Federal Reserve Economic Data

At the July 31 FOMC press conference, Chair Powell said “recent indicators suggest that economic activity has continued to expand at a solid pace,” even in the face of a labor market that appears to be normalizing.

Real GDP growth picked up significantly in the second quarter of 2024, according to the BEA’s advanced estimate, at an annualized rate of 2.8%. While this output growth is an important measure of activity on its own, many policymakers also pay attention to actual output growth with respect to potential output growth, the economy’s estimated maximum sustainable output.

The FRED graph above shows the output gap, which is the difference between actual and potential real GDP. Output has been above potential for the past year; most recently, it appears to have exceeded potential output by about 1% in the second quarter, up from approximately 0.9% in the first quarter. This is an improvement over 2022 and early 2023, when the output gap was slightly negative, and is roughly in line with the second half of 2019, when economic growth was relatively high compared with its 2010-2018 average.

The graph also shows the output gap tends to be negative after recessions, but then eventually returns to a positive gap after a recession. For example, the 2008-2009 financial crisis was deep and long enough to keep actual output below potential all the way through 2017. It wasn’t until late 2019 that the gap became firmly positive around levels not seen since 2007.

One signal of the economy’s resilience is that output returned to potential within two years of the initial COVID shock in 2020 despite a precipitous decline. Another signal is that the output gap has continued to become positive even as potential output has continued to grow at a stable pace: Annualized quarterly growth rates of potential output have hovered around 2% since 2018. By comparison, growth rates of GDP have averaged 2.8% over the past eight quarters. This also has implications for monetary policy, referred to in this FRED Blog post about the Taylor Rule.

An important caveat: Potential output cannot be observed, so policymakers contend with considerable uncertainty here, including frequent and unpredictable revisions to the estimate of potential output. A good illustration of these revisions over time was delivered by Larry Summers in the 2016 Homer Jones Memorial Lecture.

How this graph was created: In FRED, search for and select “Real Potential Gross Domestic Product.” From the “Edit Graph” panel, use the “Customize data” section in the “Edit Line 1” tab to search for and select “Real Gross Domestic Product.” You should see two series on the “Edit Line 1” tab listed as (a) and (b). In the “Customize data” section again, enter and apply (b/a – 1) * 100 in the formula bar.

Suggested by Kevin Kliesen and Joseph Martorana.

The H.8 Release from the Federal Reserve’s Board of Governors details aggregate balance sheet data (assets and liabilities) for all US commercial banks, and the data can be found in FRED. The first post on this topic examined recent trends in total bank assets for large and small banks. The second examined recent trends in the securities held by large and small banks. This post (the 3rd of 3) examines recent trends in bank loans and leases and deposits at large and small banks.

In the aggregate, the largest category on the asset side of commercial bank balance sheets is loans and leases. Loans and leases include (a) commercial and industrial loans, (b) residential and commercial real estate loans, (c) consumer loans, and (d) all other loans and leases. Our first FRED graph (above) plots loans and leases as a percentage of total assets for large and small commercial banks. A few things are worth noting in the FRED graph.

• Small banks have a larger percentage of their assets as loans and leases compared with large banks.
• Loans and leases tend to be sensitive to the state of the economy. During the past recession (February 2020 to May 2020), loans and leases as a percent of total assets fell sharply at small and large banks. However, the share of loans fell proportionately more for large banks—from 55.6% for the week ending January 29, 2020, to 51.4% for the week ending May 27, 2020 (roughly corresponding to the beginning and end of the recession). Over this period, loans and leases as a percent of total assets only fell from 68.3% to 66.4% at small banks.
• Since the end of the recession in May 2020, banks have once again been increasing loans and leases as a percent of total assets. However, the share of loans and leases on the asset side has not yet returned to its pre-pandemic levels for both categories of banks.

Fundamentally, commercial banks are in the business of intermediation. That is, they take deposits from customers—individuals or businesses—and use those deposits to finance loans or the purchase of other assets that increase bank earnings and thus profits. Deposits are the largest liability on a commercial bank’s balance sheet.

Our second FRED graph plots total deposits as a percentage of total liabilities since the beginning of 2015. Over most of this period, deposits (insured and uninsured) comprised roughly 90% of total liabilities for small banks. Beginning in mid-2019, though, small banks have increased their deposit-to-liability percentage (deposit ratio), which reached 94% in late February 2022. By contrast, large banks initially used other sources of funding, as their deposit ratio was much smaller in early 2015—roughly 83%. Over time, though, large banks have also sharply increased their deposit ratio, and it eventually rose to about 96% in early April 2022.

A good portion of the surge in bank deposits was pandemic related: fiscal stimulus and a decline in discretionary funding by individuals that led to increased personal savings. Acharya et al. show that bank deposits also increase when the Federal Reserve engages in large-scale asset purchases (quantitative easing), as it did from mid-March 2020 through June 1, 2022. Moreover, they show that a large percentage of these increased deposits were uninsured. From March 31, 2020, to December 31, 2022, uninsured deposits at US chartered banks increased by $1.56 trillion to $7.79 trillion.

The last few data points in the second graph are striking. Deposits as a percent of total liabilities have fallen sharply in response to numerous factors: One is the FOMC’s tightening actions, which reduce reserves, and another is recent market turmoil that was spurred, in part, by the recent failures at one large bank (Silicon Valley Bank, or SVB) and one “small” bank (Signature Bank).

