The Federal Reserve Board has proposed a rule to modify its capital planning and stress testing regulations. The proposed changes would take effect for the 2016 capital plan and stress testing cycles.
The proposed rule would modify the timing for several requirements that have yet to be integrated into the stress testing framework. Banking organizations subject to the supplementary leverage ratio would begin to incorporate that ratio into their stress testing in the 2017 cycle. The use of advanced approaches risk-weighted assets–which is applicable to banking organizations with more than $250 billion in total consolidated assets or $10 billion in on-balance sheet foreign exposures–in stress testing would be delayed indefinitely, and all banking organizations would continue to use standardized risk-weighted assets.
Banking organizations are currently required to project post-stress regulatory capital ratios in their stress tests. As the common equity tier 1 capital ratio becomes fully phased in under the Board’s regulatory capital rule, it would generally require more capital than the tier 1 common ratio. The proposal would remove the requirement that banking organizations calculate a tier 1 common ratio.
The Board is also currently considering a broad range of issues related to its capital plan and stress testing rules. Any modifications will be undertaken through a separate rulemaking and would take effect no earlier than the 2017 cycle.
Comments on the proposal will be accepted through September 24, 2015.
The outlook for the economy and inflation is broadly consistent with the central tendency of the projections submitted by FOMC participants at the time of our June meeting. Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy. But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step. We will be watching carefully to see if there is continued improvement in labor market conditions, and we will need to be reasonably confident that inflation will move back to 2 percent in the next few years.
Let me also stress that this initial increase in the federal funds rate, whenever it occurs, will by itself have only a very small effect on the overall level of monetary accommodation provided by the Federal Reserve. Because there are some factors, which I mentioned earlier, that continue to restrain the economic expansion, I currently anticipate that the appropriate pace of normalization will be gradual, and that monetary policy will need to be highly supportive of economic activity for quite some time. The projections of most of my FOMC colleagues indicate that they have similar expectations for the likely path of the federal funds rate. But, again, both the course of the economy and inflation are uncertain. If progress toward our employment and inflation goals is more rapid than expected, it may be appropriate to remove monetary policy accommodation more quickly. However, if progress toward our goals is slower than anticipated, then the Committee may move more slowly in normalizing policy.
Long-Run Economic Growth
Before I conclude, let me very briefly place my discussion of the economic outlook into a longer-term context. The Federal Reserve contributes to the nation’s economic performance in part by using monetary policy to help achieve our mandated goals of maximum employment and price stability. But success in promoting these objectives does not, by itself, ensure a strong pace of long-run economic growth or substantial improvements in future living standards. The most important factor determining continued advances in living standards is productivity growth, defined as the rate of increase in how much a worker can produce in an hour of work. Over time, sustained increases in productivity are necessary to support rising household incomes.
Here the recent data have been disappointing. The growth rate of output per hour worked in the business sector has averaged about 1‑1/4 percent per year since the recession began in late 2007 and has been essentially flat over the past year. In contrast, annual productivity gains averaged 2-3/4 percent over the decade preceding the Great Recession. I mentioned earlier the sluggish pace of wage gains in recent years, and while I do think that this is evidence of some persisting labor market slack, it also may reflect, at least in part, fairly weak productivity growth.
There are many unanswered questions about what has slowed productivity growth in recent years and about the prospects for productivity growth in the longer run. But we do know that productivity ultimately depends on many factors, including our workforce’s knowledge and skills along with the quantity and quality of the capital equipment, technology, and infrastructure that they have to work with. As a general principle, the American people would be well served by the active pursuit of effective policies to support longer-run growth in productivity. Policies to strengthen education and training, to encourage entrepreneurship and innovation, and to promote capital investment, both public and private, could all potentially be of great benefit in improving future living standards in our nation.
The IMF released their report on the United States. They reiterated the need for a credible medium-term fiscal strategy that would anchor ongoing consolidation efforts, underpin debt sustainability, and reduce fiscal uncertainties. Although the U.S. banking system has strengthened its capital position, the search for yield during the prolonged period of low interest rates, rapid growth in assets in the nonbank sector, and signs of stretched valuations across a range of asset markets point to emerging pockets of vulnerabilities. Potential financial sector risks include the migration of intermediation to the nonbanks; the potential for insufficient liquidity in a range of fixed income markets that could lead to abrupt moves in market pricing; and life-insurance companies that have taken on greater market risk.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
The U.S. economy’s momentum in the first quarter was sapped by unfavorable weather, a sharp contraction in oil sector investment, and the West Coast port strike. But the underpinnings for a continued expansion remain in place. A solid labor market, accommodative financial conditions, and cheaper oil should support a more dynamic path for the remainder of the year. Despite this, the weaker outturn in the first few months of this year will unavoidably pull down 2015 growth, which is now projected at 2.5 percent. Stronger growth over the next few years is expected to return output to potential before it begins steadily declining to 2 percent over the medium term.
