Minnesota hit the news this past week in a big October way. A horticulturist from Anoka, MN, my hometown, earned the title of largest pumpkin in 2022. The gourd came in at 2,750 pounds earning the owner almost $30,000 in award money. By the way, Anoka is the Halloween Capitol of the world and lays claim to the annual Pumpkin Bowl Football Game.
The reports this past week related to the job market and the inflation level were interesting. Job market first. We do not talk about the ethical issue of the impact of high interest rates. As the Fed pushes interest rates higher to quell inflation, the ultimate outcome will be job losses. How we treat those who’s employment will be sacrificed for our longer term economic gain is often overlooked. This past week’s job report did not show any impact of the interest rate changes so far. New jobless claims and continuing jobless claims have remained flat for about a month now. The level is not excessive, it continues to be reflective of a strong job market. Many employers are still under staffed trying to meet both demand and service standards.
Inflation is far from peaking based on both the CPI as well as the PPI. It was thought that with the decline in gas prices which occurred prior to the most recent OPEC news, that would have softened the CPI. This was not the case. Food prices continue to be problematic. The interesting aspect here is that the demand remains strong. People are still spending, not only on staples but also on discretionary items. Air travel continues to be strong. Auto sales are flat, not declining. All that leaves the impression that it will take some time to knock the inflation levels down.
That brings me to the St. Louis Federal Reserve reports. As I shared before, on April 13, 2022 the level of deposits in US banks reached a peak. Since that date they have been abating. At the same time, commercial loans are growing to record levels. As consumers and commercial clients become less liquid, the economy will naturally slow. With the level of quantitative tightening, the money supply this year is contracting quickly. Again, this would drive prices down. Banks will have to reassess the deposit rate levels soon to attract funds to support the growth in loans.
The current level of loan demand is based on two factors. First is expansion needs due to staff shortages. The second is liquidity issues due to higher expenses, supply chain issues and cash cycle problems. With clients facing increased inflation in supplies and inventory, bankers need to be discussing the changes in the Gross Profit Margin right now. The second issue that you need to be reaching out to your clients with, is the change in their operating expense margin. Both these interim numbers are likely to be causing cash shortfalls for your clients. Good bankers will calculate the amount of money left on the table due to a lower gross profit margin and/or a higher operating expense margin. Your plan shouldn’t be to wait until your borrower has a cash shortfall, but to pre-empt the short fall by being prepared for an expected cash shortfall ahead of time and get the financing approved to assist them.
On the other hand, if your client is struggling with the margins and more financing will not solve the problem or in some cases, just make the conditions worse, getting them the help they need, possibly from another source, is critical.
The early warning signs of illiquidity in the market are already rising. Action on your part is required now. Have a great week