Recent actions by the Federal Reserve, FDIC, and US Treasury have attempted to calm the fears of both depositors and investors in the U.S. commercial banking sector. Nevertheless, there has been some deposit flight from small commercial banks to larger banks and from commercial banks to money market mutual funds. In response, banks have greatly increased their borrowings (which include discount loans from the Reserve Banks). From the week ending March 8, 2023, to the week ending March 29, borrowings by small banks rose by 42.2%, or $175 billion, while borrowings by large banks rose by 47.7%, or by $304.4 billion.

FRED users who are interested in monitoring the US commercial banking sector can do so by analyzing weekly trends in commercial banks’ balance sheets in found in the H.8 data.

How this graph was created: First graph: Search FRED for and select “Loans and Leases in Bank Credit, Small Banks.” Click on “Edit Graph” and use “Edit Line” to search for and add to that new line the “Total Assets, Small Banks” series and apply formula (a/b)*100. Do the same for large banks. Second graph: Do the same as with the first, but use the “Deposits” series instead of the loans and leases series for small and large banks. Start the graph on 2015-01-01.

Suggested by Kevin Kliesen and Cassie Marks.

The H.8 Release from the Federal Reserve’s Board of Governors details aggregate balance sheet data (assets and liabilities) for all US commercial banks, and the data can be found in FRED. Our previous post on this topic covered total bank assets for large versus small commercial banks. Neither of these posts provides a comprehensive examination of the US banking sector, but we’re continuing to highlight a few key trends in light of recent developments.

This post (the 2nd of 3) examines recent trends in the securities held by large and small domestically chartered commercial banks: Securities comprise the second-largest category on the asset side of the balance sheet, with two subcategories.

• Treasury and agency securities are obligations issued by the federal government (Treasury securities), US government agencies such as the Federal Housing Administration, and US government-sponsored enterprises such as the Federal National Mortgage Association (“Fannie Mae”).
• “Other securities” are mortgage-backed securities not issued or guaranteed by the US government or other entities, such as those issued by states or political subdivisions.

In the latest reporting week (March 22, 2023), the value of Treasury and agency securities for US commercial banks totaled $4.15 trillion and Other securities totaled $1 trillion.

The FRED graph above plots Treasury and agency securities as a percent of total bank assets for (i) large and (ii) small commercial banks from the week ending January 7, 2015, to the week ending March 22, 2023. This 8-year period encompasses the previous FOMC tightening cycle (2015-2018), the pandemic recession in early 2020, and the current economic recovery and current FOMC tightening period since March 2022. The graph also includes the yield on 10-year Treasury notes, which is a common benchmark yield for longer-term loans such as 30-year fixed-rate residential mortgages.

At the beginning of 2015, large and small commercial banks held a roughly equivalent percentage of their assets in the form of Treasury and agency securities—about 15.5%. Since then, large banks have increased their holding of Treasury and agency securities to a little less than 24% of their total assets—though that percentage is down modestly from its peak of 26.3% on February 16, 2022.

Small banks, however, were reducing their holdings of Treasury and agency securities until just after the recession ended: Government securities as a percentage of assets fell to 12% in late May 2020. Thereafter, small banks began to increase their holdings of securities, which reached 17.1% in late August 2022. Since then, small banks, like large banks, have begun to reduce their holdings of government securities, so that the percentage of assets as of March 22 (15%) is now slightly less than the percentage that prevailed in January 2015 (15.5%). The recent reduction in securities holdings by banks is not surprising, given the recent rise in interest rates.

So, how do movements in interest rates affect bank holdings of securities? One of the fundamental relationships in finance is the inverse relationship between bond prices and interest rates. The price of a bond, and thus its yield (interest rate), is determined by a myriad of factors that influence both the supply of and the demand for bonds. One determinant of the demand for bonds is investors’ expectations of future inflation. All else equal, an increase in expected inflation means that the fixed payments promised by a bond’s issuer (e.g., the US government) will have a lower value than originally expected. In that case, the price of the bond will fall and the interest rate will increase. Similarly, if bond investors expect interest rates to rise—perhaps because of higher inflation and future actions by the Federal Reserve to tamp down inflation—bond prices are expected to fall, leading to the expectation of a capital loss. This also makes bonds less attractive. (See this On the Economy blog post.)

As the FRED graph above shows, small and large commercial banks were adding to their holdings of government securities during a period of rising interest rates (and higher inflation). In essence, banks were adding securities that were paying more in interest, which increased their interest earnings. However, the trade-off is that the market value of their bond portfolio was declining. This is not necessarily a problem if the bank intends to hold the security to maturity.

The peak in government securities holdings for large banks (as a percent of total assets) occurred in the week ending February 16, 2022 (26.3%), roughly a month before the FOMC increased its federal funds target rate, which commenced the current rate-tightening period. By contrast, small banks continued to add to their holdings of government securities; the peak (17%) did not occur until roughly six months later, the week ending August 24, 2022. Since then, as noted, securities as a percentage of assets have declined at large and small banks as interest rates have risen. Thus, there were realized or unrealized losses on commercial banks’ securities portfolios during the period of rising interest rates. According to the FDIC, total unrealized losses on securities that are available for sale and those held to maturity was about $620 billion at the end of 2022.

The third related post on this topic will examine recent trends in loans and leases and deposits. FRED users who are interested in monitoring the US commercial banking sector can do so by analyzing weekly trends in commercial banks’ balance sheets found in the H.8 data.

How this graph was created: Search FRED for “10-year market yield.” Click on “Edit graph, open the “Add Line,” and search for “Treasury securities large banks.” To that new line, add a series searching for “Total assets large banks” and apply formula a/b. Repeat for small banks. Open the “Format” tab and set the y-axis position to the right for the last two lines. Finally, restrict the sample period to start on 2019-01-01.

Suggested by Kevin Kliesen and Cassie Marks.