Can we Finally Admit THIS IS DEEPER THAN CENTRAL BANK POCKETS!?
Today’s GDP number was unpleasant to say the least, especially relative to market expectations. The print came in at 1.2% vs expectations of 2.6%. To make matters worse, Q1 GDP was revised down to .80%. But let me show you, this is hardly anything new. This has been going on for 38 quarters in a row. That’s right! A record setting 38 quarters in a row! Historically speaking, when Nominal GDP has dropped below 5%, it was typically done during US recessions. But as you can see in the graph below, US Nominal GDP has been below that 5% threshold for 38 quarters in a row:
It is not the headline GDP number that is the real issue. The real issue is this problem of anemic growth in the US has been wide-spread and pervasive, no industry has been spared. The Federal Reserve Bank of Chicago puts out an index they refer to as the CFNAI, or the Chicago Fed National Activity Index. This index is updated monthly with 85 separate economic indicators that cover production, income, employment, hours worked, wages, personal consumption, housing, sales, orders and inventories. This is the broadest measure of economic activity available on a monthly basis. I have broken down the average level of this index during NBER defined business cycle expansions since 1967. The graph below is self-explanatory:
I think it is time to state the obvious here. This problem is deeper than Central Bank pockets! Even with the extraordinary monetary policies put in place starting in 2008, we have had the worst 9 year period of economic performance in modern times. Washington and regulatory authorities need to WAKE UP and see that Central Banks alone can’t fix this. Horrible fiscal, health care and trade management in Washington, combined with the choking effects of over-regulation across all business lines is slowly drowning this country. This is not my opinion, these are just the facts.
The recent spurt in positive economic data has everyone chattering again about another rate hike this year (this is getting old), but I have presented many forward looking models in this blog that all say this spurt in recent above-trend economic activity is short-lived. The Fed needs to start using its "transparency" to let
know that they have done about all they can with monetary policy. No matter how bad the Fed wants to normalize rates, doing so would just make things worse.
Falling asset yields will continue to present repricing risk for bank margins, and given the pockets of under performance across business lines, credit risk will be elevated also. That being said, at the local level, there are still many pockets of strength and thus lending opportunities that should persist through the end of the year. We see loan-to-deposit ratios are up industry wide as well as earnings; things remain fairly optimistic for most community banks regardless of the sub-par macro environment.
07/29/2016 08:13:26 AM
For anyone who attended the ALMEdge® Conference in April, today's very weak economic report from the Bureau of Labor Statistics on new jobs created in the month of April should hardly be surprising. Pundits, whether on television or the internet, seem utterly shocked that the number was so far below economists' expectations, but the credit markets and the ISM reports have been telegraphing the approaching weakness for months. I presented this chart at the April User's Conference. It clearly shows that we should expect the pace of labor market growth to decelerate, beginning now, through year-end:
Not only were credit markets telling you to expect this, but the ISM reports were also alerting you that an abrupt change (slowing) in the labor market should be expected. My post last month talked about the importance of listening to those that do, not to opinions. Within both of the monthly ISM surveys (Manufacturing & Service Sector) there are questions posed to business operators about the future of their employment levels. I have taken the ISM Employment Index contained in each report and created an economically weighted index, based on the total amount of jobs in each sector. This index clearly leads the year-over-year (YOY) growth rate in payroll growth by an average of 5 months. Here is the chart:
So, we have two different leading indicators that tell us we should expect payroll growth to continue to decelerate for the rest of the year, at a minimum. This makes it very difficult for the Fed to raise rates going forward. I continue to say that any further hikes will be a big mistake, so for bankers potential reinvestment risk will be high due to the likelihood of falling earning asset yields, and credit risk will grow into this environment. Pay close attention to what is going on around you. These conditions may or may not exist in your communities but you need to pay attention and listen to those that do.
06/03/2016 11:18:59 AM
The Yield Curve Neither Hires nor Borrows
A great verbal war seems to be underway among financial and economic pundits. One pundits' model says "RECESSION" while another says "NO RECESSION." I read one such battle this weekend. It was over what the current message of the yield curve was. Both arguments were passionate and seem to be well articulated and seemingly supported by the data and graphs they provide for the reader. The first research analyst thought that the yield curve slope should be adjusted by his fancy math because of the efforts of the Fed to manage the yield curve via their QE and "operation twist" experiments. His adjusted curve showed the curve is now inverted and signaling an oncoming recession. The second analyst basically argued this academic was nuts and that the curve will invert, on its own, when we are REALLY headed for a recession, no adjustments are necessary. He pointed out that a yield curve inversion has led every recession and the curve is currently steep. The positively sloped yield curve is a sign of good ecoomic activity with moderate inflation expectations. I got tired of the back-and-forth relentless arguing of positions and moved on to a different article.
The next piece I read intrigued me. It was on small business sentiment. I instantly thought back to the bicker-fest I had just read and said to myself "wow, thes guys are missing the big picture here, the yield curve doesn't hire people or borrow money from banks, businesses do!" Small businesses are also responsible for the majority of new jobs created in this country so we really should be focused on what they are telling us, not what the yield curve MIGHT be telling us.
The piece covered research done by a firm called Rcube over in Europe. They have done some really interesting research on small business sentiment surveys, and how you can use that data to create a picture of the future of small business profitability based on the current operating and regulatory environment. They used data from the National Federation of Independant Business (NFIB) to create what they refer to as the "Small Business Profits Indicator". This indicator is a great leading indicator of not only profitability but capital expenditures, employment and earnings. Here is the proof in charts:
Now, while going through all of this, I kept telling myself that the chart of this small business indicator looked so familiar. It bothered me to the point of recreating the research for myself and this way, I could start trying to figure out what I was missing, what was bothering me so much. Then VOILA!! I found it. The graphic picture of this profitability indicator reminded me of the yield curve spread I had seen in the bicker-fest article I had just read. So, I overlayed the two and here is what I got:
The realtionship is stunning. But somthing changed in the relationship and they have parted ways recently. The two data sets had a strong correlation of .68 up until the Fed embarked on its QE mission. Since then, the correlation has plumetted to just .04. This solved for me why this battle of opinions has grown so loud. The yield curve may not be inverted, but business is already operating like it is inverted! The Fed's control of the yield curve may be hiding the reality of what is really going on. Small businesses are telling us that things are not all that hot. They are telling us that they expect profitability to tumble and because of that, we should expect less earnings and thus, less capital spending and thus, less hiring in the future. This means ultimately that if the Fed chooses to raise rates again this year, it will be a big mistake. The message for us in all of this is that we need to listen to those who hire and borrow.
05/24/2016 07:49:24 AM