This Week’s Economic Update, May 8, 2023

Last week, I was in Lexington Kentucky where I was invited to speak at the Independent Community Bankers Bank Annual Credit Conference. I met many wonderful bankers at this very informative event. The ICBB did a wonderful job in lining up a number of great speakers who provided very timely information related to current events in banking. Hats off to the staff of the ICBB whose work behind the scenes made for a very successful conference.
I believe I shared a while ago about my 1943 Farmall H tractor. In using any type of equipment, I learned long ago that speed plus torque breaks things. Go too fast and use too much power and you will be picking up pieces and having to fix things. This same concept can be applied to our economy. The Federal Reserve has moved very aggressively in raising interest rates. The rapidity and amounts have been the most aggressive in history. The level and time compression associated with the rate increases have exceeded the 1994-1995 as well as the 2004-2005 time periods, the prior fastest increases. This has provoked a breaking of the banking system. Banks did not adjust the deposit rates fast enough in trying to keep up with the Fed increases. This caused the depositors to flock to higher rate investment alternatives which created the panics that destroyed SVB, Signature and First Republic.
On the regional bank side of things, the moves by the Fed opened the opportunity of short sellers to drive bank stock prices down causing near failures this past week. This was done through rumors and exaggerations of the problems that regional banks were having. The short seller moves appear to have petered out by Friday. Cooler heads will hopefully prevail. Many of the regional banks have balance sheets that are fortress strong with plenty of liquidity to withstand the drain on the deposits that they have seen. The “Mark to Market” accounting has negatively impacted the banks only in the fact that they chose to maintain a long duration in the investment portfolio. They had to show paper losses due to the accounting requirements related to the available for sale investments. However, few if any actually sold the investments. When rates start to decline in time, the banks will all recover the losses, boosting income.
The Fed pushed too hard, too fast with too much power. They broke the banking system. Now the Fed needs to fix what they broke, providing a realistic plan that will provide the resources that the banks need to serve their clients and provide their intermediary services that business and other stakeholders need. Let’s hope they do this before it is too late.
The ISM manufacturing report for April showed a small uptick in activity. The move from 46.3 in March to 47.1 in April appears to be the start of the replacement of the draw down on inventories that had occurred earlier this year. New orders bumped up a bit. Manufacturing is still contracting, but just at a lesser pace than last month.
The ISM Services Business Activity softened from 55 to 52, approaching stall speed. Services are still growing, but at a miniscule level. Consumers do appear to becoming much more selective in their spending. With higher interest rates, larger purchases related to goods as well as services are being curtailed. Anything requiring financings is being considered very carefully.
The job market continues to march along. While initial jobless claims climbed this past week to 242,000, non-farm payrolls increased at the rapid pace of 253,000. Average hourly earnings at .5% for the month posted the strongest performance since last July. Employers continue to try to attract workers with higher pay. Part of the problem here is the lack of productivity. Non-farm productivity fell 2.7% in the last quarter. This is not a good sign in the effort to control inflation. Increasing productivity is the best sign of a strong, healthy economy. Inefficiency is never good. Sadly, nothing is on the horizon that will approve efficiency in our work places. An easy, low piece of hanging fruit is getting back to the office. The reason for the remote workplace is behind us.
Have a great week.