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Lenders Reveal an Optimistic Outlook for U.S. Economy in Near Term

By Michael E. Jacoby and Jessica Zwirzina

Phoenix Management Services

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For over 20 years, Phoenix Management Services has been collecting, tabulating and analyzing the results from its “Lending Climate in America” survey 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 Q4/17 survey results we saw increasing confidence by lenders regarding the U.S. economy in the near-term. In the Q4/17 survey, their near-term expectations (i.e. how will the U.S. economy perform during the next six months) increased 36 points to a GPA of 2.79, and their long-term expectations (i.e. how will the U.S. economy perform beyond the next six months) fell 10 points to a grade point average (GPA) of 2.42. While there was a slight decrease in the long-term GPA, both sentiments continue to represent an overall ‘B’ grade. In our Q4/17 survey, lenders revealed a) a significant increase in the near-term GPA, b) an increase in the diffusion indexes across all lending sectors (an increase suggests optimism and enthusiasm with regard to lending and credit), and c) their belief that the U.S. budget deficit and the stability of the stock market are the factors that have the greatest impact on the overall economy.
 

Near-Term Economy GPA Reaches Record High
Each quarter we ask lenders, “How do you expect the U.S. economy to perform in the next six months on a scale of A through F?” The Q4/17 survey results exhibited a significant increase of 36 points in the economic grade point average (GPA) to 2.79 from 2.43 in Q3/17. This GPA represents the highest near-term GPA in the history of the Phoenix “Lending Climate in America” survey. The majority of lenders (71%) believe the economy will perform at a ‘B’ level, while only 25% of lenders expect the U.S. economy to perform at a ‘C’ level over the next six months.  The Q4/17 results reversed the recent trend of a higher long-term GPA than near-term GPA, perhaps suggesting that lenders believe the economy is about to peak.  

In addition, 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?” Lenders continue to have an optimistic view about the U.S. economy in the long-term, however, its GPA decreased 10 points from a 2.52 in Q3/17 to a 2.42 in Q4/17. In Q4/17 we saw an increase in the percentage of lenders (12%) that expect the U.S. economy to perform at a ‘D’ level beyond the next six months. While most lenders (46%) expect the U.S. economy to perform at a ‘B’ level, this 12-percentage point increase has ultimately caused the Q4/17 long-term GPA to decrease.  

Lenders Predict Lending Sectors to Increase and Loan Structures to Relax
One of the questions posed to survey respondents is whether they expect economic indicators to be up, down, or remain at the same level over the next six months. The question drills down even further into specific lending sectors including small business, middle market, large corporate, and international lending. To measure lender sentiment our survey utilizes a Diffusion Index.  Our Diffusion Index is calculated by subtracting the percentage of negative expectations from the percentage of positive expectations, and a Diffusion Index of 0% indicates neutral expectations. In our Q4/17 survey, lenders indicated an increase in these metrics and they are optimistic about their institution’s opportunities across all lending sectors. The large corporate diffusion index increased to 25%, a 30-percentage point increase, compared to -5% the previous quarter. Middle market saw a slight increase of 8-percentage points to 29%, while the small business diffusion index also saw an increase of 8-percentage points to 17%. The diffusion index for international lending saw a significant increase to 4% from the previous quarter’s results of -22%. This is the first time the diffusion index for international lending has been positive since Q2/15. In addition, the diffusion index across all lending sectors increased 18-percentage points to a 19% in Q4/17 versus the prior quarter’s results of 1%.

Echoing these sentiments, we saw an increase in lenders that expect their financial institution to relax their loan structures over the next six months. Our “Lending Climate in America” survey routinely asks lenders whether their financial institution plans to increase, maintain, or relax their loan structures. The question is then broken down further based on average loan size. While a majority of lenders, 80% of respondents, expect their financial institution to maintain its current loan structure (a 6-percentage point decrease from Q3/17), 12% of the respondents expect their financial institution to relax its current loan structure (a 6-percentage point increase from Q3/17).

Bankruptcies and Loan Losses to Increase
As a turnaround firm, we are keenly interested in lenders’ opinions on bankruptcies and loan losses. While in Q3/17 we saw a decrease from lenders on both metrics when compared to the Q2/17 results, in Q4/17 we saw another uptick from lenders regarding bankruptcies and loan losses. The diffusion index for loan losses increased 12-percentage points to 21% from the Q3/17 results of 9%, while the diffusion index for bankruptcies increased 16-percentage points to 38%.  These upticks would seem to indicate that the aggressive lending of late may finally be coming home to roost.

The interest rate diffusion index increased to 91%, a 13-percentage point increase, compared to 78% in the previous quarter. As part of our “Lending Climate in America” survey we also routinely ask lenders on a quarterly basis in what direction they think the Fed will move interest rates and by how much in the coming six months. Of the lenders surveyed in Q4/17, 50% expect the Fed to raise interest rates by 50 basis points or more, and 46% expect the Fed to raise interest rates by 25 basis points within the next 6 months. These answers were provided before the December Federal Reserve meeting when interest rates were raised by 25 basis points.  

Budget Deficit and Stock Market to Affect the Overall Economy
Another question routinely asked to lenders is to select the two factors that they believe could have the strongest potential to affect the economy in the next six months. The top two factors selected by lenders in the Q4/17 survey were the U.S. budget deficit and the stability of the stock market. The U.S. budget deficit garnered the highest amount of responses at 50%, an eighteen-percentage point increase from the Q3/17 results of 32%, while stability of the stock market garnered 38% of responses.

While a majority of the lenders believe the U.S. budget deficit and stock market stability will be the factors that most affect the economy in the next six months, when asked to identify what they believe will benefit the most from the Trump Administration’s newly proposed tax plan, only 12% of lenders believe a) Federal deficit, and b) stock and/or bond market appreciation will benefit the most from the newly proposed tax plan. The majority of lenders, 38%, believe that GDP expansion will benefit the most from the Trump Administration’s newly proposed tax plan, while 26% believe personal income growth.

Conclusion
The results from our Q4/17 survey indicate an optimistic outlook on the U.S. economy in the near-term as we enter 2018, but some darker clouds, in the form of lower long-term GPA for the U.S. economy, and higher interest rates, loan losses, and bankruptcies, appear to be on the horizon.


The Phoenix Management “Lending Climate in America” Survey is conducted quarterly. To see the full survey results for Q4 2017 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 270 Phoenix clients in a wide variety of industries since joining Phoenix in 1992. He can be reached at mjacoby@phoenixmanagement.com

Jessica Zwirzina is the Marketing and Communications Manager at Phoenix Management Services. She can be reached at jzwirzina@phoenixmanagement.com

 

 

 

 









Michael E. Jacoby

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 270 Phoenix clients in a wide variety of industries since joining Phoenix in 1992. He can be reached at mjacoby@phoenixmanagement.com


Jessica Zwirzina
Jessica Zwirzina is the Marketing and Communications Manager at Phoenix Management Services. She can be reached at jzwirzina@phoenixmanagement.com

The Phoenix Management “Lending Climate in America” Survey is conducted quarterly. To see the full survey results for Q4 2017 as well as to view previous quarter results, please visit http://www.phoenixmanagement.com/about-phoenix/lending-survey