The bruises from the March banking turmoil are starting to become more visible. The Conference Board’s leading economic indicators tumbled 1.2% - more than twice February’s pace as restrictive monetary policy, the banking turmoil, and a tighter bank credit channel is starting to have a measurable negative impact on the economic outlook.
Leading Indicators Recession Signal Intensifies
There has been a sobering, straight downward trend for U.S. leading economic indicators since the Fed started hiking interest rates a year ago. But the pace of decline appears to have stepped-up a notch as the banking turmoil unfolded. The Conference Board’s Leading Credit Index, Interest Rate Spread, ISM New Orders, consumer expectations, and building permits all contributed measurably to the LEI’s March decline.
Orders, Credit, and Consumer Confidence Take a Hit
The first phase of the banking turmoil has largely stabilized following the collapse of SVB and Signature Bank. The Federal Reserve, FDIC, and Treasury Departments’ actions to provide emergency liquidity and backstop customer deposits has been remarkably effective in ending additional bank runs and staunching deposit outflows from the banking system.
Our tracking of the weekly H4 data from the Federal Reserve paints a rather soothing picture of the banking system’s need for additional liquidity. After the first week following the failure of SVB, Fed Discount Window borrowing has dropped in four of the past five weeks, while total bank borrowings from the Federal Reserve, including through the Bank Term Funding Program, (BTFP), have dropped in three of the past four weeks.
Bank Liquidity Needs Have Eased
However, we must now brace for the second phase - tighter bank credit standards, weaker loan demand, and rising credit losses that may just be getting underway. We don’t have any real hard evidence at this point, but we are starting to get reports that bank credit conditions may have measurably deteriorated last month through surveys such as the NFIB’s Small Business Optimism Index and the Fed’s April Beige Book report released just yesterday.
Small Businesses Expect Tighter Credit Conditions
The April Beige Book reported that lending volumes and loan demand generally declined across consumer and business loan types with “several Districts” noting that banks tightened lending standards amid increased uncertainty and concern about liquidity. The San Francisco District of the Fed, which includes the states of California, Nevada, Oregon, Washington, Arizona, Utah, and Idaho, added that “lending activity declined substantially and lending standards tightened notably” in recent weeks with several depository institutions opting to reduce loan volumes, especially for new clients. At the same time, existing and planned investment projects across sectors have been delayed or cancelled due to higher funding costs, heightened uncertainty, and more limited access to credit.
While still largely anecdotal, there is growing evidence that the March bank turmoil will leave some longer lasting bruises on the bank credit channel and economic growth even as bank liquidity concerns fade. We are already getting reports that it has raised the cost of credit, and reduced the access to credit for many consumers and businesses though its ultimate impact on the U.S. economy remains highly uncertain.
To learn more, check out this week's U.S. Outlook Report.