JP Morgan Daily Economic Briefing: 05-02-10

JP Morgan Daily Economic Briefing

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Page 1: Global data summary

• The economic news was not all bad this week but, pending tomorrow’s payroll report, on balance the data disappointed. Two developments stand out, both of which pertain to the sustainability of the expansion. One was today’s jobless claims report, which showed that initial claims recently have settled near 480,000. The recent stall in claims suggests that GDP growth is slowing, which already is built into our forecast. More important, our models suggest that this level of claims is consistent with little or no growth in employment. This is what is expected for tomorrow, but it is important that claims do not stall at this level.

• The second disappointment was the continued, low level of the global services PMIs in January. Both the surveys and hard data suggest a sharp contrast between the boom in the manufacturing sector and sluggish activity in the remainder of the economy. We had hoped that a bounce in the January services PMIs would signal a needed broadening in the base of growth. If these conditions persist it would suggest we have underestimated the structural impediments to growth. In the US, these would include regulatory/policy uncertainty, small business financing, real estate, and state and local finances.

• US labor productivity surged again in 4Q, marking a 3-quarter growth stretch averaging 6.4% annualized. The US surge stands in marked contrast to what is happening in the Euro area and Japan and is feeding a phenomenal rise in US corporate profits. We continue to believe that US corporates are poised to resume hiring but, as noted above, the case for this happening right away has been diminished by the backup in jobless claims.

• The first look at January consumer spending was a bit on the soft side. Auto sales weakened in January across the developed economies, falling 1.5mn units to 30.2mn (saar). That said, aggregate sales have held up surprisingly well in light of the fading of government incentive schemes

• German manufacturing orders slumped in December. Most indicators indicate that global manufacturing is booming, including our PMI and export and IP data from Asia. To the extent that these data stand revision, they probably are additional confirmation of softness in the Euro area economy.

• In his press conference, Trichet indicated that he will lay out the ECB's strategy beyond the first quarter following the March ECB meeting, and also signaled confidence in Greece’s fiscal plan. The Bank of England’s MPC left its QE program on hold pending developments on the economy.

Page 2 - 3: Lending standards stabilize but not demand

Credit standards for lending to large businesses have stabilized in the G-4, while demand continues to contract. By contrast, credit standards for residential mortgages are still tightening even as demand appears to have stabilized. In the US, banks willingness to extend consumer installment credit is at long last expanding on net. In whole, the halt to the inward shift in the credit supply curve is a welcome development that is a first step toward removing an important drag on the recovery.

The great recession brought with it a record collapse in net private credit creation in the major developed economies. This has led policymakers to complain vociferously that banks need to open their lending books to assure the recovery continues. At the same time, bank operators contend that credit creation is plunging due to a lack of demand. On the surface, this may seem like an odd debate since supply must always equal demand, leading both to have fallen commensurately with each other. However, the debate is less about actual demand and supply and more about the demand and supply curves for credit.

During the recession, both curves shifted inward, resulting in a crash in credit supplied and demanded. However, for business lending, the latest data hint that the supply curve has steadied while the demand curve continues to shift inward. After tightening for ten straight quarters, G-4 credit standards for bank lending to large firms appear to have stabilized at the turn of the year, even as demand for C&I lending continues to contract. In contrast to business lending, credit standards on residential mortgages continue to tighten—even if at a much reduced pace—while the demand for mortgages began expanding in 2H09.

Credit standards on large firm C&I lending began tightening in late 2007 and reached a peak pace of tightening in late 2008 and early 2009, when the share of banks tightening standards outnumbered the share easing by 40% points.1 On net, banks continued to tighten through 2009, but as of the current quarter, there are just as many banks easing or leaving standards unchanged as there are tightening. By contrast, the majority of banks in the G-4 are still seeing demand contract for C&I lending despite seeing no net change in standards and depressed rates of interest.

The tightening in C&I lending standards was most severe in the US and the Euro area, where between 80 and 90% of all banks were tightening standards in late 2008. Banks in the UK tightened standards considerably in 2008 as well, but not to the same extent. By contrast, Japanese businesses experienced little tightening throughout the downturn. The move to stability in credit standards in the G-4 has been broad based, with bank standards in all four countries roughly unchanged as of the latest reading (Japan has arguably seen a slight up-tick in credit standards since the onset of outright deflation).

The continued decline in demand for business lending reflects offsetting moves in the G-4. The US has experienced a sharp moderation in the share of banks seeing reduced borrowing demands. Improvements in business demand for credit have been more limited in the Euro area and UK, while loan demand recently has deteriorated considerably in Japan. The fall-off in Japan is disappointing and, like the pickup in tightening, likely reflects the growing concerns about deflation and the strength of the yen.

In the consumer space, the tightening in standards for secured lending (including mortgages) has abated considerably in the past year. As with business lending standards, the US has seen the largest moderation. However, credit standards on household secured lending in the UK fell sharply in 2H09 and were actually easing, on net, as of the turn of the year. Demand for mortgages accelerated considerably in the US, Euro area, and UK throughout 2009 and was expanding, on net, at a robust pace in 4Q09. However, the latest readings suggest that the temporary curtailment in the first-time home buyer tax credit in the US damped demand. The UK also saw some deceleration, on net.

The ultimate test of the usefulness of these surveys is whether they correlate with actual behavior. As noted above, the readings on credit standards only give insight into the supply side of the lending equation, and they are diffusion indexes, rather than a survey of the amount of new lending. None theless, for the United States where we have a deeper history with the data, the mappings between credit standards and actual spending are impressive, both for the business and the household sector. As a result, the latest surveys are encouraging.

Credit standards for large firm C&I lending align well with total business fixed investment (BFI) in the US (which includes nonresidential construction). Indeed, the lending standards data appear to lead BFI, particularly during turning points in the business cycle. The latest 1Q10 reading suggests nominal BFI, which just edged up in 4Q09, could expand at a 10% annualized pace this quarter. Similarly, the recent improvement in banks’ willingness to extend consumer installment credit points to a further decent gain in nominal consumer spending this quarter.

ENDS

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