Masonry Magazine August 1992 Page. 38
THE WASHINGTON WIRE
Credit Crunch Starting to Ease
Unfavorable trends have started to reverse. Loan terms have started to ease a little and the problem now isn't a lack of supply-it's an absence of demand.
THE CREDIT CRUNCH is beginning to ease a bit in the view of analysts in government and industry. A restructuring of balance sheets by businesses and consumers is underway, a necessary prerequisite to major increases in both spending and investment. The nation's banks have plenty of money to lend to businesses and consumers. As a result, the financial institutions are looking for strong borrowers. So far, though, bank lending has shown little signs of surging. but it's more a lack of demand than availability.
Restraint on credit has been a major factor in inhibiting the recovery. Financial institutions have been forced to write off a host of bad loans, mostly in the real estate area where over-building produced loan defaults. What's more, corporation and consumer debt soared during the late 1980s. From 1984 to 1990, U.S. companies added $1.1-trillion of outstanding debt, while U.S. companies added $1.1-trillion of outstanding debt, while retiring equity at a rate of 490-billion annually in the same period. Leveraged buyout fever contributed to the explosion.
Consumers got into even deeper trouble with high debt than most firms. People borrowed heavily in an effort to live better than they could afford. The ratio of installment debt to disposable income reached an all time high. And consumers cut their buying.
BUT IN RECENT MONTHS the unfavorable trends have started to reverse. The mountainous level of corporate and consumer debt is beginning to shrink. Big companies have made major strides in restructuring their balance sheets. They have taken advantage of a favorable stock market to sell new equities, in many cases using the proceeds of the sales to pay down outstanding debt. The leveraged buy-out and merger fever has cooled considerably this year. In addition, many companies conserved cash by laying off unneeded workers, selling or closing marginal operations, and slashing expenses in other ways.
What's more, the debt that remains is costing companies less to carry. The Federal Reserve has engineered a big decline in interest rates since 1990, cutting debt servicing costs.
CONSUMERS HAVE ALSO MADE SOME HEADWAY in reducing their debt burdens. Consumer installment debt has been falling in absolute terms for some time. Even when the rapidly growing home equity loans are included in the picture, the overall debt situation is the most favorable it's been since the 1980s. Also reassuring is the drop in both mortgage delinquencies and bankruptcies during the second half of last year, following unsettling increases earlier.
But people have a lot further to go to get debt to comfortable levels. Reason: income growth for the past three years has been the weakest ever. Nevertheless, the outlook for consumer spending is better now than it has been for a number of months.
THE COMMERCIAL BANKING SYSTEM is in better condition than a year ago. Banks have improved their financial condition, a key ingredient to growth. Bank deposits are growing rapidly and capital positions have also improved. Many institutions are showing strong profits after writing off shaky loans.
Surveys show that banks aren't tightening credit terms further. There's some evidence that loan terms have been eased a little.
THE PROBLEM NOW ISN'T A LACK OF SUPPLY. It's an absence of demand. Many companies simply do not need bank loans to finance ongoing businesses. They don't want to carry items in inventory with business still lackluster. And they don't need funds to increase output. They have a lot of of capacity.
But banks are setting the stage for the healthier pace of new lending, which will help to underpin the recovery this year.
CURRENT CREDIT CONDITIONS support a forecast of a moderate recovery. While banks seem likely to become more willing lenders as 1992 moves along, they won't be returning to the days of aggressive lending like in the 1980s. In particular, bankers will remain tight fisted for all real estate lending; loan losses are staggering on construction loans in most parts of the U.S. Corporations with weak balance sheets will face trouble getting loans.
AND, AS NOTED, CONSUMERS have a way to go in cutting the debt loads. This suggests only moderate increases in consumer spending for this year with people remaining cautious on outlays, especially for big ticket items. It's hard for the economy to grow at a fast pace absent strong consumption; consumer spending accounts for two-thirds of real Gross Domestic Product-total output of goods and services in the economy, adjusted for inflation.
Firms, in turn, would have small incentive to expand their productive output, even though the cost of capital is lower than anytime in the past twenty years. Many companies continue to face tough competitive pressures to trim their expenses.
Net, the nation seems a long way from a surge in consumption and investment that has sparked strong eco-