Results from Phoenix Management’s Q1/24 “Lending Climate in America” survey highlighted concerns about the outcome of the upcoming presidential election and increased uncertainty surrounding the retail and construction industries.
The survey asked lenders which macroeconomic headwind they were most concerned about heading into 2024, and a majority of lenders (55%) said they are most concerned about the 2024 election and other political uncertainties. Of the remaining 45% of responses, 27% believe other policy risks (e.g. interest rates) are most concerning, while the other 28% are keeping their eyes on the geopolitical climate and war risk.
Debtwire recently released a report indicating that bankruptcy filings increased 58% in 2023. When lenders were asked if they believed this trend would continue, a large majority (73%) agreed, also noting that this is a possible precursor to a recession. The remaining 27% of respondents believe that bankruptcy filings will not increase in 2024 and the U.S. will avoid a recession.
Almost 75% of respondents identified both the retail and construction industries as likely to experience the most volatility in the next six months.
Additionally, the survey asked lenders how they see overall demand for loans changing. Of the lenders surveyed, 46% of lenders believe there will be no change in the demand for loans, while 18% believe there will be a decrease. The remaining respondents (36%) believe that there will be an increase in the demand for loans. This was cemented by 64% of surveyed lenders saying they believe there will be an interest rate decrease in the upcoming six months, with the other 36% believing the Federal Reserve will make no change to interest rates in the next six months.
According to the survey, lender optimism in the U.S. economy increased slightly in the near term from 1.75 in Q4/23 to 1.91. In addition, 73% of lenders believe the economy will perform at a “C” level during the next six months, while 18% believe the economy will perform at a “D” level. In a more telling finding, lender expectations for the U.S. economy’s performance in the longer term increased significantly from 2.08 to 2.55. Of the lenders surveyed, 64% believe the U.S. economy will perform at a “B” level during the next 12 months, an increase of 39 percentage points from Q4/23.
“Lenders are concerned with the economic impact of the upcoming presidential election, and an overwhelming majority believe that bankruptcy filings will increase in 2024,” Michael Jacoby, senior managing director of Phoenix Management, a part of J.S. Held, said. “Furthermore, borrowers’ expectations regarding expansion, hiring and acquisition plans have been tamped down since the Q4 survey. The results seem to fly in the face of increases in both the short-term and long-term expectations of the economic performance of the U.S. economy. Still, it supports the notion that different pockets of the economy and industry sectors are performing differently.”
In response to the survey’s findings that a majority of lenders identified retail and construction as industries likely to experience the most volatility in the upcoming six months, Jacoby said: “This certainly dovetails with what we are seeing in our client base. We expect continued volatility and choppiness in borrower performance and lender outlook until the Fed begins reducing rates and the outcome of the 2024 presidential election is decided.”
