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October Senior Loan Officer Opinion Survey (SLOOS) Shows a Credit Tightening Cycle That’s Still Winding Down

Published on November 12, 2024

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Peter Williams

October Senior Loan Officer Opinion Survey (SLOOS) Shows a Credit Tightening Cycle That’s Still Winding Down

The US economy is coming off the largest non-recessionary tightening in credit standards in its history. This is a source of current robustness (the tightening has already happened and there are fewer overly optimistic expectations to falsify) and, as it gradually reverses, a tailwind in 2025+.
The return of the SLOOS to more neutral levels, although with no notable areas that suggest outright easing yet, has come more slowly than I expected a year ago.
Standards are still tightening most broadly for CRE, multi-family housing, and credit card lending. In contrast, commercial and industrial and consumer installment loan standard tightening is at effectively neutral levels now.
Loan demand continues to gradually normalize although it is only slowly recovering after the fall-off that took place during the tightening cycle. With rate levels as high as they are it seems unlikely that we will see a real surge in demand, rather it seems much more likely to slowly normalize.
The Fed likely continues to see the SLOOS as suggesting fairly tight lending standards, which an important part of how it assesses broader financial conditions and monetary policy transmission. This is consistent with a literal interpretation of the SLOOS as a measure the share of banks still net tightening credit standards (this is how the Fed staff describe it in their release writeup); empirically both level (particularly in a cumulative sense as the SLOOS are phrased as a tightening diffusion index) and rate of change effects tend to matter and lend somewhat different interpretations.
SLOOS tightening tends to have its most acute impacts on non-residential investment, which outside of intellectual property has been fairly sluggish in recent years, with smaller and more gradual effect on consumption; as a result it looks more like a supply shock than it does a classic financial conditions shock that rapidly dents demand.
Q3 bank earnings season suggested that consumer spending patterns and delinquencies are both returning to something like normal after the post-pandemic period (see more here).

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