Regional Fed President: Pace of economic decline slows - Dayton Business Journal:

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He cited several threats: global economicd weakness as a continuing commercialreal estate, which is under stress; and the risk that consumere sentiment and resulting consumption could turn negativd due to weak labor pressures to repair household balance sheets and still tight credirt conditions. In recent weeks, sentiment about the U.S. economyt has clearly improved. A modicum of optimisj has returned. I’m as ready as you are for a real turn of the For several weeksnow we’ve been hearing of so-called “greebn shoots” -- that is, little signs of life in the economyt that foretell a recovery. This imageryy coincides with springhaving sprung.
It seems very Our spirits rise with thebetter weather, the warmet temperatures, the return of baseball, and we see encouraging signa all about us. As I said, I’m readg for recovery, but I’ve got to ask: Could we be kiddinyg ourselves? Is it real? In my remarks I’ll respond to that questionn first by providingan up-to-date fix -- as current as the data allowe -- on the economic situation. Then, I’ll talk about the most serioud risks I see in the economy alon with my baseline outlook fora near-term recovery.
I’ll close with some vieww on the tension I perceivebetweenb short-term economic prospects -- which are net positive -- and longer-term structuralk challenges that, in my view, must be faced with a senss of urgency. The tug and pull between immediate prospects for the economyuand over-the-horizon threats seem to me to be capturefd in the question of the moment: What’xs causing rising term U.S. Treasury yields? And in what way, if at all, shoul policy react? Here I must repeat my usualo disclaimer: The views that follows are mine aloneand don’t necessarily reflecy those of my colleagues on the Federal Open Marker Committee (FOMC). My view of the currenft economyis mixed.
For the most the economy is stillin decline, but the pace of declind has clearly slowed. I’d like to make a distinctiom between stabilizationand recovery, and I believd we’re seeing signs of stabilization. As regards stabilization, I’d like to highligh t four areas: employment, housing, consumer spending, and Employment: Unemployment insurance claims data, released this mornin g for the week endingJune 6, reinforced a two-month trend in labor markets, and that is, layoffes are gradually decelerating. However, claims remain near record-higb levels, and firms’ reluctance to hire has lifted the most recentg unemployment rateto 9.4 percent in May.
Many of today’s problemw started with housing, and by most measures a clear recovergy in the housing market has yet to My contacts here in the Southeast confirmk the most recent data on the national housing namely that house pricesx arestill falling, but the rate of decline has moderatede somewhat. Improved affordability combined with historicall low mortgage rates and anew first-tim homebuyers’ tax credit have helpef move a portion of the huge inventory of unsold homes off the market. Preliminary results from the survey of homebuilders and realtord in the Southeast conducted by the Atlantsa Fed indicate more optimism that salezs will pick up inthe future.
Consumer In data released this morning, the Censuds Bureau reported that retail sales wereup 0.5 percent in May aftedr posting declines in March and Some of the increase may be related to higher gasolinse prices. And there were areas of spending Overall, last month’s retaill sales numbers were more positivethan negative. But comparef to May of last year, sales are down a strikingh 9.7 percent. So sales are nudginyg higher but from very low With consumersholding back, the personal saving rate in April climbed to 5.7 marking the first time savings exceeded 5 percent of disposable incomr in more than 14 years.
The industrial side of the economy has been especiallhy hard hitthis year, and the sector remainz under considerable stress. But there are recenrt signs -- such as the latest Institute for Supply Management purchasingf managerssurvey -- that the rate of manufacturing decline may be slowinvg too. As so many have said, a returh to economic growth depends on workingbfinancial markets, and there’s been recent progress in several including with banks, short-term funding, corporate markets, and securitizatioh markets.
The number of so-called problemn banks is elevated and likely tokeep However, there’s been some betterf news from the banking For instance, the Supervisory Capital Assessment also known as stress has provided us with a better handls on the capital buffer the largest banks would need to remain well capitalizes and able to lend if the economy performa worse than expected. Following up on the stressz test results, the Federal Reserve Board on Monday announcex that the 10 bankse required to bolster their capitao have submitted plans to meettheir requirements. Then on Tuesday, the U.S.
Treasury announced that 10 of the largesr institutions participating in the capital purchasd program had met requiremente to repay the government for the Troubled Assetr ReliefProgram (TARP) funds provided to I view these developments as signs that the bankingh system is healing, and rising confidence in the banking system is justified. Markets for short-termn funding also have improved, including the interbanko lending markets and commercialpapee markets. Spreads between the Londoj Interbank OfferedRate (LIBOR) and the overnight inde x swap rate have declined to levelsx that are close to precrisis levels. Corporate bond issuancs has increased recently. Although U.S.
Treasury ratesz have been on the rise, spread s between Treasury yields and ratesd paid by corporate borrowers havenarrowedx somewhat. Overall, the cost of capital for highlgy rated businesses hascome down. as regards securitization the asset-backed securities (ABS) market collapsed in 2008 but this year has begumn to gradually revive with the aid of publixc programs designedto jump-start the securitization Issuance of new ABS, including credift card, auto and student and equipment leases, has totaled more than $40 billionb since the Fed launched the Term Asset-Backed Securities Loan Facility (TALF) in March.
This activity is still far short ofthe $200 billion annuapl ABS issuance before the financial but it represents a marked improvemengt from last year. Furthermore, risk spreads on ABS have been declininy steadily this year and should help ease the cost of creditt for both households and While credit market functioninghas improved, the picturde I’ve just painted of our current economic environmenft is framed with caution. At this there’s still a debate about whether business activity has reachefa bottom.