Inflation pressures remain muted. In May headline and core personal consumption expenditure (PCE) inflation declined to 0.2 and 1.2 percent year on year, respectively. Long-term unemployment and high levels of part-time work both point to remaining employment slack, and wage indicators on the whole have shown only tepid growth. When combined with the dollar appreciation and cheaper energy costs, inflation is expected to rise slowly staring later in the year, reaching the Federal Reserve’s 2 percent medium-term objective by mid 2017.
An important risk to growth is a further U.S. dollar appreciation. The real appreciation of the currency has been rapid, reflecting cyclical growth divergences, different trajectories for monetary policies among the systemically important economies, and a portfolio shift toward U.S. dollar assets. Lower oil prices and increasing energy independence have contained the U.S. current account deficit, despite the cyclical growth divergence with respect to its main trading partners and the rise in the U.S. dollar. Nevertheless, over the medium term, at current levels of the real exchange rate, the current account deficit is forecast to widen toward 3.5 percent of GDP.
Despite important policy uncertainties, the near term fiscal outlook has improved, and the federal government deficit is likely to move modestly lower in the current fiscal year. Following a temporary improvement, the federal deficit and debt-to-GDP ratios are, however, expected to begin rising again over the medium term as aging-related pressures assert themselves and interest rates normalize. In the near-term, the potential for disruption from either a government shutdown or a stand-off linked to the federal debt ceiling represent important (and avoidable) downside risks to growth and job creation that could move to the forefront, once again, later in 2015.
Much has been done over the past several years to strengthen the U.S. financial system. However, search for yield during the prolonged period of low interest rates, rapid growth in assets in the nonbank sector, and signs of stretched valuations across a range of asset markets point to emerging pockets of vulnerabilities. The more serious risks are likely to be linked to: (1) the migration of intermediation to the nonbanks; (2) the potential for insufficient liquidity in a range of fixed income markets that could lead to abrupt moves in market pricing; and (3) life-insurance companies that have taken on greater market risk. But several factors mitigate these downsides. In particular, the U.S. banking system has strengthened its capital position (Tier 1 capital as a ratio of risk-weighted assets is at about 13 percent) and appears resilient to a range of extreme market and economic shocks. In addition, overall leverage does not appear excessive, household and corporate balance sheets look generally healthy, and credit growth has been modest.
The consultation focused on the prospects for higher policy rates and the outlook for, and policy response to financial stability risks, integrating the findings of the latest IMF Financial Sector Assessment Program for the U.S.
Executive Directors agreed with the thrust of the staff appraisal. They noted that the economic recovery continues to be underpinned by strong fundamentals, despite a temporary setback, while risks remain broadly balanced. Directors observed that considerable uncertainties, both domestic and external, weigh on the U.S. economy, with potential repercussions for the global economy and financial markets elsewhere. These include the timing and pace of interest rate increases, prospects for the dollar, and risks of weaker global growth. Directors stressed that managing these challenges, as well as addressing longstanding issues of public finances and structural weaknesses, are important policy priorities in the period ahead.
Directors agreed that decisions on interest rate increases should remain data-dependent, considering a broad range of indicators and carefully weighing the trade-offs involved. Specifically, they saw merit in awaiting clear signs of wage and price inflation, and sufficiently strong economic growth before initiating an interest rate increase. Noting the importance of the entire path of future policy rate changes, including in terms of the implications for outward spillovers and for financial markets, Directors were reassured by the Federal Reserve’s intention to follow a gradual pace of normalization. They welcomed the Federal Reserve’s efforts, and commitment to continue, to communicate its policy intentions clearly and effectively. Directors acknowledged that financial stability risks could arise from a protracted period of low interest rates. In this regard, they underscored the importance of strong regulatory, supervisory, and macroprudential frameworks to mitigate these risks.
Directors commended the authorities for the progress in reinforcing the architecture for financial sector oversight. They concurred with the main findings and recommendations of the Financial Sector Assessment Program assessment. Directors highlighted the need to complete the regulatory reforms under the Dodd-Frank Act and to address emerging pockets of vulnerability in the nonbank financial sector. They encouraged continued efforts to monitor and manage risks in the insurance sector, close data gaps, and improve the effectiveness of the Financial Stability Oversight Council while simplifying the broader institutional structure over time. Directors looked forward to further progress in enhancing cross-border cooperation among national regulators, and the framework for the resolution of cross-jurisdiction financial institutions.
