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Monday, November 29, 2010

ABA Provides Principles for Guiding Long-Term DIF Funding

ABA in a comment letter last week provided a set of principles to guide the FDIC’s long-term funding strategy for the Deposit Insurance Fund. ABA was commenting on the FDIC’s notice of proposed rulemaking that would set a target size for the DIF that would maintain it at a steady level without increases in turbulent times.

Under its principles for guiding long-term DIF funding, ABA said the insurance fund should only be used for the protection of insured depositors; low, steady and predictable premiums should be set that do not fluctuate with the business cycle, thus avoiding premium spikes; an upper limit should be set on the insurance fund size; and the FDIC should establish a dividend policy to slow the fund’s growth as it approaches the upper limit to ensure that the agency does not accumulate resources significantly above those needed to protect insured depositors.

ABA also emphasized that the FDIC should use the full time period set by Congress to reach the fund’s newly established 1.35% minimum. “The FDIC should monitor the progress toward rebuilding the fund and adjust premiums downward should the fund be growing faster than expected,” the association said. “After that is achieved, we believe it appropriate to reduce the premium rate to the long-term low level and build the fund at a more modest pace to assure that the maximum resources remain in banks’ communities.”

ABA also pointed out that recent changes in law and regulation – such as the Dodd-Frank Act and Basel III capital regulations – will lower the probability and costs of bank failures and therefore lower the DIF’s funding needs. The FDIC’s proposed 2.00% minimum reserve ratio is far too high given these changes, ABA said. Moreover, allowing the fund to grow beyond even 2.50% adds little to FDIC’s protection while taking funds out of communities where they could support small business growth. Read the letter. Read the proposal.

Tuesday, November 23, 2010

FDIC Quarterly Banking Profile: Bank Earnings and Assets Up; Asset Quality Improves

The FDIC released the quarterly banking profile (QBP) for third quarter, which reviews the performance of all FDIC-insured institutions. Highlights include:

-Earnings improve year-over year for the fifth consecutive quarter
-Net income increases substantially from a year earlier
-Loan-loss provisions decrease
-Asset quality improves for second straight quarter
-Total industry assets increase by $163 Billion

ABA Chief Economist James Chessen Commented:

Today’s report reaffirms that the banking industry is indeed regaining its footing in spite of the still fragile economy. Asset quality has improved, loan losses have declined, and banks continue to increase their capital levels. As economic conditions improve, banks will be in a strong position to look for new lending opportunities and meet loan demands in their communities.

For the full report click here.

Q3 Real GDP Growth Revised Upward to 2.5 Percent Annualized

Real GDP growth in the third quarter was revised upward to 2.5 percent annualized from the initially reported 2.0 percent growth rate. This was a 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. In comparison, real GDP grew at paces from 5 to 8 percent for multiple quarters following the deep recessions in the early 80s and mid 70s.

The upward revision was primarily due to an increase in consumption and improvements in net-exports. Consumption added 2.0 points to growth, compared to 1.8 percent previously reported. Though still relatively modest, this was the strongest consumption growth since before the recession. However, much of the growth over the quarter was still due to the continuing expansion of business inventories. Inventory accumulation accounted for 1.3 points of growth. This is somewhat troubling, because inventory adjustments are largely temporary, and will likely not drive growth moving forward. Real final sales, which measures current demand, rose by 1.2 percent. Though this is double what was initially reported, it is still modest.

































































































annualized % changeQ3 2010PreviousQ2 2010Q1 2010Q4 2009Q3 2009
Real GDP2.52.01.73.75.01.6
% contribution to real GDP
    Consumption2.01.81.51.30.71.4
    Fixed Investment0.20.12.10.4-0.10.1
        Residential-0.8-0.80.6-0.30.00.3
        Non-Residential1.00.91.50.7-0.1-0.1
    Inventories1.31.40.82.62.81.1
    Government0.80.70.8-0.3-0.30.3
    Net Exports-1.8-2.0-3.5-0.31.9-1.4

