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Monday, February 28, 2011

Personal Income Up 1.0% on Payroll Tax Reduction, Consumption Up 0.2%

In January, personal income jumped upward by 1.0%. The bulk of the increase was due to the temporary payroll tax reduction going into effect, which added 0.6 point to the growth number. Still, even though most of the gain was due to a tax change, wages and salaries still showed solid growth over the month, rising by 0.3%. From a year prior, personal income was up 4.6%.

Personal consumption rose by a much smaller 0.2% in January. Spending growth was held back by weaker spending on services. From a year prior, consumption spending was 4.0% higher.

The slower growth rate of consumption relative to income over the month caused the savings rate to rise by four tenths of a point to 5.8%. This is the highest savings rate since September. It will have to be seen in the next few months if the boost in income due to the payroll tax reduction is largely saved or spent.

As measured by the PCE deflator, prices increased 0.3% over the month, primarily due to energy products. From a year prior, the PCE deflator was 1.2% higher. The core PCE deflator, which excludes energy and food prices, rose by a lesser 0.1% over the month and was 0.8% higher than a year prior.















































































m/m % changeJanDecNovOctSepAug
Personal Consumption0.20.50.30.70.30.5
    Real-0.10.20.20.50.20.3
Personal Income1.00.40.30.50.00.4
    Real0.70.10.20.3-0.10.2
PCE Deflator0.30.30.10.20.10.2
    Core PCE Deflator0.10.00.10.10.00.0
Savings Rate (level)5.85.45.45.55.86.1

Sunday, February 27, 2011

Exiting Accommodative Policy Can Be Tricky

In case you missed it, here is what Federal Reserve Bank of Philadelphia President Charles Plosser said in a speech this week about the Federal Reserve exiting its accommodative policy.

"I think monetary policy faces some difficult choices in the not-too-distant future. In particular, there is no question that, at some point, we will need to begin to remove the extraordinary amount of accommodation we have provided.

Yet, history tells us that exiting from an accommodative policy is tricky, and it is likely to be especially so this time around. Not only have our policies kept the federal funds target near zero for more than two years, they have also greatly expanded the Fed’s balance sheet from about $800 billion to more than $2.5 trillion.

Some people have questioned whether the Fed has the tools to exit from its extraordinary positions. The answer to that is an unequivocal yes. We can raise interest rates and we can sell assets or stop reinvesting the proceeds when securities mature. The question is not can we do it, but will we do it at the right time and at the right pace. Since monetary policy operates with a lag, the Fed will need to begin removing policy accommodation before unemployment has returned to acceptable levels. Will we have the fortitude to exit as aggressively as needed to prevent a spike in inflation and its undesirable consequences down the road?"


Read the speech.

Friday, February 25, 2011

CBO: Almost $48 Billion in Migrants' Remittances in 2009

The Congressional Budget Office (CBO) found that migrants' remittances from the United States totaled $48.4 billion, according to a recently released study. This is nearly 70 percent more than official development aid provided by the U.S. government.

Moreover migrants' remittances from the United States has grown rapidly over the last two decades. In 1990, total migrants' remittances were $11.9 billion and by 2000, it equalled $30.9 billion. Between 2000 and 2009, remittances grew at an annualized rate of 5 percent.

Of the $48.4 billion in remittances, CBO wrote:

"$38 billion was personal transfers by foreign-born residents in the United States sent to households abroad, and the rest, about $11 billion, was the compensation of employees who were in the United States for less than a year."

It should not come as a shock that Mexico was the top destination for remittances with $20 billion.

The CBO found that the fee for remittances are declining. The key drivers for the lower transaction fees were technological progress and greater awareness among migrants about alternative ways to remit funds. The study reported that between 2001 and 2009 fees fell at a rate of 5.5 percent per year and 9.9 percent per year to Mexico and Columbia, respectively.

To read the report, click here.

Q4 Real GDP Growth Revised Downward to 2.8% From 3.2%

In the fourth quarter, real GDP growth was revised downward to 2.8% on an annualized basis, from the original reported rate of 3.2%. This pace of growth is on par with that of the third quarter, which was 2.6% annualized. The downward revision was primarily due to an upward revision to imports and a downward revision to state and local government spending. Personal consumption also was revised downward somewhat, though this component still remained the strongest it’s been since recovery began. These downward factors where in part countered by upward revisions to exports and non-residential construction spending.

