One of the best--but rarest--leading indicators of the economy is the Fed's "senior loan officer" survey, released just four times a year. Fortunately, it's due out at 2 p.m. today, just in time to help determine how much the recent bank stress is likely to spill over to broader economic growth.
And the details of this usually sleepy report may actually be quite market-moving. "We think it is more important for markets this week than CPI," wrote Andrew Brenner of Natalliance in a client note this morning. "It is forward-looking...CPI is backwards looking and is not predictive of the future."
Brenner and his team are expecting about a 15-point jump in business lending tightness to a reading of over 60, leaving us just below the peaks we hit in 2008 during the Great Financial Crisis, and in 2020 when the pandemic hit. And it's worth noting that the Fed only surveys about 88 banks, mostly the largest ones in each district, so this won't even capture the presumably worse conditions at the smaller banks right now.
In other words, lending conditions in the U.S. are now probably among the tightest we've experienced in all but the worst recessions of the past thirty years. Which makes sense--we've just had a convulsion resulting in three of the four largest bank failures in U.S. history, and major profitability questions hang over the remainder of the system right now. The "KRE" regional bank ETF may be higher the last couple sessions, but it is still down 35% since the start of the year.
Interestingly, this data is timed to prepare the Fed for its May policy meeting, so Chair Powell should have had the numbers last week when the committee hiked by another quarter-point. Perhaps that means the report will surprise us with better-than-expected results; or perhaps, as I wonder, this Fed simply doesn't put a lot of credence on leading economic indicators.
But investors do. "This data has been a staple in our cyclical framework forever, as it's one of the three precursors to a recession," wrote Michael Kantrowitz of Piper Sandler yesterday about the loan officer survey. The data "have historically helped determine whether a Fed tightening cycle leads to a hard or soft landing."
One insight Kantrowitz has gleaned from the data: a soft landing can occur when banks are easing lending standards into a downturn, which happened in 2019, 1994, and in the mid-1980s. But today, the hard landing appears to already be sealed with both consumer and business standards tightening dramatically as of the January report.
And with nine different Fed officials on the calendar this week, it would be nice to hear at least one of them opine on why they rely so much on the lagging data, like inflation and employment, as opposed to the grim message in leading indicators like the Fed's own loan officer survey.
See you at 1 p.m!
Kelly
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