Global consulting firm J.S. Held revealed the “Lending Climate in America” survey results from Phoenix Management, a part of J.S. Held, highlighting concern regarding the impact of the presidential election and the timing and magnitude of future Federal Reserve interest rate reductions.
The Q4/24 “Lending Climate in America” report highlights rising lender optimism following the recent U.S. presidential election and continuing an upward trend heading into 2025. In the report, lenders identify the macroeconomic factors they believe have the strongest potential to impact the economy, as well as which actions their customers have planned in the next six to 12 months.
The survey asked lenders which factors could have the strongest potential to impact the economy in the upcoming six months. Sixty-two percent of lenders believe the 2024 election, and its aftermath, will have the strongest impact on the economy, while 41% of lenders believe the interest rate changes will have the strongest potential to impact the economy. Lenders also expressed heavy concern regarding the possibility of constrained liquidity in capital markets.
Lenders revealed what actions their customers may take in the next six months. Almost two-thirds of the surveyed lenders believe their customers will raise additional capital, buoyed by an anticipated decrease in interest rates. Entering new markets follows closely with around half of lenders expressing those plans for their customers.
Sixty-three percent of respondents identified the retail trade industry as the most likely to experience volatility in the next six months, followed by the real estate and consumer products industries at 49% and 42% of respondents (respectively).
Additionally, the survey asked lenders if their respective institutions plan to tighten, maintain or relax their loan structures for various sized loans. On average, the Q4 results were identical to Q3; however, there was a slight shift in the relaxing of loan structure for smaller sized loans.
Lender optimism in the U.S. economy increased substantially in the near term from 1.76 in Q3/24 to 2.40. In this current quarter, there is an equal expectation of C and B level performances (47% each), with the remainder skewed toward poorer performance at a D level. More telling, lender expectations for the U.S. economy’s performance in the longer term increased greatly from 2.47 to 2.93. Of the lenders surveyed, 53% believe the U.S. economy will perform at a “B” level during the next twelve months, the same level as the prior quarter. In this quarter, there was a shift out of the “D” and “F” predictions into the “A” and “C” categories.
On Dec. 18, 2024, the Federal Reserve reduced interest rates by one quarter of a percent.
“We are definitely getting mixed messages from lenders. While there is near consensus that the Fed will reduce interest rates by at least an additional 50 basis points in the next six months (87% of all respondents), 41% of lenders identified interest rate risk as a factor that will have the strongest potential to impact the economy,” Michael Jacoby, senior managing director of Phoenix Management, said. “We believe lenders are concerned about the potential impact if interest rates do not decline at this anticipated pace, which is more of a possibility today than when this survey was completed pre-election. Lenders are also concerned with the consumer, as evidenced by 63% identifying retail and 42% identifying consumer products as industries expected to experience the most volatility in the next six to twelve months. Nevertheless, the GPA for the U.S. economy for the coming six months increased by 64 basis points to 2.40, the highest grade since Q2 2021.”
Based on lender sentiment expressed in the Q4/24 survey, the question remains: will we see further reductions when the Fed meets again in Q1/25?
