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By New_Deal_democrat November 14, 2017 9:44 am
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Banks loosen lending, but firms are diffident about borrowing

The Fed released the Senior Loan Officer Survey last Monday, which is of particular interest because in its nearly 30 year history, it has been a good long leading indicator, and so has been added to my stable of same.

And the news was puzzlingly mixed.

First, the positive news: banks continued to loosen lending standards to commercial firms, exactly as forecast by the Chicago National Financial Conditions Index:

In recognition of this, I recently added the Financial Conditions Index to my list of "Weekly Indicators." It is always nice to get confirmation that data is performing as expected. In the six weeks since the end of the third quarter, the Index has continued to be very positive, so the looseness of credit is continuing.

This tells us that credit is relatively loose, and a recession should be more than a year away.

Now here is the puzzle: if banks want to lend, commercial firms don't particularly want to borrow.  Demand is down YoY for the second quarter in a row (red, inverted in the graph below):

If bank lending has been a good long leading indicator, so has demand for loans -- and demand is declining.

This is the first time in the history of this survey that there has been such a divergence.  Further, this highlights a larger divergence I found in the long leading indicators. By and large, those indicators focused on the behavior of producers and consumers are generally neutral or even negative. Meanwhile, those indicators focused on money and finance are generally positive. My suspicion is that there cannot really be a downturn unless finance really falters. But it is an interesting bifurcation in the economy.

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