Citizens Business Conditions Index moderate from Q1 peak

Vermont Business Magazine Citizens announced Friday that the national Citizens Business Conditions Index (CBCI) dropped to 52.9 in the second quarter of 2022, down from its eight-year peak of 59.5 at the end of the first quarter, but extending its streak to seven straight quarters above 50 , indicating continued growth conditions for businesses. Citizens has bank branches across Vermont.

Business activity remains healthy, but is clearly cooling from the prior quarter. This could reflect an economy returning to a more sustainable level – or it could indicate that conditions are poised to worsen. Consumer inflation continued to trend higher throughout the quarter, reaching an annual pace of 9.1% in the report for June. The Federal Reserve (Fed) increased interest rates twice during the quarter. The Treasury market flashed a recessionary signal as the gap between 2-year and 10-year bond yields fell below zero. Consumer sentiment touched new lows. Yet, spending held steady, as pent-up demand from COVID restrictions continued to drive economic activity.

“We are seeing several cross currents in the environment. Concern levels are high, but individual outlooks are still good,” said Eric Merlis, managing director, Global Markets, Citizens. “Companies are still experiencing growth and maintaining positive momentum, and consumers are showing resilience. We see markets trying to calibrate expectations with these conflicting signals.”

Citizens announced Friday that the VT data in the most recent Citizens Business Conditions Index (CBCI) dropped from last quarter (see table) – but less so than the national drop.

Three of five components of the Index were additive in the second quarter, another sign of moderating activity after five-of-five were positive in Q1. Both the manufacturing and non-manufacturing indexes from the Institute for Supply Management trended in expansionary territory. However, they also showed moderation from Q1. The manufacturing index peaked around the first quarter of 2021, when the COVID rebound was in full swing. The non-manufacturing index peaked in the fourth quarter of 2021.

The index saw continued strength in the proprietary activity of the bank’s commercial banking clients, another underlying component of the CBCI. On the other hand, applications for new business formation were down in the period, detracting from the CBCI and indicating a pause from Q1.

Meanwhile, employment trends were neutral for the period. This is particularly notable at a moment when growth is slowing and recession fears have increased. After the unexpected GDP contraction in the first quarter, a second-quarter contraction could signal an economic recession, according to the standard definition. A typical recession is accompanied by a weak labor market and higher unemployment – ​​but the scenario could evolve differently in an environment where the job market is already contending with a shortage of labor. If the US experiences a “jobful” slowdown, consumer activity could remain supported – more than in a traditional recession.

While the path of inflation is still uncertain, this level of business activity could prove to be sustainable. As policymakers continue to tighten monetary policy, and as supply-chain pressures ease, the outlook for inflation could be for gradual moderation.

“It is not surprising that we came down from last quarter’s peak given current market volatility and Fed action to curb inflation,” Merlis added. “We may be at a sustainable level of business activity, but there are still headwinds that could push activity lower.”

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.

Preparing your company for an economic cycle

Every company faces business life cycle challenges and opportunities, but there are some strategies that most companies should consider when faced with a possible economic slowdown or downturn.

Most companies were focused on getting leaner during the pandemic and many raised excess capital so they could maintain liquidity

Now, many middle market and mid-corporate businesses are in a stronger position as they face another economic cycle but business leaders should still consider steps to help prepare for more rate increases and tame inflationary pressure.

Here are five suggestions from Steve Woods – EVP & Head of Corporate Banking:

  • Diversify revenue streams

Diversifying revenue streams can help stabilize cash flows during a downturn. One of the best ways to diversify revenue streams is through a merger or acquisition. Look for a target that will serve as an effective hedge if your market is disrupted.

  • Review your current cash flow

A cash flow review should go back at least through the pandemic to demonstrate your company’s resiliency and will give you and your financial partners an important view of potential hurdles.

  • Lock in costs when possible

Hedging solutions can help provide certainty in volatile interest rate and foreign exchange rate environments. Commodity hedging can also lock in prices as a hedge against inflation.

  • Differentiate between types of expenses

Maintenance expenses are how much the company is spending just to maintain the status quo. Growth expenses are new capital spending that will specifically lead to revenue growth or margin expansion.

  • Adopt automated payment solutions

Reviewing financial processes and procedures such as invoicing and fine-tuning areas that can be improved will help streamline operations and avoid unnecessary costs.

A wide range of solutions exist to automate and time payments to help your company maximize cash flow.

Nationally, the index dropped to 52.9 in the second quarter of 2022, down from its eight-year peak of 59.5 at the end of the first quarter, but extending its streak to seven straight quarters above 50, indicating continued growth conditions for businesses. Business activity remains healthy, but is clearly cooling from the prior quarter.

Previously, the Treasury market flashed a recessionary signal as the gap between 2-year and 10-year bond yields fell below zero. Consumer sentiment touched new lows. Yet, spending held steady, as pent-up demand from COVID restrictions continued to drive economic activity. Today, the Federal Reserve may be expected to continue its campaign against inflation by aggressively hiking interest rates at its meeting; tomorrow could bring GDP news suggesting the US economy shrank for the second quarter in a row. Combined with this regional index, it is possible that the economy is returning to a more sustainable level – or conditions are poised to worsen.

7.29.2022. PROVIDENCE, RI—Citizens Bank

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