Latest / Market Pulse / 2023 Economic Outlook: Opportunities for Lenders
Transcript
- Katherine Doe (00:50): All right. Okay, Chris, so let's dive right in. The jobs report seemed to indicate that the labor market is still strong even though we're starting to hear about some big layoffs at big name tech and media companies recently. So what is your overall analysis of the labor market with where we are today and perhaps either some challenges or opportunities and where we might find ourselves throughout 2023? Cris deRitis (01:22): Yeah, great question. So, the labor market has been very resilient. This year during the pandemic recovery here, there's been a slowdown in hiring. At the start of 2021, we were hiring over 500,000 people per month, or adding 500, over 500,000 new jobs to the economy every month. And here at at the end of 22, it's, it's closer to 250,000 - 260,000. So definitely slowing. But by historical standards, still very, very strong. We have to add about a hundred thousand people to the economy every month to keep up with population growth. So anything north of that means we are continuing to pull people off the sidelines and back into the labor market. So, one perhaps a bit surprising observation here is that despite all the Fed hiking and interest rates, we, the labor market has been surprisingly resilient in terms of hiring and in terms of demand, we have about 10.3 million job openings at the moment. So still lots of opportunity out there. That is, again, off the high of off the peak level. But it does indicate that businesses by and large are still looking for workers. They do see opportunity to expand their operations. They are looking to hire qualified individuals in, into their companies and actually struggling to find them so that the labor market is perhaps the one or the brightest spot in the economy right now in terms of its resilience. And one reason why we may avoid an all-out recession going forward is that, that that demand remains so strong. So even if it weakens in terms of job openings being pulled, unlikely that we'll see very widespread layoffs going forward. So again, I, I think the labor market has been strong and should continue to remain relatively strong in 2023 as well. Katherine Doe (03:21): So what do you think might throw that off? I know in the previous installment of this series, we mentioned a few things that could, you know, be a potential curve ball to look for or, or look out for in the future. I'm guessing, you know, another wave of C could, could keep people at home and, and need people back, you know, with childcare and whatnot. Anything else you're, you're forecasting? Cris deRitis (03:49): Yeah, so definitely we have all, all sorts of risks or shocks to worry about, right? Covid be being one ongoing recession risk, right? We haven't fully digested all of the rate hikes that the Federal Reserve has, has taken, and there are more rate hikes to, to come here, more tightening of monetary policy that's going to make it more expensive for consumers to borrow in businesses to invest. And that certainly will slow things down. And there is a risk that it goes too far, right? That we haven't fully appreciated just how much of an effect it will have. Perhaps after we get through the holiday season here, we might see a pretty substantial pullback in spending, and that certainly could ripple through the, the economy. So there are, there are certainly those types of risks out there. There are also all sorts of, all other unknowns out there in terms of the situation of, of course, of the war between Russian Ukraine. If we got an oil price shock or another energy shock here, supply chain issues could rise up again. And that certainly could complicate the economy's trajectory when it comes to inflation and lead to even more tightening by the Fed, which could in turn lead to even weaker economic growth. And that could lead to more widespread job losses. So, clearly there are risks here. The other thing I would note is that we, we also want to perhaps take a look at different sectors, right? We're talking in, in aggregates here. Maybe the overall labor market will manage, but there are clearly parts of the labor market already that are under stress. So you think about mortgage lending, right? That's, that certainly has been cut back and we, you've seen layoffs among mortgage originators, right? That's, that's unlikely to change time soon, given the current level of interest rates, construction or home building as well has retreated here. So clearly there, there are certain sectors that are more at risk than others going forward, that a lender would want to take into account depending on where they're positioned. Katherine Doe (05:59): Hmm. And so that, that's a good segue to the next question I had in mind. When I hear that job growth is, is going well and it's a bright spot you know, people who are employed perhaps want to borrow money and they look like better candidates. And with that in mind, how, how do we advise lenders to steer their course and to strategize knowing that while the job market is good there are still other economic factors that might make them want to pull back and be cautious. How, how do we find a good medium in there? Cris deRitis (06:43): Yeah. great question. So again, I think the main, one main point is just to recognize that there is a lot of variety in the economy at any given point in time. So we can talk about the macro economy and the broad trends and say, yeah, there, there's, there are lots of opportunities out there, but that there's a lot of churn in the labor market as well. So people are losing, unfortunately, people are losing their jobs every day. Luckily, many of them are able to find jobs relatively quickly. So you do see those that churn taking hold here as a lender, I think you want to be take advantage of the data and tools that are out there to have as best insight as, as you can into the future positions of future opportunities here. So if you are lending, perhaps to workers in the tech industry, and the tech industry is facing a number of, of high layoffs at the moment that may not mean that you avoid the tech industry all altogether because there are smaller tech firms perhaps, that are picking up some of the job losses that are, that are being made. So I think you want to have both that micro and that macro view of what's going on in the economy more broadly. Certainly you want to understand where the rates are headed and what impact that could have on your borrowers, but then the micro data could, can help you with more of the transaction or operational decisions that you're making in terms of granting credit or servicing loans. Right? I think you need that that full picture to really take advantage of the situation and certainly manage the risks that might already exist in your portfolio. Katherine Doe (08:26): Mm. And so do you think it's important for lenders as they're working through portfolio management and why smart portfolio management to be periodically checking to, to check on job status? We have so much more data available to