Consumer confidence fell sharply in data released yesterday. The Conference Board said that its Consumer Confidence Index dropped nearly 11 points in February to 46, down from a revised 56.5 in January. A reading of 90 or above is thought to be healthy. The monthly average of the index since it began in 1967 has been 95.6. A measure that looks at the public’s evaluation of current economic conditions, fell from 25.2 to 19.4, the lowest level since 1983.
Continued unemployment is thought to be the cause of the drop in consumer confidence. Twenty thousand Americans lost their jobs in January, despite a marginal easing of the unemployment rate to 9.7%. One million Americans could see their jobless benefits evaporate in March if Congress doesn’t act. About 11.5 million are currently drawing unemployment aid. A record 41.2% of these people have been out of work for at least six months. The White House Council of Economic Advisers predicts that unemployment won’t decline to the 5.8% rate seen in 2008 for another seven years. The unemployment benefits extension is stalled in the Senate.
Since 70% of the American economy is driven by consumer spending, the drop in confidence will dampen economic growth. Yesterday the Dow Jones Industrial Average dropped 100.97 points on the news.
In data released yesterday, home prices inched up in December, the seventh consecutive monthly increase. Standard & Poor’s Case Shiller 20 city home price index rose 0.3% from November to December. Home values were still off 3.1% compared to the year before. However, according to Zillow.com, home prices continued to fall in 21% of the 143 markets it tracks.
Most banks struggled in the fourth quarter. In 2009, 140 banks failed, the most since the savings and loan crisis. Yesterday, the Federal Deposit Insurance Corporation said that its insurance fund fell to negative $20.9 billion at the end of 2009, which was a $12.6 billion drop in the final three months of the year. At year end, the FDIC’s reserve ratio was negative 0.39%, the lowest on record.
Profits for banks insured by the FDIC dropped to $914 million for the fourth quarter compared to $2.8 billion in the third quarter. For the last three months of the year, bank balances shrank at the fastest pace ever.
For banks, the bad news is continuing in 2010. Commercial loans made by banks, have fallen by $134 billion this year, while consumer credit has shrunk 7% since its peak in February of last year. The FDIC has raised the number of distressed banks to 702. At a press conference, FDIC Chairwoman Sheila Bair explained why, “This year, the losses are going to be heavily driven by commercial real estate, we’ve known for some time and we have been projecting that… The pace is probably going to pick up this year and for the total year it will exceed where we were last year. ”
Last Thursday, the Federal Reserve bank raised the rate at which banks can borrow funds overnight from the central bank from 0.50% to 0.75%. All members of the 12 Federal Reserve banks supported the decision. It was the first increase in two years. The governors cited “continued improvement in financial market conditions.”
Last Friday the consumer price index, CPI showed that inflation has not increased, remaining at 2%. If food an energy costs are removed, the CPI showed its largest monthly drop in more than 27 years. Since the Fed usually raises interest to dampen inflation, most economists don’t see another interest rise anytime soon. “I think a rate hike in the near-term would be very disruptive,” said Mark Zandi, chief economist with Moody’s Economy.com. “Businesses are still very shell-shocked and nervous.” Of course most economists didn’t foresee last week’s rate rise, either.
Still, there is one sector of the economy that continues to do well. Yesterday, New York State Comptroller Thomas DiNapoli said that Wall Street bonuses jumped 17% in 2009, to $20.3 billion, good news for the state of New York’s budget.
