‘Twas the Season for Consumer and Business Spending

In 2019, Ariana Grande’s chart-topping single “7 Rings” took the tune of a classic “The Sound of Music” song and turned it into a pop hit. The verses of the song still followed the spirit of Julie Andrews’ “My Favorite Things,” with a few nods to the original lyrics as Grande rattled off details of post-breakup shopping sprees. In the chorus, she famously boasted “I see it, I like it, I want it, I got it,” hinting at her lack of budget and freedom to spend as she pleases.This past holiday season, “I see it, I like it, I want it, I got it” sums up consumer spending fairly well.Consumer & Business SentimentClosing out 2024, consumer and business confidence showed promising signs. On the consumer side, spending stayed solid through the holiday season, boosted by wage growth and activity among higher-income households. While inflation is still a concern, people seem to be adjusting, driving resilience in spending habits.Businesses followed suit with stronger confidence, particularly among small businesses. The NFIB Small Business Optimism Index hit its highest point since 2021, and larger companies reflected steady optimism through increased hiring and capital investment. That said, weakened demand in some industries continues to make growth uneven.For community financial institutions (CFIs), this presents a mix of opportunities and considerations. Consumers’ spending strength could drive demand for personal loans, credit cards, and other lending products. Small businesses may also need financing to match their optimism. However, the uneven economic environment means extra care is needed when evaluating borrower risk.Economic OverviewThe economy performed better than most people expected in 2024, with Q4 GDP coming in at an estimated 2.6%. Consumer activity, along with business hiring and a generally solid corporate outlook, acted as the backbone for much of this growth. Additionally, housing activity showed signs of improvement despite elevated borrowing costs, and recession fears softened compared to earlier in the year.Still, it’s not all smooth sailing. Inflation remains a sticking point. While the Federal Reserve has already lowered rates by a full percentage point in 2024, they’re signaling a cautious approach moving into 2025. Add to this the uncertainty around global tariffs and geopolitical tensions, and it’s clear some hurdles remain.CFIs should pay attention to how these bigger-picture trends might affect demand for credit and borrowing behavior. Lower rates could eventually help ease pressure, but the timeline for these changes remains uncertain.Banking LandscapeLending conditions were steady but selective through the end of 2024. Deals deemed solid by banks went through, while private credit markets handled riskier opportunities. On a positive note, delinquency rates stabilized, and declining deposit costs gave net interest margins a bit of breathing room. Additionally, there was a significant uptick in M&A activity — up 29% YoY — which could be an interesting trend for CFIs to keep an eye on.For lenders, conditions remain a bit tricky. Staying competitive on rates might be crucial to holding onto certain deals, but the more significant question looms over areas like commercial real estate (CRE). While CRE deals remain slow, the right strategies in other lending areas could help make up for it. If lending activity stays sluggish, mergers might be a sensible path forward for some institutions.Housing TrendsThe housing market wrapped up 2024 with a mix of progress and familiar challenges. Permits and housing starts moved in the right direction, and buyers seemed more willing to accept higher mortgage rates as the "new normal." Existing home sales went up, inventories improved slightly, and even with rates holding near 7%, the housing outlook stayed fairly positive.Still, some hurdles remain — affordability being chief among them. Higher borrowing costs and elevated construction prices held growth in check, even as sentiment showed slight improvement. For CFIs, this means opportunities exist within local construction financing, especially with the right tailored products and guidance. Leveraging local expertise could be a key advantage in navigating this space.Final Thoughts2025 comes with a cautious but optimistic economic outlook. Resilient consumer spending and a more confident business sector give plenty of reasons to plan for growth. Still, inflation, rate pressures, and global uncertainties remind us to stay flexible and prepared for potential shifts.For CFIs, success will lie in balancing opportunity with caution. Leaning into consumer lending products and small-business support can help drive growth, even in uneven times. Meanwhile, focusing on relationships and adapting to customer needs will remain central to navigating the challenges ahead.