Tuesday, August 7, 2018

Gimme credit for Q2 2018: conditions looser, demand improves, but acaution flag for housing

 - by New Deal democrat

The Fed released its quarterly Senior Loan Officer Survey on credit yesterday. This is one of my long leading indicators. Let's take an updated look.

The first graph is of the percentage of banks tightening vs. loosening credit, for larger (blue) and smaller (red) firms. Thus a negative number, showing loosening, is a positive for the economy:

For large firms in particular, credit got very loose in the quarter just past.

Meanwhile, demand for those loans, which -- anomalously -- had been lackluster, picked up in the 2nd quarter:

For comparison purposes, here is credit provision for larger firms (blue below, as in the first graph above) vs. the weekly Chicago Fed National Financial Conditions Index (red):

You can see that the much more timely weekly measure is a good proxy.

Over the past 30 years, the provision of credit to firms has correlated well with corporate profits (both measured YoY in the graph below):

Finally, starting last quarter, I highlighted a few other measures in this survey which unfortunately have changed composition in the last decade. Since I've been watching housing closely, let me just republish the Fed's mashup of measures of tightening vs. loosening mortgage credit (first graph below), and demand for same (2nd graph):

This shows that mortgage conditions have been loosening for the last several years, and continued to do so last quarter. Meanwhile demand for mortgages has been declining in the last year, but if anything improved slightly. 

An interesting comparison to watch in the future is how well this might correlate with consumer loan delinquency, which will be updated for the 2nd quarter next week by the NY Fed:

Delinquencies bottomed in Q1 2006 during the last expansion, a year or more after credit was tightened and demand decreased. They were improving as of the last report. 

The bottom line is that the 2nd quarter Senior Loan Officer Survey continued to be a positive for the economy.