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Friday, May 31, 2013

Minneapolis Fed Publishes Regulatory Burden Calculator for Community Banks

The Minneapolis Federal Reserve created a regulatory burden cost calculator associated with hiring additional compliance full-time equivalent employees (FTEs.) The authors’ methodology is based on measuring regulatory cost through additional hires. The concluded that hiring one FTE reduces ROA by approximately 23 basis points for the median bank with assets below $50 million. The paper points to a crucial hurdle faced by community banks, dealing with the increased costs associated with new regulations.

Read the Minneapolis Federal Reserve piece.

Consumer Sentiment Jumped in May

Consumer confidence rose to its highest level since 2007 in May, according to the University of Michigan’s consumer sentiment index. Both present conditions and expectations contributed to the 8.1 index point increase to 84.5. It is also the largest monthly gain since October 2006.



The present conditions portion of the index improved to 98.0 in May, up from 84.8 the previous month. Future expectations also rose 11.6 index points from the previous month to 75.8.

Inflationary expectations remained unchanged in May from the previous month. Both the one- and five-year expectations held close to their respective averages over the past year and a half, with a reporting of 3.1% and 2.8% respectively.

Personal Income Failed to Grow in April

After a revised 0.3% rise of personal income in March, April’s report is disappointed, with personal income failing to grow over the month. The savings rate remained steady at 2.5%.



Wages in April were essentially unchanged. Gains in investment income were offset by declines in government transfer payments and farm proprietors' income.

Total spending fell 0.2% over the month, due primarily to decreased spending on gasoline and utilities. Core spending, however, grew 0.1% in April, a slowdown from the 0.2% growth reported in March.

Consumer prices, according to the PCE indicator, rose 0.7% from year ago levels, the lowest inflation since late 2009.

Read the BEA release.

Thursday, May 30, 2013

First Quarter GDP Revised Down to 2.4%

Real economic growth for the first quarter was revised down by 0.1% to 2.4% in the BEA’s second estimate released today. Despite the modest downward revision, first quarter growth is still well above the 0.4% growth seen in 4Q12.



As we previously noted following the BEA’s initial estimate, consumption drove first quarter GDP growth, and was revised up in the second estimate from 2.2% to 2.4%. Inventories, which were revised down in the second estimate to 0.6% from 1.0, still recovered in the first quarter. This follows a steep decline in the 4th quarter of 2012, likely due in part to Hurricane Sandy.



The government spending drag increased in the revision by 0.2% to 1.0%. Although less than the 1.4% drag last quarter, spending cuts continue to present a strong headwind to the U.S. economy. Net exports were less of a drag on the economy in the second revision, decreasing from .5% to .2%.

Read the BEA release.

Wednesday, May 29, 2013

ABA Statement on FDIC Bank Earnings Report

ABA's Chief Economist, James Chessen, gives his opinion.

FDIC Banks Earning Report
“Banks performed strongly in the first quarter, with asset quality continuing to improve and earnings remaining strong due to aggressive cost controls. At the same time, topline revenue growth continues to be a struggle as businesses delay borrowing due to concern about rising healthcare costs, tax increases and the pace of our economic recovery. Until the fog of uncertainty dissipates, rapid loan growth is unrealistic.”

Business Loans Increase for 11th Consecutive Quarter, But Challenges Hinder Growth
“While business loans grew for the eleventh consecutive quarter, the pace has slowed. Banks are working aggressively to make loans, but businesses are hesitant to expand amidst the specter of higher taxes, uncertain healthcare costs and new regulations. In addition, companies feel no urgency to borrow as interest rates are expected to stay abnormally low for several years to come.”

Bank Earnings Strong in Challenging Environment
"As a sign of the industry’s broad-based recovery, over 90 percent of banks were profitable in the first quarter. A continued focus on expense control and a dramatic improvement in asset quality has helped earnings remain solid even as businesses delay borrowing. Low interest rates continue to squeeze margins and put significant pressure on traditional banking.”

