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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Critical Indicator Signals America's Economic Fortunes May be Changing

Something unusual happened the last few weeks.

Bank lending in the U.S. didn't fall significantly.

Since the onset of the financial crisis, outstanding loans at U.S. commercial banks have been in a freefall. Over $600 billion in loans have been repaid or defaulted on. Representing an 8% contraction in credit.

This is unprecedented in the financial data. The Federal Reserve began tracking loans in 1973. Since that time, there has never been a significant drop in outstanding credit.

US Bank Loans & Credit

We are in uncharted waters. Which raises serious questions about the health of the U.S. economy.

How much of America's economic achievement over the last 40 years was fueled by credit? And now that money is flowing out of the economy, back to the banks, what will the effect be on prices, wages and business profits?

As I've been saying for a year and a half, this is one of the most critical indicators to watch in order to gauge America's coming economic fortunes.

And it appears those fortunes may be turning.

For the last three weeks of reported data (February 24 to March 10), outstanding loans stayed flat. The first three-week period without a fall since early 2008.

(The "jump" in loans seen on the chart above in late October and early November 2009 was in fact a statistical anomaly. Caused by commercial banks acquiring loans from bankrupt institutions outside the commercial banking system. Excepting these acquisitions, loans fell during this period too.)

This is an improvement. A stabilizing number would indicate money is no longer being drained from the economy. Of course, loans aren't increasing, which could still represent a problem for an American system built on credit.

The prospects for a renewal in lending are not so sunny. The main problem being the lack of credit-worthy borrowers. Banks are reluctant to lend to people who might not be able to pay the money back after they lose their job, see their home drop in value or go bankrupt under the weight of other debts.

As the chart below from the Bank of Japan shows, non-performing loans are running hot in both America and Europe. Reaching 4% in both regions. This is not an environment that's going to coax out a lot of new lending.

NPL Ratio of Financial Institutions

If you only watch one economic indicator this year, make it this one. Credit growth is key to the American economy. Let's see if it returns.

Here's to changing trends,

By. Dave Forest of Notela Resources


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Leave a comment
  • Anonymous on March 27 2010 said:
    The importance of credit in economic growth and development is a no-brainer, and so once we learn that credit has not collapsed, and may be expanding, we can start smiling again. In fact if you read European instead of U.S. newspapers, it's easy to believe that the new president and his team may have turned the US economy around.
  • Anonymous on March 29 2010 said:
    Mr. Banks, I think you're right on the money. Politics is never on the money in the US. Winning in the polls and hurting whoever is in power is the fame
  • Anonymous on March 29 2010 said:
    Contraction in credit increases economic contraction which is deflationary for assets, and businesses e.g. housing values still falling.
    Inflation is happening also, in the consumables we buy- so we are losing from both sides. The Wall St. driven rally will end badly as main street consumption (70% of GNP) continues to contract, and the gov. tries to replace it with their (our) future tax dollars.This is not sustainable, but the public will reelect them and that's all they care about.

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