Tag: USA

How Far Will U.S. Housing Momentum Ease?

From Moody’s

The U.S. housing market has garnered attention recently but for the wrong  reason amid numerous signs of some weakening. Parts of the housing market have likely peaked while others haven’t, including new-home sales and construction, which pack the biggest GDP and employment punch.

Source: Mortgage News Daily.

Before assessing where housing is headed, it’s important to identify the possible culprits in the recent weakness in sales and construction. Common theories being tossed around blame the tax legislation that reduced the incentive to be a homeowner by increasing the standard deduction, lowering the deduction for a new mortgage, and capping the deductible amount of state and local taxes (which include property taxes) at $10,000 per year. More time is needed to assess the law’s impact on housing, since evidence is lacking. Sales of higher-priced homes, which would be most vulnerable, have been climbing. The tax legislation’s drag on housing will likely play out by reducing home sales and pushing some households to rent instead of buy, potentially putting upward pressure on rents.

We believe that affordability issues, mainly mortgage rates, are a more credible reason for housing’s recent slump. Affordability is a function of house prices, mortgage rates and income. Earlier this year, we noted that there was evidence that the housing market’s sensitivity to mortgage rates is increasing. The recent weakness in housing is consistent with this, since past increases in mortgage rates have been sufficient enough to be a drag.

To assess the impact, we ran through our U.S. macro model a scenario of a permanent increase in mortgage rates of 1 percentage point in the first quarter. That would be roughly the average of the gain during the taper tantrum and following the presidential election. The results show that the hit to residential investment is noticeable over the course of the subsequent year; real residential investment would be 7% lower than the baseline —enough to shave 0.1 to 0.2 percentage point off GDP growth for the year.

So far, mortgage rates have risen by 60 basis points this year, so the hit is smaller than our exercise, but it supports our view that higher interest rates are hurting housing.

Though there are headwinds, new-home sales and construction haven’t peaked, as fundamentals remain supportive. To estimate the underlying demand for new housing units, we broke it up into its main components, the trend in household formations, demand for second homes, and scrappage or obsolescence. The biggest source of demand is household formations, which have been running around 1.3 million per annum recently and this should continue over the next couple of years.

Demand for second homes tends to grow with the total number of housing units. We estimate that demand is running around 200,000 per annum. Housing units are scrapped from the housing stock each year because of demolition, disaster and disrepair. We estimate scrappage at 200,000 per year.

Even though underlying demand for new housing units is 1.7 million,  housing starts should exceed that. Each year some housing units are started but never completed; assuming this is 1% of total housing starts—likely conservative—that would be an additional 17,000 starts. Underlying  demand is about 25% below housing starts in the first half of this year. To close this gap over the next two years, would require homebuilding to rise 15% per annum. However, given the constraints facing builders this is unlikely. Alternatively, closing the gap in four years would require  approximately an 8% gain per annum. Therefore, residential investment won’t be booming but it will be respectable.

What Does A Yield Curve Inversion Really Signal?

We look at the latest US data, and check the history of yield curve inversions and their link to recessions.

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You Ain’t Seen Nothing Yet

We look at the FED QT and its potential impact.

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US Bank Supervision Gets The Hump

From The St. Louis Feds On The Economy Blog.

The health of banks is important to everyone, whether a borrower or a saver, an individual or a business. Subject to certain restrictions, bank deposits up to $250,000 are insured by the Federal Deposit Insurance Corp. The agency’s deposit insurance fund is financed by banks through fees. For catastrophic events, the fund is further supported by a $100 billion line of credit at the Treasury Department, meaning that taxpayers serve as the ultimate backstop in the event of a crisis.1

Because of the government safety net and in support of financial stability, bank supervisors monitor the health of banks through periodic examinations. At the conclusion of its exam, each bank is assigned a rating—called CAMELS—that allows comparisons of bank health over time and with peers.

CAMELS as a Health Monitor

CAMELS is an acronym representing its six components:

  • Capital adequacy
  • Asset quality
  • Management
  • Earnings
  • Liquidity
  • Sensitivity to market risk

Banks are rated on each component, and a composite rating is also computed. Ratings range from one to five:

  • 1 is “strong.”
  • 2 is “satisfactory.”
  • 3 is “less than satisfactory.”
  • 4 is “deficient.”
  • 5 is “critically deficient.”

To earn a 1 on any component, a bank must show the strongest performance and risk management practices in that area. Alternatively, a rating of 5 indicates weak performance, inadequate risk management practices and the highest degree of supervisory concern.

