Williamsville State Bank & Trust

The Reuters/University of Michigan survey for February disclosed that consumer confidence fell from 78.4 in January to 70.6 in February and to 70.5 in March. This was the lowest showing in 16 years.

The Commerce Department stated that, if you adjust for inflation, consumer spending did not increase in February over January. This is the second straight month that consumer spending showed no gain. It is reported that consumers have restricted gasoline consumption by 1.1% from year earlier levels. Americans may be commencing to change their driving habits and lifestyles.

C. Employment.

The Labor Department reported that 63,000 jobs were shed by the U.S. economy in February. 450,000 workers have stopped looking for work. The unemployment rate is down to 4.8% because of people giving up looking for work. It’s the first time the U.S. economy suffered back-to-back monthly job losses since 2003.

The performance declined in the following sectors.

39,000 jobs in construction, with a 12-month loss of 220,000.

52,000 jobs in manufacturing, with a 12-month loss of 299,000.

34,000 jobs in retail employment.

To accommodate the growing population the U.S. economy must create at least 100,000 net new jobs per month. The prior rates were as follows:

2005 labor growth was 211,000 jobs monthly.

2006 labor growth was 175,000 jobs monthly.

2007 labor growth was 91,000 jobs monthly.

Some statistical figures of interest:

2.83 million people were getting jobless benefits in February.

The average unemployment time has risen to 8.8 weeks.

Non-farm business worker’s hours have been cut by 1.6%.

D. Housing.

It is reported that mortgage foreclosures have risen to an all-time high and homeowners’ equity has fallen to levels not seen since the Second World War. It is reported that for the first time since records have been kept owner’s equity in homes as an average dropped below 50%. The Fed has reported that on an average home equity dropped to 47.9% in the fourth quarter of 2007. In 1945 the average was over 80%.

The Fed’s analysis is that home equity has dropped 533 billion dollars in the fourth quarter alone.

The Mortgage Bankers Association advised:

More than 2% of all U.S. homes are in foreclosure. This is the highest number since records were started in 1972.

The Commerce Department reported:

Construction spending was down 1.7% in January. It was the largest single drop in 14 years.

The Commerce Department disclosed new home sales fell 2.8% in January to a seasonably adjusted rate of 588,000 units. This is the third consecutive month of decline.

The median price of a new home dropped to $216,000 in January, down 4.3% from December.

The National Association of Realtors reported that home sales dropped a seasonably adjusted 0.4% in January from December to 4.89 million. That is 23.4% below a year ago. The average sales time to sell an existing home is 10.3 months, up from 9.7 months in December.

E. Manufacturing.

The Institute for Supply Management stood at 48.3 in February. This was the lowest reading in five years. A reading above 50 indicates expansion. Orders for durable goods (those lasting over three years) fell 5.3% in January according to the Commerce Department.

Productivity dropped 1.9% from the previous quarter according to the Department of Labor. The reason is hard to explain, except that it appears it may be caused by restructuring and the hiring of lesser-qualified people to reduce costs.

The U.S. government reported that wholesale prices climbed 7.4% in 2007. That is the biggest increase since 1981. This will be passed on to the consumer in coming months.

The January retail sales news showed an increase of 0.5%. The gain is reported to be the lowest in over 30 years. The Institute for Supply Management said its non-manufacturing index rose to 49.3 in February from 44.6 in January. Although this is good news, it still doesn’t show expansion. A level of 50 or better does.

The dollar has sunk to new lows against the Euro and the British pound. The lowering of interest weakens our currency as funds are transferred by 0owners to currencies that can earn more.

The Commerce Department reported that the trade gap narrowed 6.9% in December to 58.8 billion and was 58.2 billion in January.The trade gap for the full year of 2007 narrowed 6.2% from 2006. It was the biggest decline in 16 years.

Exports of goods are up 28% in 2007 from 2005 levels. Imports only increased 17% during the same period. The weaker dollar makes good cheaper to sell overseas. It also makes it cheaper for foreign shops to be opened in the U.S.

OPEC has recently accused the U.S. of “mismanagement”. There is a sufficient supply of oil. Since oil is bought and sold in dollars, it requires the U.S. buyers to use more dollars to buy the same amount of oil.

In spite of oil prices exports rose while imports fell. This indicates a shift in domestic consumer spending and strong foreign demand for U.S. goods helped by the dollar’s weakness.

Springfield area unemployment is reported to have jumped to 5.9% in January from 5.1% a year earlier, according to the Department of Employment Security.

The Illinois Department of Employment Security reported that unemployment in the state dropped 0.1% in January to 5.5%.

The Capital Area Association of Realtors reported that 171 homes sold in January.

