Washington Trust Bank Weekly Economic Perspectives

Economic Perspectives - 11/21/25

Steve Scranton

Economic Summary

Let the data deluge begin! What we learned from this week's economic data releases was that the data was mixed both in its timeliness and its results. Due to the government shutdown, government data is for August or September, while private sector data is for October and November.

Consumer Sentiment
The University of Michigan reported a further decline in its Consumer Sentiment Index in November. The index fell to 51.0 from 53.6. Consumers became far more pessimistic about their current conditions as that sub-index fell from 58.6 to 51.1. They became a little more hopeful about the future as the sub-index for future expectations rose from 50.3 to 51.0.

Housing
Existing home sales rose 1.2% in October after rising 1.3% in September. The Mortgage Bankers Association reported a 5.2% decline in mortgage applications last week. The decline was led by a 7.3% decline in applications to refinance while applications to purchase a home fell 2.3%. The average 30-year mortgage rate rose from 6.34% to 6.37%. Sentiment improved for home builders as the National Association of Home Builders rose from 37 in October to 38 in November.

Jobs
The Bureau of Labor Statistics reported a 119,000 increase in jobs for the month of September. This was a rebound from experiencing negative jobs growth for two out of the previous three months. The unemployment rate rose to 4.4% from 4.3% in August as more people entered the labor force seeking jobs. Layoffs continued to remain within the range of 200,000-250,000 as last week's initial claims came in at 220,000. Continuing claims rose from 1,926,000 to 1,974,000.

Manufacturing Activity
The Philadelphia Federal Reserve reported an improvement in its manufacturing activity index. The index is still negative (activity is still contracting) but it rose from a negative 12.8 level in October to a negative 1.7 level in November. S&P-Global's manufacturing PMI index fell from 52.5 in October to 51.9 in November. Durable goods orders (excluding transportation orders) rose 0.3% in August after rising 0.4% in July. Factory orders (excluding transportation orders) rose 0.1% in August after rising 0.5% in July.

Service Sector Activity
S&P Global reported a slight increase in its service sector activity index. The index rose from 54.8 in October to 55.0 in November.

Trade Balance
The nation's trade balance shrank from -$78.2 billion in July to -$59.6 billion in August. The reduction reflected the impact of the US tariffs as imports shrank faster than exports.

Perspectives

Last week's Perspectives section examined whether banks were tightening their lending standards. This week drills down to examine, for those banks who responded they were tightening lending standard, the reasons why.

Soundbite

The most important reason given for tightening lending standards is a less favorable economic outlook. 40% of respondents indicated this reason was very important. Banks do not have just one reason for tightening standards as evidenced by the fact that all seven of the reasons listed by the Federal Reserve had at least 30% of the respondents indicate this reason was a factor-either somewhat important or very important.

Analysis

If a bank responded that they had tightened their lending standards, there were seven follow up questions to identify the reason.

Increased Concerns About the Effects of Legislative Changes, Supervisory Actions, or Changes in Accounting Standards
Current or Expected Liquidity Position
Deterioration in Current or Expected Cash Position
Less Aggressive Competition from Other Banks or Nonbank Lenders
Reduced Risk Tolerance
Less Favorable Economic Outlook
Worsening of Industry-Specific Problems

If a bank becomes concerned over the outlook for the economy, the lending department may begin to tighten its lending standards to avoid making loans to a business or consumer that may be negatively impacted by a weakening economy. Even though optimism about the economy is driving stock prices higher, lending departments of banks appear to have become more pessimistic over the economic outlook. This is evidenced by the fact that the response that had the biggest increase was the Very Important response. Over the last four quarters the percentage of responses for Very Important rose from 10.5% to 40.0%. Those saying this category was not an important reason for tightening standards only comprised 10.0% of the responses.

SLOOS2-Economic Outlook.jpg

If a bank starts to become concerned over problems happening in the banking industry, that could cause them to become more cautious even if the industry-specific problems are not impacting them. The natural tendency when you become more cautious is to tighten your lending standards. The graph below shows that the Very Important percentage dropped from 28.6% to 22.2%. Where the increase occurred was the Somewhat Important response. The percentage rose from 28.6% to 44.3%.

