MACROECONOMIC INSIGHTS

Transcription

1 MACROECONOMIC INSIGHTS U.S. ECONOMIC OUTLOOK 13 July 2018 On the Banking System, Monetary Policy & Regulation Since the recession ended in June 2009, the growth rate for loans and leases extended by all commercial banks in the U.S. has been tracking well below previous cycles. This is notable given the significance of banks in the context of monetary policy implementation; banks are the key mechanism that the Federal Reserve uses to indirectly influence the broader economy. For example, when the recession occurred in December 2007, the Federal Reserve reduced its benchmark interest rate with the intention of spurring econmoic growth. This phenomenum relies on its own credibility to influence longer term interest rates lower, and for commercial and investment banks to also adjust its financing rates lower to support lending, for example, in the form of mortgages for single family homes. This dynamic incentivizes households, firms and governments to consume goods and services and invest in housing, equipment, software, and various other items. Because of the severity of the crisis however, the Federal Reserve was forced to abandon the typical mechanism to spur economic growth. The central bank turned to unconventional means in which it purchased a substantial amount of long term treasuries, mortgage backed securities and other similar assets to directly influence the lending rates on the respective assets. Essentially, banks failed in the transmission mechanism process during the crisis. Turning back to recent dynamics, annual loan growth has averaged only 3.7 percent from 20 to For context, during the past three business cycle expansions, loan growth averaged approxiamtely, 8.7 percent from 2002 to 2008, 6.3 percent from 1992 to 2001 and 8.8 percent from 1983 to Loan growth through the current cycle is less than half the previous cycle. It is clear the growth rate for loans is substantially slower this cycle compared to previous periods (see chart on the right panel). Therefore, it is worth exploring if this is evidence that banks remain in a derisory position to act as the transmission mechanism for the Federal Reserve. Perhaps a fundamental shift in policy adversely impacted banks and by extention resulted in weaker economic output during this business cycle expansion. Current Previous PCE: 2.3% 1.7% Core PCE: 2.0% 1.5% CPI: 2.8% 2.3% Core CPI: 2.2% 1.9% Unemployment Rate: 4.0% 4.1% U6 Unemployment Rate: 7.8% 8.2% Non Farm Payrolls: 213, ,000 Jobless Claims (4-wk Avg): 223, ,500 Real GDP: 2.0% 2.5% 2-Yr Treasury Rate: 2.58% 2.27% -Yr Treasury Rate: 2.85% 2.90% Next FOMC Meeting: Consensus for Rate Hike: Jul/Aug 31-1 Sep Fed Funds Target Range: PCE, CPI readings are YoY; core strips out food & energy U6 Unemployment: Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons Interest Rate Monitor Loans & Leases in Bank Credit* Percent Annual 8.8% 6.3% 8.7% 3.7% -5 '82 '89 '96 '03 ' '17 *All commercial banks in US, year over year growth rate One of the hallmark pieces of legislation that Congress passed into law in 20 following the crisis was the Dodd-Frank Wall Street Reform and Consumer Protection Act. Considering the near collapse of the financial system in late 2008, it was certainly an appropriate response to calibrate and introduce regulation to promote a more resilient system in the future. However, the benefits from the reform appear to come with some important concessions of which may be lower loan growth and a more temperate economic expansion. In part, the dynamic may be attribubted to lower levels of profitability for the banking industry. For every dollar of equity invested, U.S. banks have returned on average approximately 8.5 percent per year since 20. This is nearly half (about 40 percent) the returns of the previous two cycles which generated approximately 14 and 15 percent, respectively. Additionally, households and firms may still be in a deleveraging position