No, Commercial And Industrial Loans Are Not A Leading Indicator

by: Hale Stewart

By New Deal democrat

There are a number of Doomer sites I typically read, among other reasons because a few of them do link to interesting data series that turn out to be useful. One such site is Wolf Street, where this morning I read the following:

C&I loans are a sign of what businesses of all sizes are doing – from the small company that is borrowing to buy a piece of equipment to the largest behemoth that is funding its inventories. These loans show whether companies in aggregate are expanding their investments or pulling in their horns.
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This chart covers C&I loans going back to 1988, covering the last three recessions. The turning points are circled in red:

The turning point during the Financial Crisis was unique – a sudden deep collapse in credit, when the banking system began to seize, rather than a classic turning point that evolved over time, as the prior two turning points exemplified.

The timing of a turning point may not be perfectly aligned with the beginning of a recession, but it’s close.

Now, I was pretty sure that what happened during the Great Recession was actually pretty typical, but I had to go back and check.

So here is what C&I loans look like from 1948 to 1968:


And from 1968 to 1988:


Now we have expanded the number of recessions from 3 to 11. And what do we find? That in addition to 1991 and 2001, loans only turned down one other time in advance of a recession: in 1948. They turned down concurrent with the outset in 1972. The other 7 times, they only turned down after the recession started, if at all!

So much for a leading or concurrent indicator.

But, wait a minute, isn't the fact that they recently turned down still noteworthy?

Well, let's take a look at that too. So here is the m/m % change since 1988:


From 1948 to 1968:


From 1968 to 1988:


When we look at the complete record, we see sporadic small down months in the midst of nearly all expansions.

Here for the umpteenth time is the lesson: beware any claim that only covers the last few cycles, especially when the data series has a much longer history.

But just to show you how these data expeditions can be useful, look what I found when I decided to include the rate of delinquencies on C&I loans (red):


That, my friends, just like the unemployment rate, is a leading indicator for downturns in addition to being a lagging one for upturns. Only 3 cycles, so caution is warranted. After rising during the energy-led shallow industrial recession, delinquencies are now going sideways.