– by a New Deal Democrat
The Senior Credit Officer Survey, which measures the credit offered by banks and the demand for credit from their customers, was released yesterday afternoon for Q1 and the news – unsurprisingly – was not good.
Credit conditions not only tightened, but tightened at a higher rate than in previous quarters, as about half of all banks tightened credit conditions (in the chart below, a positive number means tightening, i.e. more bad for the economy) :
Note that in the past, credit conditions were often the most difficult even before the onset of the recession.
Not only that, but more than half of all banks reported that demand for new loans from commercial customers has fallen:
The number of banks reporting reduced demand is on par with the worst of several recessions.
What this report tells us is that the economy continues to grow based on “catch-up” of supply chain bottlenecks on both the producer and consumer sides. New supply and demand for capital project loans is declining.
There is another ominous sign, at least in the short term. Below is a chart of several weekly measurements of financial conditions from the Chicago Federal Reserve. In these indices, like the data above, a positive number is bad. They are usually reasonably approximate and give advance notice of the quarterly data in the senior loan officer survey.
The leverage sub-index (red), touted by the Chicago Fed as leading, has done just that, as it is currently at levels that more often in the past have occurred shortly before or during recessions. The adjusted index, which leads but with a less variable entry, is still below zero:
Here’s the ominous note: The two times the leverage subindex has been as weak as it is now but not associated with recessions are:
(1) the stock market crash of 1987.
(2) the 2011 debt ceiling crisis.
The fact that the leverage ratio is at these levels as it looks like we are headed for another debt ceiling disaster is, as I said above, ominous.
I went back and checked my posts from that period in 2011. In August and September, all the monthly data – long leads, short leads, matched, whatever – collapsed in unison to the point where it looked like there might be recession already and suddenly started. It should not be at all surprising if the same thing happens as we approach the brink of debt default again.