🧭 The Weekly Scoop

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Here’s what you need to know this week.…

This week was more mixed feelings. While the economy slowed down from its high tempo in the first few months of the year, a rebound may have started in April. Manufacturing and economic data point to a pickup last month, and corporate execs are consistently expressing optimism about the year ahead despite the decline in profits for the first quarter. Hiring picked up last month too. Unemployment is the lowest it’s been in over fifty years.

That rebound doesn’t come without a cost, though. We’ll get the official April inflation numbers next week, but initial indicators have investors worried about rising living costs becoming the norm.

There’s also an uncertain, lingering panic about more significant issues. The real estate market is not healthy, and the banking system is raising red flags. Banks exist on confidence. They don’t have everyone’s money in a vault. They lend it out. So if everyone panics and withdraws their money, it’s over. No bank can survive a bank run. Silicon Valley Bank, Signature Bank, and First Republic all seem like isolated incidents with unique situations. First-quarter financial updates from other banks all appear healthy. However, it’s hard to dismiss three of the four biggest bank failures in US history happening within a month. It’s clear that the Federal Reserve raising interest rates so quickly this year has put stress on smaller financial institutions. [🤓]. At the very least, it will cause smaller banks to be more cautious about their lending, making it a little harder for small and medium businesses that borrow from them to fund and expand their operations. That will slow the economy.

For now, the question continues to be: will a slowdown become a recession, and will a recession be a crisis? It seems like it will be different depending on the industry and the business size.

🐻 Reasons to be pessimistic:

• A series of events this week have investors worried about the stability of regional banks.

  1. The week kicked off with the 2nd-biggest bank failure in US history, First Republic Bank. First Republic suffered massive withdrawals from depositors amidst the panic in March and hasn’t been able to recover. JPMorgan Chase absorbed First Republic Sunday night.

  2. Thursday, another regional bank, PacWest Bancorp, said it’s looking for buyers. That worried investors more, even though PacWest said its deposits were fine.

  3. Then, TD Bank and First Horizon called off a merger because they couldn’t get regulatory approval. Investors don’t love seeing failed bank mergers when you have small banks looking to merge with bigger banks to help strengthen their financial stability. It threatens the broad assumption that small banks can just get saved by big banks when they’re in trouble.

• The rebounding economy may keep inflation around longer. The Labor Department reported the core Personal Consumption Expenditures (PCE) Price Index, policymakers’ main inflation gauge, rose 0.3% in March. Food and energy prices declined, but other living costs kept creeping higher and slowed consumer spending.

• Companies aren’t as liberal with pay bumps this year. Payroll provider ADP reported declining wages across private sector businesses in April, with median annual pay now up only 6.7% over the past year. The Labor Department said average hourly earnings are up 4.4% over the past year, not keeping up with rising living costs.

• The government needs to figure out the debt ceiling. Treasury Secretary Janet Yellen warned that the government would run out of cash and max out its credit card by June 1st. Congress needs to approve a higher debt limit before then, but this process is always political. Raising the debt ceiling doesn’t approve more spending. It just allows the Treasury to pay the bills Congress already created. More anxiety lies ahead.

🐂 Reasons to be optimistic:

• Hiring picked up in April, and unemployment fell. The Labor Department said US employers increased staff by 253,000 workers last month, far more than economists expected and higher than March and April. The unemployment rate declined to 3.4%, the lowest level in over fifty years.

• Policymakers might be done raising rates. The Fed increased baseline interest rates by 0.25% to 5.25% [🤓] and signaled that it could be the last rate hike, ending the most aggressive policy campaign to restrict the economy in decades. Fed Chairman Powell did leave the door open for more rate increases if inflation picks back up later in the year. For now, the Fed expects a slowdown, but not a recession, and for the banks and financial system to stay stable.

• Corporate financial reports have been better than feared. We’re halfway through first quarter updates, and so far, 80% of the market has reported better profits than investors expected. Overall, corporations are on track to make 4% less profit than a year ago.

