US economy grew 2.5% in Q2

RAPPLER: BY AGENCE FRANCE-PRESSE

24

WASHINGTON, USA – The US economy grew at an annual rate of 2.5% in the second quarter, the Commerce Department said Thursday, September 26, leaving its prior estimate unchanged.

Analysts had expected that second-quarter gross domestic product (GDP) expanded at a slightly stronger 2.6% pace.

The world’s largest economy grew 1.1% in the first quarter.

“With the third estimate for the second quarter, the general picture of economic growth remains largely the same,” the Commerce Department said.

Revisions offset each other in the data, leaving last month’s estimate unchanged.

Inventory investment was lower than previously estimated, amid weaker spending by food and beverage stores and information industries.

Exports of goods and services also were revised lower.

But state and local government spending was revised upward, particularly in investment in structures.

Overall, the pace of economic growth in the April-June period was lackluster and well below the momentum needed to boost job growth.

Analysts expect that growth slowed sharply in the current third quarter that ends Monday.

Macroeconomic Advisers puts the third-quarter pace at 1.7%, while Moody’s Analytics revised down its tracking estimate to 1.4% Wednesday after weaker-than-expected durable goods orders and new-home sales.

The Federal Reserve last week cut its growth forecast for this year to 2% to 2.3% as it unexpectedly announced it would keep an open throttle on its easy-money policy.

Fed Chairman Ben Bernanke said that the central bank could still begin reducing its $85 billion a month bond purchases, known as quantitative easing (QE) in the next 3 months, but only if the outlook for the economy strengthened.

READ: Fed leaves stimulus unchanged at $85-B, no taper

“If the data confirm our basic outlook, if we gain more confidence in that outlook… then we could move later this year,” he said after a two-day Federal Open Market Committee policy meeting.

READ: Fed cuts 2013-2014 US economic growth forecast

The Fed’s preferred measure of inflation — the personal consumption expenditures (PCE) price index for goods and services — fell 0.1% in the second quarter, according to the Commerce Department data.

“Worryingly, it looks like even this relatively modest growth is only being achieved by firms cutting prices,” said Chris Williamson, chief economist at Markit.

“That was the first time these prices have fallen since the dark days of early 2009 and points to a general lack of demand growth.” – Rappler.com

US banks surrender profit for capital relief

 
NEW YORK — US banks are increasingly giving up the right to sell tens of billions of securities in their investment portfolios, a shift that helps them avoid the pain of weaker bond markets but will cut into future profits as interest rates rise.
 
Lenders ranging from large banks like US Bancorp to smaller banks like Cullen/Frost Bankers Inc. have been changing the way they account for investment securities, adopting a treatment that essentially forces them to hold onto bonds through thick and thin, instead of being able to sell them when markets tank. The accounting switch gives them near-term relief that helps them meet new capital and liquidity rules. 

The accounting shift is known as moving assets from “available-for-sale” treatment to “held-to-maturity,” a change that has been underway for several years.

US commercial banks’ held-to-maturity books increased 62% to $347.4 billion in the second quarter from $215 billion in the fourth quarter of 2010, according to SNL Financial. 

As bond markets weakened in the second quarter, the switch accelerated, with held-to-maturity accounts rising 8.7% from the first quarter. It was the biggest increase in nearly two years. 

One of the first big banks to make the shift was US Bancorp of Minneapolis, Minnesota, the sixth-largest US bank, with $353.4 billion in assets. The bank is a favorite of Warren Buffett, whose Berkshire Hathaway Inc. is one of its biggest shareholders. 

US Bancorp’s held-to-maturity securities book ballooned to $34.7 billion in the second quarter, or 46% of its investment portfolio, from just $1.5 billion at the end of 2010, with most of the change coming in 2011. 

But the bank is now saddled with tens of billions of dollars in low-yielding assets. The weighted average yield on US Bancorp’s held-to-maturity portfolio was 1.89% in the second quarter of 2013, compared with 2.72% for the available-for-sale portfolio.

As rates start to rise, the bank could earn less on some assets than it has to pay to fund itself, cutting into its income. 

To be sure, banks have some ways to mitigate that pain. For example, they can borrow against the held-to-maturity assets and invest the proceeds. And many bank loans carry floating rates, so rising rates will boost interest income.

But banks that go too far with a held-to-maturity strategy will not be able to free up as much of their balance sheet to make new loans if the economy improve in the coming months, said Johannes Palsson, managing director at Angel Oak Advisory, a risk management consulting firm. 

Those banks are “kind of stuck. There’s not much you can do” to take advantage of future loan growth, Mr. Palsson said. 

For available-for-sale assets, banks must record paper losses each quarter when the securities’ values fall. The paper losses do not hit earnings but reduce net worth, as measured by the book value of assets minus liabilities.

That happened to banks in the second quarter, when bond markets weakened amid talk of the US Federal Reserve cutting back on its bond buying program.

The $38 billion of unrealized investment gains they had reported at the start of the year swung to $13.1 billion of paper losses by the end of August, according to Fed data.

For a long time, regulators ignored changes in the value of available-for-sale books when assessing a bank’s capital strength.

But under the international framework known as Basel III, losses from available-for-sale assets will hit regulatory capital, and a bond market selloff could force US banks to boost their capital levels. 

Paper losses on held-to-maturity securities, however, would not subtract from banks’ capital levels.

