1.15%. When the reserve ratio reaches 2.0%, effective assessment rates would be lowered about 25%. When the fund reaches 2.5%, the effective assessment rates would be lowered 15% further, or 50% below the initial 8.5 basis point average.



The ABA is gathering insight from bankers on the proposal for a comment letter. Contact ABA’s Rob Strand with your comments.
Read the FDIC proposal here.

Housing Starts Rise 0.3%, Single Family Starts Up 4.4%

In September, housing starts continued to rise off of their recent lows of the early summer, increasing by 0.3%. This brings the annualized sales pace to 610,000 units, the highest level since April. As with housing activity in general, housing starts have been very volatile over the past year due to the effects of the homebuyer tax credit. Starts rose in the early part of the year through April, then fell off quite heavily in the months following. August began a rebound that continued through September. Starts were up 4.1% from a year prior.

Unlike the increase in August, which was heavily driven by the volatile multi-family unit component, September’s rise was due to a 4.4% rise in single family starts. Multifamily starts, after rising 42.3% in August, retreated somewhat, falling 9.7% in September.

New building permits, which tend to lead future starts, fell 5.6%. However, this was entirely due to a decrease in multi-family unit permits. Single family permits rose 0.5%. This was the first increase since March.

Millions (SAAR)	Sep	Aug	Jul	Jun	May	Apr
Housing Starts	0.61	0.61	0.55	0.54	0.59	0.68
M/M % Change	0.3	10.5	2.0	-8.3	-13.4	7.1
Single Family Starts	0.45	0.43	0.43	0.45	0.46	0.56
M/M % Change	4.4	1.4	-5.1	-2.0	-18.5	5.2

(Source: Census Bureau)

Chicago Fed President: Economy in Liquidity Trap but Further Easing Still Needed

This past weekend at the Federal Reserve Bank of Boston’s Annual Economic Conference, Chicago Federal Reserve Bank President, Charles Evans stated that he believes the economy is in a liquidity trap:

In my opinion, much more policy accommodation is appropriate today. In a speech two weeks ago, I stated that I believe the U.S. economy is best described as being in a bona fide liquidity trap. This belief is not a new development for me; instead, it is a dawning realization. Risk-free short-term interest rates are essentially zero. Both households and businesses have an excess of savings relative to the new investment demands for these funds. With nominal interest rates at zero, market clearing at lower real interest rates is stymied.

His diagnosis of current conditions led him to conclude that the Fed should pursue further accommodative monetary policies:

In this setting, even a moderate expansion without a double dip will not lead to appropriate labor market improvement. Accordingly, highly plausible projections are 1 percent for core Personal Consumption Expenditure Price Index (PCE) inflation at the end of 2012 and 8 percent for the unemployment rate. For me, the Fed’s dual mandate misses are too large to shrug off, and there is currently no policy conflict between improving employment and inflation outcomes. The economic theories that central bankers rely on for evaluating appropriate monetary policy suggest to me that we need lower short-term real interest rates than the current real federal funds rate of –1 percent. Indeed, if the federal funds rate were positive, I would advocate substantial nominal reductions. But we are effectively at zero.

A variety of typical linear Taylor rules suggests around –4 percent. In addition, some calculations for optimal monetary policy simulations I have seen indicate that real rates of –3 or –4 percent between now and the end of 2012 would boost aggregate demand enough to deliver substantially lower unemployment by the end of 2012. If you reach the conclusion that we are in a liquidity trap, or even near a perilous liquidity trap, more accommodation is not data-dependent or a close call.

The observation is not new that Taylor rule models suggest that real short term interest rates should be substantially negative. This has been discussed by many observers for quite some time now. In fact, the Fed’s use of quantitative easing once short term nominal interest rates could not be lowered any further implicitly acknowledges that this is the FOMC’s view.

However, Evans' remarks are a bit puzzling. If it is indeed true that the economy is currently in a liquidity trap, then further easing will be ineffective. Any new liquidity will simply be kept on the Fed’s balance sheet as excess reserves. On the other hand, if further easing is able to push real interest rates down to -3 to -4 percent, then a liquidity trap does not exist. It is not clear how these two notions are reconciled.

