Our internal recession model has been flashing red for a while, and although lots of progress has been made vs. inflation the US economy has held up very, very while. Double checking our model here against a well-proven external source: the Senior Lending Officer Opinion Survey.
The Senior Lending Officer Opinion Survey (SLOOS) is a measure of bank lending standards and whether they are trending “accommodative” (easier to get a loan) and “tighter” (means…tighter). A tighter lending environment is symptomatic of a looming recession and the SLOOS data confirms such. The obvious take on the chart below is that once >30% of those lending officers surveyed start saying lending conditions are getting tougher, the probability of recession in the coming 12mos rockets to +90%. Data is data.
The SLOOS data is consistent with our view that (1) a US recession looms, (2) it’s time to own quality because non-quality will soon not have access to capital, and (3) stay away from areas of likely permanent loss like major metro area commercial real estate and anything that rhymes with “junk bonds” (that’s where the defaults happen). And despite what Fed officials might be saying in front of microphones this week, it is consistent with the belief that this Fed rate hiking cycle is done and ever-increasing odds that the next Fed move is a cut, not a hike (maybe by mid-2024).
Source: FRB, NBER, Bloomberg Finance LP, Deutsche Bank as of November 7, 2023
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