Reflation of the US economy was, not for the first time, called into question last week. The sharp uptick in sentiment indicators has seemingly failed to spur ‘animal spirits’ in the real economy. The slowdown in bank lending witnessed since Mr Trump’s election has also been precipitous.
Nevertheless, this has not been a credit driven cycle. Outstanding loan liabilities of domestic non-financial corporates had already dropped to just 13.78% of GDP in Q4 last year, down from a pre-crisis high of 20.87% in Q4 2008. Household sector mortgage debt had continued to fall relative to GDP, hitting a new cyclical low of 51.73%. Credit standards are tightening again, but this will not derail the recovery. Indeed, the reduced systemic risks may help prolong the current cycle, making it the longest in the post-war era.
Despite President Trump’s assertions, the failure to pass the healthcare bill could push back planned corporate tax cuts and deregulation. The preoccupation with healthcare reforms is understandable. For some investors, the rally in equities has been tied to fiscal stimulus, not to mention extensive deregulation. However, the US economy was gaining momentum well before Mr Trump’s election victory in November, a point underlined by the Census Bureau’s Quarterly Services Survey for Q4. The correction in equities should be seen as a buying opportunity.
Summary
- Access to credit tightens in February. Bank lending has slowed sharply too
- However, this is not a credit-driven cycle: the impact on growth may be limited
- Tighter credit could in fact help to prolong the economic cycle and sustain the rally in equities
