Thursday, June 30, 2011
He points out that the U.S. tax code provides an extra incentive for households to take out larger mortgage loans, as they can deduct the interest payments on the mortgage debt from their gross incomes. This effectively lowers the after-tax interest rate on mortgage loans, thus making mortgage debt more attractive.
At the same time, the tax code creates an incentive for financial institutions to use debt over equity. If debt is used, the interest payments can be deducted before paying corporate income taxes. In comparison, if equity is used, dividends are paid after taxes. This makes debt financing relatively cheaper to equity financing.
Kocherlakota said that the use of leverage exacerbated the sensitivity of the financial system to the decline in asset prices, especially residential prices in recent years.
He concludes that Congress should modify the U.S. tax system to reduce the
incentives of using too much leverage.
Click here to read the speech.
Loans that are 30-59 days delinquent fell to 2.6% of the portfolio, the lowest level in three years.
Mortgages more than 60 days past due and delinquent loans to bankrupt borrowers fell to 4.8% of the portfolio, down from 5.3% last quarter and 6.4% this time last year. This is the fifth consecutive quarter that seriously delinquent loans have fallen and the lowest level since 1Q 2009.
Despite this encouraging report the number of loans in the foreclosure process remains at 4.0%, up from 3.6% this time last year. This means that much of the improvement in performing loans is a result of bad loans being taken out of the portfolio altogether. In fact the number of performing loans in the portfolio fell from 29.6 million this time last year to 28.9 million last quarter.
See the report.
Tuesday, June 28, 2011
Six of the twenty MSAs (Charlotte, Chicago, Detroit, Las Vegas, Miami and Tampa) dropped to new index lows in April. However thirteen of the cities and both composite indices posted positive changes. Both the ten- and twenty-city indices remain near the crisis lows seen in March 2011 at 152.51 and 138.84 respectively.
Housing prices still face significant downward pressure from the stockpile of distressed homes as well as concerns with the overall economy. The Case-Shiller index remains well above its historical average that we quickly moved away from beginning in 1997. This suggests to many that there is still a lot of room for prices to fall.
ABA’s Chief Economist James Chessen commented, “although these numbers are encouraging, it shows that many markets have yet to hit bottom. We’re a long way away from seeing year-over-year gains for home prices.”
See the report here.
Monday, June 27, 2011
Wages and salaries grew more slowly at 0.2% over the month (the lowest since December) showing a shift towards nonwage income as a result of poor job growth.
Personal consumption was stagnant as a response to high gasoline prices, stock and house price declines, and low confidence. Real personal consumption declined 0.2%. One silver lining here is that the largest drag, gasoline prices, is clearly reversing its trend as of late. Services spending accounted for the only patch of growth in May rising by 0.4%.
The lower growth rate of consumption relative to income over the month caused the savings rate to rise slightly to 5.0 from 4.9 the month prior. Savings have been slightly lower in the past few months relative to the end of last year.
As measured by the PCE deflator, prices increased 0.2% over the month, the slowest rate since November. Excluding food and energy, prices rose 0.3%, which is the fastest growth in core inflation since October 2009. Prices are 2.5% above their year-ago levels. This represents a low, but rising inflation rate.
ABA’s Chief Economist James Chessen commented, “we are going need to see more growth in jobs and wage income before consumers will increase spending growth.”
Read the release here.
Friday, June 24, 2011
Banks are beginning to ease their underwriting standards, particularly for commercial loans, reflecting increased competition, improved market liquidity, and a desire to grow. This includes indirect consumer, international, large corporate, asset-based lending, and leveraged loans.
About one third of banks have continued to tighten standards for products tied to weak parts of the economy or that are creating high losses, particularly credit card, home equity, commercial and residential construction, and residential real estate loans.
The report noted that the large volume of commercial and residential real estate loans in banks’ portfolios remains a concern. Additionally, the weak economy and high unemployment have exposed banks with large credit card holdings to significant credit risk.
Over the next 12 months, examiners believe that credit risk will likely increase for 36% of loan products, decrease for 22%, and remain unchanged for 42%.
Read the report.
The upward revision was primarily due to personal consumption, private inventory investment, exports, and nonresidential fixed investment. This was partially offset by downward revisions to federal, state and local government spending. Imports also rose putting additional downward pressure on GDP.
Read the release.
Thursday, June 23, 2011
Every bank that underwent a PCA because of capital deficiencies, and eventually failed, produced a loss to the FDIC that was comparable to failures that did not involve a PCA.
Thus, GAO concluded that PCA did not fulfill its goal of limiting bank failure losses to the FDIC’s deposit insurance fund.
