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Wednesday, November 30, 2011

Beige Book Shows Slow Growth

The Federal Reserve’s Beige Book report, covering the period from mid-October to mid- November, showed modest growth in economic activity in most Federal Reserve districts. St. Louis was the only region to report a decline in economic activity. Commercial and residential real estate related industries were the only industries diverging from the trend, remaining weak. This report shows the period likely continued third quarter’s trend of modest employment and output gains.

Consumer spending increased only modestly, with gains spread evenly across the country. “Holiday sales were generally expected to be flat or increase modestly over a year ago,” in six of the districts. Spending on tourism also showed signs of strength, with New York and Atlanta describing growth as “robust and strong.”

“Manufacturing activity grew at a steady pace across most of the country, with all districts other than St. Louis reporting increases in orders, shipments or productions.” This sector was an important driver during the early stages of the recovery, but was subdued early this year.

Hiring during the period was generally subdued, with wages remaining stable. “Some firms looking to fill open positions were having difficulty finding qualified workers, particularly for high-skilled manufacturing and technical positions.” The Atlanta Fed noted concern about the deterioration of skills for those who remain unemployed.

The housing sector has not experienced any of the recovery seen in the other sectors. “Single-family home construction remained weak, while multifamily construction picked up in New York, Philadelphia, Cleveland, Chicago, and Minneapolis.” It appears homeowners are taking advantage of low rates with home refinancing growing more quickly than overall bank lending.

Read the report
.

Central Banks Coordinate Efforts to Avert Credit Crunch

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are coordinating actions to enhance global liquidity so as "to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses."

The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points.

In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary.

Read the Federal Reserve press release.

Announced Job Cuts Virtually Unchanged in November

The number of planned layoffs announced in November was virtually unchanged from the previous month.

US-based employers reported job cuts totaling 42,474 in November, down 0.7% from 42,759 in October, according to the latest report from global outplacement firm Challenger, Gray & Christmas, Inc.

November was the second consecutive monthly decline in planned job cuts after reaching a 28-month high of 115,730 in September.

However, year-to-date job cuts of 564,297 surpassed the 2010 year-end total of 529,973.

November job cuts were dominated by government sector job-cut announcements, which accounted for 44% of all job cuts during the month. For the year, government agencies have now announced 180,881 job cuts.

Read the press release.

Tuesday, November 29, 2011

Borrower Rights and Foreclosures

A working paper recently published by the Federal Reserve Bank of Atlanta found that giving borrowers additional rights can extend the foreclosure timeline but generally do not lead to better borrower outcomes.

Many have argued that laws that give borrowers additional rights can help prevent unnecessary foreclosures by giving borrowers more time to cure their delinquencies or by facilitating workouts.

This study compares states that allow power-of-sale foreclosures with judicial review states. The study found that preventing power-of-sale foreclosures extends the foreclosure timeline but does not, in the long run, lead to fewer foreclosures. The study reports that one year after the borrower first defaults, lenders had only auctioned off 14% of properties in judicial review states compared to 35% in power-of-sale states. Additionally, a year after default, 26% of borrowers in judicial review states have cured their default compared to 25.6% of borrowers in power-of-sale states.

Next the study compares Massachusetts "right-to-cure" law with neighboring states that did not adopt such laws. The authors found that the right-to-cure law lengthens the foreclosure timeline but does not lead to better outcomes for borrowers.

The study concludes that judicial intervention succeeds in reducing foreclosure by
increasing the incidence of persistent delinquency. States with borrower-protection laws do not prevent foreclosure, they merely delay it.

Read the paper.

Existing Home Prices Deteriorated in September

S&P Case Shiller’s 10- and 20-city indices showed existing home prices falling 0.4% and 0.6% respectively in a report released by S&P this morning. Prices declined in 17 out of the 20 metro areas measured.


On a year-ago basis prices did improve slightly compared to the same period reported in August. The 10-city index declined 3.3% from last year, a slight improvement from the 3.5% decline reported last month. The 20-city index showed similar improvement posting a 3.6% drop from a year ago, an improvement from the 3.8% drop reported in August.


Of the 20 metropolitan areas surveyed only three saw prices strengthen. Washington DC saw the strongest gain with prices improving 1.2% from August. New York and Portland both saw a meager 0.1% jump in prices.

Atlanta fared the worst, experiencing a 5.9% drop. Tampa and San Francisco also saw significant drops of 1.5% each.

Following a period of stability this summer, housing price declines are reaccelerating. The price weakness is likely a result of an increased number of distressed sales. Although other recent data indicates the overall housing market should begin recovering, the trough in home prices will lag this recovery until the distressed properties leave the market.

