When we chose to say the economy was getting weird in the last newsletter, we had no idea that events were about to prove us to have been more prescient than we ever could have imagined.
Although the last newsletter was dated March 15, the writing was completed a week earlier, before the collapse of the Silicon Valley, Signature and Silvergate banks, which then led to a worldwide banking crisis caused by the Federal Reserve raising interest rates in its attempt to address an inflation crisis that was created in the first place by the U.S. government’s persistent adherence to out-of-control spending.
Despite – or possibly because of – the Biden administration’s rush to shore up the banking system and its repeated assurances that the worst was past, the economic unraveling continued.
Even before the bank blow-up, the economy was throwing off mixed signals that were being read by expert economists as signs that a recession, a mild slump, or slow growth were coming in the months ahead. Since the crisis began, we saw just how clueless most of these experts were.
But some of their most recent observations may prove to be apt when it comes to the heavy involvement of regional and smaller banks in commercial real estate lending, which is now seen as a worrying sign.
Of course, when you talk about CRE that term covers a broad expanse of land, incorporating multi-family housing (a fancy term for rental apartments), shopping centers, office buildings and industrial real estate, which consists primarily of warehouses and distribution centers.
As we have reported on a regular basis in this publication, IRE is seen as remaining strong even as the economy has slowed down to a degree. One reason is that when the economy is growing, storage space is needed. That also is the case when the economy slows down and stuff isn’t moving.
However, fulfillment and other distribution centers are an entirely different business. Most of the growth in that segment of the industry has been driven in recent years by the explosion in ecommerce sales, particularly during the Covid 19 pandemic and lockdowns that prevented people from accessing brick-and-mortar stores.
Earlier it was leaked that Amazon.com plans to cancel, delay, or close no fewer than 99 of its fulfilment centers in the U.S. this year. That news followed reports that Amazon had shuttered about 70 such centers during 2022.
Another blow to the revival of ecommerce and other retail sales growth comes from the burgeoning credit card debt carried by consumers because of inflation and the Fed cranking up interest rates, which triggers rises in credit card interest rates that are now up to nearly 24% in some cases.
This should be of more concern because more Americans are relying on credit cards to deal with inflationary price increases of even basics like food and medicine. Bankrate.com recently reported that 36% of adults owe more money in credit card debt than they have saved.
“It’s clear that the less-than-optimal economy, including historically high inflation coupled with rising interest rates, has taken a double-edged toll on Americans,” says Mark Hamrick, Bankrate senior economic analyst. “Many resorted to tapping their emergency savings if they have it, or have taken on credit card debt, or some combination.
The New York Federal Reserve Bank also reported that credit card balances rose 15% throughout 2022, and more recent news says that this trend has speeded up during the first few months of 2023.
Other research confirms that consumers also have been cutting back on discretionary spending in response to their burgeoning credit card debt. Because consumer spending drives the economy, these trends also could fuel a recession.