Reporting/Market Focus from the  August 2005 Edition of the SGS Newsletter

Added to this month’s reporting and analysis are several measures of short-term credit for consumers and businesses: Consumer Credit, Commercial and Industrial (C&I) Loans and Commercial Paper Outstanding. Each series is of reasonably good quality, is published by the Board of Governors of the Federal Reserve System and tends to move in response to business conditions. Accordingly, these series are viewed as lagging indicators to economic activity. At present they tell a mixed story of business activity, suggesting that the 2001 recession lingered into 2004 or beyond, and that the economy may have started turning down again.
Consumer credit has tracked recessions closely over time, although downturns in consumer borrowing during 1985/6 and 1996/7 mirrored economic slowdowns noted in the business community but not in official GDP reporting. The series includes credit card debt; it does not include longer-term debt such as mortgages.
The last peak in year-to-year growth was at 11.7% in April 2001, right after the official onset of the recent recession, though some months after the economy had slowed significantly. Following the pattern of the down economy, year-to-year growth in consumer credit fell to below 5% as of February 2003 and has stayed there since, never recovering. Growth just reported for June 2005 was up 4.4% year-to-year.
Commercial and industrial loans and commercial paper outstanding need to be viewed jointly as they both reflect short-term borrowing by businesses. Annual growth in C&I loans peaked around 11.4% in July 2001 and fell sharply into negative by December of that year. No recovery was seen until the Fed began tightening in July 2004. Growth since had returned to the 11.5% level as of June. Annual growth in commercial paper outstanding, peaked around 36% in September 2000, sank sharply into negative territory and began recovering around May 2004. Growth plunged anew, however, after peaking in May 2005 at about 29%. Year-to-year growth as of the four weeks ended August 3 had fallen to 9.2%. The data on commercial paper is more current than the C&I numbers by over a month.
Certainly the environment of unusually low interest rates has distorted borrowing patterns for these series, as both consumers and business have moved to lock in longer-term funds at historically low interest rates. Nonetheless, the pressures of the business cycle still push short-term credit activity, and there are, again, hints in these data of a more prolonged 2001 recession than formally is recognized, and of broad economic activity perhaps taking something of a hit during second-quarter 2005.
As interest rates reach more normal levels, these credit series may give us additional reliable indications of what is happening in underlying business activity.