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News
Market Comment
The unemployment rate, which was expected to hover around 9%, fell to 8.6%, as reported by the U.S. Labor Department on December 2nd. Nearly 120,000 workers were added to the workforce in November, and this is on top of a 100,000 gain reported in October. While this is certainly good news for those getting jobs, it is not necessarily a sign that the economy has turned the corner.
Payroll gains are good, but the decline in the unemployment rate was helped by nearly 315,000 people joining the ranks of “former job seekers”. These are people that become so discouraged in their job search that they stop looking for work and are therefore not counted as unemployed. Furthermore, more than half of the employment gains came from retailers and temporary help firms as business staffs for the busy holiday shopping season.
The lack of any significant job growth is having a particularly tragic impact on one group; the young. In the U.S. unemployment among those under 25 is just over 18%, in Europe it’s just over 20%. Only 3 industrialized countries have a youth (those between 18 and 25) unemployment rate under 10%. Austerity programs implemented and contemplated in Europe, the wind-up of stimulus measures created to assist job creation and the end of the holiday shopping season will be a further blow to youthful job seekers. Relief for the young unemployed may not come anytime soon as economies worldwide continue to struggle and politicians argue over governments’ role in fixing the problem. In the U.S., the lack of sensible discussion from either party in response to the administration’s job creation bill and extension of the payroll tax cut is additional evidence of the gridlock that exists over possible solutions.
In another sign of an “improving” economy, consumer confidence levels went up in November which translated into record Black Friday sales. Retail sales on the Friday after Thanksgiving were $11.4 billion, a 6.6% increase over 2010. Combined with internet sales, consumers spent nearly $52.4 billion over the Thanksgiving weekend.
Although consumer spending increased at a 2.3% annual rate in the third quarter, the quickest pace of 2011, the savings rate fell suggesting many are using savings in order to spend.
Banking
In the quarter that ended September 30th JPMorgan Chase surpassed Bank of America as the largest U.S. bank, measured by assets, even though its revenues declined. As banks continue to struggle, what they previously called “earnings” are now being called “results”. There are several reasons banks continue to struggle but probably the biggest reason is the decline in spreads between what banks pay for deposits and what they earn on assets (a loan is an asset to a bank). Although depositors may receive next to nothing on their bank deposits, that doesn’t help a bank when the yield curve, the difference between short and long term rates, is relatively flat (as of this writing a 2 year treasury note is yielding 0.23% and a 10 year treasury is yielding 1.82%) and there are few lending opportunities. Add to this combination new regulation that requires banks to keep larger capital cushions to protect against losses from bad loans and you find that banks may be reluctant to make a loan unless the credit risk of that loan is almost non-existent.
Don’t spend too much sympathy on the banks however. In the first quarter of 2011 the five largest U.S. banks spent nearly $47 million on lobbying efforts (a 12% increase over 2010) attempting to weaken or repeal rules that are being contemplated by lawmakers. Sympathy toward community banks is warranted however as these smaller banks will be forced to atone for sins not necessarily of their creation and the municipalities and businesses that rely on community banks may suffer along with them.
Money Markets
Yields on local government investment pools and other money market funds are consistently yielding less than 0.15%. With proper planning and a comprehensive cash flow forecast, local governments have several options that could improve yields by 50 basis points over current money market yields, by lengthening maturities while minimizing overall risk. If you would like to discuss these options please contact Ken Herdeman (262)796-6164, kherdeman@bankersbankusa.com or Brian Mann (651-697-8565), bmann@bankersbankusa.com.
December 2011
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BBE Community Investment Partners, LLC
375 Bishops Way – Brookfield, WI 53005 – 262.796.6164
3060 Centre Pointe Dr – Roseville, MN 55113 – 651.697.8568
www.cip-llc.com
Information obtained is from sources we believe to be reliable but we do not guarantee accuracy. Neither the information, nor any opinion expressed, constitutes a solicitation by us of the purchase or sale of any security. Yields, rates and prices are subject to change and availability. Past performance does not guarantee future results.
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