AUGUST 20, 2010

By John Suter, Vice President, Capital Market Funding

With the market outlook continuing to look tame for both short- and long-term interest rates, corporate bond issuance has gained momentum. Traditionally, September is heavily laden with bond issuance, and this year will be no different as corporations emerged from black-out earnings periods.

Companies are looking to solidify their balance sheets and lower their interest cost, which will help prop up profits and stimulate economic activity and hiring down the road. Large corporate issuers like Kimberly Clark, McDonald’s, IBM and Wal-Mart launched issuances at (or near) all-time lows. Interest rates on investment-grade corporate bonds recently averaged just 4 percent, according to Barclays Capital, the lowest in more than six years, and just 1.7 percentage points above relatively risk-free Treasury debt.

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Consumer Prices Rise in July

The consumer price index (CPI) rose 0.3 percent in July—the first jump since March—meeting economists’ expectations.

Higher energy costs helped lift consumer prices: Energy prices increased 2.6 percent, on the heels of a 2.9-percent drop in June and a negative streak dating back to January. Food prices fell 0.1 percent, which was mainly the result of continued weakness in fruit and vegetable prices.

Source: Bureau of Labor Statistics

Year-over-year, CPI rose from 1.1 percent in June to 1.3 percent in July. Overall, inflation at the consumer level remains in check. There are, however, risks of deflation going forward as sluggish job and income growth will discourage businesses from raising prices. Deflationary expectations are likely to hold if the economy remains weak or worsens.

Producer Price Index Rises

Producer prices for finished goods rose 0.2 percent in July as prices for food and energy goods climbed 0.7 percent, easing deflation concerns. July’s producer price index (PPI) gain matched expectations and follows two consecutive declines of
0.5 percent and 0.3 percent in June and May, respectively.

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AUGUST 6, 2010

Economic Growth Slowed During Q2

U.S. economic growth slowed during Q2 due to a rising trade deficit and an easing in consumer spending. According to initial estimates, gross domestic product (GDP) expanded at a 2.4-percent annualized rate during Q2, a marked slowdown from Q1’s upwardly revised 3.7-percent pace. The data indicate the economy continues to expand, albeit at a slower pace relative to recent quarters.

Consumer spending, which accounts for approximately 70 percent of the economy, rose at a 1.6-percent pace in Q2, compared with a 1.9-percent rate in Q1. The relatively subdued pace of consumption indicates that weakness in the labor markets and tight credit conditions are continuing to restrain consumer spending. The core personal consumption expenditure (PCE) price index, the Federal Reserve’s preferred measure of inflation, rose at an anualized rate of just 1.1 percent during Q2, down slightly from 1.2 percent in Q1.

The U.S. economy has now expanded for four straight quarters, resulting in a 12-month growth rate of 3.2 percent—the largest year-over-year increase since Q1 2005. But annual revisions to GDP revealed a much deeper recession than previously thought, with the economy shrinking 4.1 percent from Q4 2007 to Q1 2009; this compares with an original estimate of -3.7 percent. Future growth is expected to remain positive but weak until demand fundamentals improve.

Employment Cost Data Reflect Slow Wage Growth

Total compensation costs for civilian workers inched up 0.5 percent for the three-month period ending June 2010, matching market expectations. The Employment Cost Index comprises wages and benefits, with wages accounting for 70 percent of employment costs. Wages increased 0.4 percent in Q2 for both private and public sectors. Benefit costs in the private sector grew 0.6 percent as a result of rising health benefit costs; this was much lower than the 1.1-percent increase reported in Q1. Benefit cost growth has been weak as companies have passed along health insurance costs to employees.

Annualized total compensation growth was 1.9 percent—the fastest pace since Q1 2009. Total private-sector compensation costs rose 1.9 percent in the 12-month period ending June 2010, unchanged from the same period a year earlier. Private-sector wages and salaries increased 1.6 percent over the past 12 months, the same amount as a year earlier. Private-sector benefit costs increased 2.5 percent compared to 2.3 percent a year earlier.

Due to the weak labor market, wage, salary and benefit growth rates have been falling, which is one reason why consumption remains weak. Compensation growth is expected to grow at a modest pace for the rest of 2010.

