Bank Tumult Raises Recession Risk

"Banking-sector turmoil raises the odds that the U.S. economy, already widely seen as prone to recession, might actually tip into one.

After a week of federal interventions to stabilize the banking system and market volatility driven by investor uncertainty, the economic outlook now hangs on two factors: private-sector confidence and Federal Reserve interest-rate policies.

Recessions in 1990, 2001, 2008 and 2020 were all accompanied by shocks, including, respectively, Iraq's invasion of Kuwait, the Sept. 11 terrorist attacks, the collapse of Lehman Brothers and Covid-19. For the first three of those recessions, the economy was already weak, and the shock removed all doubt about whether a downturn was at hand.

The collapses of Silicon Valley Bank and Signature Bank, followed by stress at Credit Suisse Group AG and First Republic Bank, represent a new threat, which could strain bank lending and the willingness of businesses to hire and households to spend. The economy's strength remains its robust job market.

"I don't think of this as being equivalent to Lehman, or 9/11, or Iraq invading Kuwait," Richard Clarida, global economic adviser at Pimco and a former Fed vice chair, said of SVB's collapse. "But whatever your views were on the odds of a recession before this, they've probably gone up."

Questions hung over the economic outlook before SVB failed. Large tech companies had been retrenching after overexpanding during the Covid health crisis. Fed interest-rate increases had frozen the real-estate sector and rattled stock investors. Corporate profits were falling in many sectors, and consumer moods soured during two years of a rising cost of living. Yet a strong job market trumped those challenges and kept the economy growing, leaving analysts to debate what might make it crack.

In January, a majority of economists surveyed by The Wall Street Journal said recession was already in motion for 2023. After the SVB failure, those who believed the U.S. would avoid recession were less sure. Goldman Sachs, for example, recently raised its estimate of the probability of recession to 35% from 25%.

Rubeela Farooqi, a forecaster at High Frequency Economics, said she wants to see more evidence before she changes her no-recession call. "Economic activity is not collapsing, and growth is still positive," she said. "But in the case of a banking crisis or a broader financial-market breakdown, households and businesses will retrench, and economic growth will slow." 

That means a higher recession risk, she said, though one benefit is it also could mean less inflation.

While economists pore over numbers, moments like these often come down to intangible human emotions. The main goal of policy makers this past week was to stop the panic that led depositors in small and midsize banks to pull their money out in search of safer holdings. When banks lose depositor funds and other sources of money, they pull back on lending, potentially leading to a credit crunch that typically slows household and business borrowing, spending and investing.

Bank-loan growth has been slowing since November, though it remained relatively robust before the SVB failure, up 10.8% from a year earlier at the beginning of March. Bank deposits, by contrast, have been contracting for months, a possible harbinger of slower credit growth that was already brewing before the collapse.

"You've now got an additional confidence challenge, which is the confidence of the bankers to extend credit," Mr. Clarida said.

Policy makers are aware that a failure to quash the early signs of a bank panic could ultimately lead to a credit crunch. "Americans can feel confident that their deposits will be there when they need them," Treasury Secretary Janet Yellen told lawmakers Thursday. The Biden administration, she added, was intent on demonstrating its "resolute commitment" to keeping deposits safe.

Beyond confidence in banks, confidence among businesses and households about profits and jobs will also shape the outlook.

Earnings among S&P 500 companies were down 3% in the fourth quarter from a year earlier, according to Refinitiv, a research company that tracks earnings releases.

When 2023 began, one big risk that hung over the outlook was that companies would respond to pressure on profit margins by cutting their payrolls to reduce costs. But they hadn't done so at the time of SVB's collapse. Payrolls rose by 815,000, seasonally adjusted, during the first two months of the year, an exceptionally large gain.

A survey of 1,400 small and midsize businesses by the executive coaching and advisory firm Vistage Worldwide Inc., conducted in partnership with The Wall Street Journal immediately before and during SVB's collapse earlier this month, provides some clues about whether the bank failure is a tipping point for businesses.

It found that 53% believed the economy would worsen in the next year, and only 9% said conditions would improve. Yet 54% said they planned to increase payrolls, and more said their profits would rise rather than fall. Even during the bank run, small-business leaders were confident in their own businesses even though they had doubts about the broader economy. Responses weren't much different before or after the SVB collapse.

Households have displayed similarly mixed views. University of Michigan surveys of households showed that sentiment tumbled to levels correlated with past recessions last June, because of concern about the rising cost of living. After inflation peaked, sentiment improved modestly and spending firmed.

The Fed is a wild card in the economic outlook. Interest-rate increases were a culprit in earlier recessions. The Fed, however, has often cut rates in response to shocks that threatened the economy. Officials at the central bank have been especially sensitive to the damage caused by financial crises since 2008.

Fed officials are due to meet next Tuesday and Wednesday with a decision to make about rates, and Chair Jerome Powell has a difficult choice. Inflation remains above the central bank's 2% objective, which before SVB's collapse had left Mr. Powell intent on continuing to raise rates. But he now also faces an imperative to calm markets. The Fed needs to decide next whether to raise rates again by a quarter-percentage point to slow inflation or to hold steady until markets settle.It could end up being a close call.

Mr. Clarida said the central bank's decision could come down to how markets behave between now and the meeting's conclusion on Wednesday." [1]

 

 Western elites walk with a burning torch around powder kegs. Unprecedented sanctions against Russia continue to push up prices. This forces banks to raise interest rates sharply. High interest rates reduce the value of banks' long-term bond investments. Meanwhile, price-squeezed consumers and businesses begin to withdraw deposits from banks en masse. This threatens massive bank failures that nothing can stop without further inflation and moral hazard. Banks stop lending and lead the economy into recession. This causes political instability in the West.

 

1. Banking Turmoil: Bank Tumult Raises Recession Risk --- Trouble at SVB and other lenders will test the Fed and private- sector confidence
Hilsenrath, Jon; Wolfe, Rachel.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 18 Mar 2023: A.6.