That was a drop of 27.5% from last year. There were 1,600 homes for sale in the area and that is down from the 2,000 listed in August. The State Association reported that sales were down 31.1%

What is occurring in the field of financing and credit is the “negative feedback loop”. That is, a set of problems in the industry one day simply creates, by reaction and behavior, another more complicated set of issues to be dealt with. The following is a good illustration: The housing over saturation caused consumers to pull back which put downward pressure on the market causing loss of equity and, therefore weakening of asset values. This weakening caused borrowing difficulties not only for builders and homeowners but also for securitized investments valuation. When that occurred credit on a broad spectrum was affected. The effect of which resulted in margin calls and re-evaluation of collateral. This, when there is no market stability, has lead to the present crisis.

The market needs liquidity. The Federal Reserve moved to accomplish this. It plans to allow the major banks and brokers to swap mortgage-back securities for 200 billion in Treasury bonds. This move increases the credit exposure the Fed is willing to undertake. The Fed is becoming a lender of first resort when it does this, rather than a lender of last resort. Since August the Fed has provided almost a trillion dollars in direct or indirect aid to support the financial market.

We are living and operating in a global economy. We must recognize that the U.S. consumer is no longer the center of power in the economic world. Leadership is also shifting, it appears, from the old industrial stalwarts, like the U.S., to emerging market countries.

It is reported that during 2007 the developing countries produced over 52% of the global growth. It is reported that China alone produced 17.8% of the global GDP growth last year compared to 14.6% of the U.S. economy. Growth in the new world vs. the old world is .4% to 2.2%.

The actions of the Fed produce a mixed bag of results. The Federal Reserve reports that against major currencies the dollar has fallen 14.3% over a year’s time. The result has been that foreign investors are seeking other currencies for investment because of lack of return. As a result foreign goods cost more, i.e. oil. Any goods whose market is based on the U.S. currency are seeing an increase in their cost because the dollar buys less.

The one advantage is a weak dollar provides a stimulus to foreigners to buy U.S. products.

We cannot continue living beyond our means. Credit has been too easy to obtain. Consumer debt of all types has grown too high. Investment standards have grown too lax. The prudent man has given way to invidious comparison.

People must take accountability for their actions. They must take the losses as well as the gains. There is a point where the responsibility is the individuals’. The government is not the solution. Since when has the government been our financial savior? Individuals have to provide and earn security and success on their own.

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The core price index of personal consumption expenditures, the government’s preferred gauge for inflation, rose 2.24% in December from 2.15% in November. The Fed prefers a 1.5% to 2.0% range for keeping price stability. The Labor Department also indicated that inflation rose 0.8% in the fourth quarter, as it did in the third quarter. Considering the Fed’s current dropping of interest rates to 3% to stimulate the economy we can expect more inflation. Consumer prices rose significantly in 2007. The Labor Department disclosed prices were up 4.1% in 2007 versus a 2.5% increase in 2006.

The Commerce Department reported gross domestic product rose 0.6% at an annual rate in the fourth quarter. That is down considerably from the 4.9% growth for the third quarter. For the year, GDP grew at a rate of 2.2%. Overall, the 2007 calendar year slowed but there was reasonable growth. A view away from Wall Street leaves me with the impression that the economy may be better than as viewed on Wall Street. Are the Fed Chairman and Congress overreacting?

The Conference Board disclosed that consumer confidence fell from 90.6 in December to 87.9 in January. The survey is based on a sampling of 5,000 U.S. households. The Reuters/University of Michigan report found that consumer confidence improved from 75.5 in December to 78.4 in January. However, a year ago in January it was 96.9. Average weekly earnings after adjusting for inflation actually fell 0.1% in 2007. This was the fourth decline in five years. Regardless of which sampling of consumer sentiment you prefer, there is no question the consumer is pressed. Considering the effect of the credit tightening, many consumers will have difficulty making ends meet in 2008. America is having trouble paying for its excessive borrowing. The problem originating from excessive borrowing for homes purchased is just the beginning. There are problems now in credit card lending, home equity and cars.

Consumers have three sources to tap when they want to spend…current income, savings and holdings (current wealth) and borrowings. Consumer savings are negligible and stocks and housing equities are under siege. As a result, consumer spending will need a substantial boost in current income to prevent more borrowing. Consumers are going deeper in debt from the latest reports. The Federal Reserve reports disclosed, in November that consumer borrowing rose at an annual rate of 7.4%, the highest increase in three months, and credit card borrowing rose at a rate of 11.3%, the fastest pace in six months.

The Labor Department released figures that showed nonfarm employment fell by 17,000 in January.

