This Week’s Economic Update, July 8, 2024

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In the courses I teach, I share the importance of commercial bank clients having an executed buy/sell agreement to be used in the event of the demise of an owner.  Properly structured, these are tools that can save a company from having to close or be sold.  In June the Supreme Court handed down a ruling that significantly impacts the structure of buy/sell agreements that are funded with life insurance.  In the case of Connelly V. United States, a buy sell existed between two brothers which was funded with a $3,000,000 life insurance policy.  A caveat in the buy sell indicated that the surviving brother had the first right of refusal to buy out the shares, with the life insurance proceeds required to be used by the company to purchase the deceased ownership.  The appraised value of the shares and the payment was $3,000,000.  However, the IRS claimed that since the company was the recipient of the life insurance, which was not originally included in the value of the company, the estate was required to pay taxes on a company value of $5,300,000, not the buyout price of $3,000,000.  This resulted in an additional estate tax liability of $889,914.  Might be a good time to work with your clients in adapting any buy/sell agreements after this ruling.

The Synapse Bankruptcy continues to cause angst across the banking world. I shared this earlier in regards to Banking As A Service (BaaS) business segment.  You might recall that there is still $85, 000,000 of missing depositors funds after the April bankruptcy filing.  Beyond user balance issues, many customers who used Synapse and its intermediaries for their personal financial banking transactions are now locked out of the access to their funds.  The fintech “go-between” linked up customers under the guise of insured accounts.  As it turns out, 100,000 customers with $265,000,000 in deposits have been locked out of their accounts since May 11.  The apps that customers used are not banks.  Because there were essentially four parties to each transaction, the depositor, Synapse, A Fintech App and finally the bank where the deposits resided, it is unclear who the actual account holders were and whether they are covered by FDIC insurance.  As Synapse and the Apps are not FDIC insurance, no one now knows if the deposits are actually insured.  That is a lot of people who could be out a lot of money.  For now, the lack of access to the funds at this time is creating a horrendous stress.  This is something that may blow up later this Summer.

The economy continues to do a slow leak.  Virtually every report over the last two weeks is showing slippage.

The ISM Manufacturing Report dipped a meager .2% leveling out at 48.5% in June.  Forward looking numbers are also soft with new orders continuing to contract along with backlog of orders.  As expected with these levels, production is declining as is employment.  Inventory levels appear sufficient to meet any current demand.  Eight industries reported growth in June.  These eight industries included petroleum, primary metals, and printing related companies.  None of which would set the heart on fire as a great outlook for the future.  Nine industries noted they are in contraction.  This included machinery, fabricated metals, wood products, electrical and food/beverage.  These are areas that typically lead a strong growing economy.  Not a good outlook for the start of the third quarter.

The ISM Services Report was also concerning.  Since Services account for nearly 80% of the economy, a dip here has much more impact.  The drop of 5 points from the May report, moving from 53.8 down to 48.8 is a shocker.  Any number less than 50 reflects contraction in the sector.  The segments of the service sector that reported growth included management companies, health care, utilities and finance.  Agriculture, forestry, real estate rental and sales, retail trade and transportation all declined.  Again, the areas in an economy you want to see growing are the very ones that are not right now.  One of the major issues in the service report was related to inflation.  Prices remain high and continue to be an issue.

The job market should be included in the softening news.  New job hires are ok, but off from prior reports. We are now down to the low 200,000 level on a monthly basis.  When you consider that 70,000 of the 200,000 was from increasing government payrolls, and manufacturing dropped 8,000 jobs,you really get a flavor for how soft things are getting.

Have a great week

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