The wheels are about to fall off the US bank loan market.
After we first showed in early March the steep drop in bank loan creation for both Commercial and Industrial, auto and total loans - all traditionally leading indicators to economic contraction and recession as business and consumers halt spending, even with borrowed money - numerous other analysts and pundits have attempted to explain, and justify why one should not be particularly concerned about this tumbling indicator. Most notable among them Goldman, who in late March "explained" that there was nothing ominous about the crash in loan creation, and instead it was just a function of a base effect, and a shift from loan to corporate bond issuance.
Two months later we can confirm that not only was Goldman wrong, but so are all the Pollyannas who assert there is nothing troubling about the ongoing collapse in loan creation.
According to the latest Fed data, the all-important C&I loan growth contraction has not only continued, but over the past two months, another 50% has been chopped off, and what in early March was a 4.0% annual growth is now barely positive, down to just 2.0%, and set to turn negative in just a few weeks. This was the lowest growth rate since May 2011, right around the time the Fed was about to launch QE2.
At the same time, total loan growth has likewise continued to decline, and as of the second week of May was down to 3.8%, the weakest overall loan creation in three years.
Another loan category that has seen a dramatic slowdown since last September, when Ford's CEO aptly predicted that "sales have reached a plateau." Since then auto loan growth has been slashed by more than 50% and at this runrate, is set to turn negative some time in late 2017. Needless to say, that would wreak even further havoc on the US car market.
For a while, despite numerous attempts at explanation, there was no definitive theory why this dramatic slowdown was taking place. It even prompted the WSJ to inquire "who hit the brakes?"
Well, after the latest Fed Senior Loan Officer Survey, we may have the answer.
First, recall that in late April we showed another very troubling trend: consumer credit card default rate as tracked by S&P/Experian Bankcard had surged to the highest level since June 2013, suggesting that contrary to reports otherwise, the US consumer is increasingly unwell.
A quick look at the latest Fed Senior Loan officer survey revealed even more disturbing trends. According to the report, "banks reported tightening most credit policies on Commercial Real Estate loans over the past year.... On balance, banks reported weaker demand for CRE loans in the first quarter." Even more troubling was the continued drop in demand for C&I loans among small, medium and large corporations, with "inquiries for C&I lines of credit remained basically unchanged" staying at a modestly depressed rate.
This stark admission that in addition to declining bank supply due to tighter standard (i.e., worries about further losses), there was less demand by businesses and consumers for loans, has explained once and for all the ongoing collapse in commercial bank loan creation, both total, C&I and auto. Of th two, the declining demand for loans businesses, is by far the most concerning aspect of an economy that is supposedly growing, and where companies should be willing to take out new credit to fund expansion (instad of merely issuing bonds to buyback their stock).
Digging deeper into the Fed report confirmed the worst-case scenario: the collapse in loan growth was almost entirely due to a sharp, recent consumer revulsion toward credit, with reduced level of consumer card and auto loan demand in the quarter. The decline took place despite "visibly softer" underwriting standards for cards which surprised some analysts as not creating incremental demand;
And while C&I loans are tumbling, demand for credit cards is now running at the lowest level in the 5 years the survey has provided credit- card-only data for consumer demand.
With all that, we can now close the book on the WSJ's previously unanswered question of "who hit the breaks?" The answe the US consumer, the driver behind 70% of US GDP, officially tapped out. In fact, it was almost as if US consumers were hit by a perfect storm of adverse events in late 2016 and early 2017, just as GDP was on the verge of its first pre-recessionary contraction in years, and just as the S&P rose to new all time highs to distract from what is emerging as an imminent US recession.
Here's the bottom line: unless there is a sharp rebound in loan growth in the next 3-6 months - whether due to greater demand or easier supply - this most accurate of leading economic indicators guarantees that a recession is now inevitable. How accurate: every single time C&I loan peaked, a US recession follow. We doubt this time will be different.