Making Sense of Credit Contraction in US Economy

Investors remain optimistic of more rate hikes that will make lending rates appealing

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Apr 11, 2017
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There has been a noticeable slowdown in lending since Donald Trump was elected president of the U.S.

This is evident in the latest figures released by the Federal Reserve, published in February and confirmed in March. Trump Trade was set to ignite the U.S. economy with a series of radical economic changes. These included deregulation of the corporate sector, a reduction in corporate taxation (15% to 20% targeted range), imports and tariffs designed to protect U.S. manufacturers and immigration overhauls.

By February, U.S. banks reported a decline in outstanding bank loans, harkening back to the difficulties experienced in the aftermath of the global financial crisis. Bank loans declined dramatically in January and February, and that performance continued into March. This stands in contrast to lenders’ shares which are now hovering at 10-year highs.

U.S. banks lending less while European banks lend more

Various companies involved in arranging loans for small companies have reported a marked decline in the number of small loans issued by banks. Much of the uncertainty in the political arena has transferred over to the banking sector. Multiple rate hikes are in the cards for 2017, over and above the 25-basis point rate hike that was implemented on March 15. Banks are looking to boost profitability this year, but they are being hamstrung by the political gridlock in D.C.

Trump’s agenda encompasses deregulation and lower taxation, but that has been put on the back burner as Democrats and Republicans fight tooth and nail for ideological control of the country’s future. The volume of personal and business loans has dropped precipitously according to the chief economist of Gluskin Sheff, David Rosenberg. The same cannot be said in the Euro Zone, where lending is on the up since the Global Financial Crisis. The annual average increase in Europe is now 2% (December 2016), up marginally from November 2016 according to the ECB.

Slowdown in credit growth raising eyebrows

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Trump’s performance as commander in chief is in question. We are seeing a plethora of weak U.S. economic indicators that are now contrasting sharply with Trump’s claims that the economy is burning red hot. This in turn is bolstered by the Fed’s raising of interest rates. Taken together, a blurry picture of the U.S. economy is now forming. While U.S. stocks continue to rally, Warren Buffett (Trades, Portfolio) thinks they're still undervalued. That sounds like a vote of confidence for the U.S. economy from one of the world's most iconic value investors.

Equities markets are at sky-high levels despite the recent pullback and a risk-averse approach being taken. For every additional $1 of new debt being generated, just 17 cents in additional GDP is being added to the U.S. economy. In the 1960s, every $1 of debt added 75 cents to the gross domestic product. U.S. companies are investing less, as the political uncertainty grows

Trump is still within his first 100 days as president and getting his proverbial feet wet in the swamp that he’s trying to drain. From a personal perspective, there is no reason to panic about the tightening in the credit markets. A series of victories by Trump will once again put banks at ease, and lending will flow more freely.

Trump has a victory on the Supreme Court with his nominee being pushed through. That will certainly be a big boost for conservatives and the Republican agenda, which will safeguard the Constitution as it was written, not as it is being interpreted.

Personal loan options remain appealing

Individuals interested in credit facilities from banks will do well to prepare themselves with all the tools necessary coming up with the right balance for their loan portfolios. A personal loan calculator would be a good place to start, but an in-depth analysis on loan consolidation options will put them on the right path. Such tools are available to low-income, middle-income and high-income earners in need of credit facilities.

By planning loan requirements, term repayments and annual interest rate percentages effectively, the estimated monthly payments can be ascertained. This provides plenty of information to clients when they are approaching banks and other lending institutions.

What is even more attractive about the current climate is that interest rates are going to rise in the future, making loans far more attractive in the present. The U.S. still presents relatively affordable loan options for individuals, and companies can also borrow at highly attractive rates. This is in no way an indication that the U.S. economy is stumbling – on the contrary.

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