Ahh the first signs of Spring. On Ground Hog Day a group got together and dug a ground hog out to see if there would be 6 more weeks of winter. Please do not try this at home, if you do, we will forever call you stumpy. Ground hogs really do not like to get roused from a seasonal slumber. I am pretty sure the ground hog is smarter than anyone at these events. For one, anyone can clearly see whether it is cloudy or sunny. I do not need to rely on a visually impaired marmot to see a shadow. For another, historically, the weather predictor on February 2 as to when Spring weather will actually occur, is less than 40% correct. This all sounds to me like a college drinking party that got out of hand one year that has now become an example of very bad behavior.
It appears we may be on the verge of another banking convulsion, similar to what occurred a year ago with SVB. Sadly, both incidents have been incited by short sellers aggressively targeting banks that are not in trouble, but if you spread enough bad news, stock prices will go down and they make the money at the expense of the committed shareholders and employees. That being said, we are starting to see stress in the commercial real estate portfolios of many banks. How they will deal with the decline in values as well as cash flows from the entities is going to be key. Banks are also seeing a massive pull back in loan demand. Virtually every bank I talk to or work with are seeing pipelines at all time lows. Borrowers are hoping interest rates will fall and are waiting for that lower cost of funds until they decide to invest in expansion. Clients appear to also be less optimistic about the future than they were a year ago. Many are reluctant to invest when the economy is softening. Lastly, bankers are being much more selective in providing credit for a number of reasons, liquidity at the bank is one of the largest issues. They are care to keep their powder dry for their very best clients. Everything being said, it is going to be a year for banking that is not for the faint of heart.
The labor reports on Friday were surprising. Expectations were muted for a couple of reasons. Manufacturing continues to be in a contraction mode. While announcements of layoffs continue, they have not yet occurred. Initial jobless claims have risen, however, are still considered low based on a historical comparison. The January numbers are always suspect as the Bureau of Labor Statistics incorporates some adjusting numbers at the start of the year. In certain cases, these amounts reconcile abnormalities that have arisen. That does create a bit of fluff in the final results. The truth is somewhere beneath the numbers that were provided.
In cross referencing a couple of reports, including the ADP report, the areas of job growth appear to be in business and professional services, medical, government social services and surprisingly retail. Outside of retail, all of these improving areas have higher incomes which would produce the very strong wage growth numbers that we saw in the BLS report.
While it could be the result of the reconciling numbers, there are areas that show a bit of weakness in the job market. The labor participation rate did not change and actually has not for some time in a meaningful manner. This seems to mean our working population is increasing at the same rate as jobs. Based on our current demographics that does not seem right.
The U6 unemployment rate has been increasing steadily since last April when it was 6.6%. In January it hit its high of 7.2%. U6 employment includes unemployed, underemployed as well as discouraged workers that have quit looking for work. If times were good, this number would be going down. From the various reports I look at, what I see is that if you have skills, are educated and have something to offer an employer, you will be hired. As the U6 rises, it is evidence that more of our workforce is getting left behind either due to their own decisions or lack of access to the training they need to land a job.
The Manufacturing ISM report for January also surprised me. After all the Federal Reserve reports in January indicating a rapid decline in manufacturing, to see the ISM at 49, just beneath the rate of expansion. I am not sure if the regional reports were too limiting or maybe came too early in the month. The ISM respondents were highly optimistic, seeing new orders rising well above December numbers. Production is rising and inventories are well beneath sustainable levels. The comments from those taking part in the survey were as optimistic as they have been seen since the pandemic.
Have a great week.