Welcome to May Day. This was the day we would dance around May Poles, hang baskets with goodies on the doorsteps of friends and build a nice bonfire in the evening. Essentially it was a celebration that Summer was beginning. Typically, the leaves on trees were bursting forth, the grass was green and the snow piles were all gone by now. This year, we look more like the 1st of April, not the start of summer, at least in Minnesota.
Manufacturing numbers continue to be very soft. The Kansas Fed number for early April was down dramatically. In March it was a break-even number of 3. The April number was -21. This is in line with the other fed manufacturing numbers. As you read this the April ISM manufacturing number will be released. Based on the performance so far that I am seeing, I would expect a number around 45. The March number was 46.3. Not a great start to the second quarter.
There are some indicators that manufacturing might be picking up during the last half of the second quarter. Inventories throughout the wholesale and retail sectors have fallen dramatically. During the fourth quarter of last year inventories were excessively high. During the first quarter of 2023 inventories fell by more than $1 Billion. We are at a point where inventories are getting too low and need to be replenished. Manufacturing continues to hold on to staff which is an expectation that production will need to ramp up soon to meet demands.
The durable goods numbers for March were again impacted by Boeing orders. In total durable goods orders rose 3.2% in March. When you remove the Boeing impact as well as non-defense related orders, the actual level fell .4% below the February number. What was clearly embedded in the report was that industry investments in new equipment were non-existent. It appears that companies feel they have sufficient capacity to meet the upcoming production demands. Added to this are the interest rates. Firms are calculating the return on investment of new equipment at the higher interest rates and realizing the costs outweigh the benefits. This likely will not change anytime soon.
The private durable goods investment is proven out by the dramatic drop in commercial loans in the US banking system. Since March 15, 2023 the banking system has shed $256 Billion in commercial, non-real estate loans. From my conversations with a number of bankers nationwide I am hearing that this is due to a combination of factors. First, borrowers are paying down revolving lines of credit and drawing down on their deposits which are earning nothing. Second, loan demand is softening as companies hold off in investments due to concerns about the future, adequate capacity, as well as high lending rates that push the ROI beneath an acceptable level for further investments.
The banking system has sufficient reserves to provide the lending that businesses need. While deposits have bled off, there are adequate borrowing opportunities for banks to support new lending. This issue is the cost of that lending. In most cases the average cost of funds related to deposits is holding around 1%, some cases a bit higher. Borrowing costs hover around 5%. The banks also have sufficient “Available ForSsale” investment portfolios to meet any demand. The reluctance in liquidating these portfolios relates to locking in the mark to market losses that they are reporting this year. When rates begin to drop in the next year, if these investments are still held, banks will be able to recover the write downs that they experienced this year.
The job market continues to be incredibly resilient in light of the continued news of layoffs. New unemployment numbers as well as continuing claims remain rather static.
The labor market may or may not be related to my last point this week, the level of outstanding revolving debt. For context, the revolving debt in the US is at record levels, passing the pre pandemic high in April of 2022, about the same time deposits in the banking industry peaked. Since the beginning of the year, revolving credit balances have risen by 4.2%. The bulk of the growth was before March 22, 2023. Since March 22, the level has plateaued. The reasons for the use of revolving debt vary. For some it is the last resort to make ends meet. Of course, this will be short lasting as they either reach the max credit allowed or are cut off due to lack of payment. The second reason is optimism about the future, they have a job and believe they can repay in the future. That the level of debt might be leveling off could be a sign that the consumer has a growing concern about the future. We should watch this indicator over the next month or so.
Have a great week.