• Job openings declined in March, while layoffs stayed low overall. The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) reported 9.6 million roles available at the end of March, down from over 11 million in December. There are 1.6 open positions for every unemployed worker. Overall layoffs increased to 1.8 million in March. That’s up from 1.6 million in February but still in line with pre-pandemic averages. Fewer job openings without a spike in unemployment is the sweet spot policymakers are looking for. It means the balance of supply and demand are getting closer in line, cooling down an overheating economy. [🤓]

• Manufacturing may be rebounding. The S&P Global US Manufacturing Purchasing Managers’ Index (PMI) indicated an expansion in business activity for the first time in six months in April.

• US exports jumped in March. The Commerce Department reported a surprise narrowing last month of the US trade deficit, the gap between what we import and export. Goods and oil exports jumped the most.

🏡 For your home

6.5% = Average 30-year mortgage rate

That’s up from 6.4% a month ago and up from 5.2% a year ago. _{Mortgage Bankers Association, 4/27/23}

$375,700 = Median existing home sales price

That’s up from $364K a month ago and down from $379K a year ago. _{National Association of Realtors, 3/31/23}

💼 For your work

242,000 = Layoffs Last Week (Initial jobless claims)

That’s up from 229K the week before and in line with pre-covid averages. _{Labor Dept., 5/4/23}

253,000 = New jobs added last month

That’s up from 165K the month before and slightly above pre-covid averages. _{Labor Dept., 4/30/23}

3.4% = Unemployment rate

That’s down from 3.5% the month before and the lowest rate in 50+ years. _{Labor Dept., 4/30/23}

9.6M = Available jobs

That’s down from 10M the month before and well above pre-covid averages of ~7M. _{Labor Dept., 3/31/23}

Who’s hiring: Education, leisure, and hospitality

Who’s firing: Construction, technology, and business services

👜 For your wallet

5.0% = Cost of living increase (1-Year Inflation)

Living costs are 0.1% higher than the month before. Normal inflation sees prices rise by 0% to 0.2% per month, 1-2% per year. _{Bureau of Labor Statistics, 3/31/23}

8.4% = Groceries cost increase (1-Year inflation)

Groceries are -0.3% less expensive than a month ago. _{Bureau of Labor Statistics, 3/31/23}

$3.57 = National Gas Price/Gallon

That’s up from $3.51 the month before and lower than $4.23 a year ago. _{AAA., 5/4/23}

💰For your savings

0.39% = Average interest banks pay on a savings account_{, FDIC, 4/17/23}

5.25% = Interest rate banks earn on their savings accounts_{, Federal Reserve, 5/3/23}

The Federal Reserve has raised baseline interest rates from 0% to 5.25% in the past year. Make sure your bank is paying you higher interest on your savings.

Find a high-yield savings account.

💸For your investments

-0.4% = This past week’s change in the US Stock Market

-2% past month, -3% past year, and +55% over 5 years. _{S&P 500 Index, 5/4/23}

3.4% = The yield on the 10-Year US Treasury Bond

Yields are -3% past week, -1% past month, and +13% over the past year. _{US Government Bonds, 5/4/23}

-3% = This past week’s price change for Bitcoin

+3% in the past month and -27% in the past year. _{Coinbase, 5/4/23}

-3% = This past week’s price change for Ethereum

+3% in the past month and -36% in the past year. _{Coinbase, 5/4/23}

The Federal Reserve

The Federal Reserve, aka the Central Bank, aka The Fed, is in charge of our whole money system. When the economy is struggling, the Fed lowers baseline interest rates to make it cheaper for consumers and businesses to borrow and spend. The Fed also pumps more money into the system by buying bonds with new dollars that it essentially speaks into existence. The additional cash keeps the pipes flowing as the borrowing and spending heat up, stimulating economic activity.

Once the economy's strong enough to stand on its own, the Fed starts to raise interest rates and pull back some of that money to ensure the economy doesn't overheat. Inflation is the Fed's heat gauge, and the gauge has been reading hot.

So everyone's watching whether the Fed can dial up the economic restrictions quickly enough to slow inflation and cool the economy but not so quickly that it sparks mass unemployment.