Fed Survey Shows Tighter Lending Standards, Weakening Credit Demand
(…) “Banks reported expecting to tighten standards for all categories of business loans as well as credit-card loans and jumbo mortgages,” the survey said. “Meanwhile, banks anticipate that loan performance will deteriorate for all surveyed categories.” (…)
The situation changed most with respect to construction and land-development loans. In the fourth quarter, 16% of banks tightened their credit standards for this type of loan, while just 3% eased them. That was up from the third quarter, when 9% tightened while 3 % eased. One-fourth of banks reported weaker demand in the fourth quarter, compared with 4% seeing stronger demand.
Many banks expected those trends to continue into 2019, with around one-fourth of banks expecting an uptick in delinquencies and charge-offs in their construction and land-development as well as commercial and industrial loans.
More banks tightened their standards for commercial real-estate loans and consumer credit-cards in the fourth quarter than loosened them, the survey said.
A growing share of banks also reported weakening demand for various types of residential mortgages and consumer loans in the fourth quarter.
Oft-cited reasons for tightening lending standards included “a less favorable or more uncertain economic outlook,” declining collateral values and lower appetite for risk.
Banks’ lower appetite for risk coincides with Americans’ lower appetite for debt:
Dealers Are Loaded With Unsold Cars Analysts warn car makers could be forced to cut factory production with U.S. auto sales expected to weaken in 2019
There were 3.95 million vehicles on dealership lots at the end of January, a 4% increase from December and up nearly 3% from the prior-year January, according to data released Monday by Wards Auto. (…)
General Motors Co. has already moved to end production at five North American factories this year in response to falling sedan sales, and aiming to get ahead of an expected U.S. car market downturn. More auto makers could be forced to follow suit as rising interest rates on new-car loans and more affordable options on the used-car lot are expected to put a damper on new-car sales this year. (…)
U.S. Factory Orders and Shipments Fall
Manufacturers’ orders declined 0.6% (+4.1% y/y) during November following an unrevised 2.1% October fall. The Action Economics Forecast survey looked for a 0.4% rise.
Durable goods orders rebounded 0.7% m/m (5.3% y/y) after a 2.1% decline. Orders for defense and civilian aircraft recovered following sharp October declines. Excluding transportation altogether, new orders for durable goods fell 0.4% (+4.8% y/y). Strength in orders for metals was offset by a decline in machinery.
Orders for nondurable goods (which equal shipments) fell 1.9% (+2.9% y/y) after a 0.1% uptick. A 9.3% decline in shipments from petroleum refineries led the decline (+5.2% y/y). (…)
-
Monthly changes in new orders (ex. transportation): (The Daily Shot)
COMPOSITE PMIs
The Caixin China Composite PMI™ data (which covers both manufacturing and services) signalled higher Chinese business activity for the thirty-fifth month in a row in January. However, the rate of expansion softened since December, as shown by the Composite Output Index posting down from 52.2 at 50.9 in January.
On a sector basis, growth continued to be driven by the service sector, which saw activity expand solidly at the start of the year. Notably, the seasonally adjusted Caixin China General Services Business Activity Index was down only slightly from 53.9 in December to 53.6. In contrast, manufacturing companies signalled a relatively subdued trend, with output declining modestly in January.
Total new orders rose slightly in the latest survey period. Sector data signalled divergent trends, with a sustained and strong rise in new business across services companies contrasting with a reduction at manufacturers. Notably, service providers registered the fastest increase in new work for seven months.
January data pointed to an improved trend for exports, as overall new work from abroad increased for the first time in ten months. Encouragingly, both manufacturing and services firms registered higher export sales at the start of 2019. Furthermore, service providers recorded the steepest increase in export orders for over a year.
With activity levels rising solidly, services companies in China continued to add to their workforce numbers in January. Though marginal, the rate of job creation edged up to a three-month high. Manufacturing employment meanwhile remained on a downward trend, though the latest fall in staff numbers was the least marked since last April. At the composite level, payroll numbers stabilised following a seven-month sequence of decline.
The level of outstanding work continued to increase at Chinese firms during January, thereby extending the current trend to just under three years. That said, the rate of accumulation remained marginal. The upturn was largely driven by the manufacturing sector, which saw backlogs rise modestly, as services companies registered a slight decline.
