Economy Grew at 1.3% in the Second Quarter

Real GDP grew at a slow 1.3% annualized pace in the second quarter of 2011 according to a Bureau of Economic Analysis report released this morning. The report also revised first quarter growth down substantially from 1.9% to 0.4%. This revision makes last quarter’s growth the slowest since 2Q 2009, when the economy was still in recession. Although this month’s growth is up from last quarter, it is still modest.

Government continued to weigh on growth contributing -0.23% to the change, this is significantly better than last quarter where government contributed -1.23% to GDP. Net exports improved as well, aiding growth by 0.58% rather than detracting 0.34%. The biggest hurdle growth faced this month was consumption, which only aided GDP growth by 0.07%, down from 1.47% last quarter and 2.48% in 4Q 2010.



Read the release.

Beige Book Points to Slowdown

The Federal Reserve Released its Beige Book today, which shows that economic recovery slowed in much of the United States. Over half of the 12 Fed districts reported a slowdown since the last report. The manufacturing outlook remained optimistic, however capital spending was more cautious. Consumer spending increased overall with some growth in non-auto retail sales in most districts. Activity in non-financial sectors improved in most districts as well.

Although most districts saw modest hiring, the labor market remains weak.

Weather and state budget impasses limited growth in some districts. However, districts with large exposure to energy and mining reported strong growth within extractive industries.

Loan demand has increased in three districts, decreased in two and were relatively flat in five districts. Credit quality was either steady or improving.

Read the report.

Consumers Paid $72 Billion More Than They Purchased on Credit Cards

A new analysis by TransUnion contradicts the conventional wisdom that the decline in credit card balances was primarily due to charge-offs.

According to TransUnion, "consumers made an estimated $72 billion more in payments on their credit cards than purchases between the first quarters of 2009 and 2010."

Average credit card debt per borrower has declined from $5,776 in the first quarter of 2009 to $4,679 as of the first quater of 2011, according to TransUnion.

Read the press release.

Hoenig Advocates Raising Interest Rates

In testimony delivered this afternoon before the House Subcommittee on Domestic Monetary Policy and Technology committee, Kansas City Federal Reserve President Thomas Hoenig advocated for moving interest rates up from the current levels.

Hoenig noted: “Though I would support a generally accommodative monetary policy today, I have raised questions regarding the advisability of keeping the emergency monetary policy in place for 32 months with the promise of keeping it there for an extended period.”

Hoenig outlined several concerns with keeping interest rates at zero:

“First, a guarantee of zero rates affects the allocation of resources…a zero-rate policy increases the risk of misallocating real resources, creating a new set of imbalances or possibly a new set of bubbles.”

“Another important effect of zero rates is that it redistributes wealth in this country from the saver to debtor by pushing interest rates on deposits and other types of assets below what they would otherwise be. This requires savers and those on fixed incomes to subsidize borrowers.”

“In addition, historically low rates affect the incentives of how the largest banks allocate assets. They can borrow for essentially a quarter-point and lend it back to the federal government by purchasing bonds and notes that pay about 3 percent. It provides them a means to generate earnings and restore capital, but it also reflects a subsidy to their operations”

“Finally, my view is that unemployment is high today, in part, because interest rates were held to an artificially low level during the period of the early 2000s.”

“That said, I am not advocating for tight monetary policy. I’m advocating that the FOMC carefully move to a non-zero rate. This will allow the market to begin to read credit conditions and allocate resources according to their best use rather than in response to artificial incentives”

Read his testimony.

New Home Sales Fell 1% in June

In June new homes sold at an annualized pace of 312,000 units, down 1% from May. This is the third consecutive monthly decline, however we remain slightly above the six month average of nearly 300,000.



This slow rate of sales pushed up the month’s supply of houses on the market slightly to 6.3. This is still a historically low number and shows that few homes are being built. New homes continue to face competition from the large number of distressed homes on the market.

The median price of a new home rose 7.7% to 234,400, up from 222,600 in May.

Read the report.

Case Shiller: Existing Home Prices Rose 1% Last Month

According to the non seasonally adjusted twenty-city Case-Shiller Index, existing home prices rose in May by 1.0% and the ten-city index rose by 1.1%. This continues the growth seen last month that followed an eight month decline. Both the ten- and twenty-city indices were down 3.6% and 4.5% respectively from a year ago.



