Bankers and economists worry that festering inflation and rapidly rising interest rates will combine to stall the economy. But new surveys and comments from bankers early in the fourth-quarter earnings season suggest that lenders and bank economists now anticipate only a mild recession causing some deterioration in credit quality.
“There’s a lot of wait-and-see mentality,” Patrick Ryan, president and CEO of first bank, a $2.6 billion asset bank in Hamilton, New Jersey, said in an interview. “There’s still a fair amount of activity, but people are moving at a slower pace.”
Business owners continue to plan for long-term growth and engage with bankers about credit needs, but increasingly they are taking more time to evaluate options. worried about higher interest rates and dealing with the high inflation that took hold last year, Ryan said.
Many, he said, are waiting for data from early 2023, hoping it will show inflation continuing its slowdown from a 40-year high of more than 9% hit in June. Inflation eased to 6.5% in December, but remained three times higher than the Federal Reserve’s preferred level of around 2%.
More evidence of progress on the inflation front would allow Fed policymakers, after multiple steep rate hikes last year, and more expected earlier this year, to halt hikes in the spring, stabilize during the summer and fall, and potentially start lowering rates by the end of 2023.
“I think it could actually be a decent year,” Ryan said. An economy that weakens from the end of 2022, but avoids a sharp center, would allow banks to selectively increase lending in the coming year while keeping credit costs low, Ryan said.
Bad loan charge-offs may rise at the industry level, Ryan said, but they are likely to creep up, effectively “normalizing” from current low levels.
Such a scenario is increasingly expected. Members of the American Bankers Association’s Economic Advisory Committee, made up of bank economists, on average expect the US economy to show no growth, but they avoid anything more than a slight contraction this year.
“Household spending is about to plateau this year,” said Simona Mocuta, chair of the committee and chief economist at State Street Global Advisors. “Federal stimulus payments helped consumers weather the pandemic-induced recession and generate substantial savings. But much of the excess savings has dried up, especially for low-income households.”
Andrew Harrer/Bloomberg
As spending slows, bank economists forecast inflation to slow to 2.8% in 2023, followed by a drop to 2.2% in 2024. Most ABA committee members believe this it will allow Fed officials to rein in rate hikes in the near term, helping steer the economy out of a significant recession this year before growth resumes in 2024.
S&P Global Market Intelligence separately surveyed about 140 U.S. bank and credit union executives at the end of 2022, and two-thirds of them said they expect a recession and higher credit costs this year. But most are looking for only marginal increases in loan cancellations.
Several bank executives said during the current earnings season that they expect a modest economic slowdown this year.
PNC Financial Services Group, for example, increased its provision for credit losses during the fourth quarter and anticipates gross domestic product to fall 1% this year.
“Looking to the future, we are operating our company with the expectation of a shallow recession in 2023said PNC President and CEO William Demchak during the company’s earnings call from $557 billion in Pittsburgh assets last week.
Steve Steinour, chairman and chief executive of $183 billion Huntington Bancshares in Columbus, Ohio, said he expects a “mild” recession. He said in an interview that this will likely reduce demand for loans, but he still sees pockets of strength from manufacturing to government infrastructure projects.
After increase fourth quarter loans About 9% from a year earlier, Huntington forecast average loans to grow 5-7% this year, led by commercial loans.
“There are challenges, but there are also tailwindsSteinour said.
Christopher Maher, president and CEO of OceanFirst Financial in Red Bank, New Jersey, takes a similar view. He said in an interview that the bank’s clients with assets of $12.7 billion are cautiously optimistic. Demand for loans is declining as both consumer and business customers are wary of higher interest rates. The bank is also becoming more demanding with the loans it makes, given recession risks.
“Now is the time to be very selective,” he said. However, Maher still expects OceanFirst to gradually increase lending this year. “We expect the economy to slow down, but we don’t see anything serious.”
