Fed: Smaller Banks Report Pressure on Commercial Loan Demand

The Federal Reserve’s Beige Book — released eight times a year — collects qualitative observations about current economic conditions across the central bank’s dozen districts.

And in the latest edition of the Beige Book, respondents noted that the U.S. economy slowed headed into the final weeks of last month. The survey said that of the 12 regional banks, six observed “slight declines” in economic activity contained within their districts, and two others said that the local economic trends were “flat to slightly down.”

Pricing increases moderated, per the report published Wednesday (Nov. 29), and expectations are that the moderate increases will continue into the next year.

Overall, said the Fed, sales of discretionary items and durable goods, including furniture and appliances, declined, on average, as consumers showed more price sensitivity.

Travel and tourism activity was “generally” healthy. The Beige Book dovetails with separate economic data that debuted Thursday (Nov. 30). As spotlighted here, Commerce Department reports on consumer spending and prices showed that spending remains lofty on travel and services (read: experiences). Absent those categories, consumer spending slowed, and in tandem with that slowdown, business activity has declined, albeit slightly.

The reporting from the New York Fed offers a bit of a microcosm for Main Street small and medium-sized businesses (SMBs), given the fact that the district also is a bellwether for banking, finance and lending activities.

“Conditions in the broad finance sector weakened slightly, with loan demand declining and delinquency rates edging up. The outlook worsened, with businesses in the region no longer expecting economic conditions to improve in the coming months,” the Fed noted. And in the same report, the New York Fed added that “small to medium-sized banks in the region overwhelmingly reported lower loan demand across all loan segments, including refinancing” and said a substantial number of banks have been tightening standards for business and commercial loans. Delinquency rates are edging up.

The Read Across

For the Main Street firms that are key drivers of the U.S. economy, we’ve detailed that access to credit has been difficult at best and that only about a third of owners said they were able, and would be able, to tap both business and personal funds. The fact that the banks, as noted in the Beige Book, are tightening underwriting speaks to those pressures.

But the fact that loan demand is also waning also hints that businesses may be hesitant to take on more debt (at high rates) to buy inventory, or expand, if demand seems murky, and if the goods already lining the shelves are not moving all that quickly. On the other hand, it’s also possible that these same firms have sought to gain financing via alternative channels. Headed into the fall, we found that roughly half of SMBs were seeking credit, and nearly 14% of these smaller firms were considering using business loans from online lenders.