The overall, or composite, rating for each bank is based on the six components. However, it is not an arithmetic average of the individual component ratings. Rather, some components are weighed more heavily than others based on examiner judgment of risk.

For community banks, the asset quality rating is critical because of the size of the loan portfolio at small banks. We’ll take a deeper dive into asset quality and the other individual components of CAMELS in upcoming posts.

Who Sees the Rating?

At the conclusion of each examination, the bank’s rating is revealed to senior bank management and the board of directors. If the rating is 3, 4 or 5, the board is typically required to enter into an agreement with bank supervisors to correct the issues. The most serious deficiencies can result in formal supervisory actions that can be enforced in court.

Each bank’s CAMELS ratings and examination report are confidential and may not be shared with the public, even on a lagged basis. In fact, it is a violation of federal law to disclose CAMELS ratings to unauthorized individuals.2 Outsiders may monitor bank health through private-sector firms that use publicly available financial data to produce their own analysis of bank health, sometimes even using their own rating system.

Notes and References

1 The FDIC may borrow money from the U.S. Treasury, the Federal Financing Bank and individual banks to replenish the fund on a temporary basis. See the FDIC’s Federal Deposit Insurance Act page for more information.

2 Violators may be assessed criminal penalties under 18 USC §641.

US Corporate Trade Warnings Portend Softer Capex – Fitch

Growing concerns in the US business community about the potentially adverse effects of tariffs could cause modest deterioration in US manufacturing activity and capital spending by YE 2018, according to Fitch Ratings.

The escalation of the US-China trade dispute and the notable absence of constructive negotiations point to a continuation of trade-related uncertainty for US businesses through the second half of the year.

We expect approximately 3% growth in aggregate capital spending for Fitch’s universe of rated US corporates in 2018, following 6% growth in 2017, due in part to the cash benefits of tax reform. However, warnings that business strategies may be altered and capital projects delayed, along with potential pressure on exports, suggest capex trends could weaken. We currently expect aggregate capex to decline 0.8% in 2019. This may mark a potential inflection point in the current late-stage business cycle.

Several US companies, including Harley Davidson, Brown-Forman, and General Motors (GM), have spoken out on the potential adverse effects of escalating trade tensions. Harley-Davidson plans to move production of motorcycles for EU markets to its non-US plants to avoid retaliatory tariffs that would add an average of $2,200 to the cost of motorcycles exported to the region from the US. Brown-Forman cautioned that trade issues could negate benefits of a strong economy with the uncertainty making it difficult to accurately forecast earnings. GM indicated that potential US auto tariffs would raise prices of its vehicles, reduce its global competitiveness and lead to a loss of US jobs.

Comments by companies across various sectors, including electrical equipment, appliances and components, and food, beverage, and tobacco, were noted in the Federal Reserve’s June meeting minutes and the Institute for Supply Management’s (ISM) Purchasing Manager survey. This reflects broadening concern over the influence trade-related uncertainty is having on business sentiment and growth plans. Moreover, industry groups such as the US Chamber of Commerce and the Alliance of Automobile Manufacturers that support the business community are lodging complaints to the Trump Administration.

US leading economic indicators currently suggest overall business sentiment remains strong and manufacturing activity continues to expand due to a healthy growth outlook. The US Purchasing Manager’s Index (PMI) was near peak levels, rising to 60.2% in June from 58.7% in May. The index has only exhibited slight volatility in response to trade developments over the past year. The Philadelphia Fed’s survey of business intentions, a good bellwether of future capital spending plans, has recently declined slightly from very healthy levels, perhaps in response to protectionist threats.

Eurozone PMIs continue to signal expansion but have consistently declined since the beginning of 2018. Earlier in July, we noted increased trade tensions have raised the risk that additional tit-for-tat measures could have a greater impact on global economic growth than those seen so far. This would particularly be the case given the fact that investment and net exports are key components of GDP.

According to the ISM, expansion in new orders, production and employment drove the increase in the June US PMI reading. Inventories continue to struggle to maintain expansion levels, as a result of supplier deliveries slowing further. Labor constraints and supply chain disruptions continue to limit full production potential and price increases across all industry sectors remain on the rise. Additional rounds of tariffs could place further upward pressure on input costs, disrupt supply chains and weaken manufacturing activity in the near-term.

Why the war on poverty in the US isn’t over, in 4 charts

From The US Conversation.

On July 12, President Trump’s Council of Economic Advisers concluded that America’s long-running war on poverty “is largely over and a success.”

While the council’s conclusion makes for a dramatic headline, it simply does not align with the reality of poverty in the U.S. today.