Even assuming that it is possible to drive real rates down to these negative levels, other concerns still arise. With nominal short term rates near zero, in order to get real rates into the range that Evans is suggesting, the Fed would have to set an inflation target of about 3 to 4 percent. This is an area well above the 1 to 2 percent range that the Fed has historically been comfortable with.

Moving above this range could potentially have serious long term consequences. Long run inflationary expectations have remained anchored at low levels for many years because of the gradual building of confidence in the Fed’s hawkishness. If the Fed abandons this reputation and the market begins to expect higher long term inflation, it may not be easy to put this genie back into the bottle. It took the Fed 20 years following the high inflationary era of the 70s to build market confidence in the Fed’s inflation fighting credentials. As it moves forward with any new quantitative easing, the Fed should take the concern into consideration that inflation expectations could become unanchored. This is especially true if the Fed is unclear whether further accommodation would be effective.

Industrial Production Down 0.2%, Manufacturing Down 0.2%

In September, industrial production fell 0.2%, which was the first decline since last February and the largest since June, 2009. Manufacturing output also fell by 0.2%. Auto production increased by 0.5% over the month and business equipment output rose 0.1%; however, this was not enough to bring total manufacturing output growth into positive territory. The month’s decline is consistent with a recent trend of softening manufacturing activity over the past number of months.

Mining output rose 0.7%, while utilities output fell 1.9%. The latter category had risen heavily from May through July due to unusually warm weather across much of the county, spurring increased air conditioning related electricity demand. Following this rise, production levels have fallen back into more normal ranges driving large decreases in August and September.

M/M % Change	Sep	Aug	Jul	Jun	May	Apr
Total Output	-0.2	0.2	0.7	0.1	1.1	0.5
Manufacturing	-0.2	0.1	0.6	-0.3	1.1	0.9
Mining	0.7	1.6	0.9	-0.2	-0.8	1.9
Utilities	-1.9	-1.4	0.9	2.5	4.1	-3.8
Capacity Utilization R.	74.7	74.8	74.7	74.2	74.1	73.2

10.10.18(Source: Federal Reserve)

University of Michigan Consumer Sentiment Index Down 0.3 Point

In October, the University of Michigan Consumer Sentiment Index fell 0.3 point to 67.9. The decline leaves the index at its lowest level since August 2009. Confidence levels remain very low. The weakening in August was entirely due to worsening in the current conditions component, which fell 6.3 points. In contrast, the future expectations component of the index rose by 3.7 points.

Changes in inflationary expectations were mixed. The one-year outlook fell to 2.7% from 2.8% in September. The five-year outlook rose 0.1% to 2.8%.

1966 = 100	Oct	Sep	Aug	Jul	Jun	May
Headline Index	67.9	68.2	68.9	67.8	76.0	73.6
Current Conditions	73.0	79.6	78.3	76.5	85.6	81.0
Future Expectations	64.6	60.9	62.9	62.3	69.8	68.8

10.10.15 Source: University of Michigan

CPI Up 0.1% Core Prices Unchanged

In September, the Consumer Price Index rose 0.1% following two months of 0.3% increases. As in most recent months, the index was pushed upward by energy prices, but the boost was much smaller in September. Food prices were the bigger story this time, which rose 0.3%. The core index, which excludes prices of energy and food products, was unchanged for the second straight month.

From a year prior, the CPI was 1.1% higher, tying the recent low of this past June. The core CPI was up by a lesser 0.8% from a year prior. This is a new cyclical low for the core index and shows a very low level of current inflation.

Mo. % Change	Sep	Aug	Jul	Jun	May	Apr
CPI	0.1	0.3	0.3	-0.1	-0.2	-0.1
Core CPI	0.0	0.0	0.1	0.2	0.1	0.0
Year/ Year % Ch.
CPI	1.1	1.2	1.3	1.1	2	2.2
Core CPI	0.8	1.0	1.0	1.0	1.0	1.0

Source: Bureau of Labor Statistics

Retail Sales Up 0.6% Core Sales Up 0.4%

In September, retail sales grew at a brisk pace of 0.6%, following an upwardly revised increase of 0.7% in August (previously reported as a 0.4% increase). Sales were boosted by the volatile auto and gas sales components; however, core sales, which remove these categories still rose by 0.4%. Most retail subcategories saw significant sales improvement in September, clothing and apparel was the only major area showing declines. Of note is that housing driven categories such as furniture and appliances, which have tended to show sales declines in most recent months, experienced solid sales growth in September.

