QUOTE OF THE WEEK
“Our greatest glory is not in never falling, but in rising every time we fall.” – Confucius
The most recent update from Omega Squared, our investment advisory partner, is that we are not quite yet in a recession but we are getting close and looks like we will be there sometime in the next three months or so. Will it be a soft landing like the Fed is saying, or will it be a deep recession? It is tough to make an accurate predication but just like always we will let the data tell us.
A couple of recent reports that don’t bode well for the future are NFIB Small Business Sentiment hit another new cycle low and U.S. Redbook Weekly Retail Sales remain in the doldrums at cycle lows for the second week in a row.
What I really want to talk about is the most recent report of the Senior Loan Survey which is the survey of senior loan officers at the banks. This survey covers the period of March 22nd to April 7th, which is somewhat dated, and hasn’t taken into consideration the effects of what will come out of the debt ceiling crisis currently being debated in Washington.
The survey is showing that commercial loan standards are tightening, loan demand is falling, and credit spreads are widening. This is the fourth consecutive quarter that commercial loans are falling and is now lower than the recessions of 1991 and 2001 but it isn’t worse than the Great Recession of 2008.
Commercial real estate standards are significantly tightening and demand is notably weakening, especially for office space, as people who were working from home during the pandemic are not returning to the office.
On the consumer side we are seeing credit tightening on credit cards, auto loans, and all other consumer loans.
Every quarter the Fed asks a series of questions of the banks. Two of these being how and why banks are expected to change lending standards over the remainder of 2023. The answer was that over all loan categories, banks are expected to tighten credit over concerns of expected deterioration in credit quality of their loan portfolios and borrower’s ability to pay.
The other concern in the survey to cause banks to draw back on lending, is that the banks are concerned about funding costs, their own liquidity, and deposit outflows.
What does this all mean for the economy and the likelihood of a recession? It is important to remember that loans are the “oil in the engine” of the economy. Without loans businesses will have less capital to expand, potentially putting new initiatives on hold, or worst of all not be able to pay expenses or salaries. This slows the economy and then it turns into a vicious economic cycle downward.