IMF says global financial system showing signs of recovery

But risks remain

Risks to the global systems have subsided, the IMF said in its semi-annual Global Financial Stability Report, amid unprecedented policy actions around the world and recent signs of an economic recovery.

But the organization warned, “The road to financial rehabilitation is unlikely to be straight and that there will be significant policy issues ahead.”

The report indicated that actual and potential write-downs from bad assets such as loans and securities have fallen by some $600 billion over the past six months—from about $4 trillion to $3.4 trillion, as a lessening in financial stress has narrowed spreads.

Although write-down estimates are subject to considerable uncertainty, the analysis showed that the financial system is on the mend.

Nonetheless the GFSR stressed the need for banks to further repair damaged balance sheets by raising more capital. 

The GFSR estimates that commercial banks have already recognized $1.3 trillion through the first half of 2009, but face another $1.5 trillion of potential asset write-downs . U.S. banks have recognized slightly more than have those in the United Kingdom and euro area.

Because of the diminished capacity to lend, threats to the recovery remain, the IMF said.  More likely, a slow rebound in bank lending could hamper the global recovery.

Chicago PMI flounders

Volatility isn't cause for alarm

Following three-consecutive monthly gains, the Chicago Purchasing Managers Index fell from 50.0 in August to 46.1 in September, well below the forecast offered up by Bloomberg News of 52.0.

A decline like that would be a bit unsettling if it occurred in the ISM Manufacturing Index, but the Chicago PMI, which looks at manufacturers in the Midwest, is fairly volatile so such a pullback isn't that unsettling, in my view.

The overall trend in the Chicago PMI is still to the upside and tomorrow's release of the ISM Manufacturing Index, which is expected to rise from 52.9 to 53.5, will provide a clearer picture of what's been happening among manufacturers during September.

A reading of 50 marks the line between contraction and expansion for both surveys.

Consumer confidence comes under pressure

Retail sales rose broadly in August, signaling that the rise in consumer confidence since the beginning of the year was finally trickling down to spending patterns.

However, today’s release suggests economic headwinds that still prevail weighed on sentiment in September.

The Conference Board reported consumer confidence fell from 54.5 in August to 53.1 in September, missing the Bloomberg forecast of 57.0.

 

 

 

 

 

The Present Situation Index decreased, as consumers viewed both current business conditions and the labor market less favorably than last month.

“While not as pessimistic as earlier this year, consumers remain quite apprehensive about the short-term outlook and their incomes. With the holiday season quickly approaching, this is not very encouraging news," according to the director of The Conference Board Consumer Research Center.

Though off the lows previously set, consumer confidence has been stuck in a narrow range since May amid rising unemployment and worries about the job market. 

Jobless claims have been gradually coming down and a continuation of this trend should eventually lend support to consumer confidence.

Still, consumer spending is likely to face stiff headwinds amid job losses and weak growth in personal income.  And it seems unlikely that born-again savers will suddenly backslide, dipping into newly-created bank accounts.

Consequently, the economy recovery is likely to be a gradual one.

Germany’s business climate continues to brighten

The rate of growth slowed in September but Germany’s business climate continued to improve, rising for the sixth consecutive month.  The IFO Business Climate Index increased from 90.5 in August to 91.3 in September, the best reading in one year.

The survey of 7,000 business in Europe’s largest economy suggests that the slow recovery will continue amid improvement in global conditions.  Germany’s economy is dependent on exports, and the dearth of demand late last year and early this year hit GDP very hard.

Unexpected dip in existing home sales

A housing rebound is critical if the nascent economic recovery is to develop into a more permanent expansion.  Today’s decline in existing home sales is a letdown, but following four-consecutive monthly gains, it shouldn’t come as too much of a surprise.

The National Association of Realtors reported today that existing home sales declined 2.7% to a seasonally-adjusted annual rate of 5.10 million units in August, giving back some of July’s outsized gain.

