View Full Version : As Credit Dries Up In U.S., Concerns Mount About Recession

12-01-2007, 09:59 AM
As credit dries up in U.S., concerns mount about recession


By Peter S. Goodman
Published: November 29, 2007

NEW YORK: Credit flowing to American companies is drying up at a pace not seen in decades, threatening the creation of new jobs and the expansion of businesses, while intensifying worries that the economy may be headed for recession.

The combined value of two key sources of credit - outstanding commercial and industrial bank loans, and short-term loans known as commercial paper - peaked at about $3.3 trillion in August, according to data from the Federal Reserve. By mid-November, such credit was down to $3 trillion, a drop of nearly 9 percent.

Not once in the years since the Fed began tracking such numbers in 1973 have these arteries of finance constricted so rapidly. Smaller declines preceded three recessions going back to 1975.

"This is a very big deal," said Andrew Tilton, a senior economist in the U.S. Economic Research Group at Goldman Sachs. "You're basically crimping the growth of the more vulnerable companies. If they can't borrow the money, their options are much more limited. They'd have to have less ambitious hiring plans, buy less machinery and cancel projects."

When credit to business slows significantly, a drop-off in investment by businesses has generally followed closely behind, Tilton added, suggesting that the ongoing tightening increases the prospect of a recession.

As the world's largest economy, any recession in the United States would likely have a ripple effect across the globe because U.S. consumers would be buying fewer goods from abroad.

Europe, so far at least, has not been subjected to a similar tightening of credit that would prompt a broader economic contraction, though available statistics provide an incomplete picture, analysts said.

Anecdotal evidence suggest that sectors depending heavily on the free flow of credit, notably construction, no longer have ready access to the cash that seemed plentiful just a year ago. Like in the United States, big leveraged buyouts are now harder to finance.

But household borrowing in the 13 nations that use the euro has kept growing at about the same levels as before the onset of the credit crisis in August. And bank lending to nonfinancial corporations has actually increased since August, according to the European Central Bank, a fact that reflects the peculiarities of this credit crisis.

"The initial reaction to a credit squeeze may be counterintuitively represented in the lending numbers," said Ken Wattret, chief euro zone economist at BNP Paribas in London. "In anticipation of a squeeze, you borrow more to guard against he future."

Back in the United States, some of the drying up of credit reflects the end of a run of mergers financed by free-flowing credit. Some can be explained by what many economists view as a healthy return to the skeptical scrutinizing of balance sheets by banks. But lenders and borrowers from the suburbs of northern Virginia to communities in southern Arizona confirm that the tightening has already begun to affect the operations of some businesses.

Two years ago, in what now seems like another era, Carmen Murray easily borrowed $100,000 from a local bank to finance her business, Rodeo Carpet Mills, which makes high-end rugs in an industrial stretch of Los Angeles. Getting a check was as simple as returning a mass-mailed flier.

Now Murray is seeking a fresh loan from the bank to finance an expansion to supply Las Vegas hotels with floor coverings. She needs new machinery and 15 more workers. If she manages to get the money at all, it will not come easily.

"They want this; they want that," Murray said. "I got the sense that I have to start all over again. They need to know who I am and all about my business."

A survey of bank loan officers conducted by the Fed in October found that about one-fifth of lenders had over the three previous months tightened lending requirements for commercial and industrial loans for large and mid-sized businesses. A slightly smaller proportion had tightened lending to small companies.

By themselves, commercial bank loans have actually surged: Large companies have tapped prearranged lines of credit to weather the financial chaos that has accompanied the unraveling of the American real estate market. But this source of finance has been nowhere near enough to compensate for the veritable shutdown of the short-term commercial paper market. Much of this debt is pledged against the value of mortgages, making them effectively radioactive in markets around the globe.

In recent years, much commercial lending was inspired by an upward spiral of enrichment: Banks made new loans, then swiftly sold them off for profit, using the proceeds to extend still more. But with much of the financial world spooked by the mortgage meltdown, buyers for commercial loans are scarce, removing a reason for banks to lend in the first place.