By G. Michael Moebs
To be successful in 2016, every financial institution needs to make these economic “C’s” part of their planning and decision making.
Forecasting is always tricky, especially for more than six months. Yet, making prediction for this year is easier than in the past 10 years, because there is more known, and it comes as we see some stability. Overall, these 6 C’s, or economic factors. show the economy improving in the U.S. and even globally. The data for the 6 C’s for ’16 is compiled by Moebs Services and based on macro and micro data and Moebs’ surveys.
Let’s see how Consumer, Crude Oil, China, Cost, Credit and Compliance will affect even small depositories.
1. Consumer
The Great Recession started in December 2007 and ended in June 2009. The official referee of recessions is the National Bureau of Economic Research (NBER). NBER is a private, not-for-profit firm that measures recessions by the decline of Gross Domestic Product (GDP) for two consecutive quarters, while the end of a recession is measured by an increase in GDP for two or more consecutive quarters. GDP is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.
Moebs Services’ Transaction Accounts Metrics (TAM) goes beyond just production and consumption scales such as GDP and also incorporates the consumers’ financial behavior at a micro level. TAM measures the average consumer checking account and the total amount of money stock of checking. Each TAM measure is compared to a norm and related changes. In simple terms, when times are economically good average balances in consumer transaction accounts fall, and when times are bad balances rise as consumers store more money for unforeseen circumstances.
According to TAM, the Consumer Great Recession ended in September 2015. Average balances of transaction accounts started rising in the fall of 2008 when the mortgage bubble burst. By the first quarter of 2015, TAM had risen to $5,500 for an average consumer checking account and $1.7-trillion for the entire checking monetary stock – both historic highs for the U.S. Starting in the second quarter and repeating in the third quarter of 2015, TAM balances fell, signaling the end of the Great Recession for the consumer. While the Great Recession ended for GDP and its production and consumption measures in June 2009, it lingered for the consumer until September 2015
Takeaway: Look for the consumer to be back even more in 2016. Consumers have their own “C’s” for ’16. They will be Cautious about loans to avoid a repeat of the mortgage bubble. They will be Careful with checking, but will allow the balance and even their checking account to run off to greener pastures – financial institutions (FIs) need to be prepared for this. The consumer will be Cheap. Rates on vehicle loans, interest on deposits and fees on transactions will make them move accounts and dollars in search of the best deal. FIs better have a plan for the “new consumer” now that the Great Recession has ended for them.
2. Crude Oil
Crude oil will influence everything from APY to Reg Z.
Iranian oil will begin to flow in 2016. The Saudis will have their first true competitor in many years. Iranian oil production costs mirror the Saudis’ at less than $15 a barrel, yet it could take much of 2016 to reach capacity and efficiency. The United States can now export its light, refined sweet crude. While this is a very small part of worldwide oil production it is significant, because American oil is valuable for manufacturing and other industrial uses and carries a high price. The disruptions in Venezuela, China, Russia and other potential oil producers will be factors in keeping the price of oil low in much or all of 2016. The Saudis and other countries may attempt to use the price of oil to influence the U.S. elections. Since United States’ manufacturing and consumption is highly dependent on oil, and with the oil price low, this will make economic activity more positive.
Takeaway: The oil implication for FIs is price. Oil affects at least 60% of the U.S. economy; low oil prices lead to low commodity prices, which can lead to higher interest rates. Janet Yellen will be “forced” by the oil price to increase rates at least twice to avoid artificial inflation from the pump savings along with lower prices for groceries and other goods purchased by the American consumer.
3. China
The consumer is number one in Chinese government planning. Significant Chinese moves in 2015 foretell 2016 and its influence on the U.S. and the world stage. The Yuan is now part of the reserve currency mix. Birth rights have been softened, allowing more than one child in China. Disney is the Chinese government’s most valuable partner. The Star Wars movie is being released Jan. 9th in China and the Chinese government has been protecting Disney from knock- offs and preserving its intellectual property. The reason is the Shanghai Disneyland will open in the spring of 2016, with the Chinese government as a stakeholder. These moves by the Chinese government make the consumer not just number one in China, but also number one in the U.S. and globally.
Takeaway: China will heavily influence American exports to help slow its conversion to a more consumer-oriented economy. While Disney, Apple, Wal-Mart and other large American companies will benefit from this economic and social switch, the big winner will be smaller businesses that can move quickly and efficiently to meet Chinese consumer demand. The implication is, especially for Main Street Financial Institutions, are you ready to support small American exporters financially?
4. Cost
It will take a couple of years for Chair Janet Yellen of the Federal Reserve to get rates in line with inflationary conditions and other economic factors. Until this happens, American businesses from Main Street banks and credit unions to large consumer companies such as Apple, Disney and Wal-Mart will have to keep an eye on costs,
Takeaway: In financial services the average of non-interest expenses to asset ratio is about 3.00%. However, according to Moebs Services’ studies, the most efficient–those who attain their optimum at their economy of scale (EOS), operate at 2.00% - some even go below 2.00%. So, the financial service battle cry is “Reduce to a Deuce” – obtain your economy of scale as soon as possible. Or, if at your EOS, do whatever it takes to stay there.
5. Credit
The loan-to-asset ratio for all U.S. FIs in the good years of 2006/7 was about 60%. Today this ratio is about 54%. Every 1% increase in the loan-to-asset ratio translates to about $170 billion more in loans. Loans precipitate at least four times the influence in any market of the economy, so $170 bllion translates to about $700 billion in new money injected into the economy. The velocity of the loan amount is expanded with the velocity of money, just at four times each $1 loaned. If the loan-to-asset ratio would increase just 50% to about 57%, this would mean $2-trillion is added to the economy.
Takeaway: 2016 is time for all financial institutions to consider the affects of the consumer coming back to the economy as well as the influence of oil prices and the export potential of China on small U.S. businesses, and to start lending at levels similar to the best years. If so, Main Street Financial Institutions, especially businesses of fewer than 25 employees, could have their most robust lending year since the start of the Great Recession in 2008.
6. Compliance
Compliance is like the weather – there are highs and lows. Yet consumers and businesses long for a stable, predictable climate. With the mortgage bubble bursting in 2008, passage of the TARP Act in 2008 followed by the Dodd-Frank Act in 2010 (including the start of the Consumer Financial Protection Bureau CFPB), the compliance weather has been most turbulent. The 2014 election gave control of both the House and Senate to the Republicans, resulting in some compliance activity and conditions became less turbulent and more stable.
Takeaway: With the coming election in 2016 it appears that the CFPB, along with other regulators, have become mild like the current weather in their releases of new regulations. For financial institutions this bodes of an opportunity to advance checking and related services such as overdrafts. The CFPB is honing its radar on Payday lenders, which can help the overdraft climate. The overdraft climate appears stable until 2017 at the earliest, and this could get extended beyond 2017 depending on the election outcome. The time to make checking and overdraft moves is now.
Mike Moebs is CEO and economist with Moebs Services, Lake Forest, Ill.