The financial services industry is continuously evolving, and it is essential to optimize collections strategies to maintain liquidity and minimize risk. One of the most critical choices for credit un...
Without a doubt, we are seeing a deceleration in the U.S. economy as the economic recovery from COVID-19 is all but complete. The unemployment rate is basically at its pre-pandemic level at 3.6% compared to 3.5% in February of 2020. Now, we enter the transition back to a more sustainable or normalized rate of growth.
Outlook for U.S. Economy Q3-Q4 2022
Despite an anticipated weak first quarter, we do expect second-quarter GDP growth for the year to be slightly stronger coming in at 1.5-2.0%.
Here’s a quarterly breakdown of what to expect for GDP growth in 2022:
- 1st quarter to be 0.6-1.2% (weaker due to large inventory numbers in Q4 2021)
- 2nd quarter will improve slightly to 1.7-2.2% (inflation will keep a lid on growth)
- 3rd quarter will likely be 2.0-2.5% (some improvement in prices and supply chains)
- 4th quarter will slow to 1.5-2.0% (tighter policy and labor tightness slow us down)
As a reference point, the U.S. Congressional Budget Office estimates the long-run growth potential for the U.S. economy is around 1.8%. So, in short, we are returning to this longer-run rate.
Risks to this outlook are not balanced with greater risk to the downside, meaning revisions will likely be downward, not upward.
In fact, we estimate the odds of a recession over the next 12-18 months are around 30%.
Action Items for Financial Institutions in Q3 and Q4
Risk Management
With consumers under increased pressure from negative real wages and declining savings, they will become increasingly vulnerable to falling behind on debt payments and insurance premiums. Strong monitoring, good communication with borrowers, robust collections efforts, and efficient resolution practices (foreclosure and repossession) will be necessary to navigate the increasing risk climate.
Additionally, strong interest rate risk monitoring and mitigation efforts will be critical in a rising interest rate environment including increases to loan loss reserves.
Non-interest Income
As loan demand softens and margins remain tight, financial institutions will need to continue exploring alternate sources of income. With recent efforts by the Consumer Financial Protection Bureau (CFPB) and members of Congress pushing for the elimination of NSF and other fees, depository institutions will have to be creative in finding new sources.
Automation
In what we expect to remain a theme for the next decade or more, as labor markets tighten, financial institutions will need to not only automate but to find the most cost-effective and customer-friendly solutions in order to remain competitive. As a result, enhanced cyber security and the use of strong data analytics will become necessities.
Outsourcing
In addition to automation, depository institutions will also need to consider outsourcing either onshore or offshore many of their most labor-intensive activities. Because the U.S. is unlikely to make meaningful reforms to its immigration policies and slowing domestic birth rates, employers in every sector will need to source talent where it is. This will likely mean other states where labor costs are relatively lower or offshore/nearshore.
Conclusion
With the economy downshifting into a slower, more normalized growth pattern, financial institutions will need to adjust as well. As loan demand naturally softens off record 2020 and 2021 levels, financial institutions need to look for alternative sources of revenue from fees and other non-interest income. Additionally, look for ways to reduce labor expenses through automation and outsourcing and consider stepping up risk management efforts as the expected rise in delinquencies comes to pass.
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