Read the report
.

Monday, November 28, 2011

NY Fed: Consumer Indebtedness Fell in Q3

The Federal Reserve Bank of New York is reporting the total consumer credit fell in the third quarter of 2011 as the decline in mortgage debt more than offset the increase in non-real estate debt.

Aggregate consumer debt fell approximately $60 billion to $11.66 trillion in the third quarter of 2011, according to the Federal Reserve Bank of New York’s latest Quarterly Report on Household Debt and Credit.

Mortgage debt fell by approximately $114 billion or 1.3% over the third quarter, while non-real estate indebtedness grew by 1.3% during the third quarter to $2.62 trillion.

Credit card debt fell by $25 billion in the third quarter. The number of open credit card accounts in the third quarter was 383 million -- down 6 million from the previous quarter and 23% from its peak in the second quarter of 2008.

Read the press release.

New Home Sales Increased 1.3% in October

Sales of new homes increased 1.3% to an annualized pace of 307,000 units according to a Census Bureau report released this morning. This follows a strong downward revision of September’s pace, to 303,000 from 313,000. Although this report indicates growth, there has been less growth than previously thought.


We continue to see a slow recovery in the new home market, with sales up 8.9% on a year ago basis. The pace now seen is the most rapid since May. The months supply of new homes on the market continues to steadily drop to a low 6.3, the lowest level since June 2006. However, this does not indicate strength in the housing market; there is simply no demand, so builders aren’t supplying as many new homes.

The median home price appreciated 3.3% in October for the first time in four months.

Read the report.

Wednesday, November 23, 2011

Consumer Sentiment Rose 3.2 points in November

Consumer sentiment improved in November, with the University of Michigan Consumer Sentiment Index rising 3.2 points to 64.1. This is a marked improvement from October’s reading of 60.9 and is the highest level since June. Consumer sentiment has begun recovering from its low of 55.7 in August.


The improvement in the index was driven primarily by improvement in the future expectations component which rose to 55.4 from 51.8. Future expectations remain the primary drag on the index. The present conditions component rose to 77.6, an improvement of 2.5 points.

Inflation expectations remained unchanged from October at 3.2% for one year and 2.7% over 5 years.

Personal Income Growth Surpasses Consumption Growth

In October, personal income growth accelerated to 0.4%, from its September growth of 0.1%. Consumers held on to the majority of this extra income, increasing their spending by only 0.1%. This marks a rapid deceleration form the 0.7% consumption growth in September.

With income growing more quickly than spending the savings rate edged up to 3.5% from a downwardly revised 3.3% in September. These levels remain extremely low as the savings rate was at 5.0% as recently as June.


Personal income rose more quickly than expected, adding $48.1 billion. This represents an acceleration in growth to 0.4%, the fastest level of growth since March. Real disposable income rose 0.3%, its fastest level this year.

Consumer spending growth slowed rapidly from 0.7% in September to 0.1% in October. This level of growth is much lower than the 0.35% average growth over the last 12 months.

Read the report.

Tuesday, November 22, 2011

FOMC Minutes Show Discussion of Additional Easing

In its November 1st and 2nd meetings the Federal Open Market Committee discussed additional policy easing according to the FOMC minutes released today. There were several members of the FOMC that wanted to see additional easing. “A few members indicated that they believed the economic outlook might warrant additional policy accommodation. However, it was noted that any such accommodation would likely be more effective if it were provided in the context of a future communications initiative.” As a result most of the members agreed that they could accept leaving the current policy unchanged. In future meetings we could expect to see additional easing.

Additionally, “a majority of participants agreed that it could be beneficial to formulate and publish a statement that would elucidate the Committee’s policy approach… and provide additional information to the public about the likely future path of the target federal funds rate.” More specifically the committee discussed specifying a longer run inflation target, but It was noted that doing so “could be misinterpreted as placing a greater weight on price stability than on maximum employment.”

Read the minutes.

Industry Continues to Regain Strength in Face of Challenges

The FDIC released its Quarterly Banking Profile today, that highlighted the strength of the industry in light of difficult conditions.

“While economic difficulties remain, higher capital levels, increased liquidity and lower losses signal a positive trajectory as the banking industry continues to gain strength.”

Increased Business Lending

“Banks are aggressively seeking out borrowers with a strong capacity to repay loans. Slow economic growth and high levels of uncertainty are still restraining lending, but that tide is beginning to turn. Business lending was particularly strong, increasing 10 percent compared to the same period a year ago. This uptick signals increased optimism about the broader economy, as businesses become more willing to take on debt and consider expansion.”