in an effort to repair their balance sheets which would certainly hinder growth. To that end, in December of last year, Congress passed legislation to lower tax rates broadly to promote investment. As a result, bank profitability metrics are poised to increase sharply (see chart on page 3) and households and firms may find it more attractive to take on debt which may spur loan growth. Additionally, in June of 2018, Congress passed legislation to calibrate the breadth and depth of Dodd-Frank. It is evidence the tone of legislation has shifted which may be supportive of greater economic expansion. Macroeconomic Insights

2 U.S. Retail Sales June Release Date: July 16, 2018 Prior Result: 0.8% June Result: TBA 1.4% % % % % % 0.4 U.S. U.S. Retail Retail Sales Sales (M/M) Later this month, we will get the final read on the pace 0.2% % of consumer spending for the second quarter. Sales in -0.2% % -0.2 May advanced a solid 0.8% month over month after -0.6% -0.4 increasing 0.4 percent in April. While a portion of the -0.8% % -0.8 growth is attributed to rising prices, particularly for -1.2% % -1.2 fuel at gasoline stations, core readings were also notably higher which is supportive of improving economic output. Advancers included spending at establishments for building materials (+2.4%), gasoline (+2.0%), food & drinking places (+1.3%), and clothing M/M Headline Chg Y/Y Core Chg (+1.3%). Furniture & home stores (-2.4%) and sporting goods (-1.1%) retailers were the sole decliners that weighed on the headline figure. Should the final reading on core retail sales this quarter remain near current levels, personal consumption one of the broad sub-categories of gross domestic product is set to accelerate notably. Personal consumption is on track to add 1.8 percentage points in the second quarter after contributing only 0.7 percentage point of growth in the first quarter. At least in the near term, the combination of moderating wage growth and higher commodity prices has not hampered consumer spending and therefore sales performance for retailers has remained buoyant U.S. Total Nonfarm Payrolls June Release Date: July 6, 2018 Market Consensus: 190k June Result: 213k Nonfarm payrolls rose by 213 thousand in June, well above expectations for 190 thousand. In addition, total nonfarm payrolls for May were revised modestly higher by 11 thousand to 244 thousand (from 223 thousand). The June figure also nearly matched its 6- month moving average of 214 thousand. The headline figure and positive revision demonstrates the overall strength and consistency in what has been a very resilient job market. U.S. Total Nonfarm Payrolls 335 Thousands Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Monthly Change 6 Month Avg Average hourly earnings advanced 0.2 percent on a month over month basis in June after increasing an unrevised 0.3 percent in May. The average workweek remained flat at 34.5 hours. Wage growth measured on a year over year basis was unchanged at 2.7 percent compared to May compared to estimates calling for modest acceleration. The unemployment rate increased in June by 0.2 percentage points to 4.0 percent (from 3.8 percent), the lowest it had been since April The increase however is attributed to a large share of workers entering the labor force (+600 thousand). Valley National Bank 2

3 U.S. Existing Homes Sales June Release Date: July 20, 2018 Prior Result: 5.43 million June Result: TBA 5,800 5,600 5,400 Thousands, annual rate U.S. Existing Home Sales 30-Yr Fixed Rate Mortgage (%) 5,200 U.S. existing home sales decelerated for the second 5,000 consecutive month in May. Units sold declined 0.4 4,800 Pol-exit percent on a month over month basis to 5.43 million 4,600 Housing Affordability Index in May, which missed the consensus estimate of ,400 million. While new homes for May increased, the 4,200 resale market represents a significantly higher share May-17 Aug-17 Nov-17 Feb-18 May-18 of the overall market. Additionally, while