Growth at 2.8% is only modest with regards to driving unemployment down. However, looking more at the underlying trend, it is encouraging that personal consumption continues to build steam. Moving forward, growth should begin to accelerate.

































































































annualized % changeQ4 2010Q4 PreviousQ3 2010Q2 2010Q1 2010Q4 2009
Real GDP2.83.22.61.73.75.0
% contribution to real GDP
Consumption2.93.01.71.51.30.7
Fixed Investment0.60.50.22.10.4-0.1
    Residential0.10.1-0.80.6-0.30.0
    Non-Residential0.50.40.91.50.7-0.1
Inventories-3.7-3.71.60.82.62.8
Government-0.3-0.10.80.8-0.3-0.3
Net Exports3.43.4-1.7-3.5-0.31.9

University of Michigan Consumer Confidence Up 3.2 Points

In February, the University of Michigan Consumer Sentiment Index fell rose 3.2 points to 77.5. Though still as a very low level, confidence levels have been gradually improving over the past six months. The rise in February was primarily due to improvement in the current conditions component, which rose by 5.1 points. The future expectations component of the index also improved, but by a lesser 2.3 points.

Inflationary expectations remained stable from the prior month. The one-year outlook was 3.4% and the five-year was 2.9%. These are elevated from a few months ago, particularly the one-year outlook, which was under 3%.











































1966 = 100FebJanDecNovOctSep
Headline Index77.574.274.571.667.768.2
    Current Conditions86.981.885.382.176.679.6
    Future Expectations71.669.367.564.861.960.9

Thursday, February 24, 2011

Is the Consumer Ready to Tip Toe Back into the Credit Waters?

There is growing evidence that consumer deleveraging might either be slowing or coming to an end.

According to data collected by the Federal Reserve Bank of New York, the number of credit account inquiries within six months – an indicator of consumer credit demand - fell for 10 consecutive quarters between the third quarter of 2007 and the first quarter of 2010. Since bottoming in the first quarter of 2010, credit account inquiries have increased for the three quarter in a row. There were $163.28 million inquiries within the last six months as of the fourth quarter of 2010. This is up 15 million from the recent low as of the first quarter of 2010.

Number of credit-related consumer-initiated inquiries reported to the credit reporting agency in past 6 months. Only 'hard pulls' are included, which are voluntary inquiries generated when a consumer authorizes lenders to request a copy of their credit report. It excludes inquiries made by creditors about existing accounts (for example to determine whether they want to send the customer pre-approved credit applications or to verify the accuracy of customer-provided information) and inquiries made by consumers themselves.

Additionally, the number of accounts opened by consumers in the last 12 months rose for the first time in the fourth quarter of 2010, since the second quarter of 2007. There were 164.3 million accounts opened in the last 12 months in the fourth quarter of 2010 – an increase of 6.36 million new accounts from the third quarter of 2010.

New Home Sales Fall 12.6% – Back to Recent Sales Pace Trend

After showing some life in December, new home sales fell back in January to the slow pre-December sales pace trend. New home sales came in as a seasonally adjusted annualized pace of 284,000, down 12.6% from December.

The sales decline was not uniform across the country. Sales jumped upward by over 50% in the Northeast and increased by 17.1% in the Midwest. However, most new homes are built in the Southern and Western regions, and in both new sales fell sharply. Sales were down 12.8% in the South and 36.5% in the West.

With the slowing pace of sales, the months supply of inventory rose to 7.9 months from 7.0 in December. The ratio, though still historically high, is much lower than it has been in the past couple years. Home builders have done a lot to reduce their inventories.

The median sales price fell over the month, declining by 1.4% to $233,900. Prices have been relatively high in recent months, but this is largely due to the change in the mix of homes for sales. A larger percent of homes sold were in the Northeast, where prices are higher rather than in the relatively less expensive Southern and Midwestern regions.





























































JanDecNovOctSepAug
Sales (mil. SAAR)0.280.320.280.280.320.27
    m/m % change-12.615.70.4-11.715.7-3.2
Median Price ('000s)$233.9$237.2$221.1$207.5$227.6$232.1
    m/m % change-1.47.36.5-8.8-2.09.9
Months' Supply7.97.08.38.67.69.1

Wednesday, February 23, 2011

Existing Home Sales Up 2.7%; Sales Prices Down 3.7% From Year Earlier

In January, existing home sales jumped by 2.7% to an annualized sales pace of 5.36 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 2.7% increase follows a 12.5% jump in December. From a year prior, sales were up 5.3%, the first year-over-year gain since June.

