US corporate credit demand slows again
One of our most watched cyclical indicators, the Senior Loan Officer Opinion Survey (SLOOS), was released yesterday and showed a modest tightening of financial conditions from the 80 leading US banks in the third quarter. Historically once tightening by the commercial banks begins it has been a signal that the end of the cycle was on its way.
These days it is still a very good guide to cycle age, but banks have significantly more capital and liquidity to deal with more adverse lending conditions, and are consequently more prepared to lend through the cycle. So, like many other old indicators, we cannot just rely on conventional wisdom.
Having said that, the survey, combined with financial results from the banks, is probably still the most useful tool we have for gauging the cycle’s life expectancy.
Looking more closely at the detail, firstly we would stress that the tightening of financial conditions was minimal and as we would expect late in a cycle, given the headwinds faced by a slowing US economy. The consumer still appears healthy, showing increasing demand for credit as interest rates declined. In auto loans and credit cards, some banks have been reducing their risk appetite in lending, especially for low credit rated consumers. But in general the lending appetite to consumers remained unchanged and demand was strong.
Another area where banks are pulling back slightly is in commercial real estate lending, again another highly cyclical sector, but we would stress again the level of tightening was incremental.
Within the commercial and industrial business sectors the main story was one of slowing demand, which was a feature of the big banks’ results last month too. Business sentiment also weakened in the third quarter as companies reduced capital expenditure in the face of a series of escalating geopolitical risks. Banks remained willing to lend, but the demand was missing, so this may bounce back in Q4 as geopolitical headwinds have abated somewhat and could decline further still.
In short, a predictable set of survey results, and like previous soft patches where we have seen some modest tightening by the commercial banks in this cycle, we would not extrapolate too much from this recent data.
