Where We Stand in 2018: Period of Growth


After the 2008 financial crisis, the United States entered the Great Recession, with unemployment rates as high as 10 percent and GDP growth contracting at -2.8 percent in 2009. The country entered the expansion business phase in the third quarter of 2009 when the GDP growth rate was once again positive at 1.3 percent.

The country's recovery was helped by the American Recovery and Reinvestment Act, which cut taxes for low-income Americans and provided economic stimulus for certain growth programs. The Fed also slashed interest rates to historic lows to encourage borrowing and economic growth. The result has been a long period of economic expansion - or growth.

How the U.S. Measures Growth

Whether or not the economy is growing depends on a variety of factors. The Nation Bureau of Economic Research measures the business cycle stages of the U.S. using economic indicators that include:

Quarterly GDP Growth Rates
Employment and Wages
Industrial Production
Consumer Price Index (Inflation)
Where We Stand on Growth in 2018

The U.S. economic outlook for 2018 remains healthy, although somewhat guarded in the wake of the recent stock market correction. Wall Street staged a dramatic turnaround after the Dow dropped over 2,100 points during the first week of Feb. 2017. In the end, the Dow had lost only its gains from the beginning of 2018. This was a correction and not considered a crash or signal of an economic downturn for several reasons.

U.S. economic growth is on pace to remain in the ideal range of 2 to 3 percent annually (2.5 percent forecast), and unemployment is forecast to remain at its natural rate. The Consumer Price Index rose 2.5 percent in 2017, which was the largest 12-month increase since 2012. Inflation is expected to be 1.9 percent in 2018, which remains under the Fed's 2.0 percent target rate. The Bureau of Labor Statistics anticipates as many as 20.5 million new jobs being added between 2010-2020 in the U.S., with 88 percent of all occupations experiencing growth.


The Current State of Lending

The state of lending for U.S. financial institutions remains positive. According to the latest FDIC quarterly report, quarterly net income from FDIC-insured institutions was up 5.2 percent in Q3 2017. 83.5 percent of all banks reported year-over-year growth in earnings. Even with increased profits, net charge-off rates and loan-loss provisions are on the rise. In the third quarter, banks reported $11 billion in uncollectible loans, up 8 percent from the prior year. Banks also increased their loan charge-off provisions by $2.4 billion, which is the largest increase since Q4 2012.

What 2018 Holds for Banks and Lending

2018 is likely to bring mixed results for lending. On the one hand, the Trump tax cuts have already proven to be a profits boon for banks. Despite a few banks taking a one-time earnings hit in the fourth quarter, most are coming out ahead thanks to the drastic reduction in the effective corporate tax rate.

The uncertainty lies in what will happen with the economy in 2018 and beyond. Should inflation become a serious issue, there's a better than good chance that the Fed will attempt to counteract it with additional rate hikes. In the meantime, consumer spending is up as is wage growth, which is good news for lenders.

There could be as many as four interest rate hikes in 2018 at the most extreme, and we could see the base rate rise above 2.0 percent for the first time since the last financial crisis. In fact, the Fed's median forecasted federal funds rate for 2018 is 2.1 percent. Should this happen, adjustable rate loan products could put a squeeze on borrowers and lead to a spike in loan defaults.

Since a 2.0 percent base interest rate is still relatively low, banks may not have to worry about these issues in the extreme until the following year if rates continue to rise. Even so, it helps to be prepared for any changes in the business cycle, particularly in light of the recent stock market correction.

Loan Portfolio Optimization Through an Asset Management Company

It's simple enough to figure out what the most profitable move would have been when you're looking into the rearview mirror. When dealing with business cycles, trying to predict the market can be a challenge. It's unlikely that we will hit a peak phase this year, but changes have already occurred that will impact banks and lending, both positive and negative.

One of the best ways that lenders can protect their bottom line results is by partnering with an experienced asset management company to facilitate loan portfolio sales. A bank can choose between selling loans and buying loans in different asset classes to maximize profits and minimize risk depending on the current market conditions.