Get Ready for Half a Recovery
By GRETCHEN MORGENSON
New York Times
Published Online: November 28, 2009 In Print: November 29, 2009
...Ian Shepherdson, chief United States economist at High Frequency Economics, estimates that growth in the United States' output for 2010 will be no better than 2 percent.
Mr. Shepherdson -- whose economic forecasts have been more right than wrong throughout the credit crisis -- says that while cost-cutting has produced enviable productivity figures and rising earnings at large companies, continued growth in corporate output will be much harder to come by.
"Looking further ahead, you can't survive on cost-cutting forever," he says. "We will have to see decent volume growth but we won't see that immediately."
Mr. Shepherdson's 2 percent estimate for gross domestic product growth next year is roughly half what he would normally expect for a solid economic recovery. And a crucial reason is the fact that bad assets on personal and institutional balance sheets are the equivalent of a ball and chain strapped to the economy, he says.
"You can pick up that ball and walk with it," he says, "but you have to walk slowly."
Some are saying our jobless rate may be above 9% at the end of 2010; ongoing, high unemployment could undercut the U.S. recovery; and "this may be worse than the Great Depression." When it's Ben Benanke telling us all of these things over the past 120 days--and when you put them all together in one sentence--perhaps there's something to that trainwreck?
Of particular note, according to Morgenson, is the retraction in small business lending and the "debt overhanging consumers and organizations."
...small businesses, which account for half of all jobs in this country, are taking the brunt of this credit contraction. Smaller banks are especially worried about their own balance sheets and aren't making loans. This puts small businesses -- important engines of growth -- squarely on the brink.
INVESTORS may be celebrating data that points to improvements in economic activity -- this month, for example, the Institute for Supply Management said manufacturing had expanded for three months in a row. But Mr. Shepherdson worries about what he sees in monthly figures put out by the National Federation of Independent Business, a trade group representing small businesses.
Morgenson points to Shepherdson reminding us that the NFIB was much "more prescient than the ISM in predicting the current recession, which began in December 2007." Morgenson notes that the NFIB predicted the downturn in the spring of 2007; while the ISM didn't call a recession until after Lehman Brothers tanked, as we entered into the fall of 2008.
Shepherdson notes recent NFIB studies which demonstrate how tough it is for small businesses to obtain credit, even now.
In its survey, the N.F.I.B. asks small businesses how easy it is for them to get loans. The most recent data shows that credit tightness peaked earlier this fall -- the worst levels in 23 years, Mr. Shepherdson says. Although credit continues to remain troublingly hard for small business to come by, that phenomenon is a largely untold story.
"Wall Street focuses on big companies because they are in the Standard & Poor's 500, but small businesses are still in a very grim state," he says. "Small-company activity according to the N.F.I.B. is still at deep recession levels."
Shepherdson reminds us that we're witnessing the dismantling of the "great credit boom of the early 2000s." But, he warns we're not even close to seeing a light at the end of that tunnel.
And, it's here where I take some exception to both Shepherdson and Morgenson, but more about that in a moment. From the article...
The article continues on with Shepherdson's explanation that the Federal Reserve's mortgage purchase efforts are, actually, all about supporting consumer and small business credit (which are pretty close to being one and the same); the Fed's efforts are not about driving down mortgage rates. Shepherdson concludes that it's all "about trying to prevent a collapse in the money supply."
Morgenson tells us that bank credit outstanding peaked at $7.3 trillion in October 2008; and, it's now at $6.72 trillion. But, we're told, "....Shepherdson says he thinks that banking-sector loan and lease assets have to fall by an additional $2 trillion. That could take another two years."
"We are in unknown territory here," he said. "Since the peak in October '08, bank credit has dropped by 8 percent. That is enormous and it is accelerating. The peak-to-trough drop in the early '90s was just 1.3 percent and that was enough to scare the pants off the Fed."
This credit cave-in is the driving force behind the Federal Reserve's mortgage purchase program, Mr. Shepherdson says. The last thing the central bank wants to see is a decline in the broad-based money supply, because when that happens it usually means a depression is afoot. Money supply didn't fall in the early 1990s, but it fell by one-quarter during the 1930s.
It is here where I maintain a difference of opinion (and fact) with Morgenson and Shepherdson.
You see, in our economy, credit is--for all intents and purposes--cash (i.e.: "money supply").
As the owner of a small software company that provides point-of-sale consumer credit technology to retailers on Main Street, throughout the country, I can report--firsthand--that Wall Street has been doing nothing less than eviscerating the consumer credit marketplace for the past 24-plus months, as well. (Shepherdson is referring to all consumer credit; I'm talking about consumer credit lines "ex-automotive." [i.e.: without car loans included])
There are a variety of reasons for this. Some of them are obvious; others, not as much. The legitimate argument has been made by Wall Street that it's too risky to lend to the public; therefore, banks are cutting back on consumers' credit lines. But, that's only a part of the equation. Another major reality is that banks do not want to carry (and/or cannot carry) massive amounts of cash reserves to support those open credit lines.
You see, the government talks about all of this out of both sides of their mouth. On the one hand, the folks in D.C. tell us they're trying to force Wall Street to lend to the public (again). But, on the other hand, they're applying intense amounts of pressure to these same banks to carry significantly greater loan loss reserves than these banks have carried up until now.
Here's the October report from the Fed (note, this does not account for available consumer credit, only that portion of available consumer credit lines that are actually utilized): "October Federal Reserve G19 Report."
I've written about this credit nightmare EXTENSIVELY, for almost two years, in MANY diaries, such as these three, being the most recent ones where I've touched upon the topic: here, here, and here.