From a year prior, sales were up 7.3%, the highest year-over-year increase since April. Core sales, which exclude autos and gasoline, were up 5.0% from a year earlier.

Mo. % Change	Sep	Aug	Jul	Jun	May	Apr
Total Sales	0.6	0.7	0.5	-0.3	-1	0.3
Ex Autos and Gas	0.4	0.9	0.1	0.3	-1.1	0.3
Year/ Year % Change
Total Sales	7.3	4.1	5.6	5.2	6.9	8.7
Ex Autos and Gas	5.0	4.9	4.3	4.1	3.8	5.0

Source: Census Bureau

Bernanke: Quantitative Easing Should Proceed with Caution

In a speech on monetary policy in a low inflation environment at the Boston Federal Reserve Bank, Federal Reserve Chairman Ben Bernanke stated that the Federal Open Market Committee needs to “proceed with some caution in deciding whether to engage in further purchases of longer-term securities.”

Currently, conventional monetary policy is constrained by the fact that nominal interest rates cannot be reduced below zero and for almost two years the target federal funds rate has been set to a range of 0 to 25 basis points. This means the Federal Reserve needs to employ nonconventional tools to provide additional stimulus, such as buying long-term securities.

Bernanke acknowledges that “previous program of securities purchases was successful in bringing down longer-term interest rates and thereby supporting the economic recovery.” But the costs of nonconventional policy must be weighed against the benefits.

“One disadvantage of asset purchases relative to conventional monetary policy is that we have much less experience in judging the economic effects of this policy instrument, which makes it challenging to determine the appropriate quantity and pace of purchases and to communicate this policy response to the public.”

“Another concern associated with additional securities purchases is that substantial further expansion of the balance sheet could reduce public confidence in the Fed's ability to execute a smooth exit from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might lead to an undesired increase in inflation expectations, to a level above the Committee's inflation objective.”

Bernanke introduced these concerns in a Jackson Hole, WY speech in late August. However, the Chairman expressed confidence that the Federal Reserve has the tools to alleviate such concerns and to smoothly withdraw monetary accommodation at the right moment.

Chairman Bernanke also stated that the Federal Open Market Committee will “actively review its communications strategy with the goal of providing as much clarity as possible about its outlook, policy objectives, and policy strategies.”

Read the full speech here.

Majority of Customers Pay Nothing for Monthly Bank Services

Results from ABA’s annual survey of bank customers showed that the majority, 53%, of depositors pay nothing in monthly bank fees for services such as checking account maintenance and ATM access. Further, 67% of consumers spend $3 dollars or less per month.

The results showed that banks provide accessible checking and savings accounts for minimal or no cost and that consumers are effectively managing their finances to keep service fees low.

Consumers should know that bank accounts cost little or nothing for most people, and people who keep their money in a bank can feel comfortable knowing that it is insured, cannot get stolen or destroyed, and is available to them 24 hours a day, seven days a week, through multiple convenience channel.

While some consumer groups focus on avoidable fees at the highest end of the spectrum, the survey clearly shows that the vast majority of bank customers manages their accounts well and keeps service charges low.

The ABA offers the following tips to help further reduce consumer banking costs:

• Free Checking and Savings Accounts -- Most banks offer them.

• ATM Machines – Avoid fees by using your own bank's ATM.

• Direct Deposit – Many checking accounts are free when your paycheck is automatically deposited each month.

• Minimum Balance – Keep at least the minimum balance in your account.

• Don't Overdraw – Keep track of transactions and account balances to avoid bounced check fees.

• Email or Text Alerts -- Ask for an automatic alert when your balance falls below a certain level.

The annual telephone survey of more than 1,000 randomly-selected consumers was conducted for ABA by Ipsos Public Affairs, an independent market research firm, on August 14-15, 2010.

Trade Deficit Widens By 8.7%; Imports Grow Faster Than Exports

In August, the trade deficit widened considerably, increasing 8.7% to a monthly pace of $46.3 billion. The increase in the trade gap comes after a large drop in July of 14.5%. Though volatile in recent months, the trade deficit began to accelerate following the Greek debt crisis last spring, which put a damper on exports. This drop in net-exports was a major drag on Q2 GDP growth. Though Q3 will likely not see a large drag on growth from net-exports, it will likely not be an area of strength either.

