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Thursday, December 30, 2010

Federal Reserve: Rural Economy Driving Economic Growth

The Ag sector has been the shining star that’s kept the overall economy moving in the right direction. Not only has it helped keep GDP in positive territory this last year, it will provide a needed boost to move the economy forward faster in 2011.

Evidence of this is found in a report recently released by the Federal Reserve Bank of Kansas City that suggests America’s rural economy is improving. “A Rural Rebound in 2010” reviews a number of key indicators and asks the question, “Can the rural economy lead the nation’s recovery again in 2011?” The answer is Yes.

According to the report, farm incomes were buoyed by overall global economic growth of 5%, which drove a 16% increase in overall agricultural exports. The USDA has forecasted a 31% growth in real net farm income over 2009.



This, in turn, influenced strong growth in rural economies, where Main Street experienced a boost. The report comments:
Despite the weak housing market, the rural economy strengthened as the year progressed, often outperforming its metro peer.

The report concludes with a prediction that rural economies will lead overall U.S. economic growth in 2011.

Read the report
.

Tuesday, December 28, 2010

Conference Board Consumer Confidence Index Fell 1.8 Points

According to the Conference Board Consumer Confidence Index, consumer confidence fell 1.8 points in December following two months of increases. At 52.5 in December, the index is only slightly above its September low of 48.6.

The decline was driven by deterioration in both present conditions and future expectations. Consumers’ assessment of present conditions fell 1.9 points while the future expectations index fell 1.7 points.


















































> 1985 = 100DecNovOctSepAugJul
Headline Index52.554.349.948.653.251.0
Present Conditions23.525.423.523.324.926.4
Future Expectations71.973.667.565.572.067.5

Case-Shiller: Existing Home Prices Fall 1.3% – Down 0.8% From Year Prior

According to the twenty-city Case-Shiller Index, existing home prices fell in October by 1.3% from the previous month on a non-seasonally adjusted basis. The ten-city metro area index decreased by 1.2%. This was the third consecutive and steepest decrease for both indices.

Frail prices are a reflection of weak existing-home sales during the latter half of the year. Generally, prices have been softening following the expiration of the home buyer tax credit last spring. The demand for housing remains very weak.

All twenty metro areas reported price declines from the three months ending in September to the three months ending in October.

From a year prior, the twenty-city index was down 0.8%, the first decline after eight consecutive months of price appreciation. Los Angeles, San Diego, San Francisco, and Washington DC were the only cities reporting year-over-year appreciation. The ten-city index was up 0.2%, the lowest gain in the eight months the index has been increasing.













































































OctSepAugJulJunMay
10 City Index



































M/M % Change-1.2-0.6-0.10.71.01.3
Y/Y % Change0.21.42.54.05.05.4
20 City Index



































M/M % Change-1.3-0.8-0.30.61.01.3
Y/Y % Change-0.80.41.63.24.24.6

(Source: Standard & Poor’s)

Thursday, December 23, 2010

New Home Sales Up in November

Sales of new single-family houses in November 2010 were at a seasonally adjusted annual rate of 290,000, according to estimates released jointly by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 5.5 percent above the revised October rate of 275,000, but is 21.2 percent below the November 2009 estimate of 368,000.

The seasonally adjusted estimate of new houses for sale at the end of November was 197,000. This represents a supply of 8.2 months at the current sales rate. This is down from a supply of 8.8 months in October.

"Despite the November improvements in new home sales and inventories, new home sales remain at extremely low levels," said Keith Leggett, senior economist at the American Bankers Association.

Consumer Spending and Personal Income Up in November

Personal income increased $42.3 billion, or 0.3 percent, and disposable personal income (DPI) increased $37.8 billion, or 0.3 percent, in November, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $43.3 billion, or 0.4 percent. This was the fifth consecutive monthly increase in consumer spending.

In October, personal income increased $49.5 billion, or 0.4 percent, DPI increased $39.3 billion, or 0.3 percent, and PCE increased $68.9 billion, or 0.7 percent, based on revised estimates.

Real disposable income increased 0.2 percent in November, the same increase as in October. Real PCE increased 0.3 percent in November, compared with an increase of 0.5 percent in October.

Wednesday, December 22, 2010

Q3 Real GDP Growth Revised Upward to 2.6% Annualized; Real Final Sales Down

Real GDP growth in the third quarter was revised upward to 2.6% annualized from the previously reported 2.5% growth rate. This was a faster pace of growth than in the second quarter, where GDP grew 1.7%. 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% for multiple quarters following the deep recessions in the early 80s and mid 70s.

