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Friday, October 31, 2014

Financial Stability Board Reports Expansion of Shadow Banking in 2013

The Basel, Switzerland-based Financial Stability Board (FSB) reported that shadow banking—financial intermediation outside of depository institutions—grew by $5 trillion in 2013 to reach $75 trillion, according to the fourth annual Global Shadow Banking Monitoring Report. Shadow banking increased its share of total financial assets worldwide from 23.6% to 24.6%; meanwhile, depository institutions’ share fell from 46.8% to 45.6%.

The report presents data as of end-2013 from 25 jurisdictions and the euro area as a whole, covering about 80% of global GDP and 90% of global financial system assets. The FSB studies shadow banking as part of its work to identify and mitigate stability risks across the financial system.

In addition, the report found that by absolute size, advanced economies have the largest shadow banking sectors, while emerging market jurisdictions recorded the fastest growth rates—albeit from a relatively small base. “While the non-bank financial system may contribute to financial deepening, careful monitoring is still required to detect any increases in systemic risk factors (e.g. maturity and liquidity transformation, and leverage) that could arise from the rapid expansion of credit provided by the non-bank sector.”

This year, the report is accompanied for the first time by the publication of a comprehensive dataset on a jurisdiction and aggregate level.

Read more.

ABA Releases Cybersecurity, Data Breaches Infographic

ABA has released an infographic on cybersecurity and data breaches. The association encourages bankers to use it as a tool to let their customers and friends know what bankers are doing to protect customers’ money and what consumers think about data breaches.

The infographic shows that banks pick up the vast majority of costs associated with making customers whole after a breach, in addition to the hundreds of millions of dollars they spend preventing cybercrime. Only one third of banks in the last five years reported receiving any reimbursement for fraud losses and reissue costs of which 83% received less than 10 cents on the dollar, according to the infographic.

In addition, the infographic shows that consumers are confident in banks, as 89% say local banks do a good job of protecting customer information, and 73% trust banks the most to protect their payment data—just 2% trust major retailers.

View and share the infographic.

Personal Consumption Declined in September

Personal consumption declined 0.2% in September. This is the first monthly decline since January, which was driven by unusually cold weather. Personal income grew 0.2%, the slowest growth all year. 3Q GDP consumption growth was strong, however this report may pull down GDP slightly in later revisions.



Wage growth improved 0.2% and disposable income improved just 0.1%. Real personal income increased a modest 0.1% in September. Dividends drove income growth in September.

The savings rate increased to 5.6 months, as both consumption declined and income increased.

Inflation remained tame; the PCE deflator rose 0.1% in September and was 1.4% above year-ago levels.

Read the BEA release.

Consumer Sentiment at 7 Year High

Consumer sentiment reached 86.9 in October, a 7 year high, driven by improvements in the future expectations component.



Future expectations jumped to 79.6, the highest reading since July 2007. Current expectations declined slightly to 98.3. While consumers are less optimistic about the future in comparison to the present, the gap between current and future expectations shrank.



The report indicated that inflationary expectations subsided slightly from the month prior, calling for 2.9% inflation over the next year and 2.8% over the next 5 years.

Thursday, October 30, 2014

U.S Economy Beat Expectations with 3.5% Growth in Third Quarter

Real GDP growth remained strong in the third quarter, growing at a 3.5% seasonally adjusted annual rate according to the Bureau of Economic Analysis' preliminary estimate. The growth is stronger than anticipated given the 4.6% growth in the quarter prior. Once again, the growth was driven by consumption. Net exports also heavily contributed to third quarter gains, improving noticeably from the second to third quarter.



Consumption contributed slightly less to overall GDP growth in the third quarter, when compared to the second quarter. Nevertheless, consumer spending continued to drive economic growth in the third quarter. Its contribution to GDP was 1.2%.



