MU banking chair urges caution amid economic uncertainty

The new year had barely dawned when the economy sent a strong message that uncertainty underlies the months ahead, especially for the financial-services sector that provides much of the revenue needed for growth in Columbia and elsewhere.

Already strained by a housing slump and a credit crunch, employment figures for December showed an actual national decline in private-sector jobs, pushing the unemployment rate to a two-year high of 5 percent and posting a four-year low in job growth—possible precursors of a recession.

Even retail posted overall layoffs for December despite the Christmas buying season. Manufacturing companies—a growing source of international hope for American businesses after the dollar had weakened against other major currencies—stopped hiring and sliced payrolls.

John S. Howe, the Missouri Bankers chair and a finance professor at the University of Missouri-Columbia, said the Federal Reserve Board “is quite worried about the vulnerability” of the economy but faces opposing economic forces that could stall much action.

Within hours of the jobs announcement, financial pundits began promoting a half-point cut—rather than the more common quarter point—in the Federal Reserve’s benchmark rate to boost the economy. At the same time, congressional Democrats were pushing measures to provide an economic boost and President George Bush was meeting financial advisers to discuss stimulation measures. Bush said in the second week of January that the overall economy can weather the turbulence, and he’s expected to outline proposals to stimulate the economy during his Jan. 28 state-of-the-union address.

Howe said the Fed will consider the effects of $100-a-barrel oil prices, which appeared in January. The high oil prices could touch all major sectors of the national economy and could lead to long-term inflationary forces that any Fed rate cuts would exacerbate.

“The Fed has goals that it is supposed to pursue: keep inflation under control and promote long-term economic growth. Sometimes these goals conflict. If the Fed is leaning toward a half-point cut, it means the risk of recession exceeds the risk of inflation,” Howe said.

Either risk brings unwelcome news for the broader banking community, which has grown accustomed to relatively stable rates and economic growth in recent years.

“Bankers appear to focus on the downsides of uncertainty,” Howe said.

He said the demographics of Columbia provide a buffer against a roiling economy. Its job base includes few low-wage manufacturing jobs, its concentration of students brings regular waves of money (earned by others) into the local economy, and, by all accounts, Columbia has grown into an “upper-middle-class town.”

Howe remembers in particular a saying from the mid-1990s when he first moved to town. “One in seven Columbia residents was said to be a Ph.D or M.D. There were almost no low-wage manufacturing jobs,” Howe said.

But he cautioned that the Columbia financial sector must continue to recognize that most residents are not doctors or professors. Howe noted 3M last fall announced another round of layoffs that will reduce its local employment base from the 1,000 found a decade ago to 260 by next June.

“The local banks should be a little cautious,” Howe said. “Columbia has shown some vulnerabilities.” [pull quote]

Signs ahead for banking community

Beyond the effects of a national recession—which, by nature, Columbia tends to weather reasonably well—Howe said the area’s bankers and customers likely would face these challenges in the near future:

• In Growing competitiveness in an increasingly crowded field. Greater Columbia has 23 banking institutions, including three new banks that have entered the local market in the past year. There also has been a huge increase in borrowing over the Internet and through specialized mortgage companies. Loans were issued by 357 different lenders in Boone County in 2006.

Howe said a competitive environment has predictable benefits for consumers, such as lower rates on loans and higher rates for deposits.

He, however, sees even greater competition ahead, both in terms of institutions and the type of retailing they use. “I think the biggest challenge is the continuing change in the structure of the industry,” Howe said.

In particular, Howe noted the entry of insurance companies such as State Farm and Shelter into local banking in the past decade, with an emphasis on using agents and Internet services while making home and auto loans. By mid-2007, Shelter Financial Bank, based in Columbia, had $86 million in deposits.

Howe said “big-box stores” likely would provide more comfortable homes for branches of major banks that would extend their reach into the community. He also foresees continued trends in “relationship banking,” which accounts for the surge in branch banking that has defied the predictions by industry analysts.

Howe added that credit unions have been able to use their legislative clout to expand their ability to do business in Missouri and continue making inroads into traditional banking business.

He acknowledged that Columbia already may be on the verge of providing too little business to support its current banking base, although many bankers are betting on Columbia as a viable regional banking center in the future.

“You wonder sometimes, but presumably the growth here has been based on a careful analysis of the growth of Columbia. The people making these decisions tend to be pretty bright” and have access to state-of-the-art research data, he said. “They don’t make decisions to expand randomly.”

• Finding ways to increase deposits. Columbia’s bank deposits grew only 3.5 percent through mid-year, down substantially from 6.5 percent the previous year and 10 percent the year before. Although many banks borrow the capital to make loans, others tend to adhere to the old philosophy of lending money on hand through deposits. “It is the most stable source of funding,” Howe said.

He even mentioned the likelihood that banks would use the age-old “kitchen utensils” promotions to lure new accounts, as many have done successfully for several years.

“For banks to be stable and reliable, they need stable growth. Bankers will be figuring out ways to get more deposits,” Howe said.

• Harnessing the younger generation’s online ease. About eight years ago, banks fell for an Internet craze that has yet to materialize. “It turned out to be essentially wrong,” Howe said. “They found that people still wanted to walk in and talk” to their bankers, and those preferences provided another boost for branch banking.

But Howe suggested that in the next few years, bank customers could see a boom in online banking that finds a younger generation, adept at the new kinds of technology, feeling just as comfortable conducting financial transactions by machine.

Getting a handle on financial uncertainty

Howe’s position was created 20 years ago when the Missouri banking community contributed funding to support the teaching role. Besides counseling students on potential banking careers and supporting the bankers’ lending school, Howe hosts an annual symposium on contemporary topics.

This year, the gathering, titled—“The Linkage Between the Economy and Loan Performance”—draws on the first phase of the national financial troubles that produced the housing slump and the credit crunch late last summer. In recent years, larger national banks, investment houses and other alternative lenders repackaged subprime loans on housing and real estate—with substantial yields—and readily found a market that produced liquidity, at least until foreclosure rates made the packages unattractive.

As defaults on those mortgages became distressingly high, the value of the commercial securities fell, and the effect spread through the economy, including the price of homes.

Howe’s session this year focuses on the “spillover effect” of these apparently limited troubles that can sour a national or local economy. While the Columbia economy generally has weathered national economic troubles well, the housing slump and credit crunch had noticeable local effects, from the health of local builders to housing supply outlets.

“The worrisome thing is the impact on the economy,” both direct and indirect, Howe said.

This year’s symposium is scheduled for March 14 at the University of Missouri Alumni Center. The cost is $65, including lunch. For additional information, contact Howe at 882-5357.