Following last week’s relatively sunny jobs report, the financial press has gone from gloomy to sanguine about the recession that never was. Not so fast, says Citi. Dissecting the Fed’s Senior Loan Officer survey, Citi thinks that the most recent data suggests a “classic recession.”
The problem that isn’t getting any attention, Citi says, is just how bad the credit situation has gotten. What’s worse, the situation is even more desperate for smaller businesses:
The survey data about credit standards for large firms has deteriorated, but has been more in line with past trends. Yet, the conditions for smaller business people seem to be more dire than in past recessions, underscoring our concern that a reliance on public company balance sheet strength misses the point of potentially weaker private company smaller business trends.
Credit conditions lead the real economy, and its only a matter of time before the deteriorating financial picture infects employment and spending:
As we have stressed for roughly six months, there is a three-quarter lag between credit standards and corporate investment in human capital, working capital and physical capital. This means that companies are on the cusp of seeing their order books soften up meaningfully over the next several months, even without considering news of weakening business demand in Europe.
Finally, as the real economy begins to falter, there will be an inevitable drag on earnings.
Given the tougher credit environment… along with the tight relationship between production and earnings, it would seem very realistic to assume that more cyclical earnings estimates face substantive downward guidance with equity market implications.
So much for the V-shaped recovery.
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