MACRO MONDAY 32~The SLOOS~ Is Lending Increasing or decreasing?
MACRO MONDAY 32 – The SLOOS
Released Monday 5th Feb 2024 (for Q4 2023)
Released quarterly, the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) is a survey of up to 80 large domestic banks and 24 branches of international banks to gain insight into credit, lending standards and bank practices. The Federal Reserve issues and collates these voluntary surveys.
The surveys generally include 25 questions and a number of special questions about development in banking practices. They cover practices for the previous three months, but also deal with expectations for the coming quarter and year. While some queries are quantitative, most are qualitative.
The surveys have come to cover increasingly timely topics, for example, providing the Fed with insight into bank forbearance policies and trends in response to the 2020 economic crisis.
Let’s have a look at the culmination of the some of the more important data from the SLOOS in chart form
The Chart
The blue line on the chart plots the results of the SLOOS survey – specifically, the net percentage of polled banks reporting that they’ve tightened their lending standards to commercial and industrial customers.
I have combined the SLOOS Tightening Lending Standards on the chart with the Unemployment Rate. You can clearly see a pattern of the SLOOS leading the Unemployment Rate and also the broad correlation of their trends. Recessions are in grey.
The SLOOS Tightening Lending Standards
(blue line)
▫️ Lending standards tightened significantly prior to the onset of each of the last three recessions (See green lines and text on chart).
▫️ When lending conditions tightened by 54% or greater it coincided with the last four recessions. (Represented by the horizontal red dashed line on the chart and the red area at the top)
▫️ On two occasions the 54% level being breached would have been a pre-recession warning; prior to the 1990 recession and 2000 recession providing approx. 3 months advance warning.
▫️ When we breached the c.34% level in Jan 2008 it marked the beginning of that recession. We are currently at 33.9% (for Q3 2023) and were as high as 50% in the reading released in July (for Q2 2023). Above the 34% on the chart is the orange area, an area of increased recession risk but not guaranteed recession.
▫️ Interestingly, every recession ended close to when we exited back out below the 34% level. This makes the 34% level an incredibly useful level to watch for tomorrows release. If we break below the 34% level it would be a very good sign. We could speculate that it could be a sign of a soft landing being more probable and could suggest a soft recessionary period has already come and gone (based solely on this chart continuing on a downward trajectory under 34%). I emphasize “speculate”.
U.S. Unemployment Rate (Red Line)
▫️ I have included the U.S. Unemployment Rate in red as in the last three recessions you can see that the unemployment rate took a sudden turn up, just before recession. This is a real trigger warning for recession on the chart. Whilst we have had an uptick in recent months, it has not been to the same degree as these prior warning signals. These prior stark increases were an increases of approx. 0.8% over two to three quarters. Our current increase is not even half of this (3.4% to 3.7% from Jan 2023 to present, a 0.3% increase over 1 year). If we rise up to 4.2% or higher we can start getting a little concerned.
▫️ The Unemployment Rate either based or rose above 4.3% prior to the last three recessions onset. This is another important level to watch in conjunction with the 34% and 54% levels on the SLOOS. All these levels increase or decrease the probability of recession and should infer a more or less risk reductive strategy for markets.
In the above we covered the Net percentage of Banks Tightening Standards for Commercial and Industrial Loans to Large and mid-sized firms. The SLOOS provides a similar chart dataset for Tightening Standards for Small Firms, and another similar dataset for Consumer Loans and Credit Cards. I will share a chart in the comments that illustrates all three so that tomorrow we can update you with the new data released for all of them. You are now also better equipped to make your own judgement call based on the history and levels represented in the above chart, all of which is only a guide.
Remember all these charts are available on TradingView and you can press play and update yourself as to where we are in terms of zones or levels breached on the charts.
Thanks for coming along again
PUKA
Released Monday 5th Feb 2024 (for Q4 2023)
Released quarterly, the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) is a survey of up to 80 large domestic banks and 24 branches of international banks to gain insight into credit, lending standards and bank practices. The Federal Reserve issues and collates these voluntary surveys.
The surveys generally include 25 questions and a number of special questions about development in banking practices. They cover practices for the previous three months, but also deal with expectations for the coming quarter and year. While some queries are quantitative, most are qualitative.
The surveys have come to cover increasingly timely topics, for example, providing the Fed with insight into bank forbearance policies and trends in response to the 2020 economic crisis.
Let’s have a look at the culmination of the some of the more important data from the SLOOS in chart form
The Chart
The blue line on the chart plots the results of the SLOOS survey – specifically, the net percentage of polled banks reporting that they’ve tightened their lending standards to commercial and industrial customers.
I have combined the SLOOS Tightening Lending Standards on the chart with the Unemployment Rate. You can clearly see a pattern of the SLOOS leading the Unemployment Rate and also the broad correlation of their trends. Recessions are in grey.
The SLOOS Tightening Lending Standards
(blue line)
▫️ Lending standards tightened significantly prior to the onset of each of the last three recessions (See green lines and text on chart).
▫️ When lending conditions tightened by 54% or greater it coincided with the last four recessions. (Represented by the horizontal red dashed line on the chart and the red area at the top)
▫️ On two occasions the 54% level being breached would have been a pre-recession warning; prior to the 1990 recession and 2000 recession providing approx. 3 months advance warning.
▫️ When we breached the c.34% level in Jan 2008 it marked the beginning of that recession. We are currently at 33.9% (for Q3 2023) and were as high as 50% in the reading released in July (for Q2 2023). Above the 34% on the chart is the orange area, an area of increased recession risk but not guaranteed recession.
▫️ Interestingly, every recession ended close to when we exited back out below the 34% level. This makes the 34% level an incredibly useful level to watch for tomorrows release. If we break below the 34% level it would be a very good sign. We could speculate that it could be a sign of a soft landing being more probable and could suggest a soft recessionary period has already come and gone (based solely on this chart continuing on a downward trajectory under 34%). I emphasize “speculate”.
U.S. Unemployment Rate (Red Line)
▫️ I have included the U.S. Unemployment Rate in red as in the last three recessions you can see that the unemployment rate took a sudden turn up, just before recession. This is a real trigger warning for recession on the chart. Whilst we have had an uptick in recent months, it has not been to the same degree as these prior warning signals. These prior stark increases were an increases of approx. 0.8% over two to three quarters. Our current increase is not even half of this (3.4% to 3.7% from Jan 2023 to present, a 0.3% increase over 1 year). If we rise up to 4.2% or higher we can start getting a little concerned.
▫️ The Unemployment Rate either based or rose above 4.3% prior to the last three recessions onset. This is another important level to watch in conjunction with the 34% and 54% levels on the SLOOS. All these levels increase or decrease the probability of recession and should infer a more or less risk reductive strategy for markets.
In the above we covered the Net percentage of Banks Tightening Standards for Commercial and Industrial Loans to Large and mid-sized firms. The SLOOS provides a similar chart dataset for Tightening Standards for Small Firms, and another similar dataset for Consumer Loans and Credit Cards. I will share a chart in the comments that illustrates all three so that tomorrow we can update you with the new data released for all of them. You are now also better equipped to make your own judgement call based on the history and levels represented in the above chart, all of which is only a guide.
Remember all these charts are available on TradingView and you can press play and update yourself as to where we are in terms of zones or levels breached on the charts.
Thanks for coming along again
PUKA
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