Full (or close to full) employment is a credit manager’s dream. People spend more, pay more, and begin to consider the long-range facets of life. Today’s Bureau of Labor Statistics update shows promise.
- Total nonfarm payroll employment rose by 559,000 in May
- The unemployment rate declined by 0.3 percentage point to 5.8 %
- Notable job gains occurred in leisure and hospitality, in public and private education, and in health care and social assistance.
If you drill down the numbers a bit, you will see that recovery is uneven. Of course, there are plenty of social issues in the mix, but credit managers have to look at the long game when they think about building their 2022 portfolio growth and credit risk goals.
· Among the major worker groups, the unemployment rates declined in May for teenagers (9.6%)
· Whites (5.1 percent), and Hispanics (7.3 %).
· The jobless rates for adult men (5.9%), adult women (5.4%), Blacks (9.1%), and Asians (5.5% ) showed little change in May.
Today’s Washington Post (and several other news dailies) point out that hospitality is where big growth comes. The upside is that masses of people return to work; the downside is the jobs are close to minimum wages.
· The U.S. economy added 559,000 jobs on net in May, an acceleration from the previous month (278,000), the Bureau of Labor Statistics reported Friday. More than half of the jobs added were in leisure and hospitality (restaurants, bars, hotels, gambling establishments, etc.), an industry hit especially hard by the pandemic and one that has been complaining loudly about its inability to attract talent.
But… does everyone want to return?
· Even more concerning, the U.S. labor force — that is, the share of people who are either working or actively looking for work — shrank a little in May, the Bureau of Labor Statistics data show. There are still about 3.5 million fewer people in the labor force than before the pandemic hit. This adds fuel to the argument that there are many people sitting on the sidelines, either unready or unwilling to return to work.
Federal support on unemployment may be part of the issue, as a recent Federal Reserve Bank points out. The study, “Unemployment Insurance Generosity and Job Acceptance: Effects of the 2020 CARES Act,” makes you wonder. The crux:
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act, through the Pandemic Unemployment Compensation (PUC) provision, provided an additional $600 per week to supplement regular unemployment benefits during the initial outbreak COVID-19 from late March through the end of July 2020.
- The generosity of the program raised concerns it could delay the speed of the labor market recovery as certain individuals, earning more per week unemployed with the additional support than on the previous job, would reject offers to return to work
Bankers do not have much to say about social and political issues (or they shouldn’t have much to say unless you have functional roles like Jaime Dimon or Jane Fraser). Still, bankers must think about how quickly the economy will recover. The economy is in a recovery mode, but we now have more recovery debt than ever. President Biden’s American Families Plan will cost billions, and while the details remain unsettled, expect a multi-trillion dollar impact to debt.
- Biden’s American Jobs Plan, which congressional Democrats have started to craft, calls to revamp roads, bridges, airports, broadband, utilities, housing, and job training.
- The second piece is expected to expand child care, paid leave, pre-K education, and tax credits for families while raising taxes on the wealthy.
Takeaways for Credit Managers
You are probably thinking about 2022 as we approach the mid-year. Here are three critical numbers to watch:
- Seasonally adjusted chargeoffs were just published by the Fed. At 2.75%, slightly up from 2.59%, expect further deterioration. There still is a lot of noise in the numbers from deferrals and such. Were I in your shoes, I would negotiate the number from 3.5% and be delighted if FYF0 2021 would settle at 3.25%
- Interest rates might tick up slightly. If it starts to hop, we will have bigger issues with inflation. For now, keep your eye on Jerry Powell, but keep the forecast flat.
- Latest revolving debt numbers have risen slowly but steadily. The U.S. will probably cross the trillion-dollar mark again in the next three months. Expect to see higher growth at top banks than middle-market rates through early 2022.
Back to work is certainly good. Hopefully, we will see very little excitement in 2022. In considering your forecast, go with slow and steady, not rapid growth.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