With the increase in sales, the months supply of inventory fell from 8.2 to 7.6, the lowest level in more than a year, yet still quite high historically. The normal long-term inventory supply is around 5 months. 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 January fell 5.9% over the month to $158,800, far exceeding the 0.8% decline in December. The median price is down 3.7% from a year ago. The steep price decline indicates the increased sales were likely driven by distressed properties.





























































JanDecNovOctSepAug
Sales (mil. annual.)5.365.224.644.384.414.24
     M/M % Change2.712.55.9-0.749.8
Med. Price (‘000s)$158.8$168.8$170.2$170.6$171.5$177.4
     Y/Y % Change-3.7-1.00.1-0.8-2.50.1
Months Supply7.68.29.610.610.911.7


Source: National Association of Realtors

FDIC: Profitability Returns Yet Problem Bank List Grows in 4Q 2010

For all of 2010, banks reported a profit of almost $87.5 billion. More than two out of every three institutions (67.5%) reported higher earnings in 2010 than in 2009. The proportion of unprofitable institutions fell from 31% in 2009 to 21% in 2010. Overall, the average return on assets for the banking industry was 0.66% for 2010, up from -0.08% for 2009.

Reductions in provisions for loan losses were responsible for most of the year-over-year improvement in earnings. Insured institutions set aside $31.6 billion in provisions for loan losses in the fourth quarter, almost 50% less than the $62.9 billion they set aside a year earlier. This is the smallest quarterly loss provision for the industry since third quarter 2007.

Noninterest income from service charges on deposit accounts was $5.5 billion (13.1%) lower than in 2009. This is the first time in the 69 years that these data have been collected that full-year service charge income has declined.

Net loan and lease charge-offs (NCOs) totaled $41.9 billion in the fourth quarter, a decline of $13 billion (23.7%) compared to fourth quarter 2009. With the exception of credit cards (which reflected the application of new accounting rules in 2010), almost all major loan categories posted year-over-year declines in quarterly charge-offs.

Asset quality improved in the fourth quarter. The amount of loan and lease balances that were noncurrent (90 days or more past due or in nonaccrual status) fell for a third consecutive quarter, declining by $17.9 billion (4.7%). Noncurrent balances declined in all major loan categories.

Additionally, other real estate owned declined for the first time since fourth quarter 2005, falling by $374 million. At the end of 2010, noncurrent assets and other real estate owned represented 3.11% of total industry assets, the lowest share since the end of third quarter 2009.

Equity capital fell by $8.5 billion (0.6%) in the fourth quarter, the first quarterly decline since fourth quarter 2008. The drop was caused by a $16.2 billion (71.9%) decline in unrealized gains on securities held for sale. In contrast, insured institution Tier 1 leverage capital, which is not affected by changes in securities values, increased by $3.4 billion (0.3%).

At the end of 2010, almost 96% of all insured institutions, representing more than 99% of all insured institution assets, met or exceeded the minimum requirements for being well-capitalized.

Total assets of insured institutions declined by $51.8 billion (0.4%) in the fourth quarter, while deposits posted strong growth, rising by $149.3 billion (1.6%). Loans fell by almost $35.7 billion during the quarter. However, banks reported an increase in commercial and industrial loans and 1-4 family mortgages during the quarter.

The number of institutions on the FDIC’s “Problem List” increased from 860 to 884 in the fourth quarter. Total assets of “problem” institutions increased from $379 billion to $390 billion.

11.02.23 (Source: FDIC)

Case-Shiller: Existing Home Prices Fall 1.0 Percent – Down 2.4 Percent from Year Prior

According to the twenty-city Case-Shiller Index, existing home prices fell in December by 1.0 percent from the previous month on a non-seasonally adjusted basis. The ten-city metro area index decreased by 0.9 percent. This was the fifth consecutive monthly decrease for both indices.

From a year prior, the twenty-city index was down 2.4 percent, the steepest decline since December 2009. San Diego and Washington DC were the only cities reporting year-over-year appreciation. The ten-city index was down 1.2 percent.

The recent decline is more reflective of the continuing effects of the homebuyer tax credit expiring and persistently high levels of excess home inventories which are being fed by increasing foreclosures. The economic recovery will likely slow distressed sales and create price stability in late 2011 or 2012.







































































Not Seasonally Adj DecNovOctSepAugJul
10 City Index







































































      M/M % Change-0.9-0.8-1.3-0.6-0.20.7
      Y/Y % Change-1.2-0.50.21.42.54.0
20 City Index







































































      M/M % Change-1.0-1.0-1.3-0.8-0.30.6
      Y/Y % Change-2.4-1.6-0.80.41.63.2


Source: Standard & Poor's

Thursday, February 17, 2011

CPI Up 0.4%; Core Prices Up 0.2%

In January, the Consumer Price Index rose 0.4% for the second straight month. As has been the case in most recent months, the growth was primarily due to rising energy product prices, which rose 2.1%. The core index, which excludes prices of energy and food products, rose by a lesser 0.2%. This is still tame, but higher than is has been recently. Inflation is still modest; however, it is beginning to accelerate somewhat as consumer demand picks up. Businesses are therefore beginning to be able to pass through costs, that are seen in the producer price index, to consumers.