Manufacturing Growth Slows in July

The Institute for Supply Management’s (ISM) manufacturing index declined 0.7 points to 55.5 in July as the growth in manufacturing, which has led the economy out of recession, slowed further. July’s decline marked the third consecutive monthly drop, putting the index at its lowest level since December 2009. Although growth has decelerated recently, the reading above 50 indicates expansion is continuing. Declines in new orders, production and imports were drags on the top-line number while employment, exports and inventory added to growth.

While the increase in the employment component is promising, the decline in imports is concerning since it reflects a drop in consumer spending. Economists remain concerned that consumer demand needs to improve further before economic growth can be sustained.

Manufacturing has accounted for about 15 percent of the total increase in private employment this year and may have added 30,000 jobs during July. Manufacturing’s contribution to growth is expected to continue to be positive going forward as companies take advantage of strong profits and hire more workers.

Factory Orders Continue To Fall

The manufacturing sector’s expansion continued to slow as factory orders fell 1.2 percent in June—the second straight monthly decline. Leading the decline was lower demand for steel, construction machinery and aircraft.

The durable goods component of new orders was down 1.2 percent, while new orders of non-durable goods fell 1.3 percent. The past two monthly declines follow nine straight months of increases. With manufacturing now starting to slip, concerns are growing about a slowing economy in the second half of the year.

JULY 30, 2010

Home Resales Dip

Source: National Association of Realtors

Existing home sales fell 5.1 percent in June to a seasonally adjusted annual rate of 5.37 million units—the weakest pace since March. June’s sales drop was better than Wall Street had expected; however, the consensus forecast had called for a 9.9-percent drop. Year-over-year sales were up 10 percent.

Inventories rose 2.5 percent to 3.99 million in June—an 8.9-month supply at the current pace of sales and the highest level since August 2009. Supplies are soon expected to reach 10 months, and home prices will deteriorate further if inventories remain high.

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JULY 16, 2010

FINANCIAL FEATURE

By Josh Silverman, Director, Term Funding & Risk Management

Even though the Federal Reserve continues to hold short-term interest rates at a range of zero to 0.25 percent and the economy is growing, the overall availability of credit continues to be tight—especially for small businesses and consumers. Fed Chairman Ben Bernanke is particularly concerned about the lack of available credit for small businesses, which account for about 60 percent of job creation.

In a speech at the Fed’s forum on restoring credit to small businesses, Bernanke said the scarcity of credit is slowing the economic recovery and keeping the unemployment rate close to 10 percent. During a typical recovery, small businesses create jobs at a faster pace than large firms. That has not recently been the case, in part because many small businesses cannot get loans.

In his prepared remarks, Bernanke said “making credit accessible to sound small businesses is crucial to our economic recovery and so should be front and center among our current policy challenges.” Bernanke also noted that “the formation and growth of small businesses depends critically on access to credit.” According to a recent bank survey by the Fed, however, lending standards among local banks—the lending institutions that small businesses rely upon—remained restrictive during the first quarter. Interestingly, the survey also revealed that major banks eased loan conditions to large firms during the first quarter, indicating that credit for big, investment-grade companies is becoming more available.

Banks say they are restricting credit because of an uncertain regulatory climate pending the passage of the U.S. financial reform bill and the likelihood of new capital requirements from international regulators. Additionally, some lenders have said current lending standards reflect more normal conditions following a period of lax standards. Demand for credit also has been depressed, with a still-fragile economy making many small businesses reluctant to hire and invest. It is a challenging cycle, as credit availability needs to improve in order to stimulate the recovery; but weak economic fundamentals are making cautious lenders less willing to supply credit.

JULY 16, 2010

The Institute for Supply Management’s (ISM) manufacturing index fell from 59.7 in May to 56.2 in June—a much lower reading than expected. A reading above 50 signals growth, but the large drop in the index indicates factory-sector expansion is starting to lose momentum.

The new orders index, which is typically used as a gauge of future demand, declined from 65.7 to 58.5 as activity in the machinery and wood products industries dropped off. This signals cutbacks in production in the second half of this year. Weaker demand for wood, apparel and leather products brought the production index down from 66.6 to 61.4, but the index remains strong, supporting employment. The employment index fell to 57.8 but still remains in expansion territory. The inventory index moved up slightly to 45.8 from 45.6, while customer inventories rose six points to 38. The prices-paid component dropped 20.5 points to 57 as a result of lower energy prices.