Within the 10-city composite, only Las Vegas posted a decline in prices at -0.9%. Washington and Boston posted the largest gains with 2.4% and 2.7% respectively.



Much of this gain in prices was a result of fewer distressed homes being sold. This is likely a temporary situation with the “robo-signing” incident slowing the foreclosure process. The Case-Shiller index remains well above its historical average that we quickly moved away from beginning in 1997, suggesting that there is still a lot of room for prices to fall.

Read the report.

Exisitng Home Sales Fell 0.8%

Sales of existing homes fell in June by 0.8% to an annualized rate of 4.77 million units according to the National Association of Realtors' report released this morning. This marks the third monthly decline in sales and puts us at our lowest annualized sales since November.

The median price of a home sold rose 0.8% for the first time since November to $184,300. This is up from $169,300 in May.

The supply of houses on the market increased to 9.5, up from 9.1 in May. This is the largest inventory seen since November. A combination of weak sales and increased listings drove this higher.



Read the report.

Gang of Six Debt Plan

A bipartisan group of six U.S. senators known as the “Gang of Six” have provided an ambitious budget plan that provides concessions on both sides and could help break the current deadlock. The proposal includes $3.75 trillion in savings over 10 years as well as $1.2 trillion in new revenue. President Obama praised the deal, saying that it is “broadly consistent with the approach that I’ve urged.”

The plan purports to cut national deficits by $3.7 trillion over 10 years under the CBO’s March 2011 baseline. It seeks to stabilize publicly held debt by 2014, and reduce public debit to 70% of the economy by 2021. Additionally it seeks to impose “unprecedented budget enforcement.”

The plan consists of two parts, a first “down payment,” and then a second bill designed to put the nation on a stable fiscal path. The plan would immediately implement $500 billion in deficit cuts, cut security and non-security spending over 10 years with spending caps, make Medicare and Medicaid cuts, and abolish the Alternative Minimum Tax.

Although the plan raises $1.2 trillion in new revenues, it also envisions a $1.5 trillion tax cut achieved through broad tax reforms.

Read the proposal.

Housing Starts Rose 14.6%

Housing Starts improved significantly in June, rising to a pace of 629,000 annualized units. This gain represents a 14.6% improvement over May (revised downward by 2%) and the strongest month-over-month gain since the beginning of the year.

These improved numbers are driven both by single-family and multi-family starts.

Total housing starts are up 16.7% over the year, the greatest increase since April 2010, when the homebuyer tax credit effectively ended for builders. Despite this growth, these housing start numbers remain 59% below the 30 year average.



Read the report.

Industrial Production Rose 0.2% in June

Industrial production rose by 0.2% in June, reversing losses of 0.1% in both May (revised down from a 0.1% rise) and April, according to the Federal Reserve's report released this morning.

This growth was led primarily by strength in utility and mining output. The more important manufacturing output, however, was flat due to a 2% drop in auto production. Despite this output in the non-auto sector rose 0.2%



Factory capacity utilization remained unchanged at 76.7%.

Overall these numbers are relative weak and show a still lagging industrial sector.

Read the release.

Consumer Prices Fell 0.2% Driven by Gas Prices

Consumer Prices fell in June for the first time in a year, according to the Bureau of Labor Statistics' report released this morning. The Consumer Price Index fell by 0,2% in June, driven by a 4.4% drop in energy prices as oil receded from its highs.

Food prices rose in June by 0.2% , half of its pace in April and May.



Excluding food and energy core CPI rose by a surprisingly strong 0.3%. This strong reading shows that the effects of the supply chain disruption, stemming from the crisis in Japan, have not yet worn off.

As these temporary factors wear off, high unemployment and sluggish economic growth combined with low energy prices will all slow consumer price growth.

Read the report.

Consumer Sentiment Falls Sharply

Consumer sentiment plunged 7.7 points in July to 63.8, the lowest level since March 2009, according to the University of Michigan’s Consumer Sentiment Survey. This low reading is likely a direct result of rising unemployment, weak housing prices, as well as concerns about the government being unable to meet its obligations, due to the current impasse on reducing the deficit and raising the debt ceiling.

The drop was due to both present conditions as well as future expectations, although future expectations weighed more heavily on the reading. This weighting highlights concerns that if the government fails to act now there could be long term economic repercussions.



