The Starving of American Business

One of the most reliable signs of a thriving economy has always been business lending. If businesses can’t borrow, they can’t invest. And if businesses can’t invest, they can’t grow. An economy with anemic lending activity is ultimately reflected in depressed revenue and plummeting hiring figures.

That’s why it’s a major cause for concern that for the week ending May 16, the Federal Register’s H.8 Report showed a sharp reduction in Commercial and Industrial (C&I) loans. According to Bespoke Investment Group, the quarterly growth rate of C&I loans fell to 15.17% on Friday, May 13 from 19.34% just two weeks earlier.

Since C&I loans cover a range of businesses, including equipment buying and factory construction, there can be little doubt an abrupt reduction in these types of loans will ultimately show up in plunging employment figures as well as market slowdowns.  Piling on, the Fed’s Senior Loan Officer Opinion Survey (SLOOS) shows that those who extend the loans are now reining them in. Observers expect data from this survey will inevitably show up later in the economy.

According to an article in the May 16 edition of Pensions & Investments, the same tightening of loans is now popping up in commercial real estate. Industry money managers are being forced to choose between buying overpriced real estate and buying in sectors that are overpriced.  The hotel sector was hit hard for financing six months ago; now the multifamily sector is feeling the very same pinch. According to Ralph F. Rosenberg, New York’s global head of KKR & Co. LP’s real estate business:

“When it comes to financing traditional assets, the credit markets are more discriminating today vs. a year ago….This is the byproduct of lenders reducing leverage levels and increasing credit spreads in the aftermath of China devaluing (its currency) last fall.”

And Richard Mack, CEO of Mack Real Estate Group, observes: “It’s a peculiar time. A lot of (real estate) equity, but not necessarily enough debt….”

One group especially – small business – remains in dire need of funding. Only half of small businesses with revenue ranging from a hundred thousand to a million dollars received the loans they applied for. Yet small business represents ninety-nine percent of U.S. companies, fifty-four percent of their revenues and over half of their payroll.  Our job creators are seeing the door slammed in their faces.

In the past, we were always confident the U.S. economy would land on its feet. If you were careful with your finances, you could afford to wait out any storm. But it appears this is no longer the case. We’re stuck in a deflationary environment – an economy that government, bankers, or the private sector can’t seem to jump-start.

While faith in the future may be an admirable quality, determination is a much better one. Doesn’t it make sense to stop hitching your dream exclusively to the wounded U.S. dollar and start accumulating physical gold? You can sequester gold in an IRA account, and feel confident you’re accumulating a tangible asset that’s negatively correlated to your paper assets, most of which are now losing value, and headed nowhere good.