If economic headwinds are to be believed, 2024 is shaping up to be characterized by modest growth, gradually falling interest rates, and continuing low levels of unemployment. It’s a much more optimistic position than businesses and consumers faced at this time a year ago.
However, an environment of uncertainty remains, particularly in the housing market, where consumer sensitivity to higher interest rates and lower housing supply are keeping prices elevated in many parts of the country, pricing some consumers out of the market.
The Federal Reserve’s interest rate pivot in the fourth quarter of 2023 signaled to economists that growth has slowed, and inflation has moderated enough that the U.S. may avoid a recession predicted by many economists and market experts, says Jeramey Lynch, JPMorgan Chase Managing Director and Regional Head of Investment and Advice in the Midwest.
Following this collective guidance, many businesses were prepared for an economic slowdown in late 2022 and 2023 by cutting costs, holding off on capital purchases and protecting their margins, Lynch added. This theoretically places them in a better position now to weather any slowdown that may or may not be imminent.
As a whole, 2023 was marked by banking industry disruption, geopolitical risks and sustained macroeconomic challenges, Lynch said. While many of those risks still remain, economic indicators alone suggest a more balanced outlook in 2024 for business owners and consumers alike, he added. Lower interest rates and moderating inflation removes many of the unknowns that were spooking the market and forcing businesses to making difficult financial decisions.
“Many businesses were prepared for higher interest rates last year but (no one knew) when those increases would stop,” Lynch says. “The market doesn’t like that uncertainty. There’s more confidence and clarity now.”
Yet early January saw some chaos in the markets that might put such optimism on pause – for now. While Federal Reserve officials in December concluded that interest rate cuts are still likely this year, the minutes of the Fed’s December meeting released just after the New Year gave little indication when those cuts may occur.
According to CNBC and other news outlets, the Federal Open Market Committee, responsible for setting rates, agreed to hold its benchmark rate steady in a range between 5.25 percent and 5.5 percent. Members indicated they expect three quarter-percentage point cuts by the end of 2024.The committee’s December minutes indicated that “clear progress” had been made to bring down inflation, which sets the stage for interest rate cuts.
“Despite the volatility of 2023, it has been encouraging to see the resilience of U.S. businesses and the firm pace of US consumer spending growth that has contributed to the year’s stronger economic picture,” said Ginger Chambless, Head of Research, JPMorgan Chase Commercial Banking.
Credit stress and spreads are top of mind
The higher credit spreads “suggest little signs of stress or concern among credit market participants,” Chambless added. Credit spreads, defined as the extra cost a business borrower has to pay above the risk-free rate, are at the tighter end of historical ranges, the report stated.
Essentially many businesses were prepared for a tougher year than most experienced. The prediction is that 2024 could still witness stress in certain sectors of the credit complex.
For example, commercial real estate loans, leveraged loans, and some areas of consumer credit – like autos and credit cards – and high yield corporate credit could be vulnerable. That credit stress could extend to overleveraged business owners who might otherwise not have the funds for investment, equipment, or the like.
New loans with floating rates decreased significantly in 2023 because of the mid-term uncertainty. The demand for business loans might increase in 2024 with pent-up demand and a healthier outlook.
Interest rates are still the determining factor
Interest rates have been quite volatile over the past several months but are generally higher than they were a year ago, even if the expectation is that they will fall this year. Member First Mortgage LLC President and CEO Jerry Reed says that mortgage rates falling to under 3 percent in 2020 because of economic concerns over the COVID pandemic is still being felt by the market today.
He says many consumers are hypersensitive to mortgage rates above 3.5 percent. As of January 11, 30-year fixed rates were hovering near 6.5 percent, one percentage point lower than late 2023.
“You have this whole generation of (millennials) that has never seen anything like the (extremely high) interest rates of the early 1980s,” Reed says.
Morningstar is predicting 150 basis points in rate cuts in 2024, which would match the Federal Open Market Committee’s indication that the federal funds rate will settle in the 5.25 to 5.5 percent range. Lynch says this market optimism means businesses looking to add debt can do it more affordably now. Lenders can work with busi8ness owners to discover what their goals are for 2024, whether growth or balance sheet adjustments, and provide lending options accordingly.
“The term we’re using is that we expect (rates) to loosen up,” says United Wholesale Mortgage (UWM) Chief Strategy Officer Alex Elezaj.
There is a connection between what consumers hear about Fed actions and their psyche, Reed says, which can influence conservative spending practices. Many homebuyers working with credit unions serviced by Grand Rapids-based Member First Mortgage are doing so out of necessity because of new jobs or lifestyle changes, Reed adds.
“There’s a fear in the psyche of the average consumer that the economy isn’t (as healthy) as it should be,” he says.
There’s also no guarantee that rates will fall in 2024. Reed believes the Fed won’t be afraid to alter its strategy if the jobs market heats up or inflation rises.
“The Fed may be done (increasing the primate rate) until there’s an economic reason for them to change course,” Reed says.
