Stuyvesant Insight: Private Credit Demand Trends Higher

Loans and leases of all commercial banks is a data series that is reported by FRED on a weekly basis.  This series tracks the total outstanding loans and leases within the commercial banking sector, including: mortgages, auto loans, consumer credit, commercial and industrial loans.  It is highly indicative of private sector activity.

Bank shares stalled the first six months of this year due to both a narrowing in the net interest margin (spread between banks assets and liabilities that determines its profitability) as well as a flat-lining in total bank credit (quantity of loans made, which are banks assets).  Recently, the 2-10 Treasury spread, which is a proxy for the NIM, has begun to expand.  It currently stands at roughly 98 bp after contracting to 78 bp on June 26, 2017.  More importantly, lending appears to have accelerated.

The graph (below) highlights the 52 week rate of change in loans and leases of all commercial banks and the annualized 13 week rate of change in all commercial banks. 

loans and leases.PNG

While the 52 week rate of change of loans and leases of all commercial banks (henceforth loans and leases) has only stabilized and trended sideways, the more volatile 13 week rate of change annualized of loans and leases has shown a rapid acceleration.  In fact, it is now running at a level commensurate with its average between 1Q14 and 3Q16.  This series has been a leading indicator for the 52 week loans and leases series, which implies that yoy loan growth should improve.  This indicates that private activity is strengthening.

This is supported by today's nonfarm payrolls report which showed an increase of 222,000 in June and an increase in labor force participation to 62.8% , this week's ISM non-manufacturing index at 57.4%, and the ISM manufacturing index at 57.8%.  Moreover, the Atlanta Fed GDP Now model currently forecasts a growth rate of 2.7%, which is significantly greater than the Federal Reserve's estimate of long-run potential growth.

Even though wage inflation was today reported at a tepid 2.5%, it is still in excess of May's trimmed mean PCE inflation rate of 1.5%.  This indicates that real wages are rising, an inflationary phenomenon.  If energy prices can stabilize, inflation expectations should begin to increase.  I would therefore expect that the upward trend in bond yields to continue given strength in both the real and inflationary component.  Positive trends in private credit demand and an expansion in the net interest margin bodes well for bank profitability