Bernanke Money Policy Seen Successful as Savers Become Consumers

Wednesday, 21 Dec 2011 10:22 AM

 

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Federal Reserve Chairman Ben S. Bernanke finally may be catching a break: His easy-money policies are showing signs of speeding up the economic rebound three years after he cut interest rates to zero.

Housing may be nearing a bottom as record-low mortgage rates tempt more buyers into the market and confidence among homebuilders climbs to the highest since May 2010. Autos, another part of the economy sensitive to interest rates, are reviving, with carmakers reporting in November their highest sales pace in more than two years.

Banks also are starting to put more of their money to work, expanding commercial and industrial loans last quarter by the most since Lehman Brothers Holdings Inc. went bankrupt in September 2008.

“When the Fed sprinkles happy dust on the economy, we always respond,” said Allen Sinai, co-founder and chief global economist and strategist at Decision Economics in New York. “The happy dust has been out there a long, long time, and I think it finally may be settling in some places.”

Since the recovery began in June 2009, households have focused on saving rather than spending, while banks have concentrated on rebuilding capital instead of lending. That may be changing, as both have made progress in rebuilding their balance sheets, Sinai said.

He sees growth accelerating in the range of 2.5 percent to 2.75 percent next year from 1.5 percent to 2 percent this year, when the economy was hit by what Bernanke called “some elements of bad luck” in a Nov. 2 news conference. These include a run- up in oil prices caused by the Arab spring and a sell-off in the stock market triggered by Europe’s debt crisis.

More Bad Luck

More bad luck may be in store if Congress fails to extend a payroll-tax cut and special unemployment benefits beyond the end of the year. That could knock a percentage point off growth in 2012, reviving fears of a double dip, said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.

Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, is even more optimistic than Sinai. Crandall -- the most-accurate forecaster of the U.S. economy as of Dec. 1, based on Bloomberg calculations -- predicts growth next year of just over 3 percent, as companies become more confident about the outlook and expand their businesses.

The resilience of the economy will lift corporate earnings and stock prices, Sinai said. Operating profits of companies in the Standard & Poor’s 500 Index will rise by an average of 8 percent to 10 percent in 2012, and the stock gauge will end the year at 1,400, he forecasts -- up from 1,241.30 at 4 p.m. in New York yesterday.

Stocks Over Bonds

“Next year, stocks will do better than bonds,” Hoffman said. He sees stock returns in the “high single digits,” including dividends, compared with yields on 10-year Treasury notes below 2 percent.

Faster economic growth should be good news for President Barack Obama as he tries to secure a second term. It’s “possible” the jobless rate may be down to 8 percent by the November elections, he said Dec. 11 on the CBS television program “60 Minutes.”

Sinai and Dean Maki, chief U.S. economist at Barclays Capital in New York, agree.

“We see the unemployment rate at 8 percent at the end of 2012,” Maki said Dec. 14 in a radio interview on “Bloomberg Surveillance” with Tom Keene, compared with 8.6 percent last month. It will fall faster than many forecasters expect, in part because “more and more of the baby boomers are retiring every month,” he added.

‘Policy-Uncertainty Shock’

Big risks remain. The economy may be buffeted in the second half of next year by what Ethan Harris at Bank of America Merrill Lynch calls a “policy-uncertainty shock.” The co-head of global economic research in New York sees growth slowing to just over 1 percent in the third and fourth quarters of 2012, as households and companies wait to see what happens to former President George W. Bush’s income-tax cuts, which are scheduled to expire at the end of 2012.

Europe also is a concern. The sovereign-debt turmoil there and a deceleration in emerging-market growth may be “poised to knock us off course,” Federal Reserve Bank of Dallas President Richard Fisher said Dec. 16.

Demand “has slowly begun to strengthen domestically, yet developments in Europe, a slowdown in growth in emerging economies such as China and Brazil, and concerns about financial tripwires that might be triggered give rise to caution,” he said in a speech in Austin, Texas.

Fastest Expansion

The economy appears to be ending 2011 with the fastest expansion of the year, said Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York. He forecasts growth of 3.5 percent in the fourth quarter, compared with what he said will be a downwardly revised 1.5 percent in the third. The Commerce Department already cut its third-quarter estimate to a 2 percent annual rate on Nov. 22 from 2.5 percent.

