How to Interpret the Fed's H8 Report

 | Jan 05, 2012 | 5:03 PM EST  | Comments
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The report, however, provides a wealth of data on bank lending patterns that can be used to create information and provide guidance on the trajectory for the real economy, unfiltered by pundits. It can also raise questions that are difficult to answer.

Before explaining how to read the report, here's a quick synopsis of an economic cycle that's important to remember when reading the data.

All economic activity in the U.S. is led by consumption, which represents roughly 70% of GDP. If consumers consume, everything else follows: bank lending, job creation and general economic activity all rise as companies move to meet and compete for consumer demand. This is the virtuous cycle.

The reverse is also true. If consumers slow or decrease spending, companies will not borrow or create jobs and economic activity will languish. This is the vicious cycle. Both cycles are part of the economic cycle.

All this is debatable at the margin, but you have to have a set of guidelines with which to judge data, create information and interpret what the data indicate.

Now, on to the report. It's a consolidated review of the balance sheets of commercial banks in the U.S. -- what kinds of deposits they hold and what kinds of loans they are make. In keeping with the consumer's lead outlined above, the first thing we want to do is locate the line items associated with consumer loans.

Of these, the most important are mortgages, auto loans and credit cards, in descending order. If these increase, it's a sign that both consumer and lender confidence is increasing; the trend exhibited in these loans should lead the other kinds of loans that banks make.

The most important of the non-consumer loans are commercial and industrial, or C&I, loans. These typically represent borrowing by the banks' largest and highest-quality commercial clients. They are typically associated with specific projects, such as building a new facility, buying office equipment, and so on. An increase in C&I loans usually precedes an increase in job creation to put these new assets to work.

C&I loans, however, don't usually increase until consumer loans have. The reason is simple: Companies borrow to expand to meet what they anticipate is a long-term or secular increase in demand for new products or services. They don't borrow hoping there will be a market for their product.

The types of loans are listed on the left side of the page with the period across the top. You can model the data if you like, but it is good to get in the habit of looking at the trend for each type of loan by reading from left to right the aggregate dollar amount of each type of loan and seeing if it is increasing or decreasing. Start with mortgages, then autos and credit cards, and then compare them to the trend for C&I loans.

For the past year, the trend has been quite peculiar. C&I loans have been increasing while consumer type loans have stagnated. This is quite a conundrum, though there are possible reasons for it (which we can discuss in the comments section).

What we can glean from this data about the immediate viability of the U.S. economy is that consumer-type loans of all kinds have continued to stagnate. This indicates that confidence and consumption are still increasing at rates that warrant concern over rising inflation, or the Fed raising interest rates. To the contrary, the Fed will have to pull long-term rates down further, with even more quantitative easing, to get banks to lend and consumers to borrow again.

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