Now, here's the truly scary part of this diary...after everything's said and done, it's projected by many, not the least of whom being highly-respected market analyst Meredith Whitney, that Wall Street will have eliminated roughly half of all consumer credit lines in the country by the end of 2010. Indeed, roughly one-quarter of all available consumer credit lines have already been eliminated in the past 24 months.
The Credit Crunch Continues
By MEREDITH WHITNEY
October 2, 2009
Wall Street Journal Op-Ed
Anyone counting on a meaningful economic recovery will be greatly disappointed. How do I know? I follow credit, and credit is contracting. Access to credit is being denied at an accelerating pace. Large, well-capitalized companies have no problem finding credit. Small businesses, on the other hand, have never had a harder time getting a loan.
Since the onset of the credit crisis over two years ago, available credit to small businesses and consumers has contracted by trillions of dollars, and that phenomenon is reflected in dismal consumer spending trends. Equally worrisome are the trends in small-business credit, which has contracted at one of the fastest paces of any lending category. Small business loans are hard to find, and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year.
Unfortunately for small businesses, credit-line cuts are only about half way through. Home equity loans, also historically a key funding source for start-up small businesses, are not a source of liquidity anymore because more than 32% of U.S. homes are worth less than their mortgages.
Why do small businesses matter so much? In the U.S., small businesses employ 50% of the country's workforce and contribute 38% of GDP. Without access to credit, small businesses can't grow, can't hire, and too often end up going out of business. What's more, small businesses are often the primary source of this country's innovation. Apple, Dell, McDonald's, Starbucks were all started as small businesses.
As is true in most recessions, banks' commercial lending portfolios shrink as creditworthy customers pay down their debts and the less-worthy borrowers are simply denied loans. Banks, in other words, want to lend only to those that don't want to borrow. Challenging as that may be, in the last cycle small businesses at least had access to their credit cards.
Small businesses primarily fund themselves through credit cards and loans from local lenders. In the past two years, credit-card lines have been cut by over $1.25 trillion. During the same time, 10% of all credit-card accounts have been cancelled. According to the most recent Federal Reserve data, small business lending is down 3%, or $113 billion, from fourth-quarter 2008 peak levels--the first contraction since 1993. Credit cards are the most common source of liquidity to small businesses, used by 82% as a vital portion of their overall funding. Thus, it is of merit when 79% of small businesses surveyed tell the Small Business Association that credit-card lending standards have tightened drastically and their access to credit lines has decreased materially.
And, then about 10 days ago, Whitney also had this to say: "CNBC: Stocks Overvalued, Recession Will Return: Meredith Whitney"
CNBC: Stocks Overvalued, Recession Will Return: Meredith Whitney
Published: Monday, 16 Nov 2009 | 4:51 PM ET
Stocks are overvalued and the US economy is likely to fall back into a recession next year, well-known analyst Meredith Whitney told CNBC.
"I haven't been this bearish in a year," she said in a live interview. "I look at the board and every single stock from Tiffany to Bank of America to Caterpillar is up. But there is no fundamental rooting as to why these names are up--particularly in the consumer space."
In a wide-ranging interview, Whitney, CEO of the Meredith Whitney Advisory Group, also said:
* She was disappointed that Fed Chairman Ben Bernanke didn't spell out how the Federal Reserve planned to exit "the biggest Fed program to date, which is the mortgage-backed purchase program." In a speech earlier Thursday, Bernanke said the central bank was watching the dollar's decline but is likely to keep interest rates low.
* The US consumer was going through the biggest credit contraction ever--even bigger than that during the Great Depression. "That credit contraction is accelerating," she said. "There's nowhere to hide at this point."
"I don't know what's going on in the market right now because it makes no sense to me," she said.
Here's Edward Harrison, publisher of the Credit Writedowns' website: "Consumer credit down, but does it show deleveraging?"
Consumer credit down, but does it show deleveraging?
Posted by Edward Harrison on 7 November 2009 at 9:47 pm
I have just taken a look at the consumer credit figures for September, released just yesterday by the Federal Reserve. The data do show some modest deleveraging, especially when looking at the recent increase in nominal GDP. However, it is still not clear to me that the scale of deleveraging is great enough to induce a recessionary relapse.
Credit from commercial banks and savings institutions have dropped off a cliff. When you hear people saying that banks aren't lending, this is what they are talking about. In Q3, banks are lending again (think cash for clunkers) because nonrevolving debt is up. That's also why GDP is up. But, revolving credit lines (credit card lines) are being cut...
Understanding that consumer credit is, and has been for decades, as much a part of consumer "money supply" as cash, itself, is to fully understand the horrific effect that the elimination of half of all available consumer credit lines will have on the public by the end of next year.
And, as Harrison notes, immediately above, this isn't about most consumers paying off their debts and saving more; it's about banks cutting consumer credit lines, and just the top few percent of our society saving more--a lot more--while the rest of us struggle to make ends meet.
But, if consumers--as in most consumers--were really saving more and not having whatever available credit they might have had stripped away from them by a Wall Street vampire squid compensating for almost three decades of its own awful behavior, then we wouldn't have been reading headlines like this all year, now would we? See: "Rent-To-Own Businesses Drawing Higher Income Customers." And, also checkout: "Rent-to-Own Business Booming."
Perhaps Naked Capitalism speculated about this best, back at the beginning of September, in: "Guest Post: 'The Savings Rate Has Recovered...if You Ignore the Bottom 99%'."
With a 25% contraction of credit for Main Street and small business having already occurred, and with twice that amount forecast by the end of 2010, the following two sentences from the Morgenson/Shepherdson blockquote, up above, take on much greater significance: "The last thing the central bank wants to see is a decline in the broad-based money supply, because when that happens it usually means a depression is afoot. Money supply didn't fall in the early 1990s, but it fell by one-quarter during the 1930s.
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