This Weeks Economic Update, December 7, 2020

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Just under 3 weeks until Christmas.  Normally we would say only 17 shopping days left.  However this year most of our shopping will likely have to be done by on line sources to alleviate concerns of Covid exposure.  That means we are already running out of time to get delivery on time.  Of course with the current restrictions, Christmas will be like Thanksgiving so having gifts dropped shipped to the reciepiant is more probable.  On the bright side, I don’t have to be embarrassed about my lack of skill in wrapping presents.  That has always gotten some laughs from my family members. 

This past week both the Manufacturing and non-Manufacturing reports for November were released.  First the ISM Manufacturing Report.  I was close last week in my prediction, essentially the report came in flat from October.  After two really good months of recovery, manufacturing growth leveled out.  The report included an indication that manufacturing growth is good at 57.5. Embedded in the report are signs that support the plateau.  New orders flattened, production leveled off and employment actually contracted just a bit.  Part of the issue is the inability to find qualified workers for the plants.  This is impacting the production level more than the new orders.  Back order levels continue to rise, again indicating that the economic sector is not in trouble.  If qualified workers who stay healthy could be found, production levels would continue to rise. 

Respondent comments in the report included that factories are having to shut down, either in part or whole when staff tests positive or the virus sweeps through the staff.  This is impacting not just the plant where the outbreak arises, but also within the supply chain.  When a supplier curtails production and is unable to fulfill the orders, it creates a domino effect through the specific industry.  One industry looks pretty bright as comments regarding increased demand are coming from the Fabricated Metal Products respondents.  It looks like 2021 will be strong in that area. Another bright area is machinery which has been down for a number of years.  In this case, manufacturing firms are investing in updated equipment to alleviate the staffing issues that are arising and look to continue to be a sore spot for years to come.  There is no indication that with the change in leadership in Washington will reverse the continuation of on shoring of production that the US has seen over the last four years.

The non-manufacturing report was less optimistic.  The service index fell slightly which is pointed directly at the Covid impact.  Concerns over conflicting national, regional, and local guidelines and direction have created confusion.  Repeated shut downs or curtailments dictated by local authorities are causing disruptions both in business activity directly as well as through the supply chains.  The uncertainty of what is to come, as well when certain restrictions will be lifted, have left many business owners unable to determine a prudent go forward strategy, as they have insufficient information.  Lastly, many service related companies are attempting to justify the investment in new technology and access points that will be needed or required going forward.  Many appear to be ready to pack it in.  Look for December activity here to take a significant dump.

This brings me to a warning to my banking readers.  In working and consulting for a number of banks, we are all seeing the start of a disturbing trend.  Sadly many business owners are reading the tea leaves.  Before they are completely wiped out, even if Congress provides some sort of stimulus shortly, the owners are calling it quits.  Since mid-November I have been getting reports of owners coming into the banks and dropping the keys off for their businesses.  They are willing to work with the banks on liquidating the equipment.  This is happening without the client even being late.  The cash from the PPP and other programs is being rapidly depleted.  The owners are realistic enough to know that any help is not coming in time or the required new investment in revamping the business is just not worth it when they could be shut down again anyway.  They are reluctantly walking away.  This is going to be the first wave of what anticipates to be a tough year coming up for many sectors.  Restaurants are being hit particularly hard.  Sadly, for the bankers involved, the liquidation of the equipment from these industries is going to be difficult.  The demand for the assets of these failed entities will be minimal and the prices falling into a significant loss level. 

If you are at all concerned about a client, now is the time to get ahead of the game.  Reach out, talk to them. Are there alternatives to shutting down and liquidating?  More money is not the solution, new ideas, mergers, select liquidation or re-inventing a new model might be options.  Waiting until 2021 is not an option. 

Have a great week, hang in there.  



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