This Week’s Economic Update, February 7, 2022

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Valentine’s Day is upon us.  While I love to provide great information, this year is no reservation.  Please take it to heart that the supply chain may give you a start.  Roses and Chocolate might be a good staple, however, with shortages, buying them you might not be able.  Might I suggest instead of goods consumable, a planned experience that both will find memorable.  No, I am not quitting my day job to be a poet. This was way to painful for both you and me.

There was a lot of information released last week that needs to be carefully unpacked.

The Institute of Supply Management shared both the manufacturing and service sector reports for January.  As expected, the manufacturing report was softer.  The report registered 57.6%, just slightly lower than December at 58.8%.  This is still considered a good growth level, just a bit softer than December.  Embedded in the numbers are signs that the manufacturing growth is abating.  Production, new orders, and the back log were all down from last month.  The back log of orders softened the most moving from 62.8 down to 56.4.  Production is keeping up in spite of supply chain issues.  The employment number indicates that manufacturing hiring is peaking.  Essentially the employment number was flat from December.  Fourteen of the Eighteen industries surveyed in the report indicated growth.  This is down from prior months when either all industries were up, or at most, one industry flat or down. Paper products showed a decline which is often an early warning of softer conditions ahead.  Paper industries include corrugated paper used in shipping.  Overall, not a bad report, but one that met the expectations that growth appears to have peaked and the market is slowing in the level of growth.

The January services report came in at 59.9%, down from 62.3% in December.  The overall business activity dropped significantly from 68.3 all the way down to 59.9.  Within the report the complaints by business centered on the supply chain and covid related impacts.  The supply chain continues to impact the service/retail sector, cutting sales since product is not available.  The covid impact relates more to employment, where staff is unable to work due to being sick.  Without the product and being short on staff, it is no surprise that this sector experienced a difficult month.

The jobs report on Friday was well over the market expectations.  Earlier this week the ADP jobs numbers indicated a significant drop in payrolls.  The US Initial jobless claims, released on Thursday, showed jobless claims falling in January.  Based on these conflicting reports, the market expected a lackluster jobs report.  What the market received was an unexpected jolt.  Non-farm payrolls increased by 467,000 in January.  This increase was predominately due to private industry hiring.  The non-government hiring totaled 444,000 of the total number.  Manufacturing only added 13,000 in January.  The numbers on their face are confusing in light of the other reports.  The big adds were in leisure and hospitality, 151,000.  This was in spite of many layoffs and shut downs due to covid.  So far there has not been an explanation as to why the ADP numbers could be so different from the US numbers.  Please note, that in the past the US Bureau of Labor Statistics have posted major revisions to the numbers in following months.  I would hate to say the Friday numbers are less reliable, but, I am questioning them.

Be honest, when was the last time you actually went to a bank branch?  Since 2000, the United States has gone from having close to 8,250 banks to the current level, just a bit over 4,000.  At the same time, bank branches peaked at around 85,000 in 2008 and are now holding at around 75,000.  The drop in banks has been 51% while branches have fallen only 12%.  The level of bank branches is not sustainable.  The cost of holding a branch continues to skyrocket with labor costs as well as operational costs increasing.  All the way from security, upkeep, new technology and maintenance, the level of overhead for a branch makes them a target for future cost cutting.  In 2021 banks closed close to 3,000 branches.  The numbers are expected to continue to climb as technology as well as the impact of the pandemic forces banks to adjust their business model.  On-line banking, bill pay, direct deposit and other remote technologies have all been pointing to the obsolesce of the traditional bank branch for some time.  The pandemic has made it quite evident; banks need to shed branches. As we move past the pandemic, expect a rash of new branch closings as the banking industry morphs into a new business model.   This change will create ripples through the economy, the first starting with the commercial real estate market. 

Have a great week.



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