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Loan default rates paint just such a picture. According to the Fed, these have (as Table 1 shows) improved across the board, providing relief from the alarming levels they had reached during the financial crisis and the great recession that followed it. But as the table also reveals, default rates in most cases remain high compared with their averages from earlier years, before the financial troubles began. The table relies on the average for 2006 for such a reference point. That year was typical of the prior period. Default rates on leases, commercial and industrial loans, and consumer loans are the only categories that have actually shown longer-term improvement, and that is only very slight. The only conclusion to draw from the general picture is that things have improved enough to support continued advances in borrowing and economic activity, but not sufficiently to support any marked acceleration in the pace of economic activity.
Source: Federal Reserve.
1 Latest data available.
2 Date of high in parentheses.
3 Percentage point difference with 2006 average.
The pattern of actual lending bears out this conclusion. Table 2 presents the critical figures in this area. Commercial and industrial (C&I) lending has picked up. It took until 2011 to gain momentum (late by the standards of past recoveries), but it has since sustained that momentum, albeit with temporary interruptions. The drop in such lending for a couple of weeks in August is hardly a disturbing reversal in this regard. In contrast, lenders throughout the recovery have shown a marked reluctance to make real estate loans of any kind, hardly surprising given the pain suffered in this area during the financial crisis and the associated recession. Very recently lenders have shown some willingness to extend credit to commercial real estate projects, a trend that seems to be picking up momentum, despite recent increases in longer-term interest rates. On the residential side, a degree of reluctance has been present throughout. In the most recent period, the acceleration in the slide no doubt reflects the probably temporary shock administered by the recent rise in mortgage rates, temporary because home purchasing remains highly affordable by historical standards. This particular drop dominates the decline in overall lending so far in August.
Source: Federal Reserve.
The continued expansion in C&I lending is encouraging in two respects. First, it tracks economic activity well and reinforces any conviction that the recovery is self-sustaining, if not especially rapid. Second, it speaks to an expansion in smaller and medium-sized businesses, both of which rely much more on such borrowing than larger firms where there is direct access to financial markets. Otherwise, the picture is one of a rather plodding expansion of exactly the sort to which all have grown accustomed since this recovery began in 2009. Even the growth in C&I loans falls short of the pace recorded in past cyclical recoveries. It also reminds anyone who cares to look that neither the fears of a downturn nor the hopes of a dramatic acceleration are well founded.
The opinions in the preceding economic commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. This material is not intended to be relied upon as a forecast, research, or investment advice regarding a particular investment or the markets in general. Nor is it intended to predict or depict performance of any investment. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Consult a financial advisor on the strategy best for you.