NY Fed Services Activity Survey
Activity declined significantly in the region’s service sector, according to firms responding to the Federal Reserve Bank of New York’s May 2023 Business Leaders Survey. The survey’s headline business activity index fell seven points to -16.8. The business climate index was little changed at -45.8, suggesting the business climate remains much worse than normal.
Employment edged slightly higher despite the decline in activity. Wages and input prices increased at about the same pace as last month, while selling price increases picked up.
Looking ahead, firms expect conditions to improve only somewhat over the next six months.
Fed Poised for Big Upgrade to Outlook Despite Swirling Risks
(…) “They are going to have to raise GDP and lower unemployment for the year,” said Julia Coronado, president of MacroPolicy Perspectives LLC and a former Fed economist. “It definitely reinforces higher for longer. The Fed isn’t going to be turning around and cutting anytime soon.” (…)
That will likely prompt the Federal Open Market Committee to boost its 2023 economic growth forecast to around 1% from 0.4%, and cut its unemployment rate expected late this year to around 4% from its prior estimate of 4.5%, said Stephen Stanley, chief US economist at Santander US Capital Markets in New York. (…)
Stanley said the FOMC’s March unemployment estimate – 1.1 percentage point higher than unemployment in April – seems impossible absent a “really severe” recession. “They’ve been way too pessimistic about 2023 and their projections all across the board,” he said. (…)
Growth averaged 1.1% in the first quarter and is tracking 2.9% so far for the second quarter, according to the Atlanta Fed’s gross domestic product tracker, and 2% per Goldman Sachs economists’ tracking. (…)
The strength could lead to a “hawkish pause” in June, in which the Fed won’t raise rates but will signal the possibility of future hikes, said Matt Colyar, Moody’s Analytics economist. (…)
April Housing Starts: Near Record Multi-Family Under Construction
Privately‐owned housing starts in April were at a seasonally adjusted annual rate of 1,401,000. This is 2.2 percent above the revised March estimate of 1,371,000, but is 22.3 percent below the April 2022 rate of 1,803,000. Single‐family housing starts in April were at a rate of 846,000; this is 1.6 percent above the revised March figure of 833,000. The April rate for units in buildings with five units or more was 542,000. (…)
Total housing starts in April were slightly above expectations, however, starts in February and March were revised down, combined. (…)
Currently there are 977 thousand multi-family units under construction. This is the highest level since September 1973! This is close to the all-time record of 994 thousand in 1973 (being built for the baby-boom generation). For multi-family, construction delays are a significant factor. The completion of these units should help with rent pressure.
Combined, there are 1.675 million units under construction, just 35 thousand below the all-time record of 1.710 million set in October 2022. (…)
This chart combines single and multi family units by stage of construction. Permits and starts have declined from their recent peaks, which will bring “units under construction” down, but there is no collapse in construction despite the sharp rise in interest rates.
Also, even with the strength in multis, the weak single-family market means there is no tsunami of new housing units coming.
The first chart above shows that multis starts have flattened in the past year. Multis permits are down 31% since December 2021.
Interest in singles remains cyclically very low.
Commercial Real Estate Prices in the US Fall for First Time Since 2011
The less than 1% decline was led by drops in multifamily residences and office buildings, data culled by Moody’s from courthouse records of transactions showed.
“Lots more price declines are coming,” Mark Zandi, Moody’s Analytics chief economist, said.
The danger is that will compound the difficulties confronting many banks at a time when they are fighting to retain deposits in the face of a steep rise in interest rates over the past year. (…)
The price declines seen so far have been more marked for higher-priced properties, according to commercial property company CoStar Group. Its value-weighted price index has fallen for eight straight months and in March stood 5.2% lower than a year ago. (…)
The rise in employees working from home has driven some downtown retailers and restaurants out of business and forced owners of office buildings to reduce rents to retain tenants or to sell all together. (…)
Banks held more than $700 billion in loans on office buildings and downtown retailers in the fourth quarter of last year, according to the Fed. More than $500 billion of that was extended by smaller lenders. (…)
One potential bright spot: The big run-up in prices in past years has left many borrowers with substantial equity cushions in the properties they own. That reduces the dangers of defaults and limits the potential losses for lenders.
The loan-to-value ratio of mortgages backed by office buildings and downtown retail properties was in the range of 50% to 60% on average at the end of last year for credit extended by bigger banks, based on data collected by the Fed.