Other components that positively contributed to the GDP growth, included: net exports, nonresidential fixed investments and government spending. Net exports jumped, moving from a drag the previous two quarters, to contributing 1.3% to overall growth as exports grew strongly while imports declined. The government’s 0.8% contribution to growth demonstrated improved finances for state and local governments and federal defense spending—government spending made its largest contribution to growth since 2009. Non-residential investment was largely the reason fixed investment grew, which contributed 0.7% to third quarter GDP. Taken together, the data paints the picture of a healthy and growing economy.

Inventories were the only category to drag on GDP growth, lowering growth by 0.6%. However, inventories are known to fluctuate and will likely rebound in the final quarter of 2014.

Read the BEA report.

Wednesday, October 29, 2014

Fed Ends QE3, Sets Up for Further Tightening

The Federal Reserve terminated its open-ended bond buying program on Wednesday as expected, but went further, beginning to signal further policy tightening.

The most unexpected element of today’s statement is that the Federal Open Market Committee (FOMC) no longer believes that there is “significant underutilization” of labor market resources, instead saying that the underutilization is “gradually diminishing.” This change highlights the Fed’s shift away from an extremely accommodative stance toward eventual rate increases.

The FOMC continues to forecast near-zero federal funds rates for a “considerable time,” but now tied to “this month.” It also introduced some leeway in terms of timing, adding that “if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.”

The Fed has now completed its asset purchases associated with QE3, completing a tapering of purchases that it began last December. Since December, the Fed has reduced purchases by $10 billion at each meeting. Prior to today’s announcement, purchases had been reduced to $15 billion monthly.

Since the beginning of QE3 in September 2012, the official unemployment rate has fallen from 8.1% to 5.9%. During this period, inflation has remained contained, staying largely below the Fed’s 2% target.

The FOMC did not update its projections at this meeting, but will do so at its December 17th meeting.

Read the FOMC release.

Tuesday, October 28, 2014

Slowing Home Price Appreciation Continued

According to the Case-Shiller 20-city index, home prices continued to rise nationally in August but the eight-month slide in price gains continued. Year-over-year price appreciation has fallen from 13.1% in January to 5.6% in August. (The monthly gain was 0.2% in August.) This trend is expected to continue, considering the outlook for rising mortgage interest rates.



The 20-city index remains 15.9% below its 2006 peak.



The 10-city index followed a similar pattern, as year-over-year growth slowed to 5.5% in August from 13.4% in January. Eight out of the 10 metropolitan areas saw home prices rise in August. The largest jumps were in Denver and Las Vegas, at 0.5% each. Only San Francisco and San Diego saw declines, 0.4% and 0.1% respectively. Prices are higher than year-ago levels in all ten areas. Notably, the range of growth rates has narrowed, indicative of a normalizing market.

Read the S&P release.

Friday, October 24, 2014

New Home Sales at 6 Year High in September

New home sales reached a 6 year high in September, hitting an annual pace of 467,000 units. New home sales in September were 0.2% above the pace in August. However, September’s report revised down August’s pace. September’s pace is a 17% improvement from year ago levels.


Two of the four regions saw their annual pace improve. The Northeast and West declined while the Midwest and South grew. The Midwest saw the largest improvement at 12.3%. The West was the weakest, declining 8.9%.

The months supply of new-home inventory remained the same in September from the month prior at 5.3 months. The median price of a new home was $259,000, a decrease of 9.7% from the month prior.

Notably, the 30-year fixed mortgage rate was at its lowest level this past week since June 2013, indicating that sales could see an uptick this fall.

Read the Census report.

Wednesday, October 22, 2014

One Third of Middle-Class Americans Not Saving for Retirement

Thirty-four percent of middle-class Americans are not currently contributing to any sort of retirement savings vehicle, according to the fifth annual Wells Fargo Middle-Class Retirement study. Of the middle-class Americans between the ages of 50 and 59, 41% are not currently saving for retirement. Thirty-one percent of all respondents and 48% of respondents in their 50s say they will not have enough money to “survive” on in retirement. The study was based on 1,001 telephone interviews from July 20 to August 25, 2014 of middle-class Americans between the ages of 25 and 75 with a median household income of $63,000.

