First construction spending was revised down/less than expected which lowered Q3 GDP forecasts, and then car sales were less than expected as well.
Together they are a large factor in consumer ‘borrowing to spend’ which is necessary to offset the demand leakages- those agents spending less than their incomes.
This doesn’t bode well for Q4, which is already at risk for little or no growth as previously discussed.
I got this email supporting the idea that bank credit expansion has been at the expense of non bank lenders, with low total credit growth.
As previously discussed, I don’t see the credit growth necessary to sustain the 3%+ GDP growth being forecast. Instead, I see the q1 negative growth and H1 total growth of only 1.2% as indicative of the underlying trend.
Warren: With respect to the recent “surge” in bank credit, please see below info that I prepared from Z.1. I recall you once suggesting that the expansion in bank credit may be attributed to banks taking share from non-bank lenders. Based on below table and graphs, that appears to be the case. When you combine bank and non-bank lenders (what I refer to as “Bank & Non-Bank Finance”), growth in credit market assets is essentially zero/nominal over recent periods, and you can see the recent increase in bank credit appears to be largely offset by a decrease in non-bank credit. Most non-banks are essentially “agents” of banks in my opinion so should view together for macro perspective. Note below that my definition of “Adjusted Credit Market Assets” is the FRB’s definition plus money market, rev repo and security credit. Not sure if this is the “correct” way to view things and I could be way off base but figured may be worth passing along. Also, for the “Insurance & Inv Mgmt” Sectors, I think the growth there may support your demand leakage narrative (but excludes equities). Thx
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Turned down this week as ‘leveling off’ continues:
The much hyped acceleration still looks like it’s over.
Acceleration alarm zones circled in yellow:
This was a major source of shadow bank funding as well as non financial funding:
Weak euro zone lending data underscores need for ECB stimulus
By Eva Taylor
Sept 25 (Reuters) — Lending to euro zone households and companies contracted for the 28th month in a row in August, though at a slower pace, putting a keener spotlight on European Central Bank efforts to get credit flowing again.
Euro zone banks, particularly in the crisis-stricken countries, have tightened up on lending as they adapt to tougher capital requirements and undergo health checks, while companies are holding back on investments, unsure of the future.
The euro zone economy ground to a halt in the second quarter and with inflation in what ECB President Mario Draghi has called the “danger zone” below 1 percent for almost a year now, the ECB saw the need to add new stimulus steps in June and September.
The ECB has now started to offer banks four-year loans at ultra-cheap rates and plans to buy asset-backed securities and covered bonds from October to lighten the weight on banks’ balance sheets and entice them to lend.
But economists in a Reuters poll are skeptical about whether the plan will work, saying bank lending to private euro zone businesses needed to grow at a 3-percent annual rate on a sustained basis to stir inflation.
August lending rates are nowhere near such levels.
In August, loans to the private sector continued to fall, down 1.5 percent from the same month a year earlier after a contraction of 1.6 percent in July, ECB data showed on Thursday. Private sector loans have not grown since April 2012.
“It remains questionable as to how much all the liquidity measures announced by the ECB will encourage banks to lift their lending,” IHS Global Insight economist Howard Archer said.
“…it is also questionable how much businesses’ demand for credit will pick up while the economic and political outlook looks so uncertain,” he said.
WEAK LENDING IN IRELAND
Draghi told Lithuanian business daily Verslo Zinios in an interview published on Thursday a continued weakness in credit growth was likely to curb the euro zone recovery.
Euro zone companies rely mainly on bank funding rather than capital markets, which is why it is so crucial to fix lingering problems in the sector.
For that purpose, the ECB is putting the bloc’s top banks through a thorough review of their balance sheets to weed out bad loans, update collateral valuations and adjust capital.
The picture varies across the euro zone. While lending to companies in Ireland fell at an annual rate of 11.8 percent in August – the fastest decline in three years – and 8.8 percent in Spain, it rose in Finland, Germany and France.
Euro zone M3 money supply – a more general measure of cash in the economy – grew at an annual pace of 2.0 percent in August, up from 1.8 percent in July.
So much for all the talk about the Fed needing to hike rates because credit growth was accelerating and all that.
(Not to mention hiking rates would in fact speed it up, but that’s another story…)
The Fed’s mandates are full employment, price stability, and low long term rates. And along with who knows what, he has to be seeing these charts:
New jobs down for the winter, up some, then back down for several months:
Not forget purchase mortgage applications are down 12% vs last year, and now cash purchases are down as well, as housing contributes less than half of what’s it’s contributed in prior cycles.
And the rest of the world economy is decelerating as well.
Consumer Credit
Highlights
Retail sales may have been soft in July but consumers were definitely drawing on credit lines including a rare and very strong rise in credit card usage. Consumer credit jumped an outsized $26.0 billion in July on top of an upward revised $18.8 billion jump in June. But it’s revolving credit, the component where credit cards are tracked, that especially stands out in the report, up $5.4 billion vs a $1.8 billion gain in June. This component has been stubbornly flat throughout the recovery and further gains in future reports would mark a long-awaited upturn in consumer spirits.
The non-revolving component, as usual, is very strong, up $20.6 billion in July vs a $17.0 billion gain in June. But July’s gain, unlike prior gains, is centered entirely in vehicle financing, not the government’s acquisition of student loans from private lenders which contracted in the month.
This report offers a very strong positive signal for the consumer sector, a sector that has not been at the forefront of the economy. The Dow is moving slightly higher following today’s report.
Note how debt to income ratios jumped immediately after the FICA hike that kicked in Jan 2014:
Student loan growth:
What was touted as an acceleration of growth seems to have leveled off over the last few weeks, and is looking more like a dip in growth (cold winter?) followed by a recovery that’s leveled off.
More troubling, however, is the late cycle pattern of a slowdown in the growth of lending followed by borrowing to fund cash shortfalls that turns into negative growth, but in this case seems the recent growth is coming from the smaller banks:
At the same time, net interest margins for banks continues to fall:
(August 7 release)
