Last month’s Recession Watch newsletter highlighted VISA’s credit card activity index to get a sense of how the consumer is faring. This month, we take a higher-level view of spending and explain why bank lending is critical for economic growth.
The chart compares the most recent lending data vs levels seen just prior to the COVID crisis. Total lending is currently growing at a 2.5% annual rate versus 4.7% pre-COVID. More importantly, consumer credit card lending is the only segment that is stronger than its pre-COVID level, and its trend is weakening.
Why does this matter? The simplest answer comes from Ray Dalio, founder of Bridgewater Associates, the world’s largest hedge fund. As Dalio explains, the economy is simply the sum of all transactions that occur within it. And transactions are paid using cash and credit. (Search for “How the Economic Machine Works by Ray Dalio” on YouTube for the full video.)
But there’s more to it than simple addition. Consumer credit tends to fuel consumption which has an immediate impact on the economy. Conversely, business lending typically supports investments in future growth (property, plant, equipment, R&D, etc). Today, we are seeing a drop in total lending, and the lending that is occurring is supporting immediate economic activity rather than future growth.
Which brings us to the question of whether a recession is likely. While the answer remains elusive, a strong argument can be made that an economic slowdown in the US is a near certainty.
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