“The first-time buyer tax credit is having the intended impact of bringing buyers into the market, allowing them to take advantage of very favorable affordability conditions,” NAR chief economist Lawrence Yun said.

“Some of the give-back in closed sales appears to result from rising numbers of contracts entering the system, with some fallouts and a backlog contributing to a longer closing process, but the decline demonstrates we can’t take a housing rebound for granted.”

Lobbying for an extension of the first-time home buyer tax credit, Yun went on to say that he anticipates a rise in foreclosures over the next 12 months and a healthy level of ready buyers to absorb the expected inventory is needed.

Yun is probably correct as the credit has been one of the few effective tools in the president’s stimulus package.  Rates remain near historic lows and affordability has also provided an incentive for reluctant buyers.

Washington should carefully consider whether it really wants end the credit.

Jobless claims heading in the right direction

Weekly jobless claims fell 21,000 in the latest week to 530,000 as the economy finally begins to generate a degree of confidence among businesses.

Yes, layoffs are still too high but are definitely trending in the right direction.

Fed gives green light to recovery

Ben Bernanke didn't say that the fragile recovery is expected to turn into a robust expansion, and few if any pundits anticipated such language. But for the first time in many Fed statements, policymakers acknowledged that "economic activity has picked up following its severe downturn."

And with "substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time," which is a clear signal that the FOMC won't be removing the massive amounts of stimulus that are supporting economic activity anytime soon.

But what the Fed did say is that it will slow its previously-announced purchases of agency-backed securities in order to promote a smooth transition in the financial markets because an abrupt end to such purchases could send bond prices much lower and force a spike in mortgage rates.

Since the housing recovery is critical to the economic recovery, the Fed would like to see mortgage rates stay near current levels. Coupled with the first-time home buyer tax credit and lower prices, the necessary ingredients are in place to further gains in housing sales and prices.

Mortgage applications rise in latest week

Falling mortgage rates are helping create a renewed interest in refis, while  the upward trend in the Purchase Index is confirming that the housing market has likely hit and rebounded from the bottom.

In the latest week, the US Mortgage Bankers Association reported the Purchase Index increased 5.6% and the Refinance Index gained 17.4%.

In recent weeks the US MBA has not reported the level of the indices, just the percentage changes, and the charts are based on those movements provided by the organization.

The US MBA also noted that for the first tine since mid-May, rates on a 30-year fixed dipped below 5%. The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.97% from 5.08%, with points increasing to 1.12 from 0.98 (including the origination fee) for 80 percent loan-to-value ratio loans.

With rates at historically low levels, and the first-time home buyer tax credit set to expire in just over two months, potential home buyers are being given excellent incentives to move  back into the market.

Moreover, prices have fallen from highs set a couple of years ago and in some markets are down significantly.

Two-day Fed meeting begins today

The Federal Open Market Committee (FOMC), the policy-making arm of the Fed, begins its two-day meeting today without any of the drama surrounding prior gatherings when a potential rate change is a possibility.

In my view, we'll have to see rising employment before the Fed takes any action on its key lending rate.

What we will be looking for is any adjustments to August's policy statement that "economic activity is leveling out." Since Fed Chief Ben Bernanke is now on record as saying that the recession is likely over, we'll probably see language reflecting his recent optimism.

Core inflation, the CPI less food and energy, is still in a downward trend and there is plenty of slack in the economy, so the Fed is not yet under pressure to tighten in order to head off rising inflation.

In the meantime, we may see more hints about how policymakers may be prepared to eventually withdraw the heavy amounts of monetary stimulus in the system. Of particular interest will be whether the Committee makes any adjustments to its plan to purchase government securities.

Data have been upbeat lately, but Treasury prices and mortgage rates have been fairly stable. Keeping rates low has lent a fair amount of assistance to the troubled housing industry, and the Fed doesn't want to see a spike in rates choke of nascent demand.

Housing momentum continues

Historically-low mortgage rates, stabilizing but still-low prices, and a first-time home buyer tax credit all combined to provide a lift to housing starts, while the more forward-looking building permits continued to move ahead.

