Credit Growth Worries For 2016
US Credit Growth slowed for the fourth consecutive quarter during the three months to September. Compared with one year earlier, credit grew by only $1.6 trillion or by just 2.7%, the weakest rate of growth since 2012. This is important because Credit Growth was the main driver of economic growth in the United States for decades until 2008, when the Americans could no longer afford to take on any more debt.
Between 1952 and 2008, any time credit grew by less than 2% on an inflation-adjusted basis, the United States fell into recession. When the US credit bubble popped in 2008, the government had to intervene on a multi-trillion dollar scale to prevent a new Great Depression. Government debt spiked by $8.5 trillion (130%), the Fed printed $3.6 trillion from thin air and interest rates were cut to zero.
Now, however, we are told that the crisis has passed. The government’s budget deficit has been brought down to less than 2.5% of GDP (below the average of the past 50 years), the Fed stopped its Quantitative Easing (money printing) program in October 2014 and, last month, interest rates were increased for the first time in nearly a decade. In other words, the government-provided “life support” for the economy has largely been removed. That means the economy’s growth prospects are once again dependent on Credit Growth. And here’s the problem: Credit Growth is weak and it looks likely to remain weak during the next few years.
In my work, I monitor Credit Growth very closely. In the latest issue of my video-newsletter, Macro Watch, I analyzed the credit data for the third quarter and I forecast credit growth out for the next two years to 2017. To do that I looked at each of the major sectors of the US economy to see how much more debt each one is likely to take on during the next nine quarters.
The total debt of the country is now $62.5 trillion. The US government accounts for 23% of that debt. The Household sector is the next largest debtor, with another 23% of the total. Next comes the Corporate sector and the Government-Sponsored Enterprises (Fannie Mae and Freddie Mac) with 13% each. These are followed by Non-Corporate Businesses, with 7%, and State & Local Governments, with 5%.
The Corporate sector and the Non-Corporate Business sector accounted for nearly half the increase in total debt over the last year. But, looking ahead, it is likely that they will borrow less over the next two years since interest rates are starting to rise and since the collapse in commodity prices makes new investment in the mining and energy industries less attractive. The level of debt of the Household sector and of the Government-Sponsored Enterprises (which both depend largely on the state of the property market and mortgage debt) are no longer contracting, as they were in the years immediately after the crisis; but the rate of expansion of their debt has been more modest than anticipated. Over the next two years, the increase in their debt should be just about enough to offset the slowdown in debt from corporations and smaller businesses. Meanwhile, the growth rate of Government debt looks set to stabilize.
Putting this all together, I estimate that total debt will increase by 2.5% this year, 3.2% next year and by 2.9% in 2017. On an inflation-adjusted basis that translates to 2.4% this year, 1.6% next year and 1.0% in 2017 (using the Fed’s forecasts for inflation over the next two years).
With credit growth likely to be below the 2.0% “recession threshold”, the outlook for the US economy is not at all encouraging over the next two years. In fact, I believe the chances that the United States will fall back into recession in 2016 are high.
A US recession would create a great deal of turmoil in the financial markets because it would force the Fed to reverse its current plans of tightening monetary policy. Instead of increasing interest rates further, a recession would force the Fed to cut interest rates and then launch a new round of Quantitative Easing. QE 4 would send the Dollar sharply lower and the financial world would be turned upside down. Many of the trades that had benefited from a strengthening Dollar over the last 18 months would become loss making; while many of the plays that had suffered from a stronger Dollar would take a big bounce higher.
So, hold tight. If I am right that weak credit growth means weak economic growth, then 2016 will be a very exciting year.
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