Business Loan Demand Improved as Banks Offer More Favorable Terms

An improving economic outlook has increased businesses’ interest in borrowing, as banks continued to offer more favorable borrowing terms.

According to the Federal Reserve’s Senior Loan Officer Survey, banks reported an increased demand for loans and higher credit lines, reflecting improvements in economic and business sentiment. Of the banks reporting higher loan demand, seventy-five percent cited the increased demand was due in part to funding needs for merger and acquisition activity. In addition, borrowing inquiries were up.



The survey showed banks are continuing to offer more favorable borrowing terms on business loans, as has been recorded over the past year. Banks are becoming more tolerant of risk and more willing to lend to various segments of the economy. However, the size of business credit lines and credit card accounts were essentially unchanged.



“The improving economic outlook is making banks more willing to lend at more favorable terms to businesses,” said Jim Chessen, ABA’s Chief Economist.

Bankers are optimistic that loan quality to businesses will improve in 2011. Eighty percent of the banks expect loan quality to large and mid-sized firms to improve, and seventy percent expect an improvement in small business loan quality. No banks expect business loan quality to decline in 2011.

Q4 Real GDP Grows 3.2% Annualized – Personal Consumption Strengthens

In the fourth quarter, real GDP growth accelerated to 3.2% on an annualized basis. This was the strongest growth rate since the first quarter of last year. The quarter’s growth was strongly affected by two opposing forces. Growth was held back greatly by the end of the inventory readjustment cycle, which had been a key contributor to growth in previous quarters. Changes in inventory accumulation placed a large drag on growth, taking 3.7 points off of the total number. However, counteracting the inventory factor was a large boost in net exports, as international trade recovered from the fall off felt earlier in the year in the wake of the Greek debt crisis. Net exports added 3.4 points to GDP growth. Both the inventory and trade factors are likely onetime adjustments and will not have large impacts going forward into the next few quarters.

Growth at 3.2 percent is solid but it is only modest with regards to driving unemployment down. However, looking more at the underlying trend, it is encouraging that the report showed that personal consumption grew at a pace of 4.4% annualized. This was by far the strongest growth rate yet of the recovery. Consumption added 3.0 points to growth over the quarter compared to 1.7 points in Q3.

ABA Chief Economist Jim Chessen stated, “It is encouraging to see consumers joining the business sector in the recovery. It suggests that the economy is transitioning away from largely public policy supported growth to a point where expansion will be self sustaining.”

Also in the report, direct government expenditures where a slight drag on growth. Stimulus funds are winding down and local and state government are cutting back. Fixed business investment continued to add to growth, though at a more modest pace than in prior quarters, and residential investment stabilized.

annualized % change	Q4 2010	Q3 2010	Q2 2010	Q1 2010	Q4 2009	Q3 2009
Real GDP	3.2	2.6	1.7	3.7	5.0	1.6
% contribution to real GDP
Consumption	3.0	1.7	1.5	1.3	0.7	1.4
Fixed Investment	0.5	0.2	2.1	0.4	-0.1	0.1
Residential	0.1	-0.8	0.6	-0.3	0.0	0.3
Non-Residential	0.4	0.9	1.5	0.7	-0.1	-0.1
Inventories	-3.7	1.6	0.8	2.6	2.8	1.1
Government	-0.1	0.8	0.8	-0.3	-0.3	0.3
Net Exports	3.4	-1.7	-3.5	-0.3	1.9	-1.4

University of Michigan Consumer Confidence Down 0.3 Point

In January, the University of Michigan Consumer Sentiment Index fell slightly, dropping 0.3 point to 74.2. Confidence levels remain very low, but they are considerably higher than they were early last year. The weakening in January was entirely due to worsening in the current conditions component, which fell 3.5 points. In contrast, the future expectations component of the index rose by 1.8 points.

Inflationary expectations rose significantly. The one-year outlook rose to 3.4% from 3.0% in December. The five-year outlook rose 0.1% to 2.9%.

1966 = 100	Jan	Dec	Nov	Oct	Sep	Aug
Headline Index	74.2	74.5	71.6	67.7	68.2	68.9
Current Conditions	81.8	85.3	82.1	76.6	79.6	78.3
Future Expectations	69.3	67.5	64.8	61.9	60.9	62.9

Some Public Debt Stories

S&P downgrades Japanese sovereign debt to AA- from AA and warns that the government has no “coherent strategy” to address its ballooning deficit.
(Source: New York Times)


As perhaps a sign of things to come, Nassau County, NY has its finances seized by the state government as it flirts with insolvency.
(Source: New York Times)


The Social Security program is now forecast to be permanently in the red with increasingly large deficits going forward. From this point on, revenues will be less than outgoing payments and the difference will be made up by the general fund borrowing additional money.
(Source: LA Times)


