U.S. Weekly Economic Roundup: Feeling For An Exit
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Economic Research:
U.S. Weekly Economic Roundup:
Feeling For An Exit
Credit Market Services:
Beth Ann Bovino, U.S. Chief Economist, New York (1) 212-438-1652;
bethann.bovino@standardandpoors.com
Satyam Panday, U.S. Economist, New York (212) 438-6009; satyam.panday@standardandpoors.com
Research Contributor:
Kaustubh Pandey, CRISIL Global Analytical Center, an S&P affiliate, Mumbai
Table Of Contents
The Minutes
Stronger Tone In Consumer Credit
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1346196 | 301135083Economic Research:
U.S. Weekly Economic Roundup: Feeling For An
Exit
The statement for the Federal Open Market Committee's (FOMC) meeting held on June 17-18 showed that the Fed
was generally upbeat about the economic outlook. Participants thought that favorable financial conditions were
supporting economic activity, though some worried about excessive risk-taking. The committee leaned toward ending
QE3 entirely at the October meeting, as we expected. Whether the Fed raises interest rates earlier or later than
anticipated depends on how well the economy performs in the second half of this year. Discussions on policy
normalization strategy highlighted that the interest rate on excess reserves will play a central role in the monetary
policy normalization process. The interest rate paid by the Fed on overnight reserve repurchase agreements could play
a supporting role, and the Fed might stop reinvesting proceeds from maturing securities concurrent with or after the
first rate hike.
The few economic releases this week include:
• Consumer credit increased by $19.6 billion in May, following a downwardly revised $26.1 billion ($26.8 billion) in
April.
• Wholesale inventories increased by 0.5% in May, following a downwardly revised 1.0% (was 1.1%) in April.
Wholesale sales rose by 0.7% in May after it rose by 1.3% in April.
• The minutes of the FOMC meeting on June 17-18 revealed that the committee intends to end its QE3 at the
October meeting.
• Nine months into the government's fiscal year, the deficit, at $365.9 billion, is down 28% from this time last year.
Higher tax receipts, up 8.2% year-on-year, are the main factor with lower defense spending, down 5.5%, a second
major factor. For June alone, the government posted a surplus of $70.5 billion.
• Initial jobless claims fell to 304,000 in the week ended July 5 from the previous week's unrevised level of 315,000.
Continuing claims rose to 2.584 million in the week ended June 28.
The Minutes
The statement following the two-day FOMC meeting ending June 18 did not reflect any seismic shift in the Fed's
monetary policy stance or its outlook for policy. Neither the disappointing first-quarter GDP growth nor a recent
pick-up in inflation materially shifted the views of the FOMC in one way or the other. As expected, the participants
decided to taper the monthly purchases of longer-term Treasury securities and agency mortgage-backed securities
(MBS) by a further $10 billion, to $35 billion per month, keeping the Fed on course to finish expanding its balance
sheet by October of this year.
Policy rates were expected to remain low for some time, as indicated by policy rate forecasts still putting the first rise
in 2015. In terms of FOMC member policy rate expectations, the median values drifted up by 12.5 basis points (bps)
and 25 bps for the end of 2015 (1.125%) and 2016 (2.5%), respectively. Moreover, the median expectation for the
longer run federal funds rate declined by 25 bps to 3.75%, perhaps reflecting some increased pessimism about U.S.
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potential growth.
Then the minutes to the FOMC meeting came out. They showed that the committee expressed concerns about
softness in retail sales, health care spending, and residential construction. But generally the members were still upbeat
about the economic outlook in the second half of this year. It also seemed like the members were in broad agreement
that inflation rates bottomed out but that they were still divided on the pace at which the rates were approaching the
inflation target of 2%. However, many participants noted that labor market slack remained high even though there has
been improvement in this sector. Wage pressures were viewed as modest. While some of the members expressed
worry about excessive risk-taking in the financial market, there was no consensus on whether the Fed should address
this. The Fed certainly is not yet concerned enough about complacency in the markets to attempt to gain more
financial stability at the cost of economic growth.
There was considerable discussion over whether the final taper move should be a $15 billion cut or a $5 billion cut.
The Fed has been reducing asset purchases in $10 billion increments from its original purchase amount of $85 billion,
and the final cut has to be either $15 billion or $5 billion at this pace. Perhaps they wanted to end the uncertainty about
the end of the quantitative easing (QE) on October or December, so they decided to more or less commit to the earlier
date by planning to make the $15 billion cut.
The pace of economic growth in the second half of the year will be the key to the monetary policy outlook. The
data-dependent nature of policy normalization remains intact. The minutes suggest that as part of the exit strategy
from the highly accommodative policy--such as starting to unwind the balance sheet--the Fed may stop reinvestment
of paid principal on bonds, starting with or after the first policy rate increase, which we expect sometime in the second
quarter. Reinvestments are to be curtailed gradually. This is a new development because back in 2011, the last time
the Fed communicated its exit strategy, the committee said that an end to reinvestment would be a signal that rate
hikes were imminent. This time around, many participants made the point that ending reinvestments before the first
rate hike would add complexity to the Fed's communication strategy and might signal that policy was tightening more
rapidly than the committee intended.
