When the original Washington Senators left the nation’s capital in 1961, heading to Minnesota becoming the Twins, major league baseball could not imagine Washington DC without a team. A new Washington Senators was created and essentially stunk up the league for 10 seasons. Only once did they have a winning season, they were still 23 games behind first place that year. Their overall record was 740 wins against 1,032 losses. That is a .410-winning percentage. During a week that saw the passing of Frank Howard, the Senators home run record holder and all-around well-loved ballplayer from that era, the Rangers finally won their first World Series. Congratulations to a team that has persevered through a great deal of adversity over the years.
Last month I shared that the ISM report for September had concerns. While manufacturing improved a bit, the improvement was due to clearing out backlogs. New orders in September were down which created a concern. That concern became clear in October. The October ISM Manufacturing report played out as I expected. The September manufacturing level was 49. The October report came in at 46.7. The contraction drops the sector to its lowest level since June. None of the sub categories in the report show any form of optimism for November. New orders and back logs are contracting at a faster rate than September. Of particular concern is a contraction of the employment level in manufacturing. Companies are cutting staff in anticipation of a slower season ahead. This is not a good start to the fourth quarter.
The ISM Services report dropped 1 point from the September report going from 54.5 to 53.6. This is still in expansion territory, but the margin is shrinking. Overall, there is no blatant red flags. The numbers are reflective of a slow leak at this time. It does appear there is an indication of deflation in service pricing. This may be helping abate a softening demand, but will not be healthy for service firms bottom lines. The travel and accommodation segment appears to be the hardest hit right now.
A major concern in both the ISM reports and other news that is being shared, surrounds the finance industry. Firms across the board are concerned about the availability of credit to continue to support their operations. In surveying bankers as well as looking at the financials of the banks, liquidity concerns are growing. After a period of relatively flat deposit levels in the banking industry, a possible new bleed off started on September 27. The decline is approaching one billion dollars. Not sure where the funds are going at this time, but the bets are to higher yield investments that appear safer. Commercial and Industrial loans have declined this year by over a billion. At the same time real estate loans in banks have increased by roughly 750 billion. Most of this increase was early in 2023. To be fair though, the numbers continue to rise, which is a surprise based on the risk in the real estate markets as well as enhanced attention real estate lending is getting from the regulators. The banks are having to walk a fine line right now, how can we keep our funding powder dry to meet our clients’ needs without having to constrict lending to a point where our earnings decline.
The productivity levels for the third quarter were a nice surprise. Worker productivity grew by 4.7%. Outside of the second quarter of 2020, this is one of the strongest growth rates experienced in the last 10 years. Part of the improvement is the “back to the office” movement. Additionally, productivity improvements are coming from companies culling the herd. Employees that are not “working out” are being cut and either not replaced or new hires who are qualified and willing to work are being found. As the durable goods orders are not reflecting an increase in business equipment purchases, the productivity improvement is not due to robotic replacement of staff.
Finally, An international trade issue that has been beneath the radar is problems at the Panama Canal. Part of the canal goes through Gatun Lake. Due to drought conditions in Panama, the lake levels have dropped in the rain fed lake to levels that are restricting transit. This is impacting trade with China for any ports along the US eastern seaboard all the way down to central South America as well as Europe and western Africa. The curtailment of ships allowed to go through the canal is causing a significant increase in both the time to get products as well as the cost of transportation. The drought has brought rain levels to the lowest level since 1950. While Panama is currently in its rainy season, the levels of precipitation continue to be well beneath replacement levels in Gatun Lake.
Have a great week.