As Debate Continues, Capital Gains Strength
“Bank capital continues to grow in both quality and quantity, and it remains at near-record levels. While appropriate capital ratios have been the focus of recent policy debates, these conversations often ignore the fact that bank capital increased throughout the financial crisis and is now 26 percent higher than 2008 levels. Regulators have categorized over 97 percent of banks as well-capitalized, which means their capital levels are at least 25 percent higher than minimum standards. “Total industry capital is now over $1.6 trillion, ensuring our industry is well equipped to fend off any economic challenges that could arise. Adding reserves banks have set aside for possible loan losses, there is a total buffer protecting the industry of almost $1.8 trillion.”

Asset Quality Improves, Failures Continue to Decline
“Banks’ portfolios have grown stronger as problem loans continue to decline. Our industry continues to put losses behind it, with most problems now firmly in the rearview mirror. Problem loans fell to levels not seen since early 2009. Bank failures are few and far between, with only four failures in the first quarter. Banks, not taxpayers, are solely responsible for all of the FDIC’s expenses, paying about $11.3 billion in premiums over the last year.”

Tuesday, May 28, 2013

Existing Home Prices Continue to Accelerate in March

According to the Case-Shiller 20-city index, home prices are now 1.4% above previous month’s prices and 10.9% above year ago levels. The country’s 10 largest cities improved 1.4% from February and 10.3% from year ago levels.



All 20 metro regions covered by the index reported price increases from year ago levels, the third consecutive month to do so. New York, the weakest performer saw home prices rise 2.6% from year ago levels, but drop 0.4% from the previous month. Phoenix continues to show the strongest home price improvement, increasing 22.5% from year ago levels.



Although home prices have seen strong growth in recent months, the growth is coming from depressed levels. The 20-city index remains 28.0% below its peak in July of 2006.

Read the Standard and Poor release.

Thursday, May 23, 2013

New Home Sales Continue to Improve in April

The pace of new home sales rose 2.3% in April, to an annualized pace of 454,000 units. April’s pace is now 29% higher than April 2012. April’s report also included notable revisions to March’s pace, which was revised to 444,000 units, a 3.5% gain, up from an initially reported 1.5% gain.



The supply of existing homes on the market remains tight at just 4.1 months. An influx of listings was offset by the strong gain in sales. Listings increased 3.3% over the month. Supply will remain at cyclical lows until residential construction picks up sufficiently.

The median price of homes sold continued to climb in April, with the median home selling for $267,200. It is no surprise this continues to rise as sales outpace supply. April’s median home price is 13.0% above year-ago levels.

Read the Census report.

Wednesday, May 22, 2013

Most FOMC Members Cited More Progress Needed Before Slowing QE Pace

In the FOMC minutes from the April 30th – May 1st meeting, most members of the FOMC agreed that, while the labor market has improved since the economic downturn, more progress is needed before the Federal Reserve slows the pace of its bond-buying program.

At the FOMC meeting, members continued their pledge to hold interest rates at near zero levels as long as unemployment remains above 6.5% and inflation doesn’t exceed 2.5%.

Notably, the minutes reveal that the FOMC is willing to change their bond buying at current levels as early as the next meeting on June 17-18, pending positive economic reports that demonstrate, “evidence of sufficiently strong and sustained growth.” Bernanke emphasized the point at a Joint Economic Committee of Congress today.

At the same hearing, Bernanke hinted that the Federal Reserve may be considering alternative strategies to exit QE. Previous guidance had suggested that the Fed would gradually begin selling bonds to wind down its balance sheet. In his testimony Bernanke had said that it is possible that the Fed could allow existing holdings to mature, allowing the balance sheet to run off.

At the hearing, Bernanke also said that the federal government should focus on less austerity in the short term and more aggressive fiscal cuts long term to prevent hampering economic growth.

Read the FOMC minutes.

Existing Home Sales Improved Slightly in April

Existing home sales rose slightly in April to an annual pace of 4.97 million units. April’s pace improved 0.6% from March’s upwardly revised pace. The pace is at the highest level since the start of this year and 11.0% above year ago averages. Notably, April’s report is the strongest reading since the introduction of the homebuyer tax credit in the fall of 2009.



The details of the report are mixed. Single-family sales grew 1.2%, but condo sales declined 3.3%. However, both categories are up 9% and 16% respectively compared to year ago levels. Access to credit is still tight and inventory is limited.