Over the month, exports grew 0.3%. At the same time, imports rose 2.1%, following an equally sized drop in July. From a year prior, exports were up 18.6%, while imports were up 25.0%.

Mo. % Change	Aug	Jul	Jun	May	Apr	Mar
Trade Deficit (billions)	$46.3	$42.6	$49.8	$41.8	$40.0	$39.7
Mo. % Change	8.7	-14.5	19.1	4.5	0.8	-0.5
Exports	0.3	1.9	-1.3	2.6	-0.8	3.9
Imports	2.1	-2.1	3.0	2.9	-0.4	2.9

10.10.14 (Source: Census Bureau)

PPI: Headline Up 0.4 Percent; Core Prices Up 0.1 Percent

In September, the Producer Price Index for finished goods rose 0.4 percent for the second straight month. This was the third continuous months of rises in the index. Recent moves in producer prices have largely been dominated be swings in energy prices. Energy product prices rose 1.2 percent in September. Also notable was a significant rise in food prices, particularly meat products which jumped 5.4 percent.

The core index, which does not include energy or food product prices, rose by a lesser 0.1 percent. From a year prior, the core index was up 1.5 percent. Though this is still quite modest producer price inflation, it ties the highest year-over-year increase since September 2009. The top line index, including all finished products, was 4.0 percent higher from a year prior.

	Sep	Aug	Jul	Jun	May	Apr
Headline Index
M/M % Change	0.4	0.4	0.2	-0.4	-0.3	-0.1
Y/Y % Change	4.0	3.0	4.1	2.7	5.0	5.3
Core Prices
M/M % Change	0.1	0.1	0.3	0.1	0.3	0.1
Y/Y % Change	1.5	1.3	1.5	1.0	1.3	0.9

10.10.14 (Source: Bureau of Labor Statistics)

NFIB: Lack of Customers Affecting Small Business Expansion Plans

The NFIB’s October 2010 Small Business Economic Trends shows that it is lack of customers, not credit availability that is adversely impacting small businesses’ willingness to hire and expand.

Overall, 91% reported that all their credit needs were met or that they were not interested in borrowing. 9% reported credit needs not satisfied, and a record 53% said they did not want a loan. Only 3% reported financing as their #1 business problem. However, 30% of the owners reported weak sales as their top business problem. The historically high percent of owners who cite weak sales means that investments in new equipment or new workers are not likely to “pay back" and thus loans taken to finance the outlays can’t be repaid.

A near record low 33% of all owners reported borrowing on a regular basis. Reported and planned capital spending are at 35 year record low levels, so fewer loans are needed. Sounds like weak credit demand. Those looking for loans predominately are looking for cash flow support, not funds to expand or hire. The percent of owners reporting higher interest rates on their most recent loan was 5%, while 3% reported lower rates. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 14%, unchanged from August. The Federal Reserve is holding rates at historically low levels, but this is not improving the outlook for the ease of financing expansion. Sales are needed, not just low rates.

Banks Have Paid 99% of TARP Dividends On Time; $27 billion in Income for Taxpayers

Treasury’s profitable investments in banks through TARP successfully restored the stability of our financial system. Banks have repaid 78% of Treasury's initial investment and have paid $13.2 billion in dividends and interest.

Treasury has earned $26.8 billion in income from the banking industry, including revenue from repayments, warrant auctions, and stock sales - a 9.9% return according to the Congressional Oversight Panel.*

Banks Have Paid 99% of Dividends On Time
Balancing the obligations to pay dividends with the need to support stability and lending during these difficult economic times, some institutions have decided – and in some cases were required by their regulator – to preserve capital through temporarily suspending dividends. 135 institutions holding only 2% of Treasury’s investments postponed $141 million of the $13.3 billion in scheduled dividends, or 1% of what was due.

Banks Have Already Repaid $42 Million in Previously Skipped Payments
Banks remain committed to their TARP obligations, and have already repaid $42 million in previously skipped payments. In fact, 92% of the suspended dividend payments are cumulative, meaning the bank is required to pay this dividend in the future. Thus, a skipped payment should not be interpreted as a loss on the TARP investment.