From a year prior, the CPI was 1.7% higher, the highest reading since May 2010. However, the core CPI was up by only 0.9% from a year prior. This is higher than the recent historical low of 0.6%, but us still very modest.






























































M/M % ChangeJanDecNovOctSepAug
CPI0.40.40.10.30.10.3
Core CPI0.20.10.10.00.00.0
Year/ Year % Ch.











CPI1.71.41.11.21.11.2
Core CPI0.90.60.70.60.80.9

Wednesday, February 16, 2011

Industrial Production Down 0.1%, Manufacturing Output Up 0.3%

In January, industrial production fell back slightly, declining 0.1%. This was the first drop in output since February, 2010. However, the entire decline was due to the more volatile utilities and mining components, which fell 1.6% and 0.7%, respectively.

Manufacturing output rose by 0.3%. Growth got a boost from a 3.2% increase in auto production. Not including autos, manufacturing output rose only 0.1%. Growth was driven by solid gains in business equipment and tech manufacturing, but was held down by a decline in non-durable goods manufacturing. Overall, industrial output growth was somewhat weaker in January when compared to recent months, but the underlying trend is stronger than the top line number of this report suggests.





























































M/M % ChangeJanDecNovOctSepAug
Total Output-0.11.20.30.00.30.1
    Manufacturing0.30.90.30.40.10.0
    Mining-0.70.5-1.00.71.21.9
    Utilities-1.64.12.1-4.10.5-1.2
Capacity Utilization R.76.176.275.475.275.275.0

Housing Starts Jump 14.6%, but Single Family Starts Down 1.0%

Housing starts jumped upward 14.6% in January to a seasonally adjusted annualized pace of 596,000 units. Though still at levels that are historically very low, this was the fastest pace starts since September. However, the growth was entirely due to the volatile multifamily component. Single-family housing starts fell by 0.1 percent over the month. Total starts were down 2.6% from a year prior, while single family unit starts were down 1.0%.

Furthermore, new building permits fell by 10.4% over the month following a sharp rise of over 15% in December. Single family starts fell 4.8% and remain at very low levels. Housing construction activity remains depressed.




















































Millions (SAAR)JanDecNovOctSepAug
Housing Starts0.600.520.550.530.600.61
    M/M % Change14.6-5.12.8-11.3-2.111.6
Single Family Starts0.410.420.460.430.450.43
    M/M % Change-1.0-8.45.1-3.13.51.2

PPI: Headline Up 0.8%; Core Prices Up 0.5%

In January, the Producer Price Index for finished goods rose 0.8%. Producer prices have been growing quickly over the past six months, growing at an annualized rate of over 8% during the period. As has been the case with other recent months, January’s rise was led by increases in energy product prices, which rose 1.8%. Prices for certain food products, notably vegetables and beef also rose quickly.

Even though energy prices were the lead driver, price increases were broad based. The core index, which does not include energy or food product prices, rose by 0.5%. This is a large increase and continues a recent trend of accelerating core producer price growth in recent months. The year-over-year growth rate for core prices remains modest at 1.6%; however, if monthly growth rates continue at this clip for much longer, there would be significant cause for inflationary concerns. Thus far, producers have not been able to pass many cost increases through to consumers; however, eventually they will have to do so.






































































JanDecNovOctSepAug
Headline Index
    M/M % Change0.80.90.70.60.30.6
    Y/Y % Change3.74.13.54.33.93.2
Core Prices
    M/M % Change0.50.20.1-0.40.20.1
    Y/Y % Change1.61.41.21.51.61.3

Tuesday, February 15, 2011

Retail Sales Up 0.3% – Bad Weather Likely Held Back Growth

In January, retail sales continued to grow, increasing by 0.3% over the month. This was a deceleration from prior months – it was the slowest rate of growth since last June. However, the underlying details are stronger. Sales were likely held back significantly due to inclement weather through much of the country over the month. This is heavily suggested by a 2.6% drop in sales of building and construction materials. Not including this sub group, sales rose 0.6 percent over the month, in line with recent growth. Core sales, which remove the volatile autos and gasoline components also rose but by a lesser 0.2%. Removing building materials from that number yields 0.4% growth.

