U.S. Recession Now Far More Likely. Blame The Banks

After more than nine months of waiting the much-heralded U.S. recession may actually happen. Still, its not guaranteed.

Back in June 2022 I wrote a column for Time Magazine stating that neither the economic data nor the anecdotal evidence showed any sign of an imminent contraction in the economy. I was sure that wasn’t going to happen before the end of 2022 in the U.S., but I saw higher risks in Europe. Neither has happened.

But that changed over the last few weeks with the failure of Silicon Valley Bank (SVB) and other much-hyped stress in the banking system. Anyone who has watched the financial news knows that SVB was a bank of significant size and in many ways vital to the technology sector.

However, it is the ripples through the wider banking system that will likely lead to a sharper economic contraction in the whole U.S. economy. That will have impacts around the globe because the U.S. economy is still the locomotive that pulls along the entire world economy. As people used to say, when the U.S. catches a cold other countries get the flu.

How do we know this? The situation in the credit market is bad. We’ve known for a while that the cost of borrowing money (a.k.a. interest rates) has risen substantially over the last year or so due to the efforts by the Federal Reserve to curb inflation. Still despite higher interest rates companies could borrow.

Now that’s less likely at any interest rate no matter how high. The credit situation has deteriorated to levels tighter than during the financial crisis a decade and a half ago. The Business Credit Index, which is compiled by the American Bankers Association, now reads 11.4, well below the 50 level of neither tight nor loose lending. The Consumer Credit Index is similarly dire. They are both worse than in 2008, the trough of the subprime crisis. The only time worse in the last few decades was during the COVID-19 pandemic government mandated lockdowns across the world.

The reason that this one indicator matters is that the world of business runs on credit. Less access to credit means less business activity and lower economic growth. Some companies will likely fail due to lack of credit. That’s normal in such times. The real question is how many.

Less credit availability is also a bad omen for the U.S. consumer. Americans like to spend like no other people in the world, and they typically do so using credit. Now that credit is less available their purchases will at best pause but could just as easily drop.

All of this means that the U.S. economy is in a much more delicate situation than it was 9 months ago, and could dip into a recession unless the credit situation rectifies itself.