Existing Home Sales Fall 2.2 Percent; Sales Prices Fall 0.6 Percent

In October, existing home sales fell 2.2 percent to an annualized sales pace of 4.43 million units. The decline ends a sales rebound over the prior two months following the fall-off due to the expiration of the home buyer tax credit last spring. Though sales were higher than their recent low in July, the pace is still considerably lower than the pre-credit sales pace. From a year prior, sales were down 33.8 percent

Despite the fall in sales over the month, the months supply of inventory fell to 10.5 from 10.6. This was due to a modest decline in the raw inventory of homes for sale. Still, the ratio is quite high. Long term, the historical normal is around 5 months of inventory. Ratios above about 6 to 7 months are historically correlated with short term price declines. In fact the median sales price fell for the fourth consecutive month in October, declining 0.6 percent to $170,500. From a year prior, prices were down 0.9 percent. Until the sales pace increases and/or the supply of inventory gets further worked off, price stability is unlikely.






























































OctSepAugJulJunMay
Sales (mil. annual.)4.434.534.123.845.265.66
    M/M % Change-2.210.07.3-27.0-7.1-2.2
Med. Price (‘000s)$170.5$171.5$177.5$182.1$183.0$174.6
    Y/Y % Change-0.9-2.50.20.40.7-0.1
Months Supply10.510.612.012.58.98.3

Friday, November 19, 2010

ABA Launches Special Site to Track Dodd-Frank Implementation

ABA launched a new online resource -- the ABA Dodd-Frank Tracker -- to help bankers keep up with the wide range of Dodd-Frank Act implementation issues. The site, which uses blog technology, enables bankers to follow specific Dodd-Frank Act issues, provides an archive of ABA’s work during the implementation process, and highlights the expanding resources the association offers its members.

Features of the tracker include news stories on Dodd-Frank Act proposals, comment letters and rules; a calendar of comment letter deadlines; and links to ABA resources. Special sections focus on key Dodd Frank Act issues, such as interchange, deposit insurance and the Consumer Financial Protection Bureau. Visitors can sign up to receive updates -- via e-mail or RSS -- as new content is posted.

Wednesday, November 17, 2010

CPI Up 0.2 Percent; Core Prices Unchanged – Lowest Annual Change Since Before WWII

In October, the Consumer Price Index rose 0.2 percent. This was the fifth consecutive monthly increase in the index. As was the case in most recent months, the index was pushed upward by energy prices, but which rose 2.6 percent in October. The core index, which excludes prices of energy and food products, was unchanged for the third straight month.

From a year prior, the CPI was 1.2 percent higher, just barely above its recent low of 1.1 percent in September. The core CPI was up by just 0.6 percent from a year prior. This was lowest year-over-year change in the index’s history going back to the 1950s. Despite rising energy prices as of late, there is a very low level of underlying inflation. This number further supports the Fed’s view that inflationary pressure is currently very mild if not outright deflationary.





























































Mo. % ChangeOctSepAugJulJunMay
CPI0.20.10.30.3-0.1-0.2
    Core CPI0.00.00.00.10.20.1
Year/ Year % Ch.
CPI1.21.11.21.31.12.0
    Core CPI0.60.81.01.01.01.0

Housing Starts Fall 11.7 Percent, Single Family Starts Down 1.1 Percent

Housing starts continued to fall in October, decreasing by 11.7 percent over the month. This brings the annualized sales pace to 519,000 units, the lowest level since April, 2009. Housing starts have been very volatile over the past few months; however, this has mostly been due to large swings in multi-family unit starts. In October, this category fell 43.5 percent. Single family starts fell by a much lesser 1.1 percent. Single family starts have essentially been flat for the past four months at an annualized pace of around 440,000. Still, this is a very slow pace and shows that building activity remains depressed.

“The excess inventory of existing homes continues to be a drag on housing starts. Until this inventory is absorbed, housing starts will stay at near historic low levels.” said Jim Chessen, ABA’s Chief Economist. Both single family and total housing starts have been in a range for this past year that is lower than any period since prior to WWII.

From a year prior, total starts were down 4.5 percent. Single family starts were down by a lesser 1.1 percent when compared to a year ago.