Joe Ready, the director of Institutional Retirement and Trust said:

Saving for retirement isn’t easy. It requires sacrifice, and it’s not something people can push off and hope to achieve later in life. If people in their 20s, 30s or 40s aren’t saving today, they are losing the benefit of time compounding the value of their money. That growth can’t be made up later, so people have to commit early in life to make savings a regular discipline year after year – it is the only way most people will achieve their financial goals to carry them through retirement.

While 61% of middle-class Americans admit they are not sacrificing “a lot” to save for retirement, 72% say they should have started earlier, up from 65% in 2013. More than half of respondents surveyed said they would cut spending “tomorrow” in certain areas in order to save for retirement, mainly in areas such as spa treatments, jewelry, impulse purchases, eating out at restaurants, or even major purchases such as a car, a computer, or a home renovation. Fewer people (38%) said they would forgo a vacation to save for retirement.



Respondents with a 401(k), 70% of those surveyed, have been able to save more than those without a 401(k), particularly among those who are younger. Respondents in their 20s with 401(k)s have saved a median of $10,000 more than those without. The savings difference between those who have access to a 401(k) and those who do not have access is $34,000 for those in their 30s and $40,000 for those in their 40s.

Read the Wells Fargo news release.

Consumer Prices Rose 0.1% in September

The consumer price index increased 0.1% over the month of September, according to the BLS. The increase was driven primarily by gains in food prices. Year-over-year price growth remained at 1.7%, slightly below the 2.0% Federal Reserve target.



Overall inflation has been constrained by falling energy prices. Overall energy prices shrank 0.7% in September, the third consecutive monthly decline. This decline was driven by a 2.1% drop in fuel oil prices.

Food prices increased 0.3% from the previous month and 3.0% from the previous year. The month-over-month increase was driven by an increase in the price of dairy and related products. Meats, poultry, fish, and eggs was the only category to see monthly price depreciation.

Read the Bureau of Labor Statistics report.

Tuesday, October 21, 2014

Existing Home Sales Saw Uptick in September

Existing home sales improved to a seasonally adjusted annual pace of 5.17 million units, a 2.4% increase from the month prior. Sales declined over the month in the Midwest but grew in the Northeast, South and, especially the West (7.1% SAAR).



Nonetheless, September's sales were down nationally by 1.7% from a year prior. All regions were down except for the South.

The market supply tightened to 5.3 months' inventory.

The median house price decreased to $209,700. However, September's median price was 5.6% higher than the year ago level and grew in each of the four regions.

This data suggests that the housing market is recovering moderately, albeit without robust growth.

Read the NAR report.

Friday, October 17, 2014

Housing Starts Rebound Above 1 Million Unit Pace in September

Housing starts rebounded in September, to an annualized rate of 1.017 million units. September’s pace grew 6.3% from a slight downwardly revised August rate. September’s growth was due to both single family and multi-family construction improvements. The pace of new construction is now 17.8% higher than a year ago.



Of the four regions, only the South did not contribute to the overall gain. Multifamily starts jumped 16.7% in September, bringing the annual pace to 371,000 units. It is important to note that multifamily starts declined 28.7% in August, so September’s gain has yet to fully offset the decline from the month prior. Single family starts also improved by 1.1% to an annual rate of 646,000 units.



Permit issuance was also stronger in September. Overall housing permits increased 1.5%, driven by a 4.8% monthly growth in multi-family permits. Single-family permit issuance declined.

Despite the positive September report, housing starts remain well below the long-run average of 1.5 million units.

Read the Census release.

Thursday, October 16, 2014

Industrial Production Rebounded in September

Industrial production grew 1.0% in September. The largest gain this year more than offset a decline the month prior. All three major components increased, with the largest gain in utilities. The six-month annualized growth rate increased to 3.9%. Year-over-year growth was 4.3%, an increase from August and the fifth consecutive month of improvement.



Manufacturing growth improved 0.5% in September, led by a 0.8% increase in high-tech. Manufacturing is the core component of industrial production and does not fluctuate like mining and utilities. As such, growth in manufacturing demonstrates that the core of industrial production is improving.

