Lingering supply chain challenges? Stubborn inflation? No problem, say small and midsize businesses in a recent national survey by a commercial lender.
The confidence shown by owners and managers of those companies in continued economic growth this year is good news for the community and regional lenders that cater to them.
The feedback helps explain the robust momentum of the U.S. job market that has bolstered the U.S. economy and, by extension, enabled banks to
"The economy is reasonably solid, and hiring has stayed strong throughout" the Federal Reserve's rate-hike campaign to tame inflation, Don McCree, Citizens' vice chair and head of commercial banking, said in an interview. "And credit quality stayed strong overall."
The Labor Department reported that U.S. employers added 303,000 jobs in March — up from 270,000 the prior month — and the unemployment rate declined from 3.9% in February to 3.8% last month, near a four-decade low. Jobs grew by six figures in every month last year and each of the first three months of 2024.
The U.S. economy expanded throughout 2023, though the pace decelerated later in the year due to the dulling effects of high rates. Gross domestic product advanced at an annual rate of 3.2% in the fourth quarter, down from 4.9% in the third quarter, according to the Commerce Department.
Forecasters are generally predicting continued expansion this year thanks to the strength of the labor market and the Fed's success in
"The economy has powered through many obstacles over the last few years that could have derailed growth and tipped it into a recession," Raymond James Chief Investment Officer Larry Adam said, noting inflation, high borrowing costs and other fallout from the pandemic. "While we expect growth to slow from its current pace, an outright recession will likely be avoided."
There were pockets of credit weakness in the fourth quarter of last year — notably including office commercial real estate, linked to remote work trends — yet banks' loan books largely remained healthy. This included commercial-and-industrial portfolios.
The fourth-quarter annualized C&I net charge-off rate for the banking industry rose to 0.45% — up 6 basis points quarter over quarter and 19 basis points from a year earlier, according to S&P Global Market intelligence. Historically, a rate below 1% has been considered low.
In terms of credit quality, "there's nothing we're particularly worried about," McCree said of Citizens' view. He said this mirrors the sentiment of both the bank's commercial clients and the business owners it surveyed. Fear of a recession "seems to be fading in people's minds."
The Citizens survey also found that, despite uncertainty imposed by the presidential election in the fall, business leaders are not overly concerned about political instability. Only 9% expect the U.S. election to have a negative impact on their company's growth plans in the year ahead.
"I think the economy is trumping everything," McCree said. "People are feeling good about their businesses."
However, business leaders remain worried about global supply chain disruptions, given the stresses caused by the pandemic and wars in Ukraine and the Middle East. Among those surveyed, 38% said they are more concerned about the impact of supply chain disruptions in 2024 than they were last year, while 51% are similarly concerned, and just 11% are less worried.
That noted, McCree said Citizens' clients are generally confident that supply chains are "clearing up."
In total, he said, when compared to a year earlier, his outlook in April of 2024 is far brighter. "I have much more conviction that we will be strong" as an economy "for the next couple of years."
The combination of lower inflation and some easing in the rate of economic growth could open the door for two to three Fed interest rate cuts later this year, McCree said. The first reduction could come over the summer, with June the soonest, he said. Rate reductions would lower borrowing costs and could stimulate loan demand for new investments that could, in turn, drive future economic advances.
Hargreaves Lansdown's Sophie Lund-Yates, lead equity analyst, agreed that rate cuts are in the cards. But she said the labor market advance in March could ultimately result in upward wage pressure and more inflation, creating a wild card that could delay Fed rate reductions.
"Not only does this make the fight against inflation more difficult," but it also "puts a potential pin in hopes for an interest rate cut in June," Lund-Yates said. The Fed's "dashboard still has some warning lights to deal with before signaling the all-clear for cutting."