Fundamentals that usually have a large influence on this index were stronger last month. Conditions in the stock market, gasoline prices, and inflationary expectations all pointed to stronger consumer sentiment. Consumers, however, seem to be more concerned with the larger picture right now, rather than particulars.

Chief Economist James Chessen commented, “Uncertainty about the future pace of the economy and nervousness about the nation’s debt levels is driving down consumer sentiment. It’s hard to be positive when the economic news continues to point to slow growth with few jobs created.”

Read the release.

Retail Sales Rose 0.1% in June

Retail sales rose 0.1% in June, reversing May’s decline of the same magnitude, according to a report released this morning by the U.S. Census Bureau. Over the last two months retail sales growth has been well below that of earlier in the year. Sales this month were hurt by falling gasoline sales, but this was offset by a surprise growth in auto sales.

Excluding gas and auto sales, core sales growth was steady at 0.2%, lower than the first quarter where sales grew between 0.5%-0.9%



Contributing most heavily to the growth were department stores, building supply stores, auto dealers, and apparel retailers. Other than gas stations the biggest losers were furniture stores and sporting goods and hobby stores.

Despite being marginally better, consumer spending growth remains weak. ABA’s Chief Economist James Chessen commented, “we are going to need to see unemployment and economic outlook improve before consumers will be willing to increase their spending significantly.”

Read the report.

Chairman Bernanke Testifies for the House Financial Services Committee

Chairman Ben Bernanke testified for the House Financial Services Committee this morning discussing the state of the economy as well as monetary policy. Some of the key points he made follow:

• The economy has been weaker than expected, due in part to some temporary factors that include rising energy and food prices as well as supply chain disruptions stemming from the crisis in Japan. With these conditions easing it is expected that the pace of economic recovery will likely increase in the second half of the year. This recovery will face some headwinds however, that include slow growth in consumer spending, a weak housing market, and fiscal tightening at all levels of government.
  
  
• Monetary policy is set to remain “highly accommodative.” Bernanke committed to keeping the target rate at “exceptionally low levels for an extended period.”
  
  
• It is estimated that QE2 lowered longer-term interest rates approximately 10 to 30 basis points. The analysis further indicates that a reduction in longer-term interest rates of this magnitude would be roughly equivalent in terms of its effect on the economy to a 40 to 120 basis point reduction in the federal funds rate. This plan was expected to add roughly 30,000 jobs per month.
  
  
• Should the economic outlook worsen Chairman Bernanke said that the Federal Reserve is prepared to initiate another round of securities purchases or increase the maturities of current holdings.
  
  
• Should the economic recovery continue at a more rapid pace and inflation become an issue, the Federal Reserve has outlined a plan to normalize monetary policy.
  
  See Chairman Bernanke's testimony

Federal Reserve Outlines Strategy to Normalize Monetary Policy

Today the Federal Reserve released the minutes from their meetings on June 21-22. During this meeting they discussed the key elements of the strategy that FOMC expects to follow when it becomes appropriate to begin normalizing the stance and conduct of monetary policy:

• The Committee will determine the timing and pace of policy normalization to promote its statutory mandate of maximum employment and price stability.
• To begin the process of policy normalization, the Committee will likely first cease reinvesting some or all payments of principal on the securities holdings in the SOMA.
• At the same time or sometime thereafter, the Committee will modify its forward guidance on the path of the federal funds rate and will initiate temporary reserve-draining operations aimed at supporting the implementation of increases in the federal funds rate when appropriate.
• When economic conditions warrant, the Committee’s next step in the process of policy normalization will be to begin raising its target for the federal funds rate, and from that point on, changing the level or range of the federal funds rate target will be the primary means of adjusting the stance of monetary policy. During the normalization process, adjustments to the interest rate on excess reserves and to the level of reserves in the banking system will be used to bring the funds rate toward its target.
• Sales of agency securities from the SOMA will likely commence sometime after the first increase in the target for the federal funds rate. The timing and pace of sales will be communicated to the public in advance; that pace is anticipated to be relatively gradual and steady, but it could be adjusted up or down in response to material changes in the economic outlook or financial conditions.
• Once sales begin, the pace of sales is expected to be aimed at eliminating the SOMA’s holdings of agency securities over a period of three to five years, thereby minimizing the extent to which the SOMA portfolio might affect the allocation of credit across sectors of the economy. Sales at this pace would be expected to normalize the size of the SOMA securities portfolio over a period of two to three years. In particular, the size of the securities portfolio and the associated quantity of bank reserves are expected to be reduced to the smallest levels that would be consistent with the efficient implementation of monetary policy.
• The Committee is prepared to make adjustments to its exit strategy if necessary in light of economic and financial developments.

