Is The Economy Signaling A Sustainable Recovery?

Bank Lending, Lending Standards, And GDP Growth

Hamilton Place Strategies
provides analysis, communi-
cations, and advocacy solu-
tions at the intersection of
business, government, and
media.
Hamilton Place Strategies
www.hamiltonplacestrategies.com
202-822-1205
Patricks Sims
Marshall Schraibman
Findings:
U.S. commercial bank
loan growth tells us
little about current
or future economic
growth, as its a lag-
ging indicator
Lending standards
are historically bet-
ter at measuring the
health of the econo-
my and forecasting
economic growth
Recent trends in U.S.
household debt re-
flect more judicious
lenders and borrow-
ers
T
he U.S. economy has
been looking for green
shoots since the crisis end-
ed, but has been getting
mixed messages in re-
sponse. GDP growth in the
rst quarter of 2014 came in
at negative 2.1 percent, only
to bounce back to 3.9 per-
cent in the second quarter.
Many question where the
economy actually sits today,
and whether we can sus-
tain growth into the future.
One place to look for some
answers may be the bank
lending that supports much
of our economic activity.
Also in the second quar-
ter, U.S. commercial bank
lending hit a new high. We
looked to see if we could use
that information to give us a
current economic snapshot,
and possibly predict future
growth. Surprisingly, loan
growth tells us little about
current or future economic
growth, based on our analy-
sis.
While companies and peo-
ple take out loans to expand
production, build a house,
and hire people, on the mac-
ro level, our analysis shows
bank lending is not a lead-
ing indicator, but a lagging
one. Instead, when thinking
about broader growth, lend-
ing standards are better at
showing where the econo-
my currently sits, and where
its possibly going.
The following analysis looks
at the correlations between
the U.S. commercial bank
lending growth, change in
lending standards per the
Feds Senior Loan Ocer
Survey, and GDP growth.
Bank Lending Lags
Statistical analysis of bank
lending and GDP growth
reveals that bank lending
is a lagging indicator. The
highest correlation between
the two indicators occurred
between GDP growth
t=0
and
bank lending
t=3
(R=.46; p=2*10
-
06
)(Figure 1). All else equal,
bank lending in future quar-
ters should reect todays
GDP numbers.
Bank lending growth came
and large rms, recently
updated at the end of July.
The survey of lending stan-
dards is based on input from
75 large domestic banks and
branches of foreign banks.
According to the Fed, the
recent survey showed a
continued easing of lend-
ing standards and terms for
many types of loan cate-
gories amid a broad-based
2 Hamilton Place Strategies
in at 8.4 percent in the sec-
ond quarter of 2014, while
GDP growth came in at 3.9
percent. While the latest
data on bank lending may
not forecast GDP growth,
based on historical data, it
could mean that the frosty
GDP growth in the rst quar-
ter of 2014 coming in at
negative 2.1 percent was
probably more due to the
disruptive eects of weath-
er than overall health of the
economy, as many econo-
mists predicted.
Lending Standards Lead
We get dierent results
when looking at the Feds
Senior Loan Ocer Opin-
ion Survey on Bank Lending
Practices for small, medium,
pickup in loan demand.
Our analysis reveals that the
net change in respondents
tightening standards was
far more predictive of future
economic growth (Figure 2).
The highest predictive pow-
er was actually in the same
period (R=.54; p=8.86*10
-09
).
However, the data is still
statistically signicant when
lending standards lead
economic growth (R=.52;
p=7.37*10
-08
). All else equal, fu-
ture GDP growth may reect
todays lending standards.
Our analysis largely reects
the ndings from a New
York Fed study from 2000.
Their analysis found that
lending standards, as mea-
Our analysis reveals
that the net change
in respondents tight-
ening standards was
far more predictive
of future economic
growth.
Fig. 1: U.S. Real GDP Growth and U.S. Commercial Bank Loan Growth (%)
-20
-15
-10
-5
0
5
10
15
20
-10
-5
0
5
10
0
6
/
1
4

0
6
/
0
9

A
n
n
u
a
l
i
z
e
d

Q
o
Q

L
o
a
n

G
r
o
w
t
h

(
%
)

0
6
/
1
2

0
6
/
1
1

0
6
/
0
6

0
6
/
0
7

0
6
/
1
0

0
6
/
1
3

0
6
/
0
8

A
n
n
u
a
l
i
z
e
d

Q
o
Q

G
D
P

G
r
o
w
t
h

(
%
)

