Echo

Credit crunch still not evident in the data but is on the horizon

Monday, September 29, 2008

Recently, I argued that the Federal Reserve Bank loan data painted a picture that differs sharply from the mainstream media’s representation of the loanable funds market. I still am of the opinion that issued bank credit is not as bad as the media’s banter would have you believe, but going forward, anecdotal evidence suggests that a credit crunch may be on the horizon. Credit card companies are increasing rates on revolving credit significantly.

At the beginning of September, I reported this about bank loans:

Relative to their 2000-2008 averages, the 3-month average of total annual loan growth is consistent with its historical average, 9%, commercial and industrial loans are growing almost four times their average (5%), and consumer loans are fifty percent higher than their average (6%). Real estate loans are a big drag, which are growing 6% below their average (12%), but the point to hammer here is that they are still growing.
To date, bank loans continue to grow and still sugges that there is no "credit crunch." Weekly data published by the Fed – which is the most recent and up-to-date data available – tells me that Americans are indeed purchasing cars and starting businesses.

The chart illustrates consumer loans and commercial and industrial loans (business loans) in levels and in growth rates on a weekly basis spanning 2000-2008. Consumer loans are growing at a healthy rate, 8.8% four-week average, since June. Likewise, commercial and industrial loans are growing, 13% four-week average, but admittedly down from their peak (around 22%) and consistent with levels earlier in the year. Through 9/17/08, loan data for consumers and firms do not illustrate a credit crunch.

However, what is not depicted in the chart is the type of loan that is extended. Are these newly-originated loans? Or are consumers and firms simply drawing on lines of credit?

The chart illustrates weekly consumer loans broken up into revolving credit (credit cards) and "other" types of consumer loans. Revolving loans account for the smaller share of total consumer loans, roughly 40%, and have been accelerating since July. On the other hand, other loans account for the larger share of total consumer loans, roughly 60%, and have been either constant or falling since the end of July. Therefore, revolving credit has been the driving factor in recent consumer loan growth.

According to Fortune Magazine:
When John Dykstra got his September credit card bill from Advanta, a small-business card issuer, he was shocked: Dykstra says he has a good credit score and has never missed a payment, but his interest rate had jumped from 7.99% to 26%.

He was even more shocked by the explanation: A brochure in the mail told him he needed to be aware of the 'continually changing business environment.'

He's not alone. Card issuers from Bank of America to Capital One are using the economic crisis as a reason to raise rates. According to Consumer Action's 2008 survey of card companies, Bank of America, Citi, and Capital One have recently said that "market conditions" could cause them to increase APR's.
RW: Revolving lines of credit will start to fall with the rising cost of borrowing (rising credit card APRs). Going forward, the chart for consumer loan growth will look much more like what the mainstream media has been reporting all along:
Simply put, the meltdown on Wall Street has made it tough for many Americans to get a loan to buy a home, purchase a car, start a business or even send a kid to college.”…”And with all the talk of a credit crunch -- some are even calling it a credit freeze -- it may get even tougher.
RW: The story may be the same with commercial and industrial loan growth, which looks healthy in the data, but may simply be recording businesses drawing on already-in-place lines of credit. The Financial Ninja reported anecdotal evidence to this fact in Bank of America Not Lovin' It:
Can you say CREDIT CRUNCH?

McDonald's Says Bank of America Won't Boost Loans (Update3): “McDonald's Corp., the world's largest restaurant company, told some U.S. franchisees to seek other ways to finance store improvements after Bank of America Corp. declined to increase lending.

Store owners have exhausted financing used to pay for upgrades and equipment to make lattes and espressos, and Bank of America won't provide more money as it works on the planned purchase of Merrill Lynch & Co., McDonald's said in a memo that was obtained by Bloomberg News.”

Sorry, we can’t make productive loans because we are too busy digesting the toxic waste we’ve acquired…
Conclusions

Recently, rising prices have forced consumers to draw on their credit cards (revolving lines of credit) more and more to finance everyday purchases like gasoline and food, and increasing credit card APR’s will force consumers to cut back on their credit card borrowing; this will almost certainly curtail consumption. Further, evidence suggests that commercial and industrial lending is set to fall as lines of credit dry up, forcing businesses to cut back on investment. Get ready for a rocky fourth quarter.

I was much more positive about the economy in July, but the trends across several key indicators have worsened. Although it is unlikely that the U.S. economy was in a recession in July, it is becoming more likely that the National Bureau of Economic Research (NBER) will date the fourth quarter of 2008 as a recessionary period.

Rebecca Wilder

10 comments:

peterthepainter September 29, 2008 at 7:39 AM  

very interesting bec! I have linked you on my blog after seeing a tipon the ninja...I have been waiting for news on credit cards and your analysis on the use of credit lines is useful too.thanx.p

Rebecca Wilder September 29, 2008 at 8:48 AM  

Thanks!

I linked you to my blogroll and look forward to reading future posts!

Rebecca

Janie September 29, 2008 at 9:40 AM  

Good sluething on the consumer small business credit. Obviously, Bank of America thinks more credit is risky but, then again, look at their background? They just bought the bank of the same name but are still the same bums they were back in the 90s.

BC September 30, 2008 at 1:12 PM  

Is this the same Advanta located at http://www.advanta.com?

Rebecca Wilder September 30, 2008 at 1:52 PM  

Hi BC, I assume so, but the article doesn't specify.

Thanks for reading! Rebecca

Mark September 30, 2008 at 4:43 PM  

What proportion of "Other Consumer Loans" are home equity related? If it's substantial, I'm not certain that a freeze up on Wall Street makes much difference since home equity that is available to use as collateral is eroding.

piglet September 30, 2008 at 8:35 PM  

"The chart illustrates weekly consumer loans broken up into revolving credit (credit cards) and "other" types of consumer loans. Revolving loans account for the smaller share of total consumer loans, roughly 40%, and have been accelerating since July."

Your chart shows the blue line (revolving credit) consistently higher than the red line, up to the beginning of 2008, when the blue line reached a plateau and was temporarily overtaken by the red line. What do you see in this chart that I cannot see? Ok the axes are not the same (bad idea) but still your story doesn,t hold. Revolving credit is growing no faster now than in earlier years. What I think your data really show is that Americans are over-indebted, and every rational person should hope not to see any more of that kind of growth.

Rebecca Wilder October 1, 2008 at 8:57 AM  

Hi Mark,

You asked: “What proportion of "Other Consumer Loans" are home equity related?”

The answer is none. Home equity lines of credit are counted in “real estate loans,” which is another category of loans entirely and has been falling precipitously. Home equity credit was 15% of real estate loans in the week of September 17. You can view the bank data here: http://federalreserve.gov/releases/h8/data.htm

Thanks for reading, Rebecca

James October 1, 2008 at 1:25 PM  

Hey Rebecca, you just got linked to by Paul Krugman! Congratulations! You're welcome for the suggestion that you contact Mark Thoma about being listed on his blogroll. Unfortunately, I haven't followed my own advice. Hey, Paul and Mark, check out Bubble Meter, too!

Rebecca Wilder October 1, 2008 at 9:03 PM  

I know, that's really cool.

Keep posting and I will keep reading! Rebecca

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