How is the rumoured recession likely to affect Financial Services in the US?

  • October 10, 2022

The news is flooded with discussion on the topic of a recession in the US, and the finance world is understandably concerned. However, a couple of important questions must be considered before worrying. Firstly, is the United States in recession or even heading for one? And secondly, if it is, how badly is the financial services industry likely to suffer from the effects?

What defines a recession

According to the NBER (National Bureau of Economic Research), which is generally recognised as the authority in defining economic recessions in the US, a recession is defined as below:

a significant decline in economic activity spread across the economy and lasts more than a few months.” 

Based on a variety of employment, income and consumption indicators. A common way to define a recession is often as a period of two consecutive quarters of negative GDP growth.

Either way, a recession is a significant, widespread and prolonged contraction in economic activity, which can cause reduced sales, leading to layoffs, tightening credit access, and increased loan defaults and bankruptcies.

So the question of whether the US is headed for a recession or is already in one remains cloudy, with experts acknowledging that the first and second quarter of 2022 saw negative growth in the US economy of -1.6% and -0.6%, respectively, the unemployment rate is historically low and astonishingly, according to a recent statistics, the majority of small businesses - who employ more than 50% of the US workforce - are not just looking to hire, but are struggling to find employees.

While the country’s economy is moving slower than in 2021, many key economic indicators continue to demonstrate strength. Continued buoyancy in the job market alongside Wall Street’s cautious optimism about Big Tech stock could indicate that a recession will be mild or possibly avoided completely. However, suppose the Federal Reserve continues to raise interest rates into 2023. In that case, it could make a recession more likely, and the overall economic downturn signals a US recession looming.

What does all this mean for Financial Services?

Assuming that at some point between now and the middle of 2023, the United States will experience some form of recession, be it short-lived and mild or prolonged and painful, there will be an impact on the financial services industry, but how much damage is likely to be done?

Much like the question of the recession itself, the effects on the financial services industry are an equally mixed bag. 

Historically, financial services have stood their ground pretty well during past recessions. Even during the pandemic, the recession experienced in the US lasted a mere two months. It is worth bearing in mind that since the financial crisis of 2008/09, the banking sector is now far more resilient following reforms to safeguard against another financial collapse. So this is promising news in terms of the financial sector’s ability to survive current and future market turbulence.

On the downside, recent predictions suggest that many bankers are likely to see some hefty cuts when it comes to this year’s bonuses, with decreases of anything from 10-50%, depending on their specialist area and the size of their firm but on the upside, some bond and hedge fund traders, sales personnel and equities trading staff could see bonuses rise by up to 20%, according to a recent report

Layoffs are expected at the largest banks, and job losses could affect 5-10% of staff as financial institutions look to offset their overheads against reduced profits. However, firms will also have to boost workers’ base salary by roughly 5% because of wage inflation and retention needs. As mentioned, smaller businesses are hiring more staff than ever, including many boutiques and middle-market investment banks.

And every cloud has a silver lining…

While the recession could negatively impact the largest investment banks when it comes to bonuses and hiring of new staff, there are plenty of areas in the financial world that may thrive during an economic downturn.

Within the finance sector, restructuring and distressed advisory consulting will probably see growth as companies look for ways to save money and manage their debts. Perhaps most crucially, the most prominent lenders themselves have been quoted as saying that not only would they survive even a savage economic downturn, but they may emerge stronger from it, with Citigroup Chief Executive Jane Fraser saying that her bank was ready for a variety of scenarios, adding that what matters to a lender in a recession is: 

capital, liquidity, credit quality and reserves – and we feel very good about all four of them.

In addition, there is plenty of support available for firms looking to weather the possible oncoming storm. For instance, Mckinsey has put together some guidance for US companies about how to build resilience to survive an economic downturn. Employees have advice available to them on how to manage their careers ahead of a recession through proactivity and protection of their existing assets, which could certainly go some way to helping those working within financial services who have concerns about how a recession could affect them personally.

No doubt, a recession may well have some unwelcome outcomes for the US financial services industry, but there are some positives to be taken from the recent news with reports that a recession could be quick and mild. There looks to be support on offer for those who need it, and there could even be the creation of opportunities in some unexpected areas. 

If you are looking for your next career move in financial services or any of our other specialist sectors in the US, contact McGregor Boyall today and find out how our expert recruiters can help you.