Shaky consumer still needs Fed support
Consumers, the cornerstone of U.S. economic activity, are still in disarray, data and central bank measures signaled on Monday, as households struggle amid the worst recession since the Great Depression.
The Federal Reserve announced the extension of programs to boost consumer lending, while credit-card issuers showed that people are increasingly having trouble paying their bills.
Manufacturing appears to be finding a floor, but without a pronounced recovery of consumer spending, any economic recovery is likely to be feeble, since consumers fuel about 70 percent of U.S. economic activity.
The Fed’s measures suggest that while the central bank’s emergency stopgaps for many parts of credit markets seem to be working, there is still much work to be done in revitalizing lending to consumers for everything from houses to cars, analysts said.
“It is rather like triage,” said Jay Mueller, senior portfolio manager with Wells Capital Management in Milwaukee. “Several of the markets that were in trouble are functioning much better. The Fed is putting resources where they are most needed,” he said.
In a joint announcement with the U.S. Treasury, the Fed said it would extend its Term Asset-Backed Securities Loan Facility to June 30, 2010 for newly issued commercial mortgage-backed securities.
The Fed and the Treasury also extended TALF through March 31 for newly issued asset-backed securities and already-issued, or “legacy,” commercial mortgage-backed securities. Both parts of the program were due to expire December 31.
In deciding to extend the TALF’s life, the Fed is trying to address the decline of commercial property markets, widely regarded as the next shoe to drop for many already debilitated smaller and medium-sized U payday loan.S. banks. “Everybody is concerned about commercial mortgage-backed securities,” said Mueller. Fed policy-makers “are still trying to get that market functioning,” he said.
After three years of sliding prices, housing activity, although stabilizing somewhat, remains depressed.
U.S. homebuilder sentiment in August rose to its highest level in over a year, a private survey showed on Monday. It added to mounting evidence that the housing market– and in turn, the economic recession — were leveling off.
The National Association of Home Builders/Wells Fargo Housing Market Index edged up to 18 from 17 in July, in line with market expectations.
But home improvement retailer Lowe’s Cos posted a 19 percent drop in quarterly profit on Monday and forecast current-quarter earnings below Wall Street estimates as consumers put off big home projects. It shares fell more than 8 percent.
ASSET FLOW WORRIES
Bond analysts also are concerned that over the long term, should foreign investors dump U.S. Treasuries, that could cause economy-wide borrowing costs, including mortgage rates, to soar, snuffing out any economic recovery.
The release of June U.S. asset flows data added to those anxieties. China, the biggest foreign holder of Treasuries, trimmed its overall holdings of U.S. government securities by $25 billion in the month, although analysts noted that one month’s decline was not enough to raise alarms, yet.