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Weekly Economic Commentary


Governor Raskin's Remarks Contain Noteworthy Observations about Credit

September 26, 2011

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Fed Governor Raskin’s comments today were largely devoted to soft and worrisome labor market conditions and a justification of the Fed’s unconventional policy actions. She also presented her views about credit availability pertaining to households and small businesses.

She noted that “it seems plausible that the effectiveness of our monetary policy tools is being attenuated by a number of unusual persisting factors, including the excess supply of housing and impaired credit for many households and small businesses. Paul Kasriel has written extensively about the importance of credit in an economic recovery and how the credit contraction following the financial crisis has trimmed the pace of economic growth. It appears that Governor Raskin’s remarks partly echo this opinion.

She went to add that “lenders continue to maintain relatively tight terms and standards on credit cards and, to a lesser extent, other consumer loans. Consequently, many households may be unable to take advantage of the lower borrowing rates that are available to those who have a high net worth and pristine credit records.”

With respect to the woes of small businesses, Governor Raskin cited the latest National Federation of Independent Businesses, which indicated that there was an increase in the percentage of small businesses reporting that “credit has become difficult to obtain.”

DEC 9.26 1Governor Raskin makes a telling point that “a smooth transmission mechanism” in which low interest rates would fuel credit and lead to an economic expansion is not in place. As a result, households are not purchasing homes at historically low rates and businesses are not borrowing to finance payrolls, capital investment, inventories and other operating expenses. The implication here is that credit has to grow to get the economy back on its feet once again.

August New Home Sales Hovers around Recession Lows, Still

Sales of new single-family homes fell 2.3% to an annual rate of 295,000 in August, which marks the sixth monthly decline in the first eight months of the year and the level of sales remains close to the record low of 278,000 seen precisely a year ago. Sales of new homes fell in the Northeast (-13.6%), West (-6.3%), and South (-2.4%) but rose in the Midwest (+8.2%) during August.

DEC 9.26 2

The median price of a new single-family home dropped to $209,100 in August from $228,900 in the prior month; the year-to-year decline stands at 7.7%. There was a 6.6-month supply of unsold new homes in the market place compared with the historical average of 6.2-months.

DEC 9.26 3The combined picture of housing starts and sales indicates that conditions have improved slightly in terms of reduced inventories of both existing and new homes, but foreclosures continue to hold down home prices and construction of new homes remains close to historical lows.

DEC 9.26 4

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.