- Bank credit is contracting continuously for the first time since the Great Recession, according to Federal Reserve data.
- This means that businesses are borrowing less as high interest rates gradually reduce confidence levels.
- The U.S. economy avoided recession last year, but some Wall Street analysts and investors remain pessimistic.
A key measure of the health of the U.S. economy sank into negative territory, lending credence to some of Wall Street's more pessimistic growth forecasts.
Bank credit levels have now declined for the third straight quarter, marking the first sustained contraction since 2010, according to the Federal Reserve Board.
This is the second such decline in more than half a century. The last time was during the Great Recession brought on by the 2008-2009 global financial crisis.
The prolonged slump in bank lending comes as many Wall Street experts remain pessimistic about the economy, despite surprisingly positive trends for 2023. Renowned investor Jeffrey Gundlach sees a 75% chance of a recession this year, but private investors think stock billionaire Henry Kravis warns of growing economic uncertainty did.
Economists David Rosenberg and Steve Hanke also predict a sharp recession, while market guru Gary Schilling says a U.S. recession may already have begun. Suggests.
“This is the second contraction in bank credit in 50 years,” Thilo Marotz, head of liquid assets at German insurance company Continentale Versikerungsverbund, said in a LinkedIn post this week.
A credit crunch means businesses are borrowing less and higher interest rates make loans more expensive to access. When debt financing becomes difficult, companies are less likely to pursue spending projects, which can further inhibit economic growth.
In an effort to curb soaring consumer prices, the Federal Reserve has raised interest rates from near zero to about 5.5% from March 2022 to July 2023.
The central bank has signaled it will start easing monetary policy once it is confident that inflation will fall in line with its 2% target, but until then it will be harder for businesses to get credit.
The U.S. economy defied forecasters' pessimistic predictions last year by avoiding recession as strong consumer spending supported growth. The country's gross domestic product expanded by a better-than-expected 4.9% in the third quarter, but is expected to slow to just 1.3% in the final three months of 2023, according to a Philadelphia Fed survey of forecasters. has been done.
Some Wall Street experts believe central bankers are now in a position to engineer a so-called “soft landing.” A soft landing refers to the dream scenario in which inflation could be brought down to 2% without causing a spike in unemployment or a deep recession.
While Treasury Secretary Janet Yellen said earlier this month that the U.S. economy is “currently in what could be described as a soft landing,” Fed officials at the Fed themselves have been in a dire state since July, according to policymakers' minutes. No mention of the r-word. Past 3 meetings.
But not all Wall Streeters are so cheerful.
“I'm still a little skeptical about the Goldilocks scenario,” JPMorgan Chase CEO Jamie Dimon said earlier this month, referring to an economy where the levels of growth, inflation and unemployment are “just right.” said.
“I still think there's a better chance than others that it won't be a soft landing,” the billionaire banker told FOX Business.
“It's not a terrible situation. It could be a mild recession or a deep recession,” he added, noting that a full-fledged recession could occur in 2024.
Top economists like Hanke and Rosenberg have repeatedly raised the possibility that the U.S. could suffer a severe slowdown in growth. Mr. Hanke said this week that he believed a recession would soon “beginning in earnest,” while Mr. Rosenberg warned in August that it would take a “miracle” to avoid a recession.
The pessimists' outlook is based on a variety of factors, including the fact that the economy has yet to bear the brunt of the Fed's aggressive interest rate hikes and the possibility that ongoing wars in Ukraine and Gaza could push up inflation and disrupt global trade. It tends to be influenced by a combination of factors.
Contracting bank credit is another sign that they could be proven right.