(Graphics courtesy of Summit Bank)
There was widespread hand-wringing early in 2023 about whether the economy would plunge into recession in 2024 from Fed tightening. Early on, however, the signs were there that broad-based economic contraction had a low probability – the American economy was stronger and hotter than mainstream media was reporting. As the year progressed, recession fears waned. But why? An inverted interest rate yield curve has been one of the most reliable recession predictors over the past 70 years, and we are now past the two year mark of higher short term rates than long. The yield curve barometer did have a false positive back in the 1960s, and it’s happening again today.
For starters, the job market has been stubbornly strong. A dramatic increase in interest would normally precipitate a jump in unemployment as, for example, financed construction projects are shelved or get put on hold, home buying dries up from a shrinking pool of qualified buyers, and consumers curtail discretionary purchases — especially those on credit. These things have happened, but not to the degree many anticipated, and without much of the expected fallout. Q4 GDP growth for the U.S. was 3.3% — down from a remarkable 4.9% Q3, but still incredibly strong given recession worries.
Employers have spent years trying to get their teams staffed with the quality and quantity of people needed to run efficiently, so are more likely in the past to keep higher payrolls through slow period, especially if they believe that period will be short. Job postings have been declining but we’ve not see a corresponding spike in unemployment. Oregon’s most recent jobless rate (Dec. 2023) is 3.7%. The only lower December figure in the past decade was 3.4% in 2019. Rates in Deschutes Co. are even lower than the state as a whole.
Let’s not forget that in less than 36 months the U.S. doubled its balance sheet – adding $4 Trillion to the economy since mid-2020. That much money being dumped into the economy is the driver behind “transitory” inflation that quickly became persistent, and that persistency called the Fed to action on interest rate increases. While the Fed is now trying to shrink the money supply, it does not happen overnight. Locally, we are hearing from commercial and residential builders in our region that cash sales have taken up slack from fewer buyers with financing.
The punchline: expect a soft landing for the U.S. economy and even less impact for the Central Oregon Region. That does not mean all industries or all businesses will have an easy go of it; some will feel more pain. If your retail or manufacturing business has been logging record sales of items people aren’t prepared to buy again this year, 2024 there could be stress on those businesses. Overall, however, we employers in the region to exhibit a greater level of resilience to the challenges that surface this year compared to those of the Great Recession.
The next 12 months promise to be dynamic for the banking industry. High interest rates precipitated deposit run-off from large and small banks alike, as depositors were incentivized to seek higher returns. That has the effect of shrinking the pool from which banks can lend, and lending at some institutions has come to an abrupt halt in order to preserve needed liquidity.
Buoyed by strong liquidity, Summit Bank had another record year for lending in 2023, and, bank-wide, it grew deposits. Similar to our peers, Summit Bank has an emphasis on gathering business and commercial deposits in the year ahead to fuel further loan growth for our existing and new clients, rather than to shore up an anemic balance sheet. We expect interest rates to fall, but at a more measured pace than some are predicting. The range of forecasted Fed decreases over the next four quarters varies from 2 to 11. Again, the stronger-than-expected economy will moderate Fed pressure for rate declines to just 3-4 in the year ahead for a total of 75-100 basis points. Deposit rates will likely see a smaller decline as the hangover for surge deposits continues combined with bank deposit betas (the rate at which banks increase deposits relative to Fed Funds rate increases) still catching up to market.
What does all of this mean to business owners and professionals in Central Oregon? Bank Local. By banking at a local bank in your community, you can help to ensure that your funds stay in the community. This means more capital deployed and circulated in this community to support investment, job creation and the health of local businesses. It is clear that Treasury rates offer an attractive option, for now, to those seeking higher yield on their funds. A question posed by community banks: if you or your business move funds to the Treasury, will the Treasury provide you the loan you need in the future? Summit Bank’s model of bank local, lend local, and support local is one we believe to be a critical element to support the future growth and financial sustainability of the region. Over the last nine years, Summit Bank has been warmly welcomed to the Central Oregon Community and, for that, we thank you. But we want to do more.
That is why, in 2024, encouraged by demand and despite economic headwinds and financial uncertainty, Summit Bank is doubling down on its investment in Central Oregon. The bank has created new job openings in the region and is in the process of completing the renovation of a building it purchased in downtown Redmond into a second Central Oregon Branch Office, slated to open in Q2 2024 in addition to our existing Bend Branch Office. At Summit Bank, no business large or small is overlooked. You are appreciated and revered for what you do. We pledge to partner with area business owners and decision makers every step of the way as we navigate through this year and beyond.
