By Michael E. Jacoby and Jessica Zwirzina, Phoenix Management Services
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. The Q2/19 survey revealed a tentative optimism among lenders regarding the U.S. economy in the near-term. In the Q2/19 survey, their near-term expectations (i.e. how will the U.S. economy perform during the next six months) increased 25 points to a grade point average (GPA) of 2.77, and their long-term expectations (i.e. how will the U.S. economy perform beyond the next six months) significantly decreased 23 points to a GPA of 2.07. In our Q2/19 survey, lenders revealed a) an increase in the near-term GPA, b) a decrease in the diffusion indexes for interest rates and bankruptcies, and c) their belief for potential further economic growth in the next year.
Lenders Reveal Tentative Optimism on the U.S. Economy in the Near Term
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?” Lenders displayed a more positive outlook and assessment of the U.S. economy in the near term. The Q2/19 survey results exhibited an increase of 25 points in the economic grade point average (GPA) to 2.77 from 2.52 in Q1/19. The majority of lenders (64%) believe the economy will perform at a ‘B’ level, while only 29% of lenders expect the U.S. economy to perform at a ‘C’ level over the next six months. There was also an increase (7%) of lenders that expect the U.S. economy to perform at an ‘A’ level. The Q2/19 results continues the recent trend of a higher near-term GPA than long-term GPA. The near-term GPA of 2.77 remains at an overall ‘B’ grade, which is a positive indication for continued growth throughout 2019.
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 indicated a pessimistic view about the U.S. economy in the long-term as its GPA decreased 23 points from a 2.30 in Q1/19 to a 2.07 in Q2/19. In Q2/19 we saw a decrease in the percentage of lenders (27%) that expect the U.S. economy to perform at a ‘B’ level beyond the next six months. While there was also a decrease (49%) of lenders that expect the U.S. economy to perform at a ‘C’ level, we saw an increase (23%) that expect the U.S. economy to perform at a ‘D’ level. This 16-percentage point increase is what ultimately caused the Q2/19 long-term GPA to decrease.
Lenders were also surveyed this quarter on whether they believe we will see a slowdown to the U.S. economy in the next twelve months. Of the lenders surveyed, 57% believe that while there has been evidence compounding that the U.S. economy is coming upon a slowdown, there is still potential further economic growth in the next twelve months. Furthermore, 43% of lenders surveyed believe we will see a slowdown to the U.S. economy within the next year.
Bankruptcies and Interest Rates to Decrease
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 6 months. The question drills down even further into specific economic indicators including, but not limited to, bankruptcies, interest rates, and unemployment. 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 Q2/19 we saw a decrease from lenders on bankruptcies and interest rate metrics when compared to the Q1/19 results. The diffusion index for bankruptcies decreased 25-percentage points to 42% from the Q1/19 results of 67%. In addition, lenders expect interest rates to decrease as well. The diffusion index for interest rates decreased 26-percentage points to 22% from the Q1/19 results of 48%. Furthermore, of the lenders surveyed in Q2/19, 26% expect the Fed to raise interest rates by 25 basis points or more, which represents a 32-percentage point decrease from the Q1/19 results of 58%, and 65% expect interest rates will remain unchanged within the next 6 months.
Phoenix’s “Lending Climate in America” survey poses three new questions to lenders quarterly. In Q2/19, lenders were asked how they expect unemployment to affect borrowers for the remainder of the year. In March 2019, unemployment rates remained flat at 3.8%, with some estimates predicting unemployment rates to end the year around 3.6%. The majority of lenders, 54%, do not expect unemployment rate to have a significant effect on borrower profitability. Of the lenders surveyed, 37% expect unemployment rate will cause increased labor costs and reduce profitability, while 9% expect unemployment rate will cause revenue growth and increase profitability. In Q2/19, the diffusion index for unemployment increased from -21% in Q1/19 to 4% in Q2/19.
Retail Industry Expected to Experience the Most Volatility Over the Next 6 Months
Another question routinely asked to lenders is to select the top three industries they expect will experience the most volatility over the next six months. The top three industries selected by lenders in the Q2/19 survey expected to experience the most volatility were retail trade, construction, and healthcare and social assistance. Garnering the highest percentage of responses (73%), were the lenders that expect retail trade to experience the most volatility over the next six months. Of the lenders surveyed, 37% expect the construction industry to experience the most volatility, while 34% believe healthcare and social assistance will experience the most volatility over the next six months.
Additionally, pertaining to the retail industry, lenders were asked if they believe Bed, Bath and Beyond can continue to turn around its performance. Bed, Bath and Beyond lost nearly half of its market value last year amid concerns about its negative same store comps, contracting margins, and competition with companies like Amazon. With even the negative growth, their stock rebounded nearly 60% this year. Lenders garnering 83% of responses think despite Bed, Bath and Beyond stock rebounding 60% this year, they will find it hard to compete with companies like Amazon and Walmart. Of the lenders surveyed, 17% think Bed, Bath and Beyond will continue to rebound with its plans to generate positive earnings growth again by 2020.
Conclusion
The results from our Q2/19 survey indicate lenders are becoming more optimistic about the U.S. economy in the near term. The optimism and improved confidence was further supported by the decrease in lenders’ expectations for bankruptcies and loan losses to increase over the next six months.
The Phoenix Management “Lending Climate in America” Survey is conducted quarterly. To see the full survey results for Q2 2019 as well as to view the infographic, please visit http://www.phoenixmanagement.com/about-phoenix/lending-survey
Authors: 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 J. Zwirzina is the marketing and communications manager at Phoenix Management Services. She can be reached at jzwirzina@phoenixmanagement.com.