Commercial & Industrial Loans Are In The Danger Zone

Commercial and industrial (C&I) loan activity is watched closely by economists to gauge the strength of the economy and estimate where we are in the business cycle. C&I loans are used to finance capital expenditures or increase the borrower’s working capital. The C&I loan cycle often takes up to a couple of years to turn positive after a recession, but provides even more confirmation that an economic expansion is underway. For example, the U.S. Great Recession officially ended in June 2009, but the C&I loan cycle didn’t turn positive until late-2010. C&I loans also help to warn when the economic cycle is approaching its end (as they are now).

Total outstanding U.S. commercial and industrial loans have increased by 92% in the current cycle, which surpasses the 80% increase during the mid-2000s cycle and the 88% increase during the late-1990s cycle:

One way of determining when the C&I loan cycle (and, therefore, the overall economic cycle) is nearing its end is by charting total outstanding commercial and industrial loans as a percentage of GDP. When C&I loans are at 10% of GDP or higher (the “Danger Zone”), that is typically a sign that the cycle is long in the tooth and about to tip over into a recession. According to the chart below, recessions occurred shortly after C&I loans peaked within the “Danger Zone.” C&I loans are currently in that zone, which I see as further confirmation that we are in a Fed-driven economic bubble that will end badly.


The current C&I loan cycle has been more powerful and longer-lasting than the prior two cycles because the Fed has held interest rates at record low levels for a record length of time. As the chart below shows, credit booms and bubbles form during low interest rate periods (low interest rates encourage borrowing):

Fed Funds Rate

The U.S. corporate debt market (which is mostly in the form of bonds instead loans) is telling a similar message as commercial and industrial loans, as I recently discussed. To summarize, ultra-low bond yields over the past decade have encouraged a corporate borrowing bubble that has also been funding the stock buyback boom. As a result, total outstanding U.S. corporate debt has increased by $3 trillion or 45% since the last peak in 2008. U.S. corporate debt is now at an all-time high of over 46% of GDP, which is even worse than the levels reached during the dot-com bubble and mid-2000s housing bubble.

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