The interest rate on excess reserves will play a central role in the monetary policy normalization process. For
controlling the pace of unwinding, interest on excess reserves (IOER) will be the key tool, and reverse repos will play a
supporting role. Discussion included having a 20-bps spread (or more) between these two rates with IOER on the
upper end and the reverse repo rate on the bottom. Adjusting the IOER will allow the Fed to push up the fed funds
rate--and in turn other market rates--since banks will not have incentive to lend to each other at a lower rate than they
can earn risk-free from the Fed. More details on the use of these rates are likely later this year.
In any case, moving forward, the discussion and forward guidance will be on policy normalization. The Fed is
waiting--as we are--to see how economic data in the second half of the year evolve for a definite answer on how and
when normalization will occur.
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Stronger Tone In Consumer Credit
Consumers continue to believe in higher education as a good investment and cars as worthwhile purchases. They did
not hesitate to take out more loans for both in May and also continued to swipe their credit cards.
The U.S. consumer credit outstanding (not including mortgages) rose $19.6 billion to $3.19 trillion in May, a bit
stronger than consensus expectations of an $18.1 billion jump. This increase follows a $26.1 billion surge in April and
extends the overall strength since September of 2011--marking it the longest string of gains since 2001 as people begin
taking on more debt after shunning credit in the recession and into the recovery (through most of 2010). Although
consumer debt levels (not including mortgages) have been increasing relative to income (share of income is now at
24.8%), the debt service ratio is benefitting from low interest rates (together with individuals' improved credit ratings
upon improved balance sheets), which has helped with the debt service burden. First-quarter 2014 household debt
service as a percent of disposable income (the last reported figure by the Federal Reserve Board as of June 2014) was
almost 9.94%--its lowest rate since the series started in 1980 and significantly below its peak of 14% in late 2007. Debt
service obligation as a percentage of disposable income for only the consumer credit (excluding the mortgages) was
5.17% compared with 4.95% in the fourth quarter of 2012, when it was the lowest.
Once again, overall gains mainly came from nonrevolving credit, which has largely risen since August 2010.
Nonrevolving credit was up by $17.8 billion in May, largely made up of student loans and auto loans. Student loans
continued to rise as a share of consumer credit since the last financial crisis. Within the nonrevolving credit segment,
the share of student loans has grown steadily--to almost 58% in first-quarter 2014 from 40% in first-quarter 2006. It
also helped that prospective and current students saw a significant drop in the interest rate on undergraduate Stafford
loans--to 3.86% last August, down from 6.8% last July. Congress passed new legislation that links financing to 10-year
Treasury yields, which had the immediate effect of reducing the borrowing cost for Stafford loans. Another factor that
helped increase nonrevolving credit was that car loans as auto sales in May were at an annualized pace of 16.7 million
units, the strongest pace in seven years.
Meanwhile, revolving debt (which includes credit-card spending) increased only $1.8 billion in May. This was a smaller
rise than in April, when it increased by an unusually high $8.8 billion--the highest monthly increase since November
2007. The slower increase in revolving credit could reflect consumer caution after April's frenzy.
The latest consumer credit figures show that with improving labor market conditions and increasing home and equity
values, consumers are starting to feel more comfortable about taking on debt. This is good news, because with home
and auto sales surging ahead, consumers will need to take on more auto loans and use credit to furnish their homes.
Economic Release Calendar
Date Time Release For Forecast Consensus Previous
14-Jul No scheduled releases
15-Jul 8:30 Retail sales (%) Jun 0.5 0.6 0.3
Retail sales (excluding auto) (%) Jun 0.4 0.5 0.1
Export Price Index (%) Jun 0.2 0.2 0.1
Import Price Index (%) Jun 0.4 0.3 0.1
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Economic Release Calendar (cont.)
Empire State Index Jul 16.5 17.5 19.3
10:00 Business inventories (%) May 0.5 0.5 0.6
16-Jul 8:30 PPI (%) Jun 0.2 0.2 (0.2)
(excluding food and energy) (%) Jun 0.1 0.2 (0.1)
9:15 Industrial production (%) Jun 0.3 0.3 0.6
Capacity utilization (%) Jun 79.2 79.3 79.1
17-Jul 8:30 Initial claims (000) 310 310 304
9:30 Housing starts (mil.) Jun 1.01 1.02 1.001
10:00 Philly Fed Index Jul 16.5 16 17.8
18-Jul 10:00 University of Michigan consumer sentiment (prelim) Jul 83.2 83 82.5
Leading indicators (%) Jun 0.5 0.5 0.5
21-Jul No scheduled releases
22-Jul 8:30 CPI (%) Jun 0.2 0.2 0.4
(excluding food and energy) (%) Jun 0.2 0.2 0.3
10:00 Existing home sales (mil.) Jun 4.95 4.93 4.89
23-Jul No scheduled releases
24-Jul 10:00 New home sales (mil.) Jun 0.505 0.493 0.504
25-Jul 8:30 Durable goods orders (%) Jun 0.9 0.7 (0.9)
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