Lockhart: Pace of economic decline slows - Atlanta Business Chronicle:

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He cited several threats: global economic weakness as a continuing commercialreal estate, which is under stress; and the risk that consumetr sentiment and resulting consumption could turn negative due to weak labofr markets, pressures to repair household balance sheets and still tight credit In recent weeks, sentiment about the U.S. economy has clearly improved. A modicum of optimism has returned. I’m as readyg as you are for a real turn of the For several weeksnow we’ve been hearin g of so-called “green -- that is, littlre signs of life in the economy that foretell a This imagery coincides with spring havingy sprung. It seems very human.
Our spirits rise with the bette weather, the warmer temperatures, the return of baseball, and we see encouragingy signs allabout us. As I I’m ready for recovery, but I’ve got to ask: Could we be kidding ourselves ? Is it real? In my remarks today, I’ll respondc to that question first by providingan up-to-date fix -- as current as the data allo -- on the economic situation. Then, I’ll talk about the most serious risks I see in the economy alongh with my baseline outlook fora near-term I’ll close with some views on the tensionb I perceive between short-term economic prospects -- whicuh are net positive -- and longer-term structural challenges that, in my must be faced with a sense of The tug and pull between immediate prospect for the economy and over-the-horizon threats seem to me to be capture d in the question of the moment: What’s causing rising term U.
S. Treasurty yields? And in what way, if at all, should policy react? Here I must repeat my usual disclaimer: The views that followq are mine aloneand don’t necessaril reflect those of my colleagues on the Federak Open Market Committee (FOMC). My view of the current economyis mixed. For the most the economy is stillin decline, but the pace of declinde has clearly slowed. I’d like to make a distinction betweejn stabilizationand recovery, and I believe we’red seeing signs of stabilization. As regards stabilization, I’dc like to highlight four areas: housing, consumer spending, and manufacturing.
Employment: Unemployment insurancr claims data, released this morning for the week endingJune 6, reinforceds a two-month trend in labor markets, and that is, layoffw are gradually decelerating. However, claims remaim near record-high levels, and reluctance to hire has lifted the most recent unemploymenft rateto 9.4 percen t in May. Housing: Many of today’s problemss started with housing, and by most measured a clear recovery in the housingg market has yetto emerge. My contacts here in the Southeast confirm the most recent data on the nationahousing market, namely that house prices are stil falling, but the rate of declinde has moderated somewhat.
Improved affordability combined with historicallyh low mortgage rates and anew first-tim e homebuyers’ tax credit have helpedd move a portion of the huge inventoru of unsold homes off the Preliminary results from the survey of homebuilders and realtors in the Southeasr conducted by the Atlanta Fed indicate more optimism that sales will pick up in the future. Consumer In data released this morning, the Census Bureaju reported that retail sales wereup 0.5 percenf in May after posting declines in March and Some of the increase may be related to higher gasoliner prices. And there were areas of spendingb weakness.
Overall, last month’s retaik sales numbers were more positivethan negative. But comparef to May of last year, sales are down a strikinv 9.7 percent. So sales are nudging higher but from verylow levels. With consumers holdinv back, the personal saving rate in Aprik climbedto 5.7 percent, markingv the first time savings exceeded 5 percentr of disposable income in more than 14 years. The industrial side of the economy has been especially hard hit this and the sector remains underconsiderabld stress. But there are recent signs -- such as the latest Institute for Supply Management purchasing managerssurvey -- that the rate of manufacturin g decline may be slowing too.
As so many have a return to economic growth dependws on workingfinancial markets, and there’s been recent progresxs in several areas, including with banks, short-terjm funding, corporate markets, and securitization markets. The number of so-called problemm banks is elevated and likelg tokeep climbing. However, there’s been some bette news from the banking For instance, the Supervisory Capital Assessment Program, also known as stress tests, has providesd us with a betteer handle on the capital buffer the largest banks would need to remain well capitalizesd and able to lend if the economy performz worse than expected.
Following up on the stress test the Federal Reserve Board on Mondag announced that the 10 banks required to bolster their capital have submitted plan to meettheir requirements. Then on Tuesday, the U.S. Treasurty announced that 10 of the largestg institutions participating in the capital purchase program had met requiremente to repay the governmenty for the Troubled Asset Relief Program funds providedto them. I view these developments as signz that the banking systemnis healing, and rising confidencde in the banking system is justified. Marketds for short-term funding also have improved, includinfg the interbank lending markets and commercialpapefr markets.
Spreads between the London Interban k OfferedRate (LIBOR) and the overnight indexx swap rate have decline to levels that are close to precrisis levels. Corporate bond issuance has increased Although U.S. Treasury rates have been on the rise, spreadw between Treasury yields and ratesx paid by corporate borrowers havenarroweds somewhat. Overall, the cost of capital for highlyu rated businesses hascome down. as regards securitization the asset-backed securities (ABS) market collapsed in 2008 but this year has begu n to gradually revive with the aid of publi programs designedto jump-start the securitizationn markets.
Issuance of new ABS, including credirt card, auto and student loans, and equipmeny leases, has totaled more than $40 billion since the Fed launcheed theTerm Asset-Backed Securities Loan Facility (TALF) in This activity is still far short of the $200 billion annual ABS issuancde before the financial crisis, but it represents a marked improvemenyt from last year. Furthermore, risk spreads on ABS have been declininv steadily this year and should help ease the cost of crediyt for both householdsand businesses. Whiles credit market functioninghas improved, the picture I’vw just painted of our current economixc environment is framed with caution.
At this point, there’ s still a debate about whether business activity has reachefa bottom.