Published June 01, 2011
The financial sector led the market lower Wednesday, not a good sign for stock-market bulls.
"The worst performing group within the financial sector is the commercial banks, all of which are down sharply," notes FOX Business senior editor Charles Brady. "Investors are worried about the impact that a slowing economy and falling housing prices will have on bank balance sheets."
Twelve of the 14 members of the S&P Commercial Banks Index fell at least 2% in trading (see chart below).
Falling prices hurt banks -- especially now -- because banks have been goosing profits higher by setting less aside in reserves. The banks have been making this move even as 11.1 million borrowers with mortgages, or about 23% of the total, are underwater (real estate tracker Zillow thinks it's closer to 27%).
At the same time, banks have been fighting to repair their balance sheets. Total loans were $5.2 trillion at the end of last year, about 4% lower than in 2009, says Moody's Investors Service. Aggregate write-offs have been declining for six consecutive quarters. The improvement in non-performing loans and delinquencies was mostly due to commercial real estate portfolios and industrial loans.
But step back for a second. What needs to be grasped in D.C. is that the U.S. economy has always restructured itself, and it is doing so once again, this time in a dramatic, painful transition that will take five years or more to shake out before job growth gets back to normal, as the Federal Reserve has indicated.
Which is why D.C. officials need to say to the American people, the recovery will take time. All the fiscal and monetary stimulus chucked in to the system will not change the tectonic plates shifting in the U.S. economy.
Keep in mind it took four years after the downturn in 1981 for jobs to come back, a time which saw a dreadful banking crash that America remained largely unaware of (when Citigroup got its first bail out, due to the Latin American debt crisis).
DC also needs to pay attention to the structural red flags in the ADP jobs report. That report showed one of the biggest drags on job creation—in fact, a trend that has been going on over the past decade--has come from the largest companies, those with 500 or more employees.
Big multinational corporations today employ about 20% of all American workers--those jobs on average pay much more than other companies, says the consultancy firm McKinsey & Co.
However, while job rolls at these large firms have squeaked higher recently, they are still down from where they were at when the recovery began, notes the Fiscal Times.
And the Bureau of Economic Analysis says that since 1999, U.S. multinationals have been shrinking their payrolls in the U.S. while beefing up their overseas workforces, according to its recent report. "Between 1999 and 2009, large global corporations pared 2.9 million workers from their U.S. payrolls while adding 2.4 million jobs at their foreign affiliates," says the Fiscal Times. "That’s a reversal from the previous decade, when they boosted payrolls across the board, including increases of 4.4 million in the U.S. and 2.7 million overseas."
Meanwhile, small outfits cannot easily follow the big guys to where the business is overseas. Stateside, small businesses are trying to pick up the slack, tough to do given the fact that new health and financial reform rules from DC will hurt their hiring.
This is the broadzoom focus D.C. needs to zero in on, as well as these overarching trends in the economy.
Manufacturing dominated the U.S. economy in the '40s through the '60s, but started to scale down by the early '80s. With the rise of the baby boom generation, and middle-class consumers, the U.S. economy transitioned into a service economy.
Post World War II and up through the mid-'60s, the market enjoyed mini bull runs thanks to the baby boom. Technology and financial services then pulled the economy through from the mid '80s up until now (financial services making up about two-thirds of the overall services economy).
But the last boom we know was built on a mountain of subprime paper bankers are still morosely staring at, a housing and credit bust that is still dragging down the economy, despite any innovation from Silicon Valley in consumer items such as personal computers, the Internet, or smart phones. In 1971 financial services made up just 3% of U.S. output. Thirty-five years later, in 2006, it made up nearly 8% of total U.S. output. Much of the country's best and brightest were lured by the big bucks on Wall Street, away from becoming engineers or doctors.
Financial engineering blew a hole in the economy, and now annualized GDP growth rates of just 2% would add just $280 billion in growth a year. That is just about the dollar amount of the interest costs on the U.S. federal deficit, now more than $14 trillion.
Elected officials need to start pointing the following out to the American people, that not only is the U.S. once again restructuring, or that the U.S. can offer its still powerful engine of a manufacturing sector to the world, but also a range of top notch, cream of the crop services, from tech services to health care to education.
Elected officials need to take to the bully pulpit now to start hammering home that message, that the U.S. is not in decline, it is still the world's leading economy and will continue to be for those very reasons.
Instead, the U.S. appears to be consumed with a market rally that has largely been based on a lot of financial starch from the Federal Reserve. Manufacturing growth is now coming in weaker than expected.
Still, the average U.S. workers produces over $42,000 a year in goods and services, the average Chinese worker just $2,800. If U.S. manufacturing were ranked separately as a country, it would rank behind France and ahead of Italy, Mexico and South Korea, says the University of Michigan. It is also 27% bigger than China's reported manufacturing base. There's still lots to be positive about.
S&P 500 Commercial Banks Index
Regions Financial Corp.
SunTrust Banks Inc.
Wells Fargo & Co.
M&T Bank Corp.
Marshall & Ilsley Corp.