What is poverty?

The U.S. federal poverty line is set annually by the federal government, based on algorithms developed in the 1960s and adjusted for inflation.

In 2018, the federal poverty line for a family of four in the contiguous U.S. is $25,100. It’s somewhat higher in Hawaii ($28,870) and Alaska ($31,380).

However, the technical weaknesses of the federal poverty line are well known to researchers and those who work with populations in poverty. This measure considers only earned income, ignoring the costs of living for different family types, receipt of public benefits, as well as the value of assets, such as a home or car, held by families.

Most references to poverty refer to either the poverty rate or the number of people in poverty. The poverty rate is essentially the percentage of all people or a subcategory who have income below the poverty line. This allows researchers to compare over time even as the U.S. population increases. For example, 12.7 percent of the U.S. population was in poverty in 2016. The rate has hovered around 12 to 15 percent since 1980.

Other discussions reference the raw number of people in poverty. In 2016, 40.6 million people lived in poverty, up from approximately 25 million in 1980. The number of people in poverty gives a sense of the scale of the concern and helps to inform the design of relevant policies.

Both of these indicators fluctuate with the economy. For example, the poverty population grew by 10 million during the 2007 to 2009 recession, equating to an increase of approximately 4 percent in the rate.

The rates of poverty over time by age show that, while poverty among seniors has declined, child poverty and poverty among adults have changed little over the last 40 years. Today, the poverty rate among children is nearly double the rate experienced by seniors.

The July report by the Council of Economic Advisers uses an alternate way of measuring poverty, based on households’ consumption of goods, to conclude that poverty has dramatically declined. Though this method may be useful for underpinning an argument for broader work requirements for the poor, the much more favorable picture it paints simply does not reconcile with the observed reality in the U.S. today.

Deserving versus undeserving poor

Political discussions about poverty often include underlying assumptions about whether those living in poverty are responsible for their own circumstances.

One perspective identifies certain categories of poor as more deserving of assistance because they are victims of circumstance. These include children, widows, the disabled and workers who have lost a job. Other individuals who are perceived to have made bad choices – such as school dropouts, people with criminal backgrounds or drug users – may be less likely to receive sympathetic treatment in these discussions. The path to poverty is important, but likely shows that most individuals suffered earlier circumstances that contributed to the outcome.

Among the working-age poor in the U.S. (ages 18 to 64), approximately 35 percent are not eligible to work, meaning they are disabled, a student or retired. Among the poor who are eligible to work, fully 63 percent do so.

Earlier this year, lawmakers in the House proposed new work requirements for recipients of SNAP and Medicaid. But this ignores the reality that a large number of the poor who are eligible for benefits are children and would not be expected to work. Sixty-three percent of adults who are eligible for benefits can work and already do. The issue here is more so that these individuals cannot secure and retain full-time employment of a wage sufficient to lift their family from poverty.

A culture of poverty?

The circumstances of poverty limit the odds that someone can escape poverty. Individuals living in poverty or belonging to families in poverty often work but still have limited resources – in regard to employment, housing, health care, education and child care, just to name a few domains.

If a family is surrounded by other households also struggling with poverty, this further exacerbates their circumstances. It’s akin to being a weak swimmer in a pool surrounded by other weak swimmers. The potential for assistance and benefit from those around you further limits your chances of success.

Even the basic reality of family structure feeds into the consideration of poverty. Twenty-seven percent of female-headed households with no other adult live in poverty, dramatically higher than the 5 percent poverty rate of married couple families.

Poverty exists in all areas of the country, but the population living in high-poverty neighborhoods has increased over time. Following the Great Recession, some 14 million people lived in extremely poor neighborhoods, more than twice as many as had done so in 2000. Some areas saw some dramatic growth in their poor populations living in high-poverty areas.

Given the complexity of poverty as a civic issue, decision makers should understand the full range of evidence about the circumstances of the poor. This is especially important before undertaking a major change to the social safety net such as broad-based work requirements for those receiving non-cash assistance.

Author: Robert L. Fischer Co-Director of the Center on Urban Poverty and Community Development, Case Western Reserve University

Kabbage Reaches a New Milestone of $5 Billion of Funding to Small Businesses In US

Very interesting release from Kabbage, highlights the growth of lending to small business online, and outside banking hours. Another example of the digital revolution well underway. 24/7 access rules…!

