First credit default warning of global crisis

Contracting bank credit levels could be a sign of an impending recession.

  • Bank credit is seeing a sustained contraction for the first time since the Great Recession, according to Fed data.
  • That is, as higher interest rates reduce confidence levels, businesses borrow less.
  • The U.S. economy avoided a recession last year, but some Wall Street analysts and investors are still pessimistic.

A key gauge of economic health in the US has plunged into negative territory, adding credence to some of Wall Street's pessimistic growth forecasts.

Bank lending levels have now fallen by three quarters in a row Board of Governors of the Federal Reserve System – First sustained contraction since 2010.

It was the second such decline in more than half a century. The last was during the Great Recession caused by the global financial crisis of 2008-2009.

Despite the surprisingly upbeat trend seen in 2023, there has been a sustained decline in bank lending as many Wall Street experts continue to project a pessimistic outlook for the economy. Top investor Jeffrey Gundlach sees a 75% chance of a recession This year, the private equity billionaire Henry Kravis has warned of economic uncertainty.

So do economists David Rosenberg and Steve Hanke Expect a sharp declineMarket guru Gary Schilling is a U.S A recession may already be underway.

US banks see second straight credit contraction in more than 50 years
St. Louis Federal Reserve

„Bank credit is shrinking for only the 2nd time in 50 years,” said Dilo Marots, head of liquid assets at German insurer Kontinental Versicherungsverbund. pointed out in a LinkedIn post This week.

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A credit contraction means firms borrow less, and higher interest rates make borrowing more expensive. When it's difficult to raise debt, businesses are less likely to move forward with spending plans, which can further drag down economic growth.

Between March 2022 and July 2023, the Federal Reserve raised interest rates from near zero to around 5.5% in an effort to control rising consumer prices.

The central bank has signaled it will start easing monetary policy once it believes inflation will fall in line with its 2% target, but until then it will be difficult for businesses to access credit.

Recession warnings

The U.S. economy defied forecasters' bleak predictions by avoiding recession last year, with strong consumer spending helping to accelerate growth. The country's gross domestic product grew by a better-than-expected 4.9% in the third quarter – though it is forecast to slow to just 1.3% in the final three months of 2023, according to a survey of forecasters. Philadelphia Fed.

Some Wall Street gurus believe central bankers are now in a position to engineer a so-called „soft landing,” a dream scenario in which they can reduce inflation to 2% without triggering unemployment or a deep recession.

Treasury Secretary Janet Yellen He said earlier this month that the U.S. economy is „now seeing what I think is a soft landing” — while the Fed's own officials haven't mentioned the dreaded r-word since July, according to minutes of the last three meetings of policymakers.

But not everyone on Wall Street is so happy.

JP Morgan Chase CEO Jamie Dimon Earlier this month, he said he was still „a little skeptical of the Goldilocks scenario” — referring to an economy where growth, inflation and unemployment levels are „just right.”

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„I still think it's more likely than not to have a soft landing,” the billionaire banker said. Fox Business.

„It's not dire. It could be a mild recession or a severe recession,” he added, adding that a downturn in 2024 is likely to bite.

Top economists like Hanke and Rosenberg have repeatedly flagged the possibility of a sharp decline in US growth. Hanke said this week that he believes a recession will soon occur.Start biting„, Rosenberg warned in August, saying it would take a „miracle” to avoid collapse.

The pessimists' outlook hinges on a combination of factors – the economy has yet to feel the impact of the central bank's aggressive rate hikes and the ongoing wars in Ukraine and Gaza that are likely to raise inflation and disrupt global trade.

A bank loan agreement is another sign that they can be proven right.

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