Senior Loan Officer Survey highlights restrictive policy but not a hard landing

Markets are under intense pressure as investors are heading for exits. Part of the concern is a fear that the economy is heading into a recession and the Fed is behind the curve in terms of cutting its rates. Those worries were exasperated by a weaker than expected jobs report last Friday.

The negative market reaction to the jobs report has led to a focus on incoming economic data. This morning, the ISM Services came in better than expected which helped ease some of the early tension. In addition, Chicago Fed President Austan Goolsbee provided some reassuring comments around the economy this morning. However, there was also a lot of focus on the Quarterly Senior Loan Survey which was released at 2pm ET.

The Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) is a quarterly survey conducted by the Federal Reserve. It gathers qualitative information from senior loan officers at approximately 80 large domestic banks and 24 U.S. branches and agencies of foreign banks. The survey's main objective is to provide insight into the lending practices and conditions in the banking sector, including the terms and standards of loans to businesses and households, as well as the demand for these loans.

This read is critical for the markets if we are under the assumption that the Fed is "behind the curve". The calls for emergency rate cuts has been a prevalent story. This loan survey would provide us with the best insight into how restrictive the Fed policies are and if they are as big of a concern as market participants think.

The July 2024 Senior Loan Officer Opinion Survey (SLOOS) included special questions focusing on the current levels of lending standards at banks, compared to their historical ranges since 2005. For commercial and industrial (C&I) loans, the survey revealed that a modest to significant share of banks reported their lending standards as tighter than the midpoints of their historical ranges across all categories. However, this represented an easing from a year ago when more banks reported tighter standards. Foreign banks also reported tighter standards for C&I loans, except for syndicated loans to investment-grade firms, which were on the easier side of the range.

In the realm of commercial real estate (CRE) loans, the survey indicated that major net shares of banks reported tighter lending standards across all categories, though these shares were lower than those reported in July 2023. Foreign banks mirrored this trend, with tight standards for all CRE loan categories. Residential real estate (RRE) loans saw significant shares of banks reporting tighter standards for jumbo mortgages and GSE-eligible residential loans. Government residential mortgages and home equity lines of credit (HELOCs) also saw moderate to significant net shares of banks reporting tighter standards. The levels of tightness reported were similar to those in the July 2023 survey, with a slight easing noted for HELOCs.

For consumer loans, the survey highlighted that standards were generally on the tighter end of their historical ranges, particularly for subprime credit card and auto loans. Prime credit card and auto loans also saw moderate to modest net shares of banks reporting tighter standards. Other consumer loans followed the same trend with significant net shares reporting tighter standards. Compared to July 2023, the net shares of banks reporting tight standards were lower in the July 2024 survey, indicating a slight easing of lending standards over the past year, though they remained tight relative to historical levels. Overall, the responses show a trend of easing from the previous year while maintaining a cautious lending environment.

The bottom line is we are seeing a slow down in economic activity but there is no evidence that the Fed is far behind the curve. Financial conditions are certainly restrictive but they are not falling off a cliff. This does not signal an "all clear" for the markets to jump in but, if we are looking for insight into the economy, then this report suggests we are closer to a "soft landing" then a collapse in the economy. This leads us to start putting together a shopping list for this pullback.