Inventories of homes for sale increased 12% in April from the previous month but are still 14% below year ago averages. However, inventories typically rise at this time of year, during the spring selling season. Despite the housing supply rising to 5.2 months, the months of supply remain well below the 6-month mark that indicates a balanced market.

Read the NAR release.

Thursday, May 16, 2013

Housing Starts Fell Sharply in April

New homebuilding slowed notably in April, with the pace falling 16.5% from the previous month. The pace of new construction fell to 853,000 annual units, from over one million in March. Housing starts are now at their slowest pace since November of last year. Despite the deterioration, we have seen significant improvement in the past year.



April’s decline was driven primarily by multi-family construction, which fell 38.9% from the previous month. Single-family construction also slowed over the month, albeit by a much more modest 2.1%. Multi-family construction tends to be volatile, but has accounted for a large portion of the improvement over the past year.



Housing permits rose sharply in April, giving hope for a rebound in construction in March. Permit issuance rose 14.3%, driven primarily by multi-family permits, which rose 37.5%.

Read the Census report.

Consumer Prices Fell 0.4% in April

The consumer price index declined 0.4% in April due primarily to falling gasoline prices. Core prices rose at a weak 0.1% in April, matching the previous month’s pace. Consumer prices are now just 1.1% above year-ago levels, the weakest level since late 2010.



The energy index was entirely responsible for April’s decline, plunging 4.3% over the month. This decline is even sharper than the strong 2.6% decline seen the previous month. Seasonally adjusted gasoline prices dropped 8.1% over the month, more than offsetting modest increases in electricity and natural gas prices.

Core price appreciation remained weak, with prices rising just 0.1% for the second consecutive month. This is considerably slower than the 0.3% monthly increases seen at the beginning of the year. Prices for goods failed to appreciate in April, while prices on services rose just 0.1%.

Read the BLS report.

Wednesday, May 15, 2013

Homebuilder Sentiment Improved in May

According to the NAHB, homebuilder sentiment improved in May as the index rose to 44 and reversed a three month negative trend. The details of the report were good as well, with all three components of the report showing improvement from the previous month, particularly optimism in the next 6 months.

Out of the four housing market regions in the U.S., only the west declined from April. The Midwest showed the most improvement and grew to an index of 45.

Low interest rates continue to help the housing market.

Read the NAHB release.

Producer Prices Fell in April

Producer prices fell 0.7% in April. Aside from gains in January and February, prices have fallen since October. The decline was broad based, led by a 2.5% decline in finished energy goods. Producer prices are now 0.7% above year ago levels, the slowest reading in 9 months.



Core prices for finished goods grew at 0.1%, down from 0.2% the previous month. Food prices dropped 0.8%, reversing a positive reading last month.

The prices of crude goods fell 2.8% from the previous month and is 5.9% below year ago levels. Crude prices continue their declining trend.

Read the BLS release.

Tuesday, May 14, 2013

Small Business Optimism Rose in April

The NFIB’s Small Business Optimism Index rose 2.6 points in April, reaching 92.1. The index is still weak, only 1.4 points above the recovery average of 90.7 and well below the long run average of 98.1.



Financing continues to be the least citied challenge facing small business, with only 2% of respondents reporting it as their single most important problem, a 1% drop from the previous month. Taxes and government requirements remained unchanged as the first and second most often cited problems for small businesses at 23% and 21% respectively.

Competition from large business and quality of labor increased, while inflation and cost of labor decreased from March. Despite the increase in the index, small businesses continue to remain pessimistic about the economy and on net a negative 15% expected business conditions to improve in 6 months. The good news is that the figure is a 13% increase over March.

Read the NFIB report.

Monday, May 13, 2013

Retail Sales Increased 0.1% in April

Retail sales increased 0.1% in April, following a revised 0.5% decline the previous month. Retail sales continue their volatile trend, alternating between increasing and decreasing the past five months. Retail sales are now 3.7% above year ago levels, an improvement from March, but still well below year-ago growth seen in other previous months.



