Spending Plans Were Delayed, Not Canceled

Jeffrey Roach (00:04):

I am Jeffrey Roach, Chief Economist for LPL Financial, and in this edition I will highlight three key factors behind business and consumer behaviors. First, foreign central banks hold more gold than treasuries. So what's happening here is this very subtle but meaningful shift in how central banks are thinking about risk and resilience. Over the past several years, foreign central banks have been tilting the reserves away from U.S. treasuries and toward gold. Now, part of that is practical. Gold doesn't carry counterparty risk and can't be sanctioned or frozen in the same way financial assets can. And at the same time, treasuries, while still highly liquid and fundamentally important, are facing a different backdrop with higher issuance and ongoing fiscal questions. Central banks are quietly building in this insulation, we could say into their portfolios. So this isn't a wholesale abandonment of the dollar system, but more of a diversification story.

Jeffrey Roach (01:05):

Second, demand for C&I loans are solid. What's interesting about the pickup in commercial and industrial loan demand over the past several quarters is that it's happening even as banks have been tightening credit conditions. From an economist's perspective, that usually tells you demand side forces are stable. Firms are still looking to finance inventory CapEx or just manage cash flow in a higher cost environment, and in some cases, they're drawing on credit lines as a precaution. Higher interest rates can actually pull forward borrowing for businesses that are trying to lock in funding before conditions get even tighter. At the same time, inflation has raised nominal borrowing needs. Companies simply need more dollars to finance the same level of activity. So even though banks are being more selective and cautious, businesses are still accessing credit. It's a bit of a push-pull Dynamic. Credit is harder to get, but the need for it hasn't gone away.

Jeffrey Roach (02:05):

In fact, in some ways it's intensified. Third, consumer confidence is resilient. Given the current pricing pressures, we would have expected a more dramatic decline in confidence. However, consumers feel the employment situation will improve by the end of the year. Hence, discretionary spending on items such as travel should increase after the temporary. Hold on, spending many who said they're currently delaying the purchases of discretionary items plan to buy them in the next six months. So GDP growth will likely dip as consumers are temporarily cautious, but we could expect a rebounded growth later this year if the geopolitical situation improves. Well, that's all for now. If you want more insights, follow us on social media and take care.