Fourth-quarter loan officer surveys in the US and Eurozone released last week paint contrasting pictures. The net percentage of US banks tightening credit standards on loans to firms fell deeper into negative territory (i.e. more banks eased standards than tightened them, with the difference larger than last quarter). The corresponding Eurozone net percentage was positive and rose slightly; it remains, however, well below the first-quarter peak and is judged here to be consistent with the economy bottoming in late 2012.
The first chart below shows a long history of the US survey – note its suspension between 1984 and 1990. The series plotted is an average of the net percentages tightening credit to larger and smaller firms. A rise in this series above +20% warned of six of the seven recessions since the late 1960s. The exception was the 1981-82 “double dip”– arguably an extension of the 1980 recession rather than a separate contraction. (Output recovered temporarily in late 1980 / early 1981 after credit controls were removed before resuming a decline.)
Even at the height of the Eurozone banking crisis last winter, the US net tightening percentage reached only +4%, providing additional evidence against the recession forecasts of the Economic Cycle Research Institute and John Hussman*, among others. Excluding the distorted early 1980s experience, negative readings similar to those recorded recently have been associated with solid economic expansion.
The following chart compares US and Eurozone series, the latter again derived by averaging net tightening percentages for larger and smaller firms. The Eurozone series surged to +36% in the first quarter of 2012, confirming an earlier recession signal from a contraction in real narrow money. It fell back, however, to +9% in the second quarter in response to the ECB supplying unlimited term funding to the banking system before recovering to +14% in the latest survey – still below the +20% warning level.
The US and Eurozone survey responses are not adjusted for seasonal variation. The next chart incorporates an adjustment – the rise in the Eurozone net tightening percentage between the second and fourth quarters largely disappears. The suggestion is that the Eurozone credit crunch eased between the first and second quarters and conditions have since shown little change.
The “monetarist” view here is that the (real) money supply leads the economy while credit is a coincident indicator. Lending surveys are a short-term leading indicator – shorter than the money supply – because they give advance warning of credit trends. On this view, real money should predict credit conditions. The final chart shows the Eurozone net tightening percentage together with six-month real narrow money growth, plotted inverted. A leading relationship, as expected, is evident – in particular, real money contraction in early 2011 foreshadowed last winter’s credit crunch. The relationship suggests that coming lending surveys will show a fall in the net tightening percentage – assuming recent real money expansion is sustained.
The lending surveys, therefore, are consistent with the suggestion from real money trends that growth prospects remain better in the US – barring an unlikely fiscal cliff disaster – but that Eurozone activity is probably bottoming out in the current quarter ahead of a modest recovery in early 2013.
*Hussman maintains that a recession has started and suggests in his latest weekly comment that a recent rise in payroll employment will be revised to show a fall. He draws a comparison with 2001, when payrolls were originally reported to have risen by 105,000 over January-April as a recession was starting; the current vintage of data shows a loss of 262,000. The alternative household survey jobs measure, however, signalled in real time that the labour market was weakening, falling by 704,000 over January-April 2001. There is no such divergence in recent data: a payrolls increase of 319,000 in September-October is “confirmed” by a 1,027,000 gain (admittedly distorted) in the household survey measure.