The Congressional Budget Office updated its Federal Budget outlook on Wednesday.(pdf) The projected deficit for the current fiscal year was revised up to $1.48 trillion, or 9.8% of GDP. Much of the upward revision was due to the tax cut and unemployment benefit extension compromise bill passed in December. If assumptions are made that most of the Bush era tax cuts will continue to be extended, that Medicare reimbursements rates will continue to be patched and that the AMT will be patched, Federal debt held by the public is on track to be about 100% of GDP around 2020.
(Source: CBO)

ABA: TARP Broadly Mischaracterized as Banking Programs Return Billions in Profit

ABA submitted a statement for the record to the House Committee on Oversight and Government Reform expressing a repeated concern that the purpose of TARP, specifically the bank programs, was not well articulated. The fact that the investments in banks were only for generally healthy institutions – and promised a significant return to the government – was lost on the public, and worse, often broadly mischaracterized as a bailout.

More than two years ago, when the TARP’s Capital Purchase Program (CPP) for banks had just begun, ABA stated in testimony that the program would return billions in profits to the taxpayers and called for more clear communication about the purpose and realities of the bank programs. In fact, Treasury has recorded a profit of $30.3 billion for TARP, after deducting losses, according to a Congressional Oversight Panel report. The bank programs have generated over 93 percent of this income.

The bank investments have been so successful that they yielded 5.5 percent more than the S&P 500 returned over the same period, according to a report by Keefe, Bruyette & Woods Inc.

Today’s hearing, titled “Bailouts and the Foreclosure Crisis”, included testimony from TARP’s Special Inspector General who stated:

TARP’s outlook has never been better. Not only did TARP funds help head off a catastrophic financial collapse, but estimates of TARP’s ultimate direct financial cost to the taxpayer have fallen substantially…The highest losses from TARP are expected to come primarily from housing programs, assistance to the automotive industry, and, potentially, SSFI [AIG].

Treasury said it expects TARP to cost between $25 billion and $50 billion, depending on the performance of AIG and the expenses of its mortgage modification programs. The profit from banks and better than expected results from some non-bank programs has driven the cost of TARP down 93 percent in less than two years, from $356 billion to $25 billion.

Further, Treasury said today that it expects to close on the sale of its last remaining stake in Citigroup on Monday. The $45 billion investment in Citi is expected to generate a $12.3 billion profit for taxpayers.

Read ABA’s full statement.

New Home Sales Up 17.5%– Fastest Pace Since Last April

The pace of new home jumped upwards by 17.5% in December to 329,000 annualized units, making it the strongest month of sales since last April. Though this is still a very slow pace, it coincides with the recently released existing home sales number showing that sales activity accelerated going into the end of the year.

The contracting number of new homes available for sale paired with the increased rate of sales pushed the months’ supply of inventory down significantly from 8.4 months in November to 6.9 months in December. This is the lowest ratio since last April, when sales spiked due to the nearing expiration of the first time home buyer tax credit. Though inventories remain somewhat high relative to sales, builders have done a lot to shed their stock of homes. If sales continue to grow over the next few months, the ratio will likely be near the historical norm of about 5 months of inventory.

The median sales price also jumped over the month, rising by 13.3% to $243,700. Most of the increase however, can be attributed to a change in the mix of homes sold. Home sales in a the western region, dominated by the pricey California markets, led the months sales growth gains. Therefore, a larger proportion of sales in December were made up of more expensive homes.

	Dec	Nov	Oct	Sep	Aug	Jul
Sales (mil. SAAR)	0.33	0.28	0.28	0.32	0.27	0.28
m/m % change	17.5	0.0	-11.7	15.7	-3.2	-8.7
Median Price ('000s)	$243.7	$215.2	$204.9	$227.6	$232.1	$211.2
m/m % change	13.3	5.0	-10.0	-2.0	9.9	-3.6
Months' Supply	6.9	8.4	8.6	7.6	9.1	8.9

President Obama State of the Union: It's the economy!

Although pundits love to argue about the relative merits of every word of the State of the Union (SOTU) address, all agreed that this address was all about the economy. President Obama said that greater effort is needed to spur job creation and bolster sustained growth despite signs of an economic recovery.

Obama proposed extending to five years the partial spending freeze he proposed last year. This freeze would only impact about 12 percent of the budget, because it would not affect entitlement and national security programs. As a result, the freeze would save $400 billion over the next decade. He also proposed a corporate tax cut, closing corporate tax loopholes, retooling the tax code, and banning earmarks in congressional legislation.

Obama also urged Congress to make targeted investments in education and technology to help the nation compete in the global marketplace. The president emphasized that to win the future, the nation needs to take on new challenges. "We need to out-innovate, out-educate and out-build the rest of the world. We have to make America the best place on Earth to do business," Obama said.

ABA community banker H. Charles Maddy III testified on a similar topic today in the House Financial Services Committee. Among other things, Maddy discussed bank consolidation, which will remove lending sources from communities:

I have heard from bankers in two separate forums say that regulators have told them that banks under $500 million in assets should consider merging as they are too small to survive. That translates to 90 percent of all banks headquartered in West Virginia.

