
The Federal Reserve reports that bank credit in the United States is decreasing consistently for the first time since the Great Recession. This decline indicates that businesses are borrowing less due to higher interest rates, causing a dent in confidence levels.
Economic Health Gauge Turns Negative
A crucial measure of economic well-being in the US has entered negative territory, supporting some of Wall Street’s more pessimistic growth predictions. Bank credit levels have fallen for three consecutive quarters, marking the first sustained contraction since 2010 and only the second such decline in over 50 years.
Wall Street Pessimism and Expert Predictions
Despite a positive trend in 2023, many experts on Wall Street are projecting a gloomy economic outlook. Influential figures like Jeffrey Gundlach and Henry Kravis express concerns about a potential recession. Economists David Rosenberg and Steve Hanke anticipate a sharp downturn, while Gary Shilling suggests a US recession might already be underway.
Impact of Credit Contraction on Businesses
The contraction in bank credit implies reduced borrowing by companies, as higher interest rates make loans more expensive. Difficulty in obtaining debt can discourage businesses from pursuing spending projects, further hindering economic growth.
Federal Reserve’s Interest Rate Hike
Between March 2022 and July 2023, the Federal Reserve increased interest rates from near-zero to around 5.5% to curb rising consumer prices. The central bank has signaled a plan to ease monetary policy once confident in inflation aligning with its 2% target. However, until then, businesses may find it challenging to access credit.
Mixed Economic Signals
Despite last year’s stronger-than-expected GDP growth of 4.9% in the third quarter, forecasts suggest a slowdown to 1.3% in the final three months of 2023. Some believe central bankers could achieve a “soft landing,” balancing inflation without triggering unemployment or a severe recession.
Differing Views on Economic Outlook
While Treasury Secretary Janet Yellen and some Fed officials express confidence in a “soft landing,” JPMorgan Chase CEO Jamie Dimon remains skeptical, suggesting the possibility of a mild or heavy recession, possibly in 2024. Top economists warn of a severe growth slump, citing factors such as aggressive rate increases by the Fed and geopolitical tensions.
Bank Credit Contraction as an Ominous Sign
The sustained contraction in bank credit is seen as another indication supporting the pessimistic outlook. It suggests that economic challenges, including the impact of aggressive rate hikes and global conflicts, could materialize, aligning with the concerns raised by the economic pessimists.