Published: January 05, 2009 08:47 am      

New year is a time for resolutions and retrospection

Several historic events mark 2008 as special. The Federal Reserve demonstrated the implications of “lender of last resort.” The federal funds rate was lowered to a target range of 0.0 to .25 percent and made it abundantly clear this rate will not be raised in the near term. The key is the implied duration of an unchanged rate, which will allow banks to recapitalize and go about increasing lending.

In their statement of Dec. 16, 2008, the Fed outlined several options, including plans to purchase agency debt and mortgage backed securities; evaluate the benefits of buying long-dated Treasuries; fund asset backed securities programs to enhance credit availability; and last, but not least, the statement noted the Fed would “continue to consider ways of using its balance sheet to further support credit markets and economic activity.” The policy announcement to be released after their next meeting on Jan. 28 should contain some of the missing details of these options. In the interim, the minutes of their last meeting are due to be released on Tuesday.

The incoming administration is floating the idea of a massive infrastructure-laden stimulus package to create 3 million new jobs. The new administration is trying to go to states and localities for stimulus package projects, avoiding Congressional earmarks. That will be good news for the approximately 1.5 million laid off construction laborers, architects, engineers and transportation- related workers. The U.S. economy needs to create approximately 100,000 jobs a month to keep pace with population growth. Payroll employment declined by 533,000 last month and the consensus is that employment will decline by an additional 478,000 jobs when the Labor Department releases this number on Friday. The headline unemployment rate is expected to increase from 6.7 percent to 7 percent.

Sales and prices of new and existing homes fell in November. While the sales of existing homes had appeared to be stabilizing, the 8.6 percent decline in November may be the beginning of a new course, with sales and prices moving lower. The inventory of existing homes rose in November and this suggests additional declines in prices. The inventory of unsold new homes did decline slightly in November from a record high in October. Home mortgage rates have moved significantly lower, in part in response to Fed efforts. According to the Mortgage Bankers Association, lower mortgage rates have created a boom in refinancing through mid-December. Some key indicators of the housing market are due this week, including construction spending, due today, and pending home sales on Tuesday.

There are some additional indicators that fourth quarter 2008 and the first quarter of 2009 may be the worst of this downturn. The growth of M2, a broad measure of money in circulation, is growing at a 22 percent annualized rate, a level usually associated with the end of a recession. There has been some improvement in investors’ appetite for risk, although investors remain in extreme risk averse territory, some indicators demonstrate improvement in investor psychology and willingness to purchase stocks. Equity volatility has also declined with mid-December levels at their lowest levels since early October.

All that glistens is not gold and the several indicators of improvement do not imply the end of bad economic news. The automaker relief plan approved last month was only a temporary measure. Unemployment rates will likely continue to increase and with job insecurity, consumers have been reluctant to spend. You need only look at holiday retail sales figures to note consumer mood.

With additional government stimulus and as this makes its way through the system, we may begin to see additional shiny nuggets in the coming months.



David Helscher is a Senior Vice President and Trust Officer with Clinton National Bank.