Read the testimony.
Read or watch the SOTU address.

Case-Shiller: Existing Home Prices Fall 1.0% – Down 1.6% from Year Prior

According to the twenty-city Case-Shiller Index, existing home prices fell in November by 1.0% from the previous month on a non-seasonally adjusted basis. The ten-city metro area index decreased by 0.8%. This was the fourth consecutive monthly decrease for both indices.

It is normal that on a non-seasonally adjusted basis that prices would be weaker moving into the late fall. However, the recent decline is more reflective of the continuing effects of the homebuyer tax credit expiring and persistent high levels of excess home inventories.

From a year prior, the twenty-city index was down 1.6%, the second 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 down by a lesser 0.4%.

	Nov	Oct	Sep	Aug	Jul	Jun
10 City Index
M/M % Change	-0.8	-1.3	-0.6	-0.2	0.7	1.0
Y/Y % Change	-0.4	0.2	1.4	2.5	4.0	5.0
20 City Index
M/M % Change	-1.0	-1.3	-0.8	-0.3	0.6	1.0
Y/Y % Change	-1.6	-0.8	0.4	1.6	3.2	4.2

Conference Board Consumer Confidence Index Up 6.7 Points

According to the Conference Board Consumer Confidence Index, consumer confidence jumped up by 6.7 points in December to 60.6. Though still quite low by historical standards (it is near the low point of the 2001 recession), this was the highest level of confidence measured since last May.

The improvement was driven by both the present conditions and future expectations components of the index. Consumers’ assessment of present conditions rose 6.1 points while the future expectations component rose 8.0 points.

1985 = 100	Jan	Dec	Nov	Oct	Sep	Aug
Headline Index	60.6	53.3	54.3	49.9	48.6	53.2
Present Conditions	31.0	24.9	25.4	23.5	23.3	24.9
Future Expectations	80.3	72.3	73.6	67.5	65.5	72.0

Study: CMBS Underwriting Differs Across Originator Types

A recent working paper published by the Federal Reserve examines the difference in commercial mortgage backed securities (CMBS) underwriting across different types of originators.

The study compared the performance of 30,000 securitized loans originated between 1999 and 2007 by commercial banks, investment banks, insurance companies, finance companies, foreign-owned entities, and domestic conduit lenders.

The study found domestic conduit lenders had significantly higher overall CMBS delinquency rates, defined as 60 days or more past due. On the other hand, lenders that originate commercial real estate loans for their books – insurance companies, commercial banks, and finance companies – reported lower delinquency rates on CMBS that they originated.

The study attributed the disparity in performance to differences in warehousing risk, presence of balance sheet operations, and the extent to which the originator is regulated.

To read the study, click here.

Banks Lent $1.7 Trillion in New Loans Over the Year

Banks initiated roughly $1.7 trillion in new lending over the 12 months ending September 2010, after taking into account reserves set aside for losses and the natural repayment of loans each year.

While the overall loan volume of $7.4 trillion has remained stable over the past year, it does not indicate that banks have stopped lending altogether, as some reports have stated. This simple generalization misses the $1.7 trillion of new loans that banks have originated, as it overlooks the constant flow of existing loans that are repaid and new loans that are lent.

Despite weak demand from credit-worthy borrowers, regulatory pressure to build capital-to-asset ratios, and mounting loan losses, banks are actively seeking lending opportunities and continue to find ways to serve their communities. Many headwinds exist - such as 116,000 business failures, over 7 million jobs lost and 15 percent reduction in business inventories over the past two years – yet banks are prudently seeking borrowers.



Read ABA's full analysis of bank lending conditions.

Existing Home Sales Up 12.3% ; Sales Prices Down 1.0% From Year Earlier

In December, existing home sales jumped by 12.3% to an annualized sales pace of 5.28 million units. The increase in sales now brings the pace to the highest rate since last May. Sales have been trending up for the last six months or so following the collapse in sales that occurred after the first time buyer tax credit expired. The sales pace is now about on par with the pre-credit extension run up in sales. From a year prior, sales were down 2.9%.

With the increase in sales over the month, the months supply of inventory fell to 8.1 from 9.5. This was the lowest the ratio has been since last March. 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. Indeed, this has been the trend over the past six months. The median price in December fell 0.8 percent over the month to $168,800. This compares to $183,000 in June and is down 1.0% from a year prior.

