The Slowdown in U.S. Credit Supply is A Harbinger of Further Weakness

One of the hallmarks of this current quarter’s performance is the slowdown in credit expansion. U.S. domestic bank loan growth is falling in most categories over the past six months (Chart 1). In particular, the decline in the growth rate of commercial and industrial loans has been quite dramatic, falling from an annual average of 9.5 percent to just over 1 percent. The sharp decline in the C&I sector is the most worrisome, since this is the sector that drives overall capital formation and economic growth. Without any expansion in bank loans, the economy fails to grow and may well sputter.

Chart 1  The Growth in U.S. Bank Loans

Since the 2008 crisis, many corporations have side-stepped the commercial banks and have turned to the corporate debt market for investible funds. And, indeed, the growth in corporate debt has been very robust since 2010. Corporations were raising record levels of debt for several reasons including: taking advantage of lower interest rates; paying out dividends and buying back outstanding shares. But these activities seem no longer to be motivating corporate treasurers to go the debt market.

Chart 2 compares the growth in corporate bond issuance in 2017 Q1 to that experienced a year earlier. Generally, new corporate issuances are heavy in the first and second quarters and then taper off. But in this instance, 2017 got off to slow start such that the decline in bank debt is not been made up by new corporate bond issues.

Something is causing the slowdown.

Chart 2 Corporate Bond Issuance, US$ Billions

Is the slowdown in credit expansion a function of credit tightening or lack of demand? Over the past three years, the growth in net investment in the private sector has been virtually zero (Chart 3).

Chart 3 Net Domestic Investment in Private Sector

Any capital formation that has been undertaken is reflective of the need to replace depreciating assets, but there has been no net increase in the capital stock in the private sector. Given that the investment in the private sector is not expanding, a vital component of national income is not carrying its weight. Growth then must depend on the consumer and government sectors. It can be inferred that slowdown in bank loans points to a lack of demand rather than unavailable credit. This does not bode well for the future.