BUSINESS INSIDER
A key gauge of economic health in the US has sunk into negative territory, adding credence to some of Wall Street’s more pessimistic growth predictions.
- Bank credit is seeing a sustained contraction for the first time since the Great Recession, according to Fed data.
- That means businesses are borrowing less, as high interest rates chip away at confidence levels.
- The US economy avoided a recession last year, but some Wall Street analysts and investors are still pessimistic
Bank credit levels have now fallen for three quarters in a row, according to the Board of Governors of the Federal Reserve System – the first sustained contraction since 2010.
This is only the second such decline in more than half a century. The last one was during the Great Recession, brought about by the global financial crisis of 2008-2009.
The extended slump in bank lending comes as many Wall Street experts continue to project a pessimistic outlook for the economy, despite the surprisingly upbeat trend seen in 2023. High-profile investor Jeffrey Gundlach sees a 75% chance of recession this year, while private-equity billionaire Henry Kravis has warned of heightened economic uncertainty
Economists David Rosenberg and Steve Hanke also expect a sharp downturn, while market guru Gary Shilling has suggested a US recession may already be underway.
“Bank credit is contracting for only the 2nd time in 50 years,” Tilo Marotz, head of liquid assets at German insurer Continentale Versicherungsverbund, pointed out in a LinkedIn post this week.
The credit contraction means that companies are borrowing less, with higher interest rates making it more expensive to take out loans. When it’s harder to raise debt, businesses are less likely to press ahead with spending projects, which can further drag on economic growth.
Between March 2022 and July 2023, the Federal Reserve jacked up interest rates from near-zero to around 5.5% in a bid to clamp down on soaring consumer prices.
The central bank has signaled that it’ll start loosening monetary policy once it’s confident that inflation will fall in line with its 2% target, but until then it’ll be tougher for businesses to access credit.
