Analysis: Is the U.S. Economy ‘Unwell?’ We’re About to Find Out​​​

After months of a remarkably strong U.S. labor market and economy, everything seems to be slowing down, according to a CNN analysis. The latest high-frequency data shows that the consumer could be running out of steam, hiring activity is moderating, business activity is softening, interest-rate-sensitive sectors are pulling back and housing is suffering. The question is whether Friday’s monthly jobs report, easily the most anticipated piece of data out this week, will confirm the trend. The unflinching resilience of the U.S. labor market is one of the greatest sources of tension in today’s economy. Federal Reserve officials have said employment numbers and the pace of wage increases need to shift lower before “sticky” inflation can be overcome. Over the past year, the Fed has raised interest rates from nearly zero to a range of 4.75% to 5% to cool the economy. But jobs numbers have blown past expectations for the past 11 months. Unemployment currently sits near historic lows at 3.6%. A slowdown in the official U.S. jobs report Friday could signal an economic sea change. “Recent labor market evidence, along with our conversations with business executives, indicate that hiring efforts have been scaled back notably across numerous sectors,” wrote Gregory Daco, chief economist at EY, on Wednesday. That could mean payrolls for March come in well below the 240,000-consensus estimate, he added. More jobs data released this week shows that hiring may be slowing. ADP estimated that private sector employment rose by 145,000 jobs in March, below the 200,000 consensus forecast, and ADP’s measure of year-over-year wage growth slowed to 6.9% from 7.2%. The February JOLTS Report, meanwhile, showed that job openings dropped 632,000 to 9.93 million in February, from 10.56 million in January. That’s the lowest level of job openings since May 2021. ​​​Read more.

Applications for Jobless Aid Rising but Still at Low Levels​​​

The number of Americans seeking unemployment aid was higher over the past few months than the government had initially reported, reflecting a modest rise in layoffs as the economy has slowed in the face of higher interest rates, the Associated Press reported. The Labor Department reported today that the number of applications has exceeded 200,000 since early February — above previous estimates, though still relatively low by historical standards. The department has revised its estimates of the number of weekly applications for jobless benefits under a new formula it is using to reflect seasonal adjustments. The new formula is intended to more accurately capture seasonal patterns in job losses. For the week that ended April 1, the number of Americans applying for jobless aid was 228,000, the government estimated. That was down from 246,000 in the previous week and 247,000 in the week before that. Using its new seasonal adjustment formula, the government revised up each of those figures by nearly 50,000. First-time applications for unemployment benefits serve as a proxy for the number of job cuts because most people who are laid off file for jobless aid. About 1.82 million people were receiving jobless aid in the week that ended March 25, an increase of 6,000 from the week before. The job market appears to be finally showing some signs of softening, more than a year after the Federal Reserve began an aggressive campaign to cool inflation by steadily raising its benchmark borrowing rate. Read more.

Commentary: You Don’t Need a Banking Crisis for a Financial Meltdown*​​​

While the most visible recent manifestations of global financial distress have been in banks — Silicon Valley Bank, Signature and First Republic in the U.S., Credit Suisse in Europe — this is giving rise to a comforting myth that the damage from the current monetary tightening cycle is containable and now contained, a product of management and supervisory lapses at a handful of institutions. But the problem isn’t “the banks,” according to a Wall Street Journal commentary. If you believe that it is, it’s best to whistle past the International Monetary Fund’s latest Global Financial Stability Report, a portion of which was released this week. The conclusion is that banks, for all the risks they still face, represent a smaller portion of the global financial system than they did at the time of the 2008 panic and that proliferating nonbanks present a new array of financial dangers. Nonbank financial intermediaries — insurers, pension funds, hedge funds, money-market funds, asset managers and plenty of others — now hold some 50% of global financial assets, the IMF notes, up from 40% in 2008. The growth has been fueled in part by the heavier regulatory burden placed on banks in that period, which made it harder for banks to play their customary role as intermediaries. Because nonbanks can be as different from each other as they are from banks, they defy any straightforward regulatory oversight. This thwarts efforts to gather comprehensive data on their activities. Enormous lacunae, especially concerning nonbanks’ uses and abuses of leverage, persist and probably always will. Yet what one can infer is suggestive of enormous risks. The first red flag is that nonbanks have been at the heart of most of the financial accidents to hit various parts of the world in the past six months or so. Nonbanks are even implicated in the banking kerfuffle that hit the U.S. last month: Panicky venture-capital funds appear to have accelerated the run on deposits at SVB. The IMF notes two other causes for concern that stand out. One is that nonbanks appear to be growing more entwined with banks across borders. The proportion of banks’ claims and liabilities attributable to nonbank financial intermediaries outside the banks’ home countries has grown to 22% and 20% in 2022 respectively, from 17% and 15% in 2015. The other is that nonbank portfolios are coming to resemble each other, with similar institutions crowding into similar sorts of assets. These trends together amplify the risk nonbanks pose to one another in a panic, and the risk they pose collectively to the traditional banking system on a global scale, according to the commentary. ​​​Read more.

