Beyond the “solid” CPI inflation report released this morning, we have received some interesting fresh insights on consumer inflation expectations, income, and spending plans from the New York Fed’s Consumer Expectations Survey for April that are worth sharing. We also would like to update everyone on the latest highlights on the bank credit crunch from the Fed’s Senior Loan Officer Survey released this week and recent trends in bank liquidity, deposits, and C&I lending, to give people a sense of how the bank credit channel is faring since stress in the bank industry surfaced in March.
Let’s start with some of the good news still coming from households. Consumers are increasingly expecting inflation to come down over the coming year, while home price expectations are turning higher.
Consumer Inflation Expectations Continue To Drop
Even so, grey clouds are forming on the consumer spending front. The household income outlook, the high-octane fuel for overall consumer spending growth, is visibly bifurcating across income brackets. Higher income households, those with incomes above $100k, are expecting above average income growth to continue over the next 12 months, while those in the lower-income brackets, between $50-$100K, and those below $50k, report a sharper deterioration in expected future income gains.
Good Times Ending For Lower-Income Households?
Moreover, a strong start for elderly household spending plans in January appears to be quickly fizzling out. A generous 8.7% increase in the cost of living adjustment for Social Security at the start of the year was only a temporary panacea. Future spending plans for the 60 year plus category have fallen back swiftly to join the younger-age cohorts. The latest consumer expectations survey results remain consistent with our forecast of moderating inflation and slowing consumer spending growth in the quarters ahead.
Elderly Households Cut Back Sharply On Spending Plans
Sitting here in the Bay Area, we have been bracing for more bad news on the bank credit channel from the banking disruption in March and April. The good news on that front is that we only saw marginal additional shares of banks tightening credit standards across most bank portfolios compared to what we saw in the fourth quarter of 2022, though the degree of tightening from those banks, including increasing loan rate spreads, appears to be intensifying. While it is still early days since the bank disruption started, we view this as somewhat good news as it could have been much worse. Even so, bank credit standards have tightened substantially from a year ago and we saw an increasing share of banks reporting weaker demand for C&I and CRE loans, and a high percentage reporting weaker demand for autos and mortgages. Bottom-line, bank credit tightening will continue to weigh on consumer and business demand, doing some of the additional work for the Federal Reserve to dampen economic growth and inflation, but no sign yet that bank lending or private spending plans are about to fall off a cliff either. Right now softening economic conditions appear to be still pointing toward a mild recession rather than a harsher downturn.
In the wake of First Republic’s takeover by JP Morgan Chase now would be a good time to update what we are seeing around the Fed’s liquidity programs, recent bank deposit growth trends, and how that may be impacting weekly C&I lending. On this front, the news is also mostly reassuring. Total bank borrowing from the Fed is still well-below its post-SVB highs and has remained relatively stable for six consecutive weeks, suggesting bank liquidity needs overall have stabilized. Bank Liquidity Needs Have Stabilized
In the week of May 3rd we did see bank Discount Window borrowing plunge to just $5.3 billion from $74 billion the week before as First Republic joined JP Morgan Chase, but other credit extensions to support FDIC Guarantees went up by $58 billion. On net, bank liquidity needs have remained relatively unchanged for weeks and First Republic’s rescue doesn’t appear to have changed very much on that front.
On the deposit front, total bank deposits continue to decline, but the pace of decline appears to be stabilizing. So generally better news on this front too. The latest weekly data from the Federal Reserve shows bank deposit outflows moderated to 3.7% annualized at the end of April, while the average weekly annualized decline is around 14% since the beginning of March.
Finally, the metric you have all been waiting for, C & I loans declined at a modest 0.4% annualized pace last week after falling at an average 3.8% annualized pace over the past three months. While tighter bank credit standards are expected to continue to put downward pressure on business and consumer loan growth, the drag so far appears relatively manageable. Now if only we can get some good news on a resolution of the debt-ceiling deadline that is rapidly approaching.
To learn more, check out this week's U.S. Outlook Report.