Two competing explanations are given for the decrease in lending by banks. Most people believe that there is a credit crunch emerging: banks are tightening lending standards and rejecting credit applications. This would be bad. It's possible that people are not interested in the money.
Almost certainly, you'll find a combination of both. Take a look first at the numbers. Early in the pandemic, the number of loans and leases recorded by commercial banks in the United States briefly increased. In the two-week period ending March 29, the most recent data available from the Federal Reserve at the time, loans and leasing fell by nearly one percent, or $105 billion. This was the largest two-week drop in dollar terms, since 1973 when the data series started. It was also the largest in percentage terms, since 2009 during the global financial crises.
Since the end of January, banks have lost more than $3 billion in deposits. Money from the banks goes into money market funds which stash it at the Federal Reserve. This is a "financial hole" as far as lending concerns, according to Paul Ashworth, Capital Economics, in a note for clients that I cited Monday.
Anirban Basu is the chief economist of Associated Builders and Contractors. He told The Times that people are using the c-words for the first time since a while. In the Federal Reserve Bank of New York Survey of Consumer Expectations, it was found that in March the percentage of consumers who said that getting credit is harder than a year earlier rose to 58.2 per cent. This was the highest share recorded since the creation of the survey in 2013.
Even if you think about it, even a credit crisis is a sign that people are still hungry for loans. You should be concerned when people are reluctant to borrow money because they expect bad times. In this situation, monetary policies are less effective. Lowering interest rates to encourage borrowing is like pushing a string.
There are indications that the observed drop in leases and loans is due at least partially to a weak demand. In a survey conducted by the New York Fed in February, the rate of applications for all types of credit during the previous 12 months fell to its lowest level since October 2020. This was probably not because the applicants were afraid of being rejected. The bank reported that the overall credit rejection rate has decreased from 18.8 to 17.3 percent since October 2022.
According to the National Federation of Independent Business, small businesses, who rely on bank loans more than large companies, reported only 2 percent of their owners in March not having met all of their borrowing needs. Randomly selected members of the N.F.I.B. reported that their credit needs had been met and 59 per cent said they weren't interested in a bank loan. Only 2 percent of members were planning to expand, the lowest since March 2009. "That's a big 'yikes'!" David Rosenberg, president of Rosenberg Research & Associates and a forecaster wrote to his clients on Wednesday.
Federal Reserve is determined to bring inflation back to its target rate of 2 percent per year and has given a low priority to making credit more available in order to ease lending terms. Even if they changed their stripes and decided to prioritise growth, the Federal Reserve would still have difficulty getting anything done if at least part of the problem is a lack in demand for loans.
Fiscal policy, including government spending and tax reductions, is more effective at boosting a weak economy. According to calculations by the Hutchins Centre of the Brookings Institution, fiscal policy began to shift from being stimulative to contracting at the beginning of 2021. Republicans in Congress want to drastically cut spending, not increase it.
Bottom line, a recession is inevitable in the United States. Julian Brigden told me on Tuesday that it may have already begun. He is the founder and president of Macro Intelligence 2 Partners. He predicted that the U.S. would likely fall into a recession by the third quarter this year if the economy did not improve. He said that the Fed's rapid and large interest rate hikes had essentially foreordained this.
Brigden expects the U.S. to have a high unemployment rate of 6 or 7 percent in early 2024. This is compared to a median forecast by Federal Reserve Governors and Bank Presidents that was 4.5 or 4.6 percent for this year, and next year.
Brigden stated that the Fed was 'pile driving this baby to the ground'.
Americans worked fewer hours elsewhere
The jobs report for March, released on Friday, wasn't quite as good as it seemed at first glance. It's true that employers added 236,000 new employees to their payrolls. The average workweek of all private nonfarm employees fell by 0.1 hours to 34.4. This six-minute drop may not seem significant, but it is a major change when viewed as a whole. Multiplying the number of workers with the number of weekly working hours per worker will reveal that the total hours worked in March actually decreased by 0.1 percent. This statistic is reported in Table B-4 of Bureau of Labor Statistics monthly news release.
Quote of the day
The theories are applied in their most vulgarized forms, and it should be a test for a good theory of economics that its vulgarization doesn't lead to a bad policy.
Preface to the paperback version of Keynes: The Return Of the Master by Robert Skidelsky (2010)