Rate increases take toll as companies prepare for economic slowdown

Citizens announced today that the national Citizens Business Conditions Index™ (CBCI) dropped to 48.5 in the fourth quarter, ending a streak of eight consecutive quarters in growth mode above 50 and reflecting cooling sentiment as rate hikes from the Federal Reserve have their intended effect.

While business activity moderated, underlying components of the index were mixed, showing some areas of strength in the period.

For the first time in 2022, inflation did not come in at higher-than-expected levels, and, in fact, it declined steadily during the quarter as the Fed continued its rate-hike campaign with two additional increases, supported by the general strength of the employment market.

Consumer activity proved strong in many categories, with healthy spending in travel and recreation. The Treasury market continued to signal a potential slowdown with an inverted yield curve, where rates on two-year Treasuries were above rates on 10-year Treasuries. However, yields across maturities ended the quarter down from highs, indicating a shifting consensus about the outlook for inflation in the quarters to come.

“This quarter was a turning point for sentiment as we saw heightened impact from the Fed’s policy actions,” said Eric Merlis, managing director and co-head of global markets, Citizens. “The process is ongoing, but reducing inflation remains at the top of the economic agenda.”

Relief from Inflation Surprises

The underlying components of the index showed mixed dynamics in the business environment. Two of five components boosted the index level, one was neutral and two weighed on the reading.

The proprietary activity data of Citizens’ commercial banking clients, a component of the index, was strong, suggesting that the conditions at middle-market businesses remained positive. The ISM non-manufacturing index also remained expansionary, though it did soften in December as extreme weather hampered holiday travel and interrupted power in some communities. Consumers spent more on services as they shifted away from large-goods purchases, which tend to be more connected to financing costs.

The strength of the consumer relies directly on employment, which has eased modestly but remains strong overall. As an index component, employment trends detracted from the index thanks to rising initial jobless claims; layoffs were announced in some technology, financial and automotive companies. New business applications also softened, weighing on the index. Still, the unemployment rate ticked down to 3.5 percent in December and non-farm payrolls edged higher in the tight labor market.

The ISM manufacturing index had a neutral impact on the CBCI level, easing from prior quarters. New orders in manufacturing have declined for four months on softer demand. The trend has contributed to inflation relief as well as to easing backlogs across the supply chain.

The mix of trends captures a quarter where softening demand for goods was deflationary while demand for services was steady amid broader employment stability.

Another Quarter of Commodity-Related Sector Leadership

Commodity-related sectors led performance for the sixth quarter in a row; this quarter, energy and utilities were the strongest. Many commodities were down from mid-year peaks but remained at elevated levels amid the ongoing war in Ukraine and the prospect of higher demand from a reopening China.

Geographically, we saw the highest levels of activity among companies in the Midwest region, followed closely by companies in the Mid-Atlantic. Companies in the Northeast showed the lowest levels of growth.

Navigating a Transitional Time

The fourth-quarter CBCI revealed a business environment that is finally seeing the results of a year-long rate hike campaign from the Fed that drove short-term rates 4.25% higher. After eight quarters of surging activity post-pandemic, momentum finally moderated, allowing inflation to come steadily down from peak levels. With ongoing signals of recession from the bond market, the outlook for rates remains in focus amid a new set of conditions where deflationary forces are beginning to take root. Yet, the tightness in the labor market could have a stabilizing effect as business conditions search for a new post-tightening normal.

“The fourth-quarter CBCI showed a business environment where activity moderated as interest-rate hikes to curb inflation took hold,” said Merlis. “While the bond market continues to issue recessionary warnings, a still-strong job market continued to be a source of support during the quarter.”

The Index draws from public information and proprietary corporate data to establish a unique view of business conditions across the country. An index value greater than 50 indicates expansion and points to positive business activity for the next quarter. For more information about this past quarter’s Index, please visit here.

Citizens is a trusted strategic and financial adviser, consistently delivering clear and objective advice. The Citizens approach puts clients first by offering great ideas combined with thorough market knowledge and excellent execution, to help our clients enhance their business and reach their potential. For more information, please visit the Citizens website.

About Citizens Financial Group, Inc.

Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions, with $226.7 billion in assets as of December 31, 2022. Headquartered in Providence, Rhode Island, Citizens offers a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. Citizens helps its customers reach their potential by listening to them and by understanding their needs in order to offer tailored advice, ideas and solutions. In Consumer Banking, Citizens provides an integrated experience that includes mobile and online banking, a full-service customer contact center and the convenience of approximately 3,400 ATMs and approximately 1,100 branches in 14 states and the District of Columbia. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, Citizens offers a broad complement of financial products and solutions, including lending and leasing, deposit and treasury management services, foreign exchange, interest rate and commodity risk management solutions, as well as loan syndication, corporate finance, merger and acquisition, and debt and equity capital markets capabilities. More information is available at www.citizensbank.com or visit us on Twitter, LinkedIn or Facebook.

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