November is nearly upon us. Time for Community Banks to lock in your planning scenario for 2018.
So let’s look at some recent national economic data and commentary and see how these may impact bankers as you tweak or finalize your macroeconomic assumptions:
Economic Growth: GDP growth hit 3% in Q3 initial estimate with approximately 0.7% due to inventory build up. Consensus forecasts were slightly lower with business investment higher than anticipated. This economic cycle's longevity continues - one of longest historically. For 2018, consensus forecast remains for moderate growth in real GDP (~2.4%).
Employment and Labor Markets: September non-farm payroll was down, although unemployment rate improved - as did many other labor market indicators. Consensus forecasts suggest modest job growth and unemployment rate trending slightly below today's levels.
Housing Sector: Housing starts, building permits and existing home sales were down in September while new home sales jumped. Consensus estimates for next year suggest moderate growth. Home price increases are expected to slow, but vary significantly by market.
Inflation and Prices: Inflation remains low with core PCE well below Fed's 2 percent target. Commodity prices are mixed. Low inflation remains consensus view through 2018 (and beyond).
Interest Rates: Fed appears ready to pull trigger in December and consensus view is for continued Fed Funds increases quarterly in 2018 - at least 3 times. Yield curve is expected to rise but flatten slightly (see a "Base Case" Scenario concept below).
Banking Sector: Loan growth has generally been slowing with Community Banks showing stronger growth than the larger banks. While loan growth may continue, it may be much lower than experienced in 2017. On the deposit front, 2017 growth continues at moderate pace and 2018 may see continued growth but also at slower pace.
Midwest Region Issues and Risks: As you finalize your planning scenario for 2018, there remain several continuing open issues and risks. (1) Automotive Sector: Are rising sales incentives a harbinger of rough patch? Will sales slow (latest 12 months through September are down 1.4%)? Any impact on your local market employment? (2) Agriculture Sector: Will commodity prices remain low? How will farm land prices hold up in your area? Will agricultural equipment manufacturers slow production - and local employment? (See our economic dashboards for Illinois, Indiana, Michigan and Wisconsin at Economic Dashboards).
There appears to be general consensus of moderate growth with slowly rising interest rates for 2018. No one has suggested any major disruption.
Capital Requirements: Finally, minimum capital ratios rise another 62.5 bps on January 1, 2018. Make certain that this change is incorporated into your financial forecasting, balance sheet and capital management and dividend planning for 2018.
Good luck on your setting of your final 2018 planning scenario. And much continued success throughout next year!
Banking Strategist compiles economic data throughout each month and updates our U.S. Economic Dashboard weekly and post to our website at this link: U.S. Economic Dashboard.