CNB Weekly Economic Commentary: Dec 14

To:          Everyone

From:      Gregory S. MacKay, Senior Vice President & Chief Economist

Date:       12/11/09

 

              After taking a few pot shots from the Senate Banking Committee during his confirmation hearings, Chairman Ben Bernanke moved his show to a more receptive audience at the Economic Club of Washington D.C. this week. Both groups heard of the unusual efforts made by the Fed in the past year and a half to stem the economic and financial decline worldwide. The Chairman also stated again to both groups of the necessity to have stronger supervision of all types of financial institutions, implying that the meltdown was based in the brokerage and insurance industries. He spoke again of the need for a “better mechanism to monitor and address risks to the financial system as a whole.”  And finally, called again for an agency similar to the FDIC to be used to liquidate unsound financial institutions. This would eliminate the need for taxpayer money in the rescue of such firms. He would prefer the Fed to lead the process, and that’s where some Senators froze, preferring to blame him and other Fed members for the troubles. But the system was put at risk by the repeal of Glass-Stegall – which was done by Congress. Oops! Sometimes the facts seem to get in the way of some of the poor posturing occasionally seen on the Hill.  

 

              Mr. Bernanke went on to give a brief economic overview to the Economic Club. He sees continued evidence of recovery in both consumer and business spending, but slow job growth in the coming year. He believes the financial markets are functioning well, but credit remains a bit tight. Finally he doesn’t see inflation as any kind of problem for some time.

 

              As we’ve said before, beginning with the Bear Stearns crisis in March of 2008 through the total meltdown in the fall of 2008, the Chairman properly assessed the situation and created the liquidity necessary to keep the global economic system from failing. The recovery is still underway – who else would you give the job?

 

              This week’s numbers add to the growing feeling that better times are arriving. Retail sales for November jumped a huge amount, up 1.3%, or about double most projections. With any kind of holiday follow through, it could be a good season for retailers. Sparse inventories are making shoppers pay more attention. Just about everything but furniture sales and clothing (both down .7%) improved dramatically. Electronic sales rose 2.8%, and building materials were up 1.5%, adding to the belief that housing is back. Year-to-year, autos have recovered, up 5.1%, and on-line shoppers pushed non-store retailers up a healthy 8.1% for the past year.

 

              It’s interesting that in the midst of this retail upswing, outstanding consumer credit actually fell for both the third quarter and October 2009. Credit card debt dropped 7.3% for the quarter and 9.3% in October. Auto-type loans fell only .9% for the quarter, and rose 2.6% in October, as “Cash for Clunkers” was supplemented in October by some consumer demand because of tight inventories and cheap financing. The credit card decline is due both to stronger consumer use of cash (which we’ve been saving at a 4%+ clip this year), and the tighter standards by the credit card issuers, which has resulted in less credit availability. With charge off rates around 10% (compared to 3% - 4% in 2006), lenders are squeezing some credit borrowing lines downward.

 

              So with this surge in consumer spending, can inventory build-up be far behind? Sure enough, wholesale inventories rose .3% in October, as wholesale sales rose 1.2%. Meanwhile, business inventories (wholesalers plus manufacturers and retailers) rose .2% in October, and sales increased 1.1%, indicating a better overall spending pattern continues to develop.

 

              Finally, the weak dollar helped the U.S. trade deficit drop to $32.9 billion in October as exports rose more than imports. And let’s not forget that much of the dollar’s strength in the past year was the price run-up due to its value as the currency of last resort during the crisis. The dollar is now back to trading at levels seen before the run-up began. It’s still cheap, but it’s great to see global demand for our products. That tells me the economy is getting better everywhere.  

 

              Stock prices were mixed this week, as prices stayed within established trading ranges.  At 3:05 p.m., for the week and year: 

         

                   

Bond yields were almost unchanged, as Chairman Bernanke’s comments seemed to suggest a status quo for both the economy and inflation.