Average input costs continued to rise at the composite level, though the rate of inflation eased to the weakest in three years. While services companies recorded the slowest increase in operating expenses since last May, manufacturing firms reported lower input prices for the second month running. A number of panellists mentioned that reduced raw material prices had helped to ease cost pressures.
Prices charged by Chinese companies meanwhile fell for the second month in a row. Output prices set by services firms rose at a fractional pace that was similar to those seen at the end of last year. In contrast, factory gate prices fell for the third successive month and at a quicker rate. A number of monitored firms mentioned that relatively subdued demand conditions and lower input costs had led them to cut their charges.
Businesses in China were generally optimistic that activity will be higher than current levels in 12 months’ time. Notably, the overall level of positive sentiment improved to a five-month high. Services companies remained slightly more optimistic about the outlook than manufacturers, despite the latter seeing confidence improve to its highest since last May. New products and expansion into new markets were key factors linked to confidence in the latest survey period.
(…) The effects of China’s policies to support domestic demand and the development of the trade war between the country and the U.S. will remain key to the prospects of the Chinese economy. Given that the government has refrained from taking policies of strong stimulus, the downward trend of the economy may be hard to turn around for the time being.
The IHS Markit Eurozone PMI® Composite Output Index edged lower in January, falling for a fifth successive month to register its lowest level for five-and-a-half years. After accounting for seasonal factors, the index recorded 51.0 in January, a little better than the earlier flash estimate of 50.7 but still down from 51.1 in December and signalling only weak growth in business activity.
Activity weakness was principally centered on France and Italy. Output in France was down for a second successive month, and at the fastest rate in over four years.
Meanwhile, Italian private sector output deteriorated for the third time in four months and to the greatest degree in over five years.
Manufacturing was the primary source of output weakness during January. Whilst service sector growth was unchanged since December at around a four-year low, production in manufacturing rose only slightly and at the weakest rate in over five-and-a-half years of growth. Output growth in manufacturing was only sustained via the depletion of backlogs and stockpiling of finished goods (which rose at a series record rate).
Indeed, manufacturing new work declined to the greatest degree since April 2013 and was a primary reason for the first fall in composite new business for over four years. New work received by service providers was barely changed, rising only negligibly since December.
Job numbers continued to increase during January, maintaining a run of growth that begin in November 2014. Moreover, job creation was sustained across the single currency area, with the exception of Italy where a net fall in jobs was recorded for the first time since September 2015. Moreover, in line with the wider slowdown in activity and new work, overall euro area employment growth was the weakest in 28 months at the start of 2019. Increased capacity nonetheless helped to support the clearance of unfinished business.
Backlogs of work declined for a second successive month in January and to the greatest degree recorded by the survey since the end of 2014. Meanwhile, input prices continued to rise markedly in January. Wage and salary pressures drove operating expenses up in the service sector, but with price pressures easing in manufacturing (thanks to lower oil-related goods prices) overall input costs rose to the weakest degree in nearly a year-and-a-half. Increased costs nonetheless led to another increase in output charges, which rose in January at the strongest rate in three months.
Business confidence also improved to its highest in three months, though nonetheless remained subdued and around the lowest in four years. International trade tensions, Brexit and ongoing political tensions – both regionally and globally – continued to undermine sentiment.
The IHS Markit Eurozone PMI® Services Business Activity Index was unmoved on December’s 49-month low of 51.2 at the start of the year. France and Italy remained the primary sources of weakness, with both countries registering declines in activity during January. This was in stark contrast to Germany and Spain, where growth of activity improved in each case.
Latest data again suggested that overall growth of activity was supported primarily through the reduction of work outstanding, which declined to the greatest degree in over four years. New business volumes were broadly unchanged, rising at a negligible pace that was the weakest in fifty months of growth.
Jobs were again created during the month, although growth continued to slide. Easing for a fourth successive period, the degree to which employment rose was the weakest seen since the end of 2016.
Meanwhile, price pressures remained elevated in January. Operating expenses continued to rise at an above trend rate, placing ongoing pressure on margins. Although output charges continued to increase, and at the fastest pace in seven months, they did so at a pace that continued to noticeably lag that of input costs.
Finally, business confidence amongst service providers was a little firmer in January but nonetheless remained close to December’s four year low.