supply has been partially attributed to the slowdown, the level of housing stock has been on the rise. In fact, the months supply of existing homes has increased from 3.2 months in December 2017 to 4.1 months in May. This dynamic suggests that perhaps borrowing costs and prices are beginning to adversely impact demand. The average selling price was up 2.7 percent compared to the previous year and set a record for the month at $264,800. By geography, the Northeast was the only region that advanced compared to the prior month. Should the trend persist in resales, gross domestic product is likely to be adversely impacted. Based on the data to-date, estimates suggest residential investment will add no growth to headline GDP. Bank Profitability Turns Higher from Lower Taxe Rate Net Liquidity Percentage Manufacturing Commercial Return Core Premium of on PCE Banks Real Equity Activity Price of Estate Tightening U.S. & Index Boosted Assets -Year and C&I Standards by Treasury Delinquency Weaker Dollar Rate 18 One of the hallmark pieces of legislation that Congress Percent Quarterly Return on Assets 90 passed into law in 20 following the crisis was the Dodd-Frank Wall Street Reform and Consumer Protection Act. Considering the near collapse of the financial system in late 2008, it was certainly an appropriate response to calibrate and introduce 2 00 Return on Equity 0.6 (0.5) regulation to promote a more resilient system in the (1.0) future. However, the benefits from the reform appear to come with some important concessions of which 0(1.5) may be lower loan growth and a more temperate Core PCE M Money Stock economic expansion. In part, the dynamic may be attribubted to lower levels of profitability for the banking industry. For every dollar of equity invested, U.S. banks have returned on average approximately 8.5 percent per year since 20. This is nearly half (about 40%) the returns of the previous two cycles which generated approximately 14 and 15 percent, respectively. Additionally, households and firms may still be in a deleveraging position in an effort to repair their balance sheets which would certainly hinder growth. To that end, in December of last year, Congress passed legislation to lower tax rates broadly to promote investment. As a result, bank profitability metrics are poised to increase sharply and households and firms may find it more attractive to take on debt which may spur loan growth. Additionally, in June of 2018, Congress passed legislation to calibrate the breadth and depth of Dodd-Frank. It is evidence the tone of legislation has shifted which may be supportive of greater economic expansion. 2.0 Valley National Bank 3

4 All Employees: Total Nonfarm May Release Date: June 29, 2018 Change, thousands of persons All Employees: Total Nonfarm for Select States Current Prior 30 New Jersey New York Florida Pennsylvania Connecticut New Jersey New York Florida Pennsylvania Connecticut Unemployment Rate May Release Date: June 29, 2018 Current Prior New Jersey 4.4% 4.5% New York 4.5% 4.6% Florida 3.8% 3.9% Pennsylvania 4.5% 4.7% Connecticut 4.5% 4.5% 7.5% 6.5% 5.5% 4.5% 3.5% Unemployment Rate for Select States 4.4% 4.5% National Unemployment Rate 3.8% 4.5% 4.5% New Jersey New York Florida Pennsylvania Connecticut Building Permits Authorized for New Home Sales May Release Date: June 29, ,000 Building Permits Authorized for New Home Sales for Select States 11,0 Current Prior,000 New Jersey 1,897 1,699 New York 4,017 2,173 Florida 11,0 12,576 Pennsylvania 2,093 1,976 Connecticut ,000 6,000 4,000 2,000-4,017 1,897 2, New Jersey New York Florida Pennsylvania Connecticut Valley National Bank 4