Record Capital Ratios

“The industry continues to put loan loses behind it and plow earnings back into capital. Capital backs every loan made and record capital ratios demonstrate a firm foundation of financial health.
“Banks added over $24 billion in equity capital during the third quarter and $288 billion since 2008 when the financial crisis took hold. Total industry capital is almost $1.6 trillion. Banks also have set aside more than $197 billion in reserves to cover possible loan losses. Capital plus reserves gives a total buffer protecting the industry of almost $1.8 trillion. In addition, the industry’s capital-to-assets ratio – a key measure of financial strength – remains at an all-time high.”

Strong Bank Earnings

"You can't have a strong economy without having a strong, growing and profitable banking sector. The return to health is a critical first step toward rebuilding the economic vitality of the country."

Problem Banks and Loan Losses

“The considerable slowdown in bank failures and continuing decline in the number of troubled banks is a positive sign as our industry continues to regain its health. The FDIC is rebuilding reserves as the industry -- which is solely responsible for all the agency’s expenses -- paid about $14 billion in premiums over the last year.”

Read ABA's statement on FDIC's Quarterly Baning Profile.

Read the FDIC's Quarterly Banking Profile.

Third Quarter GDP Growth Estimate Falls to 2.0%

The second estimate of third quarter GDP indicates that the economy expanded at 2.0% during the quarter, down from an initial estimate of 2.5%, according to a Bureau of Economic Analysis report released this morning. Over the past year the economy has expanded just 1.5%, well below levels needed for a self sustaining recovery.


The second estimate of third quarter growth was 0.5%, or $15 billion, lower than the initial estimate. The decline is due primarily to a large downward revision to private inventory investment and smaller downward revisions to nonresidential fixed investment and personal consumption expenditures. These drags on GDP were partially offset by a downward revision to imports.

Despite the downward revision, third quarter GDP showed improvement from the second quarter’s 1.3% growth. The acceleration in growth reflects stronger growth in consumer spending, business investment, and exports as well as a smaller drag from state and local government. A large drop in inventory investment was the primary drag on growth in the third quarter.

Corporate profits rose at 2.1% (not annualized) in the third quarter, slower than the 3.3% growth seen in the second quarter. Despite the slower rise, profits are up almost 8% over the previous year.


Read the report
.

Monday, November 21, 2011

Existing Home Sales Rose 1.4% in October

Existing homes sold at a pace of 4.97 million units on an annualized basis, a 1.4% increase over the pace seen in September according to a National Association of Realtors report released this morning. Months of inventory continued to shrink modestly, indicating that many distressed properties are leaving the market.


The Northeast remains the weakest region, reporting a pace of 450,000 annualized units, down 5.1% from September.

The other three regions posted solid gains. The west saw the biggest boost in October, with a pace of 1.19 million units per year, up 4.4% from September. The Midwest and South both saw gains of 1.8% and 2.1% respectively.

The months supply of homes on the market fell to 8.0, down from 8.3 in September and 9.5 in July. The median price for an existing home continued to fall to $162,500, 4.7% below its level one year ago.

The market for existing homes remains depressed. Scarce demand has meant sales have hovered around the 5 million unit mark for nearly two years. The falling inventories provide some hope, however, it must be noted that much of this improvement is due to a fall in listings, not houses being sold.

Read the report.

Friday, November 18, 2011

Exam Relief Bill Introduced

Reps. Shelley Moore Capito (R-W.Va.) and Carolyn Maloney (D-N.Y.) yesterday introduced a bipartisan, ABA-backed bill that would address concerns expressed by bankers about a lack of transparency and consistency in the examination process.

Bankers have stated that the reasons for certain decisions made by regulators during the examination process have not been clear. Moreover, bankers have reported that some examiner decisions have effectively and unnecessarily reduced the amount of capital available for increased lending -- particularly to small businesses. This has hindered banks’ ability to help local businesses grow and create jobs.

The bill, H.R. 3461, helps address these concerns by requiring, among other things: timely examination reports, clear exam standards, examination of consistency and quality of all examinations and expedited appeals to independent judge.

Read an ABA summary of the bill.
Read the bill.

