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Notwithstanding the Federal Reserve&rsquo;s monetary arm flexing, overall lending activity in April continued to rise (+1.2% MoM, +7.3% YoY, +8.5% YoY3) driven by consumer credit card spending, residential real estate loans, and commercial borrowing. Banks prefer a higher loan-to-deposit ratio (80% or more) to enhance revenue, but with such high liquidity on bank balance sheets, loans as a percentage of total assets were just over 49% in May, and only slightly up from pandemic lows of 47%. On the flipside, commercial banks&rsquo; pandemic-boosted liquidity buffers provide resilience to support credit flows and preserve balance sheet integrity.

High commodity prices, strong consumer demand, and wage spirals have all contributed to inflation. In a bid to knock this on its head, in April the U.S. central bank raised its benchmark rate by a half-a-percentage point, following a quarter-point increase in March.&nbsp;It has plans for more. With looming rate hikes, banks hoping to deploy stockpiles of liquidity will need to compete aggressively for borrowers. 
&nbsp;

Bank Balance Sheet Data<img alt="" src="https://bdf-website-server.s3.amazonaws.com/uploads/2022/05/31/wwwbigdatafedcom_dev_bdf-website-client_insights_how-much-can-banks-push-borrowing-in-this-economic-climate-odg1.png" style="width: 813px; height: 373px;" />

Residential Mortgages 
Monetary tightening drove up the 30-Year FRM (+19% MoM) to just shy of 5% (4.98%) in April; slightly higher than FRMs last seen in 2018 (then driven by a healthy economy and prospects of higher inflation). Home mortgage growth has been slowing (+0.9% MoM) and there was a decline in the number of applications to purchase a home (-6.3% MoM; -7.8% YoY3) with average loan size (-0.7% MoM; +34.7% YoY3) reflecting a mixed bag. These trends are continuing in May: -6.1% MoM (-10.5% YoY3) and -2.3% MoM (+32.6% YoY3) to date. 
 
Consumer Loans 
Consumer credit card loans now exceed pre-pandemic levels (+6% YoY3/+3.2% MoM) and buyers seem to be thinking twice about big-ticket spending, especially on goods. With record-high car prices and rising interest rates, auto loans flat-lined in April (+0.06% MoM) during a season when many people usually use tax-refunds to fund auto purchases. However, services-driven consumer spending on travel and entertainment could persist until the end of summer. &nbsp;&nbsp;&nbsp;

Deposits 
Consumers have begun spending down their pandemic-built savings (-0.5% MoM). A combination of fewer deposits and depositors pulling out cash led to a decline in commercial banks&rsquo; cash assets in April (-10% MoM). Of note, these deposits are still significantly higher than pre-pandemic levels (+44% YoY3) and at the current rate of reduction, it would take until the end of 2023 for deposits to fall to amounts last seen three years ago.

<img alt="" src="https://bdf-website-server.s3.amazonaws.com/uploads/2022/05/31/deposits-large-domestically-chartered-commercial-banks_Ea2W7Z5.svg" style="width: 813px; height: 457px;" />

Commercial Mortgages 
Demand for mortgages for commercial real estate (e.g. office buildings, shopping centers/malls, hotels) took a hit from stay-in-place and work-from-home policies, bottoming out in May 2021. With an expanded economic reopening at the end of 2021, demand has recovered at an increasing pace. In April, loans were above 2019 levels (+5.3% YoY3) and grew +1% MoM (quite significant for this loan type). With ongoing demand for hotels, people returning to the office, and more apartments still needed, this lending business has strong fundamentals.

C&amp;I Loans 
During the initial months of the pandemic, businesses accessed untapped C&amp;I credit resulting in a spike in May 2020. The Small Business Administration&rsquo;s (SBA) Paycheck Protection Program (PPP) introduced in May 2020 and which ended a year later played a huge role in the provision of additional credit in the form of forgivable loans. This liquidity support was provided by the government to banks and not businesses directly, thus resided on banks&rsquo; balance sheets but lenders did not incur any credit risk. By October 2021, C&amp;I loans had fallen to levels last seen in 2018, in part reflecting continuing declines in PPP loans through loan forgiveness and repayments. Offsetting lower PPP-related income, organic borrowing gradually increased as business owners started to look for new sources of funds to expand and build up inventories. By April, C&amp;I loans were up (+1.66% MoM) and exceeded pre-pandemic levels (+3.9% YoY3). While business confidence (Manufacturing ISM) was down in April (55.4) from March (57.1), it stayed above the long-term average (53.02) and well above overall 2019 levels, providing the necessary demand for commercial loan growth. The decline in confidence was mainly due to labor shortages across the supply chain and not due to a decline in consumer demand. However, in May, we are seeing hiring freezes by mostly tech companies and an increased frequency in layoffs. As such, demand for C&amp;I loans could be curtailed in the current small and medium business environment.