Mining production increased 1.8%, a massive uptick from the month prior. Utilities production jumped 3.9%, driven by a 4.5% growth in electric. The capacity utilization ratio improved in September, rising 0.6% to 79.3%.

Read the Federal Reserve release.

U.S. Treasury: Budget Results for Fiscal Year 2014

U.S. Treasury Secretary Jacob Lew and Office of Management and Budget (OMB) Director Shaun Donovan yesterday released details of the fiscal year (FY) 2014 final budget results. The deficit in FY 2014 fell to $483 billion, $197 billion less than the FY 2013 deficit and $165 billion less than forecast in President Obama's FY 2015 Budget. As a percentage of Gross Domestic Product (GDP), the deficit fell to 2.8 percent, the lowest level since 2007 and less than the average of the last 40 years. In dollar terms, the FY 2014 deficit is the lowest since 2008.

Read the full release.

Beige Book: U.S. Economy Grew at “Modest to Moderate Pace”

The Federal Reserve’s Beige Book, released yesterday indicated that economic expansion is continuing at a “modest to moderate" pace, a slowdown from the previous report. Reports from Cleveland, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco Districts all indicated moderate growth. The New York, Philadelphia, Richmond, Atlanta, and Kansas City Districts saw the pace of growth improve modestly. Growth in the Boston District was mixed. Several districts were generally optimistic about future growth.

The growth in consumer spending ranged from slight to moderate, with a pace similar to the previous report. Notably, the New York District reported that general merchandise sales slowed. While auto sales varied across districts, most reported a positive outlook and growth. Tourism activity was reported to have increased across much of the nation, with many Districts reporting higher hotel occupancy rates and optimism about the remainder of 2014 and 2015.

Manufacturing growth generally increased since the last report, with many districts reporting a positive outlook. The two weak spots were that, “New York noted that manufacturing growth had stalled, and Boston indicated that their contacts cited weaker results than in the past few reports.”

Loan volumes generally increased since the last reporting period. Credit standards generally remained unchanged since the previous Beige Book. The bright spots were that, “New York reported... delinquency rates continued to decline, particularly for commercial loans and mortgages. Philadelphia banking contacts described steady improvement in credit quality, and San Francisco noted that asset quality has improved since the previous report.”

The report noted that the pace of employment growth remained the same since the last reporting period. Continuing a recent trend, many districts report difficulty filling qualified workers for high-skilled positions. Notably, the districts reported increased upward pressure for wage growth, particularly for skilled labor. The report stated that, “Cleveland, Richmond, and Kansas City noted upward wage pressures for transportation workers; Richmond also reported upward wage pressures for skilled engineers, managers, information technology professionals, and bankers. San Francisco noted that software developers were receiving above-average wage increases. New York reported that workers were more frequently leaving jobs for higher pay, while a contact in the St. Louis District noted increased turnover of skilled employees who were switching to higher-paying jobs.”

Read the Federal Reserve release.

Wednesday, October 15, 2014

Producer Prices Declined in September

Producer prices declined by 0.1% in September, the first monthly decline since August 2013. Year-over-year growth slowed to 1.6%, below the 2.0% target of the Federal Reserve.



Prices for finished services decreased 0.1% in September, driven largely by a 0.7% drop in energy prices. Gasoline prices continue to drop rapidly. Final demand also dropped 0.1%.

Prices at earlier stages of production increased. Processed and unprocessed intermediate goods improved 0.1% and 0.6% respectively. The increase was driven by growing food prices in the earlier stages of production.

Read the BLS report.

Retail Sales Declined in September

Retail sales declined 0.3% in September, the first monthly decline since January, when sales were depressed due to the cold weather. Clothing sales led the decline. September’s year-over-year growth was 4.3%, a slowing of the annual pace from August, but above July’s annual pace.



Despite the overall decline, some categories of retail sales showed improvement. Electronics and appliances had the strongest monthly growth at 3.4%. The largest monthly drop occurred for clothing and accessories, which shrank 1.2%. The drop more than offset the gain from the month prior.