Thomas Hoenig Confirmation Hearing

The U.S. Senate Banking Committee held a hearing yesterday on the nomination of Thomas Hoenig for the position of vice chairman of the FDIC. Mr. Hoenig served as the president of the Federal Reserve bank of Kansas City until his retirement in September. In the hearing Mr. Hoenig stressed his 38 years in the Federal Reserve banking system has provided him with the experience in banking supervision and regulation necessary for the role. He noted his experience in dealing with financial crises through the financial panics in Asia, South America, Russia, and Mexico, as well as, the most recent financial crisis.

In the Q&A period following his testimony, Mr. Hoenig gave some insight into his views on industry consolidation and “too big to fail.” The questions and responses are as follows:

Senator Shelby: What do you believe are the principal causes of consolidation in the banking sector?

Thomas Hoenig: Well Senator, there are probably several. One of those would be just the economies of scale and the technology brought forward. I think another thing has been, and this is one thing I am sensitive to for community banks, the fact that when you do introduce new regulation, whatever the right reasons and so forth, it does put a kind of a fixed cost over the banks. They require more dollars to spread those costs over and that has encouraged consolidation. So I think one of the challenges that the regulatory authorities have is to inform community banks, all banks, but community banks in particular in terms of how these regulations can be put in place. Get them at least pointed in the right direction so that they can control some of those costs and can compete on a cost structure basis across the broad economy, and that’s essential as we go forward.

Senator Corker: I’ve had some calls from some of the larger institutions that know that you’re going to be doing what you’re going to be doing, and obviously you’ve made a lot of comments in the past about the fact that any organization that is "too big to fail," is too big, and some of them are concerned. I think it’s an interesting dynamic personally and I thank you for bringing many of these thoughts to the table, but a lot of them are concerned that maybe their funeral plans don’t quite meet your standard and you break them apart anyway. I’d like for you to expand, and by the way I’m not giving judgment on that, I’m just expressing something that has been expressed to me. I’d love for you to talk a little bit about what you think ought to happen to some of our larger institutions and secondly, will that affect how you look at the “funeral plans” that these have to produce and I think you have to approve. Is that correct?

Thomas Hoenig: Yes, and let me say, I’m not against big. I’ve said that several times. I am against "too big to fail;" because "too big to fail" does impact the taxpayer in significant ways. What my concern has been, and I voiced this, is that if you take the safety net and you place it underneath these institutions and give them and their creditors protection that they know or perceive strongly are in place, then they do increase the risk. They do increase the fragility. You can see, as an example, in leverage. The higher the safety net the more you tend to encourage leverage so you get a higher return on equity. Now, if you have strong capital but you compete from a position of strength, if you are highly leveraged you are vulnerable, so I think it is incumbent on these institutions to understand themselves their risk profile and how much risk they have. And it’s very important that the regulatory agencies and the Federal Deposit Insurance Corporation understand these institutions. And that if they present these living wills or what we choose to call them. They have to be understandable, and if the management and the directors can’t understand it, I don’t think we can understand it. So the burden is on them to show that they are manageable, that their risk will not impact the taxpayer in the future and that’s capitalism, and I think I would be supportive of that. But I don’t support future bailouts by the taxpayer for institutions that are allowed to take on too much risk.

Read the testimony.

Watch the hearing.

Thursday, November 17, 2011

Initial Jobless Claims Continue to Fall

Initial claims fell by 5,000 to 388,000 during the week ending November 12th according to an Employment and Training Administration report released this morning. This brings the four week moving average below the important 400,000 level for the first time since July 2008, except for a brief period in April. This report shows a cautious optimism on the side of firms who are beginning to retain employees.


Initial claims remained below the 400,000 threshold and continued to move lower last week, despite expectations for a modest rise. The employment market is far from healthy, however, this is the first indicator we would expect to improve. Although companies have not begun to hire again, they are holding on to the employees they have. The next step will be a return to hiring as businesses see demand pick up.

Read the report
.

New Residential Construction Flat in October

Housing starts were little changed in October, falling 0.3% to an annualized rate of 628,000 according to a Census Bureau report released this morning. This follows a downward revision of September’s growth by 4%. The October pace held up better than expectations and is the third highest rate reported in the last year. Despite this housing starts remain well below their 50-year average of 1.5 million units per year.


Single-family starts rose 3.9% from last month, indicating a shift from multi-family construction, which fell by 8.3%. Going forward housing starts are set to increase as the number of housing permits issued grew by 10.9% to its highest level since March 2010. The effect will be particularly strong in the multi-family construction, for which permits issued rose 24.4%. Single-family construction is also set to see a boost, with permit issuance up 5.1% from September. We will need a few months of solid growth to get anywhere near the historical average of 1.5 million annual units.

Read the report.

