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Lending Climate in 2013: Partly Cloudy With Some Sunny Spots

Date: Feb 04, 2014 @ 07:00 AM
Filed Under: Current Environment

Each quarter Phoenix Management distributes its proprietary “Lending Climate in America” survey to more than 5,000 lenders nationwide. Now that 2013 has come and gone, we at Phoenix thought it was an appropriate time to take a look back on our survey results from the year. From a macro-economic perspective, our surveys indicate that conditions improved markedly from 2012. Some of the highlights that contributed to this improvement included:

  • The S&P Index surging 26%
  • The Fed easing its bond-buying program
  • Congress passing a budget through 2015
  • Unemployment dropping from 7.9% to 6.7%

The lenders we surveyed did not go from the depths of despair to a party on Wall Street in even increments during the year. Their perceptions and impressions reflected all that 2013 had to offer, including some of the moments we would like to forget, such as the first government shut down in the last 17 years and the first-month flop that was, to name a few. 

That’s what makes our 18 years of doing the “Lending Climate in America” survey so interesting. We are able to obtain the perspectives from lenders on how current events, whether positive or negative, are impacting the lending market, their borrowers, the customers they serve, and the marcroeconomic climate. In addition to the general improvement in economic conditions we witnessed throughout 2013, the following sections highlight areas in which we thought certain trends or reversal in sentiments were worth noting.  

GPA Trending in Positive Direction

For each survey, we calculate a weighted average response to the question, “How do you expect the United States economy to perform on a scale of A through F?” Lenders are asked to assess economic performance over the next six months and for the period six months and beyond. The answers are then weighted and converted to a grade point average (“GPA”) based on the 4.0 grade scale. 

The surveyed lenders came into 2013 fairly pessimistic about the short term economic prospects of the U.S. economy. The GPA associated with the Q1/13 survey was a meager 1.83 or a ‘C-‘ grade. Their expectation regarding the near-term economic GPA increased each consecutive quarter in 2013, finishing the year with a 2.02 GPA or a ‘C’ grade, which equates to a very solid 19.1% increase during the course of the year.

For the longer term period (six months and beyond), the expectation of our surveyed lenders were not as robust. At a 2.15 GPA or ‘C’ grade, the long-term economic expectations started the year on solid footing relative to the short-term economic GPA of 1.83. The longer term GPA fluctuated up and down from quarter-to-quarter but ended the year 6.8% higher at 2.24, but still a ‘C’ grade. The gap between the short-term economic GPA and longer term economic GPA shrank from 0.32 at the beginning of the year to 0.22 at the end of the year. As the economy improves, the future is less bright on a relative basis.

Economic Factors Impacting Economy

Lenders were consistent throughout 2013 in their belief that the U.S. Budget Deficit is the biggest factor impacting our economy, and the strength of their sentiment increased throughout the year -- from 59% in Q1/13 to 64% in Q4/13. As other areas of our economy show steady improvement, our budget deficit appears to have become a relatively more important factor. It does appear as though progress is being made, as both parties were able to come to an agreement on a budget through 2015. As 2014 is a mid-term election year, it will be interesting to monitor the effects the elections have on U.S. Budget Deficit and business in general.

One of the biggest economic stories of 2013 was the domestic energy revolution that continued to take hold. Aided by technological innovations, energy companies are now able to affordably access fossil fuels that were not long ago thought to be unattainable in a cost-effective manner. In Q1/13, lenders ranked Unstable Energy Prices as the 2nd most likely factor to negatively impact the economy garnering 57% of the responses. This number plummeted throughout the year as lenders began to realize the economic gold mine that sits below us in the form of fossil fuels. The survey finished the year with only 7% of lenders choosing Unstable Energy Prices as a potential negative impact on the economy.

Housing was another bright spot for the economy during 2013, with the Case-Shiller Index (20-city index) rising 13.8% through the last-twelve months ending November 2013. However, many wonder how sustainable these price gains are in the face of rising interest rates and persistent unemployment/ underemployment. Respondents of the survey certainly worried about the sustainability of the housing gains. The response, ‘A Sluggish Housing Market’ began the year garnering only 18% of the responses but steadily rose throughout the year to finish at 34% in Q4/13, ranking as the 2nd greatest risk to economic stability.

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