0
6
/
0
5

GDP Growth (%)
Loan Growth (%)
Loan growth
historically lags
GDP by 3 quarters
3 Hamilton Place Strategies
sured through the same
survey data during the 1990s,
show that standards help
considerably in predicting
GDP growth.
1

Risks With Easing
While easing lending stan-
dards certainly increases the
amount of risk in the system,
the latest lending survey
does not necessarily mean
that current levels are dan-
gerous. The nancial crisis
was largely triggered by
extremely lax lending stan-
dards for home mortgages,
among other factors.
That said, the latest survey
reveals that a large amount
of respondents indicated
that recent mortgage reg-
ulations were lowering
their approval rates on such
loans, and that more
than half of the respondents
indicated that the ATR/QM
rule has reduced approv-
al rates on applications for
prime jumbo home-pur-
chase loans.
2

The Wall Street Journals Nick
Timiraos quotes Janet Yellen
making a similar point. Ac-
cording to Yellen, only the
most pristine borrowers
are able to secure mortgag-
es.
4

Basically, dont look for the
housing sector to lead the
recovery any time soon.
After falling for several years,
household debt levels rose
in 2013, but then fell again in
the recent quarter because
of low mortgage origina-
tions,
3
based on data from
the New York Fed (Figure 3).
The trends, according to
the WSJs Alan Zibel, sug-
gest Americans continue to
recover from the recession
Our analysis reveals
that the net change
in respondents tight-
ening standards was
far more predictive
of future economic
growth.
Fig. 2: U.S. Real GDP Growth and Lending Standards For Small, Medium And
Large Firms
-40
-20
0
20
40
60
80
100
-10
-5
0
5
10
15
20
25
0
6
/
0
5

0
6
/
0
6

R
e
a
l

G
D
P

G
r
o
w
t
h

(
%
)

0
6
/
1
4

0
6
/
1
2

0
6
/
1
3

0
6
/
1
0

0
6
/
1
1

0
6
/
0
9

0
6
/
0
8

0
6
/
0
7

N
e
t

%

O
f

R
e
s
p
o
n
d
e
n
t
s


T
i
g
h
t
e
n
i
n
g

S
t
a
n
d
a
r
d
s

Tightening Standards For Medium & Large Firms (%)
Real GDP Growth (%)
Tightening Standards For Small Firms (%)
Lending standards
are an inverse
indicator of growth
Hamilton Place Strategies 4
Footnotes
1 Lown, Morgan, And Rohatgi, Listening To Loan Ocers: The Impact Of Commercial Credit
Standards On Lending And Output, FRBNY Economic Policy Review, July 2000
2 Board Of Governors Of The Federal Reserve System, July 2014 Senior Loan Ocer Opin-
ion Survey On Bank Lending Practices, Senior Loan Ocer Opinion Survey On Bank Lend-
ing Practices, August 4 2014
3 Haughwout et al, Just Released: Looking under the Hood of the Subprime Auto Lending
Market, Liberty Street Economics, August 14 2014
4 Timiraos, Fed Survey: Mortgage Standards Ease for First Time Since Housing Bust, Wall
Street Journal, August 4 2014
5 Zibel, Americans Borrow for Cars, Less So for Homes, Wall Street Journal, August 14 2014
by paring existing debt and
taking on new loans judi-
ciously.
5

Time will tell if current eas-
ing of lending standards
will lead to future economic
growth. Although historically,
its a good bet.
Methodology
This analysis relies on data
obtained from the Federal
Fig. 3: Improvement In Household Debt And Delinquency
8
9
10
11
12
13
14
3.0
4.5
6.0
7.5
9.0
10.5
12.0
0
6
/
0
5

0
6
/
0
6

0
6
/
0
7

0
6
/
1
1

0
6
/
0
9

0
6
/
0
8

0
6
/
1
2

D
e
l
i
n
q
u
e
n
t

H
o
u
s
e
h
o
l
d

D
e
b
t

(
%
)

T
o
t
a
l

H
o
u
s
e
h
o
l
d

D
e
b
t

(
$
T
)

0
6
/
1
0

0
6
/
1
3

0
6
/
1
4

Percent Of Household Debt 30 Or More Days Past Due (%)
Total Household Debt ($T)
Reserve Bank of St. Louis and
the Federal Reserve Bank of
New York. It reects season-
ality and ination adjust-
ments where possible. []