Weak Local Economies Explain Missed Dividends
California and Florida are home to the most banks that have postponed dividend payments. This should not come as a surprise, since consumers, businesses, and banks in these states have endured greater real estate and economic stress than other areas.

Non-Banks Causing TARP Losses and Missed Dividends
The non-bank TARP programs are responsible for all of the TARP losses so far. For instance, insurance company AIG, a participant in one of the non-bank TARP programs, owes over $1.6 billion in dividends, or 11 times more than the missed dividends owed by the banking industry.

Treasury made the distinction between the profitable bank programs and the costly non-bank programs saying, “every one of its programs aimed at stabilizing the banking system…will earn a profit thanks to dividends, interest, early repayments, and the sale of warrants.” – U.S. Treasury press release, Dec. 9, 2009.

See ABA's full dividend report here.

*July Oversight Report, Congressional Oversight Panel, July 14, 2010.

Consumer Credit Falls in August

The Federal Reserve reported on October 7 that consumer credit contracted at an annualized pace of 1.7 percent in August.

Revolving credit fell at annual rate of 7.2 percent in August to $822.2 billion. This is the 24th consecutive monthly decline in outstanding revolving credit. Revolving credit is almost 16 percent below its August 2008 peak at $973.6 billion.

On the other hand, nonrevolving credit grew at annual rate of 1.2 percent in August to $1,592 billion. This was the fourth monthly increase in outstanding nonrevolving consumer credit.

August Housing Numbers Stagnant - Mortgage Market Trends Sheet Released

After the firestorm of housing related news stories over the last three months, there may have been a lot of reporters yawning due to the lack of excitement in the August housing numbers. After plunging by 27% in July, existing home sales rebounded somewhat in August, rising 7.6% to an annualized sales pace of 4.13 million units. July’s sales pace set a new cyclical low and was the slowest since the data series began in 1999. Much of the volatility over the past number of months has been due to the homebuyer tax credit. Mark Tepper, managing partner of Strategic Wealth Partners, colorfully captures the state of the existing homes numbers:

I would call August's number less toxic -- it wasn't pretty but it wasn't the ugliest. We're still down 21.5% from June and sales dropped significantly in July, so the hurdle was just so low that you almost had to beat it.

Along with the increase in the existing home sales numbers, the months supply of inventory fell to 11.6. This is an improvement from a month prior, but it is still the second highest of the year. The historical normal is around 5 months of inventory.

Meanwhile, homebuilders are seeing the market return to the pre-tax credit days at the beginning of this year. One developer pessimistically characterized the potential buyer’s mindset:

Everyone is negotiating. No one walks in the door and says: 'I'll take it. How much?'

The lack of buyer appetite manifested itself in the unchanged pace of new home sales in August, at an annualized pace of 288,000 units. However, July’s number was upwardly revised to 288,000 (previously reported to be 276,000). The months supply of inventory of new homes at the current sales price fell slightly to 8.6, which remains very high compared to the historical norm of 4.5 months. Looking forward to the near future, the impact of high home inventory (for both existing and new homes) will likely mean the continuation of depressed home prices.

With the demand for homes waning, home prices are becoming more affordable as measured by the National Association of Realtor’s Affordability index, which has increased over the last two months. Pair dropping prices with falling monthly 30-year mortgage rates and these would seem to be ideal conditions for buyers to jump into the market. Instead low levels of consumer confidence and some buyers already having taken advantage of the tax credit program – buyers remain fickle.

As for troubled homeowners, despite the government’s continuous attempts to find a solution through the various modification programs, none seems to be making a widespread difference. The second quarter numbers on homes entering retention action dropped 21% from a month earlier. Fortunately, for the government, the volume of foreclosures and seriously delinquent loans seems to be leveling out, at least for now. Firms freezing foreclosures should further relieve pressure on the government and underwater mortgage holders.

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

ADP Employment Report: Private Payrolls Down 39,000– First Decline in Eight Months

In September, according to the ADP Employment Report, private sector payrolls fell by 39,000. This follows an upwardly revised rise of 10,000 in August (previously reported to be a loss of 10,000). The decline in September ended a period of seven consecutive monthly increase in private payrolls. The labor market is clearly continuing to show weakness. Payrolls need to expand at about 100,000 to 150,000 per month in order to begin to drive down the unemployment rate. Considering that temporary census workers were continuing to be let go in September, it is quite likely that the employment number released by the BLS this Friday (which includes public sector payrolls) will also come in as a negative number.

