Surveys: Optimism improving, but inflation & recession concerns remain
With nearly a month of 2024 already in the books, experts are still trying to ascertain what might be ahead this year.
While consumer sentiment is improving, top executives and finance companies still remain a bit guarded, especially when a recession and inflation are mentioned.
Let’s start with the upbeat observations from Cox Automotive chief economist Jonathan Smoke, who recapped that the initial January reading on consumer sentiment from the University of Michigan jumped 13.1% to 78.8 “as views of current conditions and future expectations both increased substantially.”
Smoke continued his Monday morning blog post that, “Worries about inflation also fell as the median expected inflation rate over the next year declined to 2.9% from 3.1% last month, and the longer-term view of inflation declined to 2.8% from 2.9%.
“The five-year view of inflation ties the September reading; otherwise, it was the lowest since September 2022. That is encouraging as it suggests consumers are not anchoring to a persistent level of higher inflation. Consumers’ views of buying conditions for vehicles have improved to the best level since July 2021,” Smoke went on to say.
So, if consumers are ready to buy cars, are finance companies really eager to provide the necessary credit?
We might have to slow our roll a bit on that one.
Also on Monday, FTI Consulting announced the findings of its 2024 Leveraged Loan Market Survey, which offers insight into bank and non-bank lenders’ perspectives on the U.S. loan industry and highlights expectations for leveraged credit market conditions in the year ahead.
This year’s survey found cautious optimism prevails among finance companies and other lenders after a challenging year, with 45% of respondents believing that the probability of a U.S. recession is minor compared to last year, when only 29% had this view.
Despite the surprising strength of the U.S. economy last year in the face of monetary tightening and high inflation, FTI Consulting reported about one-third (34%) of respondents still say there is a material probability of recession in 2024, while 8% believe a recession is likely even as these adverse conditions appear poised to ease.
“Last year began with a lot of pessimism about the impacts of high inflation and monetary tightening, but it ended with many convinced that inflation had been tamed, a recession had been averted and earnings growth was set to resume,” said Chuck Carroll, a senior managing director and leader of the senior lender advisory practice at FTI Consulting.
“The findings in this year’s survey point to more tempered enthusiasm, with the continuation of high interest rates and lingering economic uncertainties lowering respondents’ expectations for 2024,” Carroll continued in a news release.
More key findings from the survey include:
—The expected inflation outlook is improved, but still high. Two-thirds of respondents (67%) said the inflation rate will exceed 3% by year-end, above the Fed’s target, compared to 97% who gave this response a year ago.
—Nearly one-half (46%) of respondents believe that persistently high interest rates despite easing inflation is the most underestimated risk by financial markets in 2024, at least double the rate of any other response.
—More than one-half (57%) of respondents expect recovery rates on defaulted senior secured debt will remain below historical norms in the year ahead, with non-bank lenders more likely to believe this (66%) than bank lenders (53%).
—ESG considerations fell in importance to lenders, with 41% of respondents saying that ESG factors minimally impact their lending decisions, if at all, compared to 27% last year.
“It’s encouraging to see more optimism in this year’s survey, but the expectation of ongoing low recovery rates likely starts to affect behavior both before and after filings,” said Dave Katz, a senior managing director in the senior lender advisory practice within the corporate finance and restructuring segment at FTI Consulting. “It’s clear, formidable challenges remain before the economy and markets are truly free to run.”
FTI Consulting surveyed large bank and non-bank lenders between Dec. 7 and Dec. 19, including commercial banks, investment banks, private credit platforms, CLOs and BDCs. Respondents included chief credit officers, workout group leaders, managing directors, senior vice presidents, executive directors, directors and vice presidents.
The survey generated approximately 250 responses.
Perhaps even more guarded are the CEOs in the United States who participated in a survey from The Conference Board.
The Conference Board said these top executives are bracing for a recession and elevated inflation.
Despite these issues topping their worry list, just 37% of US CEOs say they are prepared for a recession, and 34% are prepared for high inflation, according to that survey.
“Amid elevated inflation and a potential downturn, CEOs’ plans to grow profits in 2024 include introducing new products/services, investing in technology, increasing sales via marketing, and entering new markets,” The Conference Board said in another news release.