- by New Deal democrat
Until Thursday we are once again in a data drought this week. In the meantime, there are a few points I want to address, including the very important Moody’s downgrade of US debt.
But there was one important piece of data that came out last week that I didn’t discuss yet: the quarterly Senior Loan Officers Survey published by the Federal Reserve.
The ease or difficulty in obtaining a loan is an important long leading indicator. Banks generally ease credit terms earlier in the cycle, and tighten them as they become incrementally more cautious about loan repayment. In general they turn relatively cautious more than 12 months before a recession.
I have not placed a lot of weight on the long leading indicators for several years, because their information was confounded by the massive kinking and then unkinking of the supply chain during COVID. While that ended at the beginning of 2023, the problem for, e.g., interest rates, has been whether I should base a forecast during this entire expansion including the supply chain problem years, or only since the beginning of 2023? There is simply no good answer.
But the Senior Loan Officer Survey does not have that conundrum. Since the beginning of 2023, there either has or has not been more demand for loans, and banks either have or have not tightened terms and conditions since then. So I can safely look at the trends over the past 2+ years.
Many of the old metrics from this release were discontinued some years ago, and others do not have an extensive history, but there are two important metrics that have been reported consistently for 35 years.
The first of those is demand for loans from producers. More demand is expansionary; less is constractionary. In the below graph, the thick lines are for loan demand from big firms. The narrower lines are demand from small firms:
Note that these turned down over a year before both the 2001 and 2008 recessions. They also turned down later during the 2010’s expansion that may or may not have been cut short by COVID. As indicated above, they also turned down during the period of COVID supply chain tightness.
But over the last several years the situation looked very much like the early recoveries from both the 2001 and 2008 recessions. Demand was still not strengthening, but it had stopped declining in relative terms. This needless to say was good.
Now let me focus in on the last 5 years of this data:
After being positive in Q4 2024, it turned down in Q1 of this year. Only one quarter, but if it does not turn back positive this quarter then we have likely broken the improving trend, and this metric becomes a negative for the economy one year plus out.
The second indicator with a long history of being leading is whether banks are tightening or easing loan terms for firms. In this metric a number above zero indicates more tightening and so is a negative for the economy:
There is less noise in this indicator, and only one significant false positive, in 2016. Like demand, it was getting better in 2023 and 2024 after the supply chain issue stopped, and looked very much like an early recovery chart.
But in Q4 of last year the decline stopped, and it reversed higher in Q1 of this year. This is significant tightening, a sharper increase than in 2016. Which means it is already a negative for the economy in 2026.
Finally there is one important caveat. The Chicago Fed publishes weekly figures for financial conditions, which while noisier in the past have generally tracked with the quarterly Senior Loan Officer numbers. These are another set of series in which a negative number means loosening, so good; a positive number tightening, so bad.
In any event, they have not tracked with the most recent Senior Loan Officer Survey this year:
The weekly numbers indicate continued loose conditions, with only a very slight move to “less loose” in the past several months. I would expect these weekly numbers to turn positive (i.e., bad) significantly before the start of any recession.