Lakshman Achuthan talking credit growth and recovery on Squawk Box

This morning ECRI’s Lakshman Achuthan was talking about the recovery on CNBC. His take is that the recent slowdown in GDP growth is normal for the recessions since before World War II so far. If we dip even more from here, we have trouble.

The discussion at the end of the video about credit growth at economic turns is very interesting. Kevin Caron, the guest from Stifel Nicolaus mentions that the lack of credit growth in this technical recovery is the worst he has seen since the Great Depression. The key is the financial sector as Achuthan notes that non-financial credit growth is in line with prior incipient recoveries.

I looked at this in an October post A brief look at the Asset-Based Economy at economic turns. Here are my comments regarding financial sector credit growth:

Financial Services Debt

This is probably the key damning piece of data confirming the asset-based economy thesis.  The data are much worse than I expected.  Not only do Financial Sector debt levels rise from negligible to percentages well over 100% of GDP, but the entire post-1982 period sees zero decline compared to nominal GDP until last quarter.

What conclusions can one draw here?

1. The financial services sector is six times more important than in 1982 when its debt is measured as a percentage of GDP.
2. The financial sector protected the American economy since 1982 by increasing its debt burden relative to nominal GDP even during recession.
3. The financial services sector contracted in Q2 relative to GDP for the first time since 1982.  If this is a rear-view mirror view, that means recovery could continue. However, if this is a canary in the coalmine, that is negative for the U.S. economy. This number bears watching.

…the data on the financial services sector was surprisingly stark. I would go as far as to say that the US economy depends on leverage in the financial services sector to continue growing.  I come out of this thinking it is the financial services sector more than the household sector dictating the course of events. And as the financial sector just began to really deleverage in Q2, it bears watching how this proceeds.

I have not had a chance to crunch the numbers for the Flow of Funds data series. But, this exchange on CNBC shows these numbers are important and I will take a look at what the latest data points are telling us.

(video embedded below)