AFTER three years of stagnant loan growth, The Peoples Bank in Coldwater, Ohio, has noticed a change. Clients who two years ago would not have qualified for a loan now find that they can. One customer who was working for only 35 hours a week two years ago is now working 45 to 50 hours. “That was his reason for coming in: he had steadier income,” says Jack Hartings, president of the seven-branch bank. Since the bank’s main alternative to lending money is buying Treasury bonds that yield only 1%-2%, Mr Hartings is eager to make new loans.
Across the country, bank lending, which shrank almost steadily from early 2009, is growing again (see chart), thanks to modest employment growth, stabilising home prices in many regions, and the Federal Reserve’s Herculean efforts to hold down interest rates.
This is helping. In the fourth quarter, America’s economy grew by 2.8% at an annual rate, the fastest in an otherwise dreary year. Much of that was from inventory restocking which will not be repeated. Still, consumer spending rose at a 2% annual rate and house building expanded by 11%, the most since 2004.
Both of these sectors were helped by easier credit. Moderate job growth, skimpy pay rises and higher petrol prices held growth in income after taxes and inflation to just 0.9% last year. Consumption grew faster because households borrowed more and saved less. Saving, which had topped 5% as a share of disposable income in the wake of the recession, had fallen to 3.5% in November.
This was not sustainable, and indeed the saving rate jumped back to 4% in December. Are further increases in store? If so, that would hold back consumption, which accounts for roughly two-thirds of GDP. And indeed that is the main reason recoveries after financial crises are usually sluggish: households and businesses have to hack back the debt they accumulated during the boom years, a process called deleveraging. Households have as expected reduced their debts relative to their incomes; much of that has come by defaulting on their loans. More such defaults are probably in store. The question is, will consumers also divert more of their income from consumption? That would cause the saving rate to rise further.
Nathan Sheets, an economist at Citigroup, reckons that household debt, now running at 120% of disposable income, should be 100% to 110% given the current configuration of interest rates, unemployment and asset values. This, he reckons, can be achieved with a saving rate of just 4.5%, not much higher than it is now. But the Bank Credit Analyst, a financial forecasting service, thinks households’ current net worth is more consistent with a saving rate of 6%.
A higher saving rate would be much less painful for the economy if it were achieved through increased income rather than lower spending. That could happen. The non-partisan Congressional Budget Office (CBO), in its economic outlook released on January 31st, reckoned that real disposable incomes would grow by 3% this year thanks both to faster wage growth and a big drop in inflation. That, it reckons, should support growth in consumption and overall GDP of 2%.
Plenty could go wrong with this scenario. Oil prices could spike again; banks, worried about Europe, could tighten their lending standards, as they already have done for some business loans. And at the end of 2012 an even bigger threat looms: taxes will automatically rise and spending shrink unless Congress votes to override existing legislation. The CBO reckons that would slice the deficit in half, but at the cost of pummeling the economy. For private deleveraging to proceed, public deleveraging may have to wait.