Weak Credit Growth Means Recession Ahead

The first thing to understand about the global economy today is that CREDIT GRWOTH DRIVES ECONOMIC GROWTH. In the new Macro Watch video, uploaded today, we take a look at the latest Financial Accounts Of The United States to analyze recent trends in Credit and Debt. We also forecast credit growth out to the end of next year. What we find is bad news across the board. Not only has credit growth stalled, but debt levels have been revised higher.

During the second quarter, total credit in the United States grew at the slowest pace in a year. Total credit growth has been more or less flat – at a depressed level – for the last eight quarters. Weak credit growth in the US is one of the main reasons the global economy is moving rapidly back into recession.

Making matters worse, the data for all earlier quarters was revised up. First quarter debt levels were revised up by $2.7 trillion, or by nearly 5%. Total debt in the United States is now $62 trillion or 350% of GDP.

Looking ahead on a sector-by-sector basis, we find that credit growth is likely to remain weak through, at least, the end of next year. That suggests the United States is going to fall back into recession – unless the Fed intervenes with a new round of Quantitative Easing.

Finally, we take a look at Household Sector Net Worth. Here we see that the “Wealth to Income Ratio” has climbed to 645%, less than 1% below the record it set in 2007. The last two times this ratio topped 600%, asset prices crashed and the economy went into recession.

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