Things are changing in the corporate credit market.
The Federal Reserve’s latest Senior Loans Officer Opinion Survey published Monday indicated that it looks like the credit market is about to get a lot tighter in 2016.
(Meaning, basically, people expect it will be harder for businesses to get loans.)
And not only are indications that a big change in business lending practices coming, but Sam Coffin at UBS adds that these shift could end up squeezing the labour market, too.
As Coffin wrote in a note following the report (emphasis added):
1) The Fed asked about banks’ expectations for lending in 2016. “Modest net fractions of banks stated they expect to tighten their lending standards on C&I loans” — with 20% of banks expecting to tighten standards for C&I loans. That would be a big swing. Furthermore, for commercial property loans, around 90% of banks — depending on the type of loan — expected to tighten standards. These expectations, if correct, imply credit crunch — but they’re difficult to square with the expansion in lending seen recently.
2) There tends to be a leading relationship between lending standards and employment growth. Recent credit market and bank lending standards data suggest some spillover from business sector credit tightening into slower employment growth this year. Our credit/employment model is pointing to employment growth of around 150k per month in 2016.
And so to take these points in order, the return of business lending (C&I is short for “commercial and industrial” and so is a catch-all for loans made by banks to businesses) has been a big economic theme over the last couple years.
The Fed’s weekly H.8 series, which measures business lending, has been on a tear with lending moving straight up and to the right, indicating an increase in business borrowing and, by proxy, activity across the economy.
But as UBS notes, the SLOOS report indicates that a turn could be coming.
As for the labour market, most economists expect that the monthly pace of job gains — which has averaged 284,000 over the last three months — will cool off as the economy reaches “full employment.”
Because while the economy may still be growing the labour market will eventually reach a saturation point at which it simply cannot absorb upwards of 200,000 new workers per month.
But with the economy sort of muddling along at 2%(ish) growth, the labour market has been seen as a bright spot and a turn in this could stoke broader fears about the health of the US economy than would normally be the case.
And so the read-through is that while employment was expected to slow anyway, a squeeze could be coming faster and more abruptly than expected. At least according to the corporate credit market.
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