WASHINGTON - Despite renewed talk in the bond market that demand for credit may be stirring, there is little reason to worry that stepped-up borrowing will do much to raise interest rates in the next year or so.
That's the latest word from analysts at Merrill Lynch and, given the way some investors have been fretting about Bill Clinton and the federal budget deficit, it is a timely reminder. "The credit markets should easily accommodate prospective credit demands with only limited upward pressure on interest rates," said Bruce Steinberg, manager of macroeconomic analysis, in a market letter.
The reason, according to Steinberg, is that by historical standards demand for credit by businesses and other private-sector borrowers is likely to remain feeble. He estimated that private debt raised outside the banking system - nonfinancial debt - will rise between 6% and 8% in 1993 and 1994, which would equal rates recorded during the bottom of past recessions. Last year, private credit rose a meager 2%.
The outlook for inflation remains benign, many analysts say. There is no evidence of any pickup in wages and benefits in the current weak labor market, commodity prices are actually declining, and there is plenty of slack capacity in the manufacturing sector. Global competition for goods and services keeps pressure on U.S. firms to contain price increases.
Moreover, from the Congressional Budget Office comes word that the budget deficit, while hitting another record next year, is not likely to increase by much. In January, the budget office is expected to issue a revised forecast for a deficit of around $300 billion, up from $290 billion in fiscal year 1992 which ended Sept. 30.
One source says the estimate will assume a delay by Congress in providing federal bailout money for the savings and loan industry, which is a safe bet. It also does not include any additional outlays from a Clinton economic stimulus plan, but it is unclear how quickly Congress can appropriate any extra money and get it into the economy.
Expectations that demand for credit will pick up in the private sector were sparked by a report from the Federal Reserve showing commercial and industrial loans by banks increased in September, the first gain in 11 months. Federal Reserve Board Chairman Alan Greenspan, in a speech last week to the Tax Foundation in New York, said he saw signs "of some stirring in the loan markets in recent weeks."
But the consumer and real estate sectors, which typically boom in an economic recovery, are still struggling to recover from the debt-happy days of the 1980s.
Commercial mortgage debt, reflecting the abundance of vacant office buildings, "has recently been declining and will probably show little, if any growth in the near future," says Steinberg. And household balance sheets remain strained, so consumer installment debt is likely to remain "extremely subdued."
Steinberg concludes that although bank lending may be turning around, much of such lending during the 1980s was driven by mergers and acquisitions and stock buybacks by corporations - neither of which is expected to be much of a force in the 1990s.
The two areas. of lending that have seen some pickup are home mortgages and corporate bonds, but even here activity is subdued. Home mortgage lending grew at about a 6% rate in the first half of the year, and corporate bond issuance was up 7.5%, much of it going to pay down short-term debt.
Greenspan stressed that unless Congress and the new Clinton administration work to unshackle the banking industry from the record-keeping restrictions and other requirements that were imposed by last year's banking bill, the supply of credit will continue to be restricted. Most of the credit crunch is a function of weak demand, he said, but the rules for bankers are playing a role in blocking loans to creditworthy customers.
We are a long way from worrying about rising demand for debt pushing up interest rates.
