As hard as the Federal Reserve has tried to juice lending through various facilities designed to smooth the gears of credit creation, certain lending rates suggest that credit growth is soft. While markets have not repeated the late-2008 freak-out, conditions as measured by short-term rates, along with growth in money supply, still suggest weakness.
Data released by the Federal Reserve Thursday shows that household deleveraging is continuing, as the household debt-to-income ratio dropped to 134% in the fourth quarter from 136% in the third quarter. That’s going to continue, say economists at Bank of America-Merrill Lynch, which, in addition, will add to deflation pressures.
The reluctance of banks to lend — and the reluctance of consumers to borrow — has contributed to a recent widening in the spread between three-month Treasury bills and three-month Libor. This rate, a measure of short-term comfort with lending, was lately at about 1.1 percentage point, compared with about 0.9 percentage point in early February. U.S. Libor was lately at 1.31%, while the three-month bill’s rate had dropped to 0.19%.
“The freezing up of most securitization and some bond markets suggests significant supply-driven credit constriction, and this is reflected in the tightest bank lending standards in two decades,” writes Julia Coronado, economist at Barclays Capital. “Removing the supply constraints is the crucial first step to stimulating growth; however, even after constraints are relaxed, credit growth is likely to recover slowly owing to demand factors.”
BAS-Merrill analysts notes that the monetary base as measured by M1 and M2 measurements of money supply are showing reasonably strong growth, but M3, the broadest measure — and one that is no longer tracked by the Federal Reserve — has not improved. Year-over-year growth sits at about 1.7%, but is down 1% from the third quarter. “Broad money growth in the U.S. is still very tepid,” says Rich Bernstein, chief investment strategist at BAS-Merrill.