For almost 25 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, this proprietary survey is distributed to more than 5,000 lenders nationwide.
The Q2/20 survey revealed pessimism among lenders regarding the U.S. economy in the near -term. In the Q2/20 survey, near-term expectations (i.e. how will the U.S. economy perform during the next six months) decreased 139 points to a grade point average (GPA) of 1.18 and long-term expectations (i.e. how will the U.S. economy perform beyond the next six months) significantly increased 45 points to a GPA of 2.24. The Q2/20 survey also indicates that lenders expect bankruptcies, loan losses and unemployment to increase, and the accommodation and food service industry to experience the greatest volatility in the next six months.
COVID-19 Increases Near-Term Pessimism
Each quarter, Phoenix asks lenders “How do you expect the U.S. economy to perform in the next six months on a scale of A through F?” Lenders indicated a pessimistic view about the U.S. economy in the near-term, as its GPA decreased 139 points from 2.57 in Q1/20 to 1.18 in Q2/20. The near-term GPA of 1.18 in Q2/20 represents the lowest GPA since the 1.03 GPA in Q1/09. In Q2/20, there was a significant increase in the percentage of lenders (53%) that expect the U.S. economy to perform at a ‘D’ level during the next six months. Furthermore, there was an increase (16%) of lenders that expect the U.S. economy to perform at a ‘F’ level, and a decrease (3%) that expect the U.S. economy to perform at a ‘B’ level.
In addition, Phoenix asked lenders “How do you expect the U.S. economy to perform beyond 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 long-term. The Q2/20 survey results exhibited a significant increase of 45 points in the GPA to 2.24 from 1.79 in Q1/20. The majority of lenders (55%) believe the economy will perform at a ‘C’ level, while 24% of lenders expect the U.S. economy to perform at a ‘B’ level beyond the next six months. Of the lenders surveyed, 11% expect the U.S. economy to perform at a ‘F’ level compared with the 35% in Q1/20. The Q2/20 results reverse the recent trend of a higher near-term GPA than long-term GPA. The significant increase in the long-term GPA brings hope to a bright future on the horizon.
Lenders were asked to assess their customers’ growth over the next six months. The majority of lenders (76%) indicated their customers’ will experience no growth in the near-term, while 22% of lenders expect their customers to have moderate growth.
Loan Losses, Bankruptcies and Unemployment
One of the questions posed to survey respondents is whether they expect economic indicators to be up, down or at the same level over the next six months. The question drills down even further into specific economic indicators including, bankruptcies, loan losses and unemployment. Phoenix’s 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 Q2/20 there was an increase from lenders on bankruptcies, loan losses and unemployment metrics when compared with the Q1/20 results. The diffusion index for bankruptcies increased 43 percentage points to 100% from the Q1/20 results of 57%. In addition, lenders expect loan losses to increase as well. Of the lenders surveyed, 100% expect loan losses to increase in the next six months compared with Q1/20 results of 29%. Furthermore, of the lenders surveyed in Q2/20, 26% expect an increase in unemployment, which represents a 19-percentage point increase from the Q1/20 results of 7%.
In Q2/20, lenders were asked what they think the unemployment rate will be at Dec. 31, 2020. As of April 16, 2020, more than 22 million Americans had filed for unemployment aid in just four weeks — a staggering number that wiped out a decade of employment gains and equated to a real unemployment rate of nearly 18%, with potentially more jobless claims to come. Of the lenders surveyed, 50% think the unemployment rate will be between 10.01% to 15% by the end of December. Twenty-eight percent of lenders think the unemployment rate will be between 5.01% to 10%, while 18% think the unemployment rate will be between 15.01% to 20% by the end of December.
Volatility in Accommodation and Food Service Industries
The survey routinely asks lenders to select the top three industries they expect will experience the most volatility over the next six months. The most volatile industries selected by lenders in the Q2/20 survey, were accommodation and food service, retail trade, and arts, entertainment and recreation. Garnering the highest percentage of responses (80%), were the lenders that expect accommodation and food service to experience the most volatility over the next six months. Of the lenders surveyed, 72% expect retail trade to experience the most volatility, while 46% believe arts, entertainment and recreation will experience the most volatility over the next six months.
The growing number of stay-at-home orders, travel restrictions and social distancing measures put in place has caused the restaurant and hospitality, retail and entertainment, and recreation industries to severely feel the impact of the COVID-19 pandemic. Many businesses in these particular industries were forced to close their doors due to government restrictions or, at a minimum, operate at a limited capacity. It may be quite a while before these industries bounce back to a level remotely approaching their pre-COVID-19 performance.
The results from our Q2/20 survey indicate lenders have become more pessimistic about the U.S. economy in the near-term as the GPA reached its lowest point since Q1/09. This downturn is supported by projections for an increase in bankruptcies and loan losses, along with a forecasted increase in unemployment. Interestingly, the improved long-term GPA results reveals optimism for the U.S. economy toward the end of 2020.
The Phoenix Management “Lending Climate in America” Survey is conducted quarterly. You can see the full survey results for Q2 2020 as well as to view the infographic, here.