Here Comes The Hangover: Consumer Loan Demand Plunges As Interest Rates Spike

How do you know an economy is growing?

To answer that question fully would require for more time than most attention-deficit disorder afflicted readers can dedicate to an article here, as there are simply too many indicators to mention, some objective, others less so, but there is one clear cut sign confirming an economy is not growing: if the consumers in said economy have no demand for loans - an indicator of stagnation and/or disinflation - or worse, are actively deleveraging their existing debt exposure, a precursor to outright deflation and money destruction, the bane of every central bank.

Well, if one uses the "exclusion" indicator, the US has a very big problem.

Following the passage of tax reform in late 2017, the previous Fed Senior Loan Officer Survey released three months ago noted a meaningful pick-up in loan demand. Then, according to the Fed's weekly H.8 data on bank balance sheets, this rising oan demand spurred acceleration in actual bank C&I lending for the first time since the general elections in the last part of 2016 (recall that on several occasions in 2017, loan demand was on the verge of going negative Y/Y, traditionally a leading recession indicator).

And then... something snapped, because even though C&I lending has continued through April at a brisk clip, the latest, just released Senior Loan Officer Survey now shows the worst possible case (as per above): loan demand just turned collapsed, and not just for C&I loans but across the board.

What is even more bizarre is that this sudden revulsion toward new loans took places even as lending standards are becoming increasingly easy! As BofA notes, in the latest April survey a net 11.3% and 3.0% of banks reported easing lending standards over the previous three months for loans to large/medium C&I firms and small C&I firms, respectively, up from 10.0% and net unchanged in the prior.

And yet, despite easier access to credit, in terms of demand a net 7.0% and 1.5% of banks reported weaker demand for loans to large/medium C&I firms and small C&I firms, respectively, compared to net 2.9% and 6.0% reporting stronger demand in January. For CRE loans the net share reporting weaker demand decreased to 7.7% in April from 3.9% in January. Oops.

It wasn't just C&I loans.

The same pattern was observed within the mortgage pipeline, where banks continued to ease lending standards for residential mortgage loans: a net 3.4% and 9.7% of banks reported loosening lending standards for GSE-Eligible and QM-Jumbo mortgages, respectively, compared to a net 8.3% and 1.6% in January, respectively.

Yet just like with C&I loans, this easing of standards merely underscored the decline in demand, as the net share of loan officers reporting weaker demand for GSE-Eligible and QM-Jumbo mortgages increased to 18.6% and 16.1% in April, respectively, further deteriorating from a net 15.5% and 11.5% reporting weaker demand for GSE-Eligible and QM-Jumbo mortgages in January.

At this point it will probably not come as a surprise that at the same time as C&I and resi loan demand slumped, US consumers expressed no interest for consumer loans either, as a net 9.6% and 6.6% of banks reported weaker demand for credit card and auto loans, compared to unchanged and a net 8.5% of banks reporting weaker demand for auto loans in January, respectively. Ominously, the demand for credit card loans tumbled to match the lowest print in the past 6 years, an indication that US consumers may have finally hit their peak for credit cards demand; if so, and with the US savings rate near all time lows, the US household's purchasing power - that driver behind 70% of US GDP - is about to collapse..

Banks tightened lending standards for both credit cards and auto loans, according to the fresh April survey (net 9.4% and 6.5% of banks, respectively). This compares to net 1.9% and 4.9% tightening lending standards for credit cards and auto loans in the prior (January) survey (Figure 13).

Interestingly the Fed reported that: "Most domestic banks that reported experiencing reduced C&I loan demand indicated that customers shifting their borrowing to other sources of credit and increases in customers' internally generated funds were important reasons for weaker demand". Translated, this means that customers are not only not looking to grow their debt balances, but are effectively deleveraging.

Why? Very simple: thanks to the recent surge in Libor, the interest expense on loans has more than doubled this year, and what happens when households no longer find it economic to pay the interest on their debt? They dig deep, i.e. "shift their borrowing to other sources of credit" and repay existing loans.

If this is accurate, expect to see a plunge in the annual growth in C&I loans in the next few months as the collapse in demand translates into a mothballing of the loan pipeline as US consumers rebel against higher rates.


NVTRIC So Close Tue, 05/15/2018 - 17:12 Permalink

Lending Club, GS, Prosper, Lightwave...


All these companies will do a debt consolidation loan with your DTI ratio all the way up to 47%.  I'm fully leveraged.  Why wouldn't I be? Take the cheap money and blow it on hookers and blow! Strategic default after all the credit dries up.


That is what my mommy taught me.  Baby Boomers are so smart!

In reply to by So Close

lester1 Tue, 05/15/2018 - 15:39 Permalink

Has anyone seen the mortgage lending rates today? They're almost near 4.7%!! A lot of people won't be able to afford their mortgages soon and it's going to get very ugly for the housing market. Prices will have to come down significantly.

shizzledizzle buzzsaw99 Tue, 05/15/2018 - 16:07 Permalink

Depends on the market. I have no desire to be in a populated area so where I look is rural midwest. I have a nice parcel that I plan to hang it up on but am always looking for a deal. The overheated markets where people are willing to pay a premium to avoid long commutes or simply to be on the "good side of town" are the last to feel the shocks. These areas also happen to be the ones that attract investors (Often foreign). In areas where where prices have maintained some degree of normalcy things have been slowing and prices are coming down. 

