Two weeks ago, in order to preserve Goldman’s happy narrative that US growth is still strong (which is ironic because while on one hand Goldman tells its clients to buy the dollar, at the same time it tells Trump to short it), Goldman tried to justify the apparent collapse in loan growth, which as we Goldman tried to justify the apparent , is growing at the slowest pace in 6 years, and will soon contract outright.
What Goldman said boiled down to a form of “calendar effect”, or the argument that since loan creation had aggressively ramped up one year ago when E&Ps were aggressively drawing down on revolvers, it made Y/Y comparisons appear like a big slowdown, when in fact the current rate of growth was mostly stable and reflected roll offs of borrowing bases. This is what Goldman said:
C&I bank loans represent yet another casualty of the energy sector contraction of 2015 and 2016. More specifically, we believe the current C&I slowdown reflects payback from credit facility usage by commodities firms, many of which began drawing upon credit lines in late 2015 as financial conditions tightened and the debt issuance window closed. Following a brief acceleration in C&I lending in early 2016, bank loan growth waned in late 2016 and early 2017 once capital markets reopened and banks renegotiated and restructured credit lines. Available loan data are consistent with the timing and sector-level incidence of these inflections, and in our view, the credit line payback story is the most likely explanation of the current C&I loan shortfall, which we peg at roughly $100bn.
Today, in addition to reporting the worst mortgage applications number since the financial crisis, as US consumer demand for mortgages imploded at a pace indicative of an outright recession and confirming the Fed is unable to hike rates further without crashing housing, Wells Fargo provided a handy slide which provided some further color to Goldman’s theory … the loan slump was far broader, and in addition to commercial loans, it also had a far greater impact on consumer loans, which saw a decline across every single category, for one simple reason – lack of demand.