Housing starts in August grew 1.5% from June’s upwardly-revised figure to 598,000 annualized units.  Starts are now up four-consecutive months after  hitting a low in April of 465,000 units, though single-family homes eased slightly.

Building permits, which provide an indication of future activity, increased a modest 2.7% to 579,000 units.

Builder confidence edge up based on yesterday’s Housing Market Index but some construction outfits are looking cautiously past November 30, when the $8,000 tax credit for first-time home buyers is set to expire.

Recovery led by manufacturing, housing

Time for Washington to make changes in stimulus

Manufacturing and housing have been doing much of the heavy lifting during the early stages of the economic recovery. Home sales are up, housing starts have risen, and the latest surveys on manufacturing (see the Empire and Philly Fed) are signaling a robust recovery among goods producers as companies move to replenish inventories.

Now it's up to the consumer to lend a heavy hand. In my view, it’s time for Washington to provide some assistance by revoking many of the bloated spending measures that were part of the $787 billion stimulus bill and providing tax incentives for businesses and individuals.

If consumer spending does not kick in and the U.S. economy must rely on overseas demand for growth, the recovery will likely take a U-shape and unemployment will remain painfully high.

The first-time home buyer tax credit and cash for clunkers (with all of its problems) have been among the few bright spots of the stimulus package. It’s time to duplicate those measures.

Philly Fed points to solid rebound in manufacturing

Following Tuesday’s release of the Empire Manufacturing Index, the a closely-watched measure of factory output in the mid-Atlantic region is providing fresh evidence that manufacturing is in the midst of a solid rebound.

The Philly Fed’s Business Activity Index increased from 4.2 in August to 14.1 in September, the best reading since June 2007. A reading of zero marks the line between contraction and expansion.

New orders, however, eased slightly, and employers reported that employment continues to decline, falling from –12.9 to –14.3.

Looking ahead, the future general activity index remained positive for the
ninth consecutive month but decreased from 56.8 in August to 47.8. This isn’t too much of a surprise and should not be viewed negatively since the index recently approached a cyclical high as viewed by the chart above.

Slow progress on the jobs front, weekly claims fall

Progress is slow and last week’s figure was revised upward, but weekly jobless claims are on a gradual downward path.  Weekly initial jobless claims fell by 12,000 in the latest week to 545,000 and the 4-week moving average dipped 8,750 to 563,000.

The trend in weekly claims signals that firms are becoming less pessimistic, but many establishments continue to pare back payrolls at levels that are still unacceptably high.

Continuing claims jumped 129,000 to 6.23 million, reflecting the difficulty the unemployed are having finding work. However, the figure has been muddied somewhat by those who are losing their standard benefits of six month and are no longer counted in the continuing claims figure.

Many qualify for the government’s emergency extension.

For additional information, see Economy 101: What are weekly jobless claims?

Rising industrial production sends message of recovery

Following an upwardly revised 1.0% jump in industrial production in July, factory output increased another 0.8% in August, signaling that manufacturing may be getting set for a fairly robust recovery.

The cash for clunkers program, which helped clear out bloated inventories, played a role, but production was solid across a number of sectors.

The rise in production lifted capacity utilization from 69.0% to 69.6%. So there is still plenty of slack in the economy and very little upward push on wages - that's bad for spending and savings but bodes well for inflation in the short and medium term.

Therefore, the Fed is feeling very little pressure to raise interest rates, and probably won't budge on the fed funds rates until it sees solid growth in jobs.

Housing Market Index hits 19-month high

Builder confidence improved for the third-straight month as the NAHB/Wells Fargo Housing Market Index increased from 18 to 19, the highest level in 19 months. The reading is still well below 50, which marks the line between optimism and pessimism but the trend is clearly showing that prospective new home buyers are wading back into the market.

