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Bankers, economists expect 'shallow' recession

Bankers and economists worry that festering inflation and rapidly rising interest rates will combine to stall the economy. But new surveys and commentary from bankers early in the fourth-quarter earnings season suggest lenders and bank economists now anticipate only a mild recession that causes some credit quality deterioration.

"There's a lot of wait-and-see mindset out there," Patrick Ryan, president and CEO of the $2.6 billion-asset First Bank in Hamilton, New Jersey, said in an interview. "There's still a fair amount of activity out there, but folks are just moving at a slower pace."

Business owners continue to plan for long-term growth and are engaged with bankers about credit needs — but more are taking added time to evaluate options, concerned about higher interest rates and grappling with the lofty inflation that took hold last year, Ryan said. 

Many, he said, are waiting on early 2023 data, hopeful it will show inflation continuing its deceleration from the 40-year high of above 9% reached in June. Inflation declined to 6.5% in December but remained three times higher than the Federal Reserve's preferred level of around 2%.

Further evidence of progress on the inflation front would allow Fed policymakers — after multiple steep rate hikes last year, and more expected early this year — to cease increases in the spring, level off over the summer and fall, and potentially begin to lower rates by the end of 2023.

"I think it could actually be a decent year," Ryan said. An economy that weakens from late 2022, but avoids a sharp downtown, would allow banks to selectively increase lending in the year ahead while keeping credit costs low, Ryan said. 

Charge-offs of soured loans may rise at the industry level, Ryan said, but they would likely creep up, effectively "normalizing" from currently low levels.

Such a scenario is increasingly expected. Members of the American Bankers Association's Economic Advisory Committee, composed of bank economists, on average expect the U.S. economy to show no growth but avoid anything beyond a slight contraction this year.

"Household spending is close to stalling this year," said Simona Mocuta, committee chair and chief economist at State Street Global Advisors. "Federal stimulus payments helped consumers withstand the pandemic-driven recession and build substantial savings. But much of the excess savings has been depleted, especially for lower-income households."

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PNC Financial is among a growing group of banks that expects only a mild recession this year.
Andrew Harrer/Bloomberg

As spending slows, the bank economists forecast that inflation will decrease to 2.8% in 2023, followed by a drop to 2.2% in 2024. A majority of the ABA committee members think this will allow Fed officials to tap the brakes on rate increases in the near term, helping to steer the economy clear of a significant recession this year before it resumes growth in 2024.

S&P Global Market Intelligence separately surveyed about 140 U.S. bank and credit union executives late in 2022, and two-thirds of them said they expect a recession and higher credit costs this year. But a majority look for only marginal increases in loan charge-offs.

Several bank executives said during the current earnings season that they expect a modest economic slowdown this year.

PNC Financial Services Group, for example, boosted its loan-loss provision during the fourth quarter and anticipates gross domestic product will fall 1% this year.

"As we look ahead, we are operating our company with the expectation for a shallow recession in 2023," PNC Chairman, President and CEO William Demchak said during the $557 billion-asset Pittsburgh company's earnings call last week.

Steve Steinour, chairman, president and CEO of the $183 billion-asset Huntington Bancshares in Columbus, Ohio, said he expects a "mild" recession. He said in an interview that this will likely slow lending demand, but he still sees pockets of strength from manufacturing to government infrastructure projects.

Photo taken of front of Synovus regional office in Atlanta area.
Synovus sees more loan growth but braces for margin pressure

After increasing fourth-quarter loans about 9% from a year earlier, Huntington forecast average loans would grow 5% to 7% this year, led by commercial borrowing.

"There are challenges, but there are also tailwinds," Steinour said.

Christopher Maher, chairman and CEO of OceanFirst Financial in Red Bank, New Jersey, holds a similar view. He said in an interview that the $12.7 billion-asset bank's clients are cautiously optimistic. Loan demand is easing as both consumers and commercial clients grow wary of higher interest rates. The bank, too, is getting pickier about the loans it makes, given recessionary risks.

"Now is the time to be very selective," he said. Yet Maher still expects OceanFirst to gradually increase loans this year. "We expect the economy to slow, but we don't see anything severe."

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