Directors noted that there remain a range of challenges linked to fiscal health, lackluster business investment and productivity growth, and growing inequality. They agreed that reforms to the tax, pension, and health care systems will help create space for supporting near-term growth, including through infrastructure investment. Directors reiterated the need for a credible medium-term fiscal strategy that would anchor ongoing consolidation efforts, underpin debt sustainability, and reduce fiscal uncertainties. They called for renewed efforts to implement structural reforms to boost productivity and labor force participation, tackle poverty, address remaining weaknesses in the housing market, and advance the multilateral trade agenda.
DFA has been tracking the progress of Peer-to-Peer lending, and it continues to grow fast round the world. Here is a summary from the Lending Mag covering the best U.S. Peer-to-Peer Lending Sites for Borrowers. It is quite interesting comparing the different business models, charging structures and sheer scale of lending through this channel. In the US, at least, it is becoming a valid alternative funding source.
#1 Prosper Marketplace
Prosper Marketplace is The Lending Mag’s first choice among U.S. peer-to-peer lending companies for borrowers. This popular p2p lending platform made history in the United States when they became the first peer-to-peer lending site in the country in 2006. Since that time, Prosper has experienced tremendous growth and success, having recently surpassed $3 billion in loans. Recently, they were named by Forbes as one of the most promising companies in America.
Prosper places as number #1 on our list of p2p lenders because of the accessibility and attention to customers that they provide. Out of all the p2p lenders we have had interactions with, Prosper representatives were the most accommodating and reachable. You don’t feel like you are dealing with a cold, unreachable entity. You can sense the humanity behind the big name and they are there to help you. Here are more details about Prosper’s peer-to-peer lending site:
Maximum Loan Amount Available: $35,000
Minimum Loan Amount Available: $2,000
Average Time to Receive Funds (in days): 4 to 10 days
APR: 6.73% to 35.97%
Interest Rate: 6.05% to 31.90%
Term of Loan (years): 3 or 5
Minimum Credit Score Required: 640
Maximum Debt-to-Income Ratio: 30%
Loan Type (Secured or Unsecured): Unsecured loan
Application Affect On Your Credit: None
States Eligible To Borrow From p2p Lending Sites In Question: 47 + DC
Origination Fee: 1% to 5%
Late Fee: Greater of $15 or 5%
Unsuccessful Payment Fee: None
Check Processing: $15
Application Fee Charge: None
Prepayment Penalty Cost: None
Best Method of Contacting Their Support: Phone
#2 Lending Club
Lending Club is an absolute giant in the US peer-to-peer lending space. You really can’t talk about U.S. peer-to-peer lending without mentioning them. Their peer loans platform was founded shortly after Prosper in 2007, they’ve actually surpassed Prosper in the amount of loans funded. Many p2p loan investors feel that Lending Club’s website has the best user interface and it definitely has the largest and most impressive 3rd-party investor ecosystem.
In December of 2014 Lending Club had a wildly successful IPO on the NYSE, becoming the first publicly traded online peer-to-peer lender in US history. If this p2p lending site review was focused on investing, Lending Club would probably have been ranked #1. But getting approved to borrow through Lending Club can be a bit more difficult than with Prosper, knocking them to number #2 on our list from a borrower’s perspective. Here are more details about Lending Club’s peer-to-peer lending site:
Maximum Loan Amount Available: $35,000 ($300,000 for business loans)
Minimum Loan Amount Available: $1,000 ($15,000 for business loans)
Average Time to Receive Funds (in days): 4 to 10 days
APR: 5.99% to 32.99%
Interest Rate: 5.9% to 25.9%
Term of Loan (years): 1, 3 or 5
Minimum Credit Score Required: 660
Maximum Debt-to-Income Ratio: 35%
Loan Type (Secured or Unsecured): Unsecured loan
Application Affect On Your Credit: None
States Eligible To Borrow From p2p Lending Sites In Question:
Origination Fee: 0.99% to 5.99%
Late Fee: Greater of $15 or 5%
Unsuccessful Payment Fee: $15
Check Processing: $15
Application Fee Charge: None
Prepayment Penalty Cost: None
Best Method of Contacting Their Support: Phone
#3 Upstart
If you’ve recently graduated from college, you probably don’t need us to tell you how hard it is to convince a bank to give you a loan. Young people fresh out of college don’t usually have the type of income needed, enough credit history or a high enough credit score to get a reasonable loan rate, if you can get a loan at all.