The upward revision was primarily due to an increase in inventory accumulation and to a lesser extent, an improvement in net-exports. However, most of this gain was offset by a downward revision to consumption. Consumption added 1.7 points to growth rather than the previously reported 2.0%.

Though total growth was slightly higher in this revision, the details of it are weaker. A greater amount of the growth picture over the quarter was due to inventory accumulation. Though this is still demand growth, the effects are temporary as it primarily reflects firms making short term inventory realignments. Real final sales growth, which removes inventories in order to get a measure of the underlying demand in the economy, was only 1.0%, compared to the previous 1.2%. This is quite modest. Moving forward, GDP growth will more closely follow the real sales trend as the inventory cycle comes to an end. Therefore, in order to start to drive down unemployment, real final sales growth will have to accelerate.

































































































annualized % changeQ3 2010PreviousQ2 2010Q1 2010Q4 2009Q3 2009
Real GDP2.62.51.73.75.01.6
% contribution to r. GDP
Consumption1.72.01.51.30.71.4
Fixed Investment0.20.22.10.4-0.10.1
    Residential-0.8-0.80.6-0.30.00.3
    Non-Residential0.91.01.50.7-0.1-0.1
Inventories1.61.30.82.62.81.1
Government0.80.80.8-0.3-0.30.3
Net Exports-1.7-1.8-3.5-0.31.9-1.4

Existing Home Sales Rise 5.6%; Sales Prices Up 0.1%

In November, existing home sales rose by 5.6 percent to an annualized sales pace of 4.68 million units. The increase in sales more than reverses the 2.2% decline seen in October. Sales have generally trended upward since the large fall-off in the early summer following the expiration of the home buyer tax credit. However, sales still remains below the per-tax credit pace. From a year prior, sales were down 27.9%. This number is magnified due to a sales jump in November 2009 due to the first planned expiration of the tax credit.

With the increase in sales over the month, the months supply of inventory fell to 9.5 from 10.5. This was the lowest the ratio has been since June. 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. The median price in November, snapped a four month streak of price declines. The median price rose 0.1 percent to $170,6000/ From a year prior, prices were up 0.4%, the first positive year-over-year change since August.





























































NovOctSepAugJulJun
Sales (mil. annual.)4.684.434.534.123.845.26
    M/M % Change5.6-2.210.07.3-27.0-7.1
Med. Price (‘000s)$170.6$170.4$171.5$177.5$182.1$183.0
    Y/Y % Change0.4-0.9-2.50.20.40.7
Months Supply9.510.510.612.012.58.9

Thursday, December 16, 2010

Housing Starts Rise 3.9%, Single Family Starts Down 6.9% (Updated)

Privately-owned housing starts in November were at a seasonally adjusted annual rate of 555,000. This is 3.9% above the revised October estimate of 534,000, but is 5.8% below the November 2009 rate of 589,000. Single-family housing starts in November were at a rate of 465,000; this is 6.9% above the revised October figure of 435,000.

However, privately-owned housing units authorized by building permits in November were at a seasonally adjusted annual rate of 530,000. This is 4.0% below the revised October rate of 552,000 and is 14.7% below the November 2009 estimate of 621,000. Single-family authorizations in November were at a rate of 416,000; this is 3.0% above the revised October figure of 404,000.

“Residential housing construction faces strong headwinds. High levels of unemployment, weak household formation, and large inventories of existing homes continue to weigh on the housing market,” said Jim Chessen, chief economist of the American Bankers Association.

Millions (SAAR) Nov Oct Sep Aug Jul Jun
Housing Starts 0.56 0.53 0.60 0.61 0.55 0.54
M/M % Change 3.9 -11.1 -2.1 11.6 2 -8.3
Single Family Starts 0.47 0.44 0.45 0.43 0.43 0.45
M/M % Change 6.9 -2.7 3.5 1.2 -5.1 -2

Wednesday, December 15, 2010

Industrial Production Up 0.4%, Manufacturing Output Up 0.3%

In November, industrial production rose 0.4%, following a decline of 0.2% in October. Manufacturing output rose by 0.3%, the same growth rate as in October. Growth was held back by a large decline in the volatile auto production component, which fell 6.0%. However, business equipment and machinery continued to post strong gains, keeping the top line number in positive territory. Not including autos, manufacturing output rose 0.7%, the strongest gain since last May. This was the second continuous month of solid manufacturing output growth following weak numbers in the months prior. It suggests that manufacturing sector activity has perhaps ended its deceleration that occurred over the late summer. From a year prior, total output was up 5.4%, while manufacturing was production was up 5.3%.

Mining output fell for the second straight month, declining by a slight 0.1%. In contrast utilities output jumped 1.9%, after falling heavily over the prior three months.