If the figure is not adjusted, this will be the first drop in four years. The Department also reported unemployment dropped 0.1% to 4.9% in December, based on a separate survey of households. People are dropping out of the work force, otherwise unemployment should be increasing.

The Department is also advising that the average work week fell to 33.7 hours from 33.8 hours and the payroll gains were only 0.2%, down from 0.4% in December. The net result is that employment is weakening and those looking for work may have more problems finding jobs. For the week ending January 26th jobless claims rose 69.000 to a seasonably adjusted 375,000 for the week. The claims are the highest since October 25th. The four week moving average rose to 325,750.00. Job creation in 2008 will be essential if the economy is to grow.

The Commerce Department reports disclose that construction starts of new homes and apartments totally fell 3.7% in November. Single-family homes construction fell 5.5% to an annual rate of 829,000 in that period. Apartments rose by 4.4% to an annual rate of 332,000 units in that period. The government has reported median price for a new home was $246,900.00. The Commerce Department recently reported that totally only 1.356 million homes and apartments were sold in 2007. This was a drop of 24.8% from 2006 and this was the second steepest decline since records have been kept.

The Institute for Supply Management indicated manufacturing had improved in January from a contracting figure of 47.7 to 50.7 (a figure over 50 indicates expansion). Foreign demand has increased for durable goods. The Commerce Department said orders for durable goods, those lasting three years or more, rose 5.2% in December. Also, orders for non-defense capital goods rose 4.4% in December after a small negativity in November. Overall, however, U.S. car and truck sales fell 4.3% in January compared to one year ago. GM bucked the trend and reported a 2.5% increase.

Same store sales as reported by the International Council of Shopping Centers were up only 0.9% in December. Combined November and December sales were up 2.2%. In 2002 holiday sales grew only 0.5% from the previous year by comparison. However, as a contrast, food prices have really risen. Prices using a November 2007 comparison to November 2006 show the following increases per commodity…dozen eggs up 38% …gallon of milk up 30%......whole wheat bread up 12%. Food prices as a whole rose 5.3% seasonably adjusted in December. The consumer has to be cautious when spending his or her money, especially in light of food and energy prices today.

The drop of interest rates will adversely affect the dollar. Foreign investors will start to look to other currencies because the flooding of the markets with cheaper dollars will drive investments from U.S. governments to other investments. With the stock market in jitters, investors will look elsewhere.

The Commerce Department advised the trade deficit fell by 5.5% in the third quarter of 2007. The current account balance measures not only trade in trade and services, but also investment flows between countries.

Corn prices in November were $3.53 per bushel. An average bushel sold for $1.90 in 2000. Corn prices have increased and appreciated 85% since then. However, there are higher input costs. People who planted soy beans may have done better because soy bean acreage was down due to explosion in corn due to ethanol and prices were up.

Springfield area real estate as reported by the Capital Area Association of Realtors discloses that local sales in November were up 6.2% from November 2006. local sales for the first 11 months in 2007 were only off 2.6% from the same period in 2006. It is reported by Realty Trac, Inc., a real estate tracking firm, that Illinois is 9th in the nation in foreclosures. Illinois had 91,000 foreclosures in 2007, a 25% increase from 2006 and a 95% increase from 2005.

Springfield unemployment was 4,9% in December 2007 compared to 3.7% a year ago. However, it was the third lowest in the State per the Illinois Department of Employment Security. Illinois coal production was up 4.6% in 2007 while employment in the industry in the state was headed to an all-time low. Approximately 500 area miners lost their jobs, it is reported. III

Because of the constant bombardment difficulties caused by excess spending and too much credit, logic and reason are gradually giving way to survival fears and panic.

The public needs some quiet reflection and the press needs to control its exaggerations and doom and gloom.

The economy grew sharply by 4.4% in part of 2007, but that pace is not sustainable and never was. A more reasonable growth would be better. The decline recently may, in fact, be an adjustment to that fast pace. Does that signify recession?

The Fed move in reducing the Fed fund rate is quite a stimulus and when you add the 150 billion dollar rebate one must question whether all that is necessary.

The above, when you add the fact that lower Fed rates are causing a refinancing boom in housing, puts millions if not billions of dollars in circulation and also eases mortgage defaults.

One thing will continue, however, and that is people with poor or marginal credit will still have difficulty. The consumptive citizens living beyond their means will still have difficulty. Restraint and control must be practiced. That is a self-taught lesson and the government doesn’t teach that by its spending tactics.

Knowing the propensity of man to consume and live beyond his means requires that lending practices by the big boys must reflect the prudent practices of community banking, safe and prudent underwriting and life styles.