SLOOS2-Industry Problems.jpg

Even if a bank has a favorable outlook on the economy, it may become less risk tolerant. This could be due to several factors including (but not limited to): it has hit the internal limits set for certain loan categories designed to keep it from becoming concentrated in a loan type; it is worried about the financial health of certain industry sectors; a change in leadership for the bank. The graph below indicates that banks became less tolerant of risk since both the Somewhat Important and Very Important responses experienced an uptick in the percentage. The Somewhat Important response rose from 40.0% to 50.0% and the Very Important response rose from 6.7% to 10.0%.

SLOOS2-Risk Tolerance.jpg

Another reason a bank may tighten lending standards is if they become more concerned about changes in legislation, supervision, or accounting standards. If any of those categories makes it more expensive to operate or requires more capital to be held, that could cause banks to tighten their lending standards. What the graph below illustrates is that this reason has become less important for banks. The Somewhat Important response declined from 53.3% to 40.0% while the Very Important response declined from 14.4% to 10.0%.

SLOOS2-Legislative Changes.jpg

A bank may have felt under pressure not to tighten lending standards because they were experiencing aggressive competition from other banks or non-banks. If those competitors started to become less aggressive the bank may then feel more confident that they could raise their standards without losing customers. The graph below shows that it may be happening. After nine consecutive quarters of seeing no respondents citing the Very Important response as a reason, the most recent quarter saw 10% of the respondents say it was a very important reason. There was also an uptick in the Somewhat Important response as it rose from 13.3% to 30.0%.

If a bank is experiencing or expects deterioration in its capital position it may tighten lending standards because increasing capital to stop the deterioration means less money available to lend. What the graph illustrates is a big increase in the Somewhat Important response but a slight decrease in the Very Important response. Over the last three quarters, the Somewhat Important response has risen from 8.3% to 30.0%. The Very Important response fell from 6.7% to 0.0%.

SLOOS2-Capital Position.jpg

Banks have policies to ensure that they have sufficient liquidity to meet withdrawal flows. The need to maintain a sufficient liquidity position was highlighted during the Silicon Valley/First Republic Bank scare. Deposits and excess liquidity are what funds loan demand. If a bank's liquidity position declines to the point where there is no excess liquidity to use for loans, a bank may tighten its lending standards to slow loan growth since the alternative is to borrow to fund loans. That is not a choice most banks want to use. What we learn from the graph below is that there has been no increase in the Very Important response category. In fact, that category has had a zero percent response rate for four consecutive quarters. Where the change has occurred is in the Somewhat Important response. this response choice has risen over the last three quarters from 8.3% to 30.0%.

Conclusions

Overall, there are a variety of reasons why banks may tighten lending standards, and it is a combination of multiple concerns that trigger a bank to tighten standards. As the seven graphs highlight, at least 30% of banks who tightened standards indicated all seven reasons had some level of importance (Somewhat or Very) in the decision to tighten standards.
Based on the Federal Reserve Survey, the most important reason given by banks who have tightened lending standards is their concern over the outlook for the economy as 40% indicated that reason was very important. If we take a slightly different view and combine both the Somewhat Important and Very Important responses, the top reason was concern over industry-specific problems at 66.5%. Concern over the outlook for the economy and reduced risk tolerance tied for second at 60%. Concerns over capital positions and liquidity were not very important as both had zero responses for the Very Important response.
Now that we have a perspective on the trend regarding whether banks are tightening lending standards (last week's newsletter) and the reasons why they tightened standards (this week's newsletter), next week will take a deeper dive into what types of standards have been tightened since there are multiple lending standards a bank may have when evaluating whether to make a loan.

Disclosures

Data is sourced from the original providers (typically government agencies) and analyzed by the author.

About the author

Steve Scranton, CFA

Chief Economist

Steve is the Economist for Washington Trust Bank and holds a Chartered Financial Analyst® designation with over 40 years of economic and financial markets experience.

Throughout the Pacific Northwest, Steve is a well-known speaker on the economic conditions and the world financial markets. He also actively participates on committees within the bank to help design strategies and policies related to bank-owned investments.

As the Economist for Washington Trust Bank, Steve participates in public speaking engagements, as well as authoring multiple communications, to keep our clients informed of economic and financial market conditions.

Learn more about Steve

Content Authenticity Statement:

The Economic Perspectives newsletter is comprised entirely of the expertise, thoughts, perspectives and opinions of the author with no use of generative AI. Data is sourced from the original providers (typically government agencies) and analyzed by the author.