Posts Tagged ‘economy’

Recession Coming to an End: The Fed

Wednesday, September 16th, 2009

Eleven of the 12 regional Federal Reserve banks showed signs of a stabilizing or improving economy during July and August, according to the Fed’s latest Beige Book report.  The Beige Book’s anecdotal evidence found that the nation’s worst recession in 70 years is coming to an end.  The Fed expects the economy to grow by three or four percent in the fourth quarter of 2009.  That stands in sharp contrast to the one percent decline from April through June, and the 6.4 percent contraction during the first quarter of the year.good-business-growth-2

In the latest survey, the Dallas region reported that economic activity had “firmed”. The Fed regions of Boston, Cleveland, Philadelphia, Richmond and San Francisco reported “signs of improvement.” In Atlanta, Chicago, Kansas City, Minneapolis and New York, the Fed reported activity as “stable or  showing signs of stabilization.  The St. Louis region was the exception, where the contraction’s pace “appeared to be moderating.”

“We are slowly on the road to recovery,” former Fed Governor Robert Heller told Bloomberg Television.  The Beige Book “confirms that we have turned the corner.”

Despite the Beige Book’s declaration that stabilization is occurring, it still found weakness in the commercial real estate market where little new construction is underway.  According to the report, “Several participants noted that banks still faced a sizable risk of additional credit losses and that many small and medium-sized banks were vulnerable to deteriorating performance of commercial real estate loans.”

“Home Sweet Home” Is Back in Style

Monday, September 14th, 2009

Despite positive news about rising home sales, the number of Americans with under water mortgages might be as worrying as anything else happening in the economy. When people owe more on their mortgages than their home is worth, it limits their ability to pursue new opportunities because they cannot afford to sell.  In Chicago, First American CoreLogic reports that more than 550,000 homes were under water at the end of June.  That translates to $134 billion in negative equity.

54755_1215745994960_bStatistics from the United States Census Bureau indicate that household mobility is at a 20-year low.  According to Sam Khater, a senior economist with the consulting firm of American CoreLogic, under water mortgages are the primary reason why people are less mobile.

Lenders are wary about extending credit in housing markets where values are sinking, which feeds the negative cycle of inactivity in the housing market and pushes prices down even more.  This damages the economy because under water homeowners have a tendency to accept the inevitability of foreclosure.  Homeowners with negative equity are seven times more liable to go into foreclosure than people whose mortgage and home equity loans total between 95 and 100 percent of their home’s value.

Homes are no longer considered to be sources of future wealth.  Consumers aren’t spending because they can’t rely on getting a low-interest home equity loan to buy their way out of a personal credit crunch.  Khater notes that “Borrowers are beginning to treat a home more like a home and less like a financing vehicle.”

Economic growth is further impacted because these same homeowners (who, in most cases, have stayed current on their mortgage obligations) are delaying or eliminating home improvements due to fears that any additional investment in the home will not be economically realized in value or returned in the event of a sale.  This inactivity is being felt by many home remodeling contractors, as well as retailers.

Paul Krugman is Moving on Up

Thursday, September 10th, 2009

Paul Krugman – winner of the Nobel Prize in Economics, Princeton University professor and New York Times columnist – is taking advantage of falling home prices in a difficult market.  Krugman and his wife, economist Robin Wells, recently paid $1.7 million for a three-bedroom co-op apartment in a pre-war building on Manhattan’s upscale Riverside Drive.  The apartment had been on the market for more than one year and had an original asking price of $2.495 million, according to StreetEasy.com, a property listing service.

krugman-788178According to Krugman, “We really wanted a place that has the ultimate New York luxury, which is a washer and a dryer.  I do expect New York prices will fall some more, but we need a place.  And I came into some money.”  Krugman’s Nobel Prize included a $1.4 million cash award.  The six-room apartment has nine-foot ceilings, offers “romantic cityscapes” and has a monthly maintenance fee of $1,820.  Krugman’s long-time one-bedroom apartment on West 89th Street is under currently contract for a bargain $599,000.  Additionally, the Krugmans own a house in Princeton, NJ.