This is where Upstart steps in. This innovative lending site began facilitating p2p loans in April 2014. They aim to help those who are under-served by traditional loan companies but are filled with potential. Instead of only judging creditworthiness from your credit score, employment history and income, Upstart looks at a wide range of nontraditional factors in order to determine whether you should get a shot at getting your loan funded. These other factors include which college you graduated from, your grade point average and it’s possible that they even take your SAT scores into account.
Upstart prides itself on looking past the cold numbers and saying yes to your requests when other lenders say no. Most of Upstart’s borrowers use the funds as debt consolidation loans in order to pay off high-interest credit cards, but you can use the funds as you please.
This fast-growing p2p lending site is becoming popular among Millennials especially because they are often in a situation where they don’t have a long track record of credit history and are often offered very high loan rates because of it. Taking a bad loan at an early age can easily set your financial life on the wrong road and Upstart realizes that such poor options are not necessary or fair.
Company officials have expressed that the company’s loan products are meant to serve a young and potential-laden population that is very likely to build a solid credit profile in the future, but just hasn’t had the opportunity to do so yet. By using their sophisticated algorithm to decipher key data, the peer-to-peer lending site is able approve the extension of consumer credit at affordable rates to young borrowers who are well-positioned to handle the loans responsibly.
Here are more details about Upstart’s peer-to-peer lending site:
Maximum Loan Amount Available: $35,000
Minimum Loan Amount Available: $3,000
Average Time to Receive Funds (in days): 2 to 16
APR: 5.67% to 29.99%
Interest Rate: 5% to 25.26%
Term of Loan (years): 3
Minimum Credit Score Required: 640
Maximum Debt-to-Income Ratio: 40% to 50%
Loan Type (Secured or Unsecured): Unsecured loan
Application Affect On Your Credit: None
States Eligible To Borrow From p2p Lending Sites In Question: 50
Origination Fee: 1% to 6%
Late Fee: Greater of $15 or 5%
Unsuccessful Payment Fee: $15
Check Processing: $15
Application Fee Charge: None
Prepayment Penalty Cost: None
Best Method of Contacting Their Support: Phone
#4 Funding Circle
Funding Circle is one of the world’s biggest peer-to-peer lending sites that actually focuses primarily on small business loans. They have a US counterpart to their peer to peer lending UK branch. They’ve facilitated more than $1 billion in loans to more than 8,000 businesses in the US and UK combined. Today, 40,000 retail investors (normal people), major banks, financial institutions and even the UK Government are lending to small businesses through the Funding Circle marketplace.
Funding Circle is intensely focused on helping small businesses get loans through their p2p lending site because they have roots in small business. Their U.S. co-founders started the peer-to-peer lending site because they were small business owners themselves, they were getting rejected for small business funding at every turn and after getting rejected for small business loans nearly 100 times, they realized something was very wrong with the traditional bank lending system, it was internally flawed. They saw first hand that even when you have a growing and successful business venture that’s doing well, it’s still far too difficult to get a business loan. From that point forward, they were more determined than ever to build a more sensible small business loan solution for American business owners.
Maximum Loan Amount Available: $500,000 for business loans
Minimum Loan Amount Available: $25,000 for business loans
Average Time to Receive Funds (in days): 5 to 14
APR:
Interest Rate: 5.99% to 20.99%
Term of Loan (years): 1 to 5
Minimum Credit Score Required: 620
Maximum Debt-to-Income Ratio: Not Disclosed
Loan Type (Secured or Unsecured): Secured loan
Application Affect On Your Credit: Hard pull on your credit
States Eligible To Borrow From p2p Lending Sites In Question: 47 + DC
Origination Fee: 2.99%
Late Fee: 10%
Unsuccessful Payment Fee: $35
Check Processing: $0
Application Fee Charge: None
Prepayment Penalty Cost: None
Best Method of Contacting Their Support: Phone
#5 Peerform
Peerform was started by Wall Street executives with extensive backgrounds in Finance and Technology in 2010, the peer-to-peer lending site’s creators saw an opportunity to make funding available to borrowers when they noticed that banks seemed unwilling to lend to people and small businesses in need.
Peerform has built a good track record of giving borrowers an opportunity that the banking system had denied them and a very positive experience when seeking unsecured personal loans through an online lending process that is transparent, fast and easy to understand.
