Tuesday, 9 December 2008

For US companies the credit crunch hasn't even begun

Officially, the US economy has been in a recession since late 2007. Employment has fallen every month this year, with almost 2 million jobs disappearing. Yet, commercial bank credit growth has held up remarkably well. In October, it even managed to increase slightly.

Rising credit growth forms an important role in the pathology of recesssions. A typical recession starts when consumers cut back on spending. This leads to a decline in sales. However, firms can not quickly cut back on output. Firms continue to employ workers, and in order to keep paying their wage bills and other costs, they run down lines of credit that have been previously arranged with banks.

However, the surge in short term credit only provides temporary relief. Eventually firms start to cut back labour and begin to reduce their demand for credit. As the recession gathers momentum, the total outstanding stock of credit often falls, which is exactly what happened during the last two US recessions in teh early 1990s and early 2000s.

The slowdown in US corporate credit growth has not yet happened, which suggests that the US economy is still in the early stages of its recession.


Anonymous said...

Arrows need to be moved left 2 years in both cases, no?

Alice Cook said...

Maybe they need to move a little to the left....