RMA Predictions on Recession

I’ve been a member of the board of directors of the local RMA chapter for many years. RMA is Risk Management Associates, the national bankers’ organization. It has been around for over one hundred years and was know for most of its existence as Robert Morris Associates, Robert Morris being George Washington’s banker and the financier of the American Revolution. Late in his career, Robert Morris went bankrupt and RMA decided they should change their name, two centuries later. But I digress…

Part of membership is a monthly magazine that occasionally has articles of interest. A recent issue discussed the outlook of chief credit officer-types regarding the next recession. Now, granted, chief credit officers are the sort of people who tend to wear crash helmets while sitting under their desks, but it is still interesting to hear their outlook. It is, after all, their job to try and ‘see around the corner’ and protect their institutions from oncoming but not imminent threats.

Dev Strischek, a longtime credit policy officer at Sun Trust Banks noted the length of the current economic expansion and said, “we’ve never had this much leveraged lending in the history of the United States.” He concluded, “It’s probably time to batten down the hatches.”

Edward Schreiber, Chief Risk Officer at Zions Bancorporation, observed, “We are seeing pricing and underwriting loosen, consumer debt levels back to high levels, and corporate balance sheets leveraged at some of their highest levels.” I bet Ed doesn’t get invited to many parties.

Mark Zandi, Chief Economist at Moody’s Analytics, was more bullish than the bankers, but still concluded that the next recession is coming into view. He based this on the economy reaching the 4.5 percent unemployment rate that is considered ‘full employment’ and the inverted yield curve (short-term interest rates being higher than long-term rates). The inverted yield curve has predicted every recession in the last 60 years.

Zandi went on, “Every recession has two necessary pre-conditions. There needs to be a feeling that the economy is overheating and there has to be some major imbalance in the economy that’s mirrored in the financial system—for example, the housing and subprime mortgages of the Great Recession in 2008, the 2000-01 Internet boom equity bubble, and the 1990-91 overbuilt commercial real estate market and savings and loans crisis.” Zandi suggested the next recession will happen in the summer of 2020, but he doesn’t believe it will be as bad as it was ten yeas ago.

I don’t know how Zandi can predict a recession over a year out with such precision, but then I predicted we’d have a recession in 2017, and that has come and gone.

Is a recession coming? Of course. When? I don’t know. Can we prepare? Yes. How?

We can prepare by:

1. Being prudent in the amounts we borrow.
2. Being conservative in our growth plans.
3. Being realistic in our budgeting process.
4. Stress-testing our companies by going through the process of anticipating what we would need to do to survive a 10 or 20 or 30 percent reduction in revenues.
5. Holding more cash than we might think is necessary.
6. Paying down existing debt.
7. Paying attention to financial fundamentals before it becomes urgent.
8. Looking at our Organization Chart and making some of the hard choices we should have made long ago.
9. Looking at our Organization Chart and locking up the people we must have during the next downturn.
10. Reviewing our Mission, Vision and Strategy before we’re in the middle of a Fire Drill.