What’s unusual about what is going on with the banks in terms of the failures and the notable tightening of lending standards is that historically this behavior has taken place in response to a recession that has already begun. In the past, the economic downturn creates bad credit, some banks don’t make it as a result and for most of the banks that do respond in kind with limiting the extension of credit. This time, it was the unwinding of the sovereign bond bubble with the pin being the aggressive rate hikes in response to inflation that caused the initial tightening of lending criteria, the deposit flight, the eventual bank failures, and in turn further tightening of credit even before a recession has technically begun. And now the downside of the credit cycle awaits with the stated vulnerability already in place.
I have yet to mention one word about the debt ceiling in my commentary but will today with the meeting of both sides later. After doing this for a long time and seeing this movie so many times, it’s hard not to have my eyes glaze over every time we see what’s going on and hear the words ‘catastrophic’ or ‘calamity’ stated by both parties over decades if it doesn’t get raised but it always does. What we are telling clients in case there are a few days of disruption is just to make sure you don’t have T-bills maturing in the first few weeks of June if you need the money for something very important. As June 1st is a Thursday, to use that as an example date, if you are closing on the purchase of a house on June 1st or 2nd and your down payment money is in that T-Bill, sell it before then. And for any other important reason you need the money during those few weeks. Otherwise, the government will still pay you back even if the timing is off by a few days (unlikely weeks). Politicians like to talk tough but on something like this, they’ll all fold to raise it again.
The NFIB April small business optimism survey fell to the weakest level since January 2013 at 89, down 1.1 pts m/o/m. Plans to Hire rose 2 pts after falling 2 pts in March and Positions Not Able to Fill rose 2 pts after dropping by 4 in the month before. With respect to compensation, both current and plans for it, they fell a touch. The outlook for earnings softened 5 pts after improving by 5 pts in March. And as I’ve said before, if earnings/cash flow deteriorate, capital spending will slow as one follows the other. Capital spending plans fell 1 pt to match the lowest level since 2010 not including Covid. With inventory still elevated, now especially relative to sales, plans to increase it fell 1pt to -5. Higher selling prices continues to moderate, down 4 pts m/o/m. With respect to the outlook components, those that Expect a Better Economy fell 2 pts and is not far from the lowest on record. Those that Expect Higher Sales deteriorated by 4 pts to the softest since last July. Off the lowest level since 1980, those that said it’s a Good Time to Expand rose just 1 pt. Finally on credit conditions, they remain negative but 1 pt less so at -8.
Just a bit more here on credit, “the average rate paid on short maturity loans was 8.5%, .7 percentage points above March and the highest since October 2007.” This said, only 4% reported that financing was their top business problem (up 1 pt) and just 2% of owners said that their borrowing needs were not satisfied. This of course is something we’ll be watching really closely in coming months and quarters.
The NFIB said “Optimism is not improving on Main Street as more owners struggle with finding qualified workers with their open positions. Inflation remains a top concern for small businesses but is showing signs of easing.”
NFIB
NFIB Expect a Better Economy
NFIB Good Time to Expand
NFIB Capital Spending
The NY Fed’s April Consumer Expectations survey reflected a .3% drop in one yr inflation expectations to 4.4% but a rise in the 3 and 5 yr time frames of one tenth each with both still under 3%. That one yr read compares with 2.5% in February 2020 so still well above pre Covid trends albeit down from its highs. What anyone currently looking to buy a home is seeing in many inventory constrained markets, the median home price growth expectations was up by .7 percentage point to 2.5%, the highest since last July.
There was no change in earnings growth expectations but a weakening in expectations for employment as more expect higher unemployment a yr from now, by 1.1 percentage point to 41.8%, above its 12 month average of 40.2%. Also of note, “the mean perceived probability of finding a job (if one’s current job is lost) dropped from 57.6% in March to 55.2% in April, the lowest reading since September 2021. The decline was driven by respondents with at least some college education.”
There was softening with respect to consumer spending expectations as it fell to 5.2% from 5.7% in terms of growth and that is the lowest read also since September 2021. “The decline was driven by respondents with a household income greater than $50k.”
On credit access, it was mixed which I guess is better than feared as of now.
Moving overseas, in the face of a 40 yr high in inflation, wage growth in Japan continues to be disappointing and confusing. I say disappointing because base pay only rose .5% y/o/y in March. A say confusing because we have so many anecdotes of much greater wage gains. There was a jump in bonus pay of 4.6% and maybe this is the way Japanese employers are trying to improve overall compensation. I still believe that either in June or the meeting thereafter, the new BoJ Governor Ueda will widen again YCC by 25 bps.
China’s exports in April rose 8.5% y/o/y above as forecasted but a slowdown from the March gain of 14.8% which benefited from the reopening in the sense that backlogs were fulfilled. April likely reflects the global trade slowdown in manufactured goods. Imports missed estimates by dropping by 7.9%, well worse than the estimate of no change. Some of these imports are commodities and many are used for inputs to eventual exports.
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