In reply to by buzzsaw99

GotGalt migra Tue, 05/15/2018 - 17:28 Permalink

That is the beginning of the end though.  Buyers rush in to buy something (anything) to get a house and mortgage locked in before rates rise any more.  Thus house prices rise for a stretch even as rates go up.  But after 12 months of that (assuming rates keep rising), any other buyers just get priced out and demand cools off and prices reverse.

In reply to by migra

LawsofPhysics lester1 Tue, 05/15/2018 - 15:55 Permalink


Wow, almost a whole 5%...

remind me what savers are earning in interest on that money they actually earned by performing REAL WORK and facing REAL RISK.

All the while bankers/financiers get access to money without having to do any real work or face any real risk.

see the problem yet?

Rates must rise or the currency will be rejected fucking outright.

as the saying goes...

"Full Faith and Credit"

In reply to by lester1

HRH of Aquitaine 2.0 lester1 Tue, 05/15/2018 - 16:37 Permalink

No, but thanks for the heads up. I locked in my interest rate in Dec. 2016 @ 2.875% fixed.

Home prices in my area are still going up. I won't know what the sales prices will be until the end of September. My area is still very affordable and is halfway between two very expensive metro areas. I don't see any problems with my long term plan to rent out my house while I travel.

In reply to by lester1

jin187 Tue, 05/15/2018 - 16:04 Permalink

Excellent.  I should have all the down payments saved up right around the time the fed starts panic cutting to stop the depression.  That will give me just enough time to have my new rentals up and running for when all the idiots get foreclosed on by the loan sharks.  With any luck, the dollar will go completely through the floor, and I'll be able to payback my loans with fiat toilet paper, while I charge my renters in gold, silver, BTC, hard goods, or sexual favors.  Come on United States of Venezuela!

hongdo jin187 Tue, 05/15/2018 - 18:57 Permalink

Unfortunately your US to Venezuela "joke" is not funny.  Illinois has a 2.6% average property tax rate now and the Chicago Fed just proposed their solution to the impossible pension problem - add another 1% special property tax.  Could you afford a 3.6% per year tax on the value of your property?  And health care - every time I get a prescription from the doctor the pharmacy tells me it is not covered by my $1700/month health insurance and the pills be $600/month. Luckily I have no one in school.   And I am not dependent on any "pension" pipedream.  Not to mention WTF is the Fed doing proposing tax policy?

My prediction is that the govt will inflate to balance the government debt books and then issue a new currency. People forget how often this has really happened - script issued.  Hell, California issued script a few years ago. This will happen when all the pensions actually go broke.

The alternative is to officially declare that the full faith and credit is a hoax.  They will never tell this truth. 

In reply to by jin187

abgary1 Tue, 05/15/2018 - 16:27 Permalink

Perpetual economic growth and inflation are unachievable.

Recessions and depressions are inevitable in a credit driven economy and deflation will not mean the end of the world.


End the Fed and neo-classical economic theory.

To learn how illogical economic theory is, please read Debunking Economics: The Naked Emperor Dethroned? by Prof. Steve Keen. Please support, intellectually and financially, his efforts to develop new economic theories that are relevant to our complex, dynamic and chaotic economies and markets.

Balance-Sheet Tue, 05/15/2018 - 16:40 Permalink

Trying to return to the mid 20th Century again!  Interest rates must be kept at a real rate of zero for secured lending such as mortgages- max at 2.5% with credit cards at 7.5%. Lay off most of the bank employees who are occupying valuable space and the automated banks will still show profitability.  If mortgages slow down go to 2.25 then 2.0%.  If the USG/Pentagon Complex does not want civilians borrowing money then the Complex has to borrow it and the Fed essentially monetize it in a way that the net cost after dividends  to the UST has an effective rate of minus 1.0%.

Rex Andrus Tue, 05/15/2018 - 17:34 Permalink

1. (((Ctrl+P)))

2. Provide easy credit until the muppets are overextended.

3. Jack up rates, tighten the noose.

4.  Confiscate their real property, prostitute the females, sell the males.

the Dood Tue, 05/15/2018 - 18:47 Permalink

Well we all know how they "encourage banks to lend" right? 4th rate hike accidentally on-purpose "mistake" coming in Dec after mid-term elections.

Austrian Peter Wed, 05/16/2018 - 05:02 Permalink

Excellent observation, thanks. Also noted is that the smaller banks and non-banks are experiencing greater charge-offs on Auto and Credit Card loans than in the 2007-8 period.  More evidence of the coming catastrophe as one observer quoted:

“The US model is credit-driven, with Americans in perpetual search of the sucker, like buyers of Tesla and Netflix bonds.” They look for investors willing to accept very little upside in exchange for a lot of the downside.

“America has a credit driven model. Companies issue junk. And banks make loans, hold onto good ones, securitize bad ones, selling those off. They’re masters at passing losses on to investors.” The more they do this, the more profit they make. This incentive structure ensures America supplies ample credit securities for the world, many of dubious value.

As cycles turn, they blow up.