Monday, July 3, 2017

A prescient forecast by the Senior Loan Officer Survey

 - by New Deal democrat

There has been a spate of Doomish commentary recently (for example, here) claiming that the stalling of commericial and industrial loan growth means that we are heading into, if not already in, a recession.

Aside from the fact that typically in the past, YoY commerical and industrial loan growth has been a lagging rather than leading indicator, bottoming out well after recessions have ended,  over the weekend I was cleaning out some old saved material when I came across the following graph dating from the first quarter of 2015.  The graph compared the percentage of senior loan officers reporting tightening of standards (right scale) for commercial and industrial loans (lagged 6 quarters) to the YoY% change in commercial and industrial loans (left scale):

The relationship forecast that YoY commercial and industrial loans were going to decelerate to about +5% YoY.  I wish I knew whose graph it was, because I would sure like to give them proper kudos! Because that is exactly what has happened since (note that FRED does not permit me to lag one series of data):

Commercial and industrial loans have flatlined, just as forecast by the writer in Q1 2015.

Note, of course that in the last three quarters, the Senior Loan Officers have reported a slight loosening of standards, which suggests that commercial and industrial loans will continue to flatline through about the end of the year, and improve in 2018.

Finally, I have recently noted that the weekly Chicago National Financial Conditions Index does a decent job of forecasting the direction of the Senior Loan Officer Survey itself.  So here is the Chicago NFCI  vs. YoY commercial and industrial loans:

The Chicago weekly survey is forecasting a continued improvement in the Senior Loan Officer Survey when it is reported for Q2 in about a month.