The first time home buyer tax credit is creating some of interest while, low mortgage rates and improved affordability (falling prices) have also helped to create a firm foundation for housing.

"The component gauging sales expectations for the next six months slipped backward this month is a sign of their (builders) awareness that this is a very fragile recovery period and several major hurdles remain that could stifle the positive momentum," the chief economist for the NAHB said.

The NAHB also complained that a "critical lack of credit for housing production loans and continuing problems with low appraisals that are sinking one quarter of all new-home sales."

Groups tied to home builders have been lobbying Congress to extend the $8,000 tax credit for first-time home purchasers amid worries that demand could fall off after the credit expires.

Retail sales gallop ahead

Thus far, the recovery had been mostly confined to housing and manufacturing, while the service sector has generally stopped contracting and is showing signs of stabilizing.

Retail sales are part of the very broad service sector, with consumer spending account for 70% of economic activity.

High unemployment and stagnant incomes, coupled with Americans’ desire to repair damaged balance sheets, have limited gains in retail sales for much of the year.

But with consumer confidence in a general upward trend and the cash for clunkers program boosting car sales, retail sales surged 2.7%, and ex-autos, sales were up an impressive 1.1%.  Even if a surge in gasoline station sales caused by a spike in gas price is removed, sales still gained a solid 0.6%.

Sales are unlikely to move higher in a straight line, but August’s numbers are encouraging an may finally be signaling that one of the final pieces to the recovery puzzle is falling into place.

The economy now needs to tackle rising unemployment.

Semiconductors growing nicely

A little noticed report recently highlights  the rebound and strength in semiconductors. Worldwide sales increased 5.3% in July to $18.2 billion, according to the Semiconductor Industry Association.

“The fifth-consecutive month of sequential increases in semiconductor sales reflects  improving demand in the consumer sector,” said SIA President George Scalise.

“Sales of consumer products such as netbook PCs and cell phones are supporting the modest recovery in demand that is now under way. Purchases of Information Technology products by the enterprise sector continue to be tempered by caution and longer replacement cycles.

There is also evidence of a return to seasonal industry patterns,” Scalise concluded.

Manufacturing has been turning up recently and semiconductors are among the bright spots.

IMF says governments need to shed crisis assets

Having propped up the financial system during the global crisis, governments now need a plan to dispose of the assets they took over and reduce their greatly enlarged risk exposures, according to an IMF study.

The study points out that, contrary to popular opinion, support to the financial sector has so far had only a limited impact on deficits. Other stimulus measures have been far more important. But the interventions mean that governments’ risk exposures have risen sharply.

Energy boosts headline PPI, core remains tame

An 8% jump in energy prices and a 0.4% increase in food prices pushed the Producer Price Index up 1.7% in August, more than erasing July's 0.9% decline. The core rate, which removes the more volatile food and energy categories, increased a modest 0.2%.

As the economy pulls out of the worst recession in 70 years, there is little in the way of inflation at the wholesale level. Year-over-year, core prices eased from 2.6% to 2.3%, while the headline PPI registered a 4.3% decline.

With plenty of slack still in the economy and wages barely budging, inflation is unlikely to be much of an issue at least through the remainder of 2009 and probably well into 2010. The only item that may squeeze profit margins is the recent rise in commodity prices, but gains in productivity should mitigate much of this concern.

2011 and 2012 become much more problematic given that huge amount of stimulus still in the system.

Empire manufacturing pushes ahead

Goods producers continues to rebound as evidenced by the latest survey of regional manufacturing.  The Empire Manufacturing Index, which looks at conditions in New York, increased 7 points in September to 18.9, the best reading since late 2007. 

A level of zero marks the line between expansion and contraction.

Looking ahead, the future indexes were generally positive and near last month’s levels. The future general business conditions index rose 4 points, to 52.3, a level last reached in 2004.

Coupled with today’s robust retail sales figure, the economy appears poised to post positive numbers in 3Q.  And manufacturing may be looking more at a V-shaped recovery as companies replace depleted stockpiles.

