For over 20 years, Phoenix Management Services has been collecting, tabulating and analyzing the results from its “Lending Climate in America” survey in order to evaluate national lending attitudes and trends. Each quarter Phoenix’s proprietary “Lending Climate in America” survey is distributed to over 5,000 lenders nationwide. In the Q1/16 survey results we saw increasing pessimism by lenders with regard to the U.S. economy for both the short term and long term. In the Q1/16 survey, both their long-term expectations (i.e. how will the U.S. economy perform beyond the next 6 months) as well as their short-term expectations (i.e. how will the U.S. economy perform during the next 6 months) fell 11 points to a long-term grade point average (GPA) of 2.02, and a short term GPA of 2.00. However, the Q1/16 pessimism seems to have tapered off a bit, as this quarter’s survey results indicate a positive long-term outlook on the U.S. economy. In our Q2/16 survey, lenders revealed a) a decrease in the short-term GPA of 11 points to 1.89 while the long term GPA increased 9 points to 2.11, b) a 4 percentage point increase in their expectation that their customers will experience strong growth in the next 6-12 months, and c) a 6-percentage point decrease in their expectation that their customers will experience no growth in the next 6-12 months.
Positive Outlook for Long-Term Economy GPA
Each quarter we ask lenders “How do you expect the U.S. economy to perform beyond the next six months on a scale of A through F?” The Q2/16 survey results exhibited an increase of 9 points in the economic grade point average (GPA) to 2.11 from 2.02 in Q1/16. For the first time since Q4/14 a small number of lenders believe the economy will perform at an ‘A’ level beyond the next six months, and we saw a decrease in the percent of lenders that believe that economy will perform at a ‘D’ level. Although these movements are modest, these sentiments seem to support a more positive outlook for the U.S. economy beyond the next 6 months.
In addition, we ask lenders “How do you expect the U.S. economy to perform in the next 6 months on a scale of A through F?” What is concerning is that the lenders surveyed continue to have a pessimistic view about the U.S. economy in the short term. The short-term GPA fell 11 points from a 2.00 in Q1/16 to a 1.89 in Q2/16. This is the first short-term GPA to fall below a 2.00 since Q3/13. The percentage of lenders expecting the U.S. economy to perform at a ‘B’ level fell 7 percentage points from an 11% in Q1/16 to 4% in Q2/16. In contrast, we saw a slight increase in the percentage of lenders that expect the U.S. economy to perform at a ‘D’ level in the next 6 months. These shifts are what caused the Q2/16 short term GPA to fall below a 2.00 and reach the lowest it has been since the Q2/13 results of 1.85.
Commercial Lending Expected to Increase
One of the questions posed to survey respondents is whether they believe commercial lending will be up, down or remain at the same level over the next 6 months. This question drills down even further into specific lending sectors including small business, middle market, large corporate and international lending. Our survey utilizes the Diffusion Index to measure lender sentiment. The Diffusion Index is calculated by subtracting the percentage of negative expectations from the percentage of positive expectations. In our Q1/16 survey, lenders depicted an increasingly negative outlook, as the Diffusion Index entered negative territory for the first time since Q2/09, declining by 26 percentage points from 8% in Q4/15 to a -18% in Q1/16. However, the Q2/16 Diffusion Index increased across all lending sectors by 18 percentage points to 0%. It is a sad day when we view an increase in the Diffusion Index to 0%, but that is the reality of the U.S. economy in Q2/16.
This increased commercial lending activity is more pronounced in the large corporate and middle market, as the Diffusion Index for large corporate lending increased 21 percentage points and middle-market lending increased 26 points, shifting these indices back into positive territory in Q2/16. Unfortunately, the outlook for small business and international lending remains very low, as evidenced by their negative Diffusion Indexes of minus 22% for small business lending and a record low of minus 56% for international lending.
Lenders Expect Interest Rate Spreads to Remain Stable and Leverage Multiples to Increase
Our “Lending Climate in America” survey routinely asks lenders whether their financial institutions plan to reduce, maintain or increase their interest rate spreads and fee structures on similar credit quality loans. The questions is then broken down further based on average loan size. 85% of the respondents expect their financial institution to maintain its current interest rate spread and fee structure (an 18 percentage point increase from Q1/16), while only 11% of the respondents expect their financial institution to increase its current interest rate spread and fee structure (a 10 percentage point decrease from Q1/16). This would seem to indicate continued competitive pressure and the need to be sensitive to pricing in order to maintain and/or increase market share.
Mining, Retail Trade and Manufacturing Top the Most Volatile Industries
Another question routinely asked to lenders is to select the top three industries that they believe will experience the most volatility during the next six months. The three most volatile industries selected by lenders in the Q2/16 survey were the mining, retail trade, and manufacturing. The mining and retail trade industries garnered the highest amount responses at 71%, while manufacturing garnered 36% of responses.
The sentiments for the mining and manufacturing correspond to the Federal Reserve’s gauge of manufacturing, mining and utility, which showed output falling 1.8% in the first quarter, from a year earlier. Although records dating back to 1919 have indicated that industrial production has never decreased so deeply in a year that did not include a recession, the majority of lenders surveyed do not believe that the U.S. economy will slip into another recession within the next twelve months. Of the lenders surveyed, 38% feel as though the decrease in industrial production is misleading as it is largely driven by a decrease in mining due to historically low oil prices, and 22% of respondents believe the U.S. economy is more so driven by consumer spending on services, and as long as job gains and modest pay increases give the consumers the ability to spend, the risk of a near-term recession will be held at bay.
The results from our Q2/16 survey indicate that despite the negative perception of the U.S. economy in the short term, lenders are becoming increasingly confident and optimistic about the U.S. economy on a long-term basis, and do not believe the U.S. is poised for another recession. The uptick in many of the metrics we measure on a quarterly basis further bolster this notion.
The Phoenix Management “Lending Climate in America” Survey is conducted quarterly. To see the full survey results for Q2 2016 as well as to view previous quarter results, please visit http://www.phoenixmanagement.com/about-phoenix/lending-survey
Michael E. Jacoby is a Senior Managing Director and Shareholder at Phoenix Management Services. He has served in advisory capacities, as well as interim management positions for more than 235 Phoenix clients in a wide variety of industries since joining Phoenix in 1992. He can be reached at email@example.com
Jessica Zwirzina is the Marketing and Communications Manager at Phoenix Management Services. She can be reached at firstname.lastname@example.org