	Dec	Nov	Oct	Sep	Aug	Jul
Sales (mil. annual.)	5.28	4.70	4.43	4.53	4.12	3.84
M/M % Change	12.3	6.1	-2.2	10.0	7.3	-27.0
Med. Price (‘000s)	$168.8	$170.2	$170.4	$171.5	$177.5	$182.1
Y/Y % Change	-1.0	0.1	-0.9	-2.5	0.2	0.4
Months Supply	8.1	9.5	10.5	10.6	12.0	12.5

Housing Starts Fall 4.3%, but New Permits Increase

November housing starts fell 4.3% from October to a seasonally adjusted annualized pace of 529,000 units. This was the lowest pace of starts since mid 2009. Single-family housing starts fell by an even greater 9.0% over the month. Total starts were down 8.2% from a year prior.

However, new building permits rose by 16.7% over the month of November, by far the strongest growth rate in recent months. Most of this was due to the volatile multi-family unit component. Even so, single family unit starts grew for the third continuous month after six months of declines. It suggests that starts are perhaps hitting a bottom and new housing construction may begin to grow in upcoming months.

Millions (SAAR)	Dec	Nov	Oct	Sep	Aug	Jul
Housing Starts	0.53	0.55	0.53	0.60	0.61	0.55
M/M % Change	-4.3	3.8	-11.3	-2.1	11.6	2.0
Single Family Starts	0.42	0.46	0.43	0.45	0.43	0.43
M/M % Change	-9.0	5.8	-3.1	3.5	1.2	-5.1

Study: Household Indebtedness and Consumer Spending

Does the level of indebtedness impact the pace of economic recovery?

Research appearing in the Federal Reserve Bank of San Francisco's Economic Letter found that counties where household debt grew moderately during the housing boom (2002 to 2006) have experienced a strong recovery in durable consumption and residential investment, while counties that experienced large increases in household debt during the boom are mired in a severe recessionary environment.

The study found that in high debt counties auto sales began to fall as early as 2006 well before auto sales dropped in low debt counties. The study also finds that even after the recession is over, auto sales relative to 2005 in high debt counties are 50 percent lower in every quarter, except for the quarter associated with the cash for clunkers program. In contrast, low debt counties in the third quarter of 2010 had auto sales either equal to or above pre-recession levels.

The same pattern held true for residential investment. Low household debt counties almost completely avoided a decline in residential investment, while residential investment in high debt counties are 40 to 60 percent lower than pre-recession levels.

The study concludes that depth and length of the current recession relative to previous recessions is closely linked to the tremendous rise in household debt that preceded it.

To read the study, click here.

Who Holds Farm Debt?

According to an article by the Federal Reserve Bank of Kansas City, since 2004 real farm debt levels have grown at an annual rate of nearly 5 percent, the fastest annual rate of increase since the prelude to the 1980s farm debt crisis. However, unlike the 1970s, the run up in farm debt is concentrated in real estate and among a small group of producers.

According to the study, from 1974 to 1980, both farmland and non-farmland debt rose at an annual of about 6 percent. In comparison, “from 2003 to 2009, farm real estate debt rose more than 6 percent per year, compared to less than 3 percent per year for non-real estate debt.” This increase in farmland debt in the recent period has been attributed to the rapid growth in real farmland values.

Additionally, fewer farmers today have farm debt relative to the earlier period. In 2008 (the most recent available data), only about 30 percent of the farmers had debt outstanding. The paper points out that after the farm debt crisis of the 1980s, 60 percent of the farmers had debt.

Moreover, the rise in farm debt has been concentrated in farm operations with at least $1 million in sales. These large farm operations, which accounted for 5 percent of all farms, saw their share of total farm debt rise from 15 to 30 percent from 2004 and 2008, while operations with sales of less than $1 million saw their share of farm debt fall from 85 percent to 70 percent.

The study also found that farm debt from 2004 to 2008 at crop producers jumped by 30 percent so that by 2008, crop producers held about half of all farm debt. On the other hand, livestock producers, which hold the other half of farm debt, experienced a 5 percent increase in farm debt during this time period.

The study pointed out that young farmers (under the age of 35), despite holding only 10 percent of total farm debt, saw a 40 percent rise in their total farm debt during the 2004 through 2008 period. The run up is associated with the large capital expenditures needed to start a farm operation.

The analysis concluded that a financial shock from higher interest rates, lower farm income or both could cause financial stress to increase quickly with young farmers and livestock producers being the most vulnerable because of higher leverage ratios and weaker cash flows. The author does not discuss what steps producers have taken in the last ten years to mitigate a surge in interest rates. In the 1980s, the vast majority of farm real estate debt was written with variable rates, exposing producers to interest rate swings. Over the past decade, producers have had many opportunities to borrow at fixed rates, especially on loans secured by farm real estate.

To read the study, click here.

ABA: Bank Economists See Sustained Economic Expansion

The country’s economic health is steadily improving and on a path to sustained economic expansion in 2011, according to the Economic Advisory Committee of the American Bankers Association.

“The economy is transitioning from reliance on monetary and fiscal stimulus to a sustained expansion in the private sector. Businesses and consumers are feeling more confident about the economy, and job growth will accelerate as layoffs diminish and small business hiring picks up,” said Stuart G. Hoffman, acting committee chairman and chief economist of PNC Financial Services Group Inc.