* The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI. 

Decentralized Cryptocurrency Markets Threaten U.S. Security, Treasury Says​​​

The burgeoning decentralized cryptocurrency market threatens U.S. national security and needs greater oversight and enforcement against money-laundering, the U.S. Treasury Department said today, the Wall Street Journal reported. The warning, in a new Treasury report assessing the risk of the so-called DeFi markets, lays the foundation for tougher regulations and punitive action by federal agencies. DeFi platforms enable crypto investors to transact with each other through software running online, without a central intermediary overseeing transactions. Without the intermediaries of traditional finance such as banks, regulators currently have little insight into DeFi transactions. Ransomware hackers, rogue states and other national security threats have seized upon the market’s opaqueness to move money around the world without detection, facilitating the financing critical to their operations, the Treasury Department report said. “Illicit actors, including criminals, scammers, and North Korean cyber actors are using DeFi services in the process of laundering illicit funds,” said Brian Nelson, Treasury’s undersecretary for terrorism and financial intelligence. “Capturing the potential benefits associated with DeFi services requires addressing these risks.” The report sketches out how the Treasury Department plans to bring the market under greater federal oversight, suggesting that platforms that fail to establish sufficient vetting policies risk enforcement action. The private sector should use the department’s findings to inform their own risk mitigation strategies, the Treasury undersecretary said. Companies need to take clear steps, in line with regulations to counter money laundering, terror financing and sanctions-evasion, to prevent illicit actors from abusing DeFi services, Nelson said. Read more.

Mortgage Rates Fall for the Fourth Week in a Row​​​

Homebuyers benefited from another week of falling mortgage rates, with the average rate dropping for the fourth week in a row, according to data from Freddie Mac released today, CNN reported. The 30-year fixed-rate mortgage averaged 6.28% in the week ending April 6, down from 6.32% the week before. A year ago, the 30-year fixed-rate was 4.72%. “Mortgage rates continue to trend down entering the traditional spring homebuying season,” said Sam Khater, Freddie Mac’s chief economist. “Unfortunately, those in the market to buy are facing a number of challenges, not the least of which is the low inventory of homes for sale, especially for aspiring first-time homebuyers.” The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. After hitting a 2022 high of 7.08% in November, rates started 2023 trending down. However, they climbed again in February, after robust economic data suggested the Federal Reserve was not done in its battle to cool the U.S. economy and would likely continue hiking its benchmark lending rate. The Fed raised interest rates by a quarter point at its most recent policymaking meeting, in an effort to continue to fight stubbornly high inflation while taking into account the risks to financial stability brought about by recent turmoil in the banking sector. The fallout from the banking meltdown could lead to potentially stricter lending requirements and a “less hospitable borrowing environment,” said Hannah Jones, economic research analyst at Realtor.com. “More expensive, stricter lending helps to usher in the long-term health of the economy, but the downside is that borrowing for large purchases, including a home purchase, may be relatively more challenging in the short term.” ​​​Read more.

Rates Go Up After Tomorrow: Register Today for ABI’s Annual Spring Meeting​​​

Time is running out to get the best rate on ABI’s Annual Spring Meeting: Our rates increase after April 7. We know you don’t want to miss one of the largest gatherings of bankruptcy and insolvency professionals — or the chance to save money on registration. This year’s lineup features more than 20 hot topical sessions catered toward business and consumer professionals of all industry expertise levels, on such topics as subchapter V, ethics and compensation, bankruptcy court jurisdiction and much more; networking at the Opening Reception at the Wharf DC, President’s Inauguration Dinner and more — with the nearly 1,000 industry professionals in attendance; engagement with dynamic speakers, including judges, practitioners and seasoned financial pros — including appearances by Ken Feinberg (9/11 Special Master) and keynote speaker Prof. Kenji Yoshino (with a talk on diversity issues); and inspiring presentations, including a panel of bankruptcy judges discussing circuit splits and hot topics led by ABI Editor-at-Large Bill Rochelle. This is your last chance to avoid late fees! ​Register today.

Upcoming abiLIVE Webinar Will Examine Bankruptcy Filing Trends in 1Q 2023​​​
To help you prep for conversations at ABI's Annual Spring Meeting April 20-22, make sure you catch this upcoming FREE abiLIVE webinar on April 11, “Bankruptcy Filing Growth: Will Increases Continue Beyond 1Q 2023?,” sponsored by Epiq Bankruptcy. The panelists will examine the bankruptcy filing growth we’ve seen in the first three months of the year, and discuss what might lie ahead.

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