Some pundits and economists are sounding alarms that by increasing interest rates too fast or too high, the Federal Reserve might cause the next recession. However, we believe that bankers should direct their concerns to other economic and credit developments – such as low cap rates, high LTVs, and dubious pro forma cash flows. We believe that the likelihood of a Federal Reserve policy error causing the next recession is exceedingly low, and the cause and effect between short-term interest rates and recessions is not so obvious.
Another big difference from 2007.
Knowing where we are in the business cycle is a key input into looking at projected probabilities of default for loan credit underwriting as well as future loan prepayment speeds. If done correctly, banks want to tighten underwriting standards as the economy inflates and loosens them during the troughs of the cycle. Unfortunately, most banks do it the complete opposite loosening standards due to competition when things are overheated and tightening them at the trough.
This is a graphic of all 137 million jobs in the US that gives you a feel for the relative size of each employment sector, including the fact that services now makes up approximately 66% of all jobs.
Source: NPR / BLS Data