All but one member agreed to this strategy.

See the meeting summary.

U.S. Trade Deficit Rises Sharply

The U.S. trade deficit grew sharply in May to $50.2 billion, up 15% from April’s $43.6 according to The Census Bureau's report released this morning. This was driven by a 2.6% jump in imports and a 0.6% drop in exports. This is the largest widening of the deficit since January.

Imports grew by $2.3 billion after falling $4.6 billion in April. Much of this was driven by petroleum accounting for $1.2 billion increase since May. This reflects both higher gas prices and additional quantity.

Exports fell in May to 100.6 from 102.1 in April. This was a surprise and represents the first fall since February.



In terms of the larger picture, this report suggests that net exports will only provide a small boost to GDP rather than the large positive contribution seen in April.

See the report.

President Obama expresses desire to do biggest debt deal possible

President Obama spoke this morning on the debt ceiling talks and emphasized his desire to do as large of a deal as is possible now rather than simply provide an extension.

President Obama went so far as to say he would not sign any 30, 60, 90 or 180 day extension, noting that it would be more difficult to deal with the issue during elections.

He also stressed that both sides will be required to make large sacrifices in order to make this happen. Specifically that the Democrats would have to budge on entitlements and that the Republicans would need to yield on revenues.

See video of the press confrence.

Consumer Credit Rose $5.1 billion in May and Revolving Credit Posted its First Gain of the Year

The Federal Reserve reported that consumer credit grew by $5.1 billion in May, an annualized rate of 2.5% and the ninth consecutive monthly increase in total consumer credit. Both revolving and non-revolving credit grew in May.

Revolving credit grew by $3.4 billion (5.2% annualized) reversing its recent trend and posting the first increase of the year.



Non-revolving credit was up as well by $1.7 billion (1.3% annualized); however, this is less than the $6.5 billion increase in April. Much of the increase is likely due to auto sales which were slow in May.



See the release.

Economy added 18,000 jobs and unemployment rose to 9.2%

The June employment report released today by the Bureau of Labor Statistics was a big disappointment. The report indicated that non-farm payroll employment rose by only 18,000 in June. This follows a revised gain of 25,000 in May (previously reported to be 54,000). This represents the slowest growth in non-farm employment since September 2010.

This slow growth pushed the unemployment rate up to 9.2% even though the labor force contracted. The labor force participation rate contracted to 64.1, suggesting that more may be unemployed than the rate suggests as 272,000 stopped looking for jobs altogether last month.

Private sector employment rose by 57,000 down from an additional 73,000 in May. Government employment continued to fall across jurisdictions by a total of 39,000.



Read the release.

Private Sector Employment Grew by 157,000 in June

Private sector jobs rose by 157,000 from May to June according to the ADP National Employment Report®. This report follows weak growth from April to May of 36,000 (revised down slightly from 38,000.) June’s gain is encouraging given the poor growth in May, and may signal a return to steady job growth.

The growth in private sector jobs was driven primarily by service sector jobs, which grew by 130,000, almost triple its growth in May. The goods sector grew by 24,000 in June, offsetting a fall of 10,000 in May. Manufacturing also reversed a negative trend rising 24,000 in June (after falling 10,000 in May.)

Payrolls must grow at least this rate in order to absorb all of the new entrants into the job market. As such 157,000 additional jobs will likely be enough to keep the unemployment rate flat. We will need to see growth closer to 200,000 and above before we begin to see the unemployment rate begin to drop. Regardless this shows that the economic recovery is beginning to gain strength again and has recovered from the soft patch seen in the spring.



Read the report here.

Consumer Delinquencies Slightly Higher in First Quarter

Improving trends in consumer credit delinquencies hit a soft patch as the economy slowed in the first quarter of 2011, according to the American Bankers Association’s Consumer Credit Delinquency Bulletin that was released today.

Bank card delinquencies rose 12 basis points to 3.40 percent of all accounts in the first quarter of 2010, but remained well below the 3.88 percent registered in 2010’s first quarter and also the 15-year average of 3.95 percent.