GAO reported that regulators' use and timeliness of PCA action was inconsistent, with action often taken only before a failure was imminent, leaving little time to change course at the bank or limit losses.
As a key goal of PCA was to limit losses in failures, which it is not currently doing, GAO recommends changes to the process including:
- working through the Financial Stability Oversight Council to develop triggers that signal problems sooner than current PCA standards;
- adding a measure of risk to capital category thresholds; and,
- increasing the capital ratios that place banks in PCA categories.
Sales were up 13.5% from the prior year, as May 2010’s sales were depressed due to the expiration of the homebuyer tax credit, and a surge in sales, in April 2010.
Months’ supply of inventory fell slightly from 6.3 in April to 6.2 in May. The ratio remains quite high despite home builders doing a lot in recent years to reduce their inventories. A healthy market has around 4-5 months’ supply.
The median sales price rose 2.6% from April to $222,600, the first increase since December of last year. From a year prior, the median sales price was down 3.4%.
New home sales continue to face several significant factors that are hurting performance. The number of distressed existing homes provides an alternative to consumers looking to enter the market. Additionally elevated unemployment and concerns of a slowing economy make individuals reluctant to make a big purchase, such as a house.
ABA's Chief Economist James Chessen commented, “Until the excess inventory of existing homes is worked off, new home sales will suffer. It means continued weakness in jobs and income for builders and workers in the construction trades.”
Source: Census Bureau.
Wednesday, June 22, 2011
Key points of Bernanke’s speech included:
- The “pace of progress remains frustratingly slow.”
- Inflation is currently higher than the FOMC’s target due in part to temporary factors including the tragedy in Japan as well as commodity prices. As those factors subside, growth is expected to improve.
- Certain headwinds to growth could be more permanent, such as weakness in the financial sector, housing, and balance sheet deleveraging.
- The FOMC plans to keep rates exceptionally low for an “extended period” and will not consider a timetable for tightening for at least 2-3 meetings (late 2011 into 2012) depending on economic conditions.
- The FOMC has made no timeline commitment for holding the securities purchased through quantitative easing programs.
- Policymakers should adopt a long-term solution to growing deficits, as severe short term cuts would simply hurt the economy. Bernanke stressed the important of creating a credible plan.
- Domestic intuitions report little direct exposure to Greece; however, a contagion to other central European countries could pose a more significant threat.
Video streaming by Ustream
See the Fed’s predictions.
See ABA’s Economic Advisory Board’s predictions.
The CBO released two forecasts for the budget: (1) a baseline forecast assuming current law and (2) a more realistic forecast adjusting for expected changes to current law.
In the more realistic forecast, revenues are predicted to remain near current levels, with large increases in Medicare payments, a reflection of an aging population and growing health care costs.
Under this scenario federal debt would grow from 70% of GDP in 2011 to 187% of GDP by 2035.
Additionally, growing debt is likely to affect peoples’ incentive to work and save -- reducing national savings -- leading to higher interest rates, more borrowing from abroad, and less domestic investment.
The report recommended that the government increase revenues substantially, decrease spending significantly, or a mixture of the two. Although doing this during a slowing economy has the potential to slow the recovery, once the economy recovers the future damage from growing federal debt will be much smaller.
See the CBO's report.
The FOMC acknowledged that commodity prices have been rising, but the committee continues to see stable long-term inflationary expectations.
Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.
The FOMC noted that the economy grew at a slightly slower pace than anticipated in April.
This statement essentially continues the status quo and does not represent any significant change on the part of the Fed. The FOMC voted unanimously for the policy and statement.
See the statement.
|June 22th Meeting||April 27th Meeting|
Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.
Information received since the Federal Open Market Committee met in March indicates that the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March. Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
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. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings 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 monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability.
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.
Tuesday, June 21, 2011
Due to this decrease in sales, the months supply of inventory rose slightly to 9.3 from 9.0. The long-term inventory supply ratio has historically been around 5 months.
The median sale price in May rose from $161,100 in April to $166,500, however was down 4.6% from a year prior. The end of price declines represents a silver lining, although the increase in price may be at least in part due to a change in the mix of houses sold, and not necessarily because home values have risen this much. The housing market is lagging other parts of the economy and remains soft with excess inventories still prevalent.
ABA Chief Economist James Chessen commented, “With an unemployment rate over 9% and worries about the economy slowing further, there’s little enthusiasm for people to make big purchases, such as a home.”
Source: The National Association of Realtors.
