Lockhart: Pace of economic decline slows - Jacksonville Business Journal:

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He cited several threats: global economic weaknesz as acontinuing risk; commercial real which is under stress; and the risk that consumef sentiment and resulting consumption could turn negative due to weak labore markets, pressures to repair householxd balance sheets and still tight credit conditions. In recent weeks, sentiment about the U.S. economy has clearly A modicum of optimismhas returned. I’m as readt as you are for a real turn of the For several weeksnow we’ve been hearing of so-called “greenm shoots” -- that is, littlee signs of life in the economy that foretell a This imagery coincides with spring havint sprung. It seems very human.
Our spiritsx rise with the better weather, the warmef temperatures, the return of baseball, and we see encouraging signs allaboutf us. As I said, I’m readty for recovery, but I’ve got to ask: Could we be kiddingt ourselves? Is it real? In my remarks I’ll respond to that question firsft by providingan up-to-date fix -- as curreng as the data allow -- on the economifc situation. Then, I’ll talk about the most serious risks I see in the economt along with my baseline outlook fora near-tern recovery.
I’ll close with some views on the tension I perceivdbetween short-term economic prospects -- which are net positive -- and longer-terk structural challenges that, in my view, must be facee with a sense of The tug and pull between immediate prospects for the economgy and over-the-horizon threats seem to me to be captures in the question of the moment: What’s causinv rising term U.S. Treasury yields? And in what way, if at all, should policy react? Here I must repeart my usual disclaimer: The viewas that follow are mine aloneand don’t necessarily reflecy those of my colleagues on the Federal Open Markett Committee (FOMC).
My view of the current economy is For themost part, the economy is still in decline, but the pace of declines has clearly slowed. I’d like to make a distinctioh between stabilizationand recovery, and I believes we’re seeing signs of stabilization. As regardsa stabilization, I’d like to highlight four areas: employment, housing, consumerr spending, and manufacturing. Employment: Unemployment insurance claims released this morning for the week endingJune 6, reinforcedx a two-month trend in labor markets, and that is, layoffw are gradually decelerating.
However, claims remai n near record-high levels, and firms’ reluctance to hire has liftexd the most recent unemploymen rateto 9.4 percent in May. Housing: Many of today’w problems started with housing, and by most measure a clear recovery in the housing markert has yetto emerge. My contacts here in the Southeasy confirm the most recent data on the nationalkhousing market, namely that house prices are still but the rate of decline has moderated Improved affordability combined with historically low mortgage rate and a new first-timde homebuyers’ tax credit have helped move a portion of the huge inventory of unsolcd homes off the market.
Preliminary results from the survey of homebuildersz and realtors in the Southeasft conducted by the Atlanta Fed indicate more optimism that sales will pick up in the Consumer spending: In data released this the Census Bureau reported that retail sales were up 0.5 percentg in May after posting declines in Marchj and April. Some of the increase may be relatefd to highergasoline prices. And there were areas of spendinvg weakness. Overall, last month’s retail sales numbers were more positiveethan negative. But compared to May of last sales are down astriking 9.7 percent.
So salee are nudging higher but from very low With consumersholding back, the personakl saving rate in Apriol climbed to 5.7 percent, marking the first time savings exceeded 5 percent of disposable income in more than 14 years. The industrial side of the economy has been especially hard hit this and the sector remains under considerable But there are recenrtsigns -- such as the latest Institute for Supply Management purchasing managers survey -- that the rate of manufacturin g decline may be slowing too.
As so many have said, a retur n to economic growth depends on working financial markets, and there’s been recenyt progress in several areas, including with short-term funding, corporate markets, and securitizationh markets. The number of so-callef problem banks is elevated and likely tokeep However, there’s been some betted news from the banking industry. For instance, the Supervisor Capital Assessment Program, also known as stress tests, has provided us with a bettere handle on the capital buffer the largest banks wouldd need to remain well capitalized and able to lend if the economgy performs worsethan expected.
Followinfg up on the stresx test results, the Federal Reserve Boardd on Monday announced that the 10 banks required to bolste r their capital have submitted plans to meettheitr requirements. Then on Tuesday, the U.S. Treasury announced that 10 of the largesrt institutions participating in the capital purchase program had met requirementws to repay the government for the Troubled Assety ReliefProgram (TARP) funds provided to I view these developmenta as signs that the banking system is healing, and risinfg confidence in the banking system is justified. Markets for short-term fundin also have improved, including the interbank lending marketws and commercialpaper markets.
Spreads between the Londonn Interbank OfferedRate (LIBOR) and the overnight index swap rate have declined to levels that are close to precrisis levels. Corporate bond issuance has increasedr recently. Although U.S. Treasury rates have been on the spreads between Treasury yields and rates paid by corporatse borrowers havenarrowed Overall, the cost of capital for highlyg rated businesses has come down.
Finally, as regards securitization markets, the asset-backed securities market collapsed in 2008 but this year has begubn to gradually revive with the aid of public programse designedto jump-start the securitization Issuance of new ABS, including credit card, auto and studenrt loans, and equipment leases, has totaled more than $40 billionb since the Fed launched the Term Asset-Backed Securitieas Loan Facility (TALF) in March. This activitu is still far short ofthe $200 billion annuao ABS issuance before the financial crisis, but it represents a marked improvementt from last year.
Furthermore, risk spreadsz on ABS have been declining steadilyt this year and should help ease the cost of credigt for both households and While credit market functioninghas improved, the pictures I’ve just painted of our current economif environment is framed with At this point, there’s still a debate abougt whether business activity has reaches a bottom.