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By New_Deal_democrat February 8, 2017 10:39 am
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A close look at credit conditions: the Senior Loan Officer Survey

The Fedeeral Reserve's senior loan officer survey measures credit demand and availability each quarter.  Recently I added one measure to my list of long leading indicators, with the qualifier that we only have a little over 25 years of data. Let's take a more detailed look.

Banks loosened credit coming out of the last three recessions, increased its availability in the earlier part of expansions.  Later in the expansions, the easing tapers off and credit become tighter before the economy headed back into recession. The below graph shows this for both credit extended to large and medium-sized firms (blue) and smaller firms (red):

There does not appear to be any meaningful difference between the two measures.

From the consumer side, demand from firms of all sizes appears to follow the same pattern, with demand peaking roughly in mid-cycle, and decelerating and finally declining well before the onset of recession:

Demand from firms for credit appears to slightly lag the loosening/tightening of credit by banks (which makes sense).  The first graph below shows this for large and medium-sized firms, and the second for smaller firms: 

Unfortunately, data for demand by ordinary consumers has only been kept for about the last 6 years. I did see a Doomer article saying that such demand had fallen off a cliff.  Well, below is the entire history of both series:

Yes, there was a spill in Q4, but there is simply no way based on 6 years of data to know how significant that might be.

There is one longer-term measure, banks willingness to make consumer installment loans, that dates back to 1980.  It shows that in two of three cases there was no net tightening until just before the recession.  In the case of the 1991 recession, it did not happen until after the recession had begun:

Finally, there appears to be a fairly close relationship between credit provision (blue in the graphs below) and corporate profits (inverted, red, right scale), potentially with causation running both ways.

Here is the 1990s:

and here is the data since 2001:

Notice the following:

1. Relative credit loosening is at its maximum (shown as a trough in blue) before corporate profits peak.

2. Credit is still on net loose (i.e., net tightening below zero) when profits peak.

3. In both the 1990s and 2000s, credit became relatively tight (i.e., net tightening above zero) shortly after maximum corporate profitability.

4. Both net tightening and a peak in corporate profits were long leading indicators for both of the last two recessions.

Interestingly, credit did not become on net tight until over a year after maximum corporate profitability during this expansion, probably reflecting the limited but intense focal point (natural resources) of the industrial downturn.

Although we don't have enough data yet to be really confident, it seems a fair hypothesis that corporate profits will not make a new peak during this cycle unless credit availability turns on net positive again.

Beyond using net tightening as a long leading indicator, this survey is useful in that we can use corporate demand for loans as confirmation of the trend in credit provision, with a decline close to zero in willingness to expand credit to consumers as a coincident to short leading indicator for recession. This suggests that recession was narrowly averted one year ago, mainly because the downturn was concentrated, and both hiring and consumer spending continued to increase in the broader economy.  It also suggests that while the expansion is past mid-point and signals are deteriorating from their best measures, no outright downturn is near.


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