Wednesday, November 16, 2011

80 Is the New 65

According to Wells Fargo's 7th Annual Retirement Survey, middle class Americans now expect to work until they have saved enough to afford to retire.

The survey found that:

  • 25% of middle class Americans will need to work to 80 to retire comfortably;

  • 74% of the survey respondents expect to work in their retirement years; and

  • 53% say they “need to significantly cut back on spending today to save for retirement.”


The survey also found 49% of middle class Americans between the ages of 25 and 49 are willing to accept future cuts in Social Security and Medicare to help reduce America’s debt burden. Only 28% of those age 50 to 59 and 19% of those age 60 to 75 would be willing to accept cuts.

Additionally, most middle class Americans have not saved enough for retirement.

Read the press release.

Industrial Production Rose 0.7% in October

Industrial production rose by a strong 0.7% in October according to a Federal Reserve report released this morning. The growth follows a downward revision of September’s growth to -0.1% from 0.2%. October’s growth is well above the growth seen in recent months, excluding a 1.2% jump seen in July.

Manufacturing output rose by a solid 0.5% in October due primarily to a 3.1% growth in motor vehicle production. Excluding the auto sector manufacturing rose 0.3%, matching September’s growth.


A 2.3% increase in mining output contributed to overall industrial production growth in October. This follows a contraction of 0.5% in September. Utilities posted a 0.1% decline in October, not nearly as bad as the 2.0% decline reported in September.

Looking forward the solid increases in final sales and slower rate of inventory accumulation over the last quarter imply that manufacturing will remain strong through the rest of the year.

Read the report.

Inflation Slowed in October

Inflation, as measured by the consumer price index, fell 0.1% in October driven by falling energy prices. This is the second decline this year and well below the six month average rise of 0.2%. The fall was primarily driven by a 2.0% fall in energy prices.



Excluding food and energy, the core CPI rose 0.1%, matching last month’s growth, which was the slowest level since March. Core CPI gains in October were driven by a 0.2% increase in the prices of services offsetting a 0.1% fall in the price of goods.

Even with a loss in October CPI is up 3.6% from one year ago, less than the 3.9% reported in September. Core CPI is up 2.1% from this time last year.

The Federal Reserve has stated that a core inflation near 2% for the year is below levels consistent with its dual mandate. Moreover a lower producer price index indicates that inflation is set to ease through the remainder of this year. These factors provide the Federal Reserve flexibility to provide additional monetary stimulus should economic conditions warrant it.

Read the report
.

Tuesday, November 15, 2011

Wholesale Inflation Fell in October

The producer price index, measuring the prices manufacturers and wholesalers pay for goods and materials, fell a seasonally adjusted 0.3% for finished goods in October. This is down from growth of 0.8% in September. Excluding food and energy prices, producer prices were unchanged in October, down from September’s 0.2% core growth.


Within the core, there was a significant weakness in vehicle prices, which fell 1.6%.

The lower reading is consistent with expectations of slowing inflation in coming months. Producer prices have been a forward looking indicator, as prices seen by the manufacturers are passed through to final goods, to the consumer price index measure.

Inflation is expected to continue to moderate throughout the rest of this year and into the beginning of next. Some temporary factors that had pushed prices up are beginning to fade as passenger cars recover from supply chain disruptions seen early in the year.

Read the report.

Retail Sales Strong in October

Retail sales rose 0.5% in October according to a Census Bureau report released this morning. Although this is down from September’s 1.1% growth, it is the second strongest growth since March. Sales excluding autos and gas were stronger than in September, growing 0.7%, the strongest growth since March. Spending growth was strongest in electronics stores and on the internet, indicating consumers are willing to continue purchases for the important holiday season.


Furniture, clothing, and gasoline were the only segments that saw a decline in retail spending. Many of these saw outsize growth in the previous month and merely saw a moderation from that pace.

Read the report.

Thursday, November 10, 2011

Trade Gap Continues to Narrow

The trade gap narrowed by $1.8 billion in September according to a Bureau of Economic Analysis report released this morning. September’s trade deficit stood at $43.1 billion, falling from a downwardly revised $44.9 billion reported in August. This is the third consecutive month of decline and puts the trade deficit at its lowest level since December 2010.


Solid growth in exports and a modest rise in imports led the deficit to narrow. Exports rose by 1.4%, marking the third straight month of growth. Imports increased as well for the first time in four months but only by a meager 0.3%.

The goods deficit narrowed $2 billion to $58.9 billion. The entire narrowing in the goods deficit was due to the nonpetroleum balance, as the petroleum deficit rose by $0.4 billion.

