This Important Survey Reveals Risks Still Lurking Below The Surface

This Important Survey Reveals Risks Still Lurking Below The Surface
Stéphane Renevier, CFA

7 months ago2 mins

The Fed’s senior loan officer opinion survey (SLOOS) can give you a glimpse into credit conditions each quarter – that is, how willing banks are to lend, and how keen businesses and households are to borrow. Strong credit creation typically fuels economic growth (and the reverse is true too). So the survey can give you an early look at the economy’s direction and sometimes a warning about potential pitfalls in its path. And the most recent survey results might have you holding your breath a bit.

On the supply side of things, it shows that in the second quarter, banks were making it tougher for businesses, commercial property companies, and everyday households to secure loans. The white line in the chart shows the percentage of banks making it more difficult for medium- and big-sized firms to get commercial and industrial loans, but that rising slope looks similar for most other loan applicants too. And this isn't just your run-of-the-mill strictness: we're talking global financial crisis and pandemic crisis levels of tough. You can take this as a red flag: when banks tighten their belts, it’s because they’re worried about the economic outlook, their clients' ability to pay back, and their own financial health. They're preparing for a storm.

As for the demand side, things don’t look a lot rosier, but there are tiny signs of improvement. Interest in residential real estate, home equity lines of credit, and other consumer loans dropped, while demand for credit card loans held steady. The blue line shows that fewer medium and big businesses applied for business loans in the quarter. This matters: these loans are the fuel that powers the economic engine. They enable companies to invest in new projects and households to purchase homes – the very activities that give our economy a good old rev-up.

Taken together, it’s a less-than-sunny picture. Banks, businesses, and households all appear to be bracing for rougher weather, and the slowdown in credit creation could put a dampener on economic growth over the next few quarters, while potentially causing bankruptcies to heat up, as companies struggle to refinance or pay back their debt. The silver lining in the survey is that, despite challenging conditions, the worsening trend did slow in the second quarter compared to the first quarter – suggesting we might be at a turning point, with clearer skies on the horizon.

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