How do you know an economy is growing? To answer that question fully would require for more time than most readers can dedicate to an article here, as there are simply too many indicators to mention, some objective, others less so, but there is one clear cut sign confirming an economy is not growing: if the consumers in said economy have no demand for loans – an indicator of stagnation and/or disinflation – or worse, are actively deleveraging their existing debt exposure, a precursor to outright deflation and money destruction, the bane of every central bank.
Well, if one uses the “exclusion” indicator, the US may have a big problem.
Following the passage of tax reform in late 2017, the previous Fed Senior Loan Officer Survey released three months ago noted a meaningful pick-up in loan demand. Then, according to the Fed’s weekly H.8 data on bank balance sheets, this rising oan demand spurred acceleration in actual bank C&I lending for the first time since the general elections in the last part of 2016 (recall that on several occasions in 2017, loan demand was on the verge of going negative Y/Y, traditionally a leading recession indicator).
And then… something snapped, because even though C&I lending has continued through April at a brisk clip, the latest, just released Senior Loan Officer Survey now shows the worst possible case (as per above): loan demand just turned collapsed, and not just for C&I loans but across the board.
What is even more bizarre is that this sudden revulsion toward new loans took places even as lending standards are becoming increasingly easy! As BofA notes, in the latest April survey a net 11.3% and 3.0% of banks reported easing lending standards over the previous three months for loans to large/medium C&I firms and small C&I firms, respectively, up from 10.0% and net unchanged in the prior.
And yet, despite easier access to credit, in terms of demand a net 7.0% and 1.5% of banks reported weaker demand for loans to large/medium C&I firms and small C&I firms, respectively, compared to net 2.9% and 6.0% reporting stronger demand in January. For CRE loans the net share reporting weaker demand decreased to 7.7% in April from 3.9% in January. Oops.
It wasn’t just C&I loans.
The same pattern was observed within the mortgage pipeline, where banks continued to ease lending standards for residential mortgage loans: a net 3.4% and 9.7% of banks reported loosening lending standards for GSE-Eligible and QM-Jumbo mortgages, respectively, compared to a net 8.3% and 1.6% in January, respectively.
Yet just like with C&I loans, this easing of standards merely underscored the decline in demand, as the net share of loan officers reporting weaker demand for GSE-Eligible and QM-Jumbo mortgages increased to 18.6% and 16.1% in April, respectively, further deteriorating from a net 15.5% and 11.5% reporting weaker demand for GSE-Eligible and QM-Jumbo mortgages in January.
At this point it will probably not come as a surprise that at the same time as C&I and resi loan demand slumped, US consumers expressed no interest for consumer loans either, as a net 9.6% and 6.6% of banks reported weaker demand for credit card and auto loans, compared to unchanged and a net 8.5% of banks reporting weaker demand for auto loans in January, respectively. Ominously, the demand for credit card loans tumbled to match the lowest print in the past 6 years, an indication that US consumers may have finally hit their peak for credit cards demand; if so, and with the US savings rate near all time lows, the US household’s purchasing power – that driver behind 70% of US GDP – is about to collapse..
Banks tightened lending standards for both credit cards and auto loans, according to the fresh April survey (net 9.4% and 6.5% of banks, respectively). This compares to net 1.9% and 4.9% tightening lending standards for credit cards and auto loans in the prior (January) survey (Figure 13).
Interestingly the Fed reported that: “Most domestic banks that reported experiencing reduced C&I loan demand indicated that customers shifting their borrowing to other sources of credit and increases in customers’ internally generated funds were important reasons for weaker demand”. Translated, this means that customers are not only not looking to grow their debt balances, but are effectively deleveraging.
Why? Very simple: thanks to the recent surge in Libor, the interest expense on loans has more than doubled this year, and what happens when households no longer find it economic to pay the interest on their debt? They dig deep, i.e. “shift their borrowing to other sources of credit” and repay existing loans.
If this is accurate, expect to see a plunge in the annual growth in C&I loans in the next few months as the collapse in demand translates into a mothballing of the loan pipeline as US consumers rebel against higher rates.
Related Posts:We truly are under attack. We need user support now more than ever! For as little as $10, you can support the IWB directly – and it only takes a minute. Thank you. 1,201 views