Archive for September, 2009

U.S. Q2 GDP fall moderates, manufacturing still weak (Reuters)

Wednesday, September 30th, 2009 | Finance News

WASHINGTON (Reuters) –
The U.S. economy shrank less in the second quarter than first thought but negative news on jobs and on manufacturing in the country's Midwest in September pointed to a patchy recovery from recession.

Gross domestic product, which measures the total output of goods and services within U.S. borders, fell at a 0.7 percent annual rate instead of the 1.0 percent decline reported last month, the U.S. Commerce Department said on Wednesday.

It was the fourth straight quarter of decline in real GDP, but probably the last quarter of falling output. The U.S. economy, which slipped into recession in December 2007, is believed to have rebounded in the July-September quarter.

On the manufacturing front, however, the Institute for Supply Management-Chicago said its business barometer fell to 46.1 in September from 50.0 in August; a reading below 50 indicates contraction.

A separate survey by the ADP Employer Services showed private U.S. employers cut 254,000 jobs in September, more than the 210,000 financial markets had been expecting.

"What it comes down to is how much of this recovery is going to be sustainable. I'm not a believer yet that this is a robust economy. This is going to be a very frustratingly weak growth period," said Robert MacIntosh, chief economist at Eaton Vance Corp in Boston.

The manufacturing and jobs data sent U.S. stocks tumbling, although buying in technology heavyweights limited losses. For the third quarter, the blue-chip Dow Jones industrial average (.DJI) recorded its best quarterly gain since the last three months of 1998 (.N).

The mixed economic picture will probably result in the Federal Reserve -- the U.S. central bank -- holding its key overnight lending rate near zero percent for a long while.

Atlanta Fed president Dennis Lockhart said on Wednesday more evidence the economic recovery was sustainable was needed for the Fed to exit its extremely low interest rates and other policies designed to stimulate the economy.

In China and Japan factory activity rose while Germany reported an unexpected fall in unemployment.

MOVING IN THE RIGHT DIRECTION

The 0.7 percent fall in second-quarter U.S. GDP was better than market expectations for a 1.2 percent contraction and an improvement from the first quarter's 6.4 percent decline.

"Today's revision of real GDP ... indicates that the economy has begun to stabilize," said Mark Doms, chief economist at the U.S. Commerce Department. "The economy is moving in the right direction, and further stimulus spending should support this momentum in the coming months."

The shallow decline reflected more moderate drops in consumer spending and business investment than first thought.

Consumer spending, which accounts for over two-thirds of U.S. economic activity, fell at a 0.9 percent rate in the second quarter, down from the previously estimated 1.0 percent. Spending rose at a 0.6 percent rate in the first quarter.

Business investment fell at a 9.6 percent rate in the second quarter instead of 10.9 percent, reflecting slightly better demand for software than previously thought. It had slumped 39.2 percent in the first quarter.

Weak domestic demand meant businesses continued to reduce their stock of unsold goods. Inventories plunged by a record $160.2 billion in the second quarter rather than the $159.2 billion drop estimated by the government last month. Stockpiles of unsold goods fell by $113.9 billion in the first quarter.

The drop in inventories subtracted 1.42 percentage points from the second-quarter GDP change, the Commerce Department said. Excluding inventories, GDP rose 0.7 percent compared to a 4.1 percent decline in the first quarter.

Rebuilding of inventories is expected to be one of the main drivers of the economy's recovery.

Economists agree a recovery, aided by government spending, is under way but query its strength and sustainability because of weak consumer spending. The pace of job losses has slowed markedly but companies are still not hiring on a big scale.

The employment component of the Chicago PMI inched up to 38.8 in September from 38.7 in August.

"We're seeing the economy turn, but it's most likely not going to be a vigorous turn. You will have setbacks and the numbers will ebb and flow," said Michael Moran, chief economist at Daiwa Securities in New York.

Residential investment, at the heart of the worst U.S. recession in seven decades, dropped at a 23.3 percent rate in the second quarter after falling 38.2 percent in the first.

Separate Commerce Department data showed weak domestic and global demand meant second-quarter corporate profits after taxes rose 0.9 percent, well below the 2.9 percent estimated last month. They rose 1.3 percent in the first quarter.

There was encouraging news on the trade front. Exports fell at a 4.1 percent rate instead of the 5 percent drop reported last month. Exports plunged 29.9 percent in the first quarter.

A survey by the National Association of Purchasing Management-New York showed business activity in New York City surged to a near three-year high in September, building on recent optimism about local conditions.

For a graphic comparing Midwest with U.S. manufacturing indexes, click on http://graphics.thomsonreuters.com/099/US_PMIMFI0909.gif (Additional reporting by Ros Krasny in Mobile, Alabama and Camille Drummond and Burton Frierson in New York; Editing by James Dalgleish)

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Fed may boost rates while economy still weak: Kohn (Reuters)

Wednesday, September 30th, 2009 | Finance News

WASHINGTON (Reuters) –
The Federal Reserve may need to begin to pull back its extensive support for the weak U.S. economy before it has healed enough to substantially lower the jobless rate and get factories working again, Fed Vice Chairman Donald Kohn said on Wednesday.