To apply for an online peer-to-peer loan from Peerform, you fill out the application on their site and they will make a soft pull on your credit to see if you meet the minimum requirements for a loan. They are one of the few major peer-to-peer lending sites that accepts borrowers with FICO scores as low as 600. Those who qualify for a loan have their loan request posted on the website and it stays active for 14 days while peer-to-peer investors decide if the loan is an attractive investment or not. If your loan is fully funded within the 2 week time period, you’ll be contacted by Peerform to approve and accept the loan. If your loan is not fully funded in the 2 week time period but has raised at least $1,000, you may choose to accept or reject the lesser amount. It is completely your call, you are not obligated to accept the loan. If you do choose to accept the loan, it will be deposited to your bank account within a few business days.
When we tested their customer service and contacted Peerform, we had positive experiences both via email and on the phone. After sending an email we received a written response within 24 hours, and most of our questions were answered to satisfaction. When talking to them by phone, we noted that the company rep was very knowledgeable about the loan process and able to give helpful answers. Their site also provides all of the most important information you’d need to know about their peer-to-peer loan process, including APRs, interest rates, potential loan amounts and fees, etc. You can also contact a customer rep using the live chat option they have on the website. Here are more details about Peerform’s peer-to-peer lending site:
Maximum Loan Amount Available: $25,000
Minimum Loan Amount Available: $1,000
Average Time to Receive Funds (in days): 2 to 16
APR: 7.12% to 28.09%
Interest Rate: 6.4% to 25%
Term of Loan (years): 3
Minimum Credit Score Required: 600
Maximum Debt-to-Income Ratio: Varies
Loan Type (Secured or Unsecured): Unsecured loan
Application Affect On Your Credit: None
States Eligible To Borrow From p2p Lending Sites In Question: 23
Origination Fee: 1% to 5%
Late Fee: Greater of $15 or 5%
Unsuccessful Payment Fee: $15
Check Processing: $15
Application Fee Charge: None
Prepayment Penalty Cost: None
Best Method of Contacting Their Support: Phone
#6 Sofi
Sofi is a highly respected marketplace lending website, with nearly $3 billion in peer loans issued to this date.
They made it onto this peer-to-peer lending sites review because they do a good job at assisting early stage professionals accelerate their success with student loan refinancing, mortgage refinancing, mortgages and unsecured personal loans.
Their nontraditional loan underwriting approach takes into account merit and employment history among other determining factors, in effect, allowing their peer-to-peer lending site to offer loans that often are hard to find elsewhere.
From The Conversation. Until recently, affordable housing was mentioned only in conversations involving low-wage or unemployed workers – or the homeless. The only groups that focused on rising rental costs were low-income housing advocacy groups.
That has now changed.
For the first time since possibly the Great Depression, the lack of affordable housing is being viewed as a crisis that affects Americans of all ages, races and income groups.
While the US Supreme Court spotlighted the issue in Thursday’s ruling allowing parties to challenge housing practices even if they do not (or cannot) prove there was intentional bias or discrimination, the mainstream media is finally catching on as well.
In the last three weeks, the Washington Post, New York Times and Wall Street Journal have all sounded the alarm about the country’s looming affordable housing crisis. In addition, well-heeled non-profit groups – like the foundation recently formed by the former CEO of the nation’s largest apartment developer – have begun urging politicians to address the growing problem of rental housing unaffordability.
Growing more somber
Some of the recent media attention on the unaffordability of housing was triggered by the 2015 State of the Nation’s Housing report, just released by the Harvard Joint Center for Housing Studies (JCHS). While the JCHS has issued a similar report every year since 1988, the latest edition opens with an unusually somber tone about the state of housing in this country.
“Homeownership at 20-Year Lows,” bellows the opening line of the 2015 report.
By comparison, the first line in 2013 highlighted the “Housing Market Revival,” while the 2014 report only hinted at the growing problems with “Single-Family Slowdown.”
This change in tone was very slow in coming. The 2013 report optimistically reported that “the long-awaited housing recovery finally took hold in 2012.” The 2014 report, while less rose-tinted, still noted that “the housing market gained steam in early 2013.”
The 2015 report strikes a decidedly different and more alarmist tone by emphasizing that the housing recovery “lost momentum” as homeownership rates continued to fall. This report then chronicles the increase in the number of renters who are “cost-burdened” and cannot find affordable housing and the number of minority neighborhoods that still have not recovered from the recession.
Who’s struggling
While news sources have intermittently reported on housing affordability issues since the recession, what is new about the current affordable housing reports is who is struggling to find affordable housing. It’s no longer just millennials or the poor or homeless people.
Prior accounts have described the low homeownership rates of cash-starved millennials who live with their parents because of high student loan debt and low-wage jobs.
The recent New York Times article discusses former homeowners who are now forced to rent because they lost their homes to foreclosure and cannot qualify for a mortgage loan because of blemished credit. Likewise, the Washington Post article discusses middle- and even upper-income renters and the fact that many parents of millennials are now struggling to find affordable housing.
