Bank Stress and Tighter Lending Standards Likely to Cool Consumer Demand and Dent Economic Growth
The banking sector in the United States has recently experienced strain, which is expected to negatively affect consumer demand and economic expansion. This is due to several factors, including the Federal Reserve’s ongoing rate-increase strategy, the collapse of Silicon Valley Bank (SVB) and Signature Bank, and general instability within the industry. As a result, lending criteria has tightened, which has led to households’ reduced access to credit.
Economists from S&P Global Market Intelligence predict that these restricted credit conditions will slow down consumer expenditure, leading to a 0.4% decline in real GDP for the second quarter, following a more robust than anticipated 1.9% growth in the first quarter. The experts also revised their real GDP growth predictions for the remainder of 2023, with a deceleration in annual growth to 1.4% from the previous 2.1% in 2022.
There have been several signs of decreased consumer activity, including a slowdown in retail sales, an increase in credit card debt, a decrease in savings from their initial pandemic-era highs, and consumer confidence levels that continue to lag behind pre-pandemic levels. The collapse of SVB and Signature Bank has led to a further tightening of lending standards, making it even harder for households to access credit.
The Federal Reserve’s 475 basis point interest rate hikes since March 2022 have already made borrowing more expensive for consumers. This, coupled with elevated interest rates and sector instability, has made credit card debt financing more costly. Stricter lending criteria will further inhibit spending, as credit access becomes increasingly challenging for households.
Despite these constraints, economists believe that the effects will primarily result in a decline in purchases rather than a dramatic drop. Higher interest rates will particularly impact consumers looking to obtain mortgages or finance new vehicles, but these rates are less relevant to daily expenditures. As Shannon Seery, an economist at Wells Fargo, explains, even if consumer loan lending criteria continue to tighten and consumers reduce their credit dependence for spending, existing liquidity and real wage gains will provide a buffer for expenditure.
The demand for auto loans, mortgages, and other durable goods, such as furniture, has been visibly impacted. Nevertheless, the labor market’s continuous earnings growth has sustained consumer demand. Sean Snaith, director of the University of Central Florida’s Institute for Economic Forecasting, explains that the labor market’s strength has generally preserved consumer spending, particularly in the service sector.
