Garnet Capital Advisors Blog

The latest snapshot of the national economy from the Federal Reserve Board shows bank lending rising amid greater consumer spending and a strengthening housing market. The strong dollar, however, has created headwinds in the manufacturing and tourism sectors.

Modest to moderate growth
Each quarter, the Fed's 12 regional banks collaborate on the "Beige Book," which highlights key trends in the U.S. economy. At the biggest picture level, nine of the 12 banks reported modest or moderate growth in the third quarter - all but the ones in Kansas City, Chicago and Richmond, Virginia. That's down from 11 of 12 citing those levels of growth in the previous reporting period.

Interestingly, the mixed economic picture doesn't appear to have dimmed confidence among business people tapped by Fed researchers for their opinions. 

"Business contacts across the nation were generally optimistic about the near-term outlook," the report concluded.

Lending activity rises
Of special interest to bankers is that the third quarter of this year saw increased lending activity.

"Reports on the banking and finance sector were generally positive," read the summary of the Beige Book findings, "lending activity increased, loan quality was steady to improved, and lending standards were little changed or somewhat easier."

Commercial loans take off in New York
Drilling down to regional differences, loan demand grew year-over-year in the following Fed districts: Philadelphia, Richmond, Chicago, Cleveland, St. Louis, San Francisco and Dallas. The New York region experienced increased demand for commercial loans but a drop in refinancing activity. Kansas City's Fed reported lending weakness only in that region's agricultural sector.

Loan quality has generally been on the rise since the excessive permissiveness that brought on the financial crisis caused record-high delinquencies. That trend of declining delinquency rates continued in the New York area. Lending standards loosened in the Chicago and Richmond districts. The red-hot residential real estate sector around San Francisco saw tight lending conditions.

Concern continues over gas and oil loans
This quarter's Beige Book added data points for bankers concerned about the health of energy loans. With oil prices probing lows unseen in years, both commercial and industrial loans in the energy sector are trending lower. The following Fed banks reported a pullback in energy-producing activities and a connected decline in investments by oil and gas companies: Minneapolis, Atlanta, Cleveland and, unsurprisingly, Dallas, which is a key financial hub for U.S. energy companies.

Strong dollar deters tourists
Tourism to the U.S. came in with a lackluster quarter. As The Wall Street Journal explained, attempts to enliven foreign economies have strengthened the dollar. It's making U.S.-made goods more expensive in relation to imports. Partially as a result, tourism spending took a hit in Dallas, Kansas City, Minneapolis and New York. In New York City in particular, Broadway and hotel revenue dipped below where it was last year. States along both borders are seeing declines in spending by Canadians as well as Mexicans.

Report offers no clear support for interest rate hike
The mixed Beige Book results will play an important role as central bankers gather Oct. 27-28 for what is increasingly expected to be a decision to keep benchmark interest rates at the near-zero level. The Federal Reserve Open Market Committee has not raised interest rates for going on a decade. While it isn't clear what decision Fed Chair Janet Yellen and company will collectively take, the leaders of individual Fed banks are becoming more outspoken in their desire to see tightening.

"Real interest rates need to be higher than they are now," the president of the Richmond Fed, Jeffrey Lacker, said to Fox Business.

Banks looking to get the most out of their loan portfolios as lending expands against an overall mixed economic outlook may address any questions or concerns to loan sale advisory firm Garnet Capital Advisors.