“Delinquencies and defaults will rise, but I don’t think we’ll see a lot of forced sales,” Zandi said.
He forecasts prices dropping about 10%, assuming the US skirts a recession. If it doesn’t, the declines could get a lot worse. (…)
Many U.S. regional lenders may have to consider selling off commercial real estate (CRE) loans at a steep discount after breaching key regulatory thresholds for exposure to the troubled sector, according to new data and market sources.
(…) previously unreported data from New York-based real estate data provider Trepp, shared with Reuters, show many regional banks’ holdings exceed thresholds stipulated by regulators. (…)
A Trepp study of 4,760 banks’ public regulatory data published late Tuesday found that 763 have either a CRE or construction loan concentration ratio that exceeded these thresholds.
Some 30% of banks with $1 billion to $10 billion in assets had exceeded at least one ratio, while 23% of banks with assets of $10 billion to $50 billion exceeded at least one ratio.
While big banks have recently warned about CRE exposure, the new Trepp data underscores how acute and widespread the problem is across the banking sector. (…)
JPMorgan said in a March report it expects about 21% of outstanding office loans in commercial mortgage-backed securities will eventually default. (…)
(…) Last month, J.P.Morgan Chase & Co (JPM.N), the United States’ largest bank, asked its managing directors to work from office five days a week.
J.P.Morgan CEO Jamie Dimon, along with Wall Street counterparts at Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), has been a strong advocate of in-office work.
Global debt on the rise, emerging markets cross $100 trillion mark, trade group says
A measure of debt across the globe rose in the first quarter to almost $305 trillion, and the rising cost to service that debt is triggering concern about the financial system’s leverage, a widely tracked study showed.
The Institute of International Finance, a financial services trade group, said on Wednesday global debt rose by $8.3 trillion in the first three months of this year compared to the end of 2022 to $304.9 trillion, the highest since the first quarter of last year and second-highest quarterly reading ever.
“Global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly,” said the IIF in its quarterly Global Debt Monitor.
After peaking near 360% in 2021 the debt-to-output ratio has stabilized around 335%, above pre-pandemic levels.
Aging populations and rising healthcare costs continue to put spending pressure on governments, while “heightened geopolitical tensions are also expected to drive further increases in national defense spending over the medium term,” wrote IIF researchers. (…)
“Shadow banks now account for more than 14% of financial markets, with the majority of growth stemming from a rapid expansion of U.S. investment funds and private debt markets.” (…)
The report showed 75% of the IIF’s emerging market (EM) universe saw an increase in debt levels in dollar terms in the first quarter, with the overall figure crossing over $100 trillion for the first time. China, Mexico, Brazil, India and Turkey posted the biggest increases, the data showed. (…)
- WE O U $17T
The New York Fed recently released its first-quarter report on household debt, revealing that American households now owe someone a staggering $17 trillion.
The majority of that is tied up in home mortgages, with the remainder split across student loans, car loans and credit cards — with the latter (and smallest) of those 3 categories particularly striking.
Credit card debt remained at a record level of $986 billion, defying the usual trend of post-holiday debt reduction. Indeed, this is the first time in over two decades that credit card balances haven’t decreased in the first quarter — a period when many cut back on spending after the holiday period of October-December.
All told, credit card debt rose 17% in the last 12 months, a potential sign that consumers are turning to credit cards to cope with mounting daily expenses as inflation continues to bite. Another concern is the rising delinquency rate, with ~4.6% of credit card debt transitioning into “serious delinquency” — where debt remains unpaid for 90+ days — up from just 3% during the same period last year.
This current situation stands in contrast to the pandemic, when US consumers, buoyed by stimulus checks and lockdown savings, managed to pay off $160bn of credit card debt between the end of 2019 and March 2021. (Chartr)
In reality, Americans have considerably deleveraged after the GFC and after the pandemic.
FYI:
- Target’s comparable sales were flat compared to the previous quarter, as executives pointed to increasingly cautious consumers. (WSJ) But it beat earnings expectations despite sluggish sales.
- TJX reported F1Q24 EPS of $0.76, ahead of GS/FactSet consensus at $0.72, with the beat primarily driven by stronger gross margins. Overall comp store sales were 3% vs. GS/consensus at 3.4%/2.7%.