Median Manhattan home prices fell 18.5 percent to $835,700 from a year earlier, according to appraiser Miller Samuel, Inc., and broker Prudential Douglas Elliman Real Estate.  The number of sales is half of the 2008 number.

Krugman’s purchase comes at a time when the housing market appears to be stabilizing.  Existing home sales rose 3.8 percent in the second quarter to a seasonally adjusted rate of 4.76 million over the first quarter, according to National Realtor Association statistics.

India Still Lags in Innovation

Tuesday, September 8th, 2009

Much has been made in the world’s press about India’s economy buoyed by its IT sector. And a lot of it is justified.  The nation’s IT sector managed to grow some 20 percent in 2008, according to India’s National Association of Software and Services Companies, and IT firms have already extended 100,000 job offers for 2009.

india-outsourceBut all is not rosy for India.  While the country has surged in the basic and mid-level areas of coding and development, it has struggled in the area of R&D and top-end innovation.  India produces about 300,000 computer science graduates a year.  Yet it produces only about 100 computer science PhDs, a small fraction of the 1,500 – 2,000 that get awarded in the United States or China every year according to a recent article from Reuters.

“Students here are not exposed to research from an early age, faculties are not exposed to research and there’s no career path for innovation because there’s a lot of pressure to get a ‘real’ job,” said Vidya Natampally, head of strategy at the Microsoft India Research Centre.  Rival China has already pulled ahead with more than 1,100 R&D centers compared to less than 800 in India, despite lingering concerns about rule of law and intellectual property rights (IPR).  India is also losing out in the patent stakes. In 2006 – 2007, just 7,000 patents were granted in this country of 1.1 billion people, compared to nearly 160,000 in the United States.

India is cheaper than China for R&D.  But salaries in India have been rising by about 15 percent every year and may soon reach parity with China. R&D centre costs in Shanghai are currently just 10-15 percent higher than in India.

But this could be changing:  Microsoft, for example, has just opened a new facility in Bangalore staffed with about 60 full-time researchers, many of them Indians with PhDs from top universities in the United States.  The center “is at the cutting edge of Microsoft’s R&D, covering seven areas of research including mobility and cryptography.  Cisco, IBM, Intel, Nokia are among the other companies going beyond low-end coding to bring R&D to India.

Jacob Cherian is AlterNow’s India Contributor. He is a freelance business writer based in Kerala, India.  He has written about business outsourcing for Offshore Advisor.

Fed Chairman Ben Bernanke Likely to Keep His Job

Wednesday, September 2nd, 2009

Federal Reserve chairman and Great Depression scholar Ben Bernanke will stay in his job for another four years if President Barack Obama gets his way.  There likely will be some contentious moments during the reconfirmation hearings as Senators grill him about bailing out Wall Street institutions deemed too big to fail.  He is expected to stay on.bernanke__150184gm-a

Former Fed governor Randall Kroszner, who resigned his post to return to the University of Chicago, believes that the president has made the right choice and that Bernanke’s “amazing and steady” leadership rescued the nation from a second Great Depression.  Mark Calabria, a policy scholar at the libertarian Cato Institute, disagrees and opines that Bernanke’s renomination “sends the worst possible message”.  Still, most experts think that retaining Bernanke is a smart move, especially now that the economy and financial markets are stabilizing.  “Love him or hate him, there’s strength in continuity,” says money manager Douglas Nardi of Legg Mason Investment Counsel.  “Things are going pretty well, and you don’t want to rock the boat.”

Bernanke faces some rough months ahead.  He will have to start pulling money out of the system that he flooded with cash last fall.  This is a judgment call full of political peril, because it could mean slowing economic growth to control inflation – even if unemployment is still hovering around the 10 percent mark.  In Kroszner’s opinion, Bernanke is significantly farther along in this process than the general public realizes.  The Fed provided approximately $1.5 trillion in short-term loans as of the end of last year, which helped keep swaps, commercial paper and other institutional markets from shutting down completely.