The JCHS report explains that homeownership rates for Americans aged 35 to 44 have now dropped to levels not seen since the 1960s. In describing the housing affordability crisis for renters, the report shows that from 2004 to 2014, older Americans (aged 45 to 64) became renters at greater rates than millennials households under the age of 35.
Today’s rental crisis
Housing affordability is no longer limited to the lowest-paid workers. The JCHS report stresses that renters whose earnings place them in the highest-income quartile now account for more than 20% of new renters.
Renters are no longer the low-income, working-class Americans typically featured in news reports. Today’s rental crisis is now affecting just about everyone but the really rich.
The Wall Street Journal article assumes that policymakers are either blissfully unaware of the affordable housing crisis, or they are unwilling to do anything about it.
Politicians have not been willing to make changes to popular housing laws or policies that benefit upper-income homeowners, like the mortgage interest deduction. And they haven’t been willing to provide additional relief to lower-income renters by, for example, expanding the low income tax credit.
Politicians may be unwilling to do anything to solve the affordable housing crisis. But, after these recent reports, they can no longer say they don’t know the crisis exists.
Author: Mechele Dickerson, Professor of Law at University of Texas at Austin
A gradual hike in interest rates would increase the cost of borrowing for US companies, likely resulting in lower profits and slower growth, according to Fitch Ratings.
But while higher rates would cause some discomfort, Fitch continues to believe a gradual rise would have limited impact for U.S. corporate credits as a whole, given the offsetting backdrop of US economic growth and aggressive refinancing by most corporates over the last few years that has resulted in maturities being pushed out with low-coupon, long dated debt.
In contrast, under our stress case scenario, rapid interest rate increases by the Federal Reserve would put additional pressure on credit metrics and could prompt more rating changes. Our stress case scenario includes more rapid rate increases, a choking off of near-term credit, a flattening of the yield curve and a spike in inflation. Against a backdrop of increased M&A activity, interest rate pressure could also impair the financial flexibility of buyers as acquisitions become more expensive to finance.
The ability to handle interest rate increases varies by corporate sector. U.S. Corporate sectors with cost recovery mechanisms (utilities, master limited partnerships (MLPs)) or strong pricing power (aerospace and defense, engineering and construction) are generally among those best able to counter the challenges in the stress case stemming from faster rising inflation and interest rates, while sectors with limited pricing power(such as homebuilders) may encounter more issues.
The secondary effects of a stress scenario are also important, as rising rates in a stagnant economic environment are likely to dampen equity values. Sectors where ongoing access to capital markets is critical for funding growth (REITs and MLPs) are likely to be especially sensitive to the stress scenario, given their high distributions and limited ability to retain cash.
According to the FED, industrial production decreased 0.2 percent in May after falling 0.5 percent in April. The decline in April was larger than previously reported, but the rates of change for previous months were generally revised higher, leaving the level of the index in April slightly above its initial estimate. Manufacturing output decreased 0.2 percent in May and was little changed, on net, from its level in January. In May, the index for mining moved down 0.3 percent after declining more than 1 percent per month, on average, in the previous four months. The slower rate of decrease for mining output last month was due in part to a reduced pace of decline in the index for oil and gas well drilling and servicing. The output of utilities increased 0.2 percent in May. At 105.1 percent of its 2007 average, total industrial production in May was 1.4 percent above its year-earlier level. Capacity utilization for the industrial sector decreased 0.2 percentage point in May to 78.1 percent, a rate that is 2.0 percentage points below its long-run (1972–2014) average.
Probably not enough negative news to hold off on interest rates rises in the US later in the year, but was enough to drive the markets lower overnight.
From The Conversation. Last month’s US employment report, released on Friday, contained a lot of good news.
First, monthly jobs growth exceeded expectations, as employers hired 280,000 people. Second, the labor force participation rate ticked up, indicating that people who had stopped looking for work were becoming more optimistic about finding a job and thus had resumed their search for one.
Finally, average hourly earnings for all production and non-supervisory workers in the private sector grew by 2%, compared with May 2014.
Some people may question why wage growth of 2% would be considered good news. The reason is there was no rise in prices over that period, so the average real wage also grew by about 2%. And it is the real wage, rather than nominal pay without accounting for inflation, that ultimately determines the living standards of the American worker.
While the first two highlights from the jobs report are indeed good news, this last one might be its most important takeaway – though it’s been true for a few months now. We’ve been reading articles for years about how stagnant wages have been without focusing on the impact of the lack of inflation. In other words, while we’re not making a lot more money, it should feel like more because consumer prices have barely budged since the financial crisis – by that measure, wages for most workers are the highest they’ve been in decades.
