US, North Bay bankers brace for potential economic downturn

Although they do not address the “elephant in the room” of Congress’ impasse over raising the debt ceiling, US bank economists forecast no growth for the economy this year and only 1.6% in 2024.

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

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

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

Apart from the gloom and doom, the bank’s economists have also predicted that consumer price inflation will decrease year on year from 7.1% ending 2022 to 2.8% in 2023 and even 2.2% in 2024. As interest rate benchmarks are raised in notches , the Federal Reserve offers. targeting 2% by reducing spending.

“Family spending has come to a standstill this year. Federal stimulus payments helped consumers weather the pandemic-hit recession and make significant savings,” she said. “But much of the excess savings has been reduced, particularly for lower-income families.”

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Add to that a cooling in the once-strong labor market – a factor that has helped support the US economy despite pressures – and the unemployment rate is set to rise from 3.5% in December 2022 to 4.6% by the end of the year and into the year 2024, predicts the ABA.

The outlook for business may have been “reduced” according to the emerging banking group’s committee forecast of mass outflows and a “slowing” of consumer spending. The organization has come across stories shared by clients that their businesses are becoming more cautious about restocking inventory and making capital investments.

“Due to softening demand and sharply rising funding costs, many companies are adopting a ‘wait and see’ posture in both hiring and investment,” she said.

Mortgage rates are expected to slide from 6.6% to 6.2% YOY, and by the end of 2024, they could fall to 5.8%, the economic committee said. With that, the banking group is predicting a “broad correction in housing prices” with the average house price falling by 6% this year.

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

But stay tight

It could be a whole new ballgame for the economy if both parties in Congress can’t come to an agreement to raise the debt ceiling, which allows the nation to pay its bills.

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If the United States defaults by early summer, many economists and bankers believe the situation will be so bad, the bankers association has not incorporated the scenario into its economic forecast.

When asked by the Business Journal if the group of bankers had included the government crisis in its forecast for 2023, Mocuta replied: “No one expects that it will not be resolved.”

She later admitted that even the run-up to the deadline into unknown territory “could be painful and long” and could affect policies until 2024. The market, for one, does not react to bad with the uncertainty.

The banks of the North Bay want the economy to go away

Bank officials from Marin and Sonoma counties are guarding against potential, massive downgrades with buffers.

Summit State Bank increased its reserves to $14 million in case of economic turmoil.

“We are operating under the assumption that we will be in recession this year for a variety of reasons. We are planning for a difficult year,” said President and CEO Brian Reed. “We’re seeing consequences trickling through the economy and rising interest rates – if not a recession, at least a slowdown.”

Reed pointed out that setting aside a rainy day fund helps in these challenging situations to maintain strong earnings results. Summit State Bank posted its best year ever in 2022 on January 24th with net income of $16.96 million.

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“Looking ahead, we remain committed to protecting our profitability while continuing to grow in a disciplined manner,” he said.

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

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

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

“Regarding the recession, not everyone is on the same page. We will be heading towards some slowdown. But if they don’t raise the debt ceiling, we have a much bigger problem. No one will win,” he said. “But I have every confidence that it will work out.”

Susan Wood covers law, cannabis, production, technology, energy, transport, agriculture as well as banking and finance. Susan has worked for 27 years for various publications including the North County Times, Tahoe Daily Tribune and Lake Tahoe News. Reach Wood at 530-545-8662 or [email protected]

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