Posts Tagged ‘economy’

The Commerce Department says personal income in May rose 1.4%, the biggest gain so far in the year. The rise in income didn’t translate fully into spending. Consumer spending rose only 0.3% in May, a rise for the first time in the last 3 months while savings rate jumped to 6.9%, the highest since December 1993. “Consumers are starting to return to malls to spend a little more as they think we’re through the worst,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi.

Analysts believe a sustained recovery in consumer spending is likely only after unemployment eases. “The recession is ending. Still, purchases are likely to be modest until the job losses ease and companies start hiring,” said Rupkey. Increasing job losses led to 0.1% drop in salaries in May. Retailers believe consumer spending will not rise to any significant extent in the near-term. David Dillon, Chief Executive Officer of Kroger Company, a grocery chain, said: “Shoppers remain cautious in this economy, and we do not anticipate that changing anytime soon.”

Experts believe that the current level of housing inventory has to come down for the industry to get into a phase of sustained recovery. Short sale transactions offer a win-win-win situation to buyers, sellers, and lenders, and help clear the housing inventory available for sale. While short sales have risen in the last year or so, experts believe that banks are still not fully prepared to approve the transactions in a timely manner. Rick Shargo, vice president of marketing at RealtyTrac, said: “Interminable delays of six weeks to three months are not uncommon, or banks rejecting a 20% discount at short-sale only to ultimately take the property back and market it at 40 or 50% lower.”

Banks have to report their mortgage assets on a mark-to-market basis, and any sale at a price lower than the value in their books will mean a reduction in their reported profits. Bankers also complain that some buyers take advantage of the current situation, and demand a price which is way below the market price. Walter Molony, spokesman for the National Association of Realtors, said: “Short sales have taken far too long. The faster you clear off this excess inventory the faster you can stabilize home prices.”

The government, through its $787 billion stimulus package, hopes to create more than 600,000 jobs. Federal agencies have injected billions into public works and other projects in an attempt to create employment. President Obama reiterated his commitment to stimulate the economy in a statement yesterday. “Surely and steadily, we will turn this economy around,” said Obama. Unemployment has reached a 25-year high and hundreds of thousands of Americans are losing jobs each month. Skeptics are questioning whether the stimulus package, which was approved for funding in February, has been effective. Senate Minority Leader Mitch McConnell says, “I think the economy is just as likely to begin to recover on its own, wholly aside from this, before much of this has an impact. So I’m very skeptical that this massive sort of spending binge that we’ve engaged in is going to have much of an impact.” David Axelrod, an adviser to President Obama, argues that the drop in job cuts in May is a si gn of effectiveness of the stimulus program. “It feels as if we’re moving and the stimulus package now is not nearly done, it’s just really at its beginnings,” said Axelrod.

The Treasury Department is expected to allow 10 banks to repay funds the banks had received under the Troubled Asset Relief Program (TARP). This follows the “stress tests” conducted on the largest banks in the country to evaluate how they would fare if the economic situation worsened. The banks that are likely to be allowed to repay TARP funds include JP Morgan Chase, Goldman Sachs, and American Express. This is an indication of the government’s confidence in the ability of these banks to withstand economic downturn. The Treasury Department had said that banks will not be allowed to repay TARP funds if they were not adequately capitalized. “If you’re a bank regulator and are serving the public interest, you have no interest in having banks repay TARP,” said Christopher Whalen, managing director of Institutional Risk Analytics. The combined amount of repayment by the 10 banks could exceed $50 billion. The regulators will have an option, by way of warrants to buy common stock,

to inject funds into banks, if their capital adequacy falls below a certain level, even after banks repay TARP money. Banks have been railing against TARP funding after receiving the bailout money, due to government scrutiny and restrictions that came with it.