The services surplus shrank by $0.2 billion to 15.8 billion. Despite the decline, the service surplus is up by $1.8 billion year-to-date.

Read the release.

Tuesday, November 8, 2011

Financing Least Cited Concern For Small Businesses

Small business confidence rose slightly in October, but remains extremely low according to the NFIB’s Small Business Economic Trends report released this morning. Sales remain a large problem for small businesses, with 26% of small business owners reporting it as their top business problem. Financing and interest rates were the least cited concern for small businesses, cited by only 4% of respondents.


The Index of Small Business Optimism gained 1.3 points, nudging it up to 90.2, below the year to date average of 91.1. In October the slight gain in the index was a result of less negative views about the prospects for real sales and business conditions. The net percentage of owners expecting better business conditions in six months improved by 6 points, but still stands at -16%.

Small business owners reported an overall reduction in employment for the 5th month in a row, with an average reduction of 0.1 workers per firm. Although these conditions are better than in September, they are not good enough to spur growth. Over the next three months 9% of business owners plan to increase employment, down 2 points from September, while 12% plan to reduce their workforce, which remains unchanged from September.

The frequency of reported capital spending over the last 6 months rose 2 points to 52%. This is a marked improvement from the record low of 44% reported in August 2010. Twenty-one percent of owners plan capital outlays in the next three to six months, up one point from September. “Money is available, but most owners are not interested in a loan to finance the purchase of equipment they don’t need.”

Read the report.

Banks Ease Standards on Business Loans

As reported in the Federal Reserve Senior Loan Officer Survey, banks continued to ease standards for business loans, with the majority of banks reporting loosening standards. There were mixed reports, with some banks reporting tightening standards. This contrasts to the previous quarter’s report where loosening was more widespread. Domestic banks continued to ease some terms on C&I loans to both large and small firms by cutting loan rate spreads over their costs of funds and reducing the use of interest rate floors.


Those banks easing standards or terms on business loans continue to widely cite more aggressive competition from other banks and nonbank lenders as the reason for doing so. Those banks that tightened standards noted that despite strong capital and liquidity positions, deterioration of economic outlook had led them to tighten.


Reports of weaker demand for C&I outnumbered the reports of stronger demand in a reversal from recent quarters. This was particularly notable in demand from large and middle-market firms. Banks that saw weaker demand for business loans were much more likely to cite an increase in customers' internally generated funds as the primary reason.

Read the report.

Monday, November 7, 2011

Consumer Credit Rose $7.4 Billion in September

Consumer credit increased by $7.4 billion in September according to the Federal Reserve’s G19 report released this afternoon. September’s growth was not enough to offset August’s revised decline of $9.7 billion. This represents the 11th increase consumer credit in the last 12 months.


The rise in consumer credit was driven by an $8 billion increase in non-revolving credit. The increase in non-revolving credit was caused primarily by high September student loans and auto loans. Revolving credit shrunk by $0.6 billion for the third consecutive month, not nearly enough to offset the growth in non-revolving credit.


Read the release.

Friday, November 4, 2011

Unemployment Dropped to 9.0% in October on 80,000 New Jobs

Payroll employment increased by a modest 80,000 jobs, however the small number of new jobs were enough to push the unemployment rate down to 9.0% according to a Bureau of Labor Statistics report released this morning. The big news in the report was the upward revisions of the previous two month’s gains, which were revised up by a total of 102,000 jobs. During the past six months payrolls have increased by an average of 90,000, well below the growth needed to significantly drop the unemployment rate.


Private sector payrolls increased by 104,000, significantly lower than September’s gain of 191,000. The public sector continued to drag on employment gains, shedding 24,000 jobs, up from 33,000 jobs shed in September. The primary driver of private sector jobs remains the service sector, which added 114,000 jobs. The goods producing sector shed 10,000 jobs after adding 29,000 in September. One bright spot in the goods producing sector was manufacturing employment, which posted a gain of 5,000, offsetting August and September’s decline.


Despite weak growth in October the unemployment rate dropped to 9.0%. While it is good to see the unemployment rate dropping, we are going to need to see significantly higher growth if we want to see any significant changes in unemployment going forward. The labor force participation rate held steady at 64.2%.

Read the report.

Thursday, November 3, 2011

Financial-Trading Tax Bills Introduced

Sen. Tom Harkin (D-Iowa) and Rep. Peter DeFazio (D-Ore.) yesterday introduced companion bills that would impose a 0.03% tax on financial trading transactions, and urged the congressional deficit-reduction panel to include the idea in their final proposal.

