The wheels are falling off the US bank loan market.
After we first showed in early March the steep drop in bank loan creation for both Commercial and Industrial, auto and total loans – all traditionally leading indicators to economic contraction and recession as business and consumers halt spending, even with borrowed money – numerous other analysts and pundits have attempted to explain, and justify why one should not be particularly concerned about this tumbling indicator. Most notable among them Goldman, who in late March “explained” that there was nothing ominous about the crash in loan creation, and instead it was just a function of a base effect, and a shift from loan to corporate bond issuance.
Two months later we can confirm that not only was Goldman wrong, but so are all the Pollyannas who assert there is nothing troubling about the ongoing collapse in loan creation.
According to the latest Fed data, the all-important C&I loan growth contraction has not only continued, but over the past two months, another 50% has been chopped off, and what in early Marchis now barely positive, down to just 2.0%, and set to turn negative in just a few weeks. This was the lowest growth rate since May 2011, right around the time the Fed was about to launch QE2.
At the same time, total loan growth has likewise continued to decline, and as of the second week of May was down to 3.8%, the weakest overall loan creation in three years.
Another loan category that has seen a dramatic slowdown since last September, when Ford’s CEO aptly predicted that “sales have reached a plateau.” Since then auto loan growth has been slashed by more than 50% and at this runrate, is set to turn negative some time in late 2017. Needless to say, that would wreak even further havoc on the US car market.
For a while, despite numerous attempts at explanation, there was no definitive theory why this dramatic slowdown was taking place. It even prompted the WSJ to inquire “early March?”