Bank Failures, Like Earlier Shocks, Raise Odds of Recession

The Wall Street Journal2023-03-17

Banking-sector turmoilraises the odds that the U.S. economy, already widely seen as prone to recession, might actually tip into one.After a week offederal interventionsto stabilize the banking system ...

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Comments

MIe
2023-03-18
MIe
Bank crisis open opportunity to invest equities on volatility and relief rally for profits
All in Tesla
2023-03-18
All in Tesla
More pain to come
天天有錢賺
2023-03-18
天天有錢賺
O
Worpeng2002
2023-03-18
Worpeng2002
Ok
NPC69
2023-03-17
NPC69
K
BKT
2023-03-17
BKT
Pls like thanks

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For the first three of those recessions, the economy was already weak and the shock was the final straw that removed all doubt about whether a downturn was at hand.The collapses of Silicon Valley Bank and Signature Bank, followed by stress atCredit Suisse GroupAG andFirst 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 itsrobust 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 ofSVB’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 increaseshad 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, amajority of economistssurveyed 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 this often come down to intangible human emotions. The main goal of policy makers this past week wasto stop the panicthat led depositors in small and medium-size 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. He added that Fed surveys show some large and midsize banks were tightening loan standards before SVB’s sudden collapse.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 SecretaryJanet Yellentold lawmakers Thursday. The Biden administration, she added, was intent on demonstrating its “resolute commitment” to keeping deposits safe.Markets have yet to stabilize. Stocks rallied Monday after the Federal Deposit Insurance Corp. backstopped the deposits of SVB and Signature Bank over the weekend. Then stocks tumbled when the scare over bank stability spread to Europe and Credit Suisse. On Thursday, they rose when Credit Suisse receivedSwiss National Banksupport and several large U.S. banks lent support to a smaller rival,$First Republic Bank(FRC)$.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 about the economy. 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. Based on the latest federal data, the Atlanta Fed estimates that consumer spending was growing at a healthy 3.4% annual rate in the first quarter before the SVB shock.Confidence is shaky for Americans like Hannah and Cameron Thompson. Three years ago they opened the Gold Lion Farm general store in Jackson, Ga., which sells natural bath and home products. It generated about $350,000 in sales last year, and it supports three additional full-time employees.With business going well, the couple recently took a gamble on the hundreds of tourists who regularly flood the town as one of the main filming locations for theNetflixshow “Stranger Things.” They launched their Stranger Tours business, with startup costs of about $35,000, including vehicles and advertising.The couple are now worried that they made a bad bet. Holiday spending at the store was flat and then weakened last month. Stranger Tours got off to a strong start—until this past weekend, when Ms. Thompson noticed visitors to the website adding tickets to their virtual shopping carts as usual, and then never checking out.If business declines, she might have to reduce staff. “When one of the largest bank failures in American history happens, it really all of a sudden dawns on you that we’re not exactly sure what’s happening with the economy,” Ms. Thompson said.Having managed other small businesses during past recessions, she still doesn’t think she is currently in one. “I think there’s a lot of mixed signals,” she said, pointing out that a lot of her friends in blue-collar professions are doing fine.The Fed is a wild card in the economic outlook. Interest-rate increases were a culprit in earlier recessions. Higher rates squeezed real estate and other credit-sensitive sectors, eventually leading to a full-blown downturn. 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 March 21-22 with a decision to make about rates, and Fed ChairJerome Powellhas 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.“While we agree that more tightening will likely be needed to address the inflation problem if financial stability concerns abate, we think Fed officials are likely to prioritize financial stability for now,” Goldman Sachs economists said in a recent note to clients that predicted no rate change for the central bank at its next meeting.Mr. Clarida, the former Fed vice chair, said the central bank’s decision could come down to how markets behave between now and the meeting’s conclusion on Wednesday.There are other scenarios for the economy that don’t fit neatly into recession vs. expansion descriptions. Some economists have been arguing that the U.S. has been going through something they call a rolling recession, which storms through some sectors but not others.For example, residential-home construction has been contracting since spring 2021, according to Commerce Department