Down Angle Symbol A symbol in the form of an angle pointing downwards. A decline in bank creditworthiness could be a sign that a recession is imminent. Happiness Photographer/Shutterstock
- According to Fed data, bank lending is in sustained decline for the first time since the Great Recession.
- This means that companies are taking out fewer loans as high interest rates weaken confidence.
- The U.S. economy avoided recession last year, but some analysts and investors on Wall Street are still pessimistic.
A key indicator of U.S. economic health has slipped into negative territory, lending more credence to some of Wall Street's more pessimistic growth forecasts.
According to the Federal Reserve System's Board of Governors, bank creditworthiness has now fallen for three quarters in a row – the first sustained decline since 2010.
This is only the second such decline in more than half a century. The most recent crisis occurred during the Great Recession triggered by the 2008-2009 global financial crisis.
The ongoing collapse in bank lending comes as many Wall Street experts continue to forecast a pessimistic outlook for the economy in 2023, despite the surprisingly positive trend. Well-known investor Jeffrey Gundlach sees a 75 percent chance of a recession this year, while private equity billionaire Henry Kravis has warned of increased economic uncertainty.
Economists David Rosenberg and Steve Hanke also expect a sharp downturn, while market guru Gary Shilling suggests that a recession may already be underway in the US.
U.S. banks are experiencing their second sustained credit decline in more than 50 years. St. Louis Federal Reserve
“Bank loans are shrinking for only the second time in 50 years,” emphasized Tilo Marotz, head of liquidity reserves at German insurer Continentale Versicherungsverbund, in a LinkedIn post this week.
The credit shortage means that companies are taking out fewer loans and higher interest rates are making it more expensive to take out loans. When it becomes harder to raise debt, companies are less likely to move forward with spending projects, which can further slow economic growth.
Between March 2022 and July 2023, the Federal Reserve increased interest rates from near zero to about 5.5% to counter rising consumer prices.
The central bank has signaled it will begin easing monetary policy once it is confident inflation will fall to its 2% target, but until then it will be harder for companies to get credit.
Recession warnings
The U.S. economy defied forecasters' dire predictions by avoiding recession last year, with strong consumer spending helping to support growth. The country's gross domestic product grew a better-than-expected 4.9% in the third quarter, although that is expected to have slowed to just 1.3% in the final three months of 2023, according to a Philadelphia Fed survey of forecasters.
Some Wall Street gurus believe that central bankers are now in a position to engineer a so-called “soft landing,” which refers to the dream scenario in which they manage to bring inflation down to 2% without a rise unemployment or a severe recession.
Treasury Secretary Janet Yellen said earlier this month that the U.S. economy is “now experiencing what I think we can call a soft landing” — while Fed officials have not mentioned the dreaded R-word since July, according to transcripts of political decision-makers. last three meetings.
But not everyone on Wall Street is so cheerful.
JPMorgan Chase CEO Jamie Dimon said earlier this month that he was still “a little skeptical of the Goldilocks scenario” – referring to an economy in which the levels of growth, inflation and unemployment are “just right.” “ appears.
“I still think the chance of it not being a soft landing is higher than others,” the billionaire banker told Fox Business.
“It's not terrible. It could be a mild recession or a severe recession,” he added, noting that it was possible the downturn would be felt in 2024.
Top economists like Hanke and Rosenberg have repeatedly raised the possibility that the U.S. could suffer a severe downturn in growth. Hanke said this week he believed a recession would soon “intervene,” while Rosenberg warned in August that it would take a “miracle” to prevent a downturn.
The pessimists' outlook tends to depend on a combination of factors – including the fact that the economy has yet to feel the brunt of the Fed's aggressive interest rate hikes, and the potential that the ongoing wars in Ukraine and Gaza will push inflation higher could increase and disrupt global trade.
Taking out a bank loan is another sign that they might be right.
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