Despite weaker report in September, future outlook is strong. The steady improvements in the labor market should drive spending higher.

Read the Census report.

Tuesday, October 14, 2014

Small Business Optimism Dropped Below Pre-Recession Average in September

Small business optimism declined 0.8 points in September to 95.3, settling 5 points below the pre-recession average. September’s drop was driven by job openings and planned capital outlays.



Financing continues to be the least cited concern holding back small business conditions, with 2% of respondents citing it as the single most important problem. Government requirement and red tape overtook the top spot at 22%, with taxes dropping to the number two spot at 21%.

Four of the ten index components improved and the remaining six declined. Of the six, two declined by a combined 10 points total and account for the overall index decline. Job openings and planned capital outlays took the biggest hits, declining 5 points each, and those two components correlate directly with GDP and job growth, potentially weighing down on third quarter GDP.

Read the NFIB report.

Wednesday, October 8, 2014

Strong Dollar Worried the FOMC

Concerns for a strengthening U.S. dollar and weakening economies abroad led members of the Federal Open Market Committee to cut the group’s forecast for economic growth and inflation, according to just-released minutes from the September 16-17, 2014 meeting. The minutes noted a sentiment that growth “might be slower than … expected if foreign economic growth came in weaker than anticipated.”

The minutes also revealed that when the Fed starts to raise interest rates, the move will be more aggressive than what the markets currently forecast. However, the FOMC does wants to avoid credit market tightening as a result.

The minutes shed light on how the Fed will normalize monetary policy by allowing short-term interest rates to rise and reducing its portfolio of long-term securities. Of note, “The [FOMC] intends to reduce the Federal Reserve's securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal on securities held.”

The markets took this news favorably; the DJIA grew 150 points in the minutes following the release.

Read the full release.

Tuesday, October 7, 2014

Consumer Credit Grew $13.5 Billion in August

Consumer credit increased $13.5 billion in August, the slowest pace in 9 months. Consumer credit gains continue to be driven by non-revolving credit, as revolving credit shrank. The annualized credit growth dropped to 5.0%, from 8.1% in July.



Revolving credit shrank $0.2 billion. It’s the first time revolving credit has declined since February.



Non-revolving credit grew by $13.7 billion, driven largely by a $19.8 billion increase in federal student loans, the largest federal student loan growth since January. Vehicle sales also contributed to non-revolving growth, as auto sales jumped to a 17.5 million annualized rate in August, the strongest pace since January 2006.



Read the Federal Reserve release.

Consumer Delinquencies Fall Nearly Across the Board in Second Quarter

Delinquencies declined nearly across the board in the second quarter, falling in nine out of 11 categories as the economy improved and consumers responsibly managed their finances, according to results from the American Bankers Association’s Consumer Credit Delinquency Bulletin.

The composite ratio, which tracks delinquencies in eight closed-end installment loan categories, fell 6 basis points to 1.57 percent of all accounts – a record low that is well under the 15-year average of 2.32 percent. (See Historical Graphic.) The ABA report defines a delinquency as a late payment that is 30 days or more overdue.

“Strong job growth, rising income, low interest rates and falling debt levels have led to consumers having a greater capacity to repay debt,” said James Chessen, ABA’s chief economist. “Consumers have made great strides since the recession, with a focus on deleveraging and disciplined financial management that has kept debt levels under control.”

Read the full release. See economic charts.

New Labor Market Conditions Index

Starting yesterday, the Federal Reserve began releasing estimates of the Labor Market Conditions Index (LMCI) every month. The release is scheduled after 10:00 a.m. the first business day following the Employment Situation report.

Read the full Federal Reserve release. See the breakdown of the data in the LMCI.

Friday, October 3, 2014

Trade Deficit Dropped to $40.1 Billion in August

The U.S. trade deficit shrank for the fourth consecutive month in August to $40.1 billion. The deficit is the lowest it has been since January. Exports increased faster than imports, contributing to the overall decline in the trade deficit.



