FED Loan Officer Survey Analysis: US Strong, Europe Weak

by royalarse13

With a focus on the US firms and a glance at those abroad the following report confirms what the concensus on the macroeconomic outlook is for the developed world: Europe in a recession, although not severe, and the US economy is growing, albeit slowly.  Full report on “Senior Loan Officer Opinion Survey on Bank Lending Practices” click here for PDF.

U.S. Businesses:

Breadth in lending is good!

“The net fraction of banks reporting increased demand from small firms rose to its highest level since 2005.”

Easy Money and Demand for C&I loans are both bullish for US economy.

This isn’t an absolute measure of economic activity, but its important to have broad participation in a bull market.  However, this demand increase for small businesses coincided with US Domestic banks “reported having eased terms on Commercial and Industrial (C&I) loans,” which dampens the enthusiasm one might have summoned at the outset.

The reason to focus on C&I loans is shown graphically here: 

Loan growth to businesses closely matches employment growth.  There is little to add to this relationship — modern capitalism in the developed world is reliant on credit expansion.

US Banks reported unanimously:

increased competition from other banks and non-bank lenders” as a reason for having loosened their terms.”

Keeping up with the Joneses means slender profits for the banks, but a net benefit to the overall economy given surplus access-to-credit for those with impetus to borrow and expand their business.

U.S. Households

Housing Bust and Recovery as told by Loan Officers reporting the demand for mortgages.

Most banks reported lending standards for, and demand from, borrowers for residential real estate loans to purchase homes were little changed.  Any further chatter of the nascent US housing recovery will be extinguished should this metric fail to expand.

Household lending standards eased (HELOC and Auto) which had little impact on demand for these loans, as they reportedly weakened overall.

Foreign banks 

“Foreign respondents reported having tightened both standards and terms.

These foreign firms (who typically deal with businesses) tightened their standards on C&I loans for the Second consecutive quarter.  More costly credit for businesses in an austere climate isn’t positive for the growth of Europe and Asia.

The accelerated tightening for those with Euro-exposure was aptly summed thus:

more widespread tightening of standards on loans to non-financial firms with operations in the US and significant exposures to European economies.”

Lenders duck and cover to avoid getting hammered with EU exposure will surprise no one.  That there was an acceleration of this behaviour in light of ECB loosening is mildly surprising and decidedly negative.

However, the demand side didn’t respond with any vigour:  C&I and Commercial Real Estate loan demand was flat abroad.  Avoiding an outright contraction here is vital.  The ECB has made great effort to ensure the tide doesn’t roll out too far….

2012 Outlook

US Domestic banks expect 15-60% expect improvements in personal delinquencies and charge-off rates.  More people paying their debts is sound basis for a bullish macro thesis in the US and some optimistic experts see this as the beginning of a new secular trend.  Lenders display a positive tone on their expectations for repayment from Businesses in the US, meanwhile abroad Foreign lenders are the opposite.

What goes unreported is the relative weakness of the sovereign entities which these Foreign firms are domiciled.  Individual countries within Europe are struggling mightily and knock-on impacts to businesses are being observed in reports like these and markets daily.

Government intervention that was previously heralded in the private sector for resorting calm and order is now the anchor encumbering European economic growth.  Government leaders are at the mercy of Technocrats and Asian/American creditors.  All the parties are searching for answers seemingly adrift in the ocean of noise from the media, their aides/advisers, and the electorate.  These data are signals from the trenches that life goes on, businesses expand and contract and commerce proceeds unabated by our pessimism and fear.