Businesses are not immune tomacroeconomic challenges
A JPMorgan Chase’s Business Leaders Outlook survey conducted in November shows proof of this general business optimism. More than two-thirds of small and midsize business leaders are optimistic about their company’s performance. The majority of midsize business leaders are expecting increased revenue/sales (61 percent), though these expectations are more tempered compared to previous years.
Meanwhile, the 69 percent of small business leaders expecting increased revenue/sales is in-line with the highest levels recorded by the survey. Both small and midsize leaders anticipate greater profits (66 percent and 55 percent, respectively).
Business owners indicated in the survey that labor and inflation issues remain worrisome. More than one-third of small-business leaders (35 percent) report inflation as one of their most significant challenges, with rising taxes (19 percent) and the ability to grow sales/revenue (18 percent) are also top concerns.
Reed senses that business investments and changes will continue to rely heavily on AI and technology in 2024. That emphasis and the mass movement to conducting business online is creating challenges in other markets, and the process of how goods are bought and sold by both consumers and commercial entities. He believes the opportunities for business operating exclusively or primarily online are extensive.
“But that doesn’t help the strip mall down the street or other (retailer),” Reed says. “If you’re not an online business it can be tough.”
The impact of mortgages could be significant
Organizations in the retail sector and other B-to-B businesses will be impacted by the activity in the residential mortgage sector. Despite rising interest rates in recent years, home prices have surprisingly continued to rise as well, says Elezaj. While that’s good for existing homeowners, higher prices and interest rates have had an adverse impact on disposable incomes for many households with earners living paycheck to paycheck.
Prospective homebuyers sensitive to current interest rates can take advantage of newer products that can make homeownership more affordable, helping them to spend in other areas, Elezaj says.
“We know that consumers want options,” Elezaj says, whether they have tighter financial budgets or not. Business owners or fledgling entrepreneurs who want to contribute their own money to a new or existing business can include household cash flow through such products as temporary rate buydowns, which offer lower frontloaded rates for one to a few years, shifting higher rates to years within the term when interest rates are expected to be lower.
“Many (homeowners) like that because it gives them more flexibility,” Elezaj says. “They are looking for the right rate and right service that’s best for them.” He expects the market for refinancing to be robust later in the year if rates do fall particularly for recent homebuyers who can get better rates than were available in 2022 and 2023.
The market has provided more options and non-traditional products for homeowners as well. This was important in 2022-23 when some banks when some banks downsized their mortgage, including Wells Fargo, which focused on home loans for existing bank and wealth management customers and borrowers in minority communities, the company stated in January 2023. Elezaj says some banks have tightened their lending standards.
“We saw that happen with a number of banks because (they felt) it was one of the best ways they could (improve) their balance sheets,” Elezaj says.
Personal and commercial insurance costs could also impact capital availability and corporate growth. Some carriers have exited personal and/or commercial markets in California, Florida, and other areas of the country because of increased catastrophic weather events ranging from hurricanes and tornadoes to wildfires. According to a June 2023 Independent Agent Magazine article, Allstate, Farmers, Nationwide and State Farm were among the numerous carriers to reduce or eliminate auto and personal insurance markets in specific geographic areas.
Because of higher insurance costs and interest rates, investors have come back into the real estate market but are increasingly selective and intentional when making a purchase decision. Wealthier consumers will take advantage of any lowering of rates, but first-time homebuyers may be out of luck partially because of a lack of inventory.
One reason? The idea of how Baby Boomers plan to retire has evolved, Reed says. More seniors are remaining in their homes rather than entering assisted living facilities for end-of-life care.
“Many (seniors) are more unwilling to sell their properties,” Reed says. “The (housing) market is fighting over a much smaller pool of loans and options.”
Surprise – there was a minor recession in 2023
While the U.S. has avoided a macro recession for now, Lynch says that parts of 2022 and the first three quarters of 2023 experienced a “rolling recession.” This refers to the fact that various industries experienced negative growth for short periods of time, such as technology in 2022 and energy and the financial sector in parts of 2023.
Companies in these industries may have experienced an earnings recession as well with consecutive quarters of earning declines. Yet GDP growth was largely flat or moderately higher. The U.S. Department of Commerce’s Bureau of Economic Analysis (BEA) indicated that real GDP increased by 4.9 percent in Q3 and 2.1 percent in Q2. Meanwhile the real Gross Domestic Income (GDI) rate increased 1.5 percent in the third quarter, according to the BEA.
Avoiding opportunity costs of inaction and too much case
The ongoing resilience of the U.S. economy does may result in some dangers for business owners, Lynch says. Falling interest rates could create an opportunity cost loss for those investors and entrepreneurs who leave too much money in cash and cash equivalents, as other investments may offer the potential for higher returns.
“Many liquidity balances are high (because) higher interest rates are perceiving as a positive for savers,” Lynch says. But that liquidity comes with risks in 2024 with lower rates because there could be higher spread on interest payments. Keeping funds in cash could cause a reinvestment risk because business owners are “accepting the market rate at that time, which could be lower,” he adds.
Additionally, businesses “want to set their balance sheet is a positive note” and falling interest rates allow for more opportunity for such actions, Lynch says.
