The Federal Reserve: Banks “Experienced Stronger Demand” for Loans in April

Well, I wouldn’t say I got the end of the balance sheet recession exactly right because I don’t think it’s completely over, but I think the gradual improvement is a sign that the dark days of no loan growth are moving behind us.  Over the last few years I’ve repeatedly referred to the USA as “Japan on fast forward” and stated that the BSR would likely end by 2013-14.  Considering all the moving parts here, I wasn’t terribly far off (okay, I’ll stop patting myself on the back if you don’t mind).


Anyhow, the latest Senior Loan Officer Survey from the Fed notes something that is entirely consistent with all of this:

“In the April survey, domestic banks, on balance, reported having eased their lending standards and having experienced stronger demand in several loan categories over the past three months. “

That’s right.  You know that loans create deposits and that loans are primarily a function of banks finding creditworthy customers.  And that’s precisely what’s happening now.  Balance sheets have improved and as I said in 2011:

“I think a private sector recovery can become self sustaining in 2013 or so given the current trends in incomes and debt levels.”

I think that’s precisely what we’re seeing now.  So next time an economist asks you who’s steering the recovery tell them it’s not necessarily the Fed or the Treasury any longer, but the private sector finding its footing.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • hangemhi

    Cullen – what do you use to track private sector loan growth or change?

  • Cullen Roche

    I based much of these estimates on my estimates of income growth relative to household debt. Remember, the BSR started as a household crisis so understanding the improvement in the BSR has been largely about understand what would impact household debt dynamics.

    CMDEBT was the key St Louis Fed input. You could track that against many different variables to see the gradual improvement. We’re not totally out of the woods yet, but it’s becoming much more self sustaining.

  • Chad M

    Now all we need is for the private sector to start investing in their future…Hire and increase CAPEX, but that doesn’t seem to be what this money is going to. Rather it is going to buy rental properties, dividends and share buybacks. I am more or less speculating given that small and medium business hiring has been consistent but no real signs of picking up.

  • Frederick

    The back patting is not undeserved. You’ve pieced together a lot of moving parts into a brilliantly succinct explanation of the macroeconomic environment. I’ve not only learned a lot from you over the last few years, but have been incredibly impressed by what certainly looks like good forecasting based on a good understanding. Thanks.

  • Boston Larry

    Cullen, So this gives rational support to the strong equity rally that we have seen. If the worst days of the BSR are behind us, then it makes some sense for stocks to rally. If we are entering a self-sustaining growth phase, then corporate profits should continue to be pretty good.

  • Cullen Roche

    Gosh, I don’t know. I’ve been in the “no recession” camp for a long time now so SOME level of positive market return isn’t shocking. If you study the really nasty market downturns they tend to occur within recession with profits recession. But I think you can certainly have a market that becomes irrational within a positive environment. Are we getting there? Are we there? I don’t pretend to be able to predict the near-term, but if I had to guess I’d continue to guess that the cyclical bias is higher which could very well make the inherent downside risks that much greater at some later date. But I don’t design portfolios in a manner that you’re either “all in” or “all out” of equities so in my opinion, these sorts of thoughts are kind of useless in terms of understanding proper portfolio construction and planning your SAVINGS PORTFOLIO for the future.

  • jaymaster

    To bring up Warren Mosler again, I don’t know why he’s not noticing this.

    I know he understands the importance of private sector loans. But he seems to be focusing on the deficit only lately.

    And BTW, I thank Warren with all my heart for pulling me out of the Austrian camp.

    And also for introducing me to your blog!

  • matt mcosker

    Do we really want the private sector to take on debt to save us from a private sector balance sheet recession? I really think this time around we need some fiscal stimulus to get the private sector on better footing.

  • Kristian Blom

    Hi Cullen
    Overall, loan demand is down since 2012 looking at the data; am I missing something?

  • jwr

    I agree. At this point I don’t see how there can be sound GDP growth without rising incomes. What I mean is if there is rising GDP along with rising private sector debt without rising incomes aren’t we just witnessing another ‘debt bubble’ being inflated?

  • jaymaster

    If not now, when?

  • Boston Larry

    Cullen, thank you for a helpful response.

  • Sam A

    The rate at which government stimulus is being withdrawn is likely premature, and the impact is yet to be seen on the broader economy. I think a few more quarters and some acceleration of job gains is required to declare victory.

  • Cullen Roche

    It’s about a rate of change. Saying that something is down year over year doesn’t necessarily tell us the full story. Like saying in October 2010 that the stock market was still down on a two year rolling basis. Sure, but you missed out on all the gradual improvement between March 2009 and October 2010. Hope that helps.

  • Auburn Parks

    I totally respect your views and opinions on economic and monetary matters…..However, what am I missing here? How is the private sector’s debt overhang (possibly what you’re referring to as BSR) supposed to be solved by 2014 when this is the total credit amount owed:

    If the only 2 Great Depressions we’ve faced since 1900 were the result of way too much private sector debt….how can we expand the economy and money supply to grow further endogenously? Isn’t that the whole point….unrestrained private sector debt=money growth is fundamentally unsustainable, hence the need for increased money supply growth to come more from the Govt since it doesn’t come with a debt attached (from the private sector POV)?

  • Karl

    Cullen about a year or so ago you had mentioned we were also “due” for a recession somewhere in the 2014-2015 time range with the 6-7 time frame after the 2009 exit of the previous. Can you reconcile the 2 viewpoints? It seems unlikely to exit a “once in a few generation” BSR and immediately go into recession no? If the answer is no is it almost like emerging from a recession when you leave the BSR anew and hence there is a new glidepath ahead – thus perhaps moving out the next recession for another 3-4 years aka 10 years between recessions?

  • jt26

    Surprised there is so much strength in the CRE survey.

  • Johnny Evers

    If you measure recovery by factors like increased loans (and not employment, or median income or retirement assets, or student loan debt) then you get in a situation in which you are not measuring economic recovery, but something else.
    If the increased loans are going into business investment, hiring, etc., then we will see that in the numbers that truly matter (employment, etc), but if they are going into rental properties and secondary investments, then we are not going to see a recovery but rather another credit bubble.
    To predict recovery, you either have to have better data on where the loans are going, or else we have to see improvement in the jobs reports.

  • Kristian Blom

    You are right; it is about the rate of change.
    I always say that myself!