Phoenix Management’s Q4/18 “Lending Climate in America” Survey showed deteriorating confidence in the strength of the U.S. economy in the near and long term with a significant increase in loan losses and bankruptcies.

Lenders’ confidence on how they expect the U.S. economy to perform during the next six months decreased in Q4/18 with a grade point average of 2.71, a 37-percentage point decrease from the Q3/18 results of 3.08.

Additionally, the GPA for the U.S. economy beyond the next six months saw a significant decrease of 46 percentage points to 2.00 from the previous quarter’s results of 2.46.

Furthermore, lenders were surveyed on how they expect to react within the next six months to the slowed U.S. GDP growth from 4.2% in Q2/18 to 3.5% in Q3/18 to an estimated 2.5% by Q1/19. Of the lenders surveyed, 81% expect lending practices to remain the same. On the contrary, 19% of lenders surveyed expect lenders will tighten standards and terms to mitigate the negative impacts of slower growth.

In addition, lenders were surveyed regarding the economic factors they believe will have the strongest potential to affect the near-term economy. Seventy-five percent of respondents believe that the stability of the stock market will have the strongest potential to affect the U.S. economy in the near-term, while 38% of lenders surveyed believe that unstable energy prices will have the strongest potential to affect the U.S. economy in the near-term. The impact of recent volatility in the stock market will likely reverberate throughout the U.S. economy.

Lenders were also surveyed this quarter on whether they expect economic indicators to be up, down, or remain at the same level over the next six months. The question drills down even further into specific economic indicators including, but not limited to, loan losses and bankruptcies. To measure lender sentiment, the survey utilizes a Diffusion Index. Our Diffusion Index is calculated by subtracting the percentage of negative expectations from the percentage of positive expectations. In the Q4/18 survey, the bankruptcy diffusion index increased 50 percentage points from 21% in the previous quarter’s results to 71% in Q4/18. In addition, the loan losses diffusion index increased to 91% in Q4/18 compared to 34% in Q3/18.

“The results from the Q4/18 survey indicate lenders are pessimistic about the U.S. economy in both the near and long term. This deteriorating confidence was further supported by the meaningful increase in lenders’ expectations for bankruptcies and loan losses to increase over the next six months and the recent volatility in the stock market will likely reverberate throughout the U.S. economy,” said Michael Jacoby, senior managing director and shareholder of Phoenix.