Loans allow businesses to build factories and hire workers, for people to buy homes, and for developers to build retail spaces. So when the spigot of credit gets shut off, the US economy tends to seize up.
According to the most recent Senior Loan Officer Survey report, it does appear that the tap is being shut, albeit slowly.
The survey conducted by the Federal Reserve asks lenders at financial institutions various questions about their lending practices. Most importantly, the survey asks whether these officers are tightening standards, thus making is harder for businesses and consumers to access credit, or easing standards.
According to the survey, there continues to be higher standards demanded for businesses trying to get commercial and industrial (C&I) loans, the all important category that includes everything from loans for purchasing large equipment to expanding to a new location.
"Banks have now tightened standards for commercial and industrial (C&I) loans for four straight quarters, although the tightening in the latest survey was more modest than in the previous one," wrote Daniel Silver, an economist for JPMorgan, in a note after the release of the report.
For the third quarter survey, released Monday, a net 8.5% of loan officers reported tighter standards for loans to medium and large-sized firms, down from 11.6% reporting tighter standards last quarter but up from -7.0% in the same quarter last year.
For lending to small firms, a net 7.1% of loan officers reported tighter standards. This is up from 5.8% last quarter and -6.0% in the same quarter last year.
Importantly, the Federal Reserve also asks why banks are tightening or loosening standards. In years past, loosening has been attributed to two major things: improving economic conditions and competition from banks and non-bank lenders. In the past three quarters, however, the only factor for easing standards was "more aggressive competition", while the reasons for tightening have only increased.
"Most domestic respondents that reportedly tightened either standards or terms on C&I loans over the past three months cited as important reasons a less favorable or more uncertain economic outlook, worsening of industry-specific problems, and reduced tolerance for risk," said the Federal reserve in the release accompanying the survey.
Additionally, lending standards for commercial real estate loans tightened and there has been some tightening for consumer loans, though mortgages are still easing.
Michael Gapen, chief US economist at Barclays, said that the tightening of standards points do in fact point to a slowing economy and less certain outlook, but not a sudden disaster.
"On net, we read the overall evolution of credit extension and demand in Q2 as consistent with our view of the US economy in the later stages of the business cycle; that said, we see little evidence of a credit contraction leading a broader economic downturn in the near term," wrote Gapen in a note to clients.
On the other hand, the analysts at Bespoke Investment Group said that the report showed continued resiliency of the appetite for loans.
"In the outright positive camp for credit, [Monday's] Senior Loan Officer Survey came in much more optimistic for credit performance than previous surveys," said a note from Bespoke.
"Officers reported a significant improvement in demand for Commercial and Industrial Loans, while C&I loans also saw a slightly less tight lending environment on the supply side."
It is encouraging that demand for these loans has increased, no doubt, the continuing tightening of standards shows that while the appetite for credit may be growing, the food is slowly being taken away.