The capacity utilization rate rose to 75.1%. Though this still relatively low, this was the highest rate since October 2008.





























































M/M % ChangeNovOctSepAugJulJun
Total Output0.4-0.20.10.20.80.1
    Manufacturing0.30.30.10.10.7-0.2
    Mining-0.1-0.21.12.21.3-0.2
    Utilities1.9-3.7-1.4-1.10.92.5
Capacity Utilization R.75.274.975.17574.874.2

CPI Up 0.1%; Core Prices Up 0.1%

In November, the Consumer Price Index rose 0.1%. Unlike in most recent months, energy prices did not rise by a significant amount. Therefore, the core index, which excludes prices of energy and food products, rose by a similar 0.1%.

From a year prior, the CPI was 1.1% higher, tying its recent low of 1.1% in September. The core CPI was up by just 0.7% from a year prior. This was just 0.1% above October’s year-over- year change, which was the smallest rise in the post WWII era. There currently remains 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. % ChangeNovOctSepAugJulJun
    CPI0.10.20.10.30.3-0.1
    Core CPI0.10.00.00.00.10.2
Year/ Year % Ch.
    CPI1.11.21.11.21.31.1
    Core CPI0.70.60.81.01.01.0

FDIC Board Meeting: 200+ Jobs to Support Agency’s Dodd-Frank Responsibilities

The FDIC Board met yesterday to adopt its budget for 2011. What was interesting is that this budget discussion followed the adoption of a 2.00% long-term Designated Reserve Ratio – a very high level that ABA opposed. As noted in yesterday's post on the FDIC Board Meeting, setting a reserve ratio that is too high means that fewer resources are available for banks to deploy in their communities.

There is another important reason for limiting the size of the FDIC fund: it acts as a means of discipline, encouraging the FDIC to use its resources wisely. This is why our interest was piqued when it was reported that the FDIC would add “another 200 plus positions.” Certainly, the FDIC has a lot on its plate, dealing with high numbers of bank failures. But the budget approved by the FDIC actually eliminates 251 positions in the Division of Resolutions and Receiverships. These are vacant positions that will not be filled because the pace of failures had slowed.

So where are these new positions being deployed? First, 29 new positions will be added to support the newly created Division of Depositor and Consumer Protection. This division is to pick up where the Bureau of Consumer Financial Protection leaves off in examining smaller banks for compliance with any new rules from the Bureau.

There should be no doubt in bankers’ minds that the FDIC intends to devote considerable resources to assure compliance with the Bureau’s rules. Just to put an exclamation point on that, the FDIC is adding another 7 new permanent positions in the legal division to support the work of this new division. Moreover, FDIC noted

There are some additional decisions to create the infrastructure of that division and to beef up the enforcement portions of the compliance discipline and those are also funded as permanent positions in this budget.

There are more FDIC costs that the banking industry will bear under what the FDIC called “significant new responsibilities that we have under Dodd-Frank.” For example, the FDIC board approved the creation of an office of complex financial institutions in August and now is budgeting for 156 positions in that new organization. The FDIC noted:

There are also some additional positions, 13 positions in legal to support that new area of business. So there is a substantial amount of resource here included related to our responsibility to address those responsibilities going forward.

There’s more: “24 additional permanent positions for large bank responsibility that are driven both by the provisions of Dodd-Frank for stress testing and things like that,” noted FDIC staff. Plus, FDIC staff noted: “we have added 118 new permanent positions to implement a new permanent staffing platform for future readiness.”
Since the full cost of the FDIC – including personnel, administrative, examination, and bank failure costs – is borne by the banking industry, the decisions made by FDIC today will have significant consequences for banks and the communities they serve for years to come.

Read the Memorandum on the 2011 Budget.
View the Budget in Excel.

Tuesday, December 14, 2010

FDIC Board Meeting: $100+ billion Deposit Insurance Fund

The FDIC Board met today to adopt a final rule establishing the long-term Designated Reserve Ratio at 2.00% of insured deposits – a $108 billion fund if it were in existence today. ABA opposed such a large fund in our comment letter to the FDIC and in follow-up conversations with the FDIC. Certainly, the previous designated reserve ratio of 1.25% was too low, and losses to the fund were so great that it required a special assessment to boost the fund in order to avoid borrowing from the Treasury department. Thus, the desire for more money in the FDIC fund is understandable. But that doesn’t mean an unreasonably high reserve level or an open-ended one that leads to an ever-growing fund. Higher premiums to support a larger fund mean fewer dollars would be available to support bank capital and the many financial services that banks provide to their communities. It’s important to balance the needs of the FDIC with those of banks and their communities.

