Aaron Gallagher

According to a Treasury Department's report on the 500 financial institutions that received funding under the Capital Purchase Program, the amount of loans outstanding fell 0.8% in March to $5.24 trillion from $5.28 trillion in February. Consumer loans outstanding, including residential mortgages, declined 0.5% in March to $2.88 trillion while commercial loans outstanding fell 1.2% to $2.35 trillion. The government, through the Treasury Department's Capital Purchase Program, has invested about $200 billion in more than 500 financial institutions, in order to inject liquidity into the system. Some analysts believe that banks will be doing a disservice to the economy if they do not use tax payers' money to extend credit. Banks have maintained, however, that while they are open to lending, the demand for loans has fallen. Companies have cut-back on expansion plans and individuals are going easy on mortgages and personal expenditures. Unless the economy picks up, appetite for loans may not see any improvement in the near-future.

Pending US home sales skyrocketed to their highest number in 7 years, a sure sign that the bottom is forming and that bargain seekers have arrived. The National Association of Realtors reported that its seasonally adjusted index of sales contracts signed (the Pending Home Sales Index) jumped 6.7% to 90.3, well ahead of analysts' expectations. Lawrence Yun, NAR chief economist, said buyers have responded to favorable market conditions. "Housing affordability conditions have been at historic highs, but now the $8,000 first-time buyer tax credit is beginning to impact the market," he said. "Since first-time buyers must finalize their purchase by November 30 to get the credit, we expect greater activity in the months ahead, and that should spark more sales by repeat buyers."

The Obama administration is planning to finalize health care reform this year. The reform will include specifying requirements for minimum benefits, highlighting conditions for coverage denial, and guarantees for affordable health care. Analysts estimate that it could take well over $1 trillion to overhaul the health care system. How to pay for it without adding to the already big federal budget deficit? Max Baucus, Senate Finance Committee Chairman, is among those grappling with the problem. It is likely that all stakeholders - consumers, employers, health care providers and others in the industry - will be asked to bear the cost. Baucus, in a recent interview, said, "We'll pay for it in a balanced way." Revenue options available to the government include taxing employer contributions to health insurance, imposing Medicare tax on government employees, taxing sugary and alcoholic beverages, eliminating tax breaks in contributions to "flexible spending arrangements" and "health savings accounts."

Oil prices have risen 48% to $65 per barrel in the last five weeks. Oil, being an essential commodity in any economy, becomes dearer as its demand grows on account of recovery in the global economy. In addition, the U.S. dollar has depreciated against a basket of currencies in the last 5 weeks. A weak dollar leads to an increase in cost of imports including oil. Oil hit a record high of $147 per barrel last summer. While the current level is nowhere near $147, analysts are worried that the prospects of economic recovery may get hampered if oil prices continue to rise.

With unemployment at a high, consumers are not in a position to absorb raising costs. Gasoline prices go up by 2.4 cents for every one dollar rise in crude. James Hamilton, an economics professor at the University of California, San Diego, says if the gasoline price increases, it could "postpone some of the recovery we'd been hoping for."

Mortgage rates have risen to their highest level in the last 3 months. The average rate for a 30-year fixed mortgage jumped to 5.44% yesterday. This is in line with the steep increase in the yields of long-term treasury bonds. The 30-year rate was at a record low of 4.78% in April. The decision of the Federal Reserve to buy $1.25 trillion of mortgage securities and $300 billion in Treasury Notes this year led to a drop in mortgage rates early this year. Lower rates, in turn, led to an increase in mortgage applications.

Analysts are now worried that the surge in mortgage rates could impact the economy adversely by curbing consumer spending. Mahesh Swaminathan, a mortgage strategist at Credit Suisse Group, says, ""The spike in rates has the potential to derail a lot of things." According to Credit Suisse, a rise of 0.1% in mortgage rates translates into a 1% increase in home prices. Higher rates will hit home prices and sales. Ben Bernanke, Chairman of the Federal Reserve, referred to early signs of economic recovery as "green shoots" in an interview recently. T.J. Marta, a financial analyst, says, "If the Fed does not step in, you are going to see the 'green shoots' get frost bite."