Access to and the supply of credit is a long leading indicator. The results of tightening or loosening don’t usually hit the economy for at least a year, sometimes two. The report on that credit for Q3 was just released yesterday, and it contained some positive (or at least less negative) surprises.

There are two series in the Senior Loan Officer Survey that go back over 30 years: banks tightening or loosening credit, and reporting stronger or weaker demand for that credit. Let’s take a look at each.

The data for tightening standards is one where a positive number is a negative for the economy since it means more banks are tightening rather than loosening lending standards. And here, the news was “less bad,” which is actually a positive. More banks than not continued to tighten lending standards in Q3, but at a lower rate:

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What is interesting about this is that this sort of decline is what we have seen in the past 30 years as the economy is coming *out* of recession, not going into one - with the possible exception of the 1991 recession, where unfortunately the data started just before the brief recession began. We can’t put too much weight on this, given the limited data set, and it may simply be a reflection of the fact that interest rates went down between last winter and summer. Nevertheless, with economic data “good” news starts with “less bad” news, and that’s what this reflects.

This quarter for the first time the Survey broke down demand for credit not just between larger and smaller firms, but between larger and smaller banks as well. To keep the presentation cleaner, I’ve broken this down into two graphs.

First, smaller banks reported reduced demand for credit both from larger and smaller firms:

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This is a negative, although once again note that the percentage of the decline has bottomed out, which is very similar to what we saw in the latter part or just after the last two recessions.

But interestingly larger banks reported an *increase* in the demand for credit from larger firms:

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This is almost exactly what we have seen coming out of the last two recessions - again, with one important exception. Early in the Great Recession, when it was very shallow and focused on the housing market, a similar pattern occurred, only to be completely reversed when the banking crisis hit.

In other words, as to the demand for credit, once again the news is “less bad.” I am very much hedging my bets on what this means, given the limited history of this series. But it is of a piece with the recent increase in another long leading indicator, corporate profits, so I am keeping an open mind. This might just be a pause in a longer downward trend, or it might be the beginning of an actual turnaround in the long leading indicators.

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