ATLANTA – June 28, 2018 – Kabbage, Inc., a global financial services, technology and data platform serving small businesses, reports its 145,000-plus small business customers accessed over 300,000 loans during non-banking hours, reaching a record total of more than $1 billion in funding. In total, Kabbage has now provided access to more than $5 billion in funding to its customers across America. The non-banking hour analysis illustrates how Kabbage’s fully automated lending solutions remove the age-old hurdle of normal business hours by offering companies 24/7 access to working capital online.

“The findings illuminate the true around-the-clock nature of business owners,” said Kabbage CEO, Rob Frohwein. “While we wish small business owners could reclaim their nights and weekends, we built Kabbage to allow business owners to access funds on schedules convenient to them, not us.”

Economic Impact of $5 Billion

A new report from the Electronics Transactions Association (ETA), in partnership with NDP Analytics, a Washington, D.C.-based economic research firm, finds that for every $1 provided to small businesses via online lending platforms, including Kabbage, results in $3.79 in gross output in local communities. The study provides context to how the new milestone of $5 billion provided through Kabbage has helped to stimulate the U.S. economy.

After-Hours Lending on the Rise

The total number of dollars accessed through Kabbage outside of typical banking hours increased more than 6,000 percent between 2011 and 2018. The growth illustrates small business owners are increasingly comfortable accessing capital online, and they rely on the convenience of managing cash flow needs any time of day, particularly outside of open business hours for most banks. Non-banking hours in this analysis represents the local time between 6 p.m. and 6 a.m. on the weekdays, and the full 48 hours over the weekends.

Weekday vs. Weekend Lending

The majority of after-hour lending (64 percent) was accessed during the work week, totaling $754 million. The remaining 36 percent occurred on Saturdays and Sundays, totaling $429 million. The data is a nod to the dedication of business owners as more than one-third extend their work weeks to handle cash flow needs even on the weekends.

About Kabbage

Kabbage, Inc., headquartered in Atlanta, has pioneered a financial services data and technology platform to provide access to automated funding to small businesses in minutes. Kabbage leverages data generated through business activity such as accounting data, online sales, shipping and dozens of other sources to understand performance and deliver fast, flexible funding in real time. With the largest international network of global-bank partnerships for an online lending platform, Kabbage powers small business lending for large banks, including ING and Santander, across Spain, the U.K., Italy and France and more. Kabbage is funded and backed by leading investors, including SoftBank Group Corp., BlueRun Ventures, Mohr Davidow Ventures, Thomvest Ventures, SoftBank Capital, Reverence Capital Partners, the UPS Strategic Enterprise Fund, ING, Santander InnoVentures, Scotiabank and TCW/Craton. All Kabbage U.S.-based loans are issued by Celtic Bank, a Utah-Chartered Industrial Bank, Member FDIC. For more information, please visit www.kabbage.com.

Global Growth Robust, But US Inflation Risks Rising

Near-term global growth prospects remain robust despite rising trade tensions and political risks, but US inflation risks are rising, says Fitch Ratings in its new Global Economic Outlook (GEO).

Accelerating private investment, tightening labour markets, pro-cyclical US fiscal easing and accommodative monetary policy are all supporting above-trend growth in advanced economies. In emerging markets (EMs), China’s growth rate is holding up better than expected so far this year in the face of slowing credit growth; Russia and Brazil continue to recover, albeit slowly; and the rise in commodity prices is supporting incomes in EM commodity producers.

“Global trade tensions have risen significantly this year, but at this stage the scale of tariffs imposed remains too small to materially affect the global growth outlook. A major escalation that entailed blanket across-the-board geographical tariffs on all trade flows between several major countries would be much more damaging,” says Brian Coulton, Fitch’s Chief Economist.

Populist political forces continue to create policy risk and increase the threat of rising tensions within the eurozone that could adversely affect the outlook for investment, a key driver of growth last year. At this stage, we have made only a modest downward revision to our eurozone investment forecast for this year (to 3.3% from 3.9% in March), but a further escalation in uncertainty represents an important downside risk.

A much sharper-than-anticipated pick-up in US inflation remains a key risk to the global outlook. The decline in US unemployment – to 3.8% in May – is becoming more important to watch, and we forecast the rate to hit a 66-year low of 3.4% in 2019. A wide array of indicators of US labour market tightness suggest it is now only a matter of time before sharper upward pressures on US wage growth start to be seen.

“An inflation shock in the US could bring forward adjustments in US and global bond yields and sharply increase volatility, harming risk appetite. In particular, it could lead to a rapid decompression of the term premium, which remains negative for US 10-year bond yields. In combination with a likely aggressive Fed response, this would be disruptive for global growth,” adds Coulton.

