Economic Report: A Cautionary Approach Heading Into 2024

By Rose Oswald Poels, Wisconsin Bankers Association

The year 2023 ended with Wisconsin’s economy in a strong position despite headwinds faced throughout the year, and that resiliency is expected to last throughout 2024. According to the WBA Bank CEO Economic Conditions Survey conducted in November 2023, more than 68% of bank leaders responding to the survey believe the current health of Wisconsin’s economy is good or excellent. Looking ahead six months, 47% of respondents believe the economy will remain the same while 44% believe it will weaken. These responses are an improvement from last year when 72% of respondents believed the economy would weaken in the next six months. Moreover, most respondents (95%) do not foresee inflation worsening in the future, further supporting the notion that the economy will remain essentially the same over the next six months.

In the second half of 2023, we saw lower-than-expected inflation along with core inflation moving closer toward 2% than expected, both of which helped the Fed decide to keep rates steady and not impose any increases after July 26. We also continue to see strong employment numbers, with the unemployment rate dropping to 3.7% in November 2023. While some businesses are still looking for labor, it is less of a widespread issue than it has been in the past. This resiliency is expected to remain well into the new year.

In addition, gas prices dropped throughout last fall, which directly helped consumers’ pocketbooks. With more money in their bank accounts to spend on discretionary items instead of gasoline, retail sales numbers are expected to end the year strong.

The banking industry itself continues to show solid financial strength through the third quarter of 2023. Year-over-year lending increased in all categories — commercial, residential, and farm loans — demonstrating the responsiveness of banks to meet their customers’ needs. Individuals and businesses continue to trust banks as a safe place to keep their money, as evidenced by a slight increase in deposits, both year over year (0.59%) and quarter over quarter (0.95%). Net interest margin for Wisconsin’s banks held steady at 3.19% year over year, and capital levels are healthy.

Certainly, one headwind facing the economy is the unknown length of time that interest rates will remain elevated. While it is a positive sign for the economy that the Fed did not raise rates after July 2023, the Fed is also not expected to begin cutting interest rates until much later in 2024. This sustained period of higher interest rates particularly harms individuals with high credit card balances, and highly leveraged businesses and farmers that may also be experiencing limited revenue growth. In addition, businesses that borrowed money at a fixed rate for a two- or three-year period will see their loans reprice in 2024, which will put pressure on their overall earnings.

Demand for loans is expected to remain steady throughout 2024, although overall demand is not extremely strong. Demand for business, commercial, and agricultural loans are all expected to remain consistent into 2024; however, residential real estate lending is lagging and expected to continue to remain at lower levels. As discussed above, elevated interest rates are one factor contributing to a weaker demand for credit. In addition, other headwinds for the new year include inflation, the uncertainty surrounding a presidential election, and geopolitical issues.

While there is some caution heading into 2024, bankers believe that the economy will not materially change from its current conditions and are not expecting a recession. Bankers are in the risk business and have reserves set aside to handle any potential defaults they may experience in 2024. Overall, the industry itself is very healthy and in a strong position to work with their borrowers and customers through any potential economic issue this year.

Oswald Poels is president and CEO of the Wisconsin Bankers Association | Founded in 1892, the Wisconsin Bankers Association is the state’s largest financial industry trade association, representing more than 200 commercial banks and savings institutions and over 30,000 employees.