us today. The labor market is really great. But how, how can lenders maybe be more responsible and protect themselves maybe in some of these industries where we are seeing some more churn? Cris deRitis (09:03): Yeah. grape, I think one key lesson we learned from the pandemic actually was that you know job losses themselves may not lead to defaults or delinquencies. It's really income, right? And in the pandemic we had the a lot of governments stimulus that came in kind of replaced lost wage income. So I think it just is a a good analogy or a good indication that we need to go a bit deeper in trying to understand on the, the trends that exist in the economy. We can't just rely on overall indicators like the unemployment rate as a guide for where, where things are headed. So the more granular we can get certainly the more insight we can have into the, the potential strength of different households. So trying to understand the trends in specific industries, again, for the, the borrows you may be lending to certainly can be helpful to understand where the potential risks are. Another key area, I would say is on the on the balance, balance sheet side of things as well, right? So one thing is to note incomes and try to get your best guess or best forecast for where incomes are headed for individual borrowers. That's a good indication of potential cash flow issues for down the line, but wealth matters as well. And so having some insight into the savings that households have, we talked about some of the demographics on our previous episode here in terms of where consumers are relative to each other in the income distribution in terms of their excess savings or additional savings. So having some insight into what the wealth position is of, of your portfolio, of your borrowers and portfolio can also be quite helpful in understanding where the, the risks are. So even if there are a layoffs in a particular industry, right? If those borrowers have fairly healthy balance sheets and good prospects in the future, they may still be very high-quality candidates for a loan or a line of credit as they work through a period of unemployment. Katherine Doe (11:11): That's helpful. And so I'm going to go back to my, my favorite question and all of the advising you're doing and the questions you're being asked pertaining to the job market, you know, for our episode today. What do you think you're not being asked that should be focused on? What should people be asking you to really pick your brain properly? Cris deRitis (12:07): Yeah, so I, I think where well, I, I guess I'm going to rely on the, the answer I gave in the previous episode. There's a tendency to really focus on the short term and what's coming over the next year. Certainly that's very important. We need to do that, that is most immediate hits our, our bottom lines and affects our decisions, but we also have to keep an eye on, on the longer term. So perhaps a few more questions on where the labor market is headed, not just in 2023, but in 2024 or 25, 20 30 and beyond, I think is quite important in terms of a longer term planning in particular, I think demographics are going to make a big difference on our economy as we think about the next five to 10 years. Even today, we're already seeing some effect from retirees or baby boomers who are, who are going into retirement, perhaps at faster rates than we otherwise would've anticipated. Cris deRitis (13:05): And that does have some real effects on the labor market, is part of the reason why we have a lack of labor supply in in many sectors at this point. And so there's this open question of, well, are these retirees going to come back? And maybe they went into retirement early thinking that they were, they, their financial positions were sound, but they may realize that they need some more income. So how can we as employers certainly attract these folks who are out there still wanting to contribute? And can we make arrangements, whether it's gig work or contract work, to allow workers to continue to contribute to our overall economy here, while still meeting their needs of, you know, perhaps wanting more leisure time, or they don't want a full schedule, they want some more flexibility. So I think those are some of the, the challenges that a lender is going to face in the future, not only in terms of their customer base and who's going to be asking for credit or who needs credit, but then in terms of managing their own staff and trying to ensure that they have sufficient employees or sufficient workers to meet all the demand that's out there. And can they tap into some of these non-traditional labor markets and, and still capture value or provide value to their customers with these with these other workers. Katherine Doe (16:05): I'm going to pick a little bit more on what you mentioned with the long term, say 10 years or more forecast on the job and labor market. How do you go about forecasting that? What, what brings about your answer and, and how can lenders be that forward thinking and looking? Cris deRitis (17:02): Yeah, so anytime you go out in time, obviously there's a lot of uncertainty in the forecast. A lot of things can happen, but that doesn't mean that there isn't value going through the exercise of, of forecasting and demographics are interesting cuz in, in a way they're kind of easy, right? You can look at birth rates or mortality rates, and generally speaking, those tend to be slow moving or follow up a trend. So if you're not going too far in the future, like 50 year or a hundred years out in the future, right? That then we get really into the, the most uncertain piece. But 5, 10, 15 years out, we can, we have a pretty good idea of what those population trends would look like, at least from in terms of births and, and deaths. And then we have to make some assumptions about immigration. Cris deRitis (17:46): That's, that is a significant wild card here in terms of understanding how many people will be in the economy, both in terms of potential customers, and then certainly as potential additions to our workforce. And we've been talking about some of the, the challenges in the labor market and immigration certainly could fill some of the void that we're talking about here. So I think for lenders, it's really about gaining out those potential scenarios. And certainly in, in in the work we do at Moody's, we, we think about upside and downside scenarios make different assumptions in terms of the range of immigration that we might have over the next 10 years. And that gives us at least some sense of what are the, the potentials for the population number of households and the labor market overall going forward. So again, I don't think it's about having the answer or one correct answer. It's about going through that exercise of understanding, okay, well, under some reasonable assumptions, what can we expect here? And what if we adjust those assumption just a little bit, how mu how sensitive will this, will these figures be? And that can already help to guide us in terms of potential opportunities or potential risks further down the line.