Competing Histories

If your economic forecast for the coming year embeds something like robust growth in consumer spending, last Friday’s Federal Reserve report on consumer credit should probably give you pause.


At least some folks look at that picture and see a slow slog ahead. Calculated Risk sums up the concern:

“Consumer credit has declined for a record 11 straight months—and declined for 14 of the last 15 months and is now 4.8% below the peak in July 2008. It is difficult to get a robust recovery without an expansion of consumer credit—unless the recovery is built on business investment and exports (seems unlikely to be robust).”

At Angry Bear, the question is a little more pointed:

“Remind me again why all those banks were ‘bailed out?’ Wasn’t it supposed to be to kick-start the economy again?”

Well, here’s the thing. That consumer credit picture embeds both the supply of credit and the demand for credit. Though both tighter credit standards and weak loan demand are certainly at play, it is does seem that, at the moment, weak demand is the factor most responsible for slow loan growth in the United States. Recall, for example, this information from the Federal Reserve’s January Senior Loan Officer Survey:

“The January survey indicated that commercial banks generally ceased tightening standards on many loan types in the fourth quarter of last year but have yet to unwind the considerable tightening that has occurred over the past two years. The net percentages of banks reporting tighter loan terms continued to trend lower. Banks reported that loan demand from both businesses and households weakened further, on net, over the survey period.”

As regular readers of macroblog know, our own Atlanta Fed surveys (here and here) are indicating that soft customer demand, not credit access, is a significant story in business capital expenditure and expansion plans.

Of course, we don’t really know whether credit availability will become a more significant problem when demand begins to recover. This uncertainty is behind what is the real back story at this critical point of the recovery. As we peer ahead, we essentially have two competing, and contradictory, economic histories as our guides. First, there is the statistical regularity that deep recessions in the United States have in the post-WWII period been reliably followed by rapid recoveries. But second, there is the Reinhart-Rogoff statistical regularity that recoveries from financial crises are slow and difficult.

A Wall Street Journal interview with Carmen Reinhart provides reasonable arguments as to why slow and painful is a sensible bet. On the other hand, one could argue that the advance fourth quarter gross domestic product figure is consistent with the sharp bounce-back scenario. (If you are looking for that argument, Brian Wesbury and Robert Stein oblige.)

One thing is certain. At least one history is going to be revised.

By Dave Altig, senior vice president and director of research at the Atlanta Fed

Originally published at Macroblog and reproduced here with the author’s permission.

One Response to "Competing Histories"

  1. Guest   February 12, 2010 at 6:13 pm

    I am a normal guy. I like this site because following economics is something I like to do. I have always liked a good game of chess and world economics is very similar. If anyone can think seven moves ahead in the financial arena they would do real well. Thats what it takes to play a good game of chess.My point is I am a normal guy. Not rich. Not a suit. A bit of a rebel. Many greedy jerks who spent hours at the shredder last fall should be in jail. I spent some time in IT at banks. From a street view most of us are pulling in the purse strings and trying to by cash. The grocery stores are robbing us blind and we are only buying what we need. Seeing freinds and family all around us that cant find jobs for over a year tells us that we need something for a rainy day. Some folks have plenty of rainy day money, others lost most of it last fall. Like health insurance you never really understand the importance until you really need it and you are taking 10 pills twice a day and your company fires you for being absent and late. Then you have 18 months of coverage and unless your condition gets better; good luck finding coverage unless congress gets a bill passed banning pre-exsiting conditions.So normal people are afraid and know that they can be quickly replaced at a lower salary. This reovery is going to be different than any we have ever experienced. We are being pushed toward a globalization culture by players with very high paygrades. Many feel things just are not right but cant put their finger on it. Congress is disfunctional, the President is disrespected and jounalism is almost nonexsistant in the media; its more like opinionism.I know this all may seem off point, but I feel that this consumer reaction is unique and we will just have to see how it plays out, because what is happening in the world right now is something new in the order of things. In the near future there will be world events that will disrupt normal movement. What happens if Iran does decide to close the straits of Hormuz? When will China change the RMB? Will more Tea Party members bring sidearms to Obama town hall meetings? This economic situation is not something the run of the mill analyst should be writing about. Only people like Mr. Roubini really have the outside the box thinking to write about this situation and see the big picture.