Home Sales, Values on the Rise; Consumer Confidence Down

Monday, August 10th, 2009

Sales of new and existing homes rose in June for the third straight month, due primarily to low prices and attractive mortgage rates.  Home sales also rose 11 percent over the previous month. The federal tax credit for first-time homebuyers helped to drive the uptick.  Additionally, home prices rose for the first time in three years in May, a sign that the market might be stabilizing.

nhsaprilAccording to the Standard & Poor’s/Case-Shiller index, home prices have fallen more than 32 percent from their 2006 peaks.  The pace of the decline slowed in May for the fourth consecutive month.  “This could be an indication that home price declines are finally stabilizing” after plunging to levels last seen six years ago in 2003, noted David M. Blitzer, chairman of the S&P index committee.

On the downside, the weakening job market battered consumer confidence in July, possibly delaying a quick economic recovery.  The U.S. Conference Board’s consumer confidence index fell to 46.6 in July from 49.3 in June.  A recent Reuters survey had forecast that the June reading would be 49.  This erosion in confidence is in tune with the rising percentage of Americans who say jobs are hard to find.  Unemployment has hit a 26-year high, with several states reporting double-digit numbers.

“People are getting a bit discouraged.  Jobs are not coming as quickly as expected,” according to John Silvia, chief economist with Wells Fargo.  “This won’t be a V-shaped recovery for either the economy or the jobs market.”

Economic Free Fall Slows During Second Quarter of 2009

Friday, August 7th, 2009

Finally, there’s encouraging news on the economic front.  The economy declined just one percent during the second quarter of 2009, a rosier report than was expected.  It is the strongest signal so far that the longest recession since the end of World War II is easing its grip.

In a report issued by the Department of Commerce covering the quarter from April through June, the one percent drop in the GDP stands in stark contrast to the 6.4 percent free fall thatpromoting_sustainable_economic_growth characterized the first quarter of 2009.  That was the biggest decline in almost 30 years.  The economy shrank for four straight quarters for the first time since 1947, evidence of how severely the recession has hurt consumers and companies.

“The recession looks to  have largely bottomed in the spring,” said Joel Naroff, president of Naroff Economic Advisors.  “Businesses have made most of the adjustments they needed to make, and that will set up the economy to resume growing in the summer.”

Fed Chairman Ben Bernanke believes the recession will end towards the end of the year.  The Obama administration’s stimulus program that combines tax cuts with government spending enhanced second quarter economic activity.  Economists believe the stimulus will have a greater impact through the second half of the year, and even in 2010.

The job market is expected to remain weak.  The current 9.5 percent unemployment rate marks a 26-year high, and the Fed expects it to top 10 percent by year’s end.  Companies will remain cautious about hiring until they are convinced that the recession is officially in the past.

Bernanke Report to Congress: Signs of Stabilization

Friday, July 24th, 2009

In his semi-annual testimony before the House Financial Services Committee, Federal Reserve Chairman Ben Bernanke said that although the economy is exhibiting “tentative signs of stabilization,he plans to maintain a “highly accommodative” monetary policy for the time being.  According to Bernanke, “The pace of decline appears to have slowed significantly.  In light of the substantial economic slack and limited inflation pressures, monetary policy remains focused on fostering economic recovery.”

A Fed report related to Bernanke’s testimony notes that policy will be “tightened” as the labor market improves, as the economic recovery begins and as pressures limiting inflation “diminish”.  Bernanke also defended the central bank’s moves to restore financial stability and urged lawmakers to make plans to rein in the deficit.  The Federal Open Market Committee is keeping interest rates “exceptionally low”, with the benchmark lending rate in the zero to 0.25 percent range.

bernankefaithThe Fed is planning to purchase as much as $1.25 trillion of mortgage-backed securities, $200 billion of federal agency debt by the end of 2009, and $300 billion in long-term Treasuries by September.  Bernanke believes that some of these assets may remain on the Fed’s books for an undetermined period of time.

“Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system,” Bernanke noted. “Many of the improvements in financial conditions can be traced, in part, to policy actions taken by the Federal Reserve.”

Bernanke’s comments point to the enormous influence of the Fed worldwide, not least of which is countries pegged to the U.S. dollar – like Kuwait – or that claim the dollar as their currency – like Panama.

Hooray for Hollywood

Friday, June 19th, 2009

Hollywood’s Blockbuster Year

“Hooray for Hollywood”, said the 1937 lyric by Johnny Mercer, sung during the depths of the Great Depression.  It appears the one industry that’s recession proof has done it again.  While the world’s economy has gone into free fall, Hollywood is in a state of euphoria right now, buoyed by a box-office surge that has stumped even the experts.  Suddenly, everyone is going to the movies, with ticket sales spiking 17.5 percent, to $1.7 billion, according to Media by Numbers, a box-office tracking company.hollywood-sign-address1

“Star Trek,” director JJ Abrams’ take on sci-fi’s most enduring franchise, is the biggest hit this year with a total gross of $223 million (it remained in the Top 5 with $8.4 million last week).  Medium-budget films also performed well this year with “Taken”, starring Liam Neeson, bringing in more than $80 million, and “Gran Torino”, starring the 79-year-old Clint Eastwood, topping $130 million.  The appropriately titled “Up” may give Hollywood even more wind in its sails this summer.  The latest film from Pixar (a division of Apple, and easily Hollywood’s most consistent studio) brought in $44.2 million in its second week, with a 10-day take of $137.3 million.  An interesting counterpoint to this is that movie merchandising sales are down.  Thinkway Toys, whose range of products related to Pixar’s 2006 film “Cars” helped the film to a merchandise sales record of $5 billion, is not creating a single toy based on the new movie.  Disney stores will offer only limited merchandise to promote “Up.”

The conventional wisdom would say that all this is obvious since people seek out escapism during a recession, particularly the type that’s priced right.  However, Hollywood’s splendid performance is actually an anomaly and all the more remarkable when we consider history.  Contrary to popular mythology, the film industry was not “Depression-Proof” in the 1930s but suffered a steep decline: attendance soared after the 1927 introduction of “talkies” (Al Jolson’s “The Jazz Singer” was the first sound film).  But weekly viewership peaked at 90 million tickets in 1930, then declined by more than a third by 1933.  Part of the problem was sound: to equip their theaters and sound stages, the studios tripled their debts during the mid- and late-’20s to $410 million.  By 1933, attendance and revenues had fallen by forty percent.  To hold on, the studios cut salaries and costs, and closed a full third of the nation’s theaters.

Local Banks Facing Significant CRE Losses

Monday, June 15th, 2009

Toxic commercial real estate loans could create losses up to $100 billion for small and mid-size banks by the end of 2010 if the economy worsens.  According to a Wall Street Journal report – which applied the same criteria used by the federal government in its stress tests of 19 big banks — these institutions stand to lose up to $200 billion.  In that worst-case scenario, 600 small and mid-sized excedrin1banks could see their capital contract to levels that federal regulators consider troubling, possibly even surpassing revenues.  These losses would exceed home loan losses, which total approximately $49 billion.

The Journal, which based its analysis on data mined from banks’ filings with the Federal Reserve, are a grim reminder that the banking industry’s troubles are not confined to the 19 giants that have already completed the Treasury Department’s stress tests.  More than 8,000 lenders nationwide are feeling the dual impacts of the recession and commercial real estate slowdown.

The banks analyzed by the Journal include 940 bank-holding companies that filed financial statements with the Fed for the year ending December 31.  They range from large regional banks to mom-and-pop banks in small towns, as well as American-based subsidiaries of international banks.

Smaller banks are unlikely to appeal to bargain-hunting investors who are starting to recapitalize the industry’s giants.  As a result, these institutions must boost their capital by selling assets and making fewer loans – which could make the recession last even longer than anticipated.