Euro Area Economic Index Drops

The Conference Board Leading Economic Index (LEI) for the Euro Area decreased 0.2% in May to 108.8 (2004 = 100), following a 0.2% increase in April and a 0.5% decline in March. The Conference Board Coincident Economic Index (CEI) for the Euro Area, which measures current economic activity, declined 0.1%t in May and now stands at 103.0 (2004 = 100), up 0.3% in April, following a 0.2% decline in March. The eight components of the Euro Area Conference Board Leading Economic Index include Economic Sentiment Index; Index of Residential Building Permits Granted; Index of Capital Goods New Orders; the EURO STOXX Index; Money Supply; Interest Rate Spread; Eurozone Manufacturing Purchasing Managers’ Index; and the Eurozone Service Sector Future Business Activity Expectations Index.

Some Banks Ease Credit Card Standards

The April “Senior Loan Officer Opinion Survey on Bank Lending Practices” has found that 10% of banks, on net, indicated that they had eased standards on credit cards and non-credit-card consumer loans over the past three months. Those institutions that had eased their lending standards and terms over the past three months cited more-aggressive competition from other banks or non-bank lenders and half of those respondents cited a more-favorable or less-uncertain economic outlook as a reason for their move toward less-stringent lending.

Rates to Remain Unchanged for a Considerable Period

The Federal Open Market Committee decided yesterday not to change the federal funds rate, and indicated it may not change rates rate for a “considerable period,” citing deflation as a major concern. The evidence accumulated over the intermeeting period shows that spending is firming, although labor market indicators are mixed. Business pricing power and increases in core consumer prices remain muted. The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level.

Credit Standards

A survey of 59 U.S. banks has found that 15% have tighten standards on credit cards over the past three months. The “January 2003 Senior Loan Officer Opinion Survey on Bank Lending Practices” found that financial institutions continue to tighten lending standards and terms for commercial and industrial loans. There is also evidence that some banks are beginning to tighten standards on home mortgages. The share of banks tightening standards on residential mortgage loans edged up to 11% in January from 10% percent in the October survey. Notably, these were the first two indications of any noticeable tightening in over a decade. The net fraction of respondents that reported stronger demand for mortgages to purchase homes over the past three months dropped to 7% in January from 40% in the previous survey. Moreover, the share of banks reporting substantially stronger demand fell from 14% in October to 2% in the current survey.

Oil & War Holds Fed Rates

The Federal Open Market Committee decided today to keep its target for the federal funds rate unchanged at 1.25% citing oil prices and a possible war as factors causing restraint on spending and hiring by businesses. The Committee believes that as those risks lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to an improving economic climate over time.

2003 Growth

A blue ribbon panel of banking economists predicted yesterday that national economic growth will pick up from the less than one percent annual rate last quarter to 3.5% in the second half of the year. The American Bankers Association Economic Advisory Committee also projected that inflation will remain tame at under 2.5% this year. The economists predicted that mortgage rates will rise to 6.75% by year end, partly in response to the Fed’s less accommodative policy. As a result, the EAC sees mortgage refinancing ebbing from its record pace. Although credit quality has deteriorated over the past year, the EAC expects an improvement in business credit quality in 2003.