residential-investment data, even as other sectors such as travel and dining have mounted robust turnarounds. While the technology sector has been laying off workers after overexpanding during Covid, gas-and-oil production boomed in a race to get fossil-fuel supplies to Europe afterRussia’s invasion of Ukraine.If the Fed keeps raising interest rates, “they are going to push the economy into a deep recession, on top of the rolling recession we’ve been suffering from,” saidSung Won Sohn, an independent analyst and former Wells Fargo economist. “It would be a double whammy. The rolling recession was bad enough.”In a rolling-recession scenario, the SVB shock would intensify problems in some sectors—notably technology—without spilling over broadly into others. Silicon Valley Bank counted on tech companies and startups as its main customers.Sabrina Carrozza, who owns a small public-relations firm that advises tech and sports companies, is now feeling the effects 3,000 miles away.She lost 40% of her clients in May when cryptocurrency prices tumbled. She laid off four full-time contractors and dipped into savings to pay her Long Island mortgage. This past week, a major new tech startup she was about to sign on as a client pulled out suddenly, citing concern about the bank failure. Another current client, a tech startup, is wavering.Her own confidence in the economy is shaky.“I’m extremely worried,” she said. “I feel like I have to prepare myself for another 12 to 24 months of this, and that’s scary.”","kind":"news","is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":9943393202,"gmtCreate":1679099763606,"gmtModify":1679099767105,"author":{"id":"3577182936341023","authorId":"3577182936341023","name":"MIe","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"hat":"https://static.tigerbbs.com/f84d87792f02cf78e80ee34979fd31e5","crmLevel":6,"crmLevelSwitch":0,"idStr":"3577182936341023","authorIdStr":"3577182936341023"},"htmlText":"Bank crisis open opportunity to invest equities on volatility and relief rally for &nbsp;profits&nbsp;","listText":"Bank crisis open opportunity to invest equities on volatility and relief rally for &nbsp;profits&nbsp;","text":"Bank crisis open opportunity to invest equities on volatility and relief rally for profits","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9943393202","repostId":1186170823,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9943308992,"gmtCreate":1679093665917,"gmtModify":1679093669949,"author":{"id":"3577580366301047","authorId":"3577580366301047","name":"All in Tesla","avatar":"https://community-static.tradeup.com/news/8db11f6e6a9a2a52850e734188850dc2","vip":1,"crmLevel":9,"crmLevelSwitch":1,"idStr":"3577580366301047","authorIdStr":"3577580366301047"},"htmlText":"More pain to come","listText":"More pain to come","text":"More pain to come","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9943308992","repostId":1186170823,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9943303678,"gmtCreate":1679092836195,"gmtModify":1679092839568,"author":{"id":"3569157961325264","authorId":"3569157961325264","name":"天天有錢賺","avatar":"https://static.tigerbbs.com/a87d6821c87a3f5345fd3b39e87a3710","vip":1,"crmLevel":4,"crmLevelSwitch":0,"idStr":"3569157961325264","authorIdStr":"3569157961325264"},"htmlText":"O","listText":"O","text":"O","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":4,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9943303678","repostId":1186170823,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9943974257,"gmtCreate":1679082714680,"gmtModify":1679082718121,"author":{"id":"3582000520700468","authorId":"3582000520700468","name":"Worpeng2002","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3582000520700468","authorIdStr":"3582000520700468"},"htmlText":"Ok","listText":"Ok","text":"Ok","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9943974257","repostId":1186170823,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9943942007,"gmtCreate":1679067382010,"gmtModify":1679067385308,"author":{"id":"3584779133668268","authorId":"3584779133668268","name":"NPC69","avatar":"https://static.tigerbbs.com/47e7ac55312ae8dd1c9e7cb92adad089","vip":1,"crmLevel":5,"crmLevelSwitch":0,"idStr":"3584779133668268","authorIdStr":"3584779133668268"},"htmlText":"K","listText":"K","text":"K","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":13,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9943942007","repostId":1186170823,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9943946109,"gmtCreate":1679067317002,"gmtModify":1679067321158,"author":{"id":"3570853427202414","authorId":"3570853427202414","name":"BKT","avatar":"https://community-static.tradeup.com/news/15cb8e8f0a7c44ca01c83b3bfdddbd86","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3570853427202414","authorIdStr":"3570853427202414"},"htmlText":"Pls like thanks&nbsp;","listText":"Pls like thanks&nbsp;","text":"Pls like thanks","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":9,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9943946109","repostId":1186170823,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":173,"commentSize":6,"repostSize":0,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; 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