My last article talked about the economy not doing what economists think it should be doing given the low unemployment, rising interest rates, lagging wages, consumer spending, and more. Because of these seeming contradictions, it’s becoming harder to predict what will happen next and what should be done to put the economy on an even keel.
To all of this, we can now add the credit rating agencies getting involved. Recently Fitch Ratings lowered America’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from AAA to AA+. While that is something to be considered, it won’t have much of an impact on your business.
What may have an impact is Moody’s Investor Services downgrading the credit rating on a number of regional banks. Specifically, Moody’s downgraded the rating for Amarillo National, Associated Banc-Corp, BOK Financial, Commerce Bancshares, Fulton Financial, M&T Bank, Old National Bancorp, Pinnacle Financial Partners, Prosperity Bank, and Webster Financial Corp.
This downgrade will make it harder for these banks to provide the full spectrum of financial services their customers need. It will make getting loans from the above institutions more expensive if even possible. It means if you are a customer of one of these banks, they will be looking for more financial information about your business before a current loan is renewed or a new line of credit is granted. Indeed, if you are a customer of one of these banks, now is the time to start having discussions about any financing they are providing to your business.
By the way, there will probably be more banks that have their ratings downgraded, so if your bank isn’t listed above, it would be good to start having conversations now, just in case.
Why are the downgrades happening? Banks use their deposits to make loans to finance business investments and payment of interest. In addition, banks sell bonds to raise additional capital for these purposes. With a downgrade of their credit rating, it will be more difficult to get anyone to buy those bonds so they will have to increase the interest the bonds will pay. For the banks to better protect their investment in business, they are going to be making sure that investment has a high probability of being repaid.
With the continuing increase in interest rates, these smaller regional banks need to pay out higher amounts of interest to hold their deposits. Other financial instruments have been moving faster to offer higher interest rates, as they don’t have specific deposits to protect; rather these new instruments are seeking “new” dollars to invest at even higher rates of return. This creates a potential drain of deposits from smaller regional banks.
Beyond the threat of deposits leaving the regional banks, they need to pay competitive interest on the remaining deposits. Depending on how those remaining deposits are invested, that too can lead to a drain if the interest being charged is less than the interest paid.
In addition to the pressure of having to pay increased interest, there is also the increased probability of loan defaults. The Wall Street Journal reports mortgage delinquencies in multi–family structures remain relatively low, but are increasing. Apartment building investors bid up building prices during the pandemic, seeing the rapid increase of rents leading to the prospect of large returns when selling the property. Much of the financing for multi-family structures was short-term, and now property owners can’t afford the revised payments, so a number of properties are going into default.
Another probable impact on your business is the shutdown of Yellow Freight. They made the announcement they were ceasing all operations in early August. Yellow was one of the largest less-than-truckload (LTL) freight carriers in the country. It is possible Yellow was a favored trucking company used by the bicycle distributors from which you source products. There are other LTL carriers that will fill the void left by Yellow’s closing, but the removal of a major competitor will likely lead to an increase in freight charges, so don’t be surprised when you see an increase in the cost of your landed bicycles.
On top of that, United Parcel Service recently entered into a new contract with the Teamsters. Carol Tome, the CEO at UPS, said the contract provides industry-leading pay and benefits for their employees. As a result, it’s probable you’ll see increases in the rates charged by UPS.
And if all of this wasn’t enough to worry about, the price of oil is once again on the rise. In the last six weeks, benchmark crude prices are up 21 percent, and are projected to go even higher. Already many freight companies are adding fuel surcharges, some updating the amounts weekly.
This is a double-edged sword. With the price of oil going up, meaning gasoline will become more expensive, maybe people will park their cars and buy a bike. However, with the cost more to fill the gas tank, there may not be enough left in the personal budget for a new bike.
Here is one more thing to navigate in your business — inflation shows signs of being on the rise again. The Federal Reserve said the consumer price index rose at a 0.2 percent rate in July, the same increase seen in the previous month. This brings the annual rate to 3.2 percent over the last 12 months, certainly below the 9.1 percent peak from June 2022, but still above the 2.0 percent target. That’s the good news.
The so-called core inflation, sans food and energy, is up at an annual rate of 4.7 percent, and services (less energy) rose 6.1 percent in the last 12 months. The Federal Reserve paused interest rate increases last month, but it seems more increases may be needed.
The average mortgage rate hit a 20-year high, almost 7.1 percent during the week of August 14. Keep in mind, the increase in oil prices mentioned above and rising credit card interest rates are also having an impact; maybe not immediately but that is coming, too.
There is a corresponding pullback in consumer spending. For example, Target reported June sales were down 7 percent year-over-year. Conversely, consumers still seem to be willing to buy discretionary goods as long as they are cheap. Yes, Target’s results last quarter were affected by the Pride Month controversy, but the contrast of 6 percent sales growth at T.J. Maxx last quarter is instructive. Even Target’s first quarter, which wasn’t impacted by the backlash, sales in apparel, electronics, and appliances fell by three percent. Yet T.J. Maxx and Dollar Tree saw sales increases of three to 3.5 percent.
What does all of this mean for the inventory retailers have on hand? For the additional inventory distributors would like dealers to take? For terms they are offering? Take a look at your business and its needs. Talk to your banker to make sure your financing requirements remain safe and affordable. Talk to your shipping companies to make sure you understand their thinking about rates, and begin shopping around if necessary. This is not a time to assume all will end well, especially since the things written about here are mostly out of your control.
Contact Steve Bina: email@example.com