This Week’s Economic Update, July 24, 2023

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It is not just our cities who have a crime problem.  Near Santa Cruz California, a southern sea otter named Otter 841 has been surf board-jacking and intimidating kayakers since September 2022.  The sea otter had been born in captivity, its mother had been too friendly with humans, evidently a crime for which she was sentenced to life.  Her offspring, Otter 841 the culprit in recent thefts, is a protected species that was released to the wild in June of 2020.  By becoming unafraid of humans, the fear of escalating activity is prompting authorities to list the otter as public enemy number one.  Once taken into custody, otter 841 will be incarcerated at a USFWS Approved Location.  That’s a nice way of saying, maximum security otter prison.  No bail options seem to exist here.

The banking system seems to have plateaued for now.  As background, deposits peaked in April 2022 at $18,214 Billion.  The bleed off of funds was rather light until March of this year when the trend line steepened.  Since May 10 deposits have moved in a narrow range around the $17.200 level.  While loan demand has been uneven by region, the banking industry is seeing a decline in outstanding loan balances.  Loans peaked in January of 2023 at $2.8 Billion, declining today to $2.75 Billion.  Many banks are being much tighter on real estate lending.  The real estate market is under a great deal of stress with increasing vacancies, an inability to increase net operating income, as well as facing interest rates that are sometimes double what they were at origination.  By curtailing new loan growth, banks are unable to cover the normal amortization within their portfolios which will likely continue the downward trend in loans through this year.

On the consumer front the credit card delinquencies are starting to grab some attention.  Previously it was shared that credit card balances were rising.  The consumer spending reports released this week show that expenditures are rising at a stable rate which appears to be supported by the increases in credit card use. From 2017 to 2019 credit card use rose dramatically.  Delinquencies climbed during this period to a post Great Recession number of 2.61%.  With the massive stimulus related to the pandemic, consumers were able to catch up, bringing the delinquency level down to 1.54% by the third quarter of 2021.  Today the delinquency rate is 2.43%.  In historical terms the average over time is just over 3%.  Recognize that the credit card companies charge rates of over 18% on outstanding balances so they are still doing well. Watch this number, a threshold of 3% is the start of the red zone.

Manufacturing continues to be in the contraction zone.  June production numbers matched that of May, declining by .5%. Capacity utilization fell from 79.4% to 78.9%. That is well beneath the level of 81% where firms would be compelled to buy new equipment to efficiently meet demand.  While we are seeing the early green shoots of on-shoring, it is not yet moving the needle in the right direction.  It does not appear to be just a staffing problem, demand, reflected by new orders and back logs, are flat to downward in trend. 

The energy markets should be watched carefully.  Total US Rig counts are down to 669.  Supplies are currently balanced with demand.  However, both Chinese and Indian demand have been soft the past year.  If their economies begin to strengthen, shortages and price hikes could occur.

Have a great week



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