Global growth forecasts remain unchanged since our March GEO, at 3.3% for 2018 and 3.2% for 2019. Nevertheless, 2018 growth forecasts have been revised down for 10 of the 20 economies that make up the GEO, with the eurozone seeing a 0.2pp downward revision, the UK a 0.1pp downward revision and Japan a 0.3pp downward revision. Brazil and South Africa have seen sizeable markdowns, and our Russia and Indonesia forecasts have also been lowered. These have been offset by 0.1pp upward revisions to the US and China and a stronger outlook for Poland and India in 2018.

For 2019, there have been fewer forecast changes, with the notable exception of Turkey, where recent currency turmoil and interest rate hikes are set to take a heavy toll on domestic demand. The US 2019 growth forecast has been raised by 0.1pp, and China’s 2019 outlook has been upgraded by 0.2pp following better-than-expected recent momentum.

Fitch still forecasts a total of four Fed rate hikes in 2018, followed by three more next year. Recent pronouncements from ECB officials suggest that the Asset Purchase Programme (APP) will be phased out in 2018, but also appear to imply that purchases will be scaled down between September and the end of the year rather than stopping abruptly after September. This is significant for the likely timing of the first ECB rate hike in 2019. ECB forward guidance has stated that rate hikes will not take place until “well after” the end of asset purchases, which the bank has clarified to mean quarters rather than years. A December 2018 end-date for the APP would imply rate hikes in 3Q19 or 4Q19. On this basis, we have revised our forecast of ECB rate hikes to just one increase in 2019, from two hikes before.

Global monetary policy normalisation and upward pressures on the US dollar have likely been contributing to the rise in financial market volatility witnessed so far this year. Both these global trends look set to stay.

Fed Lifts Rate, More To Follow

The FED released their decision to lift rates, as expected. The T10 Bond Rate is up.

US Mortgage rates didn’t move much today. That keeps them in line with some of the highest levels in nearly 7 years, though the same could be said for a majority of the days since mid-April.

Higher rates will spill over into the capital markets too.  The DOW fell.

Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.

Tweaked Volcker Rule still has teeth, which is credit positive

Last Wednesday, US regulatory agencies (namely the Federal Reserve, Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission) jointly proposed changes to simplify and clarify the Volcker Rule and tailor the compliance obligations of US banks, based on their trading activities. The changes are based on several years of regulatory experience applying the Volcker Rule says Moody’s.

For banks with the most trading activity – including Bank of America Corporation, Citigroup Inc., The Goldman Sachs Group, Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Company – the proposed changes should reduce the uncertainty about the rule’s enforcement and simplify reporting requirements, which is credit positive for the banks.

The Volcker Rule will continue to prohibit most forms of proprietary trading, which it defines as purchasing or selling financial instruments (exempting of US government securities) with the intent to profit from short-term price movements.

There are three noteworthy proposed amendments to the Volcker Rule. First, to tailor the rule based on the degree of trading risk, banks will be divided into those with gross trading assets and liabilities exceeding $10 billion, those with between $1 billion and $10 billion and those with less than $1 billion – each with varying compliance requirements. The six aforementioned banks will all remain in the category with the most stringent reporting and compliance requirements.

Second, the definition of a trading account will be modified by replacing a “short-term intent” criterion with a more objective criteria that the account be recorded at fair value under applicable accounting standards. Finally, measurement of reasonably expected near-term demand (RENTD) is being modified. Under the existing rule, to be exempt from the ban on proprietary trading a bank must demonstrate that its purchase and sale of financial instruments relating to market-making and underwriting activities does not exceed RENTD. In practice, this has been difficult to demonstrate and may have contributed to banks’ reluctance to use the underwriting and market-making exemptions. Under the proposed amendments, a bank will be presumed to have stayed within RENTD if it implements, maintains and enforces internal risk limits surrounding its market-making and underwriting activities.

For the most active trading banks, added certainty about the provisos of the Volcker Rule should make it cheaper and easier to comply with the rule and provide greater certainty about allowable market-making and underwriting activities. At the same time, it may also make it easier for regulators to enforce the rule – and maintain a regulatory guardrail that protects creditors against the risk that banks drift into proprietary trading away from their core market-making activities.

A clarified Volcker Rule that is easier to comply with and enforce, when combined with other post-crisis regulatory enhancements that still require banks to hold greater amounts capital and liquidity for less liquid and more volatile exposures (including the Basel III capital and liquidity framework, the Dodd-Frank Stress Tests, and the Fed’s Comprehensive Capital Analysis and Review), is a credit-positive development.