A key point that ABA made in arguing for a reserve ratio lower than 2.00% was that the FDIC analysis completely ignored the role of the Dodd-Frank Act and higher capital standards in lowering both the probability of banks’ failing and the cost of those that do fail. A primary goal of the Dodd-Frank Act was to prevent a recurrence of the type of failure cycle we are currently experiencing. Thus, without explicit recognition of these Dodd-Frank changes and higher capital standards, the designated reserve ratio will be set far higher than is necessary. The FDIC’s response:

The current crisis occurred despite extensive legislative changes to the banking and regulatory system that were made in response to the crisis of the late '80s and early '90s.

While this is true, it certainly can’t mean that the FDIC believes that the Dodd-Frank bill or higher capital standards will do nothing to lower the probability of bank failures or the cost of those that do fail. To assume no impact from the recent changes is to repudiate key provisions of the Dodd-Frank Act.

ABA also made the point that the pace of recapitalization is as important as the level that is ultimately reached. We urged the FDIC to use the full recapitalization period provided under Dodd-Frank. In this regard, Chairman Bair provided an important clarification:

And we are making full use of the amount of time Dodd-Frank gives us to restore the funds which we should have calibrating premiums so we will have 1.15 in 2018 and then that will be a two-year period where we are required by statute to assess a larger banks and that's what the statute requires. I think that is helpful to clarify.

This is important as it keeps the maximum amount of funds in local communities while assuring progress toward the mandated minimum level and on the time frame set by Congress. We appreciate the Chairman’s remarks indicating that this is indeed the agency’s intention.

Read the ABA Comment Letter.
Read the Final Rule by FDIC.
Read FDIC's Memorandum on the Final Rule.

Fed Will Maintain Purchase of $600 Billion Worth of 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 FOMC also decided to essentially maintain its previously announced policy of purchasing $600 billion in long term treasuries that was announced last meeting:

…the Committee decided today to continue expanding its holdings of securities as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.

Essentially the tome and language in this month’s statement differed little from the prior one. More recent economic data and the tax and unemployment benefit compromise bill did not sway the committee to make changes to their policies.

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



































December 14th Meeting November 3rd Meeting
Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, 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. The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward. 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.
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. 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.
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 continue expanding its holdings of securities as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $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. 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 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.

Retail Sales Up 0.8%– Core Sales Up 0.8%

In November, retail sales grew at a brisk pace of 0.8%, following an upwardly revised increase of 1.7% in October (previously reported as a 1.2% rise). This was the fifth consecutive monthly increase. Sales growth has been quite strong over the past four months. The consumer, at least for the time being, has clearly shown some life again. Sales in November were driven by apparel, discount stores, general merchandise and gasoline. Essentially most everything that was a non-housing related consumer good showed strong gains. Housing related areas such as furniture, appliances and building materials stores continued to show weakness, posting sales declines. Core sales, which remove the volatile autos and gasoline components also rose 0.8%.

From a year prior, sales were up 7.7%. Core sales were up 6.3% from a year earlier. This was the highest annual rate of growth since before the recession.






































































NovOctSepAugJulJun
Headline Index
    M/M % Change0.80.40.40.50.1-0.4
    Y/Y % Change3.54.34.03.04.02.6
Core Prices
    M/M % Change0.3-0.60.10.10.30.1
    Y/Y % Change1.31.41.51.31.51.0

PPI: Headline Up 0.8%; Core Prices Up 0.3%

In November, the Producer Price Index for finished goods rose 0.8%. Producer prices have been growing quickly over the past four months, growing at an annualized rate of 6.4% over the period. As has been the case with other recent months, November’s rise was driven by increases in energy product prices, which rose 2.1%. In addition, food products also rose in price by 1.0%.

The core index, which does not include energy or food product prices, rose by a lesser 0.3%. This is a significant increase, but it follows a sharp decline of 0.6% in October. Both months were heavily influenced by the annual change in car year models. October's decline was driven by this adjustment to the index. Similarly, November's increase was primarily due to an increase in price of passenger vehicles.

From a year prior, the core index was up 1.3%, the lowest rate since August. The top line index, including all finished products, was 3.5%higher from a year ago.





























































Mo. % ChangeNovOctSepAugJulJun
    Total Sales0.81.70.90.90.5-0.3
    Ex Autos and Gas0.80.80.70.90.10.3
Year/ Year % Change
    Total Sales7.78.07.74.25.65.2
    Ex Autos and Gas6.35.85.24.94.34.1

Despite Cheap Money, Small Businesses Are Reluctant to Borrow

The National Federation of Independent Business (NFIB) reported that although interest rates remain historically low, most small business owners are not interested in borrowing.

