US, North Bay bankers brace for potential economic downturn

While not addressing the “elephant in the room” of a Congressional stalemate on raising the debt ceiling, U.S. bank economists predict no growth for the economy this year and a mere 1.6% in 2024.

And North Bay bankers are seeing that same cloud of challenges in case the economy goes south, with one bank executive forecasting “a difficult year.”

Simona Mocuta, chairwoman of the American Bankers Association’s Economic Advisory Committee, told attendees on a Jan. 20 online conference call that her trade group predicts a "50-50” chance the United States will enter into a recession in 2023.

“Zero growth — that’s as close to a decline as you can imagine,” she said. “We’ll see business investment outside (the) housing (market) decline, and it could be a precursor to a worse outcome.”

Aside from the gloom and doom, the bank economists have also forecasted that consumer price inflation will decrease year over year from 7.1% ending 2022 to 2.8% in 2023 and even 2.2% in 2024. In raising interest rate benchmarks in notches, the Federal Reserve is aiming for 2% by curbing spending.

“Household spending is close to stalling this year. Federal stimulus payments helped consumers withstand the pandemic-driven recession and build substantial savings,” she said. “But much of the excess savings has been depleted, especially for lower-income households.”

Add to that a cooling in the once-robust labor market — a factor that has helped to prop up the U.S. economy despite pressures — and the unemployment rate is due to climb from 3.5% as of December 2022 to 4.6% by year-end and into 2024, the ABA predicts.

Emerging mass layoffs and the “decelerating” of consumer spending may have “depressed the outlook for business,” according to the banking group committee forecast. The organization has encountered stories shared by clients of their firms’ becoming more cautious in restocking inventory and making capital investments.

“Easing demand and sharply rising financing costs are leading many companies to adopt ‘wait and see’ postures on both hiring and investment,” she said.

Mortgage rates are anticipated to slide from 6.6% to 6.2% YOY, and by late 2024, they could drop to 5.8%, the economic committee added. With that, the banking group predicts “a broad correction in housing prices” with the average price of a home declining 6% this year.

Still, a plummet in pricing is not in the cards, according to the ABA. The low inventory will also drive up the demand, and therefore, the price.

But hold on tight

It may be a whole new ballgame for the economy if the two parties at odds in Congress can’t come to an agreement to raise the debt ceiling, which enables the nation to pay its bills.

If the United States defaults by the start of summer, many economists and bankers believe the situation will be so dire, the banker association didn’t incorporate the scenario in its economic forecast.

When asked by the Business Journal if the banker group took the government meltdown into account with its 2023 forecast, Mocuta responded: “No one expects it will not get resolved.”

She later admitted that even the leadup to the deadline entering into unknown territory “may be painful and long” and could affect policies into 2024. The market, for one, reacts poorly to uncertainty.

North Bay banks brace for economy to go awry

Bank officials from Marin and Sonoma counties are guarding against potential, drastic downfalls with buffers.

Summit State Bank has increased its reserves to $14 million in the event of economic turmoil.

“We’ve been operating under the assumption that we’re going to be in a recession this year for a variety of reasons. We’re planning for a difficult year,” President and CEO Brian Reed said. “We’re seeing repercussions rumbling through the economy with a rise in interest rates — if not a recession, at least a slowdown.”

Reed pointed out that, along with setting aside a rainy-day fund, it helps in these challenging situations to maintain strong earnings results. Summit State Bank just posted a record year in 2022 on Jan. 24 with net income of $16.96 million.

“Looking ahead, we remain committed to protecting our profitability as we continue to grow in a disciplined manner,” he stated.

Exchange Bank has stashed $43 million in reserves (as of Sept. 30) to protect the bank’s assets.

“I think that’s a fair concern in a difficult environment,” President and CEO Troy Sanderson said. “We’re comfortable with our reserve position and our credit quality. We never take our eye off the ball.”

A coach at heart, Bank of Marin President and CEO Tim Myers responded to the prospect of the U.S. reneging on paying its bills in a “failure is not an option“ style.

“As for recession, everyone’s not in total agreement on that. We’ll be heading toward some slowdown. But if they don’t raise the debt ceiling, we have a much bigger problem. Nobody will win,” he said. “But I have every confidence it will work out.”

Susan Wood covers law, cannabis, production, tech, energy, transportation, agriculture as well as banking and finance. For 27 years, Susan has worked for a variety of publications including the North County Times, Tahoe Daily Tribune and Lake Tahoe News. Reach Wood at 530-545-8662 or susan.wood@busjrnl.com