Hard to believe that July 4th is already upon us. Please enjoy the upcoming weekend. Get the grill ready, have a safe trip to the lake, enjoy the fireworks and the pool. Whatever you do, please take time to wave the flag and consider how blessed we are to live in the United States of America. In spite of all the acrimony politically and whatever you think of the economy right now, we still live in a country with incredible opportunities, freedoms as well as an affluence that has rarely been seen in history. Raise a glass of whatever you enjoy drinking this coming weekend and toast our Great Country.
The Fed Manufacturing reports continued this past week. The Kansas Fed index fell from 19 in May to a -1 in June. It appears that manufacturing is softening in June. Will the decline be enough to drive the GDP number for the second quarter negative? Manufacturing is only 12% of the overall economy, so a weakness here is not fatal, but it is a piece of the puzzle that needs to be considered.
The job market continues to be strong. While we are seeing a very slight increase in new jobless claims and a steady level of continuing jobless claims, the number of open positions continues to be frustratingly high. Many industries, especially those that require training to complete the specific jobs, are unable to find qualified candidates. If we are in a recession, this would be the first one where the labor market did not signal the start by reflecting a growing unemployment rate.
The Michigan Consumer Sentiment numbers for June were down. The consumer has significantly cooled in their assessments of the economy during the second quarter. The report gave a strong 62.5% in April. That declined to 55.2% in May. The report dropped to 47.5% in June. Inflation numbers, supply chain issues and an overall frustration with their individual financial condition are making the consumer less optimistic about the future. This should be showing up in the durable goods numbers coming up next week as well as the retail/service numbers which will be released after the 4th of July.
Over the past month I have seen a drop in loan demand at the banks I regularly talk to. Between the higher interest rates, supply chain issues, as well as an impression that business is slowing down, commercial borrowers are holding back on new debt. Commercial real estate transactions are lagging. The only real loan demand growth I am seeing is cash out refinances on commercial real estate. This is the most risky form of financing. Most banks are deferring the requests, recognizing that cap rates on real estate are rising which means values are starting to deflate. Increasing the debt load while the value of the collateral is declining is a sure way to get into trouble in the near future.
The best news this last week is the strength of our banking industry. Virtually every bank, not just the large money center banks, are in a strong financial position. Tier 1 Capital rates, a key measure, are all in the safe range. Our banks have sufficient reserves to sustain themselves through a downturn, which in the end will assist in any type of soft landing that the economy might have.
I will be celebrating the 4th next week and be back on July 11. Have a wonderful week and a great 4th of July.