The decline over the month was driven by a drop in goods producing jobs, which fell by 45,000. Manufacturing lost 17,000 jobs; the third decline following four months of expansion. Manufacturing employment had been a bright spot for much of the year; however, the sector appears to have lost its momentum. Service sector jobs continued to increase, but only by a meager 6,000. However, this was not enough growth to counteract the decline in goods producing sectors.

Ch. in Payrolls ('000s)	Sep	Aug	Jul	Jun	May	Apr
Total	-39	10	42	26	63	65
Goods Producing	-45	-30	-28	-18	-21	-6
Manufacturing	-17	-2	-12	13	16	34
Services	6	40	70	44	84	71

10.10.05 (Source: Automatic Data Processing)

Bank Card Delinquencies Drop Significantly in Second Quarter 2010

Consumer loan delinquencies generally improved in the second quarter of 2010, as banks wrote off loans that can not be repaid, and consumers moderated their use of credit. Bank card, home equity loans, and auto loans all showed improvement, according to ABA’s Consumer Credit Delinquency Bulletin.

The delinquency rate on bank cards was at its lowest level since Q1 2001. Bank card delinquency rates have fallen for four consecutive quarters and are almost 28% below its peak one year ago.



This is a very positive development, but the fundamental story is the same: it's all about jobs. The economy seems to be losing steam. This will affect job creation and the ability of consumers to pay off debt in the future. When people don't have jobs, they can't pay their bills.

The delinquency results were not as broad based as the previous two quarters and, as a result, the composite ratio, which tracks delinquencies in eight closed-end installment loan categories, was virtually flat, rising just 2 basis points from the first quarter to 3.00% of all accounts in the second quarter.



Loan categories showing increased signs of stress include mobile home loans and marine loans. Mobile home loan delinquencies rose 36 basis points from the previous quarter to 4.01%, the highest rate since October 2005. Marine loan delinquencies rose 27 basis points from the previous quarter to 2.20%.

More information is available at aba.com.

TARP's Bank Programs Generate $26.8 Billion in Income for Taxpayers

Through continued repayments, warrant sales, and dividends, the bank-TARP programs have generated $26.8 billion in income for the taxpayer through September 30, nearly 90% of all the profit generated through TARP so far.

Repayments from banks far outpace those of the non-bank programs: 78% of the investments in banks have been repaid, compared with only 14% from the automotive companies and no repayments to date from insurance giant AIG, a participant in a non-bank program. As a result, all of the TARP losses are from the non-bank and mortgage programs.

Had TARP been limited only to banks, there would be no losses, only generous profits. In fact, Treasury’s investments in banks were so effective that they yielded 5.5% more than the S&P 500 returned over the same period, according to a July report from Keefe, Bruyette & Woods.

Treasury has now lowered its expected TARP cost to $50 billion from its original estimate of $341 billion because of higher than expected profit from banks in conjunction with AIG’s plan to exit the non-bank TARP program . With additional warrants and securities to sell, the Treasury’s return will continue to increase, offsetting the losses generated by the non-bank and mortgage programs.

See Treasury's full September TARP report here.

ISM Non-Manufacturing Index Up 1.7 Points to 51.5; Employment, New Orders Up

In September, the Institute for Supply Management's Non-Manufacturing index rebounded somewhat off of Augusts’ decline, rising 1.7 points to 53.2. The index had been trending downward for much of the past year and looked as if it would test the expansionary threshold of 50. September’s improvement is reassuring. Still, this was the second lowest level seen since last February, indicating that service sector activity growth is modest.

The business output component continued to fall, dropping 1.6 points, but remained in expansionary territory at 52.8. In contrast the improvement in the headline index was driven by improvements in the employment component and the new orders component. The first rose 2 points to 50.2, again rising over the expansionary threshold. The new orders component, which tends to indicate future output, rose 2.5 points to 54.9.

