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Turnaround in Supply Management surveys

It doesn’t take much to unnerve the bond market, especially a market already fragile from weak economic data. Coming on the heels of a disappointing August job report, the ISM non-manufacturing report was the straw that broke the camel’s back mid-week. The service industry index came in at 51.4 for August, versus expectations of 55. This was the weakest pace in six years. Business activity and new work orders expanded at slower rates than in the previous months. Job creation in the service sector was the slowest since 2014.

Last week’s report on ISM manufacturing was equally disappointing. The index fell to 49.4 from 52.6 in August. This was the first drop into the contractionary phase in six months. New orders for factories shrank for the first time this year. Eleven of the 18 industries in the survey reported a contraction in overall activity. The weakness in both the manufacturing and service sectors suggests companies remain cautious about investing in equipment or other expansionary strategies. The recent reports suggest an annualized GDP growth rate of just 1.00 percent.

Other Key Indicators this Week:

JOLTS – Job openings remain at record high levels, but employers are finding it difficult to fill positions with qualified workers, according to the Job Openings and Labor Turnover Survey (JOLTS). The number of jobs available increased 3.9 percent in July to 5.9 million, the highest number on record. Yet, the pace of hiring remained unchanged at 3.6 percent. The high number of job openings suggests that companies still need workers, despite the sluggish economic growth pattern. The quits rate remains at 2.1 percent, the highest level since December 2015, indicating workers feel confident about finding better, and hopefully higher-paying, jobs elsewhere.

Beige Book – The quarterly economic report from the 12 Federal Reserve districts can be summed up in two words – modest pace. That was how most of the districts described the current and future rate of growth in the U.S. Kansas City and New York reported no change in activity, while Philadelphia and Richmond noted activity slowed from the previous period. Consumer spending changed little in most districts; auto sales slowed, but remained at high levels. Real estate activity remains constrained by a lack of inventory. The labor market remains tight in most areas. Upward pressure on wages continues, with a more rapid increase for workers with specialized skill sets.

Strategically for Credit Unions:

The latest quarterly data from the NCUA reflects growing loan demand at credit unions, accompanied by a slight increase in delinquency rates. Loan volume grew 10.5 percent in the second quarter from a year ago, while the delinquency rate rose one basis point. Investment portfolios declined 2.5 percent from a year ago. Most of the decrease in the investment sector came from an 11 percent drop in assets longer than one year. Short-term investments (under one year) increased 8.1 percent. As much as credit unions want to keep lending, it may be time to start reassessing the value earned from a potentially weakening loan portfolio versus high quality securitized investments.

Sarina Freedland – Senior Investment Officer

Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.

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