The economic data released last week painted an picture that may
best suited for the ice cream shop…a double dip. Atrocious employment,
weak durable goods orders and falling new orders in the ISM index have
us questioning whether the economic pain is really over.
This time last year, we were riveted to our computer and television
screens wondering which company would be the next to need a bailout.
The policy of too big to fail was in full swing.
This autumn we are faced with the foreboding task of deciphering the
latest economic data to determine the next economic path. Our favorite
leading economic indicator, the M1 multiplier, will be our light
through this valley of darkness.
Over the last month, the M1 multiplier has continued to fall
suggesting the economy is not expected to get any better. We wrote a
month ago about the decline in the M1 multiplier and its implications
for the economy. Recall that the M1 multiplier has correlated with the
path of the economy 6 months ahead 96% of the time since the 1950's.
Part of the reason for the decline in the M1 multiplier is M1
itself. M1 is falling suggesting the American public has less money to
spend.
At the same time the monetary base is rising to record highs.
The cause of the rise in the monetary base is a dramatic rise in bank reserves.
The implication of higher reserve balances is that banks find it
more profitable to hold money at the Federal Reserve than to lend it
out. Of course this leaves the economy even more desperate for credit.
The lack of credit is clearly hurting profits which normally would help
boost M1, but as we have seen, M1 is declining, suggesting profits are
declining.
Examining the amount of loans, leases and credit commercial banks
are extending we find the number to be falling to the lowest levels all
year.
Our concern is that the banks unwillingness to lend is creating a
stealth credit crunch among small businesses. This credit crunch
resembles the more visible crunch experienced by large corporations
last fall. The difference is, small businesses are not too big to fail.
Disclosures: None