The NFIB reported that 91 percent of small businesses had either their credit needs met or were not interested in borrowing. Only 9 percent of small businesses reported that not all of their credit needs were satisfied; however, a record 53 percent said they did not want a loan. A record low 28 percent of all owners reported borrowing on a regular basis.

Reported and planned capital spending are still hovering near 37 year record low levels. Capital spending seems to be primarily in “maintenance mode” – if it breaks, replace it, but that’s it. This low level of capital spending is not surprising given that the Small Business Optimism Index remains in recession territory.

Only four percent of small businesses reported financing as their top business concern. On the other hand, 30 percent of the owners reported that weak sales continued to be their top business problem, followed by 22 percent citing taxes and 15 percent government regulations and red tape.

Monday, December 13, 2010

October Housing and Mortgage Market Trend Sheet

The latest October sales numbers were flat and the months supply is still elevated as the hangover of the home sale tax-credit lingers. Despite the tax-credit moving some housing inventory off the market this past year, the inventory continues to grow.

In the graph based on data from CoreLogic, the dark blue area represents the roughly 4 million homes that are officially for sale. The growth in the other colored lines indicates that there are now an additional 2.1 million homes that are in delinquency, foreclosure or REO status.



In the coming year, some analysts are expecting that the shadow inventory of homes will drag down the median home sales price before it stabilizes in the second half of next year. By that time, the hope is that the U.S. economy will regain its legs and the housing market will have cleared out some of its excess inventory – allowing home prices to stabilize.

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

Moody's Warns it May Downgrade US Debt Outlook if Tax Compromise Bill Passes

CNBC is reporting that Moody’s investor service warns that if the tax and unemployment compromise bill proposed by President Obama is enacted, that it may downgrade the outlook on US Treasuries from “stable” to “negative.”

Moody’s estimates that the bill will cause increased economic growth relative to the baseline law of allowing both tax cuts and unemployment benefits to expire. However, even with the increased growth, the bill will hurt US credit worthiness:
'From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth,' Moody's analyst Steven Hess said.
Downgrading the outlook to “negative” means that Moody’s sees an increased expectation of downgrading the rating from Aaa within 12-18 months following the outlook change.

Based on their estimate, unless other changes are also made to offset this effect in the next two years, enacting this bill would cause government debt as a ratio of revenues to be about 400 percent by the end of 2012.
'This is a very high ratio compared with both history and other highly rated sovereigns,' Moody's said.
Since the announcement of the plan, as predicated in a previous post, Treasury yields have been rising.

CNBC’s article can be read here.

Friday, December 10, 2010

Trade Deficit Narrows by 13.2%; Exports Post Strong Growth, Imports Decline

In October, the trade deficit narrowed considerably, falling 13.2% to a monthly pace of $38.7 billion. This was the second signifigant drop in a row. The trade deficit expanded considerably following the Greek debt crisis last spring, as exports were hurt due to currency revaluations and depressed demand in Europe. Net-exports were a significant drag on GDP growth in Q2 and to a lesser extent in Q3. However, exports have now grown solidly the past two months and this bodes well for adding to growth in Q4.

Over the month, exports grew 3.2%, following growth of 0.5% in September. At the same time, imports fell 0.5%, which was the second similarly sized decline in a row. From a year prior, exports were up 15.9%, while imports were up 16.1%.




















































Mo. % ChangeOctSepAugJulJunMay
Trade Deficit (billions)$38.7$44.6$46.9$42.9$50.1$42.2
    Mo. % Change-13.2-4.99.3-14.418.73.4
Exports3.20.5-0.12.0-1.32.8
Imports-0.5-0.82.0-2.13.13.0

University of Michigan Consumer Confidence Up 2.8 Points

In December, the University of Michigan Consumer Sentiment Index rose 2.8 points to 74.2. This was the second consecutive monthly improvement in the index. Despite still being at a low level, consumer confidence is at the highest level since last spring. The improvement over the month was driven by gains in both the current conditions and future expectations components of the index. The prior rose 3.6 points, while the latter rose 2.0 points.

Inflationary expectations fell slightly. The one-year outlook fell to 2.9% from 3.0% in November. The five-year outlook fell 0.1% to 2.7%.











































1966 = 100DecNovOctSepAugJul
Headline Index74.271.667.768.268.967.8
    Current Conditions85.782.176.679.678.376.5
    Future Expectations66.864.861.960.962.962.3

Thursday, December 9, 2010

Household Net Worth Increased by Almost $1.2 Trillion During the Third Quarter

Household net worth increased by almost $1.2 trillion to almost $54.9 trillion during the third quarter of 2010, according to the Federal Reserve’s Flow of Funds data.