This matters because it suggests the economy is in better shape than we think and may be what the Federal Reserve has in mind as it considers raising rates this year, with many (including the International Monetary Fund) urging the central bank to wait until 2016.
One of the biggest risks, however, concerns productivity, which is truly stagnant. That and take-home pay are highly correlated, so if productivity doesn’t pick up, the rise in real wages may well evaporate.
The real wage story
The consumer price inflation data for May will not be released until later this month, so the balance of this essay will focus on the real wage rate in the private sector through April – although I would not expect the story to change once we can evaluate the latest data. (Hourly wage data for government workers are not available.)
I would also like to focus on the economic prospects of middle- and lower-income workers, so I will be looking at the earnings of those in production and non-supervisory roles. This group accounts for 82% of all private sector workers, who on average earned US$20.91 an hour in April.
The average hourly real wage for this group since 2007 is shown below (converted to April 2015 dollars). The shape of this graph undoubtedly will surprise many readers given the widely held believe that the middle class has been falling behind economically.
Real wages are now the highest since 1979.Bureau of Labor Statistics
The average hourly real wage did decline during the “Great Recession” and again in 2011 and 2012, but since falling to its recent low of $20.17 in October 2012 it has increased, first at a modest pace and then more rapidly since September as price inflation disappeared.
Perhaps even more surprising for most people is that the average real wage for these employees is now at the highest level since March 1979, although it is still 8.2% below the all-time peak ($22.27) reached in January 1973.
The average real wage for middle-class workers declined during the second half of the 1970s, the 1980s and the first half of the 1990s, reaching a low of $17.97 in April 1995 (data go back to 1964). Since then, wages have tended to slowly increase, with the largest gains when price inflation disappears and the greatest losses occurring when it spikes upward.
Widespread gains
That brings us back to the most recent figures. During the 12 months through April, average hourly real earnings for production and non-supervisory workers increased by 2%. These wage gains are fairly widespread among industries, as is shown in this table.
Real wages are up across the board over the past year through April.Bureau of Labor Statistics
Moreover, the greatest wage gains occurred in some of the lowest-wage industries: in retail trade (up 2.3%), accommodations (4.6%), full-service restaurants (4.7%) and fast food restaurants (3.7%). Clearly some of the lowest-paid workers in America have enjoyed some very substantial real wage gains during the past year.
Real wage gains have also far outstripped productivity gains. From the first quarter of 2014 to the first quarter of this year (most recent data), labor productivity in the non-farm business sector increased by only 0.3%, compared with real wage growth of 1.9% for private sector production and non-supervisory workers over the same period.
The poor rate of productivity growth has been a feature of the current economic recovery. Over the past five years, from the first quarter of 2010 to the first quarter of 2015, output per labor hour has increased by only 2.8%, or 0.6% per year. Over the long run, productivity growth puts a cap on the maximum rate of growth in the real hourly wage rate – meaning if productivity doesn’t start rising, neither will wages.
Why real wage growth is poorly understood
So why are people so convinced that middle- and low-wage workers have been losing ground?
Many people point to the fact that the real hourly wage is less than it was in 1973, but that reflects the decline that occurred between 1973 and 1995. Since then, the average hourly wages have been on a slow upward trend, averaging 0.76% per year – not much, but positive all the same. And as I’ve shown, those gains accelerated in the past year year, with even larger ones in lower-wage industries.
Perhaps the recent wage gains have yet to sink into people’s consciousness, and thus their assessment of the economy will shortly improve. Also, millions of people are still unemployed or have dropped out of the labor force, and their income has not benefited from the increase in average wages.
Or perhaps people are unhappy because they are comparing their financial situation with higher-income households, who have done even better, although income inequality is only slightly worse than it was in 2000, when the middle class seemed much happier (see the excellent work of Berkeley’s Emmanuel Saez).
Or maybe it’s something as simple as our spending desires outpacing the growth in the real wage rate. People clearly were spending a lot of borrowed money through 2007, when the financial crisis sharply curtailed many people’s ability to borrow and spend.
What I do know, however, is that unless productivity growth improves, the real wage gains that the data show will prove fleeting. And then we really will be in a world of hurt.
Author – Donald R Grimes, Senior Research Associate, Institute for Research on Labor, Employment and the Economy at University of Michigan
A speech by Governor Lael Brainard at the Center for Strategic and International Studies, Washington, D.C. on “The U.S. Economic Outlook and Implications for Monetary Policy” suggests that whilst the US economic outlook is patchy, interest rates will rise.
