According to Fed data, bank credit is experiencing a sustained contraction, marking the first such decline since the Great Recession.
Businesses are borrowing less due to high interest rates eroding confidence levels. The US economy avoided a recession last year, but some analysts and investors remain pessimistic as a key economic health gauge has turned negative.
The Board of Governors of the Federal Reserve System reports a three-quarter consecutive decline in bank credit levels, the first sustained contraction since 2010 – the second in over half a century, with the last one occurring during the 2008-2009 global financial crisis.
Despite a positive trend in 2023, notable figures like Jeffrey Gundlach, Henry Kravis, David Rosenberg, and Steve Hanke predict a downturn, while Gary Shilling suggests a recession might already be underway.
The prolonged bank credit slump implies reduced company borrowing, impacting economic growth. The Federal Reserve’s interest rate hike from near-zero to around 5.5% between March 2022 and July 2023 makes it more challenging for businesses to access credit.
Although there’s optimism about a “soft landing,” not everyone on Wall Street shares this sentiment. JPMorgan Chase CEO Jamie Dimon expresses skepticism, suggesting the possibility of a mild or heavy recession in 2024.
Top economists warn of a severe growth slump, pointing to factors like the Fed’s aggressive rate increases and geopolitical tensions in Ukraine and Gaza. The contraction in bank credit serves as another indicator supporting the pessimistic outlook.