Household net worth has increased by $6 trillion from its trough in the first quarter of 2009 at the height of the financial crisis; but is still $10.9 trillion below the second quarter 2007 peak of 65.75 trillion.

The expansion in household net worth was the result of a combination of factors – gains on the market value of corporate equities, mutual fund shares, and life insurance and pension fund reserves. However, the decline in the market value on real estate was a drag on household net worth – falling by almost $750 billion during the quarter. Since the beginning of 2007, the market value of real estate assets have fallen by over $7.4 trillion.

The pace of consumer deleveraging slowed during the third quarter. The household sector reduced its level of mortgage debt during the third quarter by $64.4 billion. However, consumer credit grew by $22.3 billion during the quarter.

The Flow of Funds reported that net worth as a percent of household disposable personal income rose to 480.6% during the quarter from 472.4%. In comparison, the ratio of net worth to disposable personal income was 449.5% as of the first quarter 2009.

26.1 Million Americans Experienced Some Unemployment during 2009

The Bureau of Labor Statistics reported that the number of persons who experienced some unemployment during 2009 increased by 4.9 million to 26.1 million.

The "work-experience unemployment rate" – defined as the number of person unemployed at some time during the year as a proportion of the number of persons who worked or looked for work during the year – was 16.4% in 2009, up from 13.2% in 2008. Overall, men continued to have higher "work-experience unemployment rates" in 2009 than women, 18.8 versus 13.6%.

Among those who experienced unemployment in 2009, the median number of weeks spent looking for work was 19.7, up from 15.2 in 2008. The number of individuals, who looked for a job but did not work at all, increased by 2.7 million to about 5.8 million individuals in 2009. Of the 20.3 million persons who worked during 2009 and also experienced unemployment, 20.5% had 2 or more spells of joblessness, down from 22.1% in 2008.

Tuesday, December 7, 2010

Consumer Credit Up in October, Revolving Credit Contracts for the 26th Straight Month

The Federal Reserve reported that consumer credit increased in October at an annual rate of 1.7% to almost $2.4 trillion, as the growth in non-revolving credit outpaced the contraction in revolving credit.

Revolving credit in October declined at an annual rate of 8.4% to $800.5 billion – its lowest level since the end of 2004. This marks the 26th consecutive monthly contraction in outstanding revolving credit. Revolving credit is down 17.8% from its peak in August 2008.

Federal Reserve Governor Betsy Duke last week in a speech stated that “the decline in revolving consumer credit outstanding is due to a combination of higher charge-offs, tighter credit, and less consumer willingness to take on debt.”

Non-revolving credit, on the other hand, rose at an annual rate of 6.8% in October to almost $1.6 trillion. This was the third straight monthly increase in non-revolving credit. The October increase in non-revolving credit was in part fueled by stronger vehicle sales in October, which were modestly higher than September’s numbers.

Details of Tax Cut and Unemployment Benefit Deal

The White House announced last night a bipartisan deal that would extend expiring tax cuts and unemployment insurance benefits. If no bill is passed by the end of the month, tax rates will revert to the pre-Bush era levels and unemployment benefit extensions will come to an end.

Relative to what would have occurred without a new law, this deal represents about an $800 billion tax cut and unemployment benefit extension as well as some relatively modest new measures. This number does not represent an expansion of deficit spending on top of what is currently happening, but rather an extension of the current levels. Only about $100 billion in new tax cuts and spending occurs out of the $800 billion, and this is partially offset by an increase in revenue from elsewhere.

The following is a list of provisions in the proposal with two dollar amounts associated with each. The first is the cost to the budget compared to if no bill was passed. The second number accounts changes in net government outlays relative to the current year. There is a chance that these numbers could be tweaked before becomeing law.


Two-Year Extension of all Bush Tax Cuts: $458 Billion, $0 Billion
This included all income tax rates, the expanded child tax credit, and capital gains and dividend taxes. Also included is a two-year continuing patch of the Alternative Minimum Tax (AMT) which accounts for about $140 billion of the total. The extension of the upper income bracket rates, which the White House preferred to allow to expire, accounts for about $60 billion.

One-Year Unemployment Benefit Extension: $57 Billion, $0 Billion
Unemployment benefits will continue to be extended through the end of next year for up to 99 weeks of benefits instead of reverting back to the standard 26 week period.

One-Year Social Security Tax Cut: $120 Billion, $60 billion
The employee portion of the social security tax will be cut for one year from 6.2% to 4.2%. This adds up to be a $120 billion dollar tax cut. This would replace the expiring Making Work Pay tax credit, which provided a credit of $400 dollars per single filer and $800 per couple, totaling about $60 billion per year. Therefore, on net this represents an additional $60 billion cut.

