Why the U.S. Recovery Will Lag

The U.S. economy continues to show signs of stabilizing, or at least deteriorating at a slower rate than before. But the resumption of growth will be slow and prolonged, as we've previously advised.

One of the many reasons is that banks and their willingness to lend will remain under pressure for quite a while. New evidence of this comes from the Federal Deposit Insurance Corp., which has issued a report that overall loan quality of U.S. banks continues to deteriorate rapidly.

The FDIC reported that some 7.75 percent of the U.S. banks' loan portfolio totaling $7.7 trillion at the end of March was showing some sign of distress. That was up from 6.9 percent at the end of 2008 and from 4.1 percent a year earlier. It also exceeded the previous high of 7.26 percent set in 1990-91, during the last banking crisis.

The numbers consist of loans that are more than 30 days behind in payments. The percentage of loans that are (1) at least 90 days overdue, (2) on which the bank has stopped accruing interest or (3) the bank has written off is at its highest level since 1984.

Perhaps the most troubled loan category is consumer credit cards, where almost 14 percent of loans are at least 30 days overdue and banks are taking write-offs for bad debt at an annual rate of 7.8 percent.

Real estate is #2 on the list. Some 8.77 percent of real estate loans are considered troubled. But construction and development loans are the worst subcategory, with 17.7 percent of loans troubled.

Loans on commercial buildings, including retail and offices, are considered highly vulnerable. Just 4 percent of such loans are deemed troubled now, less than half the peak of the early 1990s. But many of these loans will have to refinanced over the next few years. This likely will prove difficult in many cases where real estate values have fallen sharply.

Comments

[Dave Wrixon:]

Yes, deleveraging means that the good quality loans become evident as they are paid off, leaving the banks with a high percentage of potential defaults. Of course, although it may be reassuring to have lower loan to asset ratios, banks are dependent on the income from the good loans to cover the losses on the bad. The paradox in the situation means that just when things appear to be getting better they are actually getting more critical. However, on the positive side, the problem is a least crystalizing.

Jun 05 07:18 AM

[Donald Ingram:]

Agreed. When things crystallize however, they move from a semi-liquid state to one of a solid state. In this case the economy in general was swimming in a cement slurry that has now firmed, and is headed for the bottom which is still to be found.
This topic is but one VERY small part of the greater whole, which is in very bad shape. Reminds me of the "Monty Python" movie in which the knight is standing there with no arms or legs yet still insisting that it's only a flesh wound!

Jun 05 11:19 AM

[mrbill:]

"One of the many reasons is that banks and their willingness to lend will remain under pressure for quite a while."

Never mind the unwillingness to lend, how about the unwillingness to borrow?

Jun 05 01:16 PM

[Fighting Yoda:]

Paul Krugman (on Bloomberg):
“We have made the transition from sheer panic to chronic anxiety,” Krugman said, adding he’s has a “hard time” seeing what might drive a “full” economic recovery. “The euro zone, like the United States, I fear, could be facing kind of a lost decade,”

Jun 05 02:27 PM

[jepittman:]

I am not privy to Mr Krugman's personal investment successes and/or failures but I would suspect that tenured professors are rarely the ones to seek out for ideas on outsized investment returns. I am sure Mr Krugman is extremely intelligent but I would trust Cramer more for investment ideas.


On Jun 05 02:27 PM Fighting Yoda wrote:

> Paul Krugman (on Bloomberg):
> “We have made the transition from sheer panic to chronic anxiety,”
> Krugman said, adding he’s has a “hard time” seeing what might drive
> a “full” economic recovery. “The euro zone, like the United States,
> I fear, could be facing kind of a lost decade,”

Jun 05 09:08 PM

[cameroni:]

Your last sentence tidily sums up the problem we face that we would like to ignore. Refinancing at higher interest rates into a an environment of deflating asset values is surely a recipe for havoc on the economy. Those who say commercial real estate is the next shoe to fall are not so far off the mark in my opinion.

On June 05 2009 the Author wrote:

"But many of these loans will have to refinanced over the next few years. This likely will prove difficult in many cases where real estate values have fallen sharply".

Jun 05 09:13 PM

[Fundamental...:]

Cramer got debunked long time ago, you are delusional trying to follow Cramer.
Krugman does not (and is not) offering investing advice - only economic forecast.

On Jun 05 09:08 PM jepittman wrote:

> I am not privy to Mr Krugman's personal investment successes and/or
> failures but I would suspect that tenured professors are rarely the
> ones to seek out for ideas on outsized investment returns. I am sure
> Mr Krugman is extremely intelligent but I would trust Cramer more
> for investment ideas.

Jun 05 11:32 PM