As credit dries up in U.S., concerns mount about recession
By Peter S. Goodman
Wednesday, November 28, 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 major 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, Tilton added, suggesting that the tightening increases the prospect of recession.
Because it has the world's largest economy, any recession in the United States would probably 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 suggests 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.
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.
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.
What loans are being extended are going primarily to companies with long-standing relationships with banks. Lenders are reluctant to bet their increasingly scarce capital on riskier, less-established companies in a time of economic anxiety. That leaves many companies - smaller firms in particular - scrambling to get hold of finance.
"Small businesses are just inherently more risky, and banks are going to be more conservative in protecting their assets," said Jody Keenan, who heads the board of the Association of Small Business Development Centers in Burke, Virginia. "We're starting to see a tightening already, particularly for very small companies. We're talking about real impacts in local communities."
A slowdown among smaller companies could be especially costly to the economy in terms of jobs. More than half of U.S. jobs are at companies with fewer than 100 workers, according to Moody's Economy.com.
In recent months, smaller companies have been adding jobs even as larger firms have been shedding workers, according to the ADP National Employment Report. Between May and October, 276,000 of the 378,000 jobs added to the U.S. economy sprung up at companies of fewer than 50 employees, the report found.
To be sure, the strongest companies with property to put up as collateral and years of profits they can point to are still able to borrow, often at highly favorable terms.
The downturn in the housing market has made banks reluctant to sink money into anything related to real estate, from title companies to bathroom tile manufacturers, but lenders have sought refuge in more vibrant areas - notably agriculture, which has benefited from the boom in ethanol production.
Other parts of the economy, notably the auto industry, have seen access to credit tighten considerably, as banks steer their limited capital away from companies with declining sales.
A year ago, when he needed new machinery, Doyle Hayes, president and chief executive of Pyper Products, an auto parts maker in Battle Creek, Michigan, went back to the local branch of Comerica bank, where he has been doing business for years. He borrowed $300,000. Last week, when Hayes needed $140,000 for a new robot, he did not even bother to inquire at the bank.
"We knew what the answer was going to be," he said. "When the auto industry goes down, anything that has four wheels becomes suspect."
Still, Hayes did not put off the purchase. "You can't save yourself into prosperity," he said. He managed to borrow the money instead from Battle Creek Unlimited, a nonprofit economic development arm of the city.
Even so, credit remains tight, so much so that Hayes is delaying payments to the companies that sell him plastic resin, his primary raw material.
"I've got to try not to answer the phone," Hayes said. "Everybody wants money. We stretch people out."
Carter Dougherty contributed reporting from Frankfurt. Floyd Norris and Eric Dash contributed from New York. |
