Posts Tagged ‘Federal Reserve Bank’

Rick Mattoon: Is the Recession Over?

Monday, March 8th, 2010

The Fed says the recession is over.Economic indicators show that the recession is over.  This is the opinion of Rick Mattoon, a senior economist and advisor in the economic research department of the Federal Reserve Bank of Chicago and a lecturer at the Kellogg School of Management at Northwestern University.  Rick’s primary research focuses on issues facing the Midwest regional economy.

In a recent interview for the Alter NOW Podcasts, Mattoon warned that most people probably don’t feel like the nation is coming out of a recession because there are few signs of job creation or easier access to credit.  One of the major concerns economists have is that this will be a double-dip “W-shaped” recession because once the bump from the $787 billion stimulus ends, there will be scant pent-up consumer demand for products and services to take the place of government spending.

One positive sign is an uptick in hiring by temporary employment agencies, which usually is considered to be a good harbinger of what future demand will be.  Another interesting theory about this particular recession in terms of jobs is the idea that companies adjusted their employee levels much more aggressively at the beginning of this cycle.  As a result, they are operating at extremely lean levels and so may hire earlier rather than later.

One problem is that there is a skills mismatch in the economy.  Many people who have lost their jobs don’t possess the right skills to find employment in growth industries such as clean energy or healthcare.  The challenge is training these individuals to bring their skills up to par.

 
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First CMBS Under TALF Is on the Horizon

Monday, November 9th, 2009

first-cmbs-under-talf-is-on-horizonThe markets are keeping a close eye on a transaction that may jump start the commercial property debt market, even though the Federal Reserve has expressed some uneasiness with the deal.  If the transaction is successful, it could pave the way for the initial sale of commercial mortgage-backed securities (CMBS) under the government Term Asset-Backed Securities Loan Facility (TALF).  The credit-hungry commercial real estate industry is hoping that the debt sale by shopping center owner Developers Diversified Realty Corporation will lead to additional CMBS sales.

Developers Diversified has obtained a $400 million loan from Goldman Sachs Group, Inc., which is intended to be converted into a CMBS offering through TALF.  The Fed, keeping the taxpayers’ best interests in mind, has reservations about financing the transaction since it involves a single borrower.  These are considered riskier than deals involving multiple borrowers, where the risk is spread over different borrowers, building type and even location.

“The Fed is being very conservative, very diligent in reviewing collateral and very risk-averse,” said Frank Innaurato, managing director at Realpoint LLC, a credit-ratings firm.  Currently, the Fed is reviewing the transaction, which involves 28 shopping centers with stable cash flows.  If the Fed says “no” to the transaction, Goldman Sachs is said to be considering selling the $400 million loan outside TALF.

TALF was created to revive the CMBS market, as well as jump start securitized debt markets by offering low-cost financing from the Fed so investors can once again purchase these securities.  The program lets investors borrow as much as 95 percent of the bonds’ value by pledging the securities as collateral – meaning the risk is on taxpayers if there is a default.

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.

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.

A Brief History of the Fed

Monday, February 23rd, 2009

The origins of the public/private Federal Reserve Bank is the subject of a new book “Innumeracy”, by John Allen Paulos. Established in 1913 when Congress passed the Federal Reserve Act in an attempt to prevent financial panics, the Fed still had an aura of mystery. Even more curiously, the Fed’s founders knowingly created the perception that they were forming a secret society – much to the exasperation of a public that widely distrusted bankers.

One of the interesting tidbits is that the organizers traveled via private train, used assumed names, and held a hush-hush meeting on an isolated island off the Georgia coast to discuss their vision of how the Fed should be structured.

These “Lords of Finance” created the Fedfederal-reserve-building as a means to keep all money in circulation pegged to the now-abandoned gold standard, which remained in effect in the United States until 1971. In practice, this meant that someone could go to the bank and exchange (for the sake of discussion) $100 for a specified amount of gold. The standard was 23.22 grains of gold to the United States dollar. The grain is based on the weight of a grain of wheat, which translates to 1/7,000 of a pound.

The world’s first central bank is the venerable Bank of England, established in 1694 to finance Britain’s foreign wars. To this day, the so-called “Old Lady of Threadneedle Street” maintains a monopoly on issuing banknotes, and manages the nation’s monetary policy.

Chicago Economists Say 2009 Is a Year of Challenge

Tuesday, February 17th, 2009

The economic forecast for 2009 is bleak, although it’s possible that recovery will begin mid-year. This is the opinion of William Strauss and Rick Mattoon, senior economists with the Federal Reserve Bank of Chicago. “We are predicting that 2008 will yield real GDP of 0.2 percent and that 2009 will be 0.7 percent,” Strauss said. “This will be the slowest two-year growth period since 1981 – 1982, an 18-month recession that will be deeper than the 2000 and 1990 – 1991 recessions.”

Although some economists believe that the unemployment rate will hit double digits this year, Strauss and Mattoon optimistically predict that it will level off at approximately nine percent. Real income growth will be flat, and might even decline. The key to recovery is a thaw in the credit markets so that their performance improves.

Trade is holding its own; exports are still in positive territory. Strauss warns, however, that exports can’t be relied upon to drive to the economy, because the global recession means that foreign buyers will purchase less than they previously did.

Given their relative optimism, I wonder if Strauss and Mattoon agree with President Obama, who warned that failure to pass his $800 billion economic recovery package “could turn a crisis into a catastrophe”? Considering the bad review that Wall Street gave to Treasury Secretary Geithner’s preliminary plans for the use of the remaining $350 million of TARP money, it will be interesting to see how the markets react to the House-Senate conference committee’s compromise bill.

Anecdotal Federal Reserve “Beige Book” Observations

Monday, October 27th, 2008

As if we needed it, even more evidence attesting to the ongoing economic slowdown came to light recently.  According to a Federal Reserve Board report referenced on Market|Watch and known as the Beige Book, the slowdown in economic activity in late September.

Among the findings are:

  • Factory activity is slowing.
  • Non-financial services – typically the backbone of economic activity – are slowing.
  • There is evidence that loan quality has actually depreciated because bank customers have moved their money into accounts that have the safety of deposit insurance.
  • Inflation pressures eased slightly, particularly in the retail sector.
  • The single bright spot was agriculture; the 2008 harvest was a good one.

Named for its nondescript color, the Beige Book is published to update the Federal Reserve on economic conditions just before its October 28 – 29 policy meeting.  The Beige Book is a series of anecdotal reports collected by the 12 regional Federal Reserve banks that gauge the state of the economy.  Although of interest, it has little influence on policymakers who rely more heavily on government reports in making decisions.  Another interest-rate cut is an expected outcome of the upcoming meeting.