The strength and resiliency of the US economy during the first half of the year defied the expectations of economists who largely expected the country to fall into recession.
Still, many expect the second half of the year to bring some volatility as Federal Reserve policymakers indicate they plan to continue making painful interest rate hikes.
While inflation rates are slowly falling, price pressures persist, and the Fed has hinted that its benchmark interest rates will stay higher for longer.
Banks also look set to continue tightening lending standards in the second half of the year. That'll make it more difficult and costly for small and midsize businesses (and US households) to secure funding.
Corporate bankruptcies are on the rise and so are consumer debt delinquencies. Delinquencies rose across all "days past due" categories on a year-over-year basis, jumping from 0.16% of loans in May 2022 to 0.25% in May 2023, according to the latest monthly CreditGauge analysis from VantageScore.
So are we entering a credit crunch? Before the Bell spoke with David Tesher, the regional credit conditions chair at S&P Global and Chiza Vitta, a senior analyst with S&P Global, to find out.
Before the Bell: Economic data is softening a bit, but the consumer is still strong. Is a recession still imminent?
David Tesher: Before we were forecasting a short and shallow recession, but we no longer think there's going to be a recession. Now, it's a situation where growth prospects are slower, but we're not predicting imminent recession.
The US consumer has been resilient, but obviously, persistent inflation is definitely eroding their purchasing power. Less wealthy consumers are definitely feeling a lot more pressure, they're using more credit card debt.
Households are bleeding through the cash pile that they had accumulated during the pandemic. Hard decisions are being made, and that's going to feed back into corporate growth prospects.
As economic conditions slow, credit is becoming tighter and companies are defaulting at a faster pace than they have. Is a credit crunch coming?
Chiza Vitta: There isn't a broad downturn across the market, but there's a lot of risk for less established companies. So yes, some corporations are distressed, but this isn't something affecting the entire market, which is what you'd associate with a broad credit crunch.
Which sectors will hurt the most?
Vitta: When it comes to ratings, the size of the company is a major factor. Sectors like tech and energy, where there's a lot of profitability, are in good shape. It's going to take a prolonged period of distress for them to get to a point where they are downgraded, let alone face a default. We're not expecting something like that. Generally speaking, it's deeply speculative companies where you're seeing interest rates as much as double. We would say that public companies may be experiencing slower growth but not a high level of distress.
When people talk about a potential credit crunch, they tend to mention how difficult it is for the commercial real estate sector to find funding. What are you seeing?
Tesher: There's been declining demand for office space, and that's weighing heavily on commercial real estate asset valuation, pressuring cash flows at a time when financing costs have increased. Work from home, the hybrid arrangement, is going to be in place for a while, and lenders are recognizing that some of the appraisals they have in place are stale. It's happening slowly, but banks, and insurance companies, whoever is holding that commercial real estate risk, have to address it. That can end up resulting in more selective funding for commercial industrial projects. So it definitely has an overhang to it. You're seeing property sell, and you're seeing reevaluation based on lower prices being recognized. But it's not all happening at once, it's a looming risk.
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