“As 2022 concludes and we look forward to the new year, consumers and businesses are financially healthy and personal and corporate liquidity, debt, etc., evidence robust balance and net effect of strong earnings. This includes the banking sector, which has benefited from historically low levels of loan delinquencies and credit losses.
“Consumers and businesses as well as the financial sector are well-positioned headed into what will likely be a recession in 2023—the depth of which is challenging to predict. The 2-year U.S. Treasury bond yield and 10-year yield remain heavily inverted, which implies investors believe long-term growth may return to pre-COVID levels once the Federal Reserve has alleviated inflation. Many commercial clients continue to deal with supply chain disruptions that are not likely to ease in the upcoming year given political tensions and war around the world. In addition, inflation and oil prices remain elevated, which continues to negatively impact the U.S. consumer.
“In summary, we expect a discerning consumer spend and a slowing economy in 2023 but remain optimistic that we’ll see an economic “normalization” and not a deep recession.”
“On a scale of 1-10, I would expect the U.S. economy will be in the 3-4 range. Unfortunately, a combination of sticky inflation and still-restrictive monetary policy will be major headwinds for economic growth and stock prices in 2023. Inflation is highly regressive (meaning it hurts the poor far more than it hurts the wealthy) but given the circumstances, the Fed likely has no choice when it comes to interest rates. The central bank has been very aggressive in tightening this year, but monetary policy tends to work with a lag and those lags are long and variable. Right now, the only reason we are not in a recession is because there has been decent capital spending and a tight labor market. Unfortunately, profits are falling in all the major stock market sectors except for energy. Weaker profitability often leads to a slowdown in capital spending plans and layoffs, which are often two sides of the same coin for most companies.
“The news isn’t all bad—there remain a large number of job openings in the U.S. economy, and a large reservoir of consumer and corporate savings. A “soft landing” in the economy is possible if restrictive monetary policy leads to a decline in job openings rather than actual job loss next year.”
“As for the Kentucky/U.S. economy, we expect the Federal Reserve to continue to increase interest rates through at least the third quarter of 2023. This will continue to impact the housing market and could delay capital expenditures nationwide but will be a welcome relief to depositors. Loan quality across the industry remains strong but with a tightening economy, this will be an area of industry focus in 2023. Within the banking sector nationwide, banks are experiencing a decline in the excess deposits that have built up over the past three years. For many banks, this has resulted in a liquidity concern and caused them to look outside their local depositors to replace these funds, relying instead on the Federal Home Loan Bank and other sources. For many banks this will continue to be a concern in 2023. Here at Cumberland Valley, we have continued our conservative approach and maintained a very high degree of liquidity. This has served us well and going into 2023, unlike many of our competitors, we do not expect to look outside our deposit base to fund our loan demand. In 2023, we will increase our lending staff and our digital presence to serve our customers across the state.”
“Stimulus dollars flowing into the economy the past few years have bolstered business resiliency. We saw very strong commercial loan
demand during the first three quarters of 2022, which has slowed slightly in the fourth quarter but remains steady. Economic performance in 2023 will most certainly be impacted by how much the Federal Reserve Bank increases interest rates. Inflation continues to cause concern as our nation’s overall personal savings (as a percentage of disposable income) has seen a significant decrease since peaking in 2020. The greatest uncertainty for most banks centers around what volume of loan demand to expect in 2023. Rising interest rates will likely mean a continued slowdown for residential real estate lending, while the volume of refinances has nearly come to a halt. We expect to be up in both staffing and capital spending in order to meet customer demand. Whether adding or enhancing physical locations or investing in smart technology, our expected growth will require the continued development of a strong, local workforce.”
“We all know 2023 will be difficult as we face the economic challenges that accompany a recession. Businesses need a solid foundation to withstand these circum-stances, an underpinning I believe begins with the workforce. The companies emphasizing their teams will offer the most promise, because a strong team will translate to all areas of the business. This is acutely true for financial services, as the preference for relationship banking increases and consumers look to experienced professionals for guidance on their personal finances in this uncertain environment. We stand poised to meet this demand by growing and developing our team of Central Bankers.”
“As we navigate an uncertain economic environment, at U.S. Bank we’re optimistic as we strategically prepare for a range of out-comes. We shared in our latest CFO Insights Report that improving risk identification and mitigation is now a top priority for 30% of finance leaders. In our own business, our digital and payment initiatives are strengthening our core competencies and give us even more of a competitive advantage as we meet our customers’ needs and deepen relationships. Credit quality and consumer spending continues to be strong, and we’re seeing loan and deposit growth.”
“Kentucky’s vibrant economy has helped spur growth across the state in recent years, despite the uncertain economic conditions. After successfully building up strong balance sheets, I expect we’ll see many local business leaders continue to exhibit resiliency and push forward with their growth plans, even if the rising interest rate environment slows near-term efforts. The recent news of major companies breaking ground in the state also indicates that there’s opportunity to come for the region.”
“Regarding labor issues, like in many other towns and cities across the country, local businesses are experiencing difficulties finding talent and filling open positions. While waiting for the labor markets to loosen, we’ve seen business leaders turn their focus to employee retention from assessing benefits to offering upskilling and training.”
“As we look at the Kentucky economy for 2023, I expect we will see continued volatility for the first half of the year with hopes of consistency returning in the back half of the year. Overall, I’m optimistic about where Kentucky is headed and believe there are positive tailwinds in several sectors of Kentucky’s economy, including areas such as the automotive/manufacturing industries, logistics, technology, food and beverage, and tourism. These sectors continue to grow and are key drivers for economic prosperity into the future. This optimism assumes improved global conditions and a reduction in inflationary pressures as we move throughout the year.”
“Fifth Third Bank in Kentucky will continue to grow and expand in the commonwealth, making strategic investments in people and places as opportunities arise. Last year, we made the decision to hire the only investment banker located in Kentucky. We will continue to capitalize on areas where we see growth opportunities.”
“The outlook for 2023 has similarities to how we entered 2022—lots of uncertainty but continued reasons for optimism. From there, the years look very different. Monetary policy from the Federal Reserve resulted in higher borrowing rates, but employment figures and consumer spending remain strong so it will take more time to see how the Fed actions will impact the economy.”
“The Lexington/Central Kentucky economy is sound and I expect that will continue into 2023. At Republic Bank, we remain well capitalized with historically strong asset quality measures, and we are looking forward to more growth in 2023. We continue to invest in technology to make banking easier for our customers, when and where they are. Core to our mission is to help our associates, our customers and our communities thrive.”
“The U.S. and Kentucky economies are set to experience mild recessions in 2023. With inflation near a 40-year high, the Federal Reserve is
aggressively raising interest rates to cool off economic growth and slow inflation. The rapid increase in interest rates is likely to push the economy into recession this year. Kentucky’s important transportation/distribution and manufacturing industries will take a hit from a shrinking national economy. But Kentucky is less exposed to the contracting housing market, and the state’s important motor vehicle manufacturing industry will benefit from pent-up demand, even with a national downturn, given the automakers’ ongoing supply-chain problems that have limited sales. The Kentucky unemployment rate, which was just below 4% at the end of 2022, will increase to around 5.5% by early 2024 before starting to decline as a national economic recovery gets underway.”