But it will take a more concerted effort by shell-shocked consumers if what appears to be shaping up as a fairly upbeat recovery in manufacturing continues into next year or moderates.

Bank of Canada looks to global recovery

Late last week, the Bank of Canada held the target for its overnight rate at 0.25% and said, "Recent indicators point to the start of recovery in major economies, supported by aggressive policy stimulus and the stabilization of global financial markets."

Stimulative monetary and fiscal policies, firmer commodity prices, and a rebound in business and consumer confidence are supporting domestic demand growth in Canada, the bank said. GDP growth in the second half of 2009 could be "stronger than the Bank projected in July."

The U.S. consumer is still holding back amid high unemployment and worries that the unemployment rate could creep past 10%, but gains around the world, including its major trading partner to the north, bode well the world's largest economy.

Wholesale inventories still on downward path

Sales have increased for several months in a row, including a respectable 0.5% rise in July. But manufacturers remained extremely cautious when it came to rebuilding stockpiles, with wholesale inventories falling a steep 1.4%.

That brought the inventories-to-sales ratio down to 1.23 from 1.26, which means it would take businesses 1.23 months to liquidate their goods on hand.

We are seeing gains in industrial production, and August’s release this week is expected to reveal a healthy increase.  And regional and national surveys of manufacturing are signaling a turnaround in the sector. 

But companies are taking a slow approach and we will likely see more destocking before businesses ramp up idle assembly lines.

Consumer sentiment signals gains in economy

The University of Michigan’s survey of consumer sentiment improved from 65.7 in August to 70.2 in September, according to preliminary data.

Most economic indicators are pointing to a rebounding economy but consumer sentiment has been lagging amid rising unemployment.

Economic recovery produces wider trade gap

It appears that the best news on the trade deficit is behind us as the U.S. economy slowly begins it upward march.

Why?  Improving demand at homes likely means improving demand for goods overseas.  The deficit fell sharply as imports of goods from overseas fell amid the slumping economy, while the steep drop in oil prices cut the nation’s bill for crude oil.

Consequently, the worst recession since the 1930s did produce what no amount of quotas and tariffs could ever hope to do: help the nation’s balance of payments.  However, the country has paid a steep price.

Weekly jobless claims post decline

Weekly initial jobless claims fell 26,000 in the latest week, better than the consensus estimate provided by Bloomberg News of 565,000., while the 4-week moving average dipped 2,750 to 570,000.

The decline is welcome news as weekly jobless claims have remained at uncomfortable levels. This may be because much of the rebound is concentrated in housing and manufacturing, while the broad-based service sector has been more sluggish.

Witness the ISM non-Manufacturing Index, which indicates the contraction is easing but is yet to move into expansionary territory.

Continuing claims did drop a steep 159,000 to 6.1 million, but it appears that much of the drop may have occurred because the standard six months of benefits have expired and not because unemployed workers have gained new employment.

Fed's Beige Book indicates recession has ended

The Fed's Beige Book, a summary of economic activity in each of the Fed's 12 districts, indicates that economic activity continued "to stabilize in July and August." Comments from the various districts included "improvement, firmed, and stabilization."

Labor market conditions remained weak across all districts, but several also noted an uptick in temporary hiring and a decline in the pace of layoffs. Most districts reported flat retail sales, while housing prices continued to decline in most places.

Job openings provide little comfort

The economy is starting to rebound but the labor market is not yet responding. The Job Openings and Labor Turnover (also known as JOLT) showed that the number of job openings in the U.S. was little changed at a series low level of 2.4 million at the end of July, the Bureau of Labor Statistics reported.

It's probably going to be sometime near the end of the year or next before the economy starts consistently generating new jobs, and much depends on the strength of the recovery.

Global PMI moves above 50

With all the bad news we continue to see in the labor market (yes, the trend is favorable but 200,000+ declines in payrolls for 12-consecutive months highlights the severity of the recession), I wanted to take a moment to point out another batch of decent news.