Excluding autos and gas, sales were up 0.6% from the previous month and 3.9% from year ago levels.

Gasoline continued to drag on retail sales, as gasoline stations saw a 4.7% drop in sales from March. Along with food and beverages, they were the only two categories with negative sale growth from the previous month. Building materials showed the strongest gains in April, increasing 1.5%.

Read the Census release.

Tuesday, May 7, 2013

Consumer Credit Growth Slowed in March

Consumer credit increased $8.0 billion in March, less then half of the $18.1 billion gain seen in February. Non-revolving credit continued to drive the gains in consumer credit, as revolving credit decreased. Growth slowed to 3.4%, after sharp increases the previous month.



Revolving credit shrank for the first time this year, dropping $1.7 billion, which was 2.4% decline from the previous month. Revolving credit continues the volatile trend seen in 2012. In the past year, revolving credit has grown by just $4.0 billion.



Non-revolving credit grew 6.5%, gaining $9.7 billion. Non-revolving credit, consisting primarily of auto and student loans, has been the primary driver of credit growth over the past two years, and has gained $154.6 billion in the past year. Student loans continue to account for the majority of this growth accounting for 80% of March’s increase on a non-seasonally adjusted basis.



The consumer credit report from January echoes the same trends witnessed in the last two years. Non-revolving consumer credit continues to swell while there is minimal revolving consumer credit change.

Read the Federal Reserve release.

Monday, May 6, 2013

April’s Federal Reserve Survey Reports Stronger Loan Demand

According to April’s Senior Loan Officer Opinion Survey on Bank Lending Practices conducted by the Federal Reserve, domestic banks, on balance, reported having eased their lending standards and having experienced stronger demand in several loan categories over the past three months.

Tightening standards for prime mortgage loans decreased 7.8% and demand for the prime loans increased 39.1%. The subprime mortgage market still reported tightening. Both large and medium, as well as small firms said the C&I loan market tightening decrease by 19.1% and 23.1% respectively. Moreover, loan demand increased for both categories. Banks that eased their C&I lending policies generally cited increased competition for such loans as an important reason for having done so.

The survey is based on responses from 68 domestic banks and 21 U.S. branches and agencies of foreign banks.

Read the Federal Reserve release.

Friday, May 3, 2013

James Chessen Discusses the Fed on Fox Business News

ABA's Chief Economist James Chessen spoke with Fox Business News today, where he discussed the wealth effect and broke down how quantitative easing relates to the market rally.

"Because [the Fed] has pushed the price of treasury’s up and interest rates down, it means that those are not good investments, so investors… look for other, better alternatives. That means riskier alternatives, and that often means stocks.”

Watch the video.

Service Industry Expansion Cooled in April

The service sector growth slowed in April, after cooling in March as well. The ISM non-manufacturing index fell to 53.1 in April from 54.4 the previous month. Despite the decline, services continue to outperform the manufacturing sector, which declined to 50.7 in April. Any reading over 50 indicates industry expansion.



The details of March’s report deteriorated across the board except for inventories and exports. The employment index dropped 1.3 points to 52.0. Overall business activity edged lower to 55.0 index points, losing 1.5 points from the previous month.

Despite the overall decline in March, the indexes remained above the neutral threshold of 50, signaling an expansion, albeit at a slower rate then the previous month.

Read the ISM release.

U.S. Economy added 165,000 jobs in April and Unemployment Fell to 7.5%

The U.S. economy added 165K jobs in April, with strong upward revisions to past reports as well. Moreover, the unemployment rate continued to fall due to real improvement in labor markets. March’s jobs growth was revised up from 88K jobs to 138K jobs. February’s numbers were revised up as well to 332K jobs. The cumulative revisions added 114,000 jobs over the previous two months. Overall April’s report is encouraging, and allays fears that job growth is slowing.



As seen in past months, April’s strong numbers resulted from positive growth in the private sector, particularly the services industry, which added 185K jobs in April. The private industry as a whole added 176K jobs in April, and saw positive revisions to the previous two months. The goods producing sector saw a 9K job loss, following 6 months of positive growth.