New building permits, which tend to lead future starts, rose by a modest 0.5 percent over the month. Single family permits rose 1.0 percent, which was the first increase since March. Meanwhile, multi-family unit permits continued to decline, falling 0.7 percent.




















































Millions (SAAR)OctSepAugJulJunMay
Housing Starts0.520.590.610.550.540.59
    M/M % Change-11.7-4.211.62.0-8.3-13.4
Single Family Starts0.440.440.430.430.450.46
    M/M % Change-1.12.11.2-5.1-2.0-18.5

Tuesday, November 16, 2010

PPI: Headline Up 0.4%; Core Prices Down 0.6%

In October, the Producer Price Index for finished goods rose 0.4% for the third straight month. This was the fourth continuous monthly increase in the index. Recent moves in producer prices have largely been dominated be swings in energy prices. Energy product prices rose 3.7% in October.

In contrast, the core index, which does not include energy or food product prices, fell by a large 0.6%. This was the largest decline in the index since 2006. Much of the decline was due to an adjustment having to do with the year’s new models of cars and light trucks. A similar decline occurred in October of last year. However, this still illustrates very modest levels of underlying inflation in the system and adds to the Fed’s view of inflation being low relative to employment levels.

“The worries of deflation are once again front and center and could soften criticisms of QE2,” said Jim Chessen, Chief Economist for the American Bankers Association.

From a year prior, the core index was up 1.4%. The top line index, including all finished products, was 4.3 percent higher from a year prior.






































































 OctSepAugJulJunMay
Headline Index
    M/M % Change0.40.40.40.2-0.4-0.3
    Y/Y % Change4.34.03.04.12.65.0
Core Prices
    M/M % Change-0.60.10.10.30.10.3
    Y/Y % Change1.41.51.31.51.01.3

Industrial Production Flat, but Manufacturing Output Up 0.5%

In October, industrial production was unchanged, following a decline of 0.2% in September. As was the case in September, October’s weakness was primarily due to a large drop off in utilities output, which fell 3.4% over the month. In contrast, manufacturing output rose 0.5%, the strongest rise since July. The gain was led by auto production, which increased by 1.6% over the month. However, even without auto production, output rose 0.5%. The month’s solid growth in output is encouraging after two months of soft numbers. It suggests that manufacturing sector activity growth is no longer decelerating.

The capacity utilization rate remained flat at 74.8%. Though this is off of its lows of the cycle, it is still considerably low. A large amount of excess capacity continues to exist. Until this rate comes up further, significant amount of industrial sector investments will not be required.





























































M/M % ChangeOctSepAugJulJunMay
Total Output0.0-0.20.20.80.01.2
    Manufacturing0.50.10.00.7-0.31.2
    Mining-0.10.12.31.0-0.2-0.8
    Utilities-3.4-2.2-1.00.92.54.1
Capacity Utilization R.74.874.874.974.874.274.2

Monday, November 15, 2010

Retail Sales Up 1.2% – Core Sale Up 0.4%

In October, retail sales grew at a brisk pace of 1.2%, following an upwardly revised increase of 0.7% in September (previously reported as a 0.6% increase). This was the fourth consecutive monthly rise. Sales were given a strong jolt by the volatile autos component, which grew 5.0% over the month. However, even without auto sales included, sales were still solid. Core sales, which remove autos and gasoline rose by 0.4%. Most retail subcategories saw significant sales improvement in October. Electronics and furniture were the only notable areas of sales declines.

Jim Chessen, ABA Chief Economist noted, “Solid retail sales growth shows that consumers have become more confident as the stock and labor markets have shown improvement. In addition, the strong sales growth was led by autos, which would suggest an increase in the demand for consumer credit.”

