U.S. bank loan demand falls as economic uncertainty persists


  • The U.S. credit cycle is entering a downturn phase, with credit contraction potentially leading to an economic recession.
  • The Fed’s Senior Loan Officer Opinion Survey (SLOOS) report indicates tighter lending standards, falling loan demand, and a slowdown in loan creation.
  • Despite tightening loan standards, total U.S. bank lending continues to rise, as businesses locked in low rates and pushed out their maturity wall.

In a recent market analysis, a cycle-driven approach was taken to better understand the current U.S. economic situation.

Fourteen months after the Federal Reserve’s initial policy rate hike, the stage in the credit cycle is gradually shifting into credit contraction, which is anticipated to lead to an eventual economic recession.

A closer look at the credit cycle

Yesterday’s Senior Loan Officer Opinion Survey (SLOOS) report from the Fed revealed tighter lending standards, falling loan demand, and a slowdown in loan creation, confirming the ongoing credit contraction and pinpointing the current stage in the credit cycle.

The SLOOS report disclosed that after a 14-month lag, the Fed’s higher interest rates have successfully transmitted to banks and their relationship with the real economy through more expensive and reduced lending to businesses.

Interest rate hikes, which began in earnest last March, are finally catching up to the financial economy in the form of tightening loan standards, eventually choking off economic growth.

The current state of lending and its impact

It is essential to note that while loan standards are tightening, total U.S. bank lending is still on the rise, and businesses have locked in low rates and pushed out their maturity wall. As a result, tighter loan conditions haven’t translated into higher corporate interest expenses yet.

Credit spreads are elevated but have not yet reached credit crisis levels. Businesses were strategic in 2020 and 2021, taking advantage of the Fed and Treasury’s near-zero interest rates and fiscal stimulus to secure low-interest term financing that matures over the next few years.

Tighter financing for corporations has just begun to transmit to higher unemployment and a slowing economy; as corporate debt matures over the next year, it will likely accelerate. For now, tight credit is a slow trickle, a preview of what is to come.

The downturn phase of the credit cycle

By analyzing these circumstances in an easy-to-follow graphic, it becomes clear that we are at the beginning of the downturn phase of the credit cycle. Over 55% of senior loan officers at small and large banks are reporting a drop in business loan demand.

Typically, when credit demand declines this significantly, the Fed is cutting rates to reinvigorate it. However, in the current situation, the Fed continues to hike interest rates, seemingly heading straight into a brick wall.

This decline in U.S. bank loan demand amidst persistent economic uncertainty paints a concerning picture for the near future. As credit contraction continues and economic growth is choked off, businesses and consumers alike will feel the impact.

Monitoring the credit cycle and adjusting strategies accordingly will be crucial for businesses and individuals alike to navigate these uncertain times.

In conclusion, as the U.S. economy faces tightening lending standards and slowing credit creation, the downturn phase of the credit cycle has arrived, leading to a potential recession.

Businesses and consumers must prepare for the challenges ahead and adapt to the changing economic landscape.

**The contents of this article were inspired by an analysis from Bitcoin Layer.

Disclaimer: The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decision.

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Jai Hamid

Jai Hamid is a passionate writer with a keen interest in blockchain technology, the global economy, and literature. She dedicates most of her time to exploring the transformative potential of crypto and the dynamics of worldwide economic trends.

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