Senior Loan Officer Survey Confirms Looser Credit Conditions

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by: Hale Stewart

A few days ago the Fed put out its Senior Loan Officer Survey. This is a long leading indicator for the economy, as it generally takes a year or two for a loosening or tightening of credit, which is what it measures, to filter through into the wider economy.

If it was a portent of DOOOM, it would have been trumpeted from the mountaintops in the econoblogosphere. Instead, it went almost entirely unremarked - because there wasn't any bad news.

So, to the graphs!

About a year ago, I added the Chicago Financial Conditions Index to my set of weekly indicators, because historically it has accurately forecast the quarterly credit report, while being much more timely. And it did so again for Q4 2017:

The weekly Chicago Index has been increasingly negative (which is good, because negative numbers mean looser credit), and now the Senior Loan Officer Survey has confirmed that loosening.

Another bit of good news comes from the demand side, which had oddly diverged from the provision of credit during the first three quarters of 2017; i.e., banks wanted to lend, but commercial customers weren't in a mood to borrow. That resolved positively in Q4:

Finally, credit conditions tend to lead actual lending by about 6 quarters:

This graph, from Q3 2015, accurately forecast the sharp deceleration in commercial lending that began in late 2016.

Here's what it looks like now (note I've inverted the Senior Loan Officer survey data in blue):

The Senior Loan Officer Survey has shown loosening for 4 quarters now. So I anticipate an upturn in the YoY% growth of commercial loans during the next six months. So the Doomers who have been clinging to this metric probably ought to think about what they gloom onto next.

New Deal democrat, XE.com