5 Key Economic Indicators Economic/Financial Indicator Units Period Current Prior Prior Year 04/01/18 01/01/18 /01/17 04/01/17 /01/16 /01/15 5Yr Max 5 Yr Min Price Levels PCE Core Inflation 1 Y/Y % Chg May 2.0% 1.8% 1.5% 1.8% 1.5% 1.5% 1.6% 1.9% 1.3% 2.0% 1.3% Consumer Price Index Y/Y % Chg Jun 2.8% 2.7% 1.6% 2.4% 2.1% 2.0% 2.2% 1.6% 0.1% 2.8% -0.2% CPI excluding food & energy Y/Y % Chg Jun 2.2% 2.2% 1.7% 2.1% 1.8% 1.8% 1.9% 2.2% 1.9% 2.3% 1.5% Producer Price Index: Final Demand Services Y/Y % Chg Jun 2.8% 2.4% 1.7% 2.4% 2.2% 2.4% 1.7% 1.6% 0.3% 2.9% 0.2% Producer Price Index: Final Demand Goods Y/Y % Chg Jun 4.3% 4.3% 2.1% 2.8% 3.3% 3.3% 4.1% 0.4% -4.9% 4.3% -5.2% Personal Consumption Expenditures Price Index Y/Y % Chg May 2.3% 2.0% 1.5% 2.0% 1.6% 1.6% 1.7% 1.6% 0.2% 2.3% 0.2% Employment & Labor Markets All Employees: Total Nonfarm Payrolls, Monthly Change Thsd Jun Unemployment Rate Percent Jun 4.0% 3.8% 4.3% 3.9% 4.1% 4.1% 4.4% 4.9% 5.0% 7.5% 3.8% U6 Unemployment Rate 2 Percent Jun 7.8% 7.6% 8.5% 7.8% 8.2% 8.0% 8.6% 9.6% 9.8% 14.2% 7.6% 4-Week Moving Average of Initial Jobless Claims, Monthly Thsd Jul Average Duration of Unemployment Weeks Jun Avg Hourly Earnings of All Employees (Private) Y/Y % Chg Jun Avg Wkly hrs worked (Manu: Production & Nonsupervisory) Hours Jun Retail Trade, Housing & Other Activity Total Vehicle Sales Millions Jun Retail Sales Y/Y % Chg May 5.9% 4.8% 4.0% 4.8% 3.9% 5.3% 4.8% 3.6% 1.8% 6.1% 1.6% Retail Sales ex Auto Y/Y % Chg May 6.4% 4.9% 3.6% 4.9% 4.4% 5.1% 4.7% 3.2% 0.5% 6.4% 0.5% Housing Starts Thsd May 1,350 1,286 1,122 1,286 1,334 1,265 1,165 1,327 1,064 1, New Housing Units Under Construction Thsd May 1,291 1,267 1,169 1,267 1,218 1,188 1,095 1, , Real Estate Loans, All Commercial Banks Y/Y % Chg Jun Building Permits Authorized for New Private Housing Thsd May 1,301 1,364 1,205 1,364 1,366 1,343 1,255 1,276 1,162 1, Production & Business Activity Industrial Production Index May Capacity Utilization: Total Industry Percent May 77.9% 78.1% 76.2% 78.1% 77.0% 76.8% 76.2% 75.2% 76.6% 79.6% 75.0% Coincident Economic Activity Index Index May 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 2.9% 3.4% 3.7% 2.7% National Accounts Q Q Q Q Q Q Real Gross Domestic Product Q/Q % Chg Q1 2.0% 2.9% 1.2% 2.8% 2.0% 2.9% 3.1% 1.8% 0.5% 5.2% -0.9% Nonresidential Fixed Investment Q/Q % Chg Q1 11.9% 7.4% 8.8% 11.9% 11.9% 7.4% 8.7% 0.8% -5.6% 12.0% -5.6% Residential Fixed Investment Q/Q % Chg Q1 7.1% 15.6% 13.0% 7.1% 7.1% 15.6% -3.0% 12.3%.2% 22.0% -3.0% Change in Private Inventories Billions Q (0.1) (0.1) Net Exports of Goods & Services Billions Q1 (634.4) (602.0) (582.8) (634.4) (634.4) (602.0) (567.2) (564.3) (520.1) (440.9) (634.4) Trade Balance: Goods & Services Millions May (43,053) (46,081) (45,823) (46,081) (52,881) (46,986) (46,074) (42,644) (41,769) (34,705) (55,536) Government: Current Expenditures Q/Q % Chg Q1 5.3% 9.6% 4.7% 5.3% 5.3% 9.6% -4.1% 2.7% -0.1% 9.6% -7.4% Financial Indicators Standard & Poors 500 Index Index Jul-13 2,730 2,728 2,391 2,519 2,363 2,168 1,924 2,873 - Yr Teasury Rate Percent Jul % 2.85% 2.33% 2.33% 2.40% 1.60% 2.05% 3.11% 1.37% 2- Yr Treaury Rate Spread Percent Jul % 0.27% 0.98% 0.86% 1.13% 0.83% 1.41% 2.66% 0.25% Oil Price (WTI) Spot Price Jul Gold Price Spot Price Jul-13 1,242 1,246 1,219 1,283 1,245 1,323 1,119 1,420 1,049 Credit Markets & Monetary Data Money Supply M2 Y/Y % Chg Jul 4.3% 4.3% 5.8% 3.9% 4.5% 5.1% 6.1% 7.3% 5.6% 7.8% 0.0% Velocity of M2 Percent Q1 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.5% 1.6% 1.4% Loans & Leases in Bank Credit, All Commercial Banks Y/Y % Chg Jul 4.8% 5.1% 3.6% 4.6% 4.1% 3.5% 4.6% 7.7% 8.0% 8.5% 2.6% Total Consumer Credit, Outstanding Y/Y % Chg May 4.8% 4.6% 6.0% 4.6% 5.0% 5.0% 6.1% 2.8% 7.2% 7.3% 2.7% 1 Personal consumption expenditures core inflation excludes food & energy prices Source: Valley National Bank, FRED 2 Total unemployed, plus all marginally attached workers plus total unemployed part time for economic reasons 5

