Negative Bank Lending -> Recession

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

The chart illustrates the trajectory of commercial and industrial loans by all commercial banks over several decades. The annual growth rate of U.S. Commercial Banks Loans and Leases in Bank Credit has decelerated to 0.30%, a notable decrease from 1.10% last month and significantly lower than the 8.10% seen last year. This rate is also below the historical average of 7.40%.

This downtrend suggests that more than merely watching the yield curve for financial forecasting is needed, as the Federal Reserve and the Treasury's interventions can materially affect market conditions. We're observing a shift towards negative bank credit growth, with rising funding costs and Net Interest Margins beginning to contract.

Despite lower interest rates, bank lending has not seen a corresponding increase. Contributing factors include student loan forbearance and the widespread adoption of 'buy now, pay later' services, which have not yet been fully incorporated into credit data. Banks are aware of these opaque risks, but without prior experience in these nascent areas, we simply cannot know the long-term behavior. These new products, not captured in traditional credit metrics, materially affect the lending landscape and consumer behavior. Banking lending turning negative would be yet another stealth recession indicator.

Learn more about the Market Situation Report written by Tier 1 Alpha.