There are a number of stories out there about the "flat-lining" of loan growth in the $2.1 trillion commercial and industrial loan market. Stock market bears say this is troubling for equities. Sure, loan growth has been slowing but the recent uptick in CEO Confidence suggests a turnaround in loan data is imminent.
The relationship between CEO Confidence and loan growth makes intuitive sense. Think about it. When executives think the U.S. economy is on sounder footing investment and capital expenditures ramps up.
There's no magical alchemy here. CEO confidence in the future, what a Wall Street analyst would dismissively call "soft data," leads to real investment, i.e. "hard data." Here's Hedgeye U.S. Macro analyst Christian Drake in this morning's Early Look:
"The propensity for soft data to lead hard data is plainly intuitive. Here’s the empirical:
- As can be seen in the Chart of the Day below, CEO confidence leads changes in C&I loan growth by 3-to-4 quarters.
- Breakouts in consumer confidence overwhelmingly result in an acceleration in total loan growth over the subsequent 12-months. In other words, when confidence rises and the spread between confidence and loan growth is at levels similar to those observed presently, loan growth shows a pro-cyclical acceleration of ~2.5%, on average, historically."
Lesson? Don't search for data points to confirm your biases. Do the math. And understand the history of economic cycles and the interrelationships between data points.
