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- US commercial and industrial lending slumped sharply this year, the chief economist at the Institute of International Finance said.
- Robin Brooks has called it a "staggering meltdown" – and warns a big slump in US investment is on its way.
- Credit flows have declined amid higher interest rates and tighter lending standards following this year's banking turmoil.
A slump in short-term credit flows to US businesses is underscoring growing risks to the world's largest economy, according to one economist.
Total commercial and industrial (C&I) lending shrank 1% year-to-date, compared with a 9.3% expansion during the same period last year, according to Robin Brooks, chief economist at the Institute of International Finance. The median growth for the comparable periods from 2010 to 2022 was 4.5%, according to him.
Credit conditions in the US economy have tightened this year, with banks raising lending standards after the collapse of Silicon Valley Bank in March unleashed a wave of turmoil across the sector. Furthermore, a sharp surge in US interest rates since early 2022 has made borrowings much more expensive, potentially damping demand.
"Meltdown in US commercial and industrial (C&I) loan growth is staggering," he tweeted on Sunday. "Cumulative C&I lending is -1.0% since the start of 2023. Median growth by this point in the year is +4.5%, while 2022 was up +9.3% by this point. Big US investment slump is underway…"
Typically, C&I loans provide companies with that can be used to finance day-to-day operations or other purposes such as the purchase of equipment. They tend to be popular with small and mid-sized companies that may have limited access to equity markets.
However, credit costs have climbed significantly over the past year or so, as the Federal Reserve raised benchmark interest rates aggressively to rein in runaway inflation. The central bank has boosted its policy rate by 500 basis points since March 2022.
Furthermore, liquidity among banks has taken a hit following the collapse of SVB and Signature bank in March, which saw over $500 billion of deposits exit the system.
However, the tighter credit conditions may indicate of increased prudence in the financial system, according to Bank of America CFO Alastair Borthwick.
"Cash flows remain in a good place. I think corporate America learned something from 2009 and 2008, and so leverage is in a good place," Borthwick said during an earnings call to shareholders. "You add all that up, get a decent environment overall for the economy, and that's where we are with respect to credit quality."