Economic growth should spur lending
Bank executive sees loan demand rise as companies use up post-recession cash.
“You can get good news out of Washington, occasionally,” said Mitch Stapley, chief investment officer at Fifth Third Bank’s asset management division in Grand Rapids.
The good news these days, according to Stapley, is that economic activity is picking up, indicated by the shrinking gap between the level of federal spending and the level of incoming tax revenue.
Stapley and Sridhar Sundaram, associate dean of Grand Valley State University’s Seidman College of Business, were guests recently on WGVU’s “West Michigan Week” program to talk about the economy and where it is heading.
Both see signs of definite improvement that are encouraging.
When the economy basically collapsed in 2008 and 2009, government spending was running approximately equal to about 24 percent of the GDP, while the long-term average has been about 20 percent, Stapley told the Business Journal last week.
Tax revenues, on the other hand, took a big hit in the recession, dropping from the long-term average of about 17 percent of GDP to 14 percent.
Stapley said that equates to a 10 percent gap in what the United States government was spending versus what it was taking in.
Then government strategies to cut spending — especially the “sequester” — helped, Stapley said, bringing spending down closer to 20 percent of GDP now. At the same time, since the Great Recession ended, tax collections have “bounced back up,” essentially hovering now at the long-term average of 17 percent of GDP.
“We’re still running a deficit, but it’s much more sustainable than it was six years ago,” he said.
Those higher tax revenues are proving there is “more economic activity” going on, said Stapley, but business does not yet appear to be willing to take risks like it did leading up to the financial crisis in the Great Recession.
Businesses “got religion” back in 2009, jokes Stapley, when the recession forced all sectors of the American economy to cut back on spending. American businesses, in particular, cut budgets “to the bone,” he said.
“If they didn’t need it, they didn’t buy it,” he said. “As the economy has improved, they paid down debt, paid off loans, and basically put a lot of money into the banks. So what we see right now is a lot of companies with probably the healthiest balance sheets we’ve seen in the last 40 years.”
A lot of the new and expanded business activity taking place now is “financed internally,” he noted.
“So we need to get through the first wave of expansion to where those cash levels have gone down. Then companies will start to turn to the banks” for new commercial loans for expansion projects, Stapley said.
“We’ve seen that over the last 18 months,” he added.
Lending standards are still much tighter than prior to the recession, but those standards are starting to loosen up, he explained.
“It’s not been as robust a recovery in lending as we would probably like to see,” he said, referring to financial institutions in general, not just Fifth Third Bank.
“But what’s really important is that people learned some lessons in 2008 and 2009, and they’re kind of living those lessons,” Stapley said. Consumers today are not borrowing irresponsibly in the home mortgage market, trying to buy “too much house,” and they’re not outspending their paychecks.
The pace of growth in the economy seems to be frustrating to some people, he noted.
“We wish that instead of the 2 percent growth (we are seeing now), we’d like 3.5 or 4 (percent). But the fact is, this is sustainable and it’s not building any real excesses in the system.”
Both Stapley and Sundaram agreed that student debt is the one sector within consumer debt that has some economists worried.
Some people who lost their jobs in the recession went back to school to qualify for better jobs, but the economy has not come back strong enough yet to generate those jobs. A lot of young people who went right into college from high school also have a lot of student debt, and good jobs for those graduates also are not readily available except in some technical fields, such as engineering.
Stapley said the concern among economists is that those student debt-holders may ultimately default if they cannot find jobs.
“We don’t know how that’s going to work out yet,” he said.
Sundaram said on “West Michigan Week” that one kind of government spending that can help the economy is on infrastructure, ranging from public utilities to transportation. In the political arena, however, even projects that both sides agree must be done sooner or later still are delayed by bickering.
Sundaram noted he has traveled in China, which has made enormous investments in public infrastructure. Today there is a “huge gap” in the advanced Chinese infrastructure, he said, compared to the U.S. situation. Making the necessary improvements here will simply be to the advantage of U.S. business, he added.
Of course, the United States is part of the global economy and what happens anywhere else has some impact on this nation’s economic health. Looking to the future, Sundaram said the “wild card” now is what happens abroad.
Both Sundaram and Stapley noted that political hot spots around the world — such as recent aggressive actions by the Russian government — add to many economists’ worries.