'Green shoots' don't mean recovery

By Karen Nye
Business reporter, BBC News, New York

New York hopes spring will bring economic growth

Springtime has finally come to New York, after a seemingly endless, cold, wet winter. But the "green shoots" evident in Park Avenue's flower beds are just tulips coming in, like any other year, not signs of economic recovery.

It is true that some of the biggest banks have reported better-than-expected, not to mention actual, profits in the last few days, which makes a change. Several caveats are in order, though.

First of all, the banks which appear to be weathering the credit storm better than others were already considered the strongest in the industry: Goldman Sachs, known for its trading and investment banking prowess, and JP Morgan Chase, a prominent name in commercial and retail banking.

Now they are queuing up to return US government loans extended under the Troubled Asset Relief Program (Tarp), intended to stabilise the banks.

Goldman Sachs sold $5bn (£3.4bn) worth of shares, in order to pay back billions in Tarp money. The head of JP Morgan Chase, a bank named after a titan in American finance who helped save the banks more than 100 years ago, equated Tarp money to a "scarlet letter", saying "we have the money right now".

They say they are just waiting for the US government stress tests this month to show that they don't need a cash cushion like that, with strings attached.

Weak spots

But even the strongest banks have admitted to a few weak spots. Goldman Sachs reported more than $2bn in toxic asset-type write-downs for December 2008, and conveniently changed to a new quarterly reporting schedule so that December was not officially counted in any quarterly profits report, certainly not the spectacular money-making first quarter of 2009.

Consumer credit losses increased at Citigroup

JP Morgan Chase reported $2.1bn in first quarter profits, like Goldman, mainly in investment banking. At the same time, consumer credit losses expanded.

Citigroup, which issues some of the most-recognised credit cards in America, reported its first profit in 18 months, at $1.6bn. That is no doubt good news for a bank which has seen its share price driven 84% lower in the space of one year.

But its losses in credit cards and consumer loans both increased sharply. And bear in mind that Citigroup has received billions in government aid, via several tranches of US investment, in addition to further guarantees on its loans.

Bank of America, which is still digesting its purchase of the country's largest mortgage company, Countrywide, is scheduled to report earnings on Monday, but analysts say it is unlikely to escape the pressure on consumer credit.

Nationwide, well-known banking analysts including Meredith Whitney predict that consumer credit cards will be the next area of troubles for banks, as more consumers lose their jobs and cannot pay their balances.

Prioritising debt

Even debt counsellors say openly that they advise cash-strapped consumers to prioritise mortgage payments (which keep a roof over their heads) over unsecured credit card debts.

JP Morgan boss Jamie Dimon likened Tarp money to a "scarlet letter"

Optimists may point out that Wall Street is often considered a forward indicator for the economy, and tout several weeks of bank shares rallying. But there is another reason to pause: much of the resurgence in the banking business has been driven by mortgage refinance.

Historically low mortgage rates are convincing the most solvent of consumers to refinance their home mortgages, but that business is underwritten by the Federal Reserve. The visible hand of government has committed to buying billions of dollars worth of mortgages, through the now government-controlled Fannie Mae and Freddie Mac mortgage companies.

Without wanting to rain on anyone's parade (after all, these weeks of pouring rain have finally brought those Park Avenue tulips to the brink of blooming), I feel obliged to quote a more esteemed source - the Nobel-prize winning economist Paul Krugman.

In reviewing the recent bank earnings, he reminds us that unemployment, which tends to trigger higher credit default and home foreclosure rates, is a lagging indicator.

During the last, shallow recession of 2001-02, unemployment continued to rise for more than a year after the recession had officially ended. He also invokes spring-time imagery and advises America not to "count your recoveries before they're hatched."