Loans at U.S. commercial banks shrank at about a 4% annual rate in the second quarter, according to preliminary data from the Federal Reserve, and bankers trimmed their outlook for a resumption of growth in earnings calls in July.
When might the slide in household and business borrowing, which with the exception of a single quarterly interruption has so far stretched on for about two years, end?
The aftermath of the 1990-91 recession offers a dispiriting precedent — one that Fed Gov. Elizabeth Duke said in a speech on June 30 gives an "idea of how long it could take for credit volumes to recover."
Even without a double dip in the economy (let alone deflation), it took two years after the 1991 trough in output for inflation-adjusted nonfinancial private-sector debt to begin to grow again, and three and a quarter years for it to rebound to its level at the end of the recession (see charts and tables below).
Among depositories alone, the recovery was even more drawn out — it took almost five years for business loans to reach their level at the end of the recession, almost eight years for mortgages and more than three years for consumer loans. (Data for total private-sector debt is seasonally adjusted, while data for depositories is not.)
If the three quarters of growth in gross domestic product through March 31 appropriately mark a turn in the business cycle, debt volume trends have been higher in some categories — nonfinancial business and mortgages and consumer loans extended by depositories — compared with an equivalent point in the 1990s, and lower in others — overall nonfinancial private-sector debt, household debt and business loans extended by depositories.
To be sure, there are parallels between the 1990-91 recession and the most recent one — both were marked by major banking crises — but there are major differences as well: this decade's reckoning has been much more severe, and the scale of the government's rescue effort has been unprecedented.
Also, while the 23% drop in commercial real estate mortgages in the five years after the 1990-91 recession was the dominant vector in that deleveraging cycle, the recent retrenchment has been far broader. Prominently, households have participated with rare gusto.
Having shed about $500 billion in debt since it peaked at 176% of GDP in the first quarter of 2009, households and businesses have made considerable progress in reducing unwieldy burdens. But the pullback is still dwarfed by the run-up, and at 168% of GDP in the first quarter of this year compared with 136% in the first quarter of 2001, nonfinancial private-sector borrowing still faces a powerful undertow.
[IMGCAP(1)]