From a year prior, sales were up 7.8%. Core sales were up 5.4% from a year earlier. These were both slightly below their recent highs, though are still near the fastest rate of growth since prior to the recession.





























































Mo. % ChangeJanDecNovOctSepAug
    Total Sales0.30.50.81.60.90.9
    Ex Autos and Gas0.20.10.40.80.70.9
Year/ Year % Change
    Total Sales7.87.67.47.97.74.2
    Ex Autos and Gas5.45.65.85.85.24.9

Monday, February 14, 2011

Farm Income Will Equal $94.7 Billion in 2011

Net farm income is forecast to be $94.7 billion in 2011, up $15.7 billion (19.8 percent) from the 2010 forecast. The 2011 forecast is the second highest inflation-adjusted value for net farm income recorded in the past 35 years.

This marks the second strong annual increase in net farm income. In 2010, net farm income rose by 27 percent in 2010.

Cash receipts from the sale of farm commodities are expected to increase by 9.1 percent. Crop receipts are expected to increase $24.1 billion, with cotton, soybean, wheat, and corn receipts expected to show the largest gains. Livestock receipts are expected to increase $4.3 billion in 2011, led by rising cash receipts for cattle and calves.

Total expenses will surpass $300 billion for the first time in history -- growing by $20.2 billion (or 7 percent) to a nominal record $307.5 billion. Feed is expected to rise $4.6 billion; miscellaneous expenses, $2.8 billion; fertilizer and lime, $2.6 billion; and fuels and oils, $2.5 billion. Total labor, repair and maintenance, and net rent to nonoperator landlords should each climb more than $1 billion.

Government payments paid directly to producers are expected to fall 12.7 percent to $10.6 billion in 2011.

Read the report.

Thursday, February 10, 2011

ABA Voices Concern for Community Banks to Geithner and Woodruff

I voiced concern for the viability of community banks given the wave of new regulations this week at The Atlantic's town hall meeting on jobs, "Find Work, Finding Our Way."

Commenting to Treasury Secretary Tim Geithner and PBS NewsHour's Judy Woodruff, I stressed the regulatory pressure many institutions are feeling.
We believe that [community banks] are extremely important to the life blood of their communities...The bill [Dodd-Frank Act] that got passed by Congress last year has already created fifteen hundred pages of proposed regulations; we think it will be thousands of pages. And for the median size community bank in this country, they only have 37 employees. They’re small businesses. To deal with that volume is becoming extremely hard.

I’m really worried that we’re at that point where we are going to lose a lot of community banks.
Watch a video of my comments at the 36 minute 25 second mark of the video below.
See a transcript of my comments.

Finding Work, Finding Our Way: A Digital Town Hall Discussion from Economy and Jobs of the Future on Vimeo.

Securitization and Mortgage Renegotiations

Research recently published by the Federal Reserve Bank of Chicago found that frictions introduced by securitization create a significant challenge to effective modification of distressed residential mortgages.

The paper found that bank-held loans are 26% to 36% more likely to be renegotiated than comparable securitized mortgages. However, the modification terms do not differ dramatically among portfolio and securitized loans.

Additionally, bank-held loans have lower post-modification default rates by 9%. This finding suggests that servicers renegotiate mortgages that they own more efficiently than mortgages that are securitized.

The study uses a unique dataset that contains precise loss mitigation and performance outcomes for about 64% of U.S. mortgages. The performance data spans from October 2007 to May 2009.

Read the paper.

Wednesday, February 9, 2011

NFIB: Small Business Confidence Improves Modestly, 92% of Small Businesses Say Credit Needs Have Been Satisfied

The National Federation of Independent Businesses released its monthly Small Business Economic Trends report. It shows that the vast majority of small businesses are able to get the financing they need:
Overall, 92 percent of small business owners reported that all their credit needs were met or that they were not interested in borrowing; 8 percent reported that not all of their credit needs were satisfied; and, 52 percent said they did not want a loan, a 2 point increase. Only 3 percent reported financing as their top business problem, down 2 points from December.
The overall index showed that business sentiment rose modestly in January continuing the recent trend of gradual improvement. Still, sentiment is weak as businesses are largely uncertain about the future. The NFIB stated that the index would have risen higher but it “was blunted by small business owners’ skepticism about the future and continued hesitancy to spend and hire.”


Though improving, the sales outlook continues to be weak. Soft anticipated demand continues to be small businesses biggest concern:
Twenty-seven percent of the owners reported that weak sales continued to be their top business problem (down 6 points) in the last month, followed by 19 percent citing taxes and 17 percent government regulations and red tape.
Also of note is that deflationary pressure seems to be easing:
The downward pressure on prices appears to be easing as more firms are raising prices and fewer are cutting them. Eighteen percent of owners (down 2 points) reported raising average selling prices, and 20 percent reported average price reductions (down 4 points). January is the 26th consecutive month in which more owners reported cutting average selling prices than raising them. However, the trend is clearly supportive of higher prices in future months.
This suggests consumer demand is continuing to improve. However, it also means that inflationary pressures may now be starting to build.

