2/22/10

Friends and Colleagues 

Last week the Fed raised the discount rate by 25 bps, citing "continued improvement in financial market conditions." 
Why did they raise rates now, and what does it mean for businesses and consumers? 
What are the latest economic fundamentals?  What's happening with credit availability and demand? 
This week we address these and other key issues with some help from our friends at Wells Fargo Securities (WFS).

Why Did the Fed Raise the Discount Rate?

• Just a week ago Bernanke stated that "before long" the Fed would raise the discount rate and return it to the spread over federal funds that existed before the crisis.
• WFS believes this quick move indicates the Fed intends to stay very close to the script Bernanke laid out to reverse the extraordinary actions the Fed put in place to fight the financial crisis.
• Those actions contributed to an enormous expansion of the Fed's balance sheet.
• They also led to concerns about whether the Fed could adequately reverse this stimulus without putting the recovery at risk or creating inflation.
• Bernanke noted that returning the discount rate to its normal relationship to the federal funds rate should not be seen as a tightening move but rather a return to a more normal monetary policy.
• Specifically the Fed noted its policy actions were "not expected to lead to tighter financial conditions for households or businesses and do not signal any change in the outlook for the economy or monetary policy."
• It does however look like the beginning of the end of an era of extremely cheap money.

 
What are the Latest Economic Fundamentals?

• Industrial Production rose 0.9% in January, with solid gains across most categories.
• Manufacturing Output rose 1.0%, with consumer goods and business equipment rising solidly.
• Production of IT equipment remains a bright spot, climbing 1.7%.
• Utility output, which surged in December, rose a more moderate 0.7% in January.
• Inflation data were mixed: the Producer Price Index climbed 1.4%, while the Consumer Price Index rose 0.2%.
• Consumer Confidence rose 2.3 points to 55.9 in January, its highest level in nearly 1½ years.
• Consumers' ongoing concerns about current conditions reflect worries about the labor market.
• Employment - Layoffs appear to have topped out, but hiring remains sluggish.
• WFS projects consumer confidence and spending will likely remain constrained through early 2010.

 
Availability of Credit

• The WFS Senior Loan Officer Survey shows that the "net percentage of banks tightening standards" in Q1 actually fell to -5%, meaning more banks were easing, not tightening, credit.
• The net % of banks increasing spreads declined to 9% compared to 100% during last year.
• TED spreads (LIBOR - Treasuries) have returned to pre-Lehman levels.

 
Consumer Spending and Credit Demand

• Continued weakness in the job market is bringing further delinquencies and charge-offs.
• Private sector jobs (not counting construction) are up, and there have been gains in the average workweek and temp help.
• However, the absolute loss in jobs and continued high unemployment are putting stress on households that will struggle paying bills and will continue to fall further behind.
• Saving rates have moved up since April 2008 which means the pace of consumer spending and credit demand will be lower than in prior recoveries.
• The dynamics of household credit usage are changing and with them the pace and character of growth.

So what can we expect and how can we plan for the months and years ahead?

As always, stay tuned.....

 

THOUGHT FOR THE WEEK

To See Ourselves As Others See Us

In our ultra-connected world we touch scores of people daily, but so many of the connections are fleeting...and often trivial. 
What do we really learn from knowing who just got back from the gym, or who remembers "My Favorite Martian"?

Yet each of us has a great gift available, if we would only embrace it.
It is the gift of people who know us well enough to see our blind spots, and care enough to give us candid feedback.

When was the last time we asked for and embraced constructive criticism?
"How am I doing?"
"How can I do better?"

These are powerful...and sometimes scary questions.
Asking them means opening ourselves up to critique, and acknowledging that we are not perfect.
It also means accepting that we are human and we have much yet to learn.

In the week ahead, may each of us seek out someone who knows us well.
May we create a safe space for them to give us honest feedback on how we are doing and how we can do better.
May we embrace the great gift of their perspective, and by doing so may we each grow to be a better version of ourselves.

Have a good week.

David Rosenthal, MAI
President & CEO
Curtis-Rosenthal, Inc.

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