Economic Watch: Slowdown Continues Amid Bank Crashes and Shifting Variables – 24 March 2023

The recent failures of Signature Bank, Silicon Valley Bank, and Silvergate have put many on high alert. This is on top of Credit Suisse’s acquisition by its rival, UBS, in what many had called a “shotgun wedding.” While alarm bells were ringing at first, the government and central banks’ swift intervention stemmed the problem before it spiraled out of control. However, these collapses have only exacerbated the moody, unpredictable outlook of the economy even further – and the slowdown we’re experiencing seems likely to continue.

Changes in Consumer Spending

The Consumer Price Index (CPI) saw a rise of 0.4 percent in February (seasonally adjusted) after an increase of 0.5 percent in January. The food index also climbed 0.4 percent, but nominal and real restaurant sales are doing relatively well. Foot traffic for dining in is also currently at a “steady level.” Much like traveling and attending events, people also want to dine out as part of the experience (and the joy) of going out.

The apparel index (which is one of the components of the CPI) also saw a significant rise, and we’ve already talked about how consumers aren’t spending as much on clothes. We can see it happen in how H&M shares dropped “as much as 3.1 percent” in February, well below expectations. It implies that deceleration is still ongoing, and with prices set to go higher, it will get tougher to sell apparel.

As a print shop owner, you might want to explore a working relationship with restaurants and other food establishments and leverage this niche to your advantage. If you haven’t already, you might want to consider other avenues to get your customers’ attention: mugs, pins, and smaller items may be good examples to try out.

Consumer Sentiment on the Same Page

The University of Michigan’s Surveys of Consumers also reflect this downturn in consumer spending, with consumer sentiment in mid-March dipping to 63.4 from 67 in February. The “persistently high prices” issue will likely cause further dips in consumer sentiment over time, and outlooks will likely remain shaky as recent events potentially cause ripple effects.

Foot traffic in March still remains low, and while retail sales looked pretty good – especially as January saw strong performance – overall retail performance is set to see more lag through the rest of March. If this slowdown of consumer purchasing continues, this can eventually contribute to an eventual recession.

Tightening Lending Standards

With the banking crisis resolved, the Federal Reserve announced that it was increasing the benchmark interest rate by “a quarter of a percentage point,” going to a range of 4.75 to 5 percent. The Fed remains determined to lower inflation further, adding that “some additional policy firming may be appropriate,” hinting that these interest rate hikes may soon come to a close.

Because of the outcome of these bank failures, lending standards will become a lot tighter. As it is, lending standards were already recession-tight before these recent events. The same can even be said for the mortgage market, as sky-high housing prices still make it hard for people to own a house.

“A more general problem that concerns us is the possibility that if banks are under stress, they might be reluctant to lend where they’re worried about shoring up liquidity and capital. And we could see credit become more expensive and less available.”

Janet Yellen, US Treasury Secretary

For the week through March 8th, prior to the banking crisis, “credit dropped $3 billion” for large banks, while small banks dropped $1.4 billion. This may inevitably result in slowing EPS/profits and persistent inflation (or even stagflation if growth slows substantially). If you recall the HOPE framework, when orders/purchases and profits go down, employment is sure to follow after some time.

With tighter lending, it becomes trickier to get money for your business expenses. You can expect higher repayment rates, among other things, making it difficult to acquire new equipment or a new branch, let alone expand your services. We would advise against making any purchases for the time being. Getting a loan will be difficult and expensive, and you might not be able to get an ROI with how the current economic climate looks like.

A Recession is Looming

While we were quite confident that a recession is still far off, the state of the economy seems to indicate it’s looming a lot closer. The Conference Board’s recent Leading Economic Index (LEI) report indicates this is happening. The LEI consists of economic indexes that “summarize and reveal common turning points,” whether positive or negative, “in the economy.” It recently dropped for the eleventh consecutive month in February, highlighting the risk of an impending recession. It may not capture the impact of the recent banking crisis, but it could ostensibly have an impact later this year.

The LEI had plunged by 7 percent over these eleven months, and this is usually viewed as an early warning sign of a hard landing (basically “marked economic slowdown”). Given how the banking crisis has seemingly exacerbated the already poor financial outlook, we believe that a recession is in the cards, but it won’t be as soon as most people claim it to be.

Some may indicate that the job market’s robustness is a signal that things are still OK. However, as per the HOPE framework, employment is one of the slowest to react to economic changes. Despite initial jobless claims went down 20,000 to 192,000 (seasonally adjusted) as of March 11, numbers can easily shift once companies feel the pinch and decide to retrench staff and readjust their business strategy.

Conclusion

Trouble does seem to be brewing for consumers and companies alike, so smarter financial planning will be needed. This will mean consumers are more likely to focus on saving than buying, which leads to sales dipping at a slow but steady pace. For your print shop to survive, you’ll need to think about diversification within your means so that you can stay relevant and profitable through these uncertain times. Be on the lookout for new fashion trends you can leverage, but make sure you calculate the investment you’ll need and whether the returns are worth the risk.

The economic outlook isn’t going to improve any time soon, so it’s best to brace yourself (and your business) for the even bumpier road ahead.