6 Regional Economic Indicators Economic Indicator Units Period Current Prior Prior Year 04/01/18 01/01/18 /01/17 04/01/17 /01/16 /01/15 5 Yr Max 5 Yr Min New Jersey All Employees: Total Nonfarm Thsd Chg May Unemployment Rate Percent May 4.4% 4.5% 4.5% 4.5% 4.7% 4.7% 4.5% 4.9% 5.2% 8.5% 4.4% Building Permits Authorized for New Private Housing Units May 1,897 1,699 2,407 1,699 2,009 2,706 1,645 1,615 2,801 4,099 1,501 Leading Index Percent May 1.52% 1.23% 1.21% 1.23% 1.12% 1.18% 1.37% 1.07% 2.27% 2.59% 0.76% New York All Employees: Total Nonfarm Thsd Chg May Unemployment Rate Percent May 4.5% 4.6% 4.7% 4.6% 4.7% 4.7% 4.7% 4.9% 4.9% 7.8% 4.5% Building Permits Authorized for New Private Housing Units May 4,017 2,173 2,424 2,173 3,776 3,519 3,890 2,942 3,402 13,442 1,603 Leading Index Percent May 1.59% 1.17% 0.83% 1.17% 0.88% 1.16% 0.72% 1.06% 1.62% 2.64% 0.27% Florida All Employees: Total Nonfarm Thsd Chg May Unemployment Rate Percent May 3.8% 3.9% 4.2% 3.9% 3.9% 3.9% 4.3% 4.8% 5.2% 7.4% 3.8% Building Permits Authorized for New Private Housing Units May 11,0 12,576,566 12,576 11,202,344,3 9,691 8,638 12,576 5,712 Leading Index Percent May 1.98% 1.91% 2.19% 1.91% 2.17% 1.51% 2.33% 1.63% 2.35% 2.78% 0.88% Pennsylvania All Employees: Total Nonfarm Thsd Chg May Unemployment Rate Percent May 4.5% 4.7% 4.9% 4.7% 4.8% 4.8% 4.9% 5.5% 5.2% 7.5% 4.5% Building Permits Authorized for New Private Housing Units May 2,093 1,976 2,166 1,976 1,805 1,671 1,687 1,906 1,922 2,651 1,163 Leading Index Percent May 2.95% 1.90% 1.24% 1.90% 1.00% 1.22% 1.76% 1.13% 0.93% 2.95% 0.51% Connecticut All Employees: Total Nonfarm Thsd Chg May Unemployment Rate Percent May 4.5% 4.5% 4.7% 4.5% 4.5% 4.5% 4.8% 4.9% 5.6% 7.9% 4.5% Building Permits Authorized for New Private Housing Units May Leading Index Percent May 0.93% 1.00% 2.01% 1.00% 0.89% 0.76% 1.55% 1.60% 1.38% 3.16% 0.22% New York Metropolitan Area All Employees: Total Nonfarm Thsd Chg May Unemployment Rate Percent May 3.9% 4.4% 4.5% 4.4% 4.3% 4.5% 4.5% 4.8% 4.9% 8.1% 3.9% Building Permits Authorized for New Private Housing Units May 4,433 2,514 3,423 2,514 4,265 4,523 4,054 2,972 4,918 16,235 2,059 Orlando Metropolitan Area All Employees: Total Nonfarm Thsd Chg May Unemployment Rate Percent May 3.2% 3.4% 3.9% 3.4% 3.5% 3.5% 4.0% 4.4% 4.9% 7.2% 3.2% Building Permits Authorized for New Private Housing Units May 1,986 3,672 1,919 3,672 2,158 1,526 1,557 1,532 1,612 3, Miami Metropolitan Area All Employees: Total Nonfarm Thsd Chg May Unemployment Rate Percent May 3.8% 4.0% 4.4% 4.0% 4.3% 4.1% 4.5% 4.9% 5.3% 7.3% 3.8% Building Permits Authorized for New Private Housing Units May 1,614 1,513 1,016 1,513 2,024 1,798 2,596 1,972 1,776 2, U.S. Regional Existing Home Sales Northeast Census Region Thsd May #N/A #N/A - - South Census Region Thsd May 2,320 2,330 2,320 2,330 2,260 2,200 2,280 #N/A #N/A - - West Census Region Thsd May 1,170 1,180 1,220 1,180 1,140 1,250 #N/A #N/A #N/A - - Midwest Census Region Thsd May 1,260 1,290 1,290 1,290 1,250 1,3 1,330 #N/A #N/A - - Source: Valley National Bank, FRED 6

7 Important Disclaimer The information in this report was prepared by Valley National Bank. The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Valley National Bank makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this report constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinions of Valley National Bank and are subject to change without notice. Valley National Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Prices and availability of financial instruments are subject to change without notice. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. The products offered by Valley National Bank s Trust Department are not FDIC insured, are not deposits or other obligations of the Bank, are not guaranteed by the Bank and involve investment risks, including possible loss of principal amount invested. Contacting the Author Evan P. Bliss Finance & Economics ext ebliss@valleynationalbank.com Other Contacts Tyler Iller Wealth Director ext tiller@valleynationalbank.com David Lackmann Investment Director ext dlackmann@valleynationalbank.com Christopher Philips Structured Products ext cphilips@valleynationalbank.com 2018 Valley National Bank. Member FDIC. Equal Opportunity Lender. All Rights Reserved. VCS