Matt Longacre: 0:07

So today I'm joined by CSBS Senior Economist Tom Siems thanks so much for joining me, Tom.

Tom Siems: 0:13

Yeah, thanks, Matt.

Matt Longacre: 0:14

So this is the start of a monthly economic podcast that we're going to do that just covers what's going on on the ground, month to month based on the data that we're seeing. So, in 30 seconds or less, what's the big story coming into February of 2021?

Tom Siems: 0:32

Yeah, Matt, I think probably the big story is the significant economic hit. Really, the world has gotten from the covid 19 pandemic and, and government lockdowns and restrictions that occurred after that, and how that continues. It's vicious assault after nearly a full year. And so the employment situation is what I am watching and monitoring most closely, because I think it's going to be the main metric that's going to signal the strength of economic growth for the months in the years ahead. So right now, payroll employment is nearly 10 million people, workers, below what it was about a year ago. And while that's up more than 12 million from as far as we dropped in April of 2020, the economy since then, since April has only added about one and a half million workers over the past six months.

Matt Longacre: 1:37

So that's a that's some pretty dour news. Is there any good news from the numbers for the last month or quarter?

Tom Siems: 1:44

Yeah, there's always good news, you know, US economists on the one hand, and then the other, we we we can find good and bad in actually the same statistics. So the good news from the employment report from the last month is that the national unemployment rate fell sharply from 6.7% in December to 6.3% In January. I think some other good news is that consumer confidence appears to be improving. And that's always a good indicator to watch, because it indicates future spending and economic growth, because consumers in the US account for about 70% of US economic activity. So I think confidence is improving, really for three visible reasons over the last, just looking over the last month. First, we have the rollout of the vaccine, and hopes and expectations that it will result in the economy reopening sooner rather than later. Second, the record high stock market prices that we've had. And the big increases that we saw in home prices over the last year has raised the kind of quote unquote, on paper net worth for many Americans. So they feel they'll feel better about their wealth. And then third, and this confidence that this one has competence, kind of going in opposite directions, but on net improving. And that is the political transfer of power that we had in January. This increased confidence for Democrats by 17.5nt. And that more than offset the 9.9% confidence decline among public firms. And then finally, I'm encouraged that, you know, we saw our first snapshot of fourth Quarter 2020 GDP this last month. Of course, GDP is gross domestic product that measures all the value of final goods and services produced in the economy. And it increased at 4% in the fourth quarter, and on a year over year basis that that means overall GDP declined by three and a half percent in 2020. We're on the uptick, if you will. And if we can generate 4% quarterly growth this year, that'll be really good.

Matt Longacre: 4:23

So you say we're on the uptick, but something interesting that you just mentioned was that people perceive themselves to be wealthier, that doesn't always translate into actually being wealthier. What is the bad news from the numbers of this quarter or this month? And what's kind of the reality on the ground moving in into 2021?

Tom Siems: 4:43

Yeah, actually, you know, even in those same indicators, I can find, you know, the bad news within those. Just going back to the unemployment rate, for example, even though it dropped by nearly a half percentage point. During the last month, there were only 49,000 new jobs added in January, and the hardest hit sectors like leisure and hospitality, retail accommodation and food services, those kind of high touch service industry jobs, the employment numbers actually fell further. And we're seeing more people basically drop out of the labor force, the labor force participation rate has waned. And that's why the unemployment rate dropped so much, even though we didn't add a lot of jobs.

Matt Longacre: 5:31

Consumer confidence, although it appears to be rising, it's far below where it was prior to the pandemic. So that indicates to me that there's still a lot of uncertainty out there, uncertainty still elevated, and consumers kind of are still in this, wait and see mode. So what's interesting about, you know, kind of this wealth effect thing that that we had mentioned, it appears like we have what I would call kind of a tale of two economies going on right now. So generally speaking, for professional workers, who can work, you know, mostly work remotely, their incomes are still pretty stable. And they continue to spend a lot of money, although probably not as much on, you know, restaurants and retail, and tourism and travel, because they're essentially locked down.

Tom Siems: 6:24

But it's those workers in those industries, you know, that work in restaurants and, and retail, tourism, etc. They're the ones that are likely struggling the most. So that's the other economy. It's because of the restrictions are in place, and those restrictions, limit consumption, which then limits their ability to earn an income, or it maybe even eliminates their ability to have an income. So that's kind of the the bad news out of that is this dichotomy between these two groups.

Matt Longacre: 7:00

So it's a tale of two economies. So based on what we're seeing, putting your prognosticator hat on, which I know is dangerous for an economist, what do you think it comes next?

Tom Siems: 7:12

It's a very dangerous for economists. Yes.

