“Who Hit The Brakes?” – Bank Loan Creation Suddenly Tumbles To Five Year Low

While the overall economy appears to be humming along, at least according to the Fed which on Wednesday is expected (with 100% certainty according to the market) to hike rates by 25bps for the second time in three months on concerns it has fallen behind the inflationary curve, with last week’s payrolls report providing some validation despite prevailing weakness within “hard data” in recent months offset by soaring “soft” sentiment reports, one area of material concern has emerged: a sudden collapse in loan growth in general, and the all important Commercial and Industrial Loan segment in particular, a drop which the WSJ recently dubbed an “ominous economic signal” and blamed policy uncertainty under Trump for the collapse in growth.

While the jury is out on whether Trump is at fault – after all the same Trump has managed to reportedly spark a historic “animal spirits” rally in the S&P, while prompting a record number of people to re-enter the labor force in the past two months -here are facts: total loans and leases by U.S. commercial banks are currently rising at an annual pace of about 4.6%, based on weekly Fed data. That is down from a 6.4% pace for all of last year and peak rates of around 8% in mid-2016. This is the slowest pace of debt creation since the spring of 2014.

While the deceleration has been broad-based across business, real estate and consumer lending and, as the WSJ notes, “is at odds with the idea of a stronger economy and rising sentiment.”

But the slowdown has been especially acute in the all important for growth Commercial and Industrial loan category, which after growing at a pace of 10% in the first half of 2016, has suddenly and unexpectedly tumbled to just 4.0% as of the latest week, nearly 50% lower than the 7% growth notched at the start of the year.  This was the lowest pace of loan growth since July of 2011.

There has been no definitive explanation for this sudden phenomenon, prompting the WSJ to inquire “WSJ recently dubbed ” which is ironic because just as troubling as the big drop in C&I loans is the relentless grind lower in auto loans, which are likewise growing at a pace that is half what it was as recently as last September.