Number of Bank Offices Fell in 2010

According to the FDIC's Summary of Deposits, the number of bank offices fell in 2010 and deposit growth was at its slowest pace in 15 years.

The report noted that the number of offices fell by 1% to 97,950 during the year ending June 30, 2010, a net decrease of 993 offices and the first decline since 1995. Additionally, deposits grew by only 1.7%, the lowest growth rate in 15 years and well below the 7.7% growth rate reported for 2009.

For the second year in a row, the ratio of offices per million people decreased. The number of offices per million people as of June 30, 2010 was 317 — almost the same as the June 30, 2006, level of 316.

FDIC attributed that contraction in bank offices to attempts by banks to reduce expenses.

To read the full report, click here.

Monday, February 7, 2011

Revolving Credit Grows for the First Time Since August 2008

The Federal Reserve reported that consumer credit grew by 3% in December to almost $2.41 trillion.

Revolving credit increased for the first time in December, after falling for 27th consecutive months. The inverse relationship between unemployment and revolving credit remains strong, as the year-over-year improvement in revolving credit corresponded with recent declines in the unemployment rate.

Revolving credit grew by 3.5% to $800.5 billion. However, revolving credit remains at its lowest level since the beginning of 2005. Overall, revolving credit is down almost 18% from its peak in August 2008.

Commenting on the first increase in revolving credit in over two years, Jim Chessen, ABA's Chief Economist, stated: "While one month does not make a trend, this increase in revolving credit is a positive sign. It reflects greater optimism on the part of consumers and banks that the economy is mending."





















Non-revolving credit rose at an annual rate of 2.8% in December to almost $1.61 trillion. This was the fifth straight monthly increase in non-revolving credit.

Read the Federal Reserve's G. 19 report, click here.

Friday, February 4, 2011

Fed Reports on Conditions and Exposures of CRE

Patrick Parkinson, the Federal Reserve’s Director of Banking Supervision and Regulation, testified before the Congressional Oversight Panel on the state of commercial real estate, including vacancy rates and prices, CRE debt and concentrations, and increasing refinancing risk.

Vacancy Rates and Prices
Vacancy rates on most CRE have stopped increasing, although they remained at elevated levels at the end of 2010, ranging between 13% and more than 16%. These levels are, on average, 5 to 6 percentage points above levels experienced in 2007.

CRE price stability ranges greatly among different types and locations of properties. Low-tier properties are still struggling from lack of demand and declining prices, while top-tier properties have seen price stabilization and some recovery.

CRE Debt and Concentrations
Outstanding CRE debt totaled $3.2 trillion at 3Q 2010. Of this amount, about one-half, or $1.6 trillion, was held on the balance sheets of commercial banks and thrifts, with an additional $700 billion held as collateral for CMBS.

Of the more than 300 commercial banks and thrifts that have failed since the beginning of 2008, more than three-fourths had CRE concentrations at year-end 2007. Almost 1,200 commercial banks, or 18 percent of all banks, had CRE concentrations at the end of the third quarter of 2010.

CRE lending, and ultimately concentrations, are more prevalent in the business models of smaller institutions, while relatively fewer larger institutions carried much CRE concentration.

At the end of the third quarter of 2010, almost 10% of CRE loans in bank portfolios were considered delinquent, a three-fold increase since the end of 2007.

Refinancing Risk
Approximately one-third of all CRE loans (both bank and non-bank), totaling more than $1 trillion, are scheduled to mature over the next two years. This circumstance represents substantial refinancing risk as CRE loans typically have large balloon payments due at maturity.

Credit losses for bank CRE loans typically continue well past the trough of recessions, and the Fed expects this pattern to continue in this cycle. Since the beginning of 2008 through the third quarter of 2010, commercial banks have incurred almost $80 billion of losses related to CRE exposure, equating to a little over 5 percent of the average exposure outstanding during this time.

Given this historical experience and the recent improvement witnessed in the broader economy, it is estimated that banks have taken roughly 40% to 50% of the CRE losses that they will realize over this cycle.

According to a Fed survey completed in the third quarter of 2010, approximately two-thirds of the respondents were engaged in workout activity. Of note, respondents reported that almost three-fourths of loan modifications were performing according to their modified terms.

The survey also noted that the volume of future CRE workouts was estimated to increase by approximately 60% during 2011.

