Commerce Bank Chief Economist Scott Colbert, CFA, was the keynote economic speaker at the recent Health Financial Management Association (HFMA) Red River conference at Choctaw Casino & Resort.
Commerce Bank is about the 40th largest bank in the country that reaches from Denver to Houston to Minneapolis to Nashville. Their core of operation is Kansas, Oklahoma, Missouri and Illinois, according to Colbert.
Colbert spoke to the Democrat prior to the conference and he said the event was for treasurers and CFOs of healthcare companies.
“Typically, they have me talk about the economy in general and the financial markets,” Colbert said. “What I really do on a day-today basis is I manage about $28 billion of fixed income monies which is bonds. Biggest clients are healthcare because a hospital has to keep a lot of money on hand in case the cash flow slows up, Medicare, Medicaid payments, the government, insurance subsidies, all of that stuff.
“So, hospitals, they have to be kind of cash rich just to stay in business and so that’s a good part of my money management. The other thing is pension endowments, foundations. These general contractors, they’re building now these huge data centers. They’re big business right now.”
Colbert spoke of the economy that he said his slowing and that causes people to worry about a recession.
“The reason they worry about a recession isn’t just because of job loss and the economy slows down, but it’s largely because on average, when we go into a recession, the stock market falls 34 percent and it’s what most people are concerned about, their financial assets and their wealth, that kind of thing,” Colbert said.
Colbert said it is important to avoid a recession and the Federal Reserve basically is in the process of taking their foot off the brake.
“They’ve been braking the economy because post-COVID with all the stimulus provided and the stimulus was huge,” Colbert said. “It was about $6 trillion. That’s about three and a half months worth of GDP, and they handed it out pretty quickly. That created all of this inflation and this initial surge off the bottom of the COVID crisis which ended basically in May of 2020. It created a lot of friction, a lot of inflation. The federal reserve had to fight back like they always do by raising rates. But they’re now in the process of trying to neutralize the rates. By neutralize what I mean is they’re trying to set a short-term interest rate that basically doesn’t accelerate or decelerate economic activity.
“They’ve been tapping their foot on the brake because they want to bring inflation down. They’ve won a lot of that battle. Inflation, as you know today with the CPI (Consumer Price Index) that just came out is three percent year over year, core and non-core. It’s nice now. They’re the exact same number, right? Whether you take food and energy out or keep it in, inflation is exactly three percent.”
According to Colbert, the Federal Reserve would like to see it closer to two and a half.
“They’d like to see their favorite measure called the PCE index, personal consumption expenditure index,” Colbert said. “They’d like to see that closer to two. That’s probably closer to 2.7 right now. So, basically, they’re 50 to 70 basis points away from where they would like inflation to be. But at the same time, the problem is, job growth, employment has slowed materially and I mean quickly this year. Probably job growth is averaging only about 47,000 per month so far this year and that compares to basically more than 100,000 last year and more than 200,000 the year before.”
Colbert said that when job growth slows, that has been the start of every recession since the end of World War II, and that is what has people worried.
“This slow down in job growth and so the fed is pivoting from tapping on the brakes slightly with a four and an eighth interest rate,” Colbert said. “They probably need to get the rates down to about three percent. That’s about where the Federal Reserve thinks that basically, they’re not accelerating the economy or decelerating the economy.
“So, we’re expecting to see about 100 basis points of rate cuts come over the next year. We’re going to get 50 basis of them very quickly. They will also cut rates in December. I’m 99.9 percent positive that’s going to happen and then, the next two cuts are likely to be more of a struggle, depending upon how the economy is doing. If it looks like the economy is continuing to slow, they’ll come, but it looks like the economy is stabilizing. They’ll probably drag their feet with that last two rate cuts.”
The government shutdown was expected to end this week after a record number of days of being closed. Asked how the government shutdown impacts the economy, Colbert said it is not helping at all with government employees not receiving their paychecks.
“Now, the government employs about 3 million people,” Colbert said. “There are 165 million jobs in this country. So, it’s about two percent of the workforce, but, two percent of the workforce doesn’t get their paycheck, that slows things down.”
Colbert agreed the country is very divided politically.
“It shows up when you look at like consumer confidence,” Colbert said. “Republicans are very confident. Democrats are not at all. It’s just startling to see the difference between whether or not you’re a Democrat or a Republican and how you feel about things. The key reason that we have a fairly optimistic outlook is largely because the financial markets are so healthy.”
He said stocks are at record highs and that credit spreads are at near record lows, meaning the cost to borrow money relative to treasury rates is low.
“You do have short-term interest rates coming down and there’s a huge wealth effect that compounds itself in the country,” Colbert said. “Yes, it’s a trickle down kind of thing and it’s kind of a derisive word. A lot of people don’t look at it that way, but the fact of the matter is is the folks that are showing up here at the casino to see the shows, maybe they’re the wealthier half of the country, employ all of the folks that are working here in the casino and it helps drive the economy.
“Middle market America here in the midwest is doing actually quite well relative to the coastal cities which have the high-tax situations and people kind of leaving them. Leaving California, leaving the northeast, heading to the southeast and the southwest. So, we’re pretty optimistic on the outlook for the economy. Charge-offs in the banking industry, this is an interesting statistic. Charge-offs of loans in the banking industry at the end of June were one basis point lower than the lowest prior to COVID. So, in other words, the health of the financial system is awfully good despite all of the bad news that you hear, and when things are pretty healthy, it’s hard to crash and burn, meaning it’s hard to end up in a recession. It takes a while. So, our outlook is still fairly positive for the economy, for the financial markets. It will slow, we’re slowing, and I would say like if this is a Shakespearean act, it’s always a five-act play. We are past the third act and entering the fourth act, but we’re not to the finale yet.
“If we can get past the government shutdown, we get past the headaches of the Big Beautiful Bill and the tariffs, once we put that in the rear-view mirror, then I think we can get back to normal operating procedure.“