Business Expensing Tax Breaks: Unknown, Likely Tens of Billions
It is not clear which tax credits will be included in the package at this point. It is likely that the R&D credit will be extended for two years. This was likely to happen regardless. The new part of the deal is allowing full investment tax write-off for 2011 compared to the 50% level currently due to the stimulus bill.

Two-Year Individual Tax Credit Extensions: $40 Billion, $0 Billion
This would extend the increases in a number of credits that were increased in value due to the stimulus bill. These include an expanded earned income tax credit, the child tax credit, and a college tuition tax credit.

Estate Tax: $88 billion, Some level of Increased Revenue
The rate has been reduced under the Bush era tax cuts, and will revert to a 55% tax on all estates over $1 million. Because of a quirk in the way various bill's time horizons overlapped and the resulting political gridlock, 2010 saw a one-year window where the rate was 0%. The deal would set in place a 35% tax on estates over $5 million for a two year period.


There is only a modest amount of new tax cuts and spending measures in this deal relative to the current year, mostly from the expanded payroll tax cut and expanded business expensing rules. This bill would mostly maintain current tax and spending levels. Therefore, this should not be read as being $800 billion in new stimulus spending over the next two years. What it does do is prevent fiscal policy contraction of around that magnitude. With recovery still slow, spending cuts and tax increases of that size would significant dampen growth in the short run.

Realistically, most of these extensions were likely to happen. Extension of the Bush era rates for most tax payers is supported by both parties. Out of the $800 billion number of this deal only about $100-$200 billion in tax cuts and expenditures were up for debate. But it was always possible that political gridlock would prevent a bill of any kind from passing resulting in no extension.

Therefore, this move should give ease to markets by removing the risk of tax rate increases this upcoming year as well as ensuring continued fiscal policy support. This will likely benifit the equities markets, while bonds are likely to move in the opposite direction. Yields will likely rise due to either increased deficit worries and/or predictions that this will help to improve economic growth.

Friday, December 3, 2010

ISM Non-Manufacturing Index Up 0.7 Point to 55.0; Employment, New Orders Up

In November, the Institute for Supply Management's Non-Manufacturing index rose modestly by 0.7 point to 55.0. This was the third continuous improvement in the index. A value over 50 indicates service sector business activity expansion. The index is now at its highest level since last May.

The business output component fell somewhat, dropping 1.4 points, but remained well into expansionary territory at 57.0. In contrast the employment component increases 1.9 points to 52.7. This is the highest level since the recovery began. Looking forward, the new orders component also rose, increasing by 1.0 point to 57.7. This indicates likely increased future production.






































































>50 = expansionNovOctSepAugJulJun
Headline Index55.054.353.251.554.353.8
    Business Output57.058.452.854.457.458.1
        Exports59.555.558.046.552.048.0
    Employment52.750.950.248.250.949.7
    New Orders57.756.754.952.456.754.4
    Backlogged Orders51.552.048.050.552.055.5

Payroll Employment Up 39,000; Unemployment Rate Up to 9.8%

In November, payroll employment rose by a meager 39,000. This followed an upwardly revised gain of 172,000 in October (previously reported to be 151,000). Though now complete, the top line number for payrolls has been volatile for most of the year due to the hiring and laying off of temporary census workers. Therefore, looking at private payrolls shows a better underlying picture of the labor market environment. In November, private firms added 50,000 jobs, the slowest pace in months and on par with the recent low in May of 51,000. Private sector job growth had been accelerating somewhat in recent months, adding 160,000 in October. November’s number is disappointing and was held back in part due to relatively weak seasonal hiring for the holidays. Though job growth continues, it remains slow and will likely continue to come at uneven pace.

ABA Chief Economist, Jim Chessen stated, “It’s a pattern that will continue to repeat itself: two steps forward, one step back. The trend will still be upwards for job growth, but don’t expect large gains anytime soon.”

Payrolls must expand somewhere around 100,000 to 150,000 per month simply to absorb new entrants to the labor market. As such, the weak growth in November caused the unemployment rate to increase. Unemployment rose to 9.8% from 9.6% a month earlier. This was the highest rate since last April. The labor force participation rate remained at its cyclical low reached last month, implying that a large amount of workers continue to be discouraged.






































































NovOctSepAugJulJun
Payroll Change (000s)39172-24-1-66-175
    Goods Producing-153-1017371
    Services54169-14-18-103-176
    Private Sector5016011214311761
Unemployment Rate9.89.69.69.69.59.5
Labor Force Particip. R.64.564.564.764.764.664.7

Wednesday, December 1, 2010

ADP Employment Report: Private Payrolls Up 93,000 – Largest Gain of Recovery Thus Far

In November, according to the ADP Employment Report, private sector payrolls rose by 93,000. This follows an upwardly revised rise of 82,000 in October (previously reported to be a gain of 43,000). November’s gain was the tenth consecutive monthly increase, and the largest of the recovery thus far. However, though improving, this growth is still modest. Payrolls must grow about 100,000 to 150,000 per month in order to absorb new entrants to the labor market and begin to drive down the unemployment rate.

