Economic Outlook - April 2023
- The regional banking system showed cracks, which played out rapidly in the month of March. Silicon Valley Bank (SVB) and Signature Bank collapsed, and the Federal Deposit Insurance Corporation backstopped all of their client deposits. The 11 largest banks in America buoyed First Republic Bank with a $30B rescue deal, and the second largest bank in Switzerland, Credit Suisse, required a government bailout. SVB’s failure is one unintended consequence of the Federal Reserve’s record setting tightening cycle (in combination with poor interest rate risk management on the part of SVB). SVB announced a loss of $15.9B in the third quarter, almost purely tied to rates rising. Signature Bank tied a larger portion of deposits to cryptocurrency. These are the second and third largest bank failures in history, only behind Washington Mutual in 2008. One silver lining: the bank run in March of 2023 was not caused by credit issues, or financial troubles of individuals and corporations who borrowed funds. Stress tests and further regulation appear to be in the regional systems’ future.
- Business activity has remained mixed, which played out in March again. The Institute for Supply Management, or ISM, saw a fourth consecutive month of contraction in manufacturing data. In contrast, the ISM Service sector data continues to show expansion, posting a reading of 55.1 to end February, marking the best month over the past year.
- Inflation, as measured by the personal-consumption expenditures (PCE) index, rose again in February 4.6%. The services component of the PCE index showed minor signs of slowing, moving from an annual rate of 7.6% in January, down to 6.8% for February. The slowdown in wage growth for services, driven by the employee “quit rate” in the industry, could have more staying power. A reduction in service wage growth, leading to an inflation level closer to the Federal Reserve target of 2%, would be a necessity in a soft-landing scenario.
- The effects of higher rates and inflation are diminishing personal savings rates, or the amount of money remaining for an individual after spending and taxes. To close out February we saw an annualized rate of 4.6%, well below the recent peak during the pandemic in April of 2020 at nearly 34%, while also nearly half of the long-term historic average of 8.8%. Consumer spending slowed in February, increasing only 0.20%. Lower savings rates are leading to less consumption, and a challenging backdrop for growth until inflation is right sized.
- The Open Market Committee decided to raise the Federal Funds overnight lending rate by the lowest margin in over a year, announcing a 0.25% lift at the March 2023 meeting. Given the liquidity crunch for some banks, and a bit slower inflation rate, the Fed hedged a bit as to the pace and timing of future rate increases.
Source: Empirical Research Partners, FactSet, Bloomberg, WSJ
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