<img alt="" src="https://bdf-website-server.s3.amazonaws.com/uploads/2022/05/31/commercial-industrial-loans-large-domestically-chartered-commercial-banks.svg" style="width: 813px; height: 457px;" />

Conclusion 
Despite the drawdown in consumer deposits and higher credit card balances, high savings rates during the pandemic mean banks still have ample funds on hand (+82% YoY3). In addition to cash, banks hold other easily-sellable assets including government-affiliated mortgage-backed securities (+44.7% YoY3), Treasury securities (+162% YoY3), and non-government securities (+30.4% YoY3). These combined stockpiles provide banks with needed liquid funds to meet the demand for loans and/or deposits. Banks will need to continue to find avenues to put these funds to work, through both consumer and commercial lending. In this increasingly high interest rate environment and uncertain economic outlook, this might become more challenging.

How Much Can Banks Push Lending In This Economic Climate?

While quarter-over-quarter (QoQ) economic growth trends have historically fluctuated, the magnitudes in 2021 were atypical; this rollercoaster was largely driven by considerable goods demand and heavy investment, particularly inventory investment. The black swan nature of the pandemic means we cannot rely solely on machine-learning algorithms to predict the recovery path. To map the forward trajectory, we use near-time company and industry data to generate a deeper understanding of the shifts occurring in the economy. Our analysis indicates economic fluctuations will likely continue into 2022 with GDP growth slowing in the first quarter and rallying in the following quarter.

2021 recap

In the first half of 2021, economic expansion was primarily driven by goods consumption as COVID restrictions reoriented spending away from services. Consumers, flush with cash, induced an epic sell-off of inventories to accommodate this increased demand. In 1Q21 and 2Q21, QoQ GDP growth registered 6.4% and 6.7%, respectively. In 3Q21, economic growth swung dramatically lower (2.3% QoQ) as COVID cases declined, leading to a substantial cooling of goods consumption and a not-so-impressive recovery in demand for services. In 4Q21, economic growth bounced back (6.9% QoQ) &ndash; mainly powered by substantial inventory investment, previously held back by supply-chain issues. For context, if the high level of inventory investment had not occurred, growth would have been 1.6%. Moderate consumer spending for both goods and services, combined with improvements in the trade balance from higher exports of crude oil, natural gas, metals, and food products also contributed to growth.

A new year and an economy in transition

4Q21 was a hard act to follow. For 1Q22, we estimate QoQ GDP growth in the low single digits (1-2%). Inventory growth calmed to a more moderate pace. Demand for goods continued to cool lowering prices and volume. And people returned to services to spend their money.

Inflation-adjusted retail sales excluding food and gas1 fell -0.5% month-over-month (MoM) in February and -0.4% MoM in March. The latest Consumer Price Index (CPI) release revealed that prices for goods, excluding food and energy, decreased -0.4% MoM in March, the first decline since February 2021. These trends are most evident in the car market. Slackened demand for used cars resulted in negative price growth (-0.7% MoM) in March; prices have risen in April but this reflects seasonal buying patterns and not a secular increase in demand.&nbsp;

<img src="https://bdf-website-server.s3.amazonaws.com/uploads/2022/06/28/drewry-container-index.png" style="width: 813px; height: 457px;" />

The weakened demand for goods led to a drop in shipping and trucking rates. The composite Drewry World Container Index, representing spot container freight rates for major trade routes, has steadily declined since late February (-15%). In parallel, trucking spot rates for both dry-van and refrigerated trucks &ndash; which carry non-perishable and perishable household goods &ndash; fell by -17% and -20%, respectively from peaks at the end of 2021. While this could reflect an increased supply of trucks, diminished demand for this type of trucking seems more likely. Flatbed spot rates, which transport heavier items like capital goods headed for businesses and construction, increased 1.7% during the same period.

While consumer goods suffered, the much anticipated return to services consumption picked up speed as the Omicron wave subsided. The surge in both prices and volume that are overriding seasonal fluctuations clearly signals a release of pent-up services demand. The most recent CPI report showed the cost of services less energy grew at its fastest rate in almost 30 years; the seasonally adjusted index increased +0.6% MoM in March. 
 
<img src="https://bdf-website-server.s3.amazonaws.com/uploads/2022/06/28/average-daily-rate-and-hotel-occupancy.png" style="width: 813px; height: 457px;" />

Air travel increased every month since January (+6% MoM in February and +23% MoM in March) &ndash; a time of year typically considered an off-season. Also defying seasonal trends is hotel occupancy which has been steadily increasing since January and in the first week of April exceeded pre-pandemic norms. In response to growing demand, average daily rates for hotel rooms have steadily climbed from January, and in March were significantly above pre-pandemic levels (+9.4% YoY32). The supply of hotel rooms has likewise expanded, registering +4.8% YoY3 in March.

Closing thoughts

It is important to note that a slowdown in 1Q22 is not an indicator of stagnation but rather the result of an economy in transition. We observe an effect akin to 3Q21 when the slowdown in goods was offset by a less striking uptick in services. Similarly, in 1Q22, this awkward adjustment makes it appear as though overall consumption and thus economic growth is slowing; hence our estimate for 1Q22 of below 2% growth. However, the potentially waning impact of the pandemic combined with pent-up demand for leisure and recreation should lead to aggressive services consumption growth mid-year. We expect fluctuations in GDP growth to even out towards the end of 2022, assuming the economy fully evolves into a post-COVID normality. &nbsp;