This Week’s Economic Update, January 8, 2024

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Welcome to 2024.  Hopefully the past two weeks have provided a bit of a break to get the batteries recharged for the new year.  In my career I typically would use the week between Christmas and New Year’s to both assess the past year as well as set goals for the coming year.  I was able to hit the ground running in January, getting off to a great start.  Hopefully your year will be likewise.

The numbers coming out continue to provide a closing look at 2023.  Some quick hits first.  The oil market continues to be in a good position for stable to falling prices.  Supplies are adequate, production continues to be at record levels.  The only issue would be an expansion of the trouble in the middle east. 

The job market remains stable to strong.  The job quit numbers continue to soften.  They peaked in 2022 and have been steadily declining since.  The current level is the lowest since 2019. This is an indicator that workers are satisfied with their current employment.  The resignation era of the early post pandemic period has definitely ended.  Open jobs are leveling out after falling for the past two years. 

Employers are holding on to employees.  The job cuts report has been ticking down every month.  In December it fell to 34,000. In context this is nearly 70,000 less than January of 2023 and on par with the job cut levels from 2017 to 2019.  New jobless claims, continuing jobless claims and new hiring for December were good.  For the most part the job market is positive and improving. 

Since October 2022 manufacturing in the US has been in a contraction mode.  The ISM fell below 50 and has remained below that level since.  The December 2023 ISM manufacturing index came in at 47.4.  While this was a very slight improvement from November, it was not all that great.  The contraction in manufacturing continues with really no indication that it will expand anytime soon.  New orders as well as the backlog of orders are declining.  Supplier deliveries are improving which reinforces the impression that the supply chain issues we suffered over the past four years have cleared up.  Production has improved, but that only leads to the fear that, with fewer new orders, the industry is facing a future contraction path.  Manufacturing firms also cut staffing levels for the third month in a row.  As the dollar has weakened recently, we would have expected an increase in exports, however they have declined for the manufacturing sector.  This may say more about the world economy than anything else.  With higher interest rates as well as lower new orders, companies are not investing in new equipment or expansion plans.  Until we start to see a level of re-investment, manufacturing will continue to contract.

The December ISM Service index fell by 2.1% from 52.7 to 50.6.  Remember, any number over 50 reflects an expansion.  The drop of this magnitude, to this level, is a concern.  Service sector industries are just above a stall rate.  Services make up nearly 80% of our economy so it has a significant impact on the GDP numbers.  This could be the result of the Christmas season or it could be a sign that the consumers are becoming much more careful in how they are spending.

Interest rates continue to be a concern to both businesses as well as consumers.  While the Federal Reserve is maintaining a narrative of rate cuts, the overall strength of the economy promotes more of a stay the course, hold the rates where they are for the time being.  This continues to put pressures on banks to raise rates on their funding sources, deposits.  Liquidity issues remain a concern for many banks.  Leadership in banks that I talk with are being much more selective in their lending programs.  During this period of disintermediation borrowers are going to be pinched if they are not already, in trying to find funding to expand or meet their client’s needs.  Bankers have a huge challenge ahead of them the first half of 2024.  The key question is how can we meet our loan demand at a price our borrowers can make work for their projects and fund the loan demand at a margin that does not tank the banks’ financial statements? 

Have a great week.

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