Although it will not come as a surprise to regular readers that, for various reasons, loan growth in the US has not only ground to a halt but, for the all important Commercial and Industrial Segment, has dropped at the fastest rate since the financial crisis, some (until recently) economic optimists, such as Bank of America’s Ethan Harris, are only now start to realize that the post-election “recovery” was a mirage.
A quick recap of where loan creation stood in the last week: according to the Fed’s H.8 statement, things continued to deteriorate, and C&I loans rose just 2.8% Y/Y, the worst reading since the start of the decade and on pace to print a negative number – traditionally associated with recessions – within the next four weeks, while total loans and leases rose by just 3.8% in the last week of March, less than half the stable 8% growth rate observed for much of 2014 and 2015.
Yet while ZeroHedge readers have been familiar with this chart for months, it appears to have been a surprise to BofA’s chief economist. However, in a report titled “Is soft the new hard data?”, Ethan Harris confirms that he has finally observed the sharp swoon lower and is not at all happy by it.
As he writes in his Friday weekly recap note, “this week saw some softness in hard data as auto sales and jobs growth declined sharply. While two observations do not make a trend, this occurrence nevertheless is noteworthy as on the one hand very positive sentiment indicators suggest activity should pick up…
… while on the other hand loan data suggests everybody is in wait-and-see mode pending details of fiscal stimulus (=tax reform) – which highlights the risk of softer hard economic data.”
A frustrated Harris then admits that such a sharp and protracted decline in loan creation has only happened twice before: the 2000 and 2008 recessions.
… the first period of no growth for at least six months since the 2008-2011 aftermath of the financial crisis, and prior to that after the early 2000s recession (Figure 3).
At the same time, consumer loan growth has slowed substantially – just up 1.4% since last November US elections compared with 3.1% the same period the prior year (figure 4).
Then again, with tax reform seemingly dead, not even a formerly uber bullish Harris find much room for optimism…
As tax reform by House Speaker Ryan’s own account is not going to happen anytime soon, and likely will be watered down as the Border Adjustment Tax (BAT) is replaced by a Value Added Tax (VAT) and the elimination of net interest deductibility for corporations, the biggest near term risk to our bullish outlook for credit spreads we maintain is a correction in equities – most likely prompted by weak hard data.
… and concludes by echoing Hans Lorenzen’s recent warning, that “the biggest near term risk to our bullish outlook for credit spreads we maintain is a correction in equities – most likely prompted by weak hard data.”