By Jarrod Compton, BOK Financial, Native American Services & Steve Wyett, BOK Financial Chief Investment Strategist
What a difference a few months can make. At the start of this year we couldn’t have predicted that the health of the financial system, potential for a recession and inflation would be all anyone was talking about.
The health of the banking industry is a topic we get asked about often by tribal members, businesses and municipalities. Essentially, the core of the problem in the financial industry is the speed and magnitude at which the Fed has raised short-term interest rates in response to inflation. Last year, the markets were anticipating 2-3 rates hikes; instead they got 500 basis points in increases in just 14 months and some leveraged institutions weren’t prepared for it. In addition, the pandemic and increased adoption of hybrid work created uncertainty around commercial real estate valuations, putting further pressure on banks. I really want to emphasize that these issues are impacting just a few specific banks and are not reflective of any systemic issue impacting the entire industry.
Even though we’re seeing some turbulence in the industry, we believe the strength and stability of our company, Native American services and beyond, is both attractive and comforting to our clients and partners. While other financial institutions are pumping the breaks, we’re fully leaning in.
Conversations about inflation and a possible recession are tightly woven. In the summer of 2022, we saw a nine percent jump in the year-over-year headline consumer price index. It’s now roughly half of where we were then but still well above where the Federal Reserve wants us to be. So, there are signs that inflation is slowing, but many of our clients aren’t seeing it as they manage their businesses and support families. So, how do we reconcile the data saying one thing but people experiencing something quite different? First, we need to recognize that slowing inflation does not mean falling prices, but rather prices going up more slowly. This highlights why the Fed is so concerned about longer-term inflation expectations. Within our economy we always have some prices falling while others are rising, but the broad nature of price increases since last year was the highest in decades. Longer term, inflation is bad for our economy, and we need to see it continue to slow.
One concern about a slowing economy is that we could slip into a recession. Trends like the significant yield curve inversion, tighter access to credit and overly aggressive rate hikes from the Fed seem to signal that a recession is imminent. It’s important to remember that consumer spending makes up roughly 2/3 of the US economy and that spending has remained strong thanks to the robust labor market and the surplus of savings consumers built up during COVID. However, inflation is taking a toll on the consumer, and more recent credit card data shows that the buffer of excess savings is fading.
As demand slows, a few industries are laying off employees to protect margins due to higher costs from inflation and higher interest rates. Tribal gaming has historically shown resilience through economic downturns and consistently outperforms other industries but even those operators know they’re not entirely immune. We keep a close eye on new unemployment claims because a spike in unemployment claims would indicate a recession was upon us but we haven’t seen that yet. So, the likelihood of an economic recession in the next 6 to 12 months is fairly high, though not a certainty by any means.
With the possibility of a recession to come we continue to work closely with our tribal customers to provide sound advice and solutions to position their enterprises for continued success.