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Credit Conditions Worst in 35 years as US Manufacturing Contracts

Interest-Rates / Credit Crisis 2008 Jul 01, 2008 - 02:17 AM GMT

By: Paul_L_Kasriel

Interest-Rates Best Financial Markets Analysis ArticleNot to belabor the point I have made in recent commentaries, but last Friday afternoon's report from the Fed of assets and liabilities of commercial banks in the U.S. showed the sharpest 13-week contraction in bank credit - loans and investments - in the history of the series, which dates back to January 3, 1973. In the 13 weeks ended June 18, bank credit contracted at an annualized rate of 9.14% (see Chart 1 below). Because of current or expected capital inadequacy, banks are reining in their earning assets and, therefore, are not availing themselves of the cheap credit the Fed is offering to fund them at. This suggests that the 2% fed funds rate in the current context does not represent as accommodative a monetary policy as it would if the banking system were willing and able to extend credit to the private sector.


Chart 1

More Regions Report Weakening Manufacturing Activity in June

In recent weeks the Philly Fed and the Buffalo branch of the New York Fed have reported weaker new orders in the manufacturing sector for June. Today, the Chicago, Milwaukee and Dallas "precincts" reported their June manufacturing results. The story is the same - weaker new orders. Chart 2 contains the new orders indexes as reported by the Chicago and Milwaukee purchasing managers. Chart 3 contains the new orders data from the Dallas Fed manufacturing survey. These reports plus the ones from Philly and Buffalo suggest that the new orders index in June ISM manufacturing report will be down, too.

Chart 2

Chart 3

By Paul L. Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2007 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Paul L. Kasriel Archive

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