The government continues to drag on job growth, shedding 11K jobs in April. April’s value is still below the government’s 6-month average of 14K job losses per month. As the impacts of sequester take hold, the government employment loss is expected, and anticipated to continue through the remainder of this fiscal year.

The unemployment rate fell to 7.5%, the lowest level since 2008. The improvement in the unemployment was solely due to new job creation, as the labor force participation rate held constant at 63.3. The lower unemployment rate was a “real” improvement with 83K fewer people reported being unemployed in April.

Read the BLS report.

Thursday, May 2, 2013

Trade Deficit Sharply Drops in March

The US foreign trade deficit dropped 11% in March to $38.8 billion. The decrease is the second in two months, following a revised decline of 2% in February. The trade gap is well below the 2012 high of $52.3 billion. The decrease in the deficit is primarily due to shrinking imports.



Imports declined by 2.5% in March, settling at $223.1 billion. Exports declined as well from a revised 186.0 to 184.3, a -0.9% change. The goods deficit was primarily responsible for March’s trade deficit, and helped contribute to the drop, decreasing from $60.8 billion to $56.1 billion. The services surplus also increased $0.2 billion to $17.3 billion, adding to the deficit reduction.

The real goods deficit, which is important to calculate GDP, narrowed to $44.4 billion from $47.8 billion.

Read the Census report.

Wednesday, May 1, 2013

Fed Maintains Policy Stance

The Federal Reserve will maintain its present level of bond buying at a pace of $85 billion per month following the Federal Open Market Committee’s April/May meeting. The Federal Reserve left its open-ended quantitative easing program (QE3) unchanged and left interest rates at near zero levels. The Fed did, however, note that it is prepared to vary purchases according to economic conditions.

“The committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes,” the Fed noted in its announcement. Chairman Bernanke has already eluded that the pace of bond buying may vary depending on the economy, however today’s statement is the first to state it explicitly.

The Fed’s statement suggested that the economy continues to recover at a “moderate pace,” with some improvement in labor and housing markets. They did note, however, that fiscal policy is restraining growth.

Read the full FOMC statement below.

ISM Manufacturing Continues Declining Trend in April

The ISM manufacturing index fell to 50.7 in April, after sharply falling in March as well. While still above the expansionary threshold of 50, March’s reading is the lowest so far in 2013. Currently the index is at its lowest point since December.



Details of the report were mixed, with production and new orders rising. Production grew 1.3 to 53.5 and new orders increased to 52.3.

Not all of the details were positive however. Imports rose to 55.0 and new export orders shrank by 2.0, widening the trade gap. The employment index dropped 4.0 points, settling at 50.2, its lowest level since November.

Inventory growth continued to fall in April, leading the gap between inventories and new orders – a proxy for future production – to 5.8 index points.

Read the ISM release.

Construction Spending Dropped 1.7% in March

Construction spending decreased 1.7% in March, the second decline in three months. Despite the weakness construction spending is still 4.7% above year-ago levels. March's report was revised up, while February's was revised down to 1.5% and -4.0% respectively.



Each component of construction spending deteriorated in March. Total private construction declined 0.4%, due to a 1.5% decrease in non-residential construction. Only private residential construction grew in March, a mere 0.4% compared to 2.3% in February.

Public construction saw the largest decrease as it declined 4.1% from the previous month. The public construction sector will likely continue the downward trend, as the impacts of sequester begin to show.

Read the Census report.

ADP Employment Grew By 119,000 in April

ADP’s National Employment Report indicated that the private sector added 119k jobs in April. April’s increase was weaker than March's gain, which was revised down to 131k jobs. April's report is the slowest pace of expansion since September 2012. March's ADP report, indicating 131k jobs translated to 88k jobs created as reported by the BLS, so it is possible that this month's job creation will be even weaker than last.



Keeping with recent trends, the majority of job creation in April came from the service sector, which created 113k jobs.

The goods sector continued its positive trend, adding 6k jobs. Trade, transportation and utilities led the way in April's job growth, adding 29k jobs. After driving gains in March, the manufacturing sector was the only component to lose jobs in April, decreasing by 10k jobs. The goods sector has now seen employment gains for five consecutive months.

Read the ADP release.