Bank Business: Availability of credit will soon outgrow demand for it.
The Economy: Is recovery coming? The new “mascara index” says yes.
Trade: Narrowing trade deficit now a bad sign as imports flag badly.

Bank Business
It’s true, the banking sector is recovering. Investors are no longer pummeling share prices. Government stress tests revealed a badly damaged but viable cadre of big banks, shoring up confidence. Some banks ... notably Goldman Sachs ... even plan to repay federal government rescue funds shortly.
Still, there’s a long, bumpy road ahead.

Scores of banks remain doomed to fail ...
At least 60 more, mostly smalls, this year. About three dozen have already succumbed in 2009. Across the Sun Belt and in hard-hit industrial states such as Ohio and Mich., tanking home mortgages combined with rising joblessness spell more trouble.
Commercial real estate woes will take a toll as well. Cracks in these loans are just appearing ... leases aren’t renewed when tenants go belly-up or seek out cheaper digs to survive the recession. Commercial mortgages account for 23% of assets of banks under $100 billion vs. 7% for bigger ones.
And higher FDIC assessments will sting, taking a bite out of banks’ precious capital cushions.

Big banks will have to sell their way out of trouble, shedding ancillary lines to salvage their core business. Bank of America plans to put First Republic Bank on the auction block, as well as Columbia Asset Management and BofA’s stake in a Chinese bank. Regions Financial and Fifth Third Bank will slim down as well.
Also ... a scramble for new profit centers to replace securitization markets, which contributed 10%-15% to revenue just a few years ago but add only 3%-5% now. In 2006, total value of issues hit $2.3 trillion. So far this year ... a paltry $89 billion.

Some banks are finding rays of sunshine through the clouds, though.
Great growth opportunities for those strong enough to take advantage. Look for U.S. Bancorp, JPMorgan Chase, Wells Fargo, Goldman Sachs, and others to snap up bargain priced units that generate deposits and fees. Among smaller banks, jittery customers are flooding those perceived as stable with deposits. And those banks are luring top-notch loan officers and commercial business from troubled rivals, including bigger banks. La.’s MidSouth Bank, for example, is aggressively marketing in an effort to pluck customers from Regions Financial, which needs to raise capital.

Sustained industry growth is a few years off and depends on the economy.
Indeed, the availability of credit will return faster than demand for it. Already some more-aggressive banks are eager to lend but are finding few qualified ... and interested ... borrowers. Most banks won’t be able to grow their way out of the hole they’re in until business spending picks up ... probably around the middle of next year.
By 2011 ... a healthier, but chastened and more conservative, bank industry.

The Economy
Companies haven’t finished liquidating inventories, despite the big drop in the first quarter ... a $100-billion cut in the value of products and materials that businesses have on hand. Firms still have plenty to burn off in coming months.
At the wholesale level, for example, the ratio of inventory to sales is down only slightly
from Jan., despite seven months of liquidation. Sales have dropped nearly as swiftly.
For the rest of the year, look for quarterly cuts of $50 billion to $80 billion.
The good news: Such steep plunges typically come late in recessions.
Measured as a percentage of GDP, the first quarter’s 0.9% decline was about the same
as the steepest inventory cutbacks seen late in the 1982, 1991 and 2001 recessions.

Consumer spending isn’t seeing a bump from tax cuts ... the roughly $10
a week that began to show up in March paychecks from lower income tax withholding.
Continued layoffs and rising unemployment are offsetting any benefits,
pushing retail sales lower in April. The 0.5% decline, which doesn’t include auto sales,
follows a 1.2% drop in March but surprising increases in January and February.
Thus ... little help for GDP in the second quarter. Odds are consumer spending
will be flat at best, with a seasonal uptick in gasoline prices an additional dampener.
By the second half of the year ... slightly better. Spending should grow 1% to 2%.
Where is the extra money going? Savings. And paying off accumulated debt.
That’s good news for long-term U.S. economic health. But it adds to the pain now.

So the lipstick index is a dud. Lipstick sales aren’t rising this recession,
as a cosmetics giant famously noted they do in periods of economic downturns.
The theory: In tough times, women turn to simple, relatively cheap luxuries.
But maybe mascara’s a better guide. Turns out that although lipstick sales
are off this year, eye makeup is flying off shelves. Mass merchandisers’ sales
of mascara, eye shadow, pencils and the like are up nearly 9% so far this year.
It’s not department stores that are benefiting, but drugstores, mass sellers
and specialty makeup stores that offer lower cost versions of the little indulgences.

Businesses, both small and large, have scant ability to raise prices.
That’s reflected in the latest Consumer Price Index report, unchanged for April.
Food prices show a decline, and gasoline prices didn’t rise as much as expected.
Some increases, in rents and medical care, are enough to dispel deflation worries.

Trade
The U.S. trade deficit will narrow by more than 25% this year.
But that’s not good news. Although the trade gap will shrink to $497 billion
in 2009 ... just 3.6% of GDP, the lowest since 2001 ... it’s not due to growing exports.
Collapsing world demand and tight world credit actually spell a 16% dive in them.
Imports are in a steeper slide than exports, shedding 19% this year
as businesses and individual consumers hunker down and slash their spending.
And any benefit to long-term interest rates from the contraction of the trade deficit
will be erased by expansion of the federal budget deficit. Plus the gap will widen again
as the U.S. pulls out of recession ahead of other economies, boosting imports.