US Businesses' Lack of Trust in Economy Rising

There is something occurring in the US economy that is not getting the attention it may deserve. Loan rates for businesses are declining. Simultaneously, consumers are spending less but are taking on more and more debt.

This is a sign of an economy that is reaching an unsustainable limit. But, it is not all sanguine. Businesses have accumulated debt, just not via traditional loans; at record levels businesses have sold debt in the open market. Still, there is a telling sign within the data that this economic cycle may be nearing an exhaustion point, Seeking Alpha reported.

A look at the rate of growth in commercial loans is a telling sign of what is happening and the state of loan growth in the business sector. Every time loan growth rates touch the 0% level as it is now, there is usually a recession attached to it. Tips in itself does not state that a recession is on the way. But, if economies repeat history, then there is something to be said about where the economy is at this time.

Business leaders have stated that their respective businesses cannot get loans simply because the regulations are too steep.

Less Demand for Loans

Not true, according to analysts working for banks. Banks are not lending out as much because there is less demand for loans. In fact, often what is cited is the lack of certainty in the economy, specifically the leadership that businesses are reluctant to take on debt. The biggest factor, they say, is Trump.

Still, high-grade businesses issued a record $414.5 billion in debt the first quarter of this year. That was a record. That is good news. But, the fact that investors piled in as they did says that there is a lack of trust in the economy going forward, that investors are not leaving behind the relativity safer debt bets to take on bigger risks, such as equities.

And, then there is the private consumer. Credit levels, loans to credit cards, have ballooned to record highs. The analysis on that is that since wages are not keeping up with cost of living consumers are going into debt to fund their lives.

So far, this has not been problematic, nor has this slowed down at all. In fact, it might be that consumer debt is what is carrying the economy at this point. However, even that is waning as the retail sales numbers released on Friday showed. If the consumer starts to slow down with their credit cards then this economy is in for a sharp decline.

Consumers Spending Less

Keep in mind that the US economy is 70% consumer driven. The consumers are slowing down their spending as the past two months have shown with retail sales declining for both February and March. One significant place that consumers are dropping their spending is automobiles. Typically, big ticket items are the first to go with consumption declines; smaller consumption items taper off later in the cycle.

When there is demand from consumption, business will ramp up investments to keep up with demand and to competitively compete in the marketplace. Businesses are not borrowing capital to do this one crucial factor. If you look at the chart above, the only times that business loans have dropped down to the level where it currently resides is recessionary times.

But, when you factor in the decline in retail consumption from individuals, as well as the decline in total vehicle sales, you see where that lack of impetus to push manufacturers to take on business risks is derived. Consumers are not consuming and firms are not expanding their risk tolerance; businesses are playing it safe, so to speak.

There have been signs that the economy has been slowing. These alarm bells are largely going unnoticed. Some analysts point to the ballooning consumer credit as a good thing. Maybe it is. But, the consumer cannot borrow their way to prosperity. And, the response from the business sector is alarming.