Does the Federal Reserve Board’s Senior Loan Officer Survey imply anything for growth?

Looking at the trend from the past several Senior Loan Officer Surveys, we have seen lending standards for banks and consumers tighten, while demand has receded and spreads of loan rates verse the banks’ cost of funds are rising. We expect when the next wave of data is released during the first week of Feb. we will see further deterioration. But what does this mean?

The survey is released on a quarterly basis, and the senior loan officers answer the questions during the first month of the applicable quarter. (i.e. Q108 data is collected during Jan. 2008) This more or less implies the data has a built in lag, since the quarter has only begun when the data is collected.

Now on to the good stuff…
After running numerous basic OLS regressions comparing the Senior Loan Officer Survey with the applicable quarters real GDP data, we found that some portions of the Senior Loan Officer survey are in fact correlated with that quarter’s real GDP growth and its sub components.

Non-residential Investment:
We found that the strongest relationship exists between non-residential investment and the data in the survey related to the the number of banks tightening lending standards to businesses , businesses’ demand for lending, and the cost of lending.. In fact, the correlation between this data and non-residential investment is strong enough to pass-through to overall real GDP growth, but as you would expect with a smaller magnitude. We found that the reason for the relationship is because the level of business lending drops when costs and lending standards increase and demand drops, all of which are measured in the survey.

Business lending related questions from survey:
1. Net Percentage of Domestic Respondents Tightening Standards for C&I Loans
2. Net Percentage of Domestic Respondents Increasing Spreads of Loan Rates over Banks’ Cost of Funds
3. Net Percentage of Domestic Respondents Reporting Stronger Demand for C&I Loans

Residential Investment:
We also found that the lending standards and demand for mortgages data is correlated with residential investment, although not at the same significance as business lending with non-residential investment. We found the strongest result between residential mortgage demand and residential investment, but unlike the non-residential relationship it was not strong enough to pass-through to overall real GDP growth.

Residential mortgage related questions from survey:
1. Net Percentage of Domestic Respondents Tightening Standards for Mortgage Loans
2. Net Percentage of Domestic Respondents Reporting Stronger Demand for Mortgage Loans

Personal Consumption Expenditure:
Unfortunately, we did not find any significant relationships..

Consumer spending related questions from survey:
1. Net Percentage of Domestic Respondents Tightening Standards on Consumer Loans
2. Net Percentage of Domestic Respondents Reporting Increased Willingness to Make Consumer Installment Loans
3. Net Percentage of Domestic Respondents Reporting Stronger Demand for Consumer Loans

What does it all mean?
To me this implies that further deterioration in the Q108 Senior Loan Officer Survey could increase the downside risk to Q1 growth, especially via the non-residential investment component. At the same time, where the survey results to improve we would expect the opposite, but given the current trend in the data, a positive report would surprise us.

Topic revisited in 11/3/08 piece