Garnet Capital Advisors Blog

Are we headed for a recession in the very near future? Many suggest we are.

Interest rates have a big impact on the economy, and with the Fed recently announcing an increase, economists are expecting changes.

Banks have been waiting for this announcement, as the prolonged low-interest rate environment we've been submerged in for years has been eating away at profit margins. While low-interest rates allowed banks to pay a lot less for the funds borrowed to lend and invest, it also put a squeeze on profit margins on their loans because it limited what they were able to charge on loans and earn on investments.

A rise in interest rates, on the other hand, potentially means bigger profits for banks, depending on the strength and types of loans that make up the overall loan portfolio. Depending on how fast interest rates rise over the next while, lenders can position themselves to capture growth.

A rate hike could also indicate a stronger demand for products like consumer loans and credit lines.

But if banks aren't prepared for any sudden moves in the market, they could miss out on the potential benefits of an increase in interest rates if the economy is not as strong as it could be.

This is potentially where we're at, depending on who you ask.

Are We Headed Towards Another Recession?

Foreign markets are reeling, and oil prices are plummeting. The GDP appears weak, and corporate profits are on the decline. A number of stock-market selloffs have been taking place as of late, and investors are increasingly seeking out haven investments such as US Treasuries, which is driving yields down.

The flattening yield curve that we've been seeing recently suggests that short-term rates are rising faster than long-term rates. In turn, this phenomenon points to a sluggish economy, prompting investors to switch their attention to the relative safety of Treasuries as riskier stocks are poised for losses.

This is usually a big sign that economists look out for when a recession is on the horizon. After all, the last five recessions that took place were preceded by an inverted yield curve.

But should we be bracing ourselves for another financial fallout?

The thing is, experts have been predicting another economic recession for a few years now. With many factors pointing to a potential recession, this could very well be reality, but only time will tell. Patterns that have recently emerged in economic data are showing signs of weakness, and the struggles that continue in Europe and the bursting bubble taking place in China could very well be the straw that breaks the camel's back and send our economy spiraling downward.

Central banks don't have as much wiggle room as they did back in 2008, either. At least back then, they were able to lower interest rates. But with the rates already at historical lows today, The Fed can't go any lower to avoid a recession.


What effect will the Fed's recent announcement of a rise in interest rates have on the economy, and banks' bottom line?

It could very well be that a recession is right around the corner. But then again, our economy just might be able to shake these otherwise negative traits. While many are forecasting an imminent recession, others are seeing the rosy side of things.

Case in point: hiring and employment are on the up and up, with 292,000 new jobs gained in December. That marks the fifth straight year where employment numbers increased by at least 2 million, which could quash projections of a dismal economy. In fact, these numbers are painting the picture of at least a strong employment milieu.

Banks Should Take a Look at Small Business and Consumer Loans

An interesting finding as of late is the fact that small- to medium-sized businesses have been particularly strong in contributing to the labor growth in the US. As larger companies continue to be more cautious, smaller businesses are swooping in to take a good chunk of the market share and expand their employee base.

Consumer sentiment is also showing signs of strength with such growth in employment numbers and more confident spending habits.

Bearing these facts in mind, banks have a real opportunity to revamp their loan portfolios and start catering more to smaller-scale businesses and consumers in an effort to hike profit levels.

So where are we at right now? Headed for another recession? Or in the midst of a strengthening economy?

Realistically, the economy can go either way, despite currently being on fragile ground. The Fed has been keeping a tight lid on interest rates since 2008's financial crisis in an effort to help the economy get back on solid ground. But with the US central bank recently ending its zero interest rate policy in mid-December to help stimulate economic growth, the cost of borrowing will obviously increase.

While we take a wait-and-see approach to the reality of the US economy's short-term future, banks and financial institutions now more than ever need to hedge their profits against a potential economic crisis should things take a turn for the worse.

The point is that no one can predict with impeccable accuracy what will eventually occur. Anything can happen, especially with technicals seemingly pointing in both directions.

What banks and credit unions need to focus on is putting high quality, short-term consumer and small-business assets on their books.

And Garnet Capital can help with that.

Browse our white papers today to find out how our 30+ years of industry-specific experience in providing valuation services to financial institutions can help your bank build profitable loan portfolios that can weather even the dimmest of economic environments.