Tuesday, May 5, 2009

Business investment to fall further according to Fed survey

The Federal Reserve Bank released its first quarter bank lending survey. The survey assesses credit conditions, as measured by lending standards and demand for loanable funds in the first three months of 2009 compared to the last three months of 2008. The results are consistent with reports in Europe and Canada: overall, the net percentage of banks that report tightening fell, and the worst of the credit crunch is likely behind us. However, it portends that business fixed investment, which took a 37.9% tumble in Q1 2009 or -16.8% over the year, is unlikely to recover soon.

Here is the general take on the survey from the LA Times:
The Federal Reserve's latest quarterly survey of bank lending practices shows credit conditions are improving somewhat for business borrowers -- but not for consumers.

But business borrowers (commercial and industrial in chart) don't want the loans...

The chart to the left illustrates credit conditions for the commercial and industrial sector. As suggested by the LA Times, lending standards continued to tighten, but the net percentage of banks having reported tightening fell (translation: fewer banks reported to have tightened). Overall, this is positive.

However, the foreboding result shows the net percentage of banks reporting reduced demand for loanable funds by medium and large sized remained at -60.4%, while that of small firms fell to -63.5%. This is consistent with the sharp 33.8% drop in equipment and software investment. Firms are forward-looking, and if demand is low now, then actual equipment and software investment - goods that increase the productivity of the firm - is likely to be anemic for quite some time.

...And demand for commercial real estate loans weakened substantially.

Commercial real estate (non-residential structures) was just 3.5% of GDP in Q1 2009, but dragged GDP by a huge 2.13% (see contribution to growth, Table 2, in the BEA release); and yesterday, the March 0.8% bump in non-residential construction was certainly a positive surprise. However, the Fed survey suggests that the March construction surge is an aberration.

To be sure, lending standards are likewise "improving", however, the net-demand for commercial real estate loans fell to -66%, its lowest level since the start of the series in 1995. Commercial real estate loan origination is stalled for two reasons: bank standards are tight, but perhaps more importantly, firms don't want the loans. Again, not good for business investment going forward.

The Fed survey does indicate that the worst of the credit crunch is likely behind us. However, businesses are facing serious headwinds, and the survey suggests that investment will not recover for some time.

Rebecca Wilder

2 comments:

  1. Don't forget that it this point in the cycle switching from inventory accumulation to inventory liquidation does wonders for business cash flow and their demand for credit. It is one of the reasons business loans are a lagging indicator.

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  2. "Commercial real estate loan origination is stalled for two reasons: bank standards are tight, but perhaps more importantly, firms don't want the loans"

    US has a decade or two of over capacity in retail sf per capita. Double the amount of the UK, Sweden, France and Italy combined.



    http://jameshowardkunstler.typepad.com/.shared/image.html?/photos/uncategorized/2007/06/25/mags_diary21_retail_graph_2.jpg

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