The composite ratio, which tracks delinquencies in eight closed-end installment loan categories, rose to 2.71 percent of all accounts, 3 basis points higher than the previous quarter but 27 basis points lower than 2010’s initial quarter.



“Rising gas and food prices took a big bite out of family budgets in the first quarter of 2011,” ABA Chief Economist Jim Chessen said. “With family incomes already stretched, even small increases in daily living expenses can be enough to derail the ability to meet debt obligations.”



Chessen explained that many consumers feel insecure about the economy and whether their financial resources can carry them through until conditions improve. “With a slow-growing economy and weak job growth, there will continue to be financial stress that will make it hard for some people to pay their bills on time,” he said.

Read the press release.

ISM Non-Manufacturing Fell to 53.3

In June, the Institute for Supply Management's Non-Manufacturing Index fell 1.3 percentage points to 53.3, down from 54.6 in May. Despite the drop, the index remains over 50, which is the threshold for service sector activity growth. As such the decline still represents expansion, but just at a slower pace than what occurred in May.

Looking at the details of the report, output growth and employment growth remained essentially unchanged. The output component fell 0.2 points to 53.4 , while the employment component rose 0.1 points to 54.1. The forward looking indicators however, both fell. New orders fell by 3.2 points to 53.6 and backlogged orders fell 6.5 points to 48.5. This is the first time backlogged orders have shrunk since December 2010. This report shows that the recovery is continuing, but at a frustratingly slow pace.



Read the report here.

Planned Job Cuts Up in June

Challenger, Gray, & Christmas reported that the number of planned job cuts announced by U.S.-based employers increased by 4,297 or 11.6 percent to 41,432 in June -- the second consecutive monthly increase.

For the quarter ending on June 30, a total of 115,057 job cuts were announced, down 12 percent from 130,749 in the first quarter and 1.2 percent lower than the second quarter in 2010.

Employers announced 245,806 planned job cuts in the first six months of this year -- the lowest level since 2000. Announced job cuts were 17.4 percent lower than the 297,677 cuts announced in the first half of 2010.

The government sector reported the largest number of job cuts with employers in the sector announcing 77,591 job cuts so far this year. In June, the government sector cut an industry-leading 10,176 jobs.

Read the press release.

Update on TARP's Bank Program Profits

The Treasury Department announced today that taxpayers have recovered approximately $255 billion from TARP’s bank programs through repayments, dividends, interest, and other income. This has exceeded the original financial support Treasury made through those programs of $245 billion, netting a positive return to taxpayers of approximately $10 billion.

Ultimately, the bank programs within TARP will provide a positive return of approximately $20 billion to taxpayers.

Read the press release.

ISM Manufacturing Index Increased to 55.3%

The manufacturing sector continued to expand in June at a slightly faster pace than May, according to information released today by the Institute of Supply Management (ISM).

The Purchasing Manager Index (PMI) rose from 53.5% in May to 55.3% in June, following three consecutive months of slower growth. This is the second consecutive reading below 60% for 2011, so despite the increase, manufacturing growth is still slower than earlier this year.

A similar trend of strong growth early in the year followed by slower, level growth during the summer was also experienced in 2010.

Production, employment, and inventories drove the gain in the overall index, while growth in new orders were flat.



Read the report.

Construction Spending Fell 0.6% in May

Construction spending in May fell 0.6% below its revised April level, according to a report released this morning by the U.S. Census Bureau of the Department of Commerce.

Private spending drove the drop with a -0.4% change, down from a 0.4% rise in April. Public spending however improved to -0.8% from -2.4% .

Construction spending during May 2011 was estimated at a seasonally adjusted annual rate of $764,981 billion. This remains only 0.5% above an 11 year low and only half of the $1.5 trillion pace that economists deem healthy.

One factor contributing to the lack of new construction spending is that homeowners are opting to renovate their houses rather than moving into new ones. Furthermore builders are struggling to compete with a large stock of distressed properties.



Read the report.

Consumer Sentiment Fell 2.8 Points

Consumer confidence fell in June to a reading of 71.5, down from 74.3 in May, according to the University of Michigan’s index. Weakness in the labor and stock markets combined with concerns on the debt ceiling drove the decline. Fortunately, gasoline prices falling from their highs helped offset some concerns.

The drop was driven primarily by the future expectations component of the index which fell by 4.7 points. Current conditions remained essentially unchanged at 82.

Inflation expectations were mixed from May, however short term expectations fell sharply.