July 28, 2013
Economic growth is hampered when credit growth declines. In 2008, we experienced a sharp decline in confidence and lending that has only now reached the levels before the decline.
When we look at the big picture, we can see that we are now at more sustainable growth trends.
The amount of outstanding commercial and industrial loans is almost at the level last seen in 2008.
A smiliar slow recovery in business loans occurred during the 2001 recession.
Although housing evaluations have been rising, the amount of revolving equity lines of credit (HELOC) continues to decline. The total outstanding is still high but approaching a more reasonable trendline of growth.
Recently rising bond yields have contributed to banks’ operating profit margins but the corresponding value of banks’ bond portfolios has fallen quite dramatically.
This decline in asset value affects bank capital ratios, which makes them less likely to increase their lending. which will be an impediment to economic growth.
This Wednesday the first estimate of 2nd quarter GDP will be released. Real GDP growth is expected to be about 1.1%, less than the meager 1.8% growth of the 1st quarter. Slowing growth may revive interest in bonds. The recent sell off in bonds has probably been an over reaction incited by fears that the Federal Reserve will reduce its bond buying program dubbed “Quantitative Easing.” While there are positive signs in the economy, they do not indicate any impending robust growth.
In addition to Wednesday’s release of GDP figures, the payroll firm ADP will show their monthly report of private employment growth, guesstimated to be slightly below the 188,000 gain predicted for June. The BLS monthly labor report follows on Friday and will be watched closely. Unemployment has been stuck in the mid-7% range since March and reductions in unemployment have been largely due to people either leaving the work force or taking part time jobs because they could not find full time work.
The Federal Reserve has said that its target for withdrawing its quantitative easing program is an unemployment target of 6.5%, with a caveat that inflation remains tame. A slow economy will naturally reduce inflationary pressures and improvements in the labor market are slowing as well. In short, the Fed is likely to continue its monetary support for another year at least.
For a month now, the stock market has risen steadily in small increments, making up the losses that began in the third week of May. Volume typically declines during summer months but this year’s volume of trading in SPY, the ETF that tracks the SP500 index, is 20% lower than this same time last year. This week, we may see a market hesitation before the release of both the GDP and labor reports.