Banking chaos could break the strong job market

By Nicole Goodkind, CNN

The job market has remained strong even as the Federal Reserve has spent a full year attempting to cool off the economy by raising interest rates. But economists think that the recent banking turmoil may be what finally raises unemployment.

Tech giants like Google, Amazon, Meta and Microsoft have all conducted large layoffs this year. Accenture announced it would slash 19,000 jobs worldwide this month and Disney has begun laying off 7,000 people.

Even with those big job cuts, the labor market in the United States remains white hot. US unemployment is near a five-decade low. The recent spate of layoffs, particularly in tech, have largely been shrugged off as companies’ adjusting their headcount after overhiring during the pandemic-era boom.

But the collapse of Silicon Valley Bank and Signature Bank and the ensuing banking meltdown have led some financial institutions to tighten their standards and issue fewer loans. Worries about maintaining enough cash through the downturn, closer scrutiny by regulators and interest rate hikes by the Fed have led to regional banks in particular to pull back on lending — a trend that may continue.

“Lending standards will tighten more, to a degree that’s greater than during the dot-com crisis,” wrote Goldman Sachs analysts in a note this week.

Economists believe that as loans dry up, so will jobs.

“Community and regional banks are the backbone of the real economy, and tighter lending will lead to slower overall economic activity and higher unemployment,” said Joe Brusuelas, principal and chief economist for RSM in a recent note.

Since the pandemic, regional banks “have provided a vast majority of lending to small firms, underwriting local small business formation,” said Philip Wool, an analyst with asset manager Rayliant. The recent banking crisis and rate hikes have suppressed that lending, he said, and “this contraction will play out in the job market.”

Small businesses account for about 63% of net new job creation in the United States, according to the Small Business Administration. Nearly 47% of all private sector employees in the country work at small businesses. “As higher borrowing costs and the associated belt tightening hit main street,” said Wool, “we expect to finally see a slowdown in growth and job gains.”

The importance of the regional banks in the lending equation “cannot be overstated,” wrote Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, in a note this week.

Current lending standards “signal that unemployment could increase by 2.5 percentage points in the next 12 to 24 months,” she said.

What to listen for in today’s Senate banking hearings

Silicon Valley Bank’s liquidity crisis and subsequent downfall sent waves of panic through the financial system in early March, setting off a chain reaction of chaos with which regional banks are still grappling.

Now, lawmakers are set to begin their investigation into what led to the second-largest and third-largest bank collapses in US history — and how to prevent something similar from happening again.

On Tuesday morning, members of the Senate Banking Committee will probe federal regulators: Martin Gruenberg, chairman of the board of directors of the Federal Deposit Insurance Corporation; Nellie Liang, under secretary for domestic finance at the US Treasury; and Michael Barr, vice chair for supervision at the Federal Reserve, about the tumultuous events that sent financial systems into a frenzy.

Tuesday’s hearing doesn’t begin until 10 a.m. ET, but all three federal regulators have already released their prepared testimony.

Here’s some of what you can expect to hear from each panelist.

▸ In his prepared testimony ahead of the hearing, Gruenberg of the FDIC said that the failures of SVB and Signature Bank “demonstrate the implications that banks with assets over $100 billion can have for financial stability. The prudential regulation of these institutions merits serious attention, particularly for capital, liquidity, and interest rate risk.”

One preliminary lesson learned from the collapses, wrote Gruenberg, is that “heavy reliance on uninsured deposits creates liquidity risks that are extremely difficult to manage, particularly in today’s environment where money can flow out of institutions with incredible speed in response to news amplified through social media channels.”

▸ In his testimony released on Monday, Barr, the Fed’s vice chair for supervision, detailed how SVB leadership failed to effectively manage interest rate and liquidity risk.

SVB’s failure is a “textbook case of mismanagement,” Barr said in his remarks.

The Fed official pointed out that SVB’s belated effort to fix its balance sheet only made matters worse.

“The bank waited too long to address its problems and, ironically, the overdue actions it finally took to strengthen its balance sheet sparked the uninsured depositor run that led to the bank’s failure,” said Barr, adding that there was “inadequate” risk management and internal controls.

▸ Under Secretary for Domestic Finance Liang’s testimony echoed earlier speeches made by Treasury Secretary Janet Yellen. “As Secretary Yellen has said, we have used important tools to act quickly to prevent contagion. And they are tools we would use again if warranted to ensure that Americans’ deposits are safe,” she said.

Liang also added that this turmoil was very different from the financial crisis of 2008. “Back then, many financial institutions came under stress because they held low credit- quality assets. This was not at all the catalyst for recent events,” she said. “Our financial system is significantly stronger than it was 15 years ago. This is in large part due to post-crisis reforms for stronger capital and liquidity requirements.”

AI could explode economic growth

The recent emergence of generative artificial intelligence (AI) could increase global GDP by 7% annually, according to a new research report by Goldman Sachs economists.

AI will likely lead to job loss, they wrote, but technological innovation that initially displaces workers has historically created employment growth over long haul.

Using census data, they found that that 60% of workers today are employed in occupations that did not exist in 1940. That implies that about 85% of employment growth over the past 80 years, “is explained by the technology-driven creation of new positions,” wrote Goldman economists Joseph Briggs and Devesh Kodnani in the report.

“Most workers are employed in occupations that are partially-exposed to AI automation and, following AI adoption, will likely apply at least some of their freed-up capacity toward productive activities that increase output,” they said. “We anticipate that many workers that are displaced by AI automation will eventually become reemployed — and therefore boost total output — in new occupations.”

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