All METARs know that the Federal Reserve has been trying to reduce the inflation rate by raising the fed funds rate. Until the banking crisis a couple of weeks ago they were also pushing longer-term rates upward by cutting their bloated assets. After a sudden increase to shore up threatened banks by buying Treasuries at face value (instead of market value) the Fed is back to QT again.
The banking crisis has caused banks to tighten standards for commercial and industrial loans to large and middle-market firms. This is typical for banks during recessions. Banks don’t want to issue risky loans as the economy is slowing. At the same time, the tightening itself slows the economy by making it more difficult for businesses to operate.
Stress among small banks is likely to slow the US economy, Goldman Sachs Research, 16 MAR 2023
…
Small- and medium-size banks play an important role in the American economy. Lenders with less than $250 billion in assets account for roughly 50% of U.S. commercial and industrial lending, 60% of residential real estate lending, 80% of commercial real estate lending and 45% of consumer lending… [end quote]
Goldman Sachs estimates a roughly 0.25 percentage point drag on 2023 GDP growth. Others have predicted a stronger effect. The Atlanta Fed’s The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2023 is 1.5 percent on April 5, down from 1.7 percent on April 3. This isn’t stellar growth but it’s not a recession, either.
March Jobs Report Shows Hiring Gradually Cooling
The labor market remains solid but has shown signs of easing demand
By Sarah Chaney Cambon and Nick Timiraos, The Wall Street Journal, Updated April 7, 2023
…
Employers added 236,000 workers last month, a historically strong gain but the smallest in more than two years, the Labor Department said Friday. The unemployment rate ticked down to 3.5%. More Americans jumped into the labor market in March, helping take pressure off wage increases. Average hourly earnings rose 4.2% last month from a year earlier, the smallest annual gain since mid-2021 when inflation was surging… [end quote]
While the red-hot employment picture is gradually cooling, there are still 3 job openings for every 2 unemployed workers (who are actively seeking work). The Labor Force Participation Rate is gradually increasing.
The March Manufacturing PMI® registered 46.3 percent, 1.4 percentage points lower than the 47.7 percent recorded in February. Regarding the overall economy, this figure indicates a fourth month of contraction after a 30-month period of expansion. Economic activity in the services sector expanded in March for the third consecutive month as the Services PMI® registered 51.2 percent. The service sector is much larger than the manufacturing sector. Pay increases in services are driving inflation higher.
The markets have moved higher. Stock prices have risen recently within their months-long channel. Bond yields have dropped. The trade is mildly risk-on and the Fear & Greed Index is neutral.
Despite pushing on the trend, the Federal Reserve hasn’t yet made a serious dent toward inducing a recession. A soft landing is possible…although risks are building in the system.
The METAR for next week is partly sunny.
Wendy