Private sector job growth will improve this year and accelerate toward the end of 2011. While total job creation was disappointing in 2010, the economy did experience 12 straight months of private-sector job growth. The EAC foresees another 2.1 million new jobs in 2011, well beyond the 1.1 million new jobs the economy added in 2010.

Full press release and 2011 economic forecast data can be found here.

See an on-site summary by Darren Gersh of the Nightly Business Report here.

CPI Up 0.5%; Core Prices Up 0.1%

In December, the Consumer Price Index rose 0.5%, the strongest growth in more than a year. Widespread strength in the commodities markets and recovery in the service sector were driving factors of the increase, and a sign that deflation pressures have subsided. The core index, which excludes prices of energy and food products, rose by 0.1%, unchanged from November. This was the second straight positive reading following a three-month run of zero inflation.

From a year prior, the CPI was 1.4% higher, the highest reading since May 2010. However, the core CPI was up by 0.6% from a year prior, the smallest December year-over-year change in index history. Financial market improvements and rebounding business and consumer sentiment drove inflationary pressures; however a weak labor market continues to be a significant headwind.

M/M % Change	Dec	Nov	Oct	Sep	Aug	Jul
CPI	0.5	0.1	0.2	0.1	0.3	0.3
Core CPI	0.1	0.1	0.0	0.0	0.0	0.1
Year/ Year % Ch.
CPI	1.4	1.1	1.2	1.1	1.2	1.3
Core CPI	0.6	0.7	0.6	0.8	1.0	1.0

Retail Sales Up 0.6% – Core Sales Up 0.4%

In December, retail sales continued to grow at a brisk pace, increasing by 0.6%, from a month earlier. The consumer has clearly shown some energy in recent months. Retail sales have now grown for six consecutive months. With that said however, though December’s growth was solid, it was the smallest since July. Core sales, which remove the volatile autos and gasoline components also rose but by a lesser 0.4%.

From a year prior, sales were up 7.9%. Core sales were up 6.2% from a year earlier. This was the highest annual rate of growth since before the recession.

Mo. % Change	Dec	Nov	Oct	Sep	Aug	Jul
Total Sales	0.6	0.8	1.6	0.9	0.9	0.5
Ex Autos and Gas	0.4	0.6	0.8	0.7	0.9	0.1
Year/ Year % Change
Total Sales	7.9	7.5	7.9	7.7	4.2	5.6
Ex Autos and Gas	6.2	6.0	5.8	5.2	4.9	4.3

Industrial Production Up 0.8%, Manufacturing Output Up 0.4%

In December, industrial production rose 0.8%, which was the strongest growth since July. Manufacturing output rose by 0.4%, roughly the pace of growth over the prior two months. Growth was held back by a decline in the volatile auto production component, which fell 0.2%. However, business equipment and machinery continued to post strong gains. Equipment production grew at an annualized pace of 10% in the fourth quarter. Not including autos, manufacturing output rose 0.5%.

Mining output snapped back, growing by 0.4% after falling in November. Utilities output jumped 4.3%.

The capacity utilization rate rose to 76.0%. Though this still relatively low, this was the highest rate since October 2008.

M/M % Change	Dec	Nov	Oct	Sep	Aug	Jul
Total Output	0.8	0.3	-0.1	0.3	0.2	0.9
Manufacturing	0.4	0.3	0.4	0.1	0.1	0.8
Mining	0.4	-0.7	0.3	1.2	2.1	1.3
Utilities	4.3	1.5	-4.3	0.5	-1.2	1.0
Capacity Utilization R.	76.0	75.4	75.2	75.3	75.1	74.9

University of Michigan Consumer Confidence Down 1.8 Points

In January, the University of Michigan Consumer Sentiment Index fell back 1.8 points to 72.7. The decline reversed part of the solid improvement in the index over the prior two months. Despite still being at a low level, consumer confidence is still the highest level since last spring. The decline over the month was driven entirely by the current conditions component, which fell 5.5 points. In contrast, the future expectations components of the index rose by 0.7 point.

Short term inflationary expectations fell rose. The one-year outlook rose to 3.3% from 3.0 percent in December. The five-year outlook remained at 2.8% for the fourth consecutive month.

1966 = 100	Jan	Dec	Nov	Oct	Sep	Aug
Headline Index	72.7	74.5	71.6	67.7	68.2	68.9
Current Conditions	79.8	85.3	82.1	76.6	79.6	78.3
Future Expectations	68.2	67.5	64.8	61.9	60.9	62.9

Beige Book: Economic Activity Expanded Moderately

Economic activity continued to expand moderately from November through December, according to the Federal Reserve's Beige Book. Conditions were generally better in Districts' manufacturing, retail, and nonfinancial services sectors than in financial services or real estate.

