The fourth quarter Phoenix Management “Lending Climate in America” survey results reveals the imminent threat of a slow-down in consumer spending.

With extra tax credits and pandemic-related stimulus payments halted, the IRS has warned Americans to brace for smaller refunds from 2022 tax filings. Acccording to a recent Bankrate survey, 75% of adults view tax refunds as being “very or somewhat important” to their overall financial situation. Phoenix’s Q1 2023 “Lending Climate in America” survey asked lenders how the average consumer will react to these smaller refunds, seventy-eight percent of lenders expect consumer spending  to dramatically decrease as pandemic-related liquidity and tax benefits have calmed after inflating their normal cash inflow and spending availability. Twenty-two percent of lenders believe consumer spending will remain at current levels, as the government’s liquidity supports’ ending will have no impact on spending habits.

Phoenix’s “Lending Climate in America” survey also asked lenders how the broader economy will be impacted by the recent collapses of Silicon Valley Bank and Signature Bank. The majority of lenders, forty-four percent, believe there will not be a risk of a broader ripple effect, while twenty-two percent believe the Federal Reserve and the FDIC will backstop customer deposits to prevent any potential ripple effect. The other thirty-three percent of the lenders surveyed are concerned that these recent collapses will lead to more regulation and restrict availability to capital (22%) or be the final blow to the U.S. economy that is already dealing with inflation and high interest rates (11%).  

Additionally, Phoenix’s “Lending Climate in America” survey asked lenders to identify how their borrowers are allocating any excess cash. Of the lenders surveyed, forty-four percent of lenders expect any excess to go towards building a cash reserve to defend against any further downturn. However, thirty-three percent of lenders believe their borrowers will use excess cash to catch up on paying down floating rate debt, while the last twenty-two percent believe their borrowers will use excess cash to invest in growth initiatives.

Lender optimism in the U.S. economy in the near term changed with an increase this quarter from 1.60 in Q4 2022 to 1.78 in Q1 2023. 44% of lenders believe the economy will perform at a “D” level during the next six months while 33% believe the economy will perform at a “C” level. Additionally, lender expectations for the U.S. economy’s performance in the longer term slightly decreased in the prior quarter from 1.80 to 1.78. Of the lenders surveyed, 78% believe the U.S. economy will perform at a “C” level during the next twelve months.

“Lenders now have precisely the same, sub-par expectations for the U.S. economy in the near term as they do in the longer term – a paltry 1.78.  It’s surprising that the near term grade improved, in light of the recent bank failures.  This provides further support of the notion that these bank failures will not have a ripple effect in the economy, although we have already seen a more cautious outlook by regulated lenders” says Michael Jacoby, Senior Managing Director and Shareholder of Phoenix. “With the elimination of pandemic-related stimulus payments, and continued inflation (albeit at a slightly reduced trajectory), we think there is still a fair amount of belt tightening by the consumer on the horizon.”

See the full results of Phoenix’s “Lending Climate in America” Survey