From a year prior, sales were up 7.3%. Core sales, which exclude autos and gasoline, were up 5.2% from a year earlier. This was the highest annual rate of growth since before the recession.





























































Mo. % Change Oct Sep Aug Jul Jun May
Total Sales 1.2 0.7 0.9 0.5 -0.3 -1.0
Ex Autos and Gas 0.4 0.4 0.9 0.1 0.3 -1.1
Year/ Year % Change
Total Sales 7.3 7.4 4.2 5.6 5.2 6.9
Ex Autos and Gas 5.2 5.0 4.9 4.3 4.1 3.8

Monday, November 8, 2010

September Mortgage Trends: Expectations Turn Bearish

Will housing prices to continue to fall? According to the Chicago Booth/Kellogg School Financial Trust Index, respondents were pessimistic. In the quarterly survey that gauges Americans’ trust in the nation’s financial system, 30% of respondents expected housing prices to fall in the next 12 months, compared to 20% a quarter earlier.



Along with the negative outlook for home prices, individuals were cynical about future employment as a growing proportion of respondents feared that unemployment will rise.

Meanwhile in August, the twenty-city Case-Shiller Index, a gauge of existing home prices, fell for the first time since March. Our full Housing and Mortgage Market Trend Sheet, located in the "OCE Documents of Interest" column at the right, is now updated with September figures. The trend sheet includes sales, pricing, construction, underwriting and delinquency data.

Friday, November 5, 2010

Consumer Credit Up in September Following 7 Months of Declines

The Federal Reserve reported that consumer credit expanded at an annualized pace of 1.1% in September to total $2.41 trillion. This was the first growth in consumer credit following seven consecutive months of declines.


The nonrevolving portion of consumer credit drove the expansion in credit. Nonrevolving credit grew at annual rate of 7.9% in September to $1.60 trillion. Nonrevolving credit has been up in three of the last four months.

Revolving credit fell at annual rate of 12.1% in September to $813.9 billion. This is the 25th consecutive monthly decline in outstanding revolving credit. Revolving credit is 16.4% below its August 2008 peak of $973.6 billion. The decline in revolving credit is directly related the elevated unemployment rate; households continue to reduce borrowings in an effort to create stronger balance sheets.


James Chessen, ABA's Chief Economist, commented, "The consumer credit numbers show households were still sitting on the sidelines and hesitant to spend money in September. The positive side, however, is that consumers are regaining control of their finances by saving more and spending less. This will help build a base where consumers will feel comfortable re-entering the game."

Payroll Employment Up 151,000; Unemployment Rate at 9.6%

In October, payroll employment rose by 151,000. The increase ended a streak of four consecutive declines. In addition, the decline in September was revised smaller to a drop of 41,000 rather than the previously reported 97,000 drop. The reversal of the trend was primarily due to the end of drag created by the laying off of temporary census workers. Government employees fell by only 9,000 over the month. Payrolls will have to expand more swiftly in order to drive down the unemployment rate.

Private sector payrolls continued to grow over the month, picking up to a pace of 159,000. This was the highest rate of private sector payroll growth since April. However, this pace is still just barely high enough to absorb the natural expansion of new entrants into the job market. Payrolls will have to expand more swiftly in order to drive down the unemployment rate.

James Chessen, Chief Economist at the American Bankers Association, stated, “Private sector employment is still moving forward as it’s done throughout 2010. It’s half of what is needed, however, to bring the unemployment rate down to more reasonable levels over the next five to six years.”

Despite the increase in payrolls, the unemployment rate, which is measured by a separate survey, stayed steady at 9.6%. The labor force participation rate continued its downward trend, declining 0.2%. At 64.5%, the rate is at its lowest of the economic cycle. There continues to be a large set of workers who have been discouraged and will likely rejoin the workforce once conditions are perceived to have improved. If discouraged workers are added onto the officially unemployed, the unemployment rate would be much higher.




































































Oct Sep Aug Jul Jun May
Payroll Change (000s) 151 -41 -1 -66 -175 432
Goods Producing 5 -4 17 37 1 21
Services 146 -37 -18 -103 -176 411
Private Sector 159 107 143 117 61 51
Unemployment Rate 9.6 9.6 9.6 9.5 9.5 9.7
Labor Force Particip. R. 64.5 64.7 64.7 64.6 64.7 65.0

10.11.05 (Source: Bureau of Labor Statistics)

Thursday, November 4, 2010

More Signs of Structural Unemployment: Relocations Plummet

In August, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota described the elevated unemployment levels as a structural problem. (See our post on his speech here). Kocherlakota noted the breakdown in the relationship between the unemployment rate and the job openings rate, two data series which are typically closely related. Historically, when job openings increase, the unemployment rate decreases. However in this recession and recovery, the decline in the unemployment rate has lagged behind improvement in the job openings rate.