Manufacturing sector in all Districts reported that activity continued to recover. Demand was generally characterized as stable and steady, and no District made mention of lingering fears of a double-dip recession, in contrast to the summer reporting periods. Capacity utilization continued to trend higher and is approaching normal rates for some contacts in the Cleveland and San Francisco Districts, while production in high-tech manufacturing was reportedly at high capacity in Dallas; some manufacturers in the St. Louis and Minneapolis Districts said they have or will soon expand capacity. However, the Boston, Atlanta, and Dallas Districts noted that business remained weak for manufacturers selling into the construction sector.

Retailers in all Districts indicated that sales appeared to be higher this holiday season than in 2009 and, in some cases, were better than expected. Philadelphia and San Francisco reported that retailers relied less heavily on discounting.

Residential real estate markets remained weak across all Districts. A majority of the Districts characterized local housing markets as weak and sluggish with little change from the previous reporting period. All Districts attributed slumping activity to concerns about the pace of economic recovery, especially in employment, while three Districts mentioned difficulty obtaining credit as another constraint on demand. High levels of existing home inventories continued to dampen the pace of new home construction in most Districts. Outlooks for residential real estate in the coming year were mixed, with contacts in most Districts expecting continued weak conditions.

Commercial construction was described as subdued or slow, while commercial leasing activity reportedly increased in four Districts.

Reports on credit activity were mixed across Federal Reserve Districts. Overall, loan demand was reported as stable in San Francisco, mixed in New York, steady to slightly softer in Kansas City, weaker in St. Louis and Dallas, and slowly improving in Philadelphia and Richmond. Most Districts reporting on credit quality described it as improving.

Unfavorable weather conditions damped agricultural production in some areas. Drought negatively affected range conditions in the Dallas District by adding to costs of feeding livestock, while Atlanta cited the challenges prolonged drought to fruit growers. The Kansas City District indicated that dry weather could affect winter wheat development, while large snow falls hampered some ranchers in the Minneapolis District. However, agricultural demand generally improved among reporting Districts, and output prices rose, especially for corn, soybeans, wheat, cattle, and cotton.

Most District reports mentioned increasing prevalence of cost pressures but only modest pass-through into final prices because of competitive pressures. For both retailers and manufacturers, increases in selling prices, if occurring, were said to be selective. Specific markets or products identified as experiencing high or rising prices included various food products, steel and other metals, building materials, textiles, chemicals, and petroleum-related products. Many Districts mentioned concerns among business contacts that petroleum-related prices, already above year-earlier levels, will continue rising in 2011.

Labor markets in most Districts appear to be firming somewhat, but with virtually no upward pressure on wages. All Districts reported that employment levels are rising in at least some sectors, by modest amounts. Some employers in several Fed Districts expressed concerns about added costs for healthcare and noted selected skill shortages in some sectors.

Chessen Talks About Consumer Delinquency on CNBC

Jim Chessen appeared on CNBC this morning discussing the latest ABA Consumer Delinquency Bulletin. The video is available below.


Click here to read more about ABA's Consumer Credit Delinquency Bulletin and to subscribe.

Demand for Labor Flat in November

According to the Bureau of Labor Statistics, the number of job openings (a measure of the demand for labor) was 3.2 million in November, which was little changed from 3.3 million in October. Since bottoming in July 2009, the number of job openings has risen by 0.9 million, or 39 percent. However, the number of job openings in November remained 1.1 million below the 4.4 million openings when the recession began in December 2007.

The number of job openings in November (not seasonally adjusted) increased from 12 months earlier for total nonfarm and total private; but was little changed over the year for government. Over the year, the job openings level increased in seven industries and was essentially unchanged in the remaining industries.

NFIB: Weak Sales, Not Credit, Biggest Problem

The National Federation of Independent Businesses (NFIB) reported that weak sales, not credit conditions, is the biggest problem for small businesses.

According to the survey, 91 percent of small business owners reported that all their credit needs were met or that they were not interested in borrowing. Only 9 percent reported that not all of their credit needs were satisfied.

Fifty percent said they did not want a loan, down three points. Thirty percent of all owners reported borrowing on a regular basis, up two points from the record low. A net 12 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), which is up one point from November.

The small business sector is unable to find reasons to ramp up hiring and capital spending, as reported and planned capital spending remain near record low levels.

Once again, the survey found that the biggest problem facing small businesses is weak demand. Until sales picks up, hiring or spending on capital projects have little likelihood of paying off and therefore will not happen. Eight percent of small business owners characterized the current period as a good time to expand facilities (seasonally adjusted), down one point but six points better than earlier in the year and the third highest reading since the economy peaked in December 2007. A net nine percent expect business conditions to improve over the next six months, down seven points from November’s reading.

Delinquency Rate Improvements Lose Steam in Third Quarter

The American Bankers Association’s Consumer Credit Delinquency Bulletin reported that consumer delinquency rates were largely unchanged in the third quarter.