"Tightening (monetary policy) while there's still slack in the economy is something that we have to do every time," he told a monetary policy conference at the Cato Institute.

Kohn said the Fed -- the U.S. central bank -- would base its actions on its forecast for the path of the economy, and would not wait for clear evidence the recovery has taken hold:

"It's incumbent upon us to ... be forward-looking in our story. Yes, there's slack, but it's going away. Yes, people are still unemployed, but people are being put back to work. And the alternative of not tightening and not beginning this process is to create a destabilizing round of inflation. ... If we can't tell that story we shouldn't be tightening."

EXIT BEFORE WARNING SIGNS

The Fed has begun to move gradually toward removing its extensive support for the economy during a devastating financial crisis. At its latest policy-setting meeting, it said it would phase out by March a program to buy mortgage-backed securities that had been aimed at bolstering housing markets.

Most analysts do not expect the Fed to begin to raise benchmark interbank lending rates from near zero until the middle of next year but analysts are watching what it plans to do shrink a balance sheet that has ballooned to over $2.3 trillion as a result of aggressive actions to stem the crisis.

Kohn said that while the recovery will likely be sluggish, the Fed would act before warning lights flash on spending or inflation.

"We must begin to withdraw (monetary policy) accommodation well before aggregate spending threatens to press against potential supply, and well before inflation as well as inflation expectations rise above levels consistent with price stability," he said.

Kohn and another senior Fed official cautioned that the recovery remains fragile.

Atlanta Fed President Dennis Lockhart said he wants to see more evidence that the private sector can thrive without government support before kicking away the crutches.

"I do not think that time has yet come, and ... I think it may well be some time before a comprehensive exit need be under way," Lockhart told the University of South Alabama's economic forum in Mobile, Alabama.

PACE OF EXIT

A European central banker echoed Lockhart's caution on removing support too soon and signaled he would be more patient than Kohn in removing programs or raising rates.

"Now is not the appropriate time to exit, but the process would begin when there are clear signs that markets are functioning properly, the economic recovery is firmly under way, and therefore upside pressures on inflation appear," said Athanasios Orphanides, governor of the Central Bank of Cyprus and a member of the European Central Bank's governing council, also at the Cato Institute.

Kohn said he could not predict how fast the Fed would raise rates or withdraw its massive supply of money to the financial system and that the Fed would monitor how its extraordinary efforts to support the economy are affecting spending decisions and inflation expectations in timing its exit strategy.

The Fed has the necessary tools to pull back its help for the economy, he said.

(Additional reporting and writing by Emily Kaiser and Ros Krasny in Mobile, Alabama; Editing by James Dalgleish)

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Homeowners in financial trouble often redefault (AP)

Wednesday, September 30th, 2009 | Finance News

WASHINGTON – Lenders are ramping up efforts to avoid home foreclosures, but a report by bank regulators says more than half of borrowers who get help fall behind again.

More than 50 percent of homeowners with loans modified in the first half of last year had missed at least two months of payments a year later, the federal Office of the Comptroller of the Currency and the Office of Thrift Supervision said Wednesday.

But the results were better among those who saw their payments drop substantially.

About one in three borrowers whose monthly payments were reduced by 20 percent or more had fallen behind again within a year. That compares with more than 60 percent for borrowers whose loan payments were left unchanged or increased.

The report by highlights a significant challenge for the Obama administration's plan to tackle the foreclosure crisis, backed by $50 billion in money from the financial industry bailout fund.

The administration's effort got off to a slow start, but has picked up speed in recent months. As of last month, about 360,000 borrowers, or 12 percent of those eligible, have signed up for three-month trial modifications. They are supposed to be extended for five years if the homeowners make their payments on time. There is currently no data on redefaults within the plan.

Traditionally, most lenders have offered payment plans that allowed borrowers to catch up on missed payments. But those modifications often do not involve an interest rate reduction and result in a higher monthly payment.

All that does is set the borrower up for failure, said Kristi Cahoon, an attorney and housing counselor with Legal Services of Northern Virginia. "A lot of them aren't true modifications," she said.

By contrast, under the Obama plan, she believes the loans will be sustainable for the homeowners she counsels. Borrowers' interest rates, for example, can go as low as 2 percent for five years under the Obama plan.

Bank regulators say they have pressed lenders to shift their focus to modifications that reduced borrowers' payments. They made up nearly 80 percent of new modifications in the April-June quarter, up from about half in the first three months of the year.

The report covers 34 million loans, representing more than 60 percent of primary home mortgages. Consistent with other reports, it showed borrowers are continuing to fall behind as job losses mount. More than 11 percent of borrowers covered by the report had missed at least one payment as of June 30, up from 10 percent in April.

It also highlighted mounting problems with an especially troubling category of loans — "pick-a-payment" or option ARM loans, which allowed borrowers to defer some of their interest payments and add them to the principal. At the end of June, 10 percent of these loans were in foreclosure, more than triple the rate for all mortgages in the survey.

The lenders included in the report offered help to about 440,000 borrowers in the April-June period, they started foreclosure on about 370,000 homes, unchanged from the January-March period.

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