'The credit crunch has started' and it could have big recession implications (2024)

Consumer perceptions of credit availability nosedived in March, a Monday survey by the Federal Reserve Bank of New York found. The share of Americans reporting that credit is much or somewhat harder to come by than it was a year ago is now 58.2%, the highest since the Fed began recording data in 2013. Only 33% of Americans feel their access to credit is as easy or hard as it was a year ago, the lowest share since April 2020.

Much like inflation expectations, perceptions of shrinking credit availability in the future can become a self-fulfilling prophecy, as banks that cut their lending are counting on other banks to do the same.

A lending slowdown may have begun only weeks after the failures of Silicon Valley Bank and Signature last month sent ripples through the financial system, according to another recent survey, by the Federal Reserve Bank of Dallas, published last week. The survey of 71 financial institutions, conducted between March 21 and 29, found that lending has already plunged. An index measuring total loan volume fell to -18.3, the lowest it has been since May 2020, with nearly half of institutions surveyed reporting a decrease in lending.

Survey respondents said the failures of SVB, Signature, and Credit Suisse in Europe had shaken confidence in the banking system, which combined with the pressure of interest rate hikes made a recession look more likely. Consumer loans saw the steepest decline among loan types, according to the Dallas Fed, and around 40% of institutions reported recently decreasing credit availability for consumer loans.

Recession or not?

It adds up to what is very likely shaping up to be a credit crunch, with bigger questions revolving around how deeply banks will cut lending and whether it will be enough to spark a recession.

“The Credit Crunch Has Started,” Torsten Slok, chief economist at Apollo Global Management, a private equity firm, proclaimed in the title of a research note last week detailing the results of the Dallas Fed’s survey. Before the banking crisis, Slok had been a proponent of the no-landing scenario, wherein the central bank stood a very good chance of reducing inflation without slowing down economic growth and ultimately avoiding a recession. But by Slok’s own admission, the bank failures changed everything.

Slok said in an interview with Bloomberg last month that the “major issue” in the wake of the banking crisis was whether regional and local U.S. banks would start cutting back on lending, which could accelerate the country’s spiral into a recession, as these institutions account for almost 40% of all lending.

“[T]he risk with that is that the slowdown that was already underway—because of the Fed raising rates—might now come faster simply because of this banking situation. So that’s why I changed my view from saying no landing, everything is fine to now saying, well, wait a minute, there is a risk now,” he said.

A credit crunch could erode American consumers’ strength, which for over a year now has been a critical guardrail against a recession. Observers including former Treasury Secretary Larry Summers and JPMorgan Chase CEO Jamie Dimon have recently warned that inflation is wearing away the stockpile of savings many Americans accrued during the pandemic, increasing the chances of a recession. Even Apollo’s Slok warned in another research note last week that consumer spending may be in for a slowdown based on shrinking tax refund rates this year.

But even with inflation and tighter lending stacking the odds against consumers, spending has barely slowed so far. It was still high before the banking crisis, rising modestly in February according to most recent data, likely helped by the country’s ever-resilient labor market, which is moderating but still remains strong as ever, adding a solid 236,000 jobs in March according to a government report last week, while unemployment actually declined slightly.

The economy was able to survive tightening lending standards over the past year, although the credit crunch may deal a heavier blow, with firms like small businesses likely to struggle more than most. As for consumers, it will likely be a few months before the extent of damage begins to manifest in spending data.