Thursday, June 16, 2011
The level of construction permits increased 8.7% in May, lead by an increase of 29% in multifamily permits and with a moderate pickup in single-family permits. Permits are now down just 5.2% on a year-over-year basis.
Read the press release.
Wednesday, June 15, 2011
In May, manufacturing production rose 0.4% after falling 0.5% in April. Continuing supply chain disruptions from the Japanese earthquake and tsunami held down output of motor vehicles and parts in the past two months. Excluding motor vehicles and parts, manufacturing output advanced 0.6% in May.
Capacity utilization for total industry was flat at 76.7%, a rate 3.7 percentage points below its average from 1972 to 2010.
Read the current release.
Core inflation (CPI minus food and energy) increased 0.3% in May, its largest increase since July 2008. The indexes for apparel, shelter, new vehicles, and recreation all contributed to the acceleration, rising more in May than in April. Core inflation is up 1.5% over the last 12 months before seasonal adjustments.
While food prices rose in May, as four of the six major grocery store food group indexes increased, energy prices, which had been rising sharply, declined in May. The gasoline index decreased for the first time since last June.
Read the news release.
Tuesday, June 14, 2011
Read the press release.
See detailed EAC forecast numbers.
Watch a two-minute video clip of EAC chairman Peter Hooper’s summary of the forecast.
The Census Bureau revised down the monthly change in retail and food service sales between March and April from 0.5% to 0.3%.
Gasoline stations sales were up 22.3% from May 2010 and nonstore retailers sales were up 15.9% from last year.
Read the report.
Core PPI, minus food and energy, rose 0.2% in May.
At the earlier stages of processing, prices received by manufacturers of intermediate goods climbed 0.9 in May, and the crude goods index declined 4.1%.
On an unadjusted basis, prices for finished goods moved up 7.3% for the 12 months ended May 2011, the largest year-over-year gain since September 2008.
Read the news release.
Overall, 92% of small businesses reported that all their credit needs were met or that they were not interested in borrowing. Only 8% reported that not all of their credit needs were satisfied, while 49% said they did not want a loan.
Three percent reported financing as their #1 business problem, so for the overwhelming majority, “credit supply” is not a problem.
Twenty-nine percent of all owners reported borrowing on a regular basis, which is only 1 point above the record low. A net 10% reported loans “harder to get” compared to their last attempt.
Small business optimism fell for the third month in a row, as one in four owners still reports “weak sales” as their top business problem. While money is cheap, most owners are not interested in a loan to finance equipment they don’t need. Only 5% of small business owners said that this is a good time to expand their facilities.
Read the June 2011 survey.
Thursday, June 9, 2011
Although recovery in stock market has pushed wealth up $8.7 trillion, or about half of what was lost in the crisis, recent declines in the stock market along with continued depressed housing prices will likely lead to a decline in net worth in the second quarter.
The decline in home prices have pushed owner's equity as a percentage of real estate values down to 38%, well below its recent high of 59.7% in 2005.
Read the release.
The goods and services deficit increased $2.2 billion from April 2010 to April 2011. Exports were up $27.8 billion, or 18.8 percent, and imports were up $30.0 billion, or 15.9 percent.
View the release.
Wednesday, June 8, 2011
Treasury Secreatary Geithner said:
"Some argue that the U.S. financial system is too concentrated, which could promote systemic risks. But the U.S. banking system today is less concentrated than that of any other major economy. And total banking assets in the United States today are only about the size of U.S. GDP – much lower than in other developed economies.
The three largest U.S. banks account for 32 percent of total banking assets in the United States, in comparison to 46 percent for the three largest in Japan, 58 percent in Canada, 63 percent in the UK, 65 percent in France, 70 percent in Germany, 71 percent in Italy, and 76 percent in Switzerland.
And total banking assets are 461 percent of GDP in the UK, 178 percent in Germany, and 820 percent in Switzerland."
Read the speech.
Tuesday, June 7, 2011
Nonrevolving credit grew in April at an annualized pace of 5.3%. This is the ninth consecutive monthly increase in nonrevolving credit, which bottomed out in July 2010.
However, revolving credit in April fell by 1.4% (annualized) to $790.1 billion, which is almost 19 percent below its August 2008 peak. Revolving credit has fallen in 30 of the last 32 months.
According to a CoreLogic report, 2.4 million borrowers had less then 5% equity in their mortgage, which, together with those reporting negative equity, accounted for 27.7% of all residential properties.
Sixty three percent of all mortgaged properties in Nevada were underwater, followed by Arizona at 50% and Florida at 46%.
The presence of a home equity loan significantly increased the risk of being underwater on a mortgage.