It was the late Nobel laureate economist Milton Friedman who first spoke of monetary policy affecting the economy with “long and variable lags,” as consumers and companies gradually adjust spending in response to changes in interest rates.

Transmission of this policy to the economy “has been gummed up” during the recovery, as households held back on spending and banks restrained lending, said Paul Ballew, chief economist at Nationwide Mutual Insurance Co. in Columbus, Ohio, and a Fed adviser. Now, “it’s starting to free up a bit.”

The tangible-capital ratio for the banking industry stood at a post-World War II high of 8.5 percent in the third quarter, based on calculations by Keefe, Bruyette & Woods. The ratio -- which measures how much loss a bank can absorb before shareholder equity is wiped out -- is “well above” the 6.9 percent average since 1934, according to the investment bank.

Fortified Balance Sheets

With their balance sheets fortified, banks have increased commercial and industrial loans by an average annual pace of almost 10 percent in the third quarter, the highest since the comparable quarter in 2008, compared with a 1.7 percent decline in the past four years, based on Fed data.

U.S. banks also have moved to fill gaps left by crisis- plagued European counterparts as they reduce lending in America. San Francisco-based Wells Fargo & Co., the largest U.S. home lender, announced Nov. 2 that it was buying a $3.3 billion commercial real-estate-loan portfolio from Irish Bank Resolution Corp., formerly known as Anglo Irish Bank.

Consumers also are in better financial shape, thanks to reductions in debt and the Fed’s record-low interest rates. Household-debt payments as a share of disposable income stood at 11 percent in the third quarter, the lowest since 1994 and down from a peak of 14 percent set in 2007, according to data from the central bank.

Best Month

That has freed up money for spending, and the automobile industry is a beneficiary. U.S. light-duty car and truck sales rose to a seasonally adjusted annualized rate of 13.6 million in November, the best month since August 2009, based on data from Autodata Corp. in Woodcliff, New Jersey.

“We’re going to breach 14 million” for 2012 as a whole, said Ballew, a former director of global market and industry analysis for General Motors Co. in Detroit. He reckons sales this year will come in just below 13 million.

“It’s a good time to buy,” he said. “Affordability is at an extremely high level, and auto-loan rates are at the lowest they’ve ever been.”

The average age of cars and light trucks on the road today has risen to 10.6 years, Jenny Lin, senior U.S. economist at Dearborn, Michigan-based Ford Motor Co., said on a Dec. 1 conference call. That’s above the seven-to-7.5 years Ballew says is the long-term average.

Pent-Up Demand

“We are going to see more and more of this pent-up demand realized,” Lin told analysts and reporters.

The story is much the same in housing. Low mortgage rates and the steep drop in prices have made homes more affordable than they’ve been in years, said Thomas Lawler, a former economist with government-backed mortgage company Fannie Mae in Washington, who now is an independent housing consultant in Leesburg, Virginia.

There’s also a lot of pent-up demand in this market, as many young adults put off moving away from their parents because of the tough economic times, he added.

“Residential-investment spending has hit a bottom, and it probably will pick up a little bit next year,” he said.

The National Association of Home Builders/Wells Fargo index of builder confidence rose to 21 this month, the highest since May 2010, from 19 in November, the Washington-based group said Dec. 19.

Three-Year High

Builders broke ground last month on the most houses in more than a year, led by a three-year high in multifamily units. Starts increased 9.3 percent to a 685,000 annual rate, the best since April 2010, Commerce Department figures showed yesterday. Building permits, a proxy for future construction, also climbed to a more than one-year high.

While sales historically fall in November, “this year we’ve not seen as dramatic a slowdown as we have seen in recent prior years,” Larry Sorsby, chief financial officer at Hovnanian Enterprises Inc. in Red Bank, New Jersey, said in a Dec. 15 call with analysts. “The market feels a little bit better than we would have expected.”

Starts may rise about 10 percent in 2012 to 675,000 for the year, said Hoffman, the second most-accurate forecaster of this statistic, according to Bloomberg calculations. He sees economic growth accelerating to a “modest” 2.5 percent in 2012 from around 1.75 percent in 2011.

“Bernanke was right; there was an element of bad luck this year,” Crandall said. “Things don’t look bad for the U.S. in 2012.”

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