>50 = expansion	Sep	Aug	Jul	Jun	May	Apr
Headline Index	53.2	51.5	54.3	53.8	55.4	55.4
Business Output	52.8	54.4	57.4	58.1	61.1	60.3
Exports	58.0	46.5	52.0	48.0	53.5	57.0
Employment	50.2	48.2	50.9	49.7	50.4	49.5
New Orders	54.9	52.4	56.7	54.4	57.1	58.2
Backlogged Orders	48.0	50.5	52.0	55.5	56.0	49.5

10.10.05 (Source: Institute for Supply Management)

Fed To Hold First Auction of Its New Term Deposit Facility

On Monday, October 4, 2010, the Federal Reserve will offer $5 billion in 28-day term deposits through its new Term Deposit Facility. Competitive bids submitted at the stop-out rate will be pro-rated and will be rounded to multiples of $10,000. Non-Competitive bids are allowed in this auction. All non-competitive bids will be automatically awarded in full at the stop-out rate of the competitive auction. The minimum amount for a non-competitive bid is $10,000; the maximum amount is $5,000,000 and should be submitted in increments of $10,000. Further details of the program can be found here.

10.10.01 (Source: Federal Reserve)

University of Michigan Consumer Sentiment Index Down 0.7 Point

In September, the University of Michigan Consumer Sentiment Index fell 0.7 point to 68.2. Confidence levels remain very low. The weakening in August was entirely due to worsening expectations of the future. The future expectations component of the index fell 2.0 points to 60.9. The expectations index is now at its lowest level since March of 2009, when the financial markets where still in great turmoil and the stock market hit its cyclical low. In contrast, the current conditions component of the index rose by 1.3 points.

Inflationary expectations fell. The one-year outlook fell to 2.2% from 2.7% in July. The five-year outlook declined to 2.7% from 2.8%.



10.10.01 (Source: University of Michigan)

Construction Spending Up 0.4%, Entirely Due to Public Spending

In August, new construction spending rose 0.4%, following a large decline of 1.4% in July.. The month’s increase was entirely due to a 2.5% rise in public construction spending. Housing construction continued to decline in the wake of the expired homebuyer tax credit, falling 0.3% (though this was the smallest decline since April). Private non-residential spending fell 1.4%, following an increase of 0.2%, which at the time was the first increase since March 2009.

On a year-ago basis, total construction spending was 10.0% lower. Private residential spending was down 1.7%, and private non-residential spending was down 24.2%. Public sector spending was down 1.0% from a year earlier.



10.10.01 (Source: Census Bureau)

ISM Manufacturing Index Down 1.9 Points to 54.4; New Orders Down to 51.1

In September, the Institute for Supply Management's Manufacturing Index fell 1.9 points to 54.4, returning the index to a downward trend. This puts the index at its lowest point since November 2009. Despite the decline, the index remains significantly above the expansionary threshold of 50. Therefore, manufacturing activity continues to expand, but at a slowest pace.

The production component fell 3.4 points to 56.5, while employment fell 3.9 points to 56.5. Looking forward, the new orders component fell 2.0 points to 51.1, while the backlogged orders component fell below the expansionary threshold to 46.5. The decline in these forward looking indicators suggest that manufacturing activity in the next couple of months will continue to decelerate and may approach a stalling point.



10.10.01 (Source: Institute for Supply Management)

Personal Income Up 0.5%, Consumption Up 0.4%; Savings Rate Up to 5.8%

In August, personal income grew at a brisk pace of 0.5%. The increase was boosted by an increase in government transfer payments associated with extending unemployment checks. Even so, wages still had a solid showing, growing 0.3%. From a year-prior, personal incomes were 3.3% higher.

Personal consumption rose 0.4% in August for the second straight month. Spending growth was primarily due to increased expenditures on non-durable goods. Big ticket item expenditures fell 0.1%, while services added modestly to growth. Consumption was 2.7% higher than a year prior.

The slightly slowest pace of consumption growth relative to incomes caused the savings rate to rise slightly by 0.1% to 5.8%. The savings rate has remained near this level since April.

As measured by the PCE deflator, prices increased 0.2% over the month. From a year prior, the PCE deflator was 1.5% higher, the third consecutive month below 2.0%. The core PCE deflator, which excludes energy and food prices, was up 0.1% over the month and was 1.4% higher from the year prior.



10.10.01 (Source: Bureau of Economic Analysis)