Magazine article Economic Trends

Loans and Leases in Bank Credit

Magazine article Economic Trends

Loans and Leases in Bank Credit

Article excerpt

01.26.2012

It has been two-and-a-half years since the National Bureau of Economic Research (NBER) declared that the severe recession that began in early 2007 had ended. Since then, the U.S. has endured such a slow recovery that many question if we are in a recovery at all.

One important measure of economic strength, loans and leases in bank credit, confirms that the current recovery has been relatively subdued compared to the recoveries after the 2001 and 1990 recessions. While loans and leases tend to be a lagging indicator (due to the time it takes for old loans to be paid off and for banks to reduce lending activity), balances in bank credit do serve as an important indicator of how quickly the general economy is growing and, more importantly, what areas of the economy are expanding.

Loans and leases in bank credit are recovering much more slowly during this recovery than they did in the previous two. One reason for the slower pace this time around is simply the fact that the most recent recession was more severe than the previous two. On a year-over-year basis, total loans and leases declined in the recent recession an average of 5.0 percent for 57 consecutive weeks. They fell a full 9.7 percent in October 2009. Additionally, on a year-over-year basis, they suffered a second significant dip in March 2011 and then continued to fall for an additional 25 weeks before recovering in September 2011. In comparison, total loans and leases fell only 0.2 percent on average in the 2001 recession on a year-over-year basis. In the 1990 recession, the decline in loans and leases was more prolonged (they fell 21 out of 26 weeks), but the declines were never more than 0.8 percent on a year-over-year basis.

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Currently, loans and leases in bank credit remain below their level at the trough of the recession. Furthermore, the largest contributor to the current growth in total loans and leases is likely to be a onetime transfer of credit balances from off-balance-sheet accounts to on-balance-sheet accounts, which caused the level of consumer credit to increase 43-0 percent in March 2010 (week 40). Despite the one-time accounting change, 132 weeks after the recession trough, total balances of loans and leases in bank credit stand at 98.8 percent of their level at the recession trough. At the same point after the 1990 and 2001 recessions, total balances stood at 103 percent and 119 percent, respectively. However, while loan and lease balances have not grown as quickly as they have in past recoveries, they are following a similar trajectory as balances in the recovery after the 1990 recession. …

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