This spring marks the end of the Federal Reserve’s calendar-based forward guidance and the return to full data dependency in the setting of the federal funds rate. So it is notable that just as policymaking is becoming more anchored in meeting-by-meeting assessments of the data, the data are presenting a mixed picture that lends itself to materially different readings.
No doubt, bad weather, port disruptions, and statistical issues are responsible for some of the softness in first-quarter indicators of aggregate spending. Indeed, it may be that the dismal estimate by the Bureau of Economic Analysis of the annualized change in first-quarter gross domestic product (GDP), negative 0.7 percent, is principally an extension of the pattern, seen for several years, of significantly slower measured GDP growth in the first quarter followed by considerably stronger readings during the remainder of the year. In that case, it would be appropriate to minimize the importance of the first-quarter estimate in judging the likely path of the economy over the remainder of the year.
But there may be reasons not to ignore the recent readings entirely. First, the limited data in hand pertaining to the second quarter do not suggest a significant bounceback in aggregate spending, which we would expect if all of the weakness in the first quarter were due to transitory factors. Private-sector forecasts of second-quarter growth are centered around 2-1/2 percent, while the Federal Reserve Bank of Atlanta’s GDPNow forecast, which was quite accurate in its prediction of the first estimate of first-quarter GDP growth, is projecting second-quarter GDP growth of only 0.8 percent.
Second, it would not be the first time this recovery has proceeded in fits and starts. The underlying momentum of the recovery has proven relatively susceptible to successive headwinds, which have kept overall economic growth well below the average pace of previous upturns.
My own reading is that earlier, more optimistic growth projections may have placed too much weight on the boost to spending from lower energy prices and too little weight on the negative implications for aggregate demand of the significant increase in the foreign exchange value of the dollar and large decline in the price of crude oil.
Based on today’s picture of moderate underlying momentum in the domestic economy and the likelihood of continued crosscurrents from abroad, the process of normalizing monetary policy is likely to be gradual. It is also important to remember that the stance of monetary policy will remain highly accommodative even after the federal funds rate moves off the effective lower bound, because the real federal funds rate will initially still be low and because of the elevated size of the Federal Reserve’s balance sheet and the associated downward pressure on long-term rates. Moreover, the FOMC has stated clearly that it will reduce the size of the balance sheet in a gradual and predictable manner starting at an appropriate time after liftoff, which will depend on how economic and financial conditions evolve.
In summary, the string of soft data in the first quarter raises some questions about the contours of the outlook. While it is possible that residual seasonality and temporary factors were responsible, it would be difficult, based on the data available today, to dismiss the possibility of a more significant drag on the economy than anticipated from foreign crosscurrents and the negative effects of the oil price decline, along with a more cautious U.S. consumer. This possibility argues for giving the data some more time to confirm further improvement in the labor market and firming of inflation toward our 2 percent target. But while the case for liftoff may not be immediate, it is coming into clearer view. When that time comes, the policy path will be highly attuned to incoming data and not on a preset course, and it is important to be mindful of the possibility of volatility as markets adjust to a change in the stance of policy. Thus, the FOMC will continue communicating as clearly as possible regarding the outlook and the factors underlying its policy determinations.
In a speech by Fed Chair Janet L. Yellen at the Providence Chamber of Commerce, Providence, Rhode Island, she outlined the state of play of the US economy. Whilst there are mixed signals, she affirmed that rates will begin to rise later this year.
Implications for Monetary Policy
Given this economic outlook and the attendant uncertainty, how is monetary policy likely to evolve over the next few years? Because of the substantial lags in the effects of monetary policy on the economy, we must make policy in a forward-looking manner. Delaying action to tighten monetary policy until employment and inflation are already back to our objectives would risk overheating the economy.
For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. To support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term.
After we begin raising the federal funds rate, I anticipate that the pace of normalization is likely to be gradual. The various headwinds that are still restraining the economy, as I said, will likely take some time to fully abate, and the pace of that improvement is highly uncertain. If conditions develop as my colleagues and I expect, then the FOMC’s objectives of maximum employment and price stability would best be achieved by proceeding cautiously, which I expect would mean that it will be several years before the federal funds rate would be back to its normal, longer-run level.
Having said that, I should stress that the actual course of policy will be determined by incoming data and what that reveals about the economy. We have no intention of embarking on a preset course of increases in the federal funds rate after the initial increase. Rather, we will adjust monetary policy in response to developments in economic activity and inflation as they occur. If conditions improve more rapidly than expected, it may be appropriate to raise interest rates more quickly; conversely, the pace of normalization may be slower if conditions turn out to be less favorable.