The rise over the month was driven by an increase in service sector jobs, which rose by 79,000. However, goods producing jobs expanded by 14,000 also, which was the first increase since spring of 2007. Manufacturing gained 16,000 jobs, reversing two months of modest declines. This is encouraging as manufacturing employment had seemed to have been losing momentum. November’s number shows the sector is continuing to grow.











































(SAAR) %Q3 2010Q2 2010Q1 2010Q4 2009Q3 2009Q2 2009
Output Per Hour2.3-1.83.96.07.08.4
Compensation/ Hour2.22.9-0.91.53.49.1
Unit Labor Costs-0.14.9-4.6-4.2-3.30.6

ISM Manufacturing Index Down 0.3 Point to 56.6

In November, the Institute for Supply Management's Manufacturing Index fell back slightly, falling 0.3 point to 56.6. Even though the index declined somewhat, it is still the second highest value since May and is significantly above the expansionary threshold. Values over 50 signify manufacturing sector activity growth.

The index was pulled down primarily by the production component, which fell 7.7 points to 55.0. Looking forward, the new orders component also fell but by a lesser 2.3 points leaving it at 56.6 for the month. Employment remained solid at 57.5, only down 0.2 point from October. Over all, these past two months help to alleviate fears of a double dip recession that seemed to be more likely this past summer.




















































m/m % changeOctSepAugJulJunMay
Total0.70.7-0.9-2.60.1-2.8
    Private Residential2.50.6-6.2-4.1-1.6-4.7
    Private Non Res.-0.70.20.4-4.0-1.6-2.5
    Public0.41.22.1-0.23.0-1.4

Construction Spending Up 0.7% - Residential, Public Spending Rise

In October, new construction spending rose 0.7%. This was the second monthly increase following significant declines in the prior two months. The month’s increase was primarily driven by a 2.5% increase in residential spending. Housing construction fell off heavily in the wake of the homebuyer tax credit expiring. The past two months, spending has recovered somewhat from that low. From a year prior, residential spending was down 9.2% from a year prior, while total construction spending was down 9.3%.

Private non-residential spending fell 0.7% after two months of modest increases. From a year prior, spending was down 20.7%. Public sector spending rose 0.4% over the month and was up 2.2% from a year earlier.















































































50 = expansionNovOctSepAugJulJun
Activity Index56.656.954.456.355.556.2
    Production55.062.756.559.957.061.4
    Employment57.557.756.560.458.657.8
    New Orders56.658.951.153.153.558.5
        Export Orders57.060.554.555.556.556.0
    Backlogged Orders46.046.046.551.554.557.0
    Inventories56.753.955.651.450.245.8

Labor Productivity Growth Revised Up to 2.3%; Unit Labor Costs Fall 0.1%

Labor productivity growth was revised upward for Q3 to 2.3% on a seasonally adjusted, annualized basis. This compares to 1.9% previously reported. Despite, the increase in productivity, the trend over the past year and a half has been decelerating growth. This is a normal process of economic recovery. At early stages of the process, employers attempt to get greater output out of their existing workforces. As some point however, little more can be done and new output demand is met by greater levels of new hiring. Moving forward, new growth will likely correspond with a pickup in new payroll employment.

Over the quarter, output per hour of labor rose 2.3% annualized, while compensation per hour rose by 2.2%. Unit labor costs, the measure of cost of a unit of output per hour, therefore fell by a slight 0.1%. Inflationary pressure from the labor markets remain minimal if existent at all due to large amounts of labor market slack leading to limited pricing power on the part of workers.












































(SAAR) %Q3 2010Q2 2010Q1 2010Q4 2009Q3 2009Q2 2009
Output Per Hour2.3-1.83.96.07.08.4
Compensation/ Hour2.22.9-0.91.53.49.1
Unit Labor Costs-0.14.9-4.6-4.2-3.30.6

Live Meeting with National Commission on Fiscal Responsibility and Reform

The National Commission on Fiscal Responsibility and Reform is meeting now (12/1) to discuss its recent report, A Moment of Truth. This meeting can be viewed live at www.whitehouse.gov/live.