Contracting Inventories and Employment in April May Hurt Banks
April PMI: Contracting Employment, Inventories Will Impact Banks (Part 2 of 3)
Employment contracts
ISM’s (Institute for Supply Management) Employment Index declined to 48.3% in April from 50% in March. The manufacturing PMI (Purchasing Managers Index) report was released on May 1, 2015. The April reading is the lowest since September 2009 and indicates a contraction in employment.
At the same time, April’s consumer confidence survey data points to a deteriorating labor market outlook of consumers. The Conference Board released the latest report on April 28.
A contraction in employment may result in increased defaults on loans, especially consumer loans. Greater defaults impact the banking sector negatively.
The PMI Index is based on five indices with equal weights. The chart above shows the growth of various indices in April and the number of months they are moving in the current direction.
Inventories are contracting
At 49.5%, April’s Inventories Index is lower than the 51.5% registered in March. The reading indicates that raw materials inventories are contracting in April following three consecutive months of growth.
Businesses generally finance their inventory needs through loans. A contraction in inventories may have a negative impact on commercial and industrial loan demand, hurting banks’ performances.
Bank of America (BAC), Wells Fargo (WFC), and JPMorgan Chase (JPM) have large commercial and industrial loan portfolios. Some regional banks, such as Fifth Third Bancorp (FITB), have a significant portion of their loans in the commercial and industrial segments.
Commercial and industrial loans are leading the current loan growth in the banking sector. An impact on commercial and industrial loan demand will impact banks’ performances and, consequently, the Financial Select Sector SPDR ETF (XLF).
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