Analysts, strategists and financial media outlets have dedicated quite a bit of time recently to the implications of stress in the banking sector for credit creation.

Lending standards were already tightening before a trio of bank failures triggered the worst bout of turmoil in the US financial sector since Lehman.

Now, it seems very likely that credit will be constrained even further. Jerome Powell himself suggested this week that the cumulative impact could be equivalent to one or more rate hikes.

This discussion tends to revolve mostly around regional lenders and the fallout for small businesses, but it goes beyond that.

Consider that thanks to long-maturity, fixed-rate debt, S&P 500 borrow costs (the ratio of interest expense to debt) hit a record low last year, shielding corporates from rising rates. That’s only sustainable if you can fund spending activity with cash.

44% of S&P 500 debt outstanding (excluding financials) matures after 2030, so even if companies did have to replace maturing debt with new borrowing at higher rates, it wouldn’t be a disaster, but it would erode margins, all else equal.

As the figure below from Goldman shows, cash balances plunged by the most in at least a half-century in 2022. 

Going forward, and assuming rates do indeed stay some semblance of “higher for longer,” management will face harder choices. “Falling cash balances will eventually force companies to sacrifice either their profit margins or their spending activity,” Goldman’s Ben Snider and David Kostin said.

Already, spending on capex, R&D, and dividends has slowed, albeit not by much. Buybacks, a leading indicator for capex, dropped sharply in Q4, and a brisk start to 2023 for authorizations belies slower executions compared to last year.

Goldman has a capex tracker derived from more than a dozen monthly macro indicators tied to nonresidental fixed investment. It’s in negative territory now.

If you’re wondering whether bank stress and any associated tightening in credit conditions has the potential to make this worse, the answer is “Yes.” As Snider and Kostin went on to point out, the Fed’s Senior Loan Officer Opinion Survey (now must-watch television, so to speak, for macro observers) has “historically been a leading indicator of investment spending growth.”

The figure on the left suggests the bottom is about to fall out for capex. Goldman didn’t put it in those terms, but did note that their own model (illustrated in the right-hand figure) points to investment spending growth of just 1% this year outside of energy.

For reference, Goldman’s capex model incorporates EBIT growth, ROE, the SLOOS and the above-mentioned capex tracker. As you can see, it maps pretty well to actual capex growth.

Bottom line: Corporate spending was probably already headed for a broad-based slowdown, and as Snider and Kostin cautioned, “the likelihood that bank stress further tightens lending conditions adds additional downside risk to the spending outlook.”