Kocherlakota noted the breakdown was a sign that companies have been unable to find appropriate people to fill the openings. Typically, workers lack the skills required to fill the openings, however, today many qualified workers may be unable to relocate to potential employment opportunities because of the housing market. Due to declines in home values, workers could be underwater on their current mortgage or have completed a mortgage modification, many of which bar the homeowner from selling the house for a specific period of time.

Data released by Challenger, Gray & Christmas highlight the steep fall in the share of job seekers who are relocating for employment. From 2001 to 2009, relocation rates for job seekers has ranged in the teens. However, the relocation rate for 2010 was 7.3%, almost half of 2009's rate of 13.3%.



Housing conditions are having a direct impact on the labor market, making the recovery increasingly challenging for businesses, those seeking work, and policy makers.

Wednesday, November 3, 2010

Fed Will Purchase $600 Billion in Additional Long-Term Treasuries

The Federal Open Market Committee voted to keep the Federal Funds Target in a range between 0 and 25 basis points. The Fed’s language continued a recent trend of more accommodating language. The FOMC for the second straight meeting explicitly stated that inflation is below the normal long term trend:
Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run…

Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.
The Fed went forward with initiating the much anticipated second round of quantitative easing:
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities.
The Fed will move to purchase on net an additional $600 billion in long-term treasuries through Q2 2011. This amounts to about $75 billion per month. About 85% of the purchases will be in the 2.5 to 10 year maturity range. The FOMC also stated that it will continuously review both the pace and the size of the purchases, leaving open the potential for even further buying going forward.

Additionally, FOMC directed the New York Federal Reserve to continue to reinvest principal payments from agency debt and mortgage-backed securities into longer-term Treasury securities. Through Q2 2011, the New York Fed is expected to reinvest $250 billion to $300 billion under this directive. Through both the principal reinvestments and the additional purchases of longer-term treasuries announced today, the Fed's average purchase pace is expected to be $110 billion per month.

Thomas Hoenig, as in recent meetings, voted against this action believing that the risk of additional purchases to future inflation outweighed any benefit.





























November 3rd Meeting September 21st Meeting
Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters. Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment 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 for the federal funds rate for an extended period. 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 for the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.


10.11.03 (Source: Federal Reserve)

Monday, November 1, 2010

Personal Income Down 0.1%, Consumption Up 0.2%; Savings Rate Down to 5.3%

Personal consumption rose 0.2% in September, following two months of 0.5% rises. Spending growth was primarily due to increased expenditures on durable goods. This component increased 0.7% over the month. Consumption was 3.7% higher than a year prior.

The faster growth rate of consumption relative to income over the month caused the savings rate to decline by 0.3% to 5.3%. The savings rate has been declining modestly in recent months; however, it still remains elevated relative to most years of the past decade. Households are continuing to desire savings to help rebuild lost wealth and to create a cushion to deal with uncertainty.

As measured by the PCE deflator, prices increased 0.1% over the month. From a year prior, the PCE deflator was 1.4% higher. The core PCE deflator, which excludes energy and food prices, was unchanged over the month and was 1.2% higher from the year prior.













































































 m/m % change Sep Aug Jul Jun May Apr
Personal Consumption 0.2 0.5 0.5 0.0 0.2 0.0
    Real 0.1 0.3 0.3 0.1 0.3 0.0
    Personal Income -0.1 0.4 0.2 0.0 0.4 0.4
Real -0.2 0.2 0 0.1 0.5 0.4
PCE Deflator 0.1 0.2 0.2 -0.1 -0.1 0.0
Core PCE Deflator 0.0 0.1 0.1 0.1 0.1 0.0
Savings Rate (level) 5.3 5.6 5.7 6.0 6.0 5.8

10.11.01 (Source: Bureau of Economic Analysis)