Loan Delinquency Data Suggest We're Nowhere Near a Great Depression II

The chart above shows delinquency rates for business and agricultural loans at all U.S. commercial banks from 1987:Q1 to 2008:Q3 using recently released Federal Reserve banking data through the third quarter. In both cases, delinquency rates for agricultural and business loans are close to all-time historical lows, and especially for business loans (1.61%) far below the 3.92% peak in the second quarter of 2002 following the last recession and far below the 6% peak during the 1990-1991 recession.

Although delinquency rates will likely rise in the fourth quarter, the low rates of delinquency for non-consumer loans (business and agricultural) through the third quarter 2008 show that we are nowhere close yet to the delinquency rates for business/ag loans during the recessionary conditions of 1990-1991 or 2001. So before we start making comparisons to the Great Depression and the 1930s, maybe we should first be using the last two recessions as our benchmark comparisons.

Of course, as expected, the major weakness for bank loans is in the real estate sector, and delinquency rates for real estate loans through the third quarter reflect that weakness (see chart below). Real estate loan delinquencies are approaching 5%, which is higher than the 2001-2002 peak of 2.2%, but not yet as high as the 7.5% in 1991.

Likewise, the delinquency rate for consumer loans (see chart below) of 3.8% is below the 5% peak in 1991, and below the rates during the peak of the economic expansion of the 1990s.

Bottom Line: Delinquency rates for commercial banks suggest weakness in the real estate sector, but some relative strength and stability in the commercial loan segment for business and agricultural loans. Most importantly, we're nowhere close to the drastic banking conditions of the 1930s, which were so severe that almost 10,000 banks failed in the four-year period between 1930 and 1933, and more banks failed (4,000) in a single year (1933) than the sum total of all bank failures in the 74-year period since 1934 (3,566). Great Depression II? No way.

Comments

[Steven Hansen:]

Mark, we are in the early days of a economic crisis. according to your data source 3.65% of all loans are already in default. there were several posts yesterday on the commercial real estate markets which is predicted to take hold within the next few years. things will get a lot worse before they get better.

i doubt we will never reach 1930's depression type conditions. but that does not mean a 21st century style depression cannot take hold. a depression is a severe contraction of the economy with slow recovery. some economists are describing this recession we are entering as a deep recession with a drawn out ''u'' shape - that is my description of a 21st century depression.

2008 Dec 01 03:29 AM

[socrateazz:]

This is interesting in that you are comparing 1933 data with the current situation. A better comparison would be 1929 and early 1930 data. I think we are in that stage right now. I see the problem as more of a wealth distribution problem than any thing else. Too much wealth outside of the country and in the hands of a few wealthy folk. 1980 was also a wealth distribution problem with too much wealth in the hands of those who wanted to spend it. When one has excess demand, wealth needs to be moved from the hands who spend it to the hands of those who will save it. When supply is in excess of demand, then an increase in demand is in order. Move wealth from those who have it to those who will spend it! Would have been better to fix the problem ten years ago. Less drastic measures would have needed to be made. If problems had been addressed in 1920 instead of 1930 a depression may not have happened. There is no urgency to fix that which seems to be working.
Look around the worlds nations. Which countries have the most middle class? Rank them by how rich they are. Do you notice those countries with the largest percentage of middle class are the wealthiest. Note that the poorest have most of their wealth in the hands of a few. The palestinians are poor. But how many palestinians are worth over a billion dollars? You would be surprised if you could find out. The greed of those controling the wealth does not allow the wealth to go where it is needed.

2008 Dec 01 04:15 AM

[Hmm?!:]

Uh... The peak fof business loan delinquencies appears to be a year or two after consumers.... and the consumers have not peaked yet!

2008 Dec 01 03:27 PM

[ArnoldCountry:]

Its all like a big oceanliner out in the ocean that needs to make a left turn.... the process is slow and not an immediate turn... we are at the beginning of the turn. I am not a doomsday person, but I do not think the worst is here yet. It will get better afterwards. I see way too much focus on everyone telling the public that things are not that bad... go back in time to Jan. 08 to Jul 08, when Indymac got seized... no rescession. Remember?

Today it was announced that we have been in a rescession since Dec. 07...

More focus on softening the landing is necessary... telling us that a depression is not hear just does not mean much.

2008 Dec 02 01:10 AM