Credit conditions have tightened significantly for small businesses after SVB failed, and firms with less than 500 employees account for almost 50% of total employment in the US economy, see charts below. Small businesses borrow from small banks, and it is getting more difficult to argue that the banking crisis is not having a negative impact on the economy.
Babysitter wages per hour are $25.2 in San Francisco, $24.6 in Seattle, and $23.5 in New York, and the increase in salaries for babysitters from 2021 to 2022 was more than 8% in Seattle, see chart below.
After the housing bubble burst in 2008, construction of new homes declined more than 50%, and residential investment pulled GDP growth down by 1% for three years.
With commercial real estate construction being roughly 75% the size of residential investment, and fewer skyscrapers and shopping malls being built, the bursting CRE bubble could be a drag on GDP growth of around 0.75% over the coming three years. This should be compared with a 2% potential growth rate for the US economy (according to the CBO).
In other words, with the commercial real estate bubble bursting, we are likely to enter three years with low growth, similar to what we saw after the housing bubble burst in 2008. Put differently, once the Fed starts cutting rates later this year, interest rates will likely stay low for several years, and QE is likely to come back in 2024.
Liquidity is a much-debated concept in investing because it is tied to a basic question most people have when they are considering a new investment: “When can I get my money back?” We tackle that question and more in the first episode of “Apollo Answers,” a new Apollo Academy series. Watch it now.
Immigration is a key reason the labor market is gradually moving from very overheated to less overheated.
Over the past 2½ years, immigration into the US labor market has increased by 4 million workers, and the working age immigrant population is now back at its pre-pandemic trend, see the first chart below.
High immigration contributes not only to solid job growth, including in leisure and hospitality, but also to increasing the participation rate and limiting the upside pressures on wages, see the second chart.
The bottom line is that high immigration is helpful for the Fed as it tries to cool down the labor market and slow down inflation.
Our employment outlook chart book is available here.
The US economy is continuing to slow down, as is job growth. Looking ahead, that’s a trend that’s expected to continue: The consensus is expecting essentially 0% growth in GDP and earnings over the next three quarters. In other words, the consensus is saying that in the next nine months, we will see no real growth in consumer spending, capex spending, or hiring. Nonfarm payrolls could be a bit higher than zero because of demographics, including immigration, but with the consensus expectation of negative growth in the third quarter, we could soon start to see nonfarm payrolls come in around -100K to -200K. In the week ahead, headline CPI inflation is expected to come in at 5.2% in March – a notable decline from 6% in February – but still far above the Federal Reserve’s 2% target. While inflation is certainly treading in the right direction, at this point it’s likely too early for the Fed to turn dovish.
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Weekly Fed data released every Friday at 4:15 pm shows how banks are responding to the SVB collapse and subsequent deposit outflows:
Fed hikes were already cooling the economy, and the latest weekly Fed data shows that the banking sector response since SVB is magnifying the speed of the slowdown.
Our banking sector chart book is available here, and the bottom line is that the immediate risks in the banking sector are starting to fade, but the behavioral change in the banking sector is beginning to weigh on the economic outlook. In short, the credit crunch has started.
We just entered Q2, and the consensus expects essentially zero percent growth in GDP and earnings over the coming three quarters, see chart below. In other words, the consensus is saying that over the next 9 months, we will see no real growth in consumer spending, capex spending, and hiring. Nonfarm payrolls could be a bit higher than zero because of demographics, including immigration, but with the consensus expectation of negative growth in the third quarter, we could soon start to see nonfarm payroll prints around -100K to -200K.
During the pandemic, we were all at home buying things online and supply chains were constrained, and goods inflation went up.
Then, when the pandemic was over, goods inflation came down, and service sector inflation went up as we started spending money on restaurants, hotels, and airline tickets.
Now the service sector is in the process of cooling down, and as a result, service sector inflation is declining. Specifically, ISM services prices paid is a leading indicator for headline inflation, core inflation, core services inflation, super core services inflation, and average hourly earnings, see charts below.
In other words, goods inflation normalized in 2022. And service sector inflation is normalizing in 2023.
Combined with rapidly falling inflation expectations, see the last chart, the bottom line is that inflation is coming down to the Fed’s 2% inflation target, and the Fed can later this year begin to move the Fed funds rate down to the r-star level around 2.5%.
In short, this inflation episode will soon be over.
A survey of 71 banks in the Dallas Fed district done after SVB went under shows a dramatic reversal in loan volumes, see chart below. This Fed survey was carried out from March 21 to 29.
