This Week’s Economic Update, May 6, 2024

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I trust you had a great day on Saturday and the Force was with you.  On the 3rd of August, 1977, a buddy of mine and I wandered into a movie theater and were blown away.  Star Wars had been released in late May of that year.  By August it was finally catching on.  The special effects were mind blowing at the time.  It did not take long before I had seen it four times, picking up something new each time.  Over the years the franchise has grown into something no one ever expected at the time.  It is the longest lasting and most wide ranging collection of stories all wound together in history.  I never became a Star Wars aficionado but still enjoy the original movies and the Mandalorian.  This is one of the few storylines that have engaged multiple generations allowing them to connect in great ways.

The banking industry continues to struggle.  Last Friday Republic First Bank of Philadelphia, PA failed.  In looking at the call reports, Republic was skating on thin ice for some time.  The slide started in 2020 and really picked up steam since mid 2022.  This was a bank that moved heavily into commercial real estate lending over the years.  At the end of 2021, 85.5% of the credit portfolio was invested in some sort of real estate.  Commercial investment real estate and multi family real estate loans totaled 48% of total loans.  At the end of 2023, 91% of all loans in the portfolio were real estate.  Commercial investment and multi family still accounted for 48% of the total portfolio. 

The real estate loans caught up with Republic in late 2022 and all of 2023.  The losses suffered on the real estate loans, operating losses due to the tightened margins, along with losses in the securities portfolio left the bank with a net loss of $43 million last year.  Sadly, they are not alone.  Many banks are facing some very tough choices.  Net interest margins continue to tighten as they seek to raise funds for continued loan growth. As liquidity issues arise, the risk of locking in security losses when investments are sold grows.  Lastly, issues within the commercial real estate portfolio are starting to rise. Now is the time to begin looking into the pending stress within your real estate loan holdings.  Catching early warning signs include frequent site visits, monitoring vacancies, reviewing rent rolls and assessing cash flow.  Any commercial real estate loan that is maturing in the next 24 months needs to be stress tested now to determine if you will have an issue in the future.  Don’t be a Republic First Bank, take action now.

Manufacturing dipped under the growth threshold in April.  The ISM report was 49.2 in April after it posted a 50.3 in March.  Beyond the overall number, the forward indicators were not optimistic.  New orders and back log orders contracted in April.  Demand is softening in the manufacturing sector at this time.  Overall, the respondents are indicating that things are flat and stable.  Equipment investments from firms remain very soft.  Until demand picks up, there seems to be plenty of capacity at this time.

The April JOLT job quits fell by 200,000.  This indicates that the job market might be softening a bit.  If workers are unsure about the future, they will not be open to jumping to another firm.  This was born out on Friday with the jobs report showing non-farm payrolls showing hiring of only 175,000.  This was well below the 315,000 in March.  That is a brisk slow down.  Other indicators in the jobs report that were concerning was the weakening hourly earnings and a slight cut in hours worked per week.

The overall level of consumer debt might be catching up to the overall demand.  The April services report moved into contraction territory.  Between the manufacturing and now the service sector contracting, we might be entering the long anticipated soft landing.  However, if this softening is truly the outcome of the level of consumer debt, this very well could turn into a hard landing very quickly. 

One bright spot are oil and gasoline supplies.  In spite of the unrest in the Middle East, prices are being overcome by the growing supply levels which are resulting in lower prices.  Hopefully, by the summer travel season we will be seeing more moderate gasoline pricing.

Have a great week.

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