Sunday, December 13, 2009

As Lending Continues to Shrink...

Bank lending continued to decline in the most recent period for which data are available, that is the July to September quarter. Loan balances were off by 3%, which represents the biggest quarterly decline since such data started being reported in 1984. Large banks, which have been the primary recipients of the bailout funds, accounted for 75% of that decline.

This is hardly surprising, in view of extensive anecdotal evidence and repeated qualitative assessments of credit conditions by the FOMC in its most recent statements as "tight". Still, there are a couple of intriguing points that spring out of this continuing trend.

1) Until earlier in the year, with the economy marred in a debilitating recession and with both household as well as capital spending in a major retreat, it was hard to disentangle the degree to which the distinctly weak lending patterns reflected the dire state of the banking system from the naturally weak demand for lending during such a period. But with personal spending rising by healthy 2.9% annual rate in Q3 and private fixed investment turning modestly positive (capital spending itself was off again- albeit by the smallest amount since Q2 2008), it is now clear that the significant turnaround of economic conditions in Q3 was not associated with an increased willingness of banks to lend more. In other words, the reluctance of banks to lend remains deeply entrenched even in the face of a presumed improvement in the demand for credit.

2) The above suggests that the sharp pick-up in consumer spending is being financed either by the increased in household wealth resulting from the stock market rally or by a decrease in the savings rate. Although the latter was not evident yet in the October data (the rate was off only by an inconsequential 0.2% to 4.4% in that month, which represents the most recently reported figure for that series), a strong likelihood exists that the improvement in personal consumption will be increasingly relying on a decline in the saving rate.

This would shatter the expectations in some quarters that the traumatic experience of the latest recession may be leading to a new paradigm in the U.S. economy, where consumers save a higher percentage of their current income. With bank lending activity unlikely to return to normal levels for some time, employment and income growth on track for only a gradual pace improvement ahead, and pent-up household demand waiting to be fullfilled, a downtrend in the saving rate over the next 9 to 12 months remains a distinct probability.

Anthony Karydakis


  1. Hi Anthony, Is it possible that the pick-up in consumer spending is also financed by credit card spending? Although credit card issuers have become stricter with issuance, this most likely has only removed the people with the lowest level of credit. The folks next in line have perhaps become bolder with their spending under the presumption that the economy is picking up.


  2. Your point would have been indeed a plausible explanation but the facts actually suggest exactly the opposite. In the last three months to November (the most recent month for which such data are available) revolving credit (i.e credit cards)has virtually collapsed, shrinking by an astonishing $37.0 billion. This is happening exactly for the reason you identified in your comments. The bulk of the pick-up in spending- at least so far- comes from the improvement in the stock market and a decline in the savings rate.