WASHINGTON–There are “multiple indicators” an upcoming economic slowdown is coming, according to a new report from the Treasury.
The 2023 annual report of the Treasury’s Office of Financial Research (OFR), which is the department’s research arm, found financial stability risks increased in 2023 and remains elevated.
Among the report’s key findings related to financial stability has to do with the commercial real estate (CRE) market.
“Credit risks have built up in the CRE sector as borrowing rates have increased, pushing valuations significantly lower,” according to the report. “In particular, the office sector continues to face difficult financial conditions and struggles with weak demand, increased tenant vacancies, and declines in valuation following the rise of the work-from-home trend. Regional, smaller, and community banks are more exposed to CRE lending and, therefore, more vulnerable to increased default rates than the largest banks.”
The Role of the Fed
The Treasury report suggests the Fed has played a big role in increasing the challenges to multiple industries.
“The monetary tightening policies begun in 2022 by the Federal Reserve may have created stressors for the banking, funding, and real estate markets in 2023,” the report reads. “Many banks’ fixed-income securities portfolios showed large unrealized losses due to rising rates, which contributed to the demise of some of those banks.
“Following the regional banking crisis in the first half of 2023, banks’ balance sheets shrunk and lending to small, medium, and (to a lesser extent) large corporations declined,” the report continues. “As mortgage rates reach their highest levels in 23 years, the inventory of homes for sale remains tight, pushing prices higher and contributing to the decline in home affordability.”
Looking Forward
Looking forward, the reports that prospects for a recession in the medium term have risen.
“The policy posture of the Federal Reserve to manage core inflation by raising interest rates has increased borrowing costs for both companies and households, potentially dampening economic growth,” the OFT wrote. “Capital goods orders and shipments appear to have peaked through this year, with business capital investment falling as prices continue to rise. Higher prices for food, services, and shelter affected household balance sheets throughout the year and will likely result in diminished household savings and retail consumer spending. While the economy has proven to be resilient, forecasters have a dim outlook for GDP growth in 2024.”
The full report can be found here.
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