According to the report, “While only 18% of borrowers with no home equity loans were underwater at the end of the first quarter, 38% of borrowers with home equity loans were in a negative equity position.”
An underwater borrower without home equity loans reported an average negative equity of $52,000, compared to $83,000 for a borrower with a home equity loan.
See the full CoreLogic report.
Friday, June 3, 2011
Small increases were reported in most categories. The employment index reported a small increase which parallels the small gain the service sector posted in today’s employment report. The relatively stronger employment increase in the ISM Index may indicate that the downturn in employment will be short-lived.
Read the press release.
Private sector employment grew by 83,000 in May - well below the prior three-month average of 244,000. However, the public sector continued to shed jobs in May, when 29,000 jobs were destroyed.
The unemployment rate edged higher in May rising to 9.1% from 9.0% in April.
While the economy and hiring has hit a soft patch, the weakness was compounded by the fact that the April number (232,000) was based on a five-week survey, while today’s May report was based off of the usual four week period.
"The jobs report shows that the economic recovery is not firing on all cylinders," said Jim Chessen, American Bankers Association's Chief Economist.
Read the press release.
Thursday, June 2, 2011
Under the Housing and Economic Recovery Act, the Treasury was directed to provide enough capital to Fannie and Freddie to maintain a net worth of zero for the companies.
From November 2008 to March 2011, the government had provided $154 billion in capital and had received $24 billion in dividends, resulting in a net expense of $130 billion.
The CBO said it expects Fannie and Freddie will need more support from the government in 2011 and 2012, but after that the GSEs would likely pay more in dividends to the Treasury than they will receive from capital support.
The CBO estimated that the additional capital support from 2012-2021 would cost the government $42 billion.
The testimony also reviews broad options for housing finance reform, including a fully private model, a fully federal model, or a hybrid.
See the statement here.
There was a mild increase in unit labor costs in nonfarm businesses, which rose 0.7% in the first quarter of 2011, as a 2.5% increase in hourly compensation outpaced the 1.8% gain in productivity. This suggests wage inflation is still benign.
Read the press release.
Wednesday, June 1, 2011
Construction spending during April 2011 was estimated at a seasonally adjusted annual rate of $765.0 billion, 0.4% above the revised March estimate of $762.1 billion. However, the April 2011 figure is 9.3% below the April 2010 estimate of $843.1 billion.
During the first 4 months of this year, construction spending was $222.7 billion, 8.4% below the $243.0 billion for the same period in 2010.
While private construction spending was higher in April, public construction spending was lower for the month.
Both residential and nonresidential private construction spending were up during April. Residential construction was at a seasonally adjusted annual rate of $232.1 billion in April, 3.1% above the revised March estimate of $225.1 billion. Nonresidential construction was at a seasonally adjusted annual rate of $250.8 billion in April, 0.5% above the revised March estimate.
On the other hand, the estimated seasonally adjusted annual rate of public construction spending was $282.0 billion, which is 1.9% below the revised March estimate of $287.4 billion.
Read the press release.
The Purchasing Manager Index (PMI) fell from 6.9 percentage points below the April reading of 60.4% to 53.5%. This is the first reading below 60% for 2011 and the lowest PMI reported for the past 12 months. Slower growth in new orders and production were the primary contributors to May's lower PMI reading.
Despite the slowdown, economic activity in the manufacturing sector expanded in May for the 22nd consecutive month, and the overall economy grew for the 24th consecutive month.
"The survey shows that the manufacturing sector has shifted into a lower gear," said Jim Chessen, the American Bankers Association's Chief Economist.
Read the press release.
Employment in the service-providing sector rose by 48,000 in May, its 17 consecutive monthly employment increase. However, employment in the goods-producing sector fell 10,000 after six consecutive monthly increases and manufacturing employment fell 9,000 in May following seven consecutive monthly gains.
"The weak pace of private sector job creation is disappointing and confirms that the U.S. economy is going through a soft patch," said Jim Chessen, the chief economist of the American Bankers Association.
Read the press release.
U.S. employers announced plans to cut 37,135 positions from their payrolls during May -- up just 1.8% from April's announced layoffs of 36,490 jobs. This is the third time this year and the 10th time in the last 14 months that planned job cuts have been below 40,000 for the month.
Compared to May 2010, planned job cuts in May 2011 were down 4.3% from year ago levels.
Announced job cuts of 204,374 in 2011 are 21% below the 258,319 planned layoffs reported in the first five months of 2010.
The government and non-profit sector continues to dominate monthly job-cut announcements accounting for nearly 40 percent of all job cuts during May.