This Week’s Economic Update, January 22, 2024

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Welcome to Janu-brrrrry. The grip of snow and cold across the nation is not letting up.  We seem to be paying for the break that we received through most of December.  The positive side here is that every day that passes, it is one more day closer to April.  The pessimists among us may correctly point out, “What makes you think Spring will come in April?” Let me just say, Hope Springs Eternal.

Before I move on to 2024 this week, one last look at an indicator from 2023.  In virtually all indicators, retailers had a very good fourth quarter.  Retail sales in December were up .6% over November levels.  This is particularly impressive as many Black Friday sales actually started, in some cases, as early as October.  Retail sales were up .3% in November, again very strong, with December doubling the November results.  Further, the level of sales at full price, not discounted, were well above prior years during the Christmas season.  Consumers hit the stores, bought what they wanted and did so without waiting for discounted pricing.  That is a pretty clear indicator that the consumer is optimistic about the future.  That seems to be a disconnect from what most are saying about the economy.  Something to keep an eye on.

This past week the New York and Philadelphia Manufacturing Indexes were released for January.  Both reflect a sector of our economy that continues to contract.  The New York index hit a -43.7 while Philadelphia dropped 2.2 point to -10.6.  The New York number is most concerning, dropping from -14.5 in December. There were few bright spots in either report that manufacturing in our Eastern seaboard is going to rebound anytime soon.  New orders are flat, back logs are slowly shrinking and employment is pretty much flat.  Manufacturers are holding on to workers only in the hope that things turn around soon.   The Kansas, Dallas and other districts will be releasing their numbers soon.  It is unlikely that the contraction in manufacturing will abate as inventories continue to increase, in spite of a consumer that seems to continue to spend at a healthy pace.

The job market has stabilized for now.  A number of industries have announced pending layoffs.  Initial jobless claims fell last week as did continuing jobless levels.  Employers in select industries, mainly service sector, are still seeking qualified candidates to hire.  However, news about future cuts in the financial sector, tech sector as well as the auto industry could turn these numbers around by Spring. One indicator that the power shift from workers to employers is changing relates to the bonus levels that staff received at the end of 2023.  Bonus payments to qualified workers dropped 21% from the end of 2022 to the end of 2023.  Employers are less worried about people leaving or moving to competing firms at this time.  This is also reflective of firms experiencing a tougher 2023 where earnings were down.  Between the level of inflation continuing to impact cost along with revenue numbers that are struggling in certain areas, bonus amounts were bound to decline.  However, 21% is a huge number.

The banking industry continues to struggle.  Due to my contacts in the industry as well as the many relationships across the nation that I develop with the attendees at all my courses, I see a deep cross section of what is going on in our financial sector.  2023 started with the banks mostly in an asset sensitive position where loan pricing was increasing faster than deposit pricing.  That was already starting to shift when the SVB debacle in March occurred.  Banks suddenly became liability sensitive with the cost of funds increasing quickly.  Once we hit the middle of the year, loan demand began to diminish.  Now, outside of commercial real estate loans, the spigot for new loans is pretty much non-existent.  The solution for the banks is not making more commercial real estate loans, the quality of these requests is questionable and frankly, many of the banks already have an unhealthy concentration in this type of loans.  With the net interest margin contracting in 2023, as well as overhead expenses rising due to labor inflation, banks struggled with matching the profitability of prior years.  Add to that the whole issue of “Hold to Maturity” related to the investment portfolio and you can see how both regional and community banks had a tough road to navigate last year.  It will not get any better in 2024.  Loan demand is not expected to turn around.  The need to seek out deposits will continue to stress the net interest margin, even if interest rates begin to decline.  Declining interest rates is still not a given, but if they do, banks that are asset sensitive, which most will be, will only exasperate the weakness of their current condition.  Now is the time for bank leadership to carefully consider the future of what they need to do to address the challenges before them.  You will not get through this by loosening your credit standards, that will only complicate the problems you will face when the quality of your credit portfolio softens.  The key will be a steady course with the recognition that the environment will be adverse and you will have to anticipate the negative for the next couple of years.

Have a great week.

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