U.S. Growth: Lenders' Lament?

Written by: Global Thought Leadership | April 12, 2019

Chart courtesy of Brandywine Global. Source: Bloomberg, as of 1/31/2019. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment

The Bottom Line

  • There's a lively debate in financial markets about how much the strong growth shown by the U.S. economy in 2018 will continue this year and the next.
  • The ranks of the worried grew when the FOMC backed away from anticipated rate hikes and scaled back plans to sell off its inventory of Treasuries and mortgage-backed securities.
  • One unintended consequence, however, appears to be the impact on banks’ willingness to make business loans. 
  • Given that the Fed's new dovishness can be read as a signal of an upcoming economic slowdown, it's logical for bank lending officers to consider tightening their standards to avoid more vulnerable companies. That could be inadvertently make matters worse just as the economy's needs greater liquidity. 
  • Indeed, the most recent quarterly Fed survey of bank lending officers shows bankers lending to larger commercial and industrial (C&I) businesses are already making this adjustment -- a sharp turn from the relatively easy stance that started two years ago. As of the January 31 survey, a net 2.8% percent of these lenders reported increased scrutiny of their loans.
  • Brandywine Global observes that this tightening can be considered a bearish signal for the economy but in the context of other signals, both bearish and otherwise.
  • However, the time lags between a dovish turn and a change in the overall economy could make lending and investment decisions for businesses even more challenging than in more settled times, as they attempt to invest just as banks' caution increases.
  • Of course, the notable reduction in trade tensions between the U.S. and China, as well as early signs that a chaotic Brexit may have been delayed, it's possible that overly cautious bankers could be missing opportunities to participate in a contrarian resurgence of growth.   

Definitions:

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (Fed), which is responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

 

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