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US Net Lending Balances As An Alternate Recession Indicator (2/2)

MARKET INSIGHT
  • In the past sixty years, business net borrowing has only been larger in the build up to the dot-com recession in the early 2000s [see chart in part 1/2].
  • Whilst not a hard and fast rule, recessions have tended to follow once business net borrowing exceeds 2.5% GDP, and as of Q1 it was 4.3% GDP.
  • The linkage here is likely an overextension of business net borrowing and subsequent stalling in business investment as a growth driver.
  • However, one area where there is room for further support from a growth driver angle is households. Although saving less on net than prior to the pandemic, they are still saving 2-3% GDP more compared to the run up to the Great Recession (red line) and likely continue to have sizeable excess savings to continue to support consumption growth (i.e. a stock rather than flow discussion that warrants further attention).
  • Note the government data were updated for Q2 with today’s 2nd GDP release (which continued to show no sign of a recession in 1H22 if looking at real GDI instead of real GDP) but the private sector data are only for Q1, due to be updated for Q2 on Sep 29.
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