Read the full testimony.

Payrolls Up 36,000; Unemployment Down to 9.0% – Bad Weather Likely Had Large Effect

The Bureau of Labor Statistics reported that payroll employment rose by 36,000 in January. This follows an upwardly revised gain of 121,000 in December (previously reported to be 103,000). Private sector employment rose by 50,000. This growth rate is very modest and much lower than in recent months. However, the reason for this is most likely due to inclement weather that occurred over much of the country during January and not because of any change in the underlying labor market dynamic. The industries with large changes in net job growth where construction and leisure and hospitality, sectors that are most susceptible to weather.

In December, the unemployment rate fell significantly to 9.0% from 9.4%. However, this was almost entirely due to over 500,000 workers leaving the labor force, not due to new job growth. The labor force participation rate slid to 64.2%, the lowest rate of the cycle thus far. Weather was likely also a major driver here, as many workers stayed home. It is probably the case that the unemployment rate will bounce back up over the next couple of months, once this temporary disruption passes.






































































JanDecNovOctSepAug
Payroll Change (000s)3612193171-29-59
    Goods Producing18-781-6-1
    Services1812885170-23-58
    Private Sector50139128143109110
Unemployment Rate9.09.49.89.79.69.6
Labor Force Particip. R.64.264.364.564.564.764.7

Treasury Reports TARP Nears Profitability; Banks Provided $20 Billion in Income

Tim Massad, Treasury’s Acting Assistant Secretary for Financial Stability, reported that TARP’s bank programs “will produce a lifetime profit of nearly $20 billion for taxpayers,” and highlighted that continued progress of non-bank TARP programs have resulted in the Treasury collecting 99% of the program’s initial investment.

As ABA recently emphasized in a statement to the House Committee on Oversight and Government Reform, the bank investments have been so successful that they yielded 5.5% more than the S&P 500 returned over the same period, according to a report by Keefe, Bruyette & Woods Inc.

Massad said the Treasury now expects TARP to break even or turn a profit, after offsetting the profit from banks with the losses on non-bank programs.
Overall, TARP investment programs – including financial support for banks, AIG, and the domestic auto industry, and targeted initiatives to restart the credit markets – are expected to either nearly break even or turn a profit. The lifetime cost of TARP is expected to be primarily attributable to the costs of our [Treasury’s] foreclosure prevention programs.
Read Massad’s full statement.

Thursday, February 3, 2011

ISM Non-Manufacturing Index up 2.3 Points to 59.4 – Highest Level Since 2005

In January, the Institute for Supply Management's Non-Manufacturing Index rose by 2.3 points to 59.4. The increase continued a five month improvement trend leaving the index at its highest level since well before the recession. Values over 50 indicate service sector business activity expansion. The continued advancement in the index in recent months has showed that the service sector has continued to pick up steam and is now growing at a brisk pace.

The details of the report show a solid advancement in business output over the month. This component rose 1.7 points to a strong 64.6. New orders were the largest driving factor of the top line index growth. The component rose 3.5 points to 64.9. This bodes well for future activity growth over the coming months. The employment component also improved, rising 1.9 points to 54.5.






































































>50 = expansionJanDecNovOctSepAug
Headline Index59.457.156.054.653.952.8
    Business Output64.662.959.458.554.455.8
        Exports53.556.059.555.558.046.5
    Employment54.552.653.652.150.749.5
    New Orders64.961.458.556.655.655.0
    Backlogged Orders50.548.551.552.048.050.5

Wednesday, February 2, 2011

Freddie Mac: 46% of Home Mortgage Refis were "Cash In"

Freddie Mac recently released its quarterly mortgage refinancing analysis. It showed that among its portfolio, the percent of borrowers cashing out equity from their homes hit an all time low in the fourth quarter. In contrast, the amount of borrowers refinancing so that they lower their principal hit an all time high. From Freddie Mac’s press release:

In the fourth quarter of 2010, 46 percent of homeowners who refinanced their first-lien home mortgage lowered their principal balance by paying-in additional money at the closing table. This is the highest “cash-in” share since Freddie Mac began keeping records on refinancing patterns in 1985.

“Cash-out” borrowers, those that increased their loan balance by at least 5 percent, represented 16 percent of all refinance loans; this is the lowest cash-out share since the analysis began in 1985...The average cash-out share over the past 25 years has been 62 percent.


Homeowners are continuing a trend of rebuilding their balance sheets after the loss of home equity and stock market wealth. This is evident in the higher personal savings rates of the past year and as shown in this data, the continued reduction of mortgage principle. Overall outstanding residential mortgage debt has fallen by about $400 billion since its peak.

