Two important pieces of US economic news have been released over the last 24 hours.

The first was the Fed’s quarterly survey of senior loan officers, conducted during the first half of January. As expected, this reported a further significant tightening of credit standards across all types of loan. The first chart below shows an indicator of corporate credit conditions derived from the survey. (It is an average of the percentage balances of officers reporting tighter standards on commercial and industrial loans to large / medium and small firms.) This indicator has warned of recessions historically by moving through 35. The latest reading is just below the “trigger” level.

The second chart plots the corporate credit conditions indicator together with a measure of the slope of the Treasury yield curve (the gap between the three-month Treasury bill rate and the average yield on bonds of over 20 years’ maturity). An inverted yield curve signals restrictive monetary conditions and is usually associated with a tightening of credit standards. The curve has been steepening recently, suggesting credit conditions could ease, though probably not until the second half of 2008.

The second piece of news was the ISM non-manufacturing survey for January, which reported shocking declines in current activity and new business. The third chart shows GDP growth with a weighted average of the ISM non-manufacturing new business and manufacturing new orders indices. The relationship is far from perfect but the ISM indicator suggests a contracting economy in early 2008.

Recent data have been weaker than I expected but a self-reinforcing downturn is not inevitable. Inventories are low, net exports should remain supportive and companies have yet to announce large-scale layoffs – see fourth chart. Loosening monetary conditions and fiscal stimulus suggest any decline will be short-lived and conditions will improve as the year progresses.