The composite ratio, which tracks delinquencies in eight closed-end installment loan categories, was virtually flat, rising just one basis point from the second quarter to 3.01 percent of all accounts in the third quarter.

Bank card delinquencies were stable, after dropping significantly over the last year, rising a mere two basis points to 3.64 percent of all accounts. Bank card delinquency rates remain well below the 15-year average (3.92 percent).

The ABA report defines a delinquency as a late payment that is 30 days or more overdue.

ABA Chief Economist James Chessen said he isn’t surprised that delinquency rate improvements slowed as the job market stumbled in the third quarter. "The economy just skipped a beat in the third quarter," Chessen said.

However, Chessen believes that delinquencies will improve over the next six months. "There’s less uncertainty about the economy now, and consumers and businesses feel more confident," Chessen said. "Improvements hinge on a consistent increase in new jobs."

To read the press release, click here.
To read more about ABA's Consumer Credit Delinquency Bulletin and to subscribe, click here.

Consumer Credit Nearly Flat in November

The Federal Reserve reported that consumer credit was largely unchanged in November growing at an annual rate of 0.7 percent to almost $2.4 trillion.

Revolving credit in November declined at an annual rate of 6.3 percent to $796.5 billion – its lowest level since September 2004. This marks the 27th consecutive monthly contraction in outstanding revolving credit. Revolving credit is down 18 percent from its peak in August 2008.

Non-revolving credit, on the other hand, rose at an annual rate of 4.2 percent in November to almost $1.6 trillion. This was the fourth straight monthly increase in non-revolving credit.

Bernanke: "self-sustaining recovery in consumer and business spending may be taking hold"

Federal Reserve Chairman Ben Bernanke gave testimony to the Senate budget committee today on the economic outlook as well as monetary and fiscal policy. In it he explained that in the Fed's view a "self-sustaining recovery in consumer and business activity may now be taking hold." He also discussed the structual components of the fiscal deficit. Excerpts from the testimony include:

Real consumer spending rose at an annual rate of 2-1/2 percent in the third quarter of 2010, and the available indicators suggest that it likely expanded at a somewhat faster pace in the fourth quarter. Business investment in new equipment and software has grown robustly in recent quarters, albeit from a fairly low level, as firms replaced aging equipment and made investments that had been delayed during the downturn.

Private payrolls expanded at an average of only about 100,000 per month in 2010--a pace barely enough to accommodate the normal increase in the labor force and, therefore, insufficient to materially reduce the unemployment rate. On a more positive note, a number of indicators of job openings and hiring plans have looked stronger in recent months, and initial claims for unemployment insurance declined through November and December.

An important part of the federal budget deficit appears to be structural rather than cyclical; that is, the deficit is expected to remain unsustainably elevated even after economic conditions have returned to normal... It is widely understood that the federal government is on an unsustainable fiscal path. Yet, as a nation, we have done little to address this critical threat to our economy. Doing nothing will not be an option indefinitely; the longer we wait to act, the greater the risks and the more wrenching the inevitable changes to the budget will be.

The full testimony can be read here.

Payroll Employment Up 103,000; Unemployment Rate Down to 9.4%

The Bureau of Labor Statistics reported that payroll employment rose by 103,000 in December. This follows an upwardly revised gain of 71,000 in November (previously reported to be 39,000). Private sector employment rose by 113,000, bringing the growth rate back in line with the trend of the past six months prior to a fallback in November. This number contrasts significantly with the earlier reported ADP estimate released on Wednesday showing growth of 297,000 jobs. It is possible that seasonal adjustment factors dealing with holiday employment contributed to this large discrepancy.

Payrolls must expand somewhere around 100,000 to 150,000 per month simply to absorb new entrants to the labor market. As such, the private sector employment growth trend over most of the past year is just barely absorbing population growth. Payrolls will have to start growing at a brisker pace in order to bring down the unemployment rate significantly.

ABA Chief Economist, Jim Chessen stated: “Today’s employment report can be looked at as a glass half full. It is encouraging that the economy continues to add jobs, showing the labor market is improving. However, it is disappointing that a higher rate of job growth is not yet occurring, which is needed to lower the unemployment rate.”

In December, the unemployment rate did fall to 9.4% from 9.8%. However, this was almost entirely due to about 290,000 workers leaving the labor force, not due to new job growth. The labor force participation rate slid to 64.3%, the lowest rate of the cycle thus far. Many workers are likely continuing to feel discouraged and have given up looking for work.

	Dec	Nov	Oct	Sep	Aug	Jul
Payroll Change (000s)	103	71	210	-24	-1	-66
Goods Producing	-2	-5	10	-10	17	37
Services	105	76	200	-14	-18	-103
Private Sector	113	79	193	112	143	117
Unemployment Rate	9.4	9.8	9.6	9.6	9.6	9.5
Labor Force Particip. R.	64.3	64.5	64.5	64.7	64.7	64.6

Interview with Incoming House Budget Committee Chairman Paul Ryan

Earlier this afternoon, Paul Gigot of the Wall Street Journal interviewed Representative Paul Ryan, the incoming chair of the House Budget Committee. His position will grant him a lot of influence in the upcoming and likely contentious budget process in the next Congress.

