The Blubber

According to the Board of Governors of the Federal Reserve System, bank credit levels have experienced a decline for three consecutive quarters, marking the first sustained contraction since 2010. This represents only the second such decrease in over fifty years, with the previous occurrence taking place during the Great Recession prompted by the global financial crisis of 2008-2009.

The prolonged downturn in bank lending coincides with a persistently pessimistic economic outlook from many Wall Street experts, despite the unexpectedly positive trend observed in 2023. Notable investors like Jeffrey Gundlach, who anticipates a 75% chance of a recession this year, and Henry Kravis, a private-equity billionaire cautioning about heightened economic uncertainty, contribute to the prevailing skepticism. Additionally, economists David Rosenberg and Steve Hanke project a sharp economic downturn, while market expert Gary Shilling suggests that a US recession may already be underway.

Tilo Marotz, head of liquid assets at German insurer Continentale Versicherungsverbund, highlighted the rarity of the situation in a LinkedIn post, noting that "Bank credit is contracting for only the 2nd time in 50 years."

The credit contraction implies reduced borrowing by companies, as higher interest rates increase the cost of loans. When businesses find it more challenging to secure debt, they are less inclined to proceed with spending projects, potentially dampening economic growth.

Between March 2022 and July 2023, the Federal Reserve raised interest rates from near-zero to approximately 5.5% in an effort to curb escalating consumer prices. Although the central bank has indicated its intention to ease monetary policy once it is confident that inflation aligns with its 2% target, the ongoing credit contraction could present challenges for businesses seeking access to credit.

Despite earlier gloomy predictions, the US economy managed to avoid a recession last year, with robust consumer spending helping sustain growth. The third quarter witnessed a better-than-expected expansion of 4.9% in gross domestic product, although a survey of forecasters by the Philadelphia Fed suggests a slowdown to just 1.3% in the final three months of 2023.