The fact that consumers are acting to rebuild savings is a positive development in the long run. Solid household balance sheets are required to sustain economic growth moving forward. However, in the short run, this acts as a drag on personal consumption growth. In 2006, $318 billion was cashed out of home equity, which helped to fuel aggregate demand in the economy. In 2010, only $32 billion was cashed out. This represents almost 2% of GDP. Furthermore, this deleveraging trend likely has quite a ways to go. Household debt-to-asset ratios are still very high by historical standards, and it is unlikely that cashing out home equity will be a significant source of consumption demand in the near future.

ADP Employment Report: Private Payrolls Up 187,000

In January, according to the ADP Employment Report, private sector payrolls rose by 187,000. This follows a downwardly revised gain of 247,000 jobs in December (previously reported to be a gain of 294,000). January’s gain, though not as large as in December, signifies a significantly faster pace of job growth than what occurred in most of the past year. The labor market is continuing to improve. Even so, this growth is still relatively modest. Payrolls must grow about 125,000 to 150,000 per month just to absorb new entrants to the labor market. Therefore, in order to drive down the unemployment rate significantly, private sector payrolls will have to grow at a faster pace for a prolonged period.

The increase over the month was driven by gains in service sector jobs, which rose by 166,000. However, goods producing jobs also expanded, adding 21,000 to payrolls. Manufacturing added 19,000 jobs, the third straight month of expansion. Notably, for the first time during the recovery, non-manufacturing goods producing jobs, which are dominated by construction, added slightly to payrolls. The downsizing of the construction industry may be nearing an end.




















































Ch. in Payrolls ('000s)JanDecNovOctSepAug
Total18724797792937
    Goods Producing212212-20-27-18
        Manufacturing192317-4-65
    Services16622585995655

Lowest January Planned Job Cuts on Record

Challenger, Gray & Christmas reported that January's announced job cuts of 38,519 was the lowest January total on record. This continues the trend of slower downsizing by employers that began in the second half of 2010.

January's announced layoffs were 20 percent above December's planned job cuts of 32,004, the lowest monthly figure since June 2000. However, compared to one year ago, announced layoffs were 46 percent below the 71,482 job cuts in January 2010.

Challenger began tracking monthly layoff announcements in 1993 and January is historically the heaviest job-cut month with employers announcing an average of 104,560 job cuts to start the year.

Government and nonprofit sector announced the most job cuts of 6,450. This was followed by retailers, which planned to shed 5,755 jobs.

To read the press release, click here.

Tuesday, February 1, 2011

Construction Spending Falls 2.5% – Residential, Public Sector See large Declines

New construction spending fell sharply in December, dropping 2.5% on a seasonally adjusted basis. This was the second monthly decline following a brief period of growth. The month’s decline was broad based amongst types of construction. Residential spending lead the fall, declining 4.1% over the month. Non-residential spending fell 0.5% and public sector spending fell 2.8%. It is possible that the large declines were in part due to inclement weather in the Northeast over the month; however, this was not likely the main factor.

On a year-ago basis, total construction spending was 6.4% lower. Private residential spending was down 6.8%, and private non-residential spending was down 12.3%. Public sector spending was down 0.3% from a year earlier.




















































m/m % changeDecNovOctSepAugJul
Total-2.5-0.21.11.2-0.9-2.6
    Private Residential-4.10.74.01.2-6.2-4.1
    Private Non Res.-0.50.70.72.00.4-4.0
    Public-2.8-1.7-0.70.62.1-0.2

ISM Manufacturing Index Up 2.3 Points to 60.8 – Highest Level Since 2004

In January, the Institute for Supply Management's Manufacturing Index rose 2.3 points to 60.8. This places the index at the highest level of the recovery thus far. After decelerating last summer, the index has been strengthening over the past six months. The manufacturing sector is continuing a robust recovery. Any index value over 50 indicates manufacturing sector activity expansion.

The production component rose 0.5 point to 63.5, while the employment component gained 2.8 points to 61.7. Looking forward, the new orders component rose 5.8 points to 67.8 and the backlogged orders index rose 11.0 points to 58.0. These two factors suggest that manufacturing activity will continue to expand at a brisk pace in coming months.















































































> 50 = expansionJanDecNovOctSepAug
Activity Index60.858.558.256.955.355.2
    Production63.563.058.261.458.157.2
    Employment61.758.959.057.956.958.2
    New Orders67.862.059.659.951.653.7
        Export Orders62.054.557.060.554.555.5
    Backlogged Orders58.047.046.046.046.551.5
    Inventories52.451.856.153.256.050.9