Predicting the Unpredictable

Labor Day has come and gone, signaling the unofficial close of summer. The 90+ degree temperatures of the past few days belie the fact that fall is just around the corner. This year’s weather patterns have been unusual, even by Indiana standards. A cold, harsh winter seemed to hang around through much of spring, and summer waited until mid-June to arrive … and only recently began to hit high temperatures on a consistent basis.

The economy has been nearly as unpredictable as the weather. This stubborn economic recovery can’t seem to sustain itself. Lately the concerns that started in Greece and much of Europe have spread to China. Consequently global worries have risen to the level that stock markets throughout the world have finally had a major correction. The question is, was it just a correction, or will we slip back into a recession?

No one knows the answer, but many have opinions. I will say upfront that I do not know or pretend to know. I have learned over the years, though, that local bankers do know what is happening in their communities. I have the opportunity to talk with many of them frequently. So far the consensus is that business loan demand continues to show some growth. That is a good sign, because it means that businesses are focused on expanding, which leads to more jobs, more wealth and, consequently, a bigger and stronger economy. Couple this ear-on-the-ground analysis with the recently released Quarterly Banking Profile of the Federal Deposit Insurance Corp., second quarter 2015, and it seems we can at least be a little optimistic. FDIC-insured financial institutions reported net earnings of $43 billion, up 7.3 percent from last year at the same time. The really good news for financial institutions is that the higher earnings came from an increase in both interest income and noninterest income.

This means that banks’ providing core services of taking deposits and making loans is what is driving this increase. That, too, should bode well for our future economy. In an unusual twist, community banks actually led the increase with a 12 percent net income improvement over last year. The bread and butter of community banks is taking deposits and making loans; simply put, that is how they make money. Industry-wide, banks’ overall return on assets was at 1.09 percent, which is encouraging on an historical basis.

If the economy is able to stave off these stock market jitters, potentially we could continue our slow-but-steady march back to normal, whatever that is. But what might cause problems? First is the timing of the much-anticipated increase in Federal Reserve interest rates. It will be an increase of only one-fourth of a percent, but will be significant for what it portends in the months and years ahead. How will the world financial markets react?

Second will be how Congress acts. It has reconvened this week in Washington, D.C., following its summer break. There are only about 50 session days remaining this year, during which Congress has to deal with many must-pass bills. Will legislators give bankers the regulatory relief for which they have been begging for several years? If so, that could help to sustain the positive returns banks are experiencing. If not, it could choke the economy and end the slow rally we have experienced. Watch how these two issues play out between now and year-end for clues as to how the economy may fare in 2016.

Those are my predictions for this unpredictable economy. As for the weather, I readily admit that I have no idea what is going to happen!

– S. Joe DeHaven

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