Source: Institute for Supply Management

Overall, there is a slowing growth trend in the manufacturing sector, but there are no signs of contraction—suggesting the industry is easing into a more sustainable pace of growth.

Service Sector of Economy Slips

The service sector expanded at a slower pace in June, with the ISM non-manufacturing index falling to 53.8 from 55.4 in May.

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JULY 2, 2010

By Josh Silverman, Director, Term Funding & Risk Management

A few months ago, U.S. financial market conditions appeared to be in good shape and the economy was showing signs of improvement. Then problems began to surface abroad. Greece came to the brink of default on its debts, and it seemed other European countries were not too far behind. What has since become known as the European Sovereign Debt Crisis has been the catalyst behind a significant deterioration in financial market conditions and a surge in volatility. After peaking at 11,205 on April 26, the Dow Jones Industrial Average has plummeted more than 1,400 points to close at 9,774 on June 30.

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JULY 2, 2010

Consumer Confidence Drops

Source: Conference Board

Consumer confidence plunged in June, indicating consumers remain concerned about the outlook for employment, income and the economy’s overall prospects. The Conference Board’s index of consumer confidence fell 10 points in June to 52.9 from a revised 62.7 in May. That was the biggest drop since February. Both components of the index dropped. The Present Situation Index fell to 25.5 from 29.8; the Expectations Index—an assessment of consumer sentiment toward the economy over the next six months—declined to 71.2 from 84.6.

The decrease in confidence is a sign that consumers are still hesitant to spend as the economy slowly recovers. Based on current standings, economists predict that improvements in confidence will take time, with higher levels not expected until early next year. The key drivers for an improvement in confidence, which should result in improved consumer spending, will be a pickup in the labor and housing markets, and an end to the oil spill crisis affecting in the Gulf Coast—a region that has seen an exacerbated decline in confidence.

First-Quarter Growth Revised Lower

The U.S. economy grew at a slower-than-expected rate in the first quarter, putting the health of the economic recovery in question. Annualized Q1 gross domestic product (GDP) growth fell to 2.7 percent from a prior estimate of 3 percent. The 2.7-percent growth rate is just barely enough to keep up with an expanding labor force and is not nearly strong enough to create new jobs for the millions of workers laid off during the Great Recession. The economy is currently getting a boost from inventory expansion, but that will fade in the months ahead as firms are now catching up with demand.

Over the past year, real GDP rose 2.4 percent, which marked the largest year-over-year increase since the end of 2007. Looking forward, the market consensus is that the economy will grow at a 3.2-percent pace for all of 2010 and then slow slightly in 2011 to 2.9 percent as the wealthiest of the G20 nations focus on deficit reduction measures over the next few years.

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JUNE 11, 2010

By Josh Silverman, Director, Term Funding & Risk Management

In prepared testimony to the House Budget Committee on June 9, Federal Reserve Chairman Ben Bernanke said the European sovereign debt crisis likely will have only a “modest” impact on recovery efforts in the United States if financial markets continue to stabilize.

“Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages as well as lower prices for oil and some other globally traded commodities,” he said. Read More »

JUNE 11, 2010

Census Hiring Paces Employment Gains

Bureau of Labor Statistics

View large chart

U.S. employers added jobs in May at the fastest pace in a decade, although gains were mostly a result of temporary government hiring for the 2010 census. Of the 431,000 net jobs created in May, 411,000 were linked to census hiring. The private sector, a better gauge of the labor market, only added 41,000 jobs—a disappointing performance following strong gains in March and April. The pickup in hiring, in addition to more workers dropping out of the labor force, brought the unemployment rate down to 9.7 percent from 9.9 percent. A 0.3-percent increase in aggregate hourly earnings and a 0.1-hour increase in the average work week were positive notes in May’s employment report.

Wall Street was disappointed by the payroll figures, as the consensus forecast was for an additional 536,000 jobs and greater job creation in the private sector. Following nearly two years of continual job losses, the U.S. economy has added 982,000 jobs this year and is expected to continue to add jobs throughout 2010. Read More »