There is something occurring in the economy that is not getting the attention it may deserve. Loan rates for businesses are declining. Simultaneously, consumers are spending less but are taking on more and more debt. This is a sign of an economy that is reaching an unsustainable limit. But, it is not all sanguine. Businesses have accumulated debt, just not via traditional loans; at record levels businesses have sold debt in the open market. Still, there is a telling sign within the data that this economic cycle may be nearing an exhaustion point.
A look at the rate of growth in commercial loans is a telling sign of what is happening and the state of loan growth in the business sector. Every time loan growth rates touch the 0% level as it is now, there is usually a recession attached to it. Tips in itself does not state that a recession is on the way. But, if economies repeat history, then there is something to be said about where the economy is at this time.
President Trump has repeatedly stated that he wants to remove as much Dodd-Frank regulation as he can. As he states, he has had many conversations with business leaders regarding their desires to get loans, but that loans are difficult to get. Business leaders have stated that their respecive businesses cannot get loans simply because the regulations are too steep.
Not true, according to analysts working for banks. Banks are not lending out as much because there is less demand for loans. In fact, often what is cited is the lack of certainty in the economy, specifically the leadership, that businesses are reluctant to take on debt. The biggest factor, they say, is Trump.
Still, high-grade businesses issued a record $414.5 billion in debt the first quarter of this year. That was a record. That is good news. But, the fact that investors piled in as they did says that there is a lack of trust in the economy going forward, that investors are not leaving behind the relativity safer debt bets to take on bigger risks, such as equities.
And, then there is the private consumer. Credit levels, loans to credit cards, have ballooned to record highs. The analysis on that is that since wages are not keeping up with cost of living consumers are going into debt to fund their lives.
So far, this has not been problematic, nor has this slowed down at all. In fact, it might be that consumer debt is what is carrying the economy at this point. However, even that is waning as the retail sales numbers released on Friday showed. If the consumer starts to slow down with their credit cards then this economy is in for a sharp decline.
Keep in mind that the U.S. economy is 70% consumer driven. The consumer is slowing down their spending as the past two months have shown with retail sales declining for both February and March. One significant place that consumers are dropping their spending is automobiles. Typically, big ticket items are the first to go with consumption declines; smaller consumption items taper off later in the cycle. The next two charts show the consumer's lack of appetite for overall consumption as well as auto sales declines:
When there is demand from consumption business will ramp up investments to keep up with demand and to competitively compete in the marketplace. Businesses are not borrowing capital to do this one crucial factor. If you look at the chart above, the only times that business loans have dropped down to the level where it currently resides is recessionary times. This is an eyebrow raising chart from that one single vantage alone. But, when you factor in the decline in retail consumption from individuals, as well as the decline in total vehicle sales, you see where that lack of impetus to push manufacturers to take on business risks is derived. Consumers are not consuming and firms are not expanding their risk tolerance; businesses are playing it safe, so to speak.
There have been signs that the economy has been slowing. Business loan growth is a very big signs as to how that is playing out in the economy. This chart gives economists a metric and a visual to illustrate exactly where the economy is.
Oddly, businesses are profitable. The Dow has been hitting record levels again, surpassing the 21,000 market just Tuesday. The latest surges in the equity market are not because of the much anticipated tax reform that was presented has any chance whatsoever of turning into meaningful legislation. Instead, just the opposite. Businesses are generally profitable.
However, I caution that simplistic analysis. On the one hand, as mentioned, businesses have taken on record amounts of debt so they may be foregoing loans instead. But, you must look at the drivers of a business, and in the case of the United States, that is the consumer. Consumption is declining. Businesses have responded, or, perhaps, have not responded, by not taking on new debt to expand operations. And, when you look at the depth of the decline in the rate of growth of business loans, we are well in to recessionary levels.
These alarm bells are largely going unnoticed. Some analysts point to the ballooning consumer credit as a good thing. Maybe it is. But, the consumer cannot borrow their way to prosperity. And, the response from the business sector is alarming.
Wile the Dow may be striding its way up to new records quickly and easily, a good look under the hood of the economy shows an entirely different picture. The earnings we have seen are from the past. What is up the road ahead is a totally different view.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.