The tax, which would take effect on Jan. 1, 2013, would apply to most nonconsumer financial trading, including stocks, bonds and all derivatives contracts. The bills would exempt initial issuance and debt with an original term of less than 100 days.

The legislation, which is modeled on a European Union proposal for a 0.1 percent financial-transaction tax on stock and bond trades, initially has garnered little congressional support.

Senator Harkin and Rep. DeFazio justified the legislation on the ground that it would curb unnecessary speculation and generate revenues. However, there is little evidence that such taxes will actually generate the revenues that are anticipated.

Read Harkin’s press release.

European Central Bank Cuts Interest Rates

The European Central Bank (ECB) cut its key interest rates by 25 basis points today.

In announcing the decision, Mario Draghi, the President of the ECB, justified the rate cut by stating that "the ongoing tensions in financial markets are likely to dampen the pace of economic growth in the euro area in the second half of this year and beyond. The economic outlook continues to be subject to particularly high uncertainty and intensified downside risks."

Draghi noted that some of these downside risks have materialized and will most likely result in a significant downward revision to average real GDP growth forecast in 2012.

Draghi stated that a number of factors are dampening the underlying growth in the euro area, including weaker global demand and ongoing tensions in a number of euro area sovereign debt markets.

The ECB expects inflationary pressures to recede in 2012 falling below 2%.

Read the introductory statement.

ISM Nonmanufacturing Index Barely Moved in October

The ISM nonmanufacturing index barely moved during October, falling to 52.9 from 53.0. The index remains above its neutral level of 50, indicating industry expansion. The details were mixed, with five of the nine measures declining.


New orders fell to 52.4 from 56.5, a decrease which more than reversed gains in September.

Inventories fell to 45.5, below the growth threshold, a notable positive for future growth. This is the third consecutive monthly decline in the inventory index and the lowest level since February 2010.

The employment index rebounded, rising to 53.3 from 48.7, but remains consistent with a weak labor market.

The report indicates the ISM index is consistent with an economy operating below potential but with no sign of recession.

Read full report.

Productivity Rose 3.1% in Third Quarter 2011

Business productivity rose 3.1% in the third quarter on a seasonally adjusted annualized basis, according to the Bureau of Labor Statistics report released this morning. This is the first positive quarter of 2011. Second quarter was revised up from a 0.7% decline to a  0.1% decline.

Over the past year, nonfarm business productivity has increased 1.1%, a sharp decline from a peak of 6% growth in early 2009.


The report indicated that hours worked increased more than output. Unit labor costs fell 2.4% in the third quarter and compensation per hour rose 0.6%.

The report noted a slow down in productivity growth in the near term. This, combined with low unit labor costs, should lead firms to hire as demand increases.

Read full report.

Wednesday, November 2, 2011

Private Sector Employment Rose by 110,000 in October

Employment in the U.S. rose by 110,000 from September on a seasonally adjusted basis, according to the ADP National Employment Report® released today. This follows an upwardly revised growth of 116,000 jobs in September (up from an initial 91,000.)


Employment in the private service sector rose 114,000 in October. Although slightly smaller than September’s gain of 122,000 the October employment growth represents 20 consecutive months of service sector employment gains. Employment in the private goods-producing sector fell by 4,000 in October while manufacturing employment fell by 8,000.

Payrolls must grow at least around 100,000 in order to absorb all of the new entrants into the job market. As such the 110,000 jobs added in October will likely not be enough to bring down the unemployment rate. We will need to see growth closer to 200,000 and above before we begin to see the unemployment rate begin to drop.

Read the report
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FOMC Leaves Monetary Policy Unchanged

The Federal Open Market Committee kept monetary policy unchanged at their November 2nd meeting. They announced that the central bank will continue “operation twist,” selling short-term securities and purchasing long-term securities, in an effort to keep long-term interest rates low and support growth. The Federal Reserve will also continue to reinvest maturing securities to maintain its current balance sheet. The fed funds target rate will be unchanged in the 0% to .25% range.

The committee noted that “[e]conomic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year.” However, the governors did note that “there are significant downside risks to the economic outlook, including strains in global financial markets.”

The three members who had previously dissented in favor of a tighter policy voted in favor of the statement. There was one dissenter, Charles Evans, who “supported additional policy accommodation at this time.” This is the first time a reason has been given for a dissent and could be a part of the Federal Reserve’s new goal of using clarity as a policy measure.

