Bank Tightening Lending & Recession Risk

In recessions, banks tighten their lending standards. Therefore, the Fed’s January Senior Loan Survey that showed the banks started to tighten standards is worrying investors. The net percentage of banks tightening commercial and industrial loans became positive in January. It went briefly positive in 2012 and 2016, which were the other two slowdowns in this expansion. Therefore, this survey is far from a confirmation that the economy is in a recession.

The net percentage of domestic banks tightening their standards for consumer loans has been mostly positive since 2017. The highest percentage is credit cards, but it’s nowhere near the level reached in the last recession, and it’s not at the level hit in the 2001 recession yet. As you can see from the chart below, the net percentage of banks increasingly willing to make consumer loans fell to near zero.

In the mid-1960s and the mid-1990s, this percentage was negative without a recession, but there is usually one near or ongoing when this goes negative.

Why Is This Happening?

It’s pretty easy to see why the January survey showed banks not increasingly willing to make loans. Financial conditions became very stressed in late 2018 before recently recovering. We’ve previously seen surveys which showed the banks were worried about the yield curve. The Fed could invert most of the curve with one more hike. The percentage of the curve that is inverted has increased. There are also worries about the trade war and government shutdown. Global growth is also slowing, especially in Europe.

The Consumer Is In Great Shape

The consumer is in good shape as the unemployment rate is 4%, and in Q4 2018 real median usual wage growth was 2.9% which was the strongest growth since the start of the cycle. Redbook same store sales growth is in the mid-single digits although it has pulled back from the cycle high reached in December where it was in the high single digits.

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