Tuesday, February 28, 2017

No, commercial and industrial loans are not a leading indicator

 - 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.
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.