It’s October already. Time for Halloween and trick or treating. And, as you prepare your 2020 annual operating plan, will the economy trick or treat you!
There appears to be some consensus among economists on the direction of the U.S. economy during 2020.
Here are some thoughts on 2020 and possible planning scenario for you to consider.
If trade wars persist, Fed continues to lower Fed Funds rate.
Balance sheet strategy results in additional $1.5 trillion support for U.S. Treasury market.
Federal Reserve to reduce Fed Funds twice in increments of 25 bps: assume Q4 2019 and Q2 2020.
Short end of yield curve will mirror Fed Funds and drop by 50 bps in total.
Normal upward sloping yield curve will be pressured; although with Federal Reserve actions, long end will only drop 25 bps with yield curve flattening.
Bank Planning Checklist:
Community Bank Leverage Ratio framework opt-in decision by Q1 2020 Call Report filing.
Loan growth: slower than 2019.
Deposit growth: with low interest rate environment, moderating growth.
Loan quality: remains solid, except for agriculture.
NIM and spreads: with continued flat yield curve, margins will be under modest pressures again.
Key Drivers of Uncertainty:
Trade war and negotiations.
Weather and climate (hurricanes, flooding, etc.).
Economy in 12th year of expansion.
Slower economic growth with consensus GDP increasing only 1.8%.
Job growth remains solid but slowing at 1.8 million new jobs.
Unemployment rate remains low, but rises slightly toward 4%.
Housing: solid performance but weaker than 2019.
Agriculture: if trade wars persist, recessionary conditions; commodity prices remain low; profitability decreasing.
Manufacturing: continued weakening.
+$1 trillion deficits continue.
Federal debt outstanding continues to rise.
Most importantly, what is happening in your local market that may deviate from the national statistics. Slightly stronger? Or weaker? Heavily agriculture? Manufacturing plants beginning layoffs?
Hopefully, 2020 will be a good year for your bank. Use this as a discussion item for your annual operating planning activities. And create your final planning assumptions for the 2020 economy and the impact on your bank.
Also, remember that there will be an opt-in for the Community Bank Leverage Ratio framework when you file your Q1 2020 Call Report, so you need to give further consideration to how you want to proceed.
Good luck and much continued success in 2020!