The PMI indicates that GDP is growing at a quarterly rate of just 0.1%, setting the scene for the region’s worst quarter since 2013. Such a weak start to the year would mean the current consensus forecast for 1.5% GDP growth in 2019 is likely to be revised lower, and hence lead to more dovish signals from the ECB.
What started as a manufacturing and export-led slowdown has shown increasing signs of infecting the service sector. The manufacturing PMI numbers are indicative of the goods-producing sector slipping into recession, while growth in services is now running at its lowest for four years. Worst may be yet to come: new orders received by factories are declining at the steepest rate for nearly six years and new business inflows into the service sector have stalled. Demand is consequently falling to an extent not seen since mid-2013. (…)
The deteriorating picture looks broad-based. Italy is in its steepest downturn for over five years and France has sunk into its sharpest decline for over four years. Faster growth in Germany and Spain meanwhile looks tenuous, as order book trends deteriorated in both cases. (…)
The U.S composite PMI is out later this morning. Will review tomorrow.
WHAT’S GOING ON?
Amid all the gloom, these are strong gains:
SENTIMENT WATCH
Don’t Hold Your Breath for Big Stock Returns, Says Goldman Sachs Investors that didn’t profit from the equity rally in January may have missed out, according to the bank.
Lots of dry powder out there:
FOLLOW THE (AFTER TAX) MONEY:
Home Buyers Flee to Florida, as Brokers Credit Tax Savings
A growing list of public officials in high-tax states are expressing alarm that big earners are bolting to low-tax states as new data suggests some home buyers are moving in response to the year-old change in the federal tax law.
New York Gov. Andrew Cuomo became the latest on Monday when he blamed a $2.3 billion state shortfall on the new federal tax law that he said is driving people to leave the state. During a news conference in Albany, Mr. Cuomo said the 2017 law capping a deduction for state and local taxes at $10,000 is the reason for the deficiency. He specifically mentioned Florida as an attractive option for New Yorkers who are unhappy with the change in the tax law
Preliminary data show a jump in Florida home purchases by buyers from high-tax states. Home values in lower-tax areas have been rising faster than those in places where limiting the ability to deduct high state and local taxes eroded some of the savings from the federal tax reduction, according to an analysis by real estate and data firm Zillow. (…)
Mr. Cuomo, a Democrat, said someone in the top tax bracket in New York City already faced a combined tax rate of 45%, which would increase by 12% to 50.4% because of the tax-deduction changes. “A taxpayer in Florida would see no increase, probably would see a decrease, and Florida also has the advantage of no estate tax,” he said. (…)
New Jersey’s Department of the Treasury reported last month a 35% drop in income-tax revenue for December compared with the previous year, attributing the shortfall to changes in tax policy. In Connecticut, income-tax collections for December came in $75 million above projections. But going forward, the tax law changes and the poor stock market performance in 2018 could drag down revenues later in the year, Connecticut’s Comptroller Kevin Lembo said last week. (…)
Florida had the highest level of net domestic migration from July 2017 to July 2018, according to U.S. Census data released in December. New York was the largest overall population loser, followed by Illinois. (…)
Other low-tax cities are also doing well. Las Vegas and Phoenix have slowed a bit recently but still have the fastest home-price growth among major metropolitan areas, according to the S&P CoreLogic Case-Shiller home-price indexes. Brokers credit Californians fleeing rising home prices and tax changes. (…)
The law that went into effect at the start of last year cut federal income taxes for most Americans, though not everyone benefited equally. That is because the law capped the deduction for state and local income and property taxes at $10,000. The bill also capped the size of a loan on which mortgage interest could be deducted at $750,000, which hurts states with higher home prices. (…)
1 thought on “THE DAILY EDGE: 5 FEBRUARY 2019”
“Lots of dry powder out there”
See: Dust explosions may be classified as being either “primary” or “secondary” in nature. Primary dust explosions may occur inside process equipment or similar enclosures, and are generally controlled by pressure relief through purpose-built ducting to the external atmosphere. Secondary dust explosions are the result of dust accumulation inside a building being disturbed and ignited by the primary explosion, resulting in a much more dangerous uncontrolled explosion that can affect the entire structure. Historically, fatalities from dust explosions have largely been the result of secondary dust explosions.
Comments are closed.