In a press conference following the release, Chairman Bernanke noted that the temporary factors that had been a drag on the economy, such as the supply chain disruptions from Japan, had largely passed. Now structural factors such as a weak housing market, restricted credit, volatility in the financial markets, and fiscal consolidation are restricting growth. Chairman Bernanke also noted that the committee had discussed nominal GDP targeting, but decided against it as the current method allows the committee to address both aspects of its dual mandate, rather than some combination of the two aspects. Finally Bernanke noted that he would not rule out including mortgage backed securities in future rounds of asset purchases.

Read the statement.



November 2nd MeetingSeptember 21st Meeting
Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent months. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. 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 Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.


To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates 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 at least through mid-2013.The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates 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 at least through mid-2013.








































The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability. The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.

October Announced Job Cuts at the Lowest Level Since June

The number of planned job cuts announced by U.S.-based employers in October were 42,759 - the lowest monthly total since June; and planned hiring announcements approached 160,000, according to Challenger, Gray, and Christmas.

October planned job cuts were 63% below September's announcements, but was up 12.6% from the 37,986 layoffs in October 2010.

To date, employers have announced 521,823 planned job cuts in 2011, which is 16% higher than the 449,258 job cuts announced between January and October 2010. The government and financial sectors remain the top two job-cutting industries for the year, with 162,373 and 54,510 job cuts, respectively.

Read the press release.

Tuesday, November 1, 2011

ISM Manufacturing Index Fell 0.8 points in October

The ISM Manufacturing index fell to 50.8 in October from 51.6, reversing September’s modest gain and leaving the index below its third quarter average of 51.3. Despite the drop, the index remains above its neutral threshold of 50, signaling the manufacturing industry continues to grow.


There were encouraging details in the report, with forward looking new orders rising 2.8 points to 52.4. The increase breaks three consecutive months of below neutral threshold and puts new orders at their highest level since April.

Much of the decline was due to a fall in the inventory index, which fell 5.3 points to 46.9, putting the indicator at its lowest level since late 2009, but we must keep in mind the index has been volatile for the past few months.

Notably, the difference between new orders and inventories, a proxy for future production, rose to 5.7 in October from -2.4. This is the first time the gap has been positive since May. Although this report does not paint the picture of a booming manufacturing industry, it does show an industry that is still expanding and poised to grow going forward.

Read the report.

Construction Spending Rose 0.2% in September

Construction spending rose 0.2% in September led by private residential construction. Despite the month-over-month gain, construction spending remains 1.3% below its September 2010 level.


Growth in construction spending was seen only in the private sector, which grew by 0.6%. Private residential construction drove the growth, rising 0.9%, with private non-residential rising 0.3%. Spending on new single-family structures rose 0.5% in September, while multifamily residential structures were up 0.2%.

Public construction spending proved to be a drag on construction spending growth, falling 0.6% after a gain of 3.5% in August. Despite the fall, spending on highway and street construction rose 1.4%, offset by falls in building of educational structures.

Read the report.

Banks Remain Committed to Repaying TARP

Since TARP was enacted three years ago, banks have remained committed to repaying Treasury’s investment, having already repaid $184.9 billion, or 90%, of the $204.9 billion that was invested in the bank TARP programs.

As of September 2011, the Treasury had received $11.2 billion in dividends and interest from financial institution investments and another $7.6 billion through the sales of warrants. The Congressional Oversight Committee expects a profit of over $22 billion from the bank TARP programs.

A recent SIGTARP report noted while larger institutions have been able to repay TARP, through repurchases of their preferred shares or sales of common stock, many community banks remain in the program, unable to raise the necessary capital in order to repurchase their shares.

Smaller institutions lack access to broad capital markets and, in periods of weak economic growth and distressed real estate markets, raising capital from local markets can be difficult.

One hundred thirty-seven mostly smaller institutions have transitioned into the Small Business Lending Fund; however, banks that have missed TARP dividend payments are not eligible to apply for the SBLF.

One hundred ninety-three of the 707 institutions receiving TARP funds have postponed $357 million of the $14.9 billion in scheduled dividend payments, or 2 percent of the amount due.

These banks that have postponed dividend payments – not surprisingly – are in areas where real estate markets and economic conditions are very weak, such as Florida. Often, regulators have prohibited some banks from paying dividends.

While missed dividend payments are troublesome, it is importmant to note that 98% of scheduled dividend payments have been made on time. Further, 96% of the missed dividend payments are cumulative – meaning the bank is required to pay the dividend in the future – and should, therefore, not be interpreted as a loss on the TARP investment.

Interest, dividend, and warrant payments made by TARP banks will be far in excess of any losses that may occur.

Read more.