Fed Beige Book: Economic Activity Slowed in Some Districts Economic activity downshifted in parts of the U.S. in recent months, the Federal Reserve said, with a few areas reporting a hit to consumer spending tied to recent market turmoil.
Just half of the Fed’s 12 districts reported modest or moderate growth since early January, according to the central bank’s “beige book” summary of regional economic conditions released Wednesday. The prior report showed nine districts expanding at that pace.
Three Fed districts cited the financial-market turmoil that kicked off 2016 as one factor behind consumers’ reluctance to spend, along with economic uncertainty and a reluctance to add to existing debt. (…)
Eight districts reported “significant headwinds” for manufacturing due to weak demand from the energy sector, and many districts said “the strengthening dollar and weakening global outlook” reduced demand for exports. (…)
Most Fed districts reported modest improvement in labor-market conditions. Seven districts said employers reported difficulty finding skilled workers.
Wage growth varied from flat to strong across all districts. St. Louis noted that 56% of contacts reported wages were above year-ago levels, the highest share in two years. Most districts reported prices remained steady. (…)
Gary sent me this Reuters piece: Unemployment is rising in former U.S. oil boom states
U.S. Oil production drops to new cyclical low
According to the U.S. Energy Information Administration (EIA), crude oil production was down for the sixth consecutive week through the week of February 26. As today’s Hot Charts show, U.S. production was down to 9.08 million barrels per day during that week, a new cyclical low. With companies still slashing their capital spending budgets against a backdrop of hostile credit markets, we believe that the downtrend in U.S. crude oil production is for real this time around. We remain comfortable with our current forecast calling for WTI in excess of $40/barrel in the coming quarters. (NBF)
Bearnobull’s readers have been aware of this for weeks…
While bulls cling to predictions that profit growth will resume for Standard & Poor’s 500 Index companies in 2016, analysts just reduced income estimates for the first quarter at a rate that more than doubled the average pace of deterioration in the last five years. Forecasts plunged by 9.6 percentage points in the last three months, with profits now seen dropping the most since the global financial crisis, data compiled by Bloomberg show. (…)
Forecasters see the stretch of profit contractions now lasting 15 months. In the seven times earnings have fallen at least that long since 1970, stocks slipped into a bear market in all but one instance, data compiled by Bloomberg and S&P Dow Jones Indices show. (…)
Reversing from a growth forecast of 1.6 percent three months ago, income among S&P 500 companies is now estimated to fall 8.0 percent this quarter. Projections for profit gains have turned to declines for technology firms and companies that make consumer necessities, expanding the number of industries with no growth to seven out of 10.
While it’s not unusual for analysts to trim estimates for any current quarter, the recent pace of downgrades is alarming. The reduction of 9.6 percentage points in the past three months is worse than all quarters since the start of 2011 and compares with an average rate of decrease of 4.1 percentage points.
Analysts see another 1.9 percent decline in S&P 500 profit next quarter, after predicting growth of 3.7 percent at the start of the year. Should the forecasts come true, that would make five consecutive quarters of negative growth. (…)
As I explained in PICK YOUR FACTS, earnings data are currently all over the map depending on which aggregator you use. I am currently using Thomson Reuters’ data because they are “middle of the road” and updated daily. Here’s their Q1’16 tally which shows –6.1% in Q1, down from –5.7% one week ago:
Interestingly, the revisions are not due to poor pre-announcements. There have been 18 positive pre-announcements so far for Q1, same as last year at the same time. There have been 89 negatives, down from 90 last year. Either corporations are whispering analysts lower or analysts are more conservative given the financial turmoil.
(…) Consider that energy-sector exposures at the big four U.S. banks— J.P. Morgan Chase,Bank of America, Wells Fargo and Citigroup—range from roughly 1.5% to 3.5% of their total loan books, according to the banks’ recent annual filings and other disclosures. That doesn’t sound huge. But it doesn’t include so-called “unfunded” exposure.
This mainly refers to lines of credit extended to clients that haven’t been tapped. Including these, total exposure is more than 2.5 times as large, or $186 billion in aggregate, for the big four.
Fortunately for bank investors, this doesn’t have to be such a big problem, especially considering the big banks’ strengthened capital positions.
(…) Credit-line agreements typically come with covenants that allow banks to cut off a client in some kind of distress. What’s more, credit lines to the energy sector are regularly reappraised against collateral, which mainly consists of oil reserves in the ground.
Not that banks are immune to drawdowns: At J.P. Morgan’s investor day last week, finance chief Marianne Lake said the bank’s downside scenario for energy—oil prices of around $25 a barrel for 18 months, resulting in an extra $1.5 billion of provisions—assumes a “quite dramatic draw down” of credit lines.
Even then, though, investors shouldn’t be quick to panic. During the oil-price bust of the 1980s, bank write-offs peaked at about 10% to 15% of loans to companies in exploration and production as well as oil-field services. Integrated majors, which make up a sizable part of big banks’ loans books, have better staying power.
Assume then, that today’s energy bust is just as bad as in the 1980s, but across the entire lending portfolio—an overly harsh scenario. Assume also that outstanding credit lines are fully tapped—also unlikely. Still, potential losses look painful but manageable. As a percentage of Tier 1 common equity, they would range from 3.6% at J.P. Morgan to 5.9% at Citigroup.
And that would be in a worst-case scenario. The reality is likely to be far less onerous. (…)