This, along with new liquidity rules that pressured banks to increase their securities holdings, encouraged banks to park assets in their held-to-maturity bucket of their investment portfolios. — Reuters

PH matches China’s 7.5% growth in Q2

BY RAPPLER.COM
POSTED ON 08/29/2013 10:00 AM  | UPDATED 08/29/2013 2:40 PM

19

MANILA, Philippines (4th UPDATE) – The Philippines remained the fastest-growing economy in Southeast Asia with a gross domestic product (GDP) growth of 7.5% in the 2nd quarter, the National Statistical Coordination Board (NSCB) announced Thursday, August 29.

Driven by the resilient services sector and improvements in manufacturing, Socioeconomic planning secretary Arsenio Balisacan said the Philippines’ April-to-June economic expansion was at par with thegrowth of regional powerhouse China.

20

The Philippines’ 2nd-quarter growth was slower than the 7.7% revised growth recorded in the first.

But Balisacan said it was “significant” because it marked the 4th consecutive quarter that the country grew above 7%.

Economic growth in the first half stood at 7.6%, faster than the 6.4% achieved in the first half of 2012, NSCB secretary general Jose Ramon Albert announced.

A ‘rebalancing’ in process

The local economy was still dependent on the services sector, which accounted for 57.9% of GDP. Industry sector’s share was 32.7%, and agriculture, the top employer, contributed 9.4%.

Trade and real estate supported the services sector, which grew 7.4%.

Trade rose 7.3%, while real estate, renting and business activities posted a 9.5% growth, indicating continued expansion of business process outsourcing, said Albert.

Services have also been consistently fueled by consumption-led economic activities and, recently, investments by overseas Filipino workers (OFWs).

Remittances have remained strong despite fiscal issues faced by western countries that host most of the OFWs, but growth has slowed down.

21

While the services sector lifted the economy the most by contributing 4.3 percentage points to the overall 7.5% growth, the spotlight was on the industry sector, which has been picking up.

The Philippines, dragged by high energy prices, restive labor and regulated wages in the past decades, is getting back in the radar of job-generating investors, noted Balisacan.

“The composition of our growth shows signs of an economy that is in the process of rebalancing, moving from being largely consumption-driven to becoming investment-led and industrialized, with the ability to provide high-quality jobs for Filipinos,” he said.

“For the past 3 quarters, capital formation has been growing more rapidly than household consumption and the growth of industry has so far outpaced that of the services sector. Notable are the double-digit growth rates in fixed capital and the manufacturing subsector in the last quarter,” he added.

Industry grew an impressive 10.3%, and contributed 3.3% percentage points to the GDP number. Construction, which stepped up again during the quarter, grew by a whopping 17.4%.

Balisacan said construction will remain key driver in coming years. “In all major forms of infrastructure, we have huge backlog.”

Manufacturing grew 10.3%, maintaining the industry’s recovery, which started a few quarters ago, when Japanese, Korean, and other foreigners decided to plow their job-generating investments back into the Philippines after heavy flooding in Thailand and the earthquake-tsunami disaster in Japan.

Balisacan said, “with the rebound of industry sector, stable and productive jobs will be generated. He added persistent unemployment will also be addressed.

“Within manufacturing, food processing, furniture and household appliances like radio and TV, basic metals, and machinery posted significant growth, indicating greater use of skilled labor,” he noted.

How the Philippines’ impressive GDP growth rate is translating into jobs is a major concern among analysts and economists watching the country.

22

Agriculture, mining

Agriculture, which remains the main employer in the country, performed poorly. For the first time since the first quarter of 2012, the sector contracted. Its 0.3% decline pulled down the GDP by 0.03 percentage points.

The officials attributed this to the 25.9% contraction in corn output and 1.8% decline in palay. These “may be due to the intense heat experienced in Ilocos and Cagayan Valley regions and farmers harvesting their crops in advance in anticipation of the drought,” Balisacan explained.

About 624,000 jobs were lost in agriculture-related activities, compared to about 224,000 and 380,000 additional jobs generated in the industry and services sectors, respectively. Balisacan cited the April 2013 labor force survey for these indicators.

“The seasonality in the agriculture sector poses a challenge to growth and employment, and this is why we will need to diversify agricultural production and move towards further processing of agricultural products, particularly food,” he stressed.

Mining and quarrying remained laggards, declining by 2.7% during the quarter. This reflected investors decisions to cut on their investments as the Aquino government reviews and pursues legislative reform on the revenue-sharing scheme between government and the mining industry.

Recently, the global miners behind Tampakan gold-copper mine in South Cotabato in Mindanao decided to downsize pre-commercial operations. The investment in the mine, which is supposed to start operations after President Benigno Aquino III steps down in 2016, is potentially the country’s biggest foreign investment with operators planning to put in up to US$5.9 billion, which in turn is expected to boost the Philippines’ GDP by 1% every year.

Govt, household spending

On the demand side, household and government spending as well as construction were the key growth drivers.

Household consumption, which contributed 3.6 percentage points to growth, rose 5.2% in the second quarter.

Government spending (2 percentage points contribution to growth) surged 17%, while construction (1.3 percentage points) rose 15.6%.

Election, 2013 targets

The mid-term polls in May, which were expected to boost spending, did not materially contribute to economic growth.

Balisacan said election spending played a “minimal role” in the second quarter.

Albert said presidential elections are usually the ones that have big impact to the economy.

With the 2nd-quarter growth, Balisacan said the 6% to 7% target for 2013 will likely be surpassed.

Officials are aiming to hit a growth rate of 7% to 8% every year until 2016 to lift more out of poverty and provide more jobs. – with reports from Judith Balea, Rappler.com