Yesterday, the JPMorgan Global All-Industry Index jumped from 48.2 in July to 52.1 in August, the first time it has been above 50 - the line that marks contraction and expansion - since May 2008 and the highest level since December 2007, when the U.S. economy first entered the recession.

"The manufacturing sector continued to lead the rebound in global economic activity. Manufacturing production levels rose for the third month running and to the greatest extent since April 2006. Meanwhile, service sector activity rose slightly for the first time in fifteen months," the survey revealed.

The U.S. consumer remains unconvinced and companies continue to shed employees. But after watching the global economy go into a free-fall late last year, it is heartening to see the economy begin to rebound.

Job losses mount, unemployment rate at 26-year high

Companies shed another 216 payrolls in August and the unemployment rate jumped from 9.4% to 9.7%, the highest level since the 1982 recession.

The economy is moving forward but uncertainty and a focus on the bottom line continues to force job cuts.

More is available on what is starting out as a “jobless recovery” at Examiner.

Natural gas bubbles over

There’s plenty of natural gas in storage as the country nears the end of summer.  Coupled with weak industrial activity, prices are holding at multi-year lows.

Earlier today, the Energy Information Administration reported that supplies increased 65 billion cubic feet to 3,323 bcf in the last week, which is 489 bcf higher than last year at this time and 501 bcf above the 5-year average.

Unless a major hurricane in the Gulf of Mexico disrupts production or we have an early and frigid start to winter, home owners who rely on natural gas to heat their homes should get a pleasant surprise when they open their heating bills this winter.

And that will provide consumers with extra cash to either spend, save, or pay down debt.

Weekly jobless claims stuck at high altitude

We’ve been seeing a number of signs that the economy is on the mend.  Housing is in an upward trend and manufacturing has begun to improve. 

However, consumers remain reluctant to spend and the broader-based service sector has lagged and remains below 50. See chart below.

Hence, we haven’t seen the improvement in weekly jobless claims that would signal a more robust recovery.

Details available at Examiner.com.

Baltic Dry Index flashing yellow

A recent article in the Financial Times indicated that  the world’s largest commodity trading houses have turned upbeat on economic growth, signaling firmer raw materials prices in the second half of the year.

After peaking at 615 in July 2008, the CRB’s Continuous Commodity Index fell 48% to a three-year low in December before beginning a rally that has been driven by demand from China and speculation that the world economy is set to recover.

Strength in commodity prices is a strong sign that demand around the world is picking up, though some of the increases may be traced back to speculators who are also betting on a global recovery.

Much of the economic data in the U.S. are flashing green, and China’s GDP took off in 2Q, but not all forward-looking indicators are signaling a global recovery is at hand.

That brings us to the Baltic Dry Index. The Baltic Dry Index tracks shipping rates for various dry bulk cargoes, which includes many raw materials.

Not surprisingly, shipping rates are based on supply and demand.

After peaking at nearly 12,000 in May 2008, prices literally collapsed, and the Baltic Dry Index settled around 670 six months later, or a whopping 95% drop in prices!

Clearly, the magnitude of the drop underscored the severity of the global recession in manufacturing that followed the demise of Lehman Brothers and the seizing up of credit markets.

Prices rebounded nicely as China resumed the importation of raw materials, but after peaking in early June, the Baltic Dry Index is 40% off its peak.

The decline suggests a note of uncertainty is in the air because the index is difficult to manipulate.  Moreover, weakness in shipping rates for raw materials may be signaling sluggish demand, which may be a sign that the rally in commodity prices could stall. 

Whatever the end result, the drop in the Baltic Dry Index bears watching.

Pending home sales in upward trend

Pending  home sales increased by 3.2% to 97.6 in July, the sixth-consecutive monthly gain and the longest winning streak since the index  began back in 2001.

Pending home sales are contracts for existing homes that have been signed but not yet closed, and it is designed to forecast existing sales about two months out.