Ryan stated that the Federal government's borrowing cap, known as the debt ceiling, will have to be raised sometime in the upcoming months if the Treasury is avoid default, but that Republicans will want something in return for their support. He stated that his party's caucus was against "naked" increases in debt. Therefore, attached to any debt authorization bill would be some kind of spending cut or change in the budgeting process that would lead to reducing the deficit. Any bill passed by the Republican House will then meet the Democratic controlled Senate where some kind of compromise will have to be reached.

The Representative also talked about setting the non-defense discretionary budget for the remainder of this fiscal year at a level no higher than the 2008 level. This portion of the budget only accounts for about 15 percent of total Federal spending, but it has grown very quickly in the past two years. Ryan also wishes to end the practice of off-budget defense expenditures for Afghanistan war spending known as supplemental spending bills. He thinks that there is enough room to make cuts in the defense operating and procurement budget that can be used to fund the ongoing operations in Afghanistan.

Regarding the Republicans working with the Obama administration, Ryan stated that he felt that many differences simply cannot be bridged because of large ideological divides. However, he feels that the Republicans would be able to work with the Democrats in areas such as energy policy, international trade, and simplifying the tax code, particularly the corporate tax side. He along with much of Congress wishes to lower the current 35 percent tax rate while making up for lost revenue by broadening the tax base via removing many tax credits and deductions. On net this would make the code more efficient and globally competitive.

The full interview can be seen here.

Jobs Picture Brightens in December

The jobs picture brightened in the final month of 2010 as ADP reported an increase in private sector jobs of almost 300,000 and the Challenger, Gray & Christmas reported that December planned job cuts were at their lowest monthly level since June 2000.

The ADP National Employment Report showed that private-sector employment increased by 297,000 jobs from November to December on a seasonally adjusted basis. This pace of job growth is usually associated with a declining unemployment rate.

After a summer pause, job creation in the private-sector has accelerated in recent months adding 29,000 jobs in September, 79,000 jobs in October, 92,000 jobs in November and 297,000 jobs in December.

Additionally, Challenger, Gray & Christmas reported that December planned layoffs were 32,004, 34 percent lower than the November number of 48,711 and 29 percent lower than the same month a year ago when 45,094 cuts were announced. Additionally, planned layoffs of 529,973 positions in 2010 were at the lowest level since 1997.

Jim Chessen , ABA’s Chief Economist, stated: “The evidence suggests that the private-sector job market has turned the corner and is gaining momentum. The key will be maintaining the momentum. It doesn't take much to reverse course in this uncertain economy.”

Construction Spending Up 0.4% - Residential, Public Spending Rise

New construction spending rose 0.4% in November. This was the third consecutive monthly increase, though the smallest of the streak. The month’s increase was due to a 0.7% rise in both private residential and public sector spending. Private non-residential spending fell for the second straight month, declining by a slight 0.1%.

On a year-ago basis, total construction spending was 6.0% lower. Private residential spending was down 5.3%, and private non-residential spending was down 16.5%. Public sector spending was up 4.2% from a year earlier.

m/m % change	Nov	Oct	Sep	Aug	Jul	Jun
Total	0.4	0.7	1.2	-0.9	-2.6	0.1
Private Residential	0.7	3.9	1.2	-6.2	-4.1	-1.6
Private Non Res.	-0.1	-0.7	2.0	0.4	-4.0	-1.6
Public	0.7	-0.3	0.6	2.1	-0.2	3.0

ISM Manufacturing Index Up 0.4 Point to 57.0

In December, the Institute for Supply Management's Manufacturing Index improved slightly, rising 0.4 point to 57.0. The index has been quite stable for three months now, staying within a half point range. A value over 50 indicates manufacturing sector activity expansion.

The production component rose 5.7 points to 60.7. In contrast the employment component fell by 2.0 points to 55.7. Looking forward, the new orders component fell 2.5 points to 54.5. Though it will oscillate somewhat, manufacturing activity continues to expand, and for the time being seems to have settled into a steady growth pace.

>50 = expansion	Dec	Nov	Oct	Sep	Aug	Jul
Activity Index	57.0	56.6	56.9	54.4	56.3	55.5
Production	60.7	55.0	62.7	56.5	59.9	57.0
Employment	55.7	57.5	57.7	56.5	60.4	58.6
New Orders	54.5	57.0	60.5	54.5	55.5	56.5
Export Orders	54.5	57.0	60.5	54.5	55.5	56.5
Backlogged Orders	47.0	46.0	46.0	46.5	51.5	54.5
Inventories	51.8	56.7	53.9	55.6	51.4	50.2