Monday, May 15, 2017

The SBA and pabulum

Bland intellectual fare: insipid or simplistic ideas, entertainment, writing, etc.
From Latin pabulum (food, fuel, fodder), from pascere (to feed).

Originally pabulum was something that nourished. During the 1920s, three Canadian pediatricians developed a bland, soft infant formula that was later marketed under the brand name Pablum and eventually the words pabulum/pablum came to refer to things simplistic or banal.


The Federal Reserve is reporting a rapid deceleration in the growth of bank loans, a principal source of credit, and thereby fuel for the economy.

Total loans at commercial banks in 2015 and 2016 grew on a year-over-year basis each month by around 8%. But starting at the end of last year, the growth rate has steadily dropped. The latest reading showed that total loans at commercial banks expanded at a rate of only 4.1% in March.

After growing over 23% in fiscal year 2015, SBA 7(a) loan volume stalled in fiscal year 2016 growing only 2.3% from the year before. 

Defying the general overall trend with other loans, SBA 7(a) loan approvals have since grown by about 10%.

The pick-up in SBA 7(a) loan approvals is good news for the economy.  Just for fun I calculated the correlation coefficient between SBA 7(a) loan volume and GDP for over six years using the Microsoft CORREL function.  It came out to a statistically significant 0.86.


SBA LIBOR Base Rate May 2017 =3.99%
SBA Fixed Base Rate May 2017 = 6.11%
SBA 504 Loan Debenture Rate for May
The debenture rate is only 2.84% but note rate is 2.888% and the effective yield is 4.625%.

There is a lot of pabulum out there on what’s going on in the economy.

For a moment it looked like the economy was starting to stall.  The Commerce Department reported that the nation’s gross domestic product – the value of all goods and services produced in the U.S. -- increased at a seasonally adjusted annual rate of only 0.7%, well below the tepid 2.1% pace clocked both in the fourth quarter and as an average throughout the nearly eight-year-old recovery.  This is the slowest pace in three years.

The Federal Reserve then met and decided to leave the fed-funds rate at 0.75% to 1%.   Their policy statement said, “The FOMC views the slowing in growth during the first quarter as likely to be transitory."

Likely to be transitory?

As if on cue, the labor market bounced back in April as employers added 211,000 jobs, providing evidence that weakness the prior month was a blip.  March was even weaker than believed after a downgrade to 79,000 from 98,000.

There does not appear to be any splenetic presentiment over a bigly recrudescence of interest rates.

At Thursday’s auction of 30 year Treasury bonds, the 3.050 percent high yield was 11.2 basis points above the April auction rate but 12 basis points short of the March auction, where the 3.17 percent high yield was the richest since September 2014.

In one sign of investor complacency, the real U.S. 30-year yield -- which subtracts the level of inflation based on the core Consumer Price Index -- is hovering near the lowest level since 1980.

One measure of inflation, the core consumer-price index, which excludes energy and food prices, notched 1.9% growth year on year, up 0.2% for April, and hovering close to the Federal Reserve’s 2% target.

One of the Fed’s leading indicators on inflation is capacity utilization which measures the amount of a plant that is in use at factories, mines and utilities.  The Federal Reserve recently reported that capacity utilization for April edged up to 76%.

Keep your eyes and ears open for Tuesday’s report on industrial production and capacity utilization.

Here is what capacity utilization rates have done:
1997- 83.6
1998- 83.0
1999- 82.4
2000- 82.6
2001- 77.4
2002- 75.6
2003- 74.6
2004- 79.2
2005- 80.7
2006- 82.4
2007- 81.5
2008- 79.9
2009- 66.9
2010- 74.8
2011- 76.7
2012- 79.0
2013- 77.8
2014- 78.8
2015- 76.5
2016- 75.4

What does all this mean?

I don’t know.

Capacity utilization at 76% is 3.8% below the average from 1972 to 2016 and below the pre-recession level of 80.8% in December 2007.  Several analysts have pointed to a rate between 81% and 82% as a tipping point over which inflation is spurred. 

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), marked the second quarter by posting a robust 5.6 percent year-over-year gain, suggesting continued growth through year-end 2017.  CAB has increased solidly over the last several months, and this suggests an increase in Industrial Production in 2017 as it appears to be a leading indicator for industrial production.

The long end of the yield curve as reflected in 30 year Treasury bond appear to be enervating any splenetic presentiment of a bigly recrudescence in interest rates by being quiescent.

Enough of this pabulum.

A three day weekend soon approaches!

According to the Federal Reserve, here is our remaining holidays for 2017:
Memorial Day May 29
Independence Day July 4
Labor Day September 4
Columbus Day October 9
Veterans Day November 11
Thanksgiving Day November 23

Christmas Day December 25

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