Exports improved 0.3% to $198.5 billion. Imports increased 0.1% to $238.6 billion.

The goods deficit widened while the petroleum deficit shrank. The services surplus improved from the previous month.

The real goods deficit, which is important for the calculation of GDP, grew to $47.9 billion.

Read the Census report.

Job Growth Picked Up Speed and Unemployment Drops to 5.9%

Total nonfarm payroll employment rose by 248,000 jobs in September, an improvement from the disappointing jobs report the month prior. Moreover, September’s report positively revises July’s and August’s headline numbers up by a collective 69,000 jobs.



The unemployment rate declined to 5.9%, however 315,000 people left the labor force in September, resulting in the labor force participation rate dropping to 62.7%. The participation rate is a new post-recession low. The number of long term unemployed, defined as those who have been out of work for over 27 weeks, declined by 9,000 people to 3.0 million — accounting for almost 32% of all unemployed individuals.


The private sector, particularly the service industry, continues to drive job growth. The service sector added 207,000 in September, the fastest pace in three months. Gains in the service sector were led by professional and business services, which grew by 81,000 jobs.

The goods producing sector continues to edge back up, growing by 29,000 jobs. However, it is still well below the pace of 63,000 seen in July. Government employment increased by 12,000, over double the growth seen the prior month.

Read the BLS release.

ISM Nonmanufacturing Index Declined in September from Previous Month Record High

In September, the ISM nonmanufacturing index declined slightly from a record high in August to 58.6. Any reading above 50 indicates industry expansion and September is the 56th month the index has remained above that threshold.



The details of the report were uneven. The employment index saw strong growth, improving 1.4 points to 58.5. It is the highest reading since 2005. Without any major upcoming economic hurdles, employment index should maintain its healthy path. Exports improved 5.0 points, which may help the nominal trade deficit, and GDP.

Business output shot up to declined 2.1 points to 62.9. New orders also declined in September, settling at 61.0.

Read the ISM report.

Wednesday, October 1, 2014

Construction Spending Declined in August

Construction spending took a hit in August, declining 0.8%. Moreover, August’s report revised down growth for June and July. Construction spending is still 5% higher than year ago levels.



All three construction spending components – private residential, private non-residential and public construction – declined.

Non-residential construction saw the steepest decline, dropping 1.4% over August. Spending on power and utility structures drove the non-residential construction spending decline, shrinking 3.9% from July. However, its still up 17.2% from August 2013. Private residential construction decreased 0.1%, but single family homes still increased 0.7%.

Public construction shrank 0.9%, and is up 1.9% from year ago levels.

Read the Census release.

ISM Manufacturing Index Declined in September

The ISM manufacturing index was 56.0 in September, a slowing of the pace from the previous month. However, the index is above its expansionary threshold of 50 with the third highest reading all year. All three of the strongest months for growth this year were in the third quarter.



The details of the report indicated an across the board slowdown in the pace of growth. New orders dropped 6.7 points to 60.0. The inventory index declined 0.5. As a result of inventories declining at a larger magnitude then new orders, the gap between new orders and inventories - a proxy for future production – shrank, recording 8.5 in September.

The Employment Index was another spot of weakness. The index declined 3.5 points to 54.6. Export orders also declined to 53.5 and backlogged orders shrank, moving below the expansionary threshold.

Read the ISM release.

ADP: Private Sector Added 213,000 Jobs in September

According to the ADP’s National Employment Report, the private sector added 213,000 jobs in September. The pace of job growth improved from the previous month and continue to remain above 200,000, indicative of a healthy and growing labor market. September’s report on net added 3,000 jobs in revisions to July and August’s headline numbers.



Job gains continued to be centered in the service sector, which added 155,000 jobs in September. However the Service Sector showed the slowest growth since August 2013.

The goods sector continued its second month of strong growth, adding 58,000 jobs in August, the fastest pace since at least 2001. The growth was driven by manufacturing gains, which added 35,000 jobs, the fastest pace since May 2010.

Read the ADP release.