Matt Longacre: 7:16

Well, you know, I think another federal government fiscal spending package is is forthcoming of some kind. And my understanding is that the Biden Administration has proposed another $1.9 trillion package. And this is after Congress authorized roughly $4 trillion, total in 2020. Actually, when you add all that, together, that total amount have come to nearly 25% of 2019 GDP, as in these are big numbers. Now, some will say that 1.9 trillion is too big, and others will say, it's not big enough.

Tom Siems: 8:00

You know, as an aside, you know, that we conduct this quarterly survey of community bankers, and we use their answers to produce our Community Bank Sentiment Index. Well, in the last survey, during December of 2020, we asked, What are you most concerned about? So we asked our community bankers, what they're most concerned about? Well, it turns out of the 11 indicators, or concerns that we had put on our list, they're concerned about everything. But topping the list was federal debt/deficit. And that was higher on the list than the COVID-19 economic lock downs higher than taxes higher than cyber attacks. And although all four of those were up there pretty high, you know, still the federal debt deficit was the highest one that was on that list. So back to this proposed stimulus package. I'm not a fiscal policy expert. But I do know or I've learned that for a stimulus package to really help the economy, it needs to be targeted, timely, and temporary. Okay, follows three T's targeted, timely, temporary. And so from my perch, I would I would think that the stimulus dollars should quickly go to businesses and industries most impacted by the government mandated lockdowns and just for, you know, some more temporary relief and help. Of course, what's ultimately needed is for the economy to completely reopen, travel, restaurants, bars, casinos, retail stores, sporting events, concerts, you know, you name it. But with ongoing fears of the virus, and the social distancing, distancing restrictions in place, such as herd immunity really still seems a long way off even with the aggressive vaccinations. So, one indicator I look at here to kind of wrap all this up is it's called the "Back to Normal" index. And it's put together by CNN business and Moody's Analytics. And they just started this year they look at I think it's 11, maybe more than that weekly and daily economic metrics, kind of look at, actually, they look at all 50 states individually, but then the nation as a whole, to see how it is operating now, relative to where it was at the end of February of last year, before the pandemic really started to impact businesses and economic activity and such. And by that measure, the national economy is currently operating at about 81%. Now that's up from its it's bottoming out of 60% last April, and a recent low mark that we had in December of about 75%. But it's still slightly below where it peaked in, in September and October at around 84%. So we were on the uptick. And then we had the latest surge of reported COVID-19 cases and hospitalizations. So that's an indicator, I think, worth watching.

Matt Longacre: 11:24

All right. And then my last question for you is, say you're advising a group of regulators of banks, non-banks at the state level, what numbers should these regulators be watching in the coming months? If you had to pick a couple indicators or numbers they should really be looking at or a couple statistics about their about their, about their entities? What should they be looking at?

Tom Siems: 11:50

Yeah, great question.

Matt Longacre: 11:52

You know, regulators, of course, are focused on safety and soundness. And with the Fed dropping the short term interest rates to near zero. Last year, we've seen margin compression. So that is we've seen the net interest margins, banks have to operate within, you know, narrowing and becoming very thin. And so with these low interest rates create more incentives for taking on additional risks. Will lenders extend credit without having solid collateral? Or conditions in place? And so I think it's important for regulators to watch various asset quality and credit quality measures. If there are declines, you know, asking whether bankers are accepting the avoidable risks in their portfolios is, seems logical to me, do they have the right procedures in place to take on the new risks? Do they have sufficient capital to absorb potential losses? You know, to be clear, banks are in the risk management business. It's their job to help small businesses and entrepreneurs and consumers manage the risks, and to you know, to help them reach their dreams. So obviously, no risk is not what regulators should be looking for, but rather a risks being put on the bank's balance sheets, you know, are they manageable? Are they not all concentrated in one place? Are they not all concentrated in one industry, those kinds of things.

Tom Siems: 13:32

And finally, CRE lending is another important thing to watch. CRE is commercial real estate lending. And when we finally come out of this pandemic, you know, there will be new ways of working and interacting. So will there be a glut of vacant space, office space on banks balance sheets with fewer paying tenants? Will hotels and other places of entertainment be able to meet their debt obligations and potentially with you know, potentially fewer tech travelers? Will strip centers have the same kind of demand for tenants that they had previously?

Matt Longacre: 14:09

So, from a regulator regulator perspectives important to still remember community bankers know their customers, and they know their markets, they listen. And they learn in their local markets, they are well aware of any credit issues and misplaced, you know, market valuations that might exist in their own communities. So they're in the best position to know when they land and when to say no. And so I think it's important for regulators to keep that in mind. And, and, you know, really just be there to ask the bankers deep and thoughtful questions about how they're managing their risks in their portfolios and the quality of their assets in their portfolios. And that will help the bankers become better bankers, and by helping the bankers become better communities all across America. We'll certainly benefit.