New Zealand Herds Fed Sheep, Bank Lenders Turn Scrooge

In 1989 a finance minister in New Zealand invented the 2 per cent inflation target, no empirical study needed. In 2012 the Federal Reserve adopted that target. The applicability of a target selected for an economy of five million people and at the time 58 million sheep to one with 332 million people and five million sheep is not clear.

A Cooling Economy

Fortunately, it is also not clear, perhaps “not yet” would be safer, that we must pay for lower inflation with significantly higher unemployment. The Fed’s increases in its benchmark interest rate from zero to 4.50-to-4.75 percent has clearly begun to cool the economy. The manufacturing sector is slowing. New orders for goods are down. The housing sector has been cooled to the point of a freeze on sales. Almost 20 per cent of high-end office space in Manhattan was available for lease at the end of last year, as big renters replace comfortable offices with cubicles, and hope that building amenities such as roof-top bars and pools will lure workers off their couches, while managers who seem to prefer work-at-home are not terribly successful in persuading their minions to show up at half-empty offices. A different approach, ending with the words “or else”, and the reminder that it is easy to fire an empty chair have other offices at pre-pandemic occupancy levels.

Vacancies are a major concern for owners of those commercial properties. Some $2.6 trillion in commercial mortgages are set to mature by 2027 according to data-provider Trepp Inc. Many of those are held by small banks increasingly reluctant to refinance and risk following the trail blazed by New York City’s recently shuttered Signature Bank, a major lender to property developers.

Banks Will Lend If You Don’t Need The Money

That cooling should accelerate now that the Fed has a new recruit in its battle against inflation. An old-fashioned credit crunch that has been building slowly took wings when a poorly managed, inadequately regulated small bank in Silicon Valley collapsed. The chairman of the Fed, Jay Powell, was too politic to cheer, but he did comment that that the fight to slay the inflation dragon “doesn’t all have to come from rate hikes. It can come from tighter credit.”

Which is what is happening. Venture capitalists report that funding for start-ups has dried up. Small businesses that create most of the jobs in America are finding that the regional banks on which they rely for financing have rolled up the welcome mat, and loan officers have turned from a warm “glad to see you” to a frosty “hope you’re not here for a loan.”

Inflation Eases, Especially For People Who Neither Eat Nor Drive

The Fed can claim some success. Its preferred measure of inflation, the Core PCE Price Index (prices of personal consumption expenditure less food and energy) was rising at an annual rate of 5.2 per cent late in September 2022 and fell to 4.60 per cent by January of this year. Food and energy are excluded because their prices are volatile. These are, of course, the two items with which consumers come in daily contact and on which they base their views on inflation.

Job Market Cooling Not Enough For The Fed

The future pace of inflation will depend in the Fed’s view on whether it has restored what Powell calls an unhealthy labour market to rude good health. The economy added 236,000 jobs last month, well below the 326,000 added in February, with only 189,000 in the private sector. Hourly earnings rose at a year-over-year rate of 4.2 per cent, significantly below February’s rate of 4.6 per cent and the lowest in the post-covid era, in part because higher-paid tech workers are being laid off while lower-paid hospitality workers are being hired, tilting the average downward. New claims for unemployment benefits are up and job openings are down. Wall Street bonuses are down 26 per cent from a sensational 2022, and the financial sector is likely to continue and probably accelerate its layoffs.

The Fed’s policymakers will decide their next move early in May. The betting is on a quarter point increase in the benchmark rate, not so much because it is needed as to show that the Fed means business, a fact of which hundreds of thousands of laid-off workers will by then be aware. Many will have been notified by the announcement method du jour, Zoom, which makes large layoffs easier without subjecting the announcer of the pain of facing those on whom he is inflicting pain.

No economic report is complete without an “on the other hand.” Although job openings have fallen, 9.9 million jobs remain open, 1.7 for every job seeker. The unemployment rate ticked down to 3.5 per cent in March from 3.6 per cent in February, still well below the 4.5 per cent analysts believe required to end the wage-price spiral. Commercial districts outside of crime-ridden cities such as New York, Los Angeles and San Francisco are festooned with “help wanted” signs. Not exactly the major cooling that would prompt the Fed to change course.

 We seem to have a developed a two-tier economy. The tech sector has seen over 100,000 layoffs and counting. It hired during covid as if the pandemic had become a permanent feature of American life. Meanwhile, the leisure and hospitality sectors continue to hire. Hotels, airlines, casinos, eateries employ 11 per cent of the work force but are accounting for 47 per cent of new hires reports The Lindsey Group. Pandemic-era shut-ins are satisfying deferred wanderlust.

The New Ageism

A new form of ageism is abroad in board rooms. The number of firms signing a commitment to give 50+ greybeards and women of a certain age a shot at their job openings rose 122 per cent in 2022 from a year earlier. One employer told The Wall Street Journal that the youngsters he had been hiring arrive late, have erratic attendance records, and spend more time with social media than with customers. He finds older workers have a different work ethic. Another says he is hiring older workers because they are “naturally predisposed to work.”

That might be unnerving the class of 2023. One recruiter reports that job seekers in that cohort no longer refuse to undertake the arduous task of writing cover letters to accompany CVs. Whether that’s a harbinger of a new natural disposition to work by coddled grads remains to be seen.

*Cartoon by Nicola Jennings