Five years ago, the Conference of State Bank Supervisors (CSBS) started a quarterly survey of community bankers nationwide, asking questions about how the bankers feel about their expectations for future business conditions. In the last survey, conducted in September, bankers sounded the most optimistic they have been in three years.
The CSBS Community Bank Sentiment Index surged to 110, up from 99 in the second quarter of 2024. Anything above 100 is considered positive; anything below is considered negative.
The survey asks seven questions and bankers can answer better, worse, the same or unsure and CSBS creates an index from the results. More than 300 community bankers from 46 states and the District of Columbia responded to the most recent survey. The Federal Reserve Bank of St. Louis publishes the results quarterly.
Despite the rosy outlook, many community bankers expressed misgivings about the economy. Thomas Siems, chief economist with CSBS, spoke to Scotsman Guide about the survey and what he expects could occur with rates in coming months.
The survey jumped into positive territory for the first time in three years. Why is that?
The things that really boosted it this time were expectations for future profitability and also expectations that the policy decisions by the Fed will result in better economic outcomes, those two things drove the index. Franchise value also went up quite a bit, but it moves with profitability. If you expect your profits to go up, you better expect your franchise value to boost as well.
Did the last survey come after the Fed cut? Was it kind of a sugar rush?
That’s a really interesting question. We keep the survey open the entire month of the quarter and the Fed’s meeting was right in the middle of the month. Now most of our survey respondents complete the survey in the first week. Let’s say we had 300 respondents, we probably had 200 that came in before the Fed announcement. But the expectations were already there. The bankers expected that there would be some kind of cut. They might have been surprised that it was 50 (basis points) instead of 25, but it certainly played into the sentiment.
The bankers felt, or at least 79% of them felt, that the U.S. is in a recession or entering a recession. Why is that?
Isn’t that interesting? In some ways, I think that bankers tend to have this pessimistic outlook on the economy. They’re risk analysts, right? And they’re trying to do kind of the worst-case scenario analysis in order for them to make money.
I’d have to go back and check all the numbers, but we had 95% of the bankers that were saying we’re in or starting a recession about a year ago. So, it’s actually down from where it was. But it did bump up from the second-quarter number, which I think was about 75%. They’re still very skeptical and concerned whether the Fed is going to be able to actually pull off this soft landing.
Do you think their concerns about a recession are justified?
We’re not really in a rut. You look at the economic numbers and they all look pretty darn good. But when you look at sentiment indicators across the board — consumer-confidence indicators, small business optimism index, CEO confidence indicators, they’re all pretty much in the doldrums. There’s a lot of concern right now.
The top concern for bankers was government regulations, right?
I spend a lot of time talking to bankers through the years, and I have not found too many bankers that think that regulations are going to be a lighter burden in the next year than they have been in the previous year. They almost always answer that it’s going to be a heavier burden. Regulatory burden is currently at the top of that list, followed not really super closely behind by the federal debt and then cyberattacks.
Do you have any thoughts on how many rate cuts there could be in the coming years?
I was a former Federal Reserve economist for many years, so I follow this very closely. We’re in a really interesting spot because the inflation problem has not been completely solved. I was maybe surprised by the 50-basis point cut. I would probably have preferred a 25-basis point cut. And I think there will be more, but it might not be as swift and as large cuts as many people project.
Were you surprised mortgage rates actually ticked up after the first cut?
In retrospect, that is not surprising if the markets feel like the Fed started to cut too early without solving the inflation problem. So, the 10-year bond jumped almost 50-basis points and the mortgage rates move with the 10-year bond. This is why they’re in a difficult position because even if they cut the Fed funds rate, they have little control over those longer-term instruments. Investors are largely determining those and if investors feel like inflation could get reignited, well, that’s going to result in an increase in those rates. That may be a good argument for the Fed to slow down at this point.
