Unveiling The Tight Credit Cloak: How Strained Lending Intensifies Odds of A Potential U.S. Recession

The landscape of the U.S. economy reveals a rocky terrain, where lending restrictions imposed by banks are ostensibly paving a path towards a looming recession. According to the latest Federal Reserve Senior Loan Officer Opinion Survey (SLOOS), lending conditions have perceptibly tightened in all sectors, underscoring the mounting caution in the banking world.

The tightening cycle began during the third quarter of 2022, driven by the anxiety surrounding loan defaults in a strained economic climate. As a consequence, banks have been circumspect about lending decisions, instigating a spiral of accelerated lending constraints in the aftermath of banking industry lows involving Signature Bank, Silicon Valley Bank, and Credit Suisse. Further testament to this austerity, Monday’s figures disclose an additional squeeze in lending conditions throughout the second and third quarters across all borrowing categories.

Moreover, the dwindling demand for loans has played a parallel tune to this restrictive melody. As explained in SLOOS: “Banks reported expecting to further tighten standards on all loan categories. Banks most frequently cited a less favorable or more uncertain economic outlook and expected deterioration in collateral values and the credit quality of loans as reasons for expecting to tighten lending standards further over the remainder of 2023”.

Overlaying this discouraging state of affairs in lending and borrowing with the Federal Reserve’s weekly data casts a daunting shadow over the U.S. economy. The agency’s high-frequency data depicts a gradual drop in lending activity over the past 18 weeks, with ‘down weeks’ edging ahead of ‘up weeks’ in terms of volume.

This tightened grip on credit by the banking world, combined with an increasingly reluctant borrowing populace, underscores the high probability of an imminent credit contraction. If this transpire, the chances of a full-